| L&T Finance Holdings Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the debt instruments of L&T Finance Holdings Limited (LTFH, holding company of the L&T financial services [LTFS] group).
CRISIL Ratings has taken note of the merger by absorption pursuant to a scheme of arrangement of L&T Finance Ltd (LTF), L&T Infra Credit Ltd (LTICL) and L&T Mutual Fund Trustee Ltd (LTMFTL), with LTFH as announced by the company to stock exchanges on January 13, 2023. The scheme has received approval from the board of directors and now awaits various regulatory and statutory approvals. The scheme of merger aims to achieve a single unified retail operating NBFC (non-banking finance company), which will improve operational and management efficiencies, streamline business operations and decision-making process, optimal utilisation of capital and enable greater economies of scale. The proposed merger will not have an impact on the ratings, given the analytical approach. CRISIL Ratings will, nevertheless, monitor the progress on the announced merger.
The ratings continue to reflect the strong and diversified presence of the LTFS group across the lending business with rise in retail portfolio mix and a well-diversified resource profile. The ratings also factor in the improved granularity of the loan book with increase in the share of retail loans (64% as on December 31, 2022, 50% as on December 31, 2021), which is in line with the company’s strategy (Lakshya 2026) of increasing retail loan book to >80% by 2026. It also centrally factors in the expectation of strong support from the parent, Larsen and Toubro Limited (L&T; rated 'CRISIL AAA/Stable/CRISIL A1+'). These strengths are partially offset by moderate asset quality. |
Analytical Approach For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of LTFH and its subsidiaries and associates. This is because all these entities have significant operational and management linkages and operate under a common brand. CRISIL Ratings has also factored in the strong support from the parent, L&T, given the strategic importance of the group to the parent along with the shared brand. L&T has majority shareholding in LTFH, at 66.15% as on December 31, 2022.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
The group has demonstrated healthy growth and improved its return on equity over the last few fiscals. Due to L&T’s focus on building a strong services portfolio including IT, technology and financial services, the LTFS group has been identified as a key focus area by the parent. L&T provides strategic oversight to the group and has personnel from its senior management on the board of LTFH. These includes Mr. S. N. Subrahmanyan (CEO & MD, L&T Ltd) is the director and chairperson and Mr. R Shankar Raman (CFO, L&T Ltd) is the Non-Executive Director. The parent also has representation in some of the key committees of the group, such as asset-liability, risk management and credit committees. The group also benefits from the synergies and expertise of L&T, especially in infrastructure and real estate lending. The parentage of L&T also supports resource profile.
Furthermore, the parent provides capital support to the group and has infused around Rs 5,700 crore (till March 2022; including ~Rs 1,900 crore in fiscal 2021). L&T has also provided an ongoing line of credit to the LTFS group, which could be used during contingency. Capital support from the parent, along with internal cash accrual, is expected to keep capitalisation adequate, with gearing not expected to exceed 7.5 times - on a steady-state basis.
The ratings also factor in the strong support from the parent, as demonstrated by the articulation of its intention to (i) maintain strategic linkages and management oversight so that, among others, the LTFS group conducts its business in a manner such that it honours its stakeholder obligations in a timely manner (ii) maintain majority shareholding in LTFH, and (iii) provide growth and risk capital, if and when required.
The financial services business is expected to remain one of the key focus areas for L&T, which should continue to support the group.
LTFH is the holding company for the financial services business of L&T and has majority stake in various subsidiaries that operate in the lending business. The group has built a strong market position, with assets under management (AUM) of Rs 88,426 crore as on December 31, 2022. Overall growth as on December 31, 2022 stood at 3% year-on-year on account of continued run down of wholesale portfolio while retail book continues to grow (34% y-o-y). Overall portfolio is well diversified with presence across various asset classes, such as farm equipment financing (14% of AUM as on December 31, 2022), two-wheeler financing (10%), rural business loans & micro finance loans (20%), consumer loans (5%), home loans (11%), loan against property (LAP 3%), SME Finance (1%), acquired portfolio (0.3%), infrastructure finance (27%) and real estate finance (8%).
As a part of its strategy, Lakshya 2026, to become a digitally enabled retail focused NBFC, the group will concentrate on scaling up and adding new products to existing retail book. As on December 31, 2022, business momentum has been strong across retail products, with retail portfolio at Rs 57,000 crore (year-on-year growth of 34% and quarter-on-quarter growth of 10%). Retail portfolio stood at 64% as December 31, 2022; LTFS has targeted to increase its retail portfolio >80% by fiscal 2026. Retail portfolio showed strong quarterly disbursement of Rs 11,607 crore, which has grown by 53% year-on-year and 13% quarter-on-quarter aided by digital and data analytics. LTFS has launched new products SME finance under its retail portfolio in fiscal 2022 and consumer finance in fiscal 2021, which showed sustained growth momentum.
Wholesale portfolio continues to witness a declining trend with AUM falling to Rs 31,010 crore as on December 31, 2022, from Rs 41,731 crore as on March 31, 2022. LTFS also commenced accelerated selldown of its wholesale portfolio in the third quarter of current fiscal. Based on change in business model, wholesale portfolio which was measured at amortised cost is now measured at fair value through profit and loss account. Consequent to change in business model in order to facilitate accelerated sell-down of wholesale finance, a one time provision of Rs 2,687 crore has been made during Q3FY23. The share of the wholesale portfolio has declined steadily to 35% as on December 31, 2022, from 48% as on December 31, 2021 and is expected to decline further.
Under the non-lending business, the LTFS group had sold its investment management business to HSBC Asset Management (India) Private Limited. The sale transaction concluded on November 25, 2022 for a total consideration of Rs 4,249 crore (which includes sale proceeds and cash surplus).
Going forward, the growth in the business is expected to be driven by Retail (including SME Finance) segment over the near to medium term.
Resource profile is spread across capital markets and bank funding. The group is a large and frequent issuer in capital markets and has strong banking relationships. Of the total borrowing of Rs 86,232 crore as on December 31, 2022, non-convertible debentures (including retail), commercial paper, external commercial borrowings (ECB) and bank borrowings formed 42%, 7%, 2%, and 48%, respectively. The diversified resource profile is also reflected in the competitive average borrowing cost[1] of 6.8% for the nine months ended December 31, 2022 (annualised; 6.8% for fiscal 2022). The parentage of L&T also supports resource profile.
Weakness:
The asset quality of the lending portfolio remains moderate. Asset quality metrics have shown an inch up on account of second wave of Covid-19 pandemic, however the same is on improving trend on account of improvement in collection efficiency and controlled slippages. On a consolidated basis, gross stage 3 and net stage 3 assets improved further and stood at 4.2% and 1.7%, respectively, as on December 31, 2022 compared to 6.7% and 3.2% respectively as on December 31, 2021.
In the infrastructure portfolio, with resolution of legacy delinquent accounts, gross stage 3 assets continue to improve. LTFH is focussing on accelerated selldown of its wholesale portfolio which stood at 35% of AUM as on December 31, 2022. LTFH has created one time provision of Rs 2,687 crore to facilitate accelerated sell down of the wholesale portfolio. Furthermore, the higher focus on retail loans, stronger underwriting and collection practices, better early warning systems, and focus on digitisation and data analytics, should support improvement in asset quality from current levels. The group also has a specialised team to oversee recovery from stressed assets.
Management’s ability to keep the portfolio quality in check will remain a monitorable. Performance of the wholesale lending portfolios will also be closely monitored given the chunkiness in ticket size and sensitivity of borrowers in these segments to an environment of prolonged stretch in liquidity. Any significant deterioration in asset quality, leading to a sharp and continued decline in profitability from the current level, will be closely monitored. [1] Borrowing cost = Annualised interest cost during the period divided by the average of outstanding borrowings at the beginning and the end of the period |
Liquidity: Superior The consolidated asset-liability maturity profile as on December 31, 2022, reflects cumulative positive liquidity gaps in all buckets up to one year. The group generally maintains liquidity to meet obligations coming up over the next 30 days. As on December 31, 2022, total debt repayment (including interest) was Rs 12,147 crore for the next three months (until March 31, 2023). Against this, liquidity of Rs 18,715 crore was available in the form of cash and liquid investments (Rs 14,726 crore) and unutilised bank limits (Rs 3,989 crore). Support from the parent is also available in the form of a line of credit.
Environment, Social, and Governance (ESG) profile The ESG profile of the LTFS group supports its already strong credit risk profile.
The ESG profiles of financial institutions typically factor in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base, and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, lending decisions may have a bearing on environment and other sustainability related factors.
The group has demonstrated an ongoing focus on strengthening various aspects of its ESG profile.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. LTFS group’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high share of foreign investors as well as access to both domestic and foreign capital markets. |
Outlook: Stable CRISIL Ratings believes LTFS group will remain highly strategically important to L&T and continue to benefit from the latter’s strong support over the medium term. Furthermore, LTFS is expected to maintain its strong and diversified presence across the financial services space and a well-diversified resource profile. |
Rating Sensitivity factors Downward factors:
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About the LTFS group The group has a diversified product portfolio with presence in the wholesale as well as retail finance segments. Over the past couple of years, the management has exited some lending asset classes and currently caters to limited segments such as farm equipment finance, two-wheeler finance, micro loans, consumer loans, home loan, LAP, SME Finance, acquired portfolio, real estate finance and infrastructure finance. As part of this strategy, the supply chain financing portfolio was sold to Centrum Financial Services Ltd in fiscal 2019. Furthermore, structured finance group and DCM were identified and classified as part of the defocused book during the quarter ended June 30, 2019. The group also had presence in the investment management business, however same has been sold to HSBC Asset Management (India) Private Limited in November 2022. As on December 31, 2022, LTFH’s consolidated networth was Rs 21,019 crore.
In fiscal 2022, on a consolidated basis, profit after tax (PAT) was Rs 1,049 crore on total income of Rs 12,324 crore, against Rs 949 crore and Rs 13,753 crore, respectively, for the previous fiscal.
For the period nine months ended December 31, 2022, PAT and total income (net of interest expense) were Rs 1,120 crore and Rs 5,532 crore, respectively, against Rs 708 crore and Rs 4,895 crore, respectively, during the corresponding period previous fiscal. |
About the Key Companies LTFH is the holding company for the financial service businesses of L&T. It was incorporated in 2008 and is listed under the National Stock Exchange and Bombay Stock Exchange; it is also registered with the RBI as a NBFC - core investment company. On a standalone basis, LTFH reported PAT and total income of Rs 218 crore and Rs 350 crore, respectively, in fiscal 2022 (against Rs 116 crore and Rs 416 crore (including one-time impact), respectively, in fiscal 2021). For the nine months ended December 31, 2022, company reported profit and total income were Rs 2,469 crore and Rs 3,089 crore (including one-time impact), respectively, compared with loss of Rs 31 crore and total income of Rs 80 crore, for the corresponding period previous fiscal.
L&T Finance Ltd (LTF) is an NBFC incorporated in 1993 and wholly held by LTFH. Effective April 12, 2021, L&T Infrastructure Finance Company Ltd (LTIFC) and L&T Housing Finance Ltd (LTHF) merged with LTF. It had AUM of Rs 83,119 crore as on December 31, 2022, comprising rural business loans & microfinance (21% of total AUM), farm equipment loans (15%), two-wheeler loans (10%), consumer loan (6%), home loans (12%), LAP (3%), SME Finance (1%), acquired portfolio (0.3%), real estate financing (9%), infrastructure loans (22%) and balance in defocused. The gross and net stage 3 assets were 4.5% and 1.8%, respectively, as on December 31, 2022. Networth and gearing were Rs 16,491 crore and 4.7 times, respectively, as on March 31, 2022 (Rs 15,621 crore and 5.1 times, respectively, as on March 31, 2021). In fiscal 2022, the company reported a PAT of Rs 808 crore on total income of Rs 11,445 crore against Rs 1 crore and Rs 12,693 crore, respectively, for the previous fiscal. For the period nine months ended December 31, 2022, the company reported a loss of Rs 998 crore (including the one-time impact) and total income (net of interest expense) of Rs 7,757 crore, as against Rs 497 crore and Rs 4718 crore, respectively, for corresponding period previous fiscal.
L&T Infra Credit Ltd (LTIC; erstwhile L&T Infra Debt Fund Ltd) was incorporated as an infrastructure debt fund (IDF-NBFC) under the Companies Act and operated under the regulation and supervision of RBI. The company received its certificate of registration as an IDF-NBFC from the RBI on October 21, 2013. As per regulations, IDF-NBFCs can be held either by a bank or an infrastructure finance company (IFC) (as a sponsor with maximum 49% equity stake and minimum 30%). LTIFC, an IFC as sponsor, held 48.36% stake in LTIC, with the remaining stake being held by other LTFS Group entities - LTF at 28.28% and LTFH at 23.36% as on March 31, 2021. In April 2021, the scheme of amalgamation by way of merger by absorption of LTIFC and LTHF with LTF was completed post receipt of all requisite approvals. Consequently, effective April 12, 2021, LTF became the largest shareholder with 76.64% stake in LTIC. The remaining stake continues to be held by LTFH. Since with merger of LTIFC with LTF, the IFC status of sponsor ceases to exist, the company had applied to Reserve Bank of India for change in the NBFC classification to NBFC – Investment and Credit Company (NBFC-ICC) from an IDF-NBFC. On June 27, 2022 the RBI approved and issued a fresh Certificate of Registration for LTIC on conversion of the Company from IDF-NBFC to NBFC-ICC. LTIC had AUM of Rs 5,296 crore as on December 31, 2022, entirely into infrastructure finance. Stage 3 assets continue to remain nil. For fiscal 2022, the company reported a PAT of Rs 4 crore on total income of Rs 731 crore as against a PAT of Rs 63 crore and total income of Rs 894 crore in the previous fiscal. For the nine months ended December 31, 2022, the company reported a loss of Rs 128 crore (including one time impact) and total income of Rs 562 crore, compared with a PAT of Rs 22 crore on total income of Rs 570 crore for corresponding period previous fiscal. |
Key Financial Indicators – L&T Finance Holdings Ltd (consolidated; as per Indian Accounting Standard)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Not yet issued |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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