Emkay Global Financial has given Buy recommendation for Larsen and Toubro Technology Services with a target price of Rs. 100 in its research report issued on May 04, 2022

Emkay Global Financial’s report on Larsen and Toubro Technology Services

L&T Finance Holdings (LTFH) reported Q4 earnings of Rs3.4bn (+28% yoy/ +5% qoq). PPOP came in at Rs10.7bn, 4% above our estimates. Q4 disbursements were driven by the rural and housing book, with rural disbursements growing by 4% qoq/20% yoy and housing up 15% qoq/50% yoy. AUM grew by 3% qoq but fell 6% yoy due to the sell-down of the infra portfolio and the sale of loans worth Rs19.1bn to an ARC. As a result of the sale, GS3 improved to 3.8% (Q3: 5.9%). Excluding this, GS3 would have been 5.7%. LTFH did not release its macro prudential provisions (Rs17.3bn) in Q4 on account of Covid-related uncertainty. As per management commentary, the proceeds from the one-off gains from the sale of the mutual fund business, expected in Q3FY23, will be used to further enhance the provision buffer. LTFH is a play on the India growth story on the back of a structural credit growth revival in rural, a cyclical revival in housing sales and a possible upcycle in infra financing. In our view, strengthening the provision buffer from the sale proceeds of its AMC business, as well as its plan for a stake sale and exit from wholesale finance and real estate finance businesses respectively, should assuage investor concerns about LTFH’s portfolio quality.

Outlook

We retain Buy on the stock with a Mar’23 TP of Rs100, valuing the consolidated entity (post sale of its AMC business-LTIM) using the excess return on equity method. Our TP implies a Mar’24E price/BVPS of 1.0x. While we raise our cost of equity from 13.1% to 13.5%, our TP-implied P/BV remains stable on account of an improved outlook for the infra business and the additional overlay buffer provided by the proceeds from the sale of the AMC business. Key downside risks: large ticket exposures slipping to NPA in housing and wholesale books; weakness in rural household balance sheets resulting in higher NPAs in the rural portfolio.

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