L&T Finance Date 24th June, 2015

CMP Rs 63

Target Price Rs 80.50, Upside +28%

General Info

FV Rs 10

Mkt Cap Rs 10,840cr

BV Rs 34

P/BV 1.5

EPS (TTM) Rs 5

Div Yield 1.20%

Dividend History

Dividend/share

Jul-15 Rs 0.80 Jul-14 Rs 0.75

Jul-13 Rs 0.75

Shareholding Pattern

Promoters,

72.95%

FIIs, 0%

DIIs, 5.99%

Others,

21.06%

Investment Rational

1. Monsoon Effect: 25% of the Retail Loan

portfolio is in Rural Area. Improving Monsoon is positive for the company.

2. Banking License: Banking license will enable the company raise low- cost deposits, while on lending side, it already has a well-diversified loan portfolio, significant part of which is in compliance with the priority sector lending requirements.

3. Improving Economic Condition: Improved growth outlook for the infrastructure finance business. Governments recent thrust on renewable energy is already helping the company report a strong growth in its infrastructure portfolio.

4. Monetary Easing: Easing Inflationary pressure could see another rate cut in CY15, this improve margins and boost growth.

5. Loan Book Growth: Loan book to grow at 25% CAGR over FY15-17E. HFC, Tractor, Two-wheeler and Microfinance in retail business and operating projects in Roads and Renewable energy sectors in the wholesale segment will lead the growth.

6. Subsidiary: RoE of HFC business to improve to 16% by FY17E.Investment management business has already achieved break-even and will begin contributing to consolidated RoE. L&T retail lending business to report RoE

expansion of 2-3% over FY15-17E.

L&T Finance

Date 24th June, 2015F

Company Background L&T Finance was incorporated in 1994. L&T Finance Holding is holding company registered with RBI as an NBFC. Larsen & Tourbo is promoter of the company. It is headquartered in Mumbai. And has presence in 23 states in India.

Operation: Operations are managed out of three locations Mumbai, Chennai and Hyderabad. These are broadly structured into three units Loan acquisition, loan servicing and business process.

Business Verticals: 1. Retail Finance 2. Wholesale Finance 3. Asset Management

4. Insurance Distribution

Retail Finance: Retail Finance consists of retail, mid corporate and housing finance business and is carried out through wholly owned subsidiaries, L&T Finance Ltd, Family Credit Ltd and L&T Housing Finance Ltd. Retail Finance Total Loan Book as on FY15 is Rs 25,000 Crore.

Product Portfolio under Retail Finance:

Consumer & Auto Loan

Micro and Small Enterprises

Mid & Large Corporation

Housing Finance Micro Finance

Farm Equipments Construction Equipments

Loan & Leases Home Loans Joint Liability Loans

Personal Vehicles Medium & HCV LAS LAP Micro Individual Loan

Small & LCV Warehouse Receipt Finance

Supply Chain Finance

Construction Funding

L&T Finance

Direct Consumer Exposure of Total Retail Portfolio

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

B2B

B2C

B2B 76% 81% 78% 67% 55% 43%

B2C 24% 19% 22% 33% 45% 57%

FY10 FY11 FY12 FY13 FY14 FY15

Break up of B2C Retail Loan Portfolio

0%

10%

20%

30%

Rural

Vehicle Finance

Housing Finance

Micro Finance

Rural 16% 19% 19% 23% 25%

Vehicle

Finance

1% 11% 12% 11%

Housing

Finance

0% 2% 9% 17%

FY11 FY12 FY13 FY14 FY15

Retail Loan Portfolio: Fig (In Crore)

Loan Book FY15

% of Total Retail Approx Yield

Rural Product 6286 cr 25% 16-20%

Personal Vehicle Finance 2847 cr 11%

Car - 12-15%, Two Wheelers 18-20%

Micro Finance 916 cr 3.6% 20-24% Housing Finance 4258 cr 17% 11-14% Supply Chain Finance 1754 cr 7% 12-15% Mid Market Finance 6928 cr 27.7% 12-16% CV Finance 2004 cr 8% 12-16% Total Retail 24993 cr

L&T Finance

Outlook of the Retail Portfolio: Product Outlook

Rural Product Finance Monsoon is advancing ahead of schedule and Good Monsoon will help in strengthening the Rural Loan portfolio. Tractor sales could increase is positive for the company.

Personal Vehicle Finance Passenger Vehicles sales is expected to pick up in FY16. 8-10% growth expected.

Micro Finance Strong demand in Microfinance.

Housing Finance Mortgage Industry penetration at 9% of Indias GDP, expected to double in next 3 years: ICRA

Supply Chain Increased focus on manufacturing sector is expected to increase lending to the sector.

Mid Market Finance Capex will take another 2 3 Quarters for pick up. This segment to show muted growth.

CV Finance CV demand to increase going forward as interest rate coming down.

Wholesale Finance The wholesale finance business comprises of Infrastructure Financing and non- Infra wholesale Financing. Infra Financing is done through L&T Infra Finance Company Ltd and L&T Debt Fund Ltd. Non Infra Financing is done through L&T Fincorp Ltd.

Infrastructure Loan Portfolio Composition

Thermal

15%

Renew able

Pow er

17%

Pow er Corp

13%Transportati

on

20%

Telecom

13%

Others

22%

Operational Asset Proportion Increasing

0%

10%

20%

30%

40%

50%

60%

Operational

Projects

21% 35% 31% 37% 47%

Under Construction 27% 29% 29% 26% 28%

Corporate 48% 32% 37% 32% 22%

Equity Investment 5% 4% 2% 5% 3%

FY11 FY12 FY13 FY14 FY15

L&T Finance

Wholesale Loan Portfolio: Fig (Rs Crore)

Loan Book FY15

% Total Infra Loan Approx Yield

Thermal Power 2960 cr 13% 13-14% Renewable Power 5931 cr 26% 13-14% Power Corp + T&D 2161 cr 9.7% 13-14% Roads 4736 cr 21.2% 13-14% Telecom 1427 cr 6.4% 13-14% Others 5022 cr 22.5% 13-14% Total 22237cr

Outlook of Wholesale Portfolio: LT Infra Portfolio Outlook

Renewable Energy Government increasing focus on renewable energy to benefit the company. Financing of renewable energy sector expected to see increased participation from Banks.

Thermal Power Resolution of domestic gas availability and pricing required to re-start stalled project. Also increased Coal production by CIL is positive.

Roads Increased order flow from NHAI under EPC model expected.

Resolution of issues in stalled projects and commencement of payment flows from NHAI key expectation.

Others Refinance opportunity expected in PPP projects.

EPC sector revival continues to lag expectation.

Limited growth in infra allied manufacturing.

L&T Finance

Asset Management LTFH entered into asset management space with acquisition of DBS Cholamandalam AMC in 2010. It later acquired Fidelitys Mutual Fund in 2012. The average AUM grew at 50% in last 2 years. Currently AUM stands at Rs 22500 cr. L&T MF market share in the overall AUM of MF industry stands at 1.9%. LTFH Asset management business has achieved break even in Q414 and it reported a PAT of Rs 5.3 cr in FY15.

Mutual Fund Composition

Equity,

39%

Cash/

Short Term,

37%

Other Fixed

Income,

12%

FMP, 12%

Trend In AUM Growth

0

5000

10000

15000

20000

25000

Series1 4000 4000 10000 19000 22500

FY11 FY12 FY13 FY14 FY15

Financials

Asset Quality Improving

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

GNPA(%) 2.39% 2.03% 3.18% 2.25%

NPA(%) 1.56% 1.26% 2.29% 1.26%

FY12 FY13 FY14 FY15

Net worth Composition invested across Business

L&T Finance

Quarterly - Gross Segmental Revenue Fig (In Crore)

Q4FY15 Q4FY14 % Chg Retail & Mid Market 911 847 7%

Wholesale 669 517 29%

Investment 42.5 27 57%

Others 199.3 21.5 826%

Total 1821.8 1412.5 28%

Yearly - Gross Segmental Revenue Fig (In Crore)

FY15 FY14 % Chg Retail & Mid Market 3628 3000 21%

Wholesale 2394 1944 23%

Investment 339 94.8 257%

Others 334 286 16%

Total 6695 5325 25%

Quarterly - Segmental PBT Fig (In Crore)

Q4FY15 Q4FY14 % Chg Retail & Mid Market 158 108.6 45%

Wholesale 99.2 148.2 -33%

Investment 4.98 1.9 162%

Others -1.43 -6.7 -78%

Total 260.75 252 3.4%

Yearly - Segmental PBT Fig (In Crore)

FY15 FY14 % Chg Retail & Mid Market 594 409 45%

Wholesale 468 475 -1%

Investment 11.2 -0.21 5433%

Others 100 -59 269%

Total 1173.2 824.79 42%

EPS Trend

Peer Group Comparison

P/E P/BV

L&T Fin 12.5 1.85

M&M Fin 19 2.7

Shriram Transport 18 2.2

Financials Yearly

FY15 FY14 FY13 FY11

Total Income 6196 5056 3956 2988

Expenses -1738 -1338 -903 -620

Profit from Operation before Other Income, Interest and Exceptional Items 4458 3718 3053 2368

Other Income 141 181 45.7 26.4 Profit from Operation Ordinary activity before Interest and Exceptional Items 4599 3899 3098.7 2394.4

Finance Cost -3568 -3073 -2332 -1702

PBT 1031 826 766.7 692.4

Exceptional Items 144 0 212 0

PBT After Exceptional Items 1175 826 978.7 692.4

Tax -324 -230 -259 -229

PAT 851 596 719.7 463.4

Total Income grew at CAGR of 27%.

PBT grew at CAGR of 14%.

PAT moved up at CAGR of 22%.

Valuation and Outlook We expect PAT to grow at normalize rate of 13-15% over next 2 years. FY16E EPS would be Rs 5.75 and FY17E EPS would be Rs 6.6. Stock is available at 10.9 x to FY16E EPS and 9.5x to FY17E EPS. Infra and Housing Finance companies are trading at average P/E multiples of 18-20. Even if we conservatively value the company at 14X to FY16E EPS, The Fair Value comes at Rs 80.50 Stock has underperformed the market and has been in consolidation mode for last 1 year and is in range. Upside move could be seen. Businesses are picking up and green shoots could be seen. Company is able to improve the asset quality. In 2-3 Quarter CV and Retail Loan segment is expected to do pick up. Declining interest rate is positive for the company.

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