Rating Rationale
July 31, 2020 | Mumbai
L&T Finance Limited
'CRISIL AAA/Stable' assigned to Subordinated Debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.4500 Crore
Long Term Rating CRISIL AAA/Stable (Reaffirmed)
 
Rs.500 Crore Subordinated Debt CRISIL AAA/Stable (Assigned)
Rs.14000 Crore Non Convertible Debentures CRISIL AAA/Stable (Reaffirmed)
Rs.5000 Crore Retail Bond* CRISIL AAA/Stable (Reaffirmed)
Rs.13500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*Public Issue of Secured Redeemable Non-Convertible Debentures and/or Unsecured Subordinated Redeemable Non-Convertible Debentures
Detailed Rationale

CRISIL has assigned its 'CRISIL AAA/Stable' rating to the Rs 500 crore subordinate debt of L&T Finance Limited (L&T Finance; part of the L&T Financial Services [LTFS] group). The LTFS group includes L&T Finance Holdings Ltd (LTFH; rated 'CRISIL AAA/Stable/CRISIL A1+) and its subsidiaries and associates. Ratings on existing debt instruments have been reaffirmed at 'CRISIL AAA/Stable/CRISIL A1+'.
 
The rating reflects the LTFS group's strong and diversified presence across the financial services space and a well-diversified resource profile. It also centrally factors in 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.
 
The nationwide lockdown from March 25 till May 31, 2020, declared by the Government of India to contain the spread of the Covid-19 pandemic, has impacted disbursements and collections of companies. While the restrictions have now been eased partially, any delay in return to normalcy will exert further pressure on collections and asset quality metrics of non-banking financial companies (NBFCs). Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.
 
On the liability side, the Reserve Bank of India (RBI) announced regulatory measures under 'Covid-19 - Regulatory Package', whereby lenders were permitted to grant moratorium on bank loans. However, CRISIL understands that LTFS group has not sought moratorium from any of its lenders and continues to service its debt obligations as per schedule.
 
On the asset side, the group has offered moratorium to its borrowers and hence, the collections are expected to be impacted till August 31, 2020. Nevertheless, LTFS group has comfortable liquidity to meet obligations during this period. The customers under moratorium were 44% for retail side and 40% for the wholesale as on June 30, 2020. For the projects under moratorium, the company has ensured that adequate liquidity is maintained in borrower's DSRA / TRA accounts.
 
LTFH, through its lending entities operates in diversified retail and corporate segments, wherein some segments may witness challenges with income streams being affected by the lockdown. Of the various retail segments that LTFS group caters to, micro loans segment is expected to be the most impacted during the lockdown because collection of repayments involves visit to households, such borrowers typically have weak credit profiles and their income generation activities would be disrupted. On the other hand, home loan segment is expected to be the least affected as sizeable proportion of the borrowers are salaried and collections are through auto-debit instructions.
 
CRISIL has also taken note of the announcement by LTFH on the scheme of amalgamation by way of merger by absorption involving amalgamation of L&T Infrastructure Finance Company Limited (LTIFC) and L&T Housing Finance Limited (LTHFL) with L&T Finance Ltd (LTFL). The scheme has received board approval, however is subject to approval from NCLT and other approvals, as may be required. The proposed merger will not have an impact on the rating, given the analytical approach as outlined below.

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of LTFH and its subsidiaries and associates. This is because all these entities have significant operational and management linkages and operate under a common brand. CRISIL 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. L&T is the majority shareholder of LTFH, with a shareholding of 63.72% as on June 30, 2020.

Please refer Annexure - Details of Consolidation, 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
The LTFS group has demonstrated healthy growth and improved its return on equity (ROE) over the last few years. 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 for the parent. As a result, L&T provides strategic oversight to the group and has personnel from its senior management, including the chief financial officer, on LTFH's board. L&T also has representation in some of the LTFS group's key committees, 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 3,779 crore to date (including Rs 2,000 crore in fiscal 2018). It has also provided an ongoing line of credit of Rs 2,000 crore to the LTFS group, which could be used in times of contingency. Capital support from the parent, along with internal cash accrual, is expected to keep capitalisation of the LTFS group adequate, with gearing (debt/networth) expected at around 7.0 times - not exceeding 7.5 times - on a steady-state basis.
  
The rating also factors in the strong support from the parent L&T, demonstrated by the articulation of its intention to (i) maintain strategic linkages and management oversight so that, among others, 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 is expected to remain one of the key focus areas for L&T, which should continue to support the LTFS group.
 
* Strong and diversified presence across the financial services space
LTFH is the holding company for the financial services business of L&T and holds a majority stake in various subsidiaries that operate in the wholesale lending (consisting of infrastructure finance, structured finance group, debt capital markets [DCM] and real estate finance), mortgage finance (home loans and loans against property [LAP]), rural lending (farm equipment, two-wheelers, and micro loans), and investment management business. In the wholesale lending segment, structured finance loans and DCM have been classified as defocused by LTFS starting from the quarter ended June 30, 2019. In the lending space, the LTFS group has built a strong market position, with assets under management (AUM) of Rs 98,879 crore as on June 30, 2020. While the portfolio has had a compound annual growth rate of around 15% over the five fiscals through March 31, 2020, the portfolio remained flat during fiscal 2020 and the quarter ended June 30, 2020 on account of difficult macro environment, and with Covid-19, 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 June 30, 2020), Infra Debt Fund (IDF, 9%), real estate finance (15%), home loans (8%), LAP (4%), micro loans (13%), two-wheeler financing (6%), and farm equipment financing (8%). The group has also forayed into consumer loans in fiscal 2020 and plans to foray into SME business loans next fiscal. The remaining 5% is the defocused portfolio (consisting of products where the book is being run down), comprising the small retail portfolio (identified earlier), structured finance group, and DCM portfolio (classified since June 30, 2019).
 
Under the non-lending business, the LTFS group had sizeable average (quarterly) AUM of Rs 58,361 crore in the investment management business as on June 30, 2020. In August 2019, LTFH entered into an agreement to sell its entire stake in L&T Capital Markets Ltd (LTCM; carrying out the wealth management business of the group) to IIFL Wealth Finance Ltd (rated 'CRISIL A1+') for a consideration amount of Rs 230 crore, plus the cash and cash equivalents balance of LTCM. The transaction has been competed on 24th April 2020 after receiving the required regulatory approvals.
 
Going forward, the LTFS group intends to focus on growing its retail business and concentrate to grow its fee-based income to supplement the net interest margins (NIMs). Consequently, it expects higher growth in the rural and home loan portfolios. The share of the wholesale portfolio (excluding the IDF loan portfolio) has been declining steadily, from 62% as on March 31, 2016, to 50% as on June 30, 2020; 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 are now sold down. Moreover, the focus will continue to be on operational projects in infrastructure segment. The share of the lending portfolio of L&T Infra Debt Fund Ltd (IDF portfolio) has increased from 4% to 9% (of the total consolidated lending portfolio) over the four fiscals through March 31, 2020. The IDF portfolio comprises projects with an average of five years of satisfactory operations and around 70% of the portfolio is either backed by a tripartite agreement or guaranteed/ supported by a government/ state authority. Furthermore, with the classification of structured finance group and the DCM book as defocused products, no additional disbursements are being done in these portfolios, and hence, their rundown should also support an increase in the share of the retail book.
 
* Well- diversified resource profile
The resource profile is diversified 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 94,133 crore as on June 30, 2020, non-convertible debentures (NCDs; including retail), commercial paper, external commercial borrowings (ECB) and bank borrowings formed 43%, 9%, 3%, and 43%, respectively. The group has raised retail NCDs of Rs 2,408 crore and ECB of around Rs 3,014 crore in fiscal 2020.
 
The diversified resource profile is also reflected in the competitive average borrowing cost1 of 8.4% for quarter ended June 30, 2020 (annualized; 8.1% for fiscal 2020). L&T's parentage also supports the resource profile.
 
Weakness
* Moderate, albeit improving, asset quality
The asset quality of the lending portfolio remains moderate. On a consolidated basis, gross stage 3 and net stage 3 assets stood at 5.24% and 1.71%, respectively, as on June 30, 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 years. 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.
 
The delinquencies may get impacted over near to medium term on account of Covid-19. The management's ability to keep the portfolio quality in check will remain a monitorable. Moreover, performance of the wholesale lending portfolios will 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 the asset quality leading to a significant decline in profitability from current levels, will be closely monitored.
Liquidity Superior

The consolidated asset-liability maturity (ALM) profile as on March 31, 2020 reflects cumulative positive liquidity gaps in all buckets up to one year, after factoring in unutilised bank lines and a committed long-term line from the parent, L&T. The group generally maintains liquidity for a minimum period of the next 30 days of upcoming repayments, under a business-as-usual as well as stress scenario. As on June 30, 2020, total debt repayment (including interest) as Rs 10,887 crore for the next four months (until October 31, 2020). Against this, LTFS had a liquidity of around Rs 16,669 crore (comprising of cash and liquid investments, unutilised bank lines and a committed line from parent).

Outlook: Stable

CRISIL believes LTFS will remain highly strategically important to L&T and continue to benefit from the strong support from the parent 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:
* Decline in L&T's credit risk profile by one notch could lead to a similar rating change for LTFH and its subsidiaries
* Any material change in the shareholding or support philosophy of L&T for the LTFS group
* Weakening in the capital structure of the LTFS group, 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 LTFS Group
The group has a diversified product portfolio, with presence in 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 investment management business. As on June 30, 2020, LTFH's consolidated networth was Rs 14,881 crore.
 
In fiscal 2020, on a consolidated basis, profit after tax (PAT) was Rs 1,700 crore on total income of Rs 14,548 crore against Rs 2,232 crore and Rs 13,302 crore, respectively, for the previous fiscal. PAT before the one time impact of DTA was at Rs 2,174 crore for fiscal 2020.
 
For the quarter ended June 30, 2020, PAT and total income were Rs 147 crore and Rs 3,398 crore, respectively, against Rs 549 crore and Rs 3,690 crore during corresponding period previous fiscal.

About the Company

L&T Finance Ltd is a non-banking finance company (NBFC) incorporated in 1993 and wholly held by LTFH. It had AUM of Rs 46,453 crore as on March 31, 2020, comprising micro loans (27% of total AUM), farm equipment loans (18%), two-wheeler loans (14%), LAP (1%), real estate financing (20%), infrastructure loans (13%) and balance in defocused. The gross and net stage 3 assets were 5.5% and 2.4% respectively as on March 31, 2020 (3.59% and 1.24%, respectively, as on March 31, 2019). Networth and gearing were Rs 8,894 crore and 4.9 times, respectively, as on March 31, 2020. PAT of Rs 366 crore on total income of Rs 8,680 crore against Rs 846 crore and Rs 7,383 crore, respectively, for the previous fiscal. PAT before the one time impact of DTA was at Rs 570 crore for fiscal 2020.

1Borrowing 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 Ltd  (consolidated; as per Indian Accounting Standard)
As On/For the quarter ended June 30 Unit 2020 2019
Total Assets Rs crore 1,09,973 1,07,838
Total income Rs crore 3,398 3,690
PAT Rs crore 147 549
Gross Stage 3 % 5.2 5.7
Return on assets (annualized) % 0.5 2.1
Gearing  Times 6.3 6.6

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of the instrument Date
of issuance
Coupon
 rate (%)
Maturity
Date
Size of
issue

(Rs Cr)
Complexity Rating assigned
along  with Outlook
INE027E07BD6 Non-Convertible Debentures 24-Jan-20 8.25% 24-Jan-23 405.0 Simple CRISIL AAA/Stable
INE027E07BE4 Non-Convertible Debentures 04-Mar-20 7.68% 03-Mar-23 75.0 Simple CRISIL AAA/Stable
INE027E07BF1 Non-Convertible Debentures 28-Apr-20 7.80% 28-Apr-23 1075.0 Simple CRISIL AAA/Stable
INE027E07BG9 Non-Convertible Debentures 11-May-20 7.50% 11-Aug-21 800.0 Simple CRISIL AAA/Stable
INE027E07BH7 Non-Convertible Debentures 12-Jun-20 7.70% 12-Jun-23 300.0 Simple CRISIL AAA/Stable
NA Non-Convertible Debentures* NA NA NA 11,345.0 NA CRISIL AAA/Stable
INE027E07AR8 Retail bonds*** 23-Dec-19 8.25% 23-Dec-22 29.8 Simple CRISIL AAA/Stable
INE027E07AS6 Retail bonds*** 23-Dec-19 8.45% 23-Dec-22 417.2 Simple CRISIL AAA/Stable
INE027E07AV0 Retail bonds*** 23-Dec-19 7.96% 23-Dec-22 0.9 Simple CRISIL AAA/Stable
INE027E07AW8 Retail bonds*** 23-Dec-19 8.15% 23-Dec-22 43.4 Simple CRISIL AAA/Stable
INE027E07AX6 Retail bonds*** 23-Dec-19 8.45% 23-Dec-24 23.2 Simple CRISIL AAA/Stable
INE027E07AY4 Retail bonds*** 23-Dec-19 8.60% 23-Dec-24 325.5 Simple CRISIL AAA/Stable
INE027E07AZ1 Retail bonds*** 23-Dec-19 8.15% 23-Dec-24 0.8 Simple CRISIL AAA/Stable
INE027E07BA2 Retail bonds*** 23-Dec-19 8.29% 23-Dec-24 75.3 Simple CRISIL AAA/Stable
INE027E07BB0 Retail bonds*** 23-Dec-19 8.50% 23-Dec-26 25.0 Simple CRISIL AAA/Stable
INE027E07BC8 Retail bonds*** 23-Dec-19 8.65% 23-Dec-26 398.2 Simple CRISIL AAA/Stable
INE027E07AT4 Retail bonds*** 23-Dec-19 8.26% 23-Dec-22 6.3 Simple CRISIL AAA/Stable
INE027E07AU2 Retail bonds*** 23-Dec-19 8.46% 23-Dec-22 62.3 Simple CRISIL AAA/Stable
NA Retail bonds*** NA NA NA 3,592.1 Simple CRISIL AAA/Stable
NA Proposed long term bank
facility**
NA NA NA 4,500 NA CRISIL AAA/Stable
NA Commercial paper
programme
NA NA 7-365 days 13,500 Simple CRISIL A1+
NA Subordinate Debt* NA NA NA 500 Complex CRISIL AAA/Stable
*Not yet issued
**Interchangeable with short term bank facility
***Public Issue of Secured Redeemable Non-Convertible Debentures and/or Unsecured Subordinated redeemable non-Convertible
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation Rationale for consolidation
L&T Finance Holdings Ltd Full Holding Company
L&T Infrastructure Finance Company Ltd Full Subsidiary
L&T Investment Management Ltd Full Subsidiary
L&T Mutual Fund Trustee Ltd Full Subsidiary
L&T Financial Consultants Ltd Full Subsidiary
L&T Housing Finance Ltd Full Subsidiary
L&T Finance Ltd Full Subsidiary
L&T Infra Investment Partners Advisory Pvt Ltd Full Subsidiary
L&T Infra Investment Partners Trustee Pvt Ltd Full Subsidiary
L&T Infra Debt Fund Ltd Full Subsidiary
Mudit Cement Pvt Ltd Full Subsidiary
L&T Capital Markets (Middle East) Limited Full Subsidiary
L&T Infra Investment Partners Proportionate Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  13500.00  CRISIL A1+  05-05-20  CRISIL A1+  14-11-19  CRISIL A1+    --    --  -- 
            04-10-19  CRISIL A1+           
Non Convertible Debentures  LT  2655.00
31-07-20 
CRISIL AAA/Stable  05-05-20  CRISIL AAA/Stable  14-11-19  CRISIL AAA/Stable    --    --  -- 
            04-10-19  CRISIL AAA/Stable           
Retail Bond  LT  1407.90
31-07-20 
CRISIL AAA/Stable  05-05-20  CRISIL AAA/Stable  14-11-19  CRISIL AAA/Stable    --    --  -- 
Subordinated Debt  LT  0.00
31-07-20 
CRISIL AAA/Stable    --    --    --    --  -- 
Fund-based Bank Facilities  LT/ST  4500.00  CRISIL AAA/Stable  05-05-20  CRISIL AAA/Stable  14-11-19  CRISIL AAA/Stable    --    --  -- 
            04-10-19  CRISIL AAA/Stable           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Long Term Bank Loan Facility* 4500 CRISIL AAA/Stable Proposed Long Term Bank Loan Facility* 4500 CRISIL AAA/Stable
Total 4500 -- Total 4500 --
*Interchangeable with short term bank facility
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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