Operations are also structured towards this objective. For example, the rural financing segment focuses on farm equipment loans, two-wheeler loans and microfinance lending. Strong tie-ups with original equipment manufacturers, such as TAFE, John Deere and Sonalika for tractors and Honda and Hero MotoCorp for two-wheelers, secure the business for L&T Finance. Even in the microfinance segment, 70 per cent of the company’s borrowers are customers who are engaged in cattle rearing or allied activities. Thus, the yield for the rural segment is 15.5-24 per cent, and this is the most profitable business with an ROE of 23.4 per cent in Q3.
As for the housing finance business, home loans to self-employed nonprofessional customers and salaried employees account for 23 per cent of housing loan book, while 40 per cent is accounted by loan against property (LAP) and the rest constituted by loans to project developers. While the lending business has presence in 39 cities, the top five cities — Mumbai, Hyderabad, Delhi, Bangalore and Chennai — account for around 60 per cent of disbursements. While in the home loans category, loan-to-value (LTV) ranges at 60-70 per cent, in case of LAP, LTV is restricted to 45 per cent, thus reducing portfolio risks (or loan defaults).
Given that L&T Finance is largely underpenetrated in the home loan market, analysts at JM Financial are bullish that the segment should sustain 32 per cent annual compound growth rate in the next few years.
The robust wholesale finance business is the most interesting piece for L&T Finance. Diverse loan book, which mitigates the operational risk, is the main advantage of the portfolio. The loan book is spread across segments such as power generation and transmission and distribution, renewable energy, roads, structured corporate finance and supply chain finance. Wholesale book accounts for 61 per cent of total loan book. Here, L&T Finance focuses on selling down of loans rather than accumulating its loan book - a strategy that helps de-risk its portfolio and generates higher fee income, which is ROE accretive without consuming much capital.
As the change in operations fall in place, L&T Finance offers significant potential for long-term investors, even as the stock has almost doubled in the last one year, outpacing the S&P BSE Sensex’s 17 per cent return.
Analysts at Axis Securities feel the new strategy should lead to re-rating of L&T Finance’s stock as ROE improvement starts kicking in.
“Strict cost controls, sanguine growth outlook in focus businesses and option value from disposal of defocused businesses all bode well,” they add.
Analysts at JM Financial expect L&T Finance to generate 17 per cent ROE in FY17, while for those at Antique Stock Broking, L&T Finance is their top pick in the financials space.