VOT Capital's avatar

follower assets

I write a newsletter covering "not so well known" Indian companies...
Small Intro and Write-up on L&T Finance- Are the troubles finally behind for this NBFC, down 60% from all time highs.
Hi folks, I will start by introducing myself. I am 24 yr old investor from India. I started my investing career by reading about Buffett &Graham, and hence invariably shifted to looking for "value" stocks. Which I understood then to be optically cheap stocks (low p.e. or low EV/Ebitda). The thing I realised was that most stocks are "cheap" for a reason and so I started looking for what those reasons maybe and the triggers that may lead to a re-rating. Hence, I started writing this newsletter- Value or Trap. In my newsletters- I give a brief history of the company, a deeper dive into the business to look for reason that may justify the low valuations and the changes that may lead to a re-rating. Sometimes, the re-rating may come not from anything the company is doing differently but due to a change in the business cycle, so you will find a few write-ups on Auto-Ancillaries, or Real Estate companies, Paper manufacturers and so on.

Coming to my latest write-up- L&T Finance Ltd. ( Disc- I own shares of L&T Finance and hence my views on the same maybe biased. This writeup is only for educational purpose and should not be taken as financial advice.)

L&T Finance is a Non-banking finance company (or NBFC), which just means they can lend and make investments (akin to that of banks) but cannot accept demand deposits & cannot issue cheques drawn on itself.

L&T Finance is backed by one of India's largest conglomerate Larsen & Toubro (L&T), it is one of the world's largest construction companies, with business interests in Defense, IT, Realty, Power, and Financial Services. L&T is a professionally managed company with no promoter.
L&T Finance (setup in 1994), wanted to turn into a bank and hence decided to get into lines of businesses that would be suitable for a bank. They were providing a variety of lending solutions from Micro Loans, Vehicle finance, Home loans to Project Finance, Supply Chain finance, and Loan against Shares. But their application for a banking license was rejected. So the company decided to defocus from most of its products and focus only on three- Rural Loans, Housing Loans and Infra Loans. This paid dividends for them as they were able to improve their RoE (from 11% in 2016 to 18% in 2018). The Book Value per share went from Rs 40 in FY16 to Rs 63 by FY18 end. In the same time frame, the stock went from Rs 70 to Rs 170, topping out at over Rs 200. This was despite the Reserve Bank of India (RBI) changing NPL norms, leading to higher Non Performing Loans for LTFS, esp. in their Infra book.

The first major blow hit in Sept 2018, with a major infrastructure and real estate company- IL&FS defaulting on around Rs 910 bn of loans. This lead to major liquidity squeeze on all NBFCs and Housing Finance companies. Then in June 2019, the second blow came with a big HFC- DHFL defaulting on loans and the promoters were accused of syphoning off funds.
In FY19, L&T Finance, started reducing exposure to the real estate sector, with smaller developers struggling to survive. They had exposure both to DHFL (NCDs) and ILFS( loan to SPVs), but expected little LGD due to the ringed fenced SPVs and enough cash in escrow to meet payment obligations. Company reported an ROE of 15% in FY19 with profits up 76% but Housing Book showing higher provisions. The stock ended FY19 at Rs 150. In FY20, while housing market continued to stay depressed, rural and infra book were doing well, till covid-19 hit. Stock ended FY20 at Rs 50.

Fast Forward to the present- company had to provide for 7% (write offs + provision) of its book and restructured another 3.5% of the book, in the last 1.5yr due to Covid. The management believes they have provided for current and expected NPLs, from both the first and second wave of Covid. They expect to be able to start growing from FY23, given there isn't another major wave of covid in India (Omicron says Hi!). The stock is trading around Rs 75 currently, which is a little below its book value of Rs 80.

My thesis is simple, good management, recognisable brand, strong rural lending franchise, and large market to grow into with Rural (25%) and Housing market (10%) still under penetrated in India. LTFS also has new product launches, with plans to enter increase consumer, health and education loans. With similar customer profiles to rural loans ( where LTFS is quite big), company has the data and reach to expand.

Risks- Another wave of covid and more importantly lockdowns, will push back the economic recovery further. While LTFS still carries liquid funds (cash +investments) worth Rs 131bn on its book, it will increase need for further provisions. Biggest risk is the management. The extra provisions and earlier recognition of NPLs are signs of prudence but going forward they will have to show, that they can grow the loan book and keep those NPLs down as well.

A much more detailed explanation, with comparison to its peers can be found here- https://valueortrap.substack.com/p/l-and-t-finance-holding-ltd?utm_campaign=post&utm_medium=web&utm_source=copy

P.s- Thanks to @investmenttalk for introducing me to this platform.