Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the outstanding debt facilities of L&T Finance Limited (LTF; formerly known as L&T Finance Holdings Ltd [LTFH]).

 

CRISIL Ratings has also withdrawn its ratings on NCDs of Rs 2,172.60 crore as the same has been fully redeemed. This rating action is in line with the withdrawal policy of CRISIL Ratings. 

 

The ratings continue to reflect the strong and diversified presence of LTF within the lending space and its diversified resource profile. The ratings also centrally factor in the expectation of strong and continued support from the parent, Larsen and Toubro Ltd (L&T; 'CRISIL AAA/Stable/CRISIL A1+'). These strengths are partially offset by the company’s moderate, though gradually improving, asset quality.

 

Total assets under management (AUM) stood at Rs 85,565 crore as on March 31, 2024, having grown from Rs 80,893 crore, a year ago; correspondingly, the proportion of retail loans in the overall advances increased to 94% from 75%. On June 30, 2024, total AUM stood at Rs 88,717 crore of which 95% were retail loans. This is in line with the company’s existing business strategy to granularise its portfolio. Against this, asset quality – though moderate – has also been restoring. On March 31, 2024, reported gross non-performing assets (GNPAs) were 3.15% of gross advances vis-à-vis 4.74%, a year ago. As of June 30, 2024 – this metric stood at 3.14% - supported by stable asset quality across portfolios.

 

For fiscal 2024, the company reported profit after tax (PAT) of Rs 2,317 crore (return on managed assets [RoMA] of 2.2%), against Rs 1,536 crore (1.4%) for the previous fiscal. For the first quarter of fiscal 2025 (Q1FY25), the company reported PAT of Rs 685 crore with an annualised RoMA of 2.6%.

 

In August 2024, LTF received the non-banking financial company – investment and credit company (NBFC-ICC) license. This was under the scheme of amalgamation, which was entered into, and successfully concluded in December 2023, between LTFH and its operating entities - LTF, L&T Infra Credit Ltd (LTICL) and L&T Mutual Fund Trustee Ltd (LTMFTL). The merged entity has been operating as a single unified retail NBFC, which is compliant with the guidelines applicable to NBFC-ICCs. In March 2024, LTFH name was changed to LTF. 

Analytical Approach

CRISIL Ratings considers the standalone business and financial risk profile of LTF (formerly known as LTFH; earlier consolidated with then LTF and LTICL). CRISIL Ratings has also factored in the strong support from the parent, L&T, given the strategic importance of the entity to the parent along with the shared brand name. L&T is the majority shareholder of LTF, with a shareholding of 66.37% as on June 30, 2024.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to, and expectation of strong support from, L&T

LTF has demonstrated a healthy growth over the past few fiscals, while maintaining a stable profitability. As part of L&T’s focus on building a strong services portfolio including IT, technology and financial services, LTF has remained a key focus area of the parent. L&T provides strategic oversight to the entity and has personnel from its senior management on the board of LTF. For instance, Mr S N Subrahmanyan (chairman & managing director, L&T) is a non-executive director and chairperson on the board of LTF whereas Mr R Shankar Raman (president, whole-time director and chief financial officer, L&T) is another non-executive director. The parent also has representation in some of the key committees of the company, such as asset-liability and risk management committees. LTF also benefits from the synergies, extensive experience and expertise of L&T, especially in infrastructure and real estate lending. The parentage of L&T, along with the brand name, also supports the resource profile. 

 

Furthermore, the parent provides has infused equity capital at periodic intervals in LTF (infused ~Rs 1,900 crore in fiscal 2021 and Rs 2,000 crore in fiscal 2018). In the past, L&T has also extended a line of credit to LTF,  to be used during contingency. Capital support from the parent, along with internal cash accrual, is expected to keep capitalisation adequate with gearing not expected to exceed 7.5 times on a steady-state basis.

 

This demonstration of financial support is reflected in the parent’s intention to (i) maintain strategic linkages and management oversight so that, among others, LTF conducts its business in a manner such that it honors its stakeholder obligations in a timely manner (ii) maintain majority shareholding in LTF, and (iii) provide growth and risk capital, if and when required.

 

The financial services business is expected to remain one of the key focus areas for L&T, which should continue to support LTF.

 

• Strong and diversified presence across the lending segment

Post the scheme of amalgamation coming into effect, LTF has been operating as a retail-focused NBFC and, has built a strong market position with AUM of Rs 88,717 crore (with retail book of Rs 84,444 crore) as on June 30, 2024. Growth in AUM remains modest at 13% year-on-year (y-o-y) in Q1FY25 as compared to 6% in fiscal 2024 and a decline of 8% in fiscal 2023, owing to an accelerated sell down of the legacy wholesale portfolio – the share of which declined from 47% of the overall advances to 5% between March 2022 and June 2024. The effect of this was partly offset by a strong growth in retail portfolio. For Q1FY25, retail loans grew at 31% (y-o-y) as against 31% for fiscal 2024 and 35% for fiscal 2023.

 

The company has been focused on increasing the degree of digital integration in all its functional areas including sourcing, underwriting, disbursement, servicing and collections. LTF deployed its beta version of ‘Project Cyclops’, an underwriting engine, which is currently launched in a pilot mode for its two-wheeler segment, that shall further improve their credit underwriting capabilities. LTF is extensively using its large customer base of ~2.4 crore through multiple channels, to enhance customer engagement and drive successful conversions, thus creating cross-selling and upselling opportunities. The growth in the retail segments has also been supported by enhanced digital presence (e.g., PLANET App.) and usage of data analytics.

 

LTF’s retail portfolio is divided into four main categories; 1. Farmer finance (16% of AUM as on June 30, 2024) 2. Rural business loans & micro finance loans (29%) 3. Urban finance consisting of two-wheeler finance (14%), personal loans (8%), home loans (18%), loan against property (5%) and 4. Small and medium enterprise (SME) finance (5%). Business momentum across all segments remains strong on account of steady urban consumption and increasing rural consumption. The remaining wholesale lending book of the entity comprises infrastructure finance (2%) and real estate finance (3%) as of June 30, 2024.

 

Retail portfolio at ~Rs 84,444 crore (95% of overall loan book) as on June 30, 2024, has exhibited steady growth momentum over the past few quarters. Quarterly disbursement towards this segment were Rs 14,839 crore (Q1FY25), higher by 33% y-o-y (Rs 54,267 crore in fiscal 2024 as compared to Rs 42,065 crore for the previous fiscal).

 

Going forward, the business growth is expected to pick up and be driven by consistent focus on the retail (including SME finance) segment.

 

• Well-diversified resource profile

Resource profile is spread across capital markets and bank funding. The company is prominent issuer in the capital markets and has long established banking relationships as well. Of the total borrowing of Rs 80,295 crore as on June 30, 2024,  NCDs (including retail), commercial paper, external commercial borrowing, bank borrowings, financial institution and others formed 34%, 8%, 1%, 56% (priority sector lending [PSL] 23% and non-PSL 28%), 5% and 1%, respectively. The diversity in resource profile aids the company’s ability to raise funds at competitive pricing. For Q1FY25, average borrowing cost[1] was 6.9% (annualised; 6.9% for fiscal 2024), which was lower than most peers. L&T’s parentage also supports the resource profile of LTF.

 

Weakness:

• Moderate, albeit improving, asset quality

Asset quality indicators, though moderate, have gradually improved in the recent past. Gross stage-3 (GS-3) and net stage-3 (NS-3) stood at 3.14% and 0.79%, respectively as June 30, 2024 (3.15% and 0.79% as March 31, 2024), improved from 4.97% and 1.57% on March 31, 2021 – supported by stronger collection efficiency, controlled slippages, higher recoveries and write offs. As on June 30, 2024, provisioning coverage ratio for GS-3 was at 75% as compared to 76%, a quarter ago. In the retail portfolio, asset quality has shown sequential improvement with GS-3 and NS-3 of 2.79% and 0.62%, respectively as on June 30, 2024, having improved from 3.21% and 0.70% as on June 30, 2023. Furthermore, the higher focus on retail loans, stronger underwriting and collection practices, better early warning systems and focus on digitisation and data analytics should continue to support asset quality.

 

Furthermore, wholesale book continues to rundown, particularly after the accelerated sell-own in fiscal 2023, and forms 5% of the AUM. The net security receipt book stands at Rs 6,770 crore (7% of AUM) as on March 31, 2024. The provisions created for wholesale portfolio as part of the accelerated sell-down strategy can potentially cover the incremental provisioning requirement. The company has also created a macroprudential provisions for retail portfolio; the stage 2 provisions (including macroprudential provisions) accounted for 69% (March 2024) of the Gross stage-2 retail assets.

 

CRISIL Ratings takes note of the recent growth in retail portfolio with better asset quality in their established products -  rural group loans and micro finance, farm equipment financing, two wheeler financing and home loans. While the SME (4.5% of AUM as of March 2024) and personal loans (7.5% of AUM as of March 2024) have also contributed to the overall growth, these two segments are yet to go through economic cycles.  Ability of the management to keep the asset quality metrics under check as recently scaled portfolios season and go through economic cycles, while the overall business continues to grow at a healthy pace, will remain a key monitorable.

[1] Borrowing cost = Annualised interest cost during the period divided by the average of outstanding borrowings at the beginning and the end of the period

Liquidity: Superior

The asset-liability maturity profile as on June 30, 2024, reflects cumulative positive liquidity gaps in all buckets up to one year. LTF generally maintains liquidity to meet obligations coming up over the next 30 days. As on June 30, 2024, total debt repayments (including interest) over the following three months (July to September 2024) were Rs 10,527 crore. Against this, LTF had a liquidity balance of around Rs 23,542 crore (comprising cash, liquid investments and unutilised bank lines). The company continues to raise debt and strengthen its liquidity position

 

Environment, social, and governance profile

The environment, social and governance (ESG) profiles of financial institutions typically factor in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, lending decisions may have a bearing on the environment and other sustainability related factors.

 

The ESG profile of LTF supports its already strong credit risk profile. LTF has demonstrated an ongoing focus towards embedding different aspects of sustainability in its business strategy, business operations and business impact.

 

Key ESG highlights:

• In fiscal 2024, the company endeavored to calculate and reported financed emissions (Scope 3) for select retail portfolios.
• During the year, the entity raised Rs 9,444 crore through sustainable finance/priority sector and implemented a sustainable finance framework to enhance its capacity to finance social and environmental projects which are in line with the United Nations sustainable development goals.
• As part of its commitment to achieve carbon neutrality by 2035, LTF has adopted a decarbonisation approach of utilising green power for its business operations and, has increased its dependence on renewable power since last fiscal. About ~39% of its overall operations in fiscal 2024 were executed through usage of green power.
• LTF also reduced its operational carbon footprint (Scope 1 and Scope 2) by ~18% over the previous year and has been creating carbon sinks by sapling plantations and increasing green cover.
• More than 50 times of water consumed in operations was replenished through the Jal Vaibhav project
• LTF, through the net promoter score, evaluates its customer satisfaction – which is a part of its stakeholder management approach. As of March 31, 2024, 51.5% of rural loan book was from low-income states – indicating contribution made towards rural development.
• Corporate social responsibility activities are focused on digital financial inclusion for women empowerment, disaster management, and other projects supporting 12.70 lakh+ community members
• More than 50% of the board members are independent directors and 33% of independent directors, are women, with segregation in chairman and executive positions. A dedicated investor grievance redressal mechanism is in place and the disclosures put out by it are extensive.

 

There is growing importance of ESG among investors and lenders. LTF’s commitment to ESG will play a key role in enhancing stakeholder confidence, given the high share of foreign investors as well as access to both domestic and foreign capital markets.

Outlook: Stable

LTF will remain highly strategically important to L&T and continue to benefit from the latter’s strong support over the medium term. Furthermore, LTF is expected to maintain its strong and diversified presence across the financial services space and a well-diversified resource profile.

Rating sensitivity factors

Downward factors

• Weakening in L&T's credit risk profile could lead to a similar rating change for LTF
• Any material change in the shareholding or support philosophy of L&T for LTF
• Weakening in the capital structure of LTF, with gearing exceeding 7.5 times on a steady-state basis, and/or deterioration in asset quality, leading to a substantial decline in profitability

About the Company

LTF is a NBFC-ICC and a subsidiary of L&T. It was incorporated in 2008 and is listed under the National Stock Exchange and Bombay Stock Exchange. On December 04, 2023, LTFH has announced the successful completion of the merger with its subsidiaries LTF, LTICL and LTMFTL. Subsequent to this, LTFH – changed its name to LTF – and has been operating as a single unified retail NBFC, housing all lending businesses under one operating NBFC.

Key Financial Indicators

L&T Finance (as per Indian Accounting Standard)

For the period ended March 31	Unit	2024	2023
Total assets	Rs crore	102718	106362
Total income	Rs crore	14055	13302
PAT	Rs crore	2318	1536
GS-3	%	3.2	4.7
Return on assets (annualized)	%	2.2	1.4
Gearing	Times	3.3	3.9

 

For three months ended June 30,	Unit	2024	2023
Total income	Rs crore	3,785	3,377
PAT	Rs crore	685	531
GS-3	%	3.1	4.0
Return on assets (annualised)	%	2.6	2.1
Gearing	Times	3.4	3.4

 

Any other information: Not applicable

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
L&T Finance Ltd	Full	Holding company
L&T Financial Consultants Ltd	Full	Subsidiary
L&T Infra Investment Partners Advisory Pvt Ltd	Full	Subsidiary
L&T Infra Investment Partners Trustee Pvt Ltd	Full	Subsidiary
Mudit Cement Pvt Ltd	Full	Subsidiary
L&T Infra Investment Partners	Proportionate	Subsidiary