LTF — earnings call

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Questions and answers

Moderator · Conference Operator

The first question is from the line of Saurabh from JPMorgan

Saurabh Kumar

Hi Sir, Congratulations.

So, this seems to be the clearing quarter for you guys.

Just have three questions.

What would be your market share now in the Tractors and Two-wheelers?

Micro Finance, I think you'll be number 3, but what will be your market share?

And are you holding to that top two or three position?

The second is if you can help with the write-off and the slippage in the quarter.

So, your Gross Stage 3 has gone up a little bit.

I'm just wondering what are those slippages?

And the third is, did I hear you right, that you said 90% Retail by March'24 is the internal target, even though the Lakshya target is higher?

And if that is the case, then how are you thinking about this excess capital, which will probably be there on your book?

Dinanath Dubhashi

Let me answer one-by-one.

So, the market share in Tractors is approximately 15%.

Market share in Two-wheelers will be 11% approximately.

In Micro Loans, it depends on how people measure it, but it is around 5.7%.

We are number 4 in Micro Loans, not Number 3.

Saurabh Kumar

And Tractor and Two-wheelers sir, what will be the market share?

Dinanath Dubhashi

As of December, what was your second question?

Sorry, I remember your third question.

Saurabh Kumar

Sir, Tractors and Two-wheelers, what would be your market position now?

Dinanath Dubhashi

Number 4, Two-wheeler also.

January 16, 2023

Saurabh Kumar

And Tractors?

Dinanath Dubhashi

Tractors, Number 1, as of December end.

But having said that, us and the next competition is a difference of a few 100 tractors.

So, we keep having fun every month, measuring it.

But it doesn't matter.

I mean there are two, three players who are at the top.

Especially, the two NBFCs that you know.

Saurabh Kumar

What will be the write-off and the slippage?

Dinanath Dubhashi

I'll just answer about this, because I can't give numbers which we have not given.

But GS3 increase, I will just explain to you.

There is a rapid drop in book.

So, the percentages will happen like that.

And in fact, you heard me guiding more-and-more on the Retail RoA tree, Retail balance sheet.

Because if I guide you on the total number, the better I do in our Wholesale sell-down, some of these numbers in short term will actually look worse.

So, I don't want to guide you on the total PAT and I think that's for you to calculate.

Because even today, I don't know how fast my Wholesale book will come down quarter-on-quarter.

Based on that total RoA, total PAT, total leverage, everything will depend on that.

And I can't obviously give very specific numbers for next quarter, because I don't know.

I mean, if I knew exactly how much Wholesale I will sell next quarter, I would have sold it this quarter.

So that would be imponderable.

And that's where our guidance comes.

What we will strive at.

I will not like to talk about that specifically as they are internal targets, etc. We now believe that with the one-time provision that we have taken in order to deal with any discounts that the buyer may ask, for illiquidity discount, it can be pretty fast.

And yeah, maybe we hope to touch about 90% by the end of the year.

And hence, now to actually take up your other question.

In FY24, the calculations will show that the more rapidly we go towards the Lakshya goal of reducing Wholesale and Retailisation, the capital may look excess in this particular year.

It may look excess.

The Board still has to take a decision whether we will give a special dividend, etc. That is also subject to regulatory approvals.

As you know that any specific dividend more than a particular amount in CIC, we'll have to take special approvals, etc. So that's the guidance on the total leverage.

And that is why if you would see through my speech, I talked about the Retail balance sheet, and the Retail P&L.

So yes, FY24, maybe, if I rapidly reduce Wholesale to say, 10%, the leverage may be limited in FY24, but then FY25 onwards, the leverage will only go upwards as Retail grows.

That is why I tried and guided you without giving the numbers about the Retail growth that we are seeing.

So, you would see that all indications are that the CAGR, at least for the first couple of years can be well in excess of 25%.

So those are the indicators that I would like to put.

Saurabh Kumar

And if that were to happen your fiscal 2025 RoA could hit at 2.8-3%, I mean, if assuming, correct?

Dinanath Dubhashi

RoA, that is Retail RoA?

Yeah, we are quite confident of even approaching close to 3% Retail RoA.

January 16, 2023

Saurabh Kumar

No, I was talking at the company level, so 90% by March'24?

Dinanath Dubhashi

Exactly.

So, Saurabh, that's why.

It is everybody's calculation and guess, how rapidly, I reduce the Wholesale book.

Correct?

I mean, I don't want to give you all the analysts there excel sheets.

And particularly for the reason that even I don't know.

So, this is a very funny thing that the metric, which is total profit, will actually go in the opposite direction of how well I do.

If I reduce it very rapidly, the upside of the balance sheet in FY25, will be even better.

But FY24 leverage will be lower, and FY24 profit coming out of Wholesale will be lower.

But the important thing to consider, I would invite all of you to think like that, the Retail growth trending definitely more than 25%.

Retail RoA trending to 3%, well before time and most importantly, because of this one-time provision we have taken, which we really wonder whether we will use it totally, but let's see.

We don't want to -- this is based on valuations that we have done; we have kept it.

But because of that, as I said in my speech, we are very confident that any sell-down in Wholesale will not come and have any splinters or hurt the Retail profitability.

And hence, the Retail profitability is very quickly approaching steady state.

And I believe that FY25 onwards, when the Retail balance sheet is say, 90% or around 90% of the total balance sheet, the growth we’ll be starting to see, clearly.

I think this is as clear an answer that I can give and very frankly, as much I can estimate.

So, I will try my hardest to reduce the Wholesale book as much as possible.

But unfortunately, what will happen because of that is leverage will be that much lesser.

So, we should not be worried about that and look towards maintaining and growing the Retail book profitably for FY24, so that then FY25 growth will catch up.

Moderator · Conference Operator

The next question is from the line of Kunal Shah from ICICI Securities

Kunal Shah

So firstly, I think last time, our indication was we'll be utilizing this money more towards the macro prudential.

And now it seems to be more like a complete markdown, and a fair valuation.

So, this is more kind of realized or something which we expect to go through.

And compared to that of the macro, the utilization or maybe the write- backs from this could be relatively on the lower side.

So how should we look at that change in stance from say macro prudential to a fair valuation?

Dinanath Dubhashi

I have not indicated macro prudential at any point of time.

I had said the word, used the word strengthen the balance sheet.

Because we had to also make up our mind as to how we will use it.

Let me explain the difference very clearly between macro prudential or any credit provisions and the provisions that we have taken.

So today, the whole book is around Rs.

31,000 crores.

Even if you calculate SRs, which are outstanding, it is around Rs.

35,000 crores, Rs.

36,000 crores.

So that's the total book.

Now when we say that this total book, we will start at resolving, ask rapid prepayments, rapid sell down, etc. Actually, the value, as I said in my speech, when the valuer, when they looked at this overall portfolio, even whatever is the NPA and all that, when they looked at the value, fair value, it came actually quite close to the hold- to-maturity value.

But then we felt and we also spoke to the valuer, our auditors, that trying and being very ardent about not passing on any discount, though we actually, the team carries the target of selling things at par value.

But we recognize that the more rapidly we sell, perhaps the buyer may need some discounts on certain things, interest rates have also gone up, various things have happened.

And because of that, we have put this illiquidity value.

So very clearly, if the book would have remained with us at the same pace or reduced at a normal pace of Rs.

2,000 crores or so per quarter, we don't think that we had to give this illiquidity discount.

Because we plan, I mean, I indicated that we hope that we will come to 90%.

So, you can do your calculation that how much the Retail growth is likely to be and for that to be 90%, how much the January 16, 2023 Wholesale book will be.

I don't want to give out internal numbers, but it is very easy to calculate.

It will be based on your projection of our Retail growth and that is how it will come.

But you will see that whatever number you come to will be a very small fraction of today's book.

And because we want to achieve that within a short period of 14.5 months, we believe that this will provide us with the cushion to be able to do that.

That is how you will have to look.

Whether there will be write-backs or things like that, we will know after 14.5 months, I will put it this way.

Kunal Shah

And if we have to look at it in terms of the maximum markdown…

Dinanath Dubhashi

Kunal, sorry.

On the other side, whether there will be any further hit to the Retail P&L because of this, that we are very-very confident.

So, as I always say, management has to hope for the best, we have to be optimistic, but provide for the worst and that is what we have done, that we have provided for a worst-case scenario that we may have to lose Rs.

2,700 crores while selling, which as you would see as a percentage of Rs.

31,000 crores is a very large percentage and that too Rs.

31,000 crores of a good book.

Kunal Shah

And if we have to look at it in terms of the markdown, so between the Real Estate and Infra, how should we look at it?

Because maybe still out of Rs.

31,000-odd crores, Real Estate is at Rs.

7,300, so and Infra is still Rs.

23,000, Rs.

24,000.

So, I think Infra would not be so vulnerable to the markdowns compared to that of Real Estate and in terms of the proportion between the two, how could be markdown proportion you would see?

Dinanath Dubhashi

I don't want to give specific proportion, but generally speaking your conclusion is right.

Kunal Shah

And secondly, in terms of opex + credit cost, you said 7%-odd?

Dinanath Dubhashi

That is correct.

7% for Retail.

Today, it is around 7.5%-odd and that is how we think it will trend.

I will also say why I'm putting this together, right?

Because I believe and we firmly believe that especially collection costs and credit costs are very fungible costs.

There are times when we have to switch one for the other.

And the more we spend on collections, credit cost can be controlled at the very base.

And that is why we would like to see how these two trend.

We will try to do better than that, but that's what -- so very simple, as I said, 11.38% precisely is today's NIMs + Fees.

How are things going to happen?

Costs are going to increase slowly as we go ahead, even though now RBI may not increase it that much.

As we re-price our liability, definitely WAC will go up, not rapidly but slowly.

That is what will happen.

Our product mix, even if it remains same, but probably little bit secured loans will grow.

So that's what will happen.

On the other side, however, the tenor of Wholesale will come down and hence, our ability, overall ALM ability to raise shorter term loan, that is say 2 years, 2.5 years overall, vis-a-vis say 5 years will increase in the ALM.

So, all this together, we are conservatively saying that NIMs + Fees should be around 11%.

You would also see that our fees have also little bit come down this quarter.

I would upfront like to say, that we are also talking to some of our insurance partners about looking at various other arrangements of booking the full potential of fees.

We are also, Board passed a resolution to apply as a corporate agent.

Till now, we were a master policy holder.

We will now be applying for a corporate agent and which would enable us to get the full potential of fees.

So, all these things together, we are very confident of a minimum 11% and hence, if we were to target for a 3% RoA, expense + credit cost has to be around 7%.

It's just very simple arithmetic is what we are looking towards.

January 16, 2023

Kunal Shah

What would have been reason for lower net worth in Q3 compared to that of Q2, particularly on the Retail side, post almost Rs.

400 crores PAT in Retail?

Sachinn Joshi

Just allocation.

Dinanath Dubhashi

My CFO will take this question

Sachinn Joshi

Kunal, this is just allocation between the three businesses.

As you would have seen, the provisions come in one entity.

The gain is sitting in the holding company.

So, it is purely the allocation

Dinanath Dubhashi

I would say, Kunal, FY24 onwards, you will start seeing proportionality of the book.

And that is why Saurabh's question, you take note of my answer, that Retail leverage will actually -- otherwise, what I was there, 3% (RoA) and close to 5x, say, 4.75x debt-equity, I would be comfortably above 15% RoE.

But that will not happen because the moment the Wholesale book comes down, the leverage of Retail will also come down.

And that will happen over FY24. And hence, the conversion of RoA to RoE and hence that RoE going to high teens will perhaps more happen in FY25. But I would invite you to say the potential of doing that by reaching steady-state RoA is pretty soon.

Kunal Shah

And one last data point, if you can share Stage 2 for Retail because this…

Dinanath Dubhashi

You know what, this demand has been there throughout and I would -- I promised you last time that we will soon give it, I would reiterate my promise.

We were not wanting to start giving some data in the middle of the year.

From the next quarter, next financial onwards, we will give very detailed breakup of our portfolio.

Because now we are -- I used to give out these numbers.

Now you know that the new regulations don't allow me to do that, unless I put it in the investor presentation.

So, we will start putting it from next FY onwards.

Moderator · Conference Operator

The next question is from the line of Rikin Shah from Credit Suisse.

Rikin Shah

I had three questions.

First one was on the NIMs.

So of course, the consolidated NIMs have gone up due to higher utilization.

But even if I look at the Retail yields in particular, they have increased 65 basis points sequentially.

So, my question is, are there any specific products which are driving higher yields quarter-on-quarter?

Is it mainly Micro Finance related or you have been able to take price hikes across the product?

That's the question number one.

Question number two is relating to the provisioning pertaining to the Wholesale book.

On that particular point, I wanted to understand the provisioning amount that we arrived at, was illiquidity discount the only variable which we used to estimate this number, or were there any other variables and if yes what were they?

And thirdly, just more of a question from an understanding perspective.

While I believe that taking this provisioning was completely prudent, given that the Lakshya 2026 required Wholesale rundown to be done over few years.

And if the book is indeed performing, wouldn't it have been better that rather than accelerated sell-down, if we could have recovered more amount and pay up for this illiquidity discount?

This is particular because the provision January 16, 2023 that we have taken is substantial - 13% of the net worth, could more number have been recovered or we would have run it over 2 years, 2.5 years rather than just next 14 months?

That's all from my end sir.

Dinanath Dubhashi

Excellent question.

I will take the last question first.

So, in my speech also and in the opening comments also, I said that it is mainly illiquidity, largely, because when the valuation was done based on credit quality, etc, given the provisions we had already made, the valuer didn't think it necessary that the value is very different.

So, have we been conservative?

I believe perhaps yes.

I don't want to make too many comments about that.

But yes, I would believe that it will be almost completely illiquidity.

That is that to answer your first question.

Second, it's a matter of P&L versus value.

And the Board and the management is completely convinced that if you look at valuation of peers, we believe that peers who perhaps have Retail business which may not be of the same quality as ours, get much better value.

Finally, our job is to maximize the value for the shareholder and hence, the management as well as the Board believes that the earlier we are recognized as a Retail finance company, the better.

And that's the reason.

This doesn't mean that we will necessarily take huge losses or anything like that.

But we wanted to give very clear strategic direction to this.

Also secondly, what happens that as much as we believe in the portfolio, you know that something happening can give some problem in Wholesale portfolio, Andhra Pradesh, some things here and there and it has always weighed down on investor feelings, perceptions, etc. Clearly, we want to finish this as early as possible and reduce Wholesale to a level where all investors are confident that it is a very small percent of the book now.

And also, if at all any further reductions or losses have to be taken, they have been already taken and finished.

The Retail P&L, you can look at as a pure pristine P&L with no fear.

Many times, I was told that sometimes we are hit by some event or we get a negative surprise and all those things were said.

We want to now ensure that there is no negative surprise coming to the balance sheet at any point of time.

This is in colloquial words, it is a dry powder, that we have learned from some analyst only, dry powder that we have created for any such issues coming up in the future.

So, that's how you need to take it.

It's how the overall P&L will progress vis-a-vis value.

We believe and hope that all of you will now give better value to us.

Rikin Shah

And sir, on yield side?

Dinanath Dubhashi

Yields.

So yes, it is not just Micro Loans.

There are three products, we saw very rapid increase in this time.

And all are good yielding products; Micro Loans, surely, i.e. Rural Business Finance, Consumer Loans, Farm and Two- wheelers, we saw very-very good increase.

So, yields have gone up.

As far as passing-on is concerned, I will be frank.

Maximum pass on actually has happened in Infra loans and Home Loans (HL), where the yields are so less than we can't afford to absorb.

So, we have passed on completely.

In the other, Micro Loans, for example, we have stayed at 24% through the entire 225 basis points rise, because we believe that we are adequately priced.

So that is how it has moved.

Product mix has moved too in Retail, moved to a little bit more high-yielding products, but definitely not necessarily only Micro Loans.

We give product mix numbers in detail.

So, you can see that.

Rikin Shah

Yes, that was from the loan book perspective.

I wanted to just understand from a yield perspective.

But anyway, that answers all my questions.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, this was the last question for today.

I would now like to hand the conference over to Mr. Dinanath Dubhashi for closing comments.

January 16, 2023

Dinanath Dubhashi

Thank you.

I will only say that let FY23 bring all of us, the country itself, very good luck in many things.

We are now seeing, soon we'll have the budget.

We'll soon, hopefully, be off major issues, major problems.

We look at the economy with hope.

We believe that not only through the plans we have, the initiatives we have taken, but also performance that we have shown, we believe that we have earned a much-increased confidence from all of you and very grateful for you for the support you have given and with folded hands, would ask you to continue this support to us and give us the credit that hopefully we deserve.

Thank you.

Thank you very much.

Moderator · Conference Operator

Thank you.

On behalf of L&T Finance Holdings Limited, that concludes this conference.

Thank you for joining us, and you may now disconnect your lines. *Since the transcript has been derived from a voice recording tool, necessary corrections have been made to remove anomalies as well as manifest but inconsequential factual discrepancies, repetitions in Q&A which would have unintentionally crept in, if any