L&T Finance, which recently redefined its business strategy, is headed for a re-rating. Marico chairman Harsh Mariwala, an independent board member of L&T Finance, bought 46,000 shares in the company early this week from the open market.
With a loan book size exceeding Rs 57,000 crore and pan-India reach with 700-plus points of presence across 24 states, L&T Finance has built a strong position in the Indian financial services industry.
“As a board member, I had to take the relevant approvals from the board and then bought the shares in my individual capacity. It is a confirmation of the fact that I believe in the L&T Finance story,“ Mariwala said.
The stock, which underperformed last year after failing to get a banking licence, has outperformed the broader market in 2016 gaining 29% so far this year as against a percent gain in Sensex.
L&T Finance has hired merchant bankers after it decided to exit most of its non-core activities such as car financing leases and SME loans which will be hived off in 2017.
As a result of focusing on the core and profitable activities, the RoEs will surge from the current 10% to about 18-19% by 2020, the management estimates.
Analysts believe the company will deliver sturdy growth in the coming years due to its diversified loan book and focus on core business. Nine broking houses have given a Rs buy’ rating on the stock with an average target price of Rs 120, while two have recommended a Rs sell’.
“L&T Finance loan book (is set) to grow over 20% CAGR in the next few years driven by the focused business, gradual improvement in asset quality and the likely benefit from government’s focus on power and infrastructure sectors along with a robust growth in housing and microfinance segments,“ said Siddhartha Khemka, senior VP research, CentrumBSE 0.51 % Broking.
The first sign of better times for the company was available in the latest September 2017 quarterly numbers.The RoE for the quarter was up 11.7% against 9.8% in the corresponding period in the previous year. In the September quarter, overall loans continued to grow at a steady 18% YoY to Rs 60,898 crore, while net NPA declined 6bps to 3.07%.
“L&T Finance has strong capabilities to raise resources and is now focused on segments which are likely to see strong growth in the near future,“ said Atul Karwa, analyst, HDFC Securities. “We feel investors could buy the stock for sequential targets of Rs 120 (2.7x FY18E ABV) and Rs 134 (3x FY18E ABV) in 2-3 quarters“.
Currently, FIIs hold 10.86% stake while mutual funds hold 2.32%. Bain Capital holds 1.8% of L&T Finance. It has invested Rs 118 crore as a subscription for warrants which will give it 5% stake. These warrants are convertible at Rs 74 per share in the first quarter of FY18.
