LTFNSEQ1 FY2023July 27, 2022

L&T Finance Limited

12,788words

64turns

8analyst exchanges

1executives

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Management on call

Dinanath Dubhashi

Managing Director and CEO, and other members of the senior

Key numbers — 40 extracted

Rs. 9000

which has just passed: • We achieved the highest ever quarterly disbursements in Retail, close to Rs. 9000 Cr which is up 10% QoQ. This is special, really special because Q4FY22 was highest ever till then a

10%

• We achieved the highest ever quarterly disbursements in Retail, close to Rs. 9000 Cr which is up 10% QoQ. This is special, really special because Q4FY22 was highest ever till then and we have built a

54%

riven by just one product; more products are driving this growth. • Retail portfolio mix rose to 54%, from 45% last year with 19% YoY increase in the Retail book. The QoQ increase in the Retail book

45%

ust one product; more products are driving this growth. • Retail portfolio mix rose to 54%, from 45% last year with 19% YoY increase in the Retail book. The QoQ increase in the Retail book is also 6%

19%

re products are driving this growth. • Retail portfolio mix rose to 54%, from 45% last year with 19% YoY increase in the Retail book. The QoQ increase in the Retail book is also 6%, which is quite in

5% last year with 19% YoY increase in the Retail book. The QoQ increase in the Retail book is also 6%, which is quite in line with one of our Lakshya 2026 goals of 25% July 20, 2

25%

ncrease in the Retail book is also 6%, which is quite in line with one of our Lakshya 2026 goals of 25% July 20, 2022 CAGR in Retail book. So, in the 1st quarter itself, we meeti

50%

. • As a part of our Fintech @ Scale, cross-sell and use of data is one of the important aspects. 50% of Rural Business Finance and 25% of Farmer Finance disbursements are now driven by cross-sell eff

Rs. 3000

database. • Consumer loans which is another loyalty cross-sell product, the book has now crossed Rs. 3000 Cr this quarter. • Coming to NIMs, we actually achieved the highest ever NIMs plus fees at 8.23%

8.23%

3000 Cr this quarter. • Coming to NIMs, we actually achieved the highest ever NIMs plus fees at 8.23% on the back of good quarterly Retail disbursements. Interestingly, the quarterly WAC (Weighted Ave

7.27%

ements. Interestingly, the quarterly WAC (Weighted Average Cost of funds) is at an all-time low of 7.27% in the phase of tightening liquidity and increasing interest rates. Now, there is no logic and no

6.67%

ave robust margins as we go ahead. • Asset quality has been pretty stable. Reduction in GS3 from 6.67% last year to 4.08% in Q1FY23, NS3 at 1.87% and PCR at 55%, these are the headline numbers. Impo

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Guidance — 20 items

Dinanath Dubhashi

opening

“We will try to be as short as possible, I will talk about this quarter, but more importantly, I will talk about what are the measures we have taken under the Lakshya (Target / Goals) 2026 plan, though quite early now.”

Dinanath Dubhashi

opening

“Within this goal, we aim to pivot from a product focused company to a customer focused approach, with the aim of creating a Fintech at Scale.”

Dinanath Dubhashi

opening

“The QoQ increase in the Retail book is also 6%, which is quite in line with one of our Lakshya 2026 goals of 25% July 20, 2022 CAGR in Retail book.”

Dinanath Dubhashi

opening

“As interest rates increase further which looks like definitely, they will, the weighted average costs will surely increase, there is no doubt about that, but we are confident that the increase will be less than proportionate with the market increase.”

Dinanath Dubhashi

opening

“But there is a difference, there will be a difference, no need to get confused.”

OTR

opening

“And with this, at least on these products, this OTR stuff will be over for once and for all.”

OTR

opening

“540 Cr, which we believe can be taken as a sort of steady state credit cost because I said that most of the OTR especially Micro Loans and Two-Wheelers which are more vulnerable OTRs they will be over by Q2FY23.”

OTR

opening

“our models and Board will decide it, what to take, but largely from Q3FY23 onwards, credit cost will be more on the steady state basis and hopefully continuously reducing as a percentage of the book.”

OTR

opening

“So, we will come largely out of, we are ideally already out of the woods, but even this OTR stuff will be over by Q2FY23 and after that we will move to more normalized credit cost.”

OTR

opening

“We are just getting this over with and by Q3FY23 we expect return to complete normalcy as far as credit cost is concerned.”

Risks & concerns — 6 flagged

The kharif crop acreage has already surpassed last year's level with paddy being the only concern due to less rainfall in UP, very clear correspondence there.

— OTR

Four strong Chief Executives, looking after each of these businesses, running almost like separate companies with common functions like HR, finance, audit, risk, etc.

— Asset quality

July 20, 2022 2) Demonstrable strengths in risk Management On the risk side, we continue to build strengths in risk management and our sustained collection performance across products, which is well above industry performance is a testament to this strong portfolio.

— Asset quality

And we are actually looking at how New Age risk management practices can be more and more adopted.

— Asset quality

So, we didn't want to take any regulatory risk by calling it micro finance and we will not able to prove that these are qualifying assets to RBI.

— Dinanath Dubhashi

Just on this continuing further, now that you have moved here, the NPA to EAD, does it mean that your interest reversals would be lower and your NII probably will be less volatile?

— Nischint Chawathe

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Q&A — 8 exchanges

I have four questions. Firstly, led by the disbursements, we noticed that NIMs plus fees is at 8.23%. But if we look at the yields in the Retail portfolio, they have come off by 50 basis points and as you scale up your Home Loan / LAP business, how should one think about them directionally. Of course, the fee income has also gone up. So, could you talk a bit more about any incremental fee that you are seeing from the cross-sell opportunities, that's the first one. Second one is on the acquired portfolio. Could you throw some light on the nature of acquisition of the portfolio? What kind of loa

Dinanath Dubhashi

So, retail yields number one, I will answer you strategically as well as tactically. Tactically, some of the reduction that you see is when the OTR book flows to GS3 or is written-off, the income is taken out (derecognized from zero DPD onwards). So, in the quarter that it happens, it goes not from the credit cost line, it goes from the income line. So, as I said, in Q1 and Q2, this all will be over. And after that, things will come back to normal. So, this small reduction, don't read too much into it. In fact, you know, I already said that NIMs may contract a little bit, that is not so much b

Just two questions, number one on the provisioning, of course, we did appreciate that you have taken some extra provisioning this quarter. But given that you already are having a large macroprudential provisions, and of course, the credit environment seems to have gotten better with collection efficiency improving across the board, why are we sort of still onboarding or maybe making an additional provision, what exactly is the philosophy? And I did hear your remark to the previous question about the OTR almost getting provided for maybe in the next quarter or so. But just a bit perplexed why d

Dinanath Dubhashi

So, technically, we have not made any more provisions. In fact, Rs. 1,700 Cr has reduced to around Rs. 1,400 Cr, right. So, we have actually utilized. I believe what you meant was why this entire Rs. 473 Cr was not taken out of those management overlays, and why P&L was hit at all, right, that is your question? It's a matter of two things: 1) the Board and 2) the Management. One needs to be confident, when we release this. That is meant for the rainy day. We will keep reducing this management overlays as we go ahead, no doubt. Also, remember always that it is, the way we started making these m

Firstly, on the Rural Business Finance, I think during your opening remarks as well as in the press release, you have shared just about 17% of the disbursements in the quarter qualified for microfinance as per new RBI guidelines. Just wanted to understand, I mean, what was the mix like before these guidelines, basically were we largely present in the customer segments where the household income was greater than three lakhs, I mean what was the mix like before that? Why I am trying to kind of understand this is, I mean despite having exposure to customers where the household income is greater t

Dinanath Dubhashi

OTR happened before the latest Microfinance guidelines came, right. So, we were not measuring household income before that, hence I won't be able to answer your question. That time even individual income was not being measured by anybody. That requirement was not there. It was a declaration taken that individual income is less than or more than Rs. 1.5 lakhs. Our customers, we believed their individual income was always more than Rs. 1.5 lakhs and that's why you remember we changed the positioning from micro finance to Micro Loans, because we were not sure that our customers’ individual income

Firstly, in terms of if you can just broadly explain this Rs. 750 Cr of Micro Loans, which are there in restructured, if you can give some flavor in terms of how much are paying, how much are part paying? And how is the behavior July 20, 2022 currently just to gauge in terms of how much could really slip and what can get into 91 plus DPD? So, maybe that would be helpful in terms of the trend because this time there was something which has flown in, so maybe that would be helpful if we can just give the behavior of that particular portfolio.

Dinanath Dubhashi

In fact, what I will rather do is that, it has reduced by ~Rs. 300 Cr, from March to June, the OTR. I will give you a breakup of that. Will that give the trend? In March-- Rs. 300 Cr? March to June, Micro Loans, OTR has reduced by ~Rs. 300 Cr. Out of which around, I would say 75% was movement to GS3 and 25% was resolved and closed. 75% moved to GS3 out of the Rs. 300 Cr, that we provided for. So, even if the same trend -- we believe that the trend should be better because more collections are happening, but even if the same trend continues that is what I said in my remarks, we are well and pro

Just one clarification, this defocused book going down by almost Rs. 1,000 crores odd, this is all recoveries?

Dinanath Dubhashi

It is a part of that Rs. 1,000 Cr ARC sale bit, but rest is recovery. July 20, 2022 On the Consumer loans side if you could give some breakup in terms of how much was cross-sell and how much was sourced from digitally or from third party --? In the book, most of it will be cross-selling, the book, almost 90%, I mean, I don't have the precise numbers, IR will give you, but in the book, most of it will be cross-sell, but in disbursements, now cross-sell is I believe around 60%. So, as quarterly disbursements go ahead, cross-sell percentage comes down, and other sources of sourcing through variou

Just wanted to, coming back to the Consumer finance book, strong improvement in disbursements, some sense on the quality of customer probably which is being onboarded. You said a large part of the existing book is the erstwhile Two-Wheeler customers, but incrementally any sense on what kind of Bureau scores or credit profile are you looking at? And secondly, on SME Finance also, how is the origination progressing in terms of strategy? Those are my two questions.

Dinanath Dubhashi

So, I will just use the word little more carefully, not erstwhile Two-Wheeler customers. There maybe even existing Two-Wheeler customers, but tested Two-Wheeler customers, that they have a particular MoB, Month on Book July 20, 2022 with us, no bounces. We look at bounces more than what is called, at the end of the month DPD. So, those criteria are used, and because of that the portfolio quality is excellent. Now, while we also started sourcing from outside over the last one year, credit matrices, analytics works on many credit matrices, and based on that we give pre-approved offers to various

So, the first one is on the Consumer loans that we are targeting. We are saying that we have roughly about 2.5 lakh database, what kind of ticket sizes are we targeting? And again, if it's an urban customer, my thought is that it's a hyper competitive space. So, what kind of Cat-A, Cat-B, Cat-C customer proportion are we planning to put in here, because if it's a Cat-A customer, it's a hyper competitive space and it is a super pampered customer. That's the first question around the Consumer loans. The second is, there is a particular line that we are getting about the monetization of 7 crores

Dinanath Dubhashi

The meaning of monetize, I hope you understood. Monetize doesn't mean selling the database. Monetize means use the data we have collected for making them offers --. So, there is nothing to stop you from the data you have collected with. And you are not sharing data with anybody. Monetizing meaning, we are not selling it. So, the word should be leveraging not monetizing, I am sorry, for using that. We are taking that database, which those people have given to us, putting it through our Data Analytics, and making them pre-approved offers. And it is up to them whether to take that offer or not. S

Oh no, no closing comment. The only thing I would say that 1st quarter of a really exciting 16 quarter plan, I believe we have made a good progress. We will keep showing better and better results every quarter, counting on your confidence I would say, thank you

Management

Speaking time

Dinanath Dubhashi

Moderator

Kunal Shah

Abhijit Tibrewal

Nischint Chawathe

Rahul

Sameer Bhise

OTR

Asset quality

Rikin Shah

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Opening remarks

Dinanath Dubhashi

Thank you, ladies and gentlemen, very good morning, and a warm welcome. We have uploaded a presentation, I believe is very self-explanatory, but I will still love to take the opportunity of giving some explanations to you. We will try to be as short as possible, I will talk about this quarter, but more importantly, I will talk about what are the measures we have taken under the Lakshya (Target / Goals) 2026 plan, though quite early now. It was during the same time last year in the midst of second wave of COVID, actually, that I mentioned to you that our strengths place us quite suitably in the medium to long term growth after the storm is over. And I believe now the storm is well and truly over, I mean there are some COVID cases etc. I have always maintained that COVID doesn't affect business so much but lockdowns do. The way we have vaccinated, the way the country has fought, I think the possibility of new lockdowns is less and because of that, I believe largely business should be bac

OTR

I would like to give a little more explanation about our OTR book here. OTR book now stands at close to Rs. 2,000 Cr from about Rs. 3,000 Cr just a quarter back. And what is this big reduction of Rs. 1,000 Cr, we need to explain. Naturally, if you consider the timings of OTR especially in assets like Micro Loans, Two-Wheelers, you remember that there was a six-month moratorium given. So, most of the billing actually started somewhere between the 1st Quarter to April etc. Now, when that happens and if collections don't happen and we had done a lot of, some of the collections had actually come in advance. And that reflects in the numbers. But whatever has to roll forward will roll forward either in Q1FY23 or in Q2FY23. And with this, at least on these products, this OTR stuff will be over for once and for all. What will remain after Q2FY23 is largely the HL book, where the moratorium was given up to two years. But this obviously is a very secured book and follows a very different kind of

Asset quality

GS3 stood at 4.08% and NS3 at 1.87% which is an improvement YoY, fairly steady QoQ. I have already given explanation that these are on EAD basis. So, please don’t try to compare it with the number in the last investor presentation. We have given past numbers. Anybody who wants any other past numbers for any other quarters etc., IR will try and give it to you. Just any clarifications if you need, you can ask on this call or to IR, this is quite clear and from now on, it will be on the EAD basis. Capital adequacy, quite adequate at 23.12%. In fact, quite high, as we grow, we believe that it should trend downwards and hence will be good for RoEs as we go ahead. So, in summary, PAT, up to Rs. 262 Cr, up 47% YoY on the back of increase in income and reduction in credit cost and we believe that this trend will continue well and will accelerate from Q3FY23 onwards. Hopefully, by FY24 we will be at profitability levels which we have been more used to before the nightmare of COVID and everythin

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