Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL AAA/CRISIL PP-MLD AAAr/Stable/CRISIL A1+' ratings on the existing non-convertible debentures (NCDs), long term principal protected market linked debentures (PP-MLD), preference share and commercial paper of L&T Infra Debt Fund Limited (L&T IDF).
CRISIL Ratings has also withdrawn its rating on NCDs of Rs 417 crore, at the company’s request as the same have matured and repaid by the company. The withdrawal is in line with CRISIL Ratings’ withdrawal policy.
L&T Infrastructure Finance Company Limited (LTIFC), an infrastructure finance company (IFC) as sponsor, held 48.36% stake in L&T IDF, with the remaining stake being held by other L&T Financial Services (LTFS) Group entities - L&T Finance Ltd (LTFL) at 28.28% and L&T Finance Holdings Limited (LTFHL) at 23.36% as on March 31, 2021. In April 2021, the scheme of amalgamation by way of merger by absorption of LTIFC and LTHFC with LTFL was completed post receipt of all requisite approvals. Consequently, effective April 12, 2021, LTFL became the largest shareholder with 76.64% stake in L&T IDF. The remaining stake continues to be held by LTFHL
L&T IDF is currently categorized as an Infrastructure Debt Fund- Non-Banking Financial Companies (IDF-NBFC). Now, as per regulations, IDF-NBFCs can be held either by a bank or an IFC (as a sponsor with maximum 49% equity stake and minimum 30%). However, with merger of LTIFC with LTFL, the IFC status of sponsor ceases to exist. As advised by Reserve Bank of India (RBI), the, company is in the process of applying for change in the NBFC classification to NBFC – Investment and Credit Company (NBFC-ICC) from an IDF-NBFC.
In its ratings on the debt instruments of L&T IDF, CRISIL has, till now, considered the standalone business and financial risk profile of L&T IDF, driven by the focused and closed-box structure of the business model, strict guidelines on investment/lending and liability profile and tax-exemption benefits.
Currently, the loan portfolio of L&T IDF continues to reflect healthy credit quality (gross stage 3 assets nil as on March 31, 2021) with high proportion of assets backed by the tripartite agreement or guaranteed/supported by a government/state authority. While the company would convert itself into a NBFC-ICC, the company is expected to continue its focus on low risk operational infrastructure projects. However, the resultant business model may undergo some changes as the company would not have income tax benefits in future and would not be able to incrementally add tripartite guaranteed assets. In order to mitigate the above risk factors, the company is expected to maintain a lower leverage of 6.5 times on a steady-state basis, compared to 11 times factored in earlier. Also, with NBFC-ICC category being permitted to access bank limits (which IDF-NBFCs are not), the liability profile of the company is expected to benefit.
At a standalone level, the current portfolio of L&T IDF comprises projects with an average of five years of satisfactory operations Further, around 70% (as on March 31, 2021) of the portfolio comprises of projects that are backed by the tripartite agreement or guaranteed/supported by a government/state authority or are highly rated. The company has an experienced team, which has demonstrated ability to refinance projects and raise funds at competitive rates in tenors of 3,5, 7, 8, 10, 15 and 20 years. Also, the company has had nil gross stage 3/gross NPA assets since inception. Loan book outstanding as on March 31, 2021 was Rs 8,470 crore (Rs 8,796 crore as on March 31, 2020; Rs 8,201 crore as on March 31, 2019). As on March 31, 2021, the overall capital adequacy (CRAR) of the company was comfortable at 37% (as against a regulatory requirement of 15%). Further, the asset-liability profile of the company is positive in all buckets up to over 2 years as of March 2021
Give the change in shareholding and expected conversion to NBFC-ICC, CRISIL Ratings has changed its analytical approach for L&T IDF, in line with other subsidiaries of LTHFL. CRISIL Ratings has combined the business and financial risk profiles of L&T Finance Holdings Limited (LTFHL; holding company of the LTFS group) and its subsidiaries and associates (including L&T IDF), and factored in strong support from the parent L&T.
The ratings continue to reflect the strong and diversified presence of the LTFS group across the financial services space and a well-diversified resource profile. It also centrally factors in the expectation of strong support from the parent, Larsen & Toubro Ltd (L&T; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'). These strengths are partially offset by moderate, albeit improving, asset quality.
In line with the Reserve Bank of India (RBI) measures for Covid-19, the LTFS group had given moratorium to its borrowers. While collection efficiency was impacted during the initial months of the moratorium, collections have inched up since then. However, the second wave of the pandemic has resulted in intermittent lockdowns and localised restrictions, which could lead to some delay in collections in the coming months following the impact on the underlying borrower cash flows. Further, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.
LTFS group witnessed an inch up in overall delinquencies in most of the retail asset classes during fiscal 2021. Under the RBI August 2020 resolution framework for Covid-19-related stress, the group invoked restructuring on around 1.5% of its portfolio, with the bulk of this in the defocused and infrastructure financing segment. The ability of the group to manage collections and asset quality during the second wave of the pandemic will remain a key monitorable. |
Analytical Approach For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of L&T Finance Holdings Limited (LTFH; holding company of the LTFS group) and its subsidiaries and associates. This is because all these entities have significant operational and management linkages and operate under a common brand. CRISIL Ratings has also factored in the strong support from the parent, L&T, given the strategic importance of the group to the parent along with the shared brand name.
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:
The LTFS group has demonstrated healthy growth and improved its return on equity over the last few fiscals. Due to L&T’s focus on building a strong services portfolio including IT, technology and financial services, the LTFS group has been identified as a key focus area by the parent. L&T provides strategic oversight to the group and has personnel from its senior management, including the chief financial officer, on LTFH’s board. The parent also has representation in some of the key committees of the group, such as asset-liability, risk management and credit committees. The group also benefits from the synergies and expertise of L&T, especially in infrastructure and real estate lending. The shared name also supports the liabilities of the LTFS group.
Furthermore, the parent provides capital support to the LTFS group and has infused around Rs 5,700 crore to date (including ~Rs 1900 crore in fiscal 2021). L&T has also provided an ongoing line of credit of Rs 2,000 crore to the LTFS group, which could be used during contingency. Capital support from the parent, along with internal cash accrual, is expected to keep capitalisation for the group adequate, with gearing not expected to exceed 7.5 times - on a steady-state basis.
The ratings also factor in the strong support from the parent, as demonstrated by the articulation of its intention to (i) maintain strategic linkages and management oversight so that, among others, the LTFS group conducts its business in a manner such that it honours its stakeholder obligations in a timely manner (ii) maintain majority shareholding in LTFH, and (iii) provide growth and risk capital, if and when required.
Financial services business is expected to remain one of the key focus areas for L&T, which should continue to support the LTFS group.
LTFH is the holding company for the financial services business of L&T and has majority stake in various subsidiaries that operate in the lending and investment management business. Under the lending business, it is present in wholesale lending (comprising infrastructure finance, and real estate finance), mortgage finance (home loans and loans against property [LAP]), and rural lending (farm equipment, two-wheelers, micro loans and consumer loans). The structured finance loans and DCM which were earlier part of wholesale lending were classified as defocused by the group starting from the quarter ended June 30, 2019. In the lending space, the group has built a strong market position, with assets under management (AUM) of Rs 94,013 crore as on March 31, 2021 (Rs 98,384 crore as on March 31, 2020). While the portfolio has registered a compound annual growth rate of around 15% over the five fiscals through 2020, it de-grew by 4% in fiscal 2021, on account of a difficult macro environment. With the pandemic, growth is expected to remain moderate in the near term.
The portfolio is diversified with presence across various asset classes, such as infrastructure finance (31% of AUM as on March 31, 2021), infra debt fund (IDF, 9%), real estate finance (14%), home loans (8%), LAP (4%), micro loans (13%), two-wheeler financing (8%), and farm equipment financing (11%). The group also made a foray into consumer loans in fiscal 2020 and plans to enter the SME business loans segment. The remaining 3% is the defocused portfolio (consisting of products where the book is being run down) mainly comprising of structured finance group, and DCM portfolio (classified since June 30, 2019).
Under the non-lending business, the LTFS group currently is primarily present in the investment management business with an average (quarterly) AUM of Rs 72,728 crore as on March 31, 2021 (Rs 71,056 crore as on March 31, 2020). The group sold its wealth management business to IIFL Wealth Finance Ltd (rated ‘CRISIL PP-MLD AAr/Stable/CRISIL A1+’) in April 2020.
Over the medium term, the group intends to focus on growing its retail business to support the net interest margins. Consequently, it expects higher growth in the rural and home loan portfolios. The share of the wholesale portfolio (excluding the IDF loan portfolio) has declined steadily to 45% as on March 31, 2021, from 62% as on March 31, 2016; the management intends to reduce the share further in the coming quarters. This shift in proportion is supported by a higher sell-down strategy in the infrastructure financing book (which also supports higher fee income) as well as through growth in the retail and housing finance portfolios. While the group continues to use its (and L&T’s) expertise in the infrastructure finance segment to underwrite loans, a majority of the disbursements is now sold down. Moreover, the focus will continue to be on operational projects in the infrastructure segment. Furthermore, with the classification of structured finance group and the DCM book as defocused products, no additional disbursements are being done in these portfolios. Hence, their rundown should also support an increase in the share of the retail book.
Resource profile is spread across capital markets and bank funding. The group is a large and frequent issuer in capital markets and has strong banking relationships. Of the total borrowing of Rs 88,556 crore as on March 31, 2021, non-convertible debentures (including retail), commercial paper, external commercial borrowings (ECB) and bank borrowings formed 49%, 7%, 5%, and 38%, respectively. The group raised Rs 746 crore ECB in the fiscal 2021. The diversified resource profile is also reflected in the competitive average borrowing cost[1] of 7.9% for fiscal 2021 (8.1% for fiscal 2020). The parentage of L&T also supports resource profile.
Weakness:
The asset quality of the lending portfolio remains moderate. On a consolidated basis, gross stage 3 and net stage 3 assets stood at 4.97% and 1.57%, respectively, as on March 31, 2021 (5.36% and 2.28%, respectively, as on March 31, 2020). This is primarily contributed by higher gross stage 3 assets in the infrastructure portfolio due to legacy delinquent accounts.
In the wholesale portfolio, the ticket size remains chunky given the nature of these asset segments. Also, most of the segments in the retail portfolio have witnessed high growth in the last three fiscals. However, with the management bringing in change in its strategy in terms of focusing on renewables and roads (for infrastructure finance), higher focus on retail loans, stronger underwriting and collection practices, better early warning systems, and focus on digitisation, the asset quality has improved over the past few quarters. The group has formed a specialised team to oversee recovery from stressed assets.
While the asset quality has held so far, delinquencies in the retail segments have seen an uptick. The delinquencies may get impacted over the medium term on account of the pandemic. Management’s ability to keep the portfolio quality in check will remain a monitorable. Performance of the wholesale lending portfolios will also be closely monitored given the chunkiness in ticket size and sensitivity of borrowers in these segments to an environment of prolonged stretch in liquidity. Any significant deterioration in asset quality, leading to a sharp decline in profitability from the current level, will be closely monitored. |
Liquidity: Superior The consolidated asset-liability maturity profile as on March 31, 2021, reflects cumulative positive liquidity gaps in all buckets up to one year, after factoring in unutilised bank limit and a line of credit from the parent. The group generally maintains liquidity to meet obligations coming up over the next 30 days. As on March 31, 2021, total debt repayment (including interest) was Rs 13,687 crore for the next six months (till September 30, 2021). Against this, liquidity of Rs 19,719 crore was available in the form of cash and liquid investments (Rs 10,122 crore), unutilised bank lines (Rs 7,597 crore), and a line of credit from L&T (Rs 2,000 crore). |
Outlook: Stable CRISIL Ratings believes LTFS group will remain highly strategically important to L&T and continue to benefit from the latter’s strong support over the medium term. Furthermore, it 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
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About the Company L&T IDF was incorporated as an infrastructure debt fund under the Companies Act and operates under the regulation and supervision of RBI. The company received its certificate of registration as an IDF-NBFC from the RBI on October 21, 2013. Post the scheme of amalgamation of LTIFC and LTHFL with LTFL, L&T IDF announced that it would be converting itself into a NBFC-ICC.
For fiscal 2021, L&T IDF’s profit after tax (PAT) as per Ind-AS, stood at Rs 63 crore on total income of Rs 894 crore as against a PAT of Rs 213 crore and total income of Rs 903 crore in the previous fiscal. Profitability was impacted in fiscal 2021 due to one-time impact of tax provision of Rs 96 crore (pertaining to FY15, FY16 and FY17); PAT before one-time impact was Rs 159 crore. |
About the LTFS Group The group has a diversified product portfolio with presence in the wholesale as well as retail finance segments. Over the past couple of years, the management has exited some lending asset classes and currently caters to limited segments such as farm equipment finance, two-wheeler finance, micro loans, consumer loans, housing and real estate finance and infrastructure finance. As part of this strategy, the supply chain financing portfolio was sold to Centrum Financial Services Ltd in fiscal 2019. Furthermore, structured finance group and DCM were identified and classified as part of the defocused book during the quarter ended June 30, 2019. The group also has presence in the investment management business. As on March 31, 2021, LTFH’s consolidated networth was Rs 18,773 crore.
In fiscal 2021, on a consolidated basis, profit after tax (PAT) was Rs 971 crore on total income of Rs 14,080 crore, against Rs 1,700 crore and Rs 14,548 crore, respectively, for the previous fiscal. Profitability was impacted in fiscal 2021 due to one-time impact of Rs 96 crore pertaining to tax provision (FY15, FY16 and FY17) for L&T IDF and Rs 88 crore due to operational expenses from LTF merger; PAT before one-time impact was Rs 1,155 crore for fiscal 2021.
[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. |
Key Financial Indicators: L&T Finance Holdings Limited (Consolidated)
*PAT and RoA prior to deduction of the one-time expenses (tax provision and merger related expenses) stood at Rs 1,115 crore and 1.1% respectively for fiscal 2021. ^PAT and RoA prior to deduction of the one-time DTA stood at Rs 2,174 crore and 2.0% respectively for fiscal 2020.
Key Financial Indicators: L&T Infra Debt Fund Limited (Standalone)
***PAT and RoA prior to deduction of the one-time expenses on account of tax provision stood at Rs 159 crore and 1.6% respectively for fiscal 2021. |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
^not yet issued *cumulative redeemable non-convertible #Preference shares (INE235P04024) had an outstanding amount of Rs. 67.2 crore as April 30, 2021
Annexure - Details of Rating Withdrawn
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Annexure – List of Entities Consolidated
*Merged into L&T Finance Ltd effective April 12, 2021 |
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Criteria Details
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