Broker’s Call: L & T Finance Holdings (Buy)
During the FY22 analyst meet, L&T Finance Holdings management said that it aims to limit its exposure to the wholesale finance business, especially the real estate finance business. LTFH expects to increase the share of retail loans to about 80 per cent of the loan book by FY26, with a 25 per cent CAGR in retail loans. LTFH seeks to achieve this retailisation with the help of fintech at scale wherein the company has made major investments in the past few years.
Since the onset of the pandemic, LTFH’s real estate business has taken a more calibrated approach — completing the ongoing projects and not disbursing new real estate loans. LTFH’s continued focus on existing real estate projects resulted in repayments/pre-payments of ₹3,000 crore in FY22. According to media reports, Apollo Global Management is in advanced talks with LTFH to acquire real estate loans worth ₹8,000-9,000 crore in a deal pegged at $1bn
In our view, a transaction of this nature would be in line with management’s goal. LTFH and Apollo Global did not comment on the report. In our view, assuming an asset-to-equity ratio of 4:1, a deal of about ₹8,000 crore should lead to the release of about ₹2,000 core of equity, which could be utilised to leverage the fast-growing retail business further.
As per media reports, there is a likelihood of first-loss protection for the buyer. It would imply that LTFH would have to maintain some contingency provisions over the life cycle of the project. Assuming the duration to be about five years, it would be reasonable to assume that the said provisions would be retained for this time frame.Overall, a sale of this nature would be in line with the management’s articulated strategy of achieving retailisation of the portfolio by FY26.
June 21, 2022