L&T Finance’s Q1 show disappoints but signs of recovery may help

Shares of the company are down more than 2% today, reflecting the disappointment from the performance.

The company reported 6.8% year-on-year fall in its operating profit even as its provisions towards stressed assets remained elevated. June quarter of FY21 was severely hit due to lockdowns and witnessed 7.2% contraction in operating profit. In short, L&T Finance’s performance worsened on profitability. All this led to the company missing street estimates on net profit for the quarter.

The non-bank finance company’s disbursements fell 36% on a sequential basis, a clear sign of the second wave’s impact. The weakness was across segments although real estate, microfinance and two-wheeler loans showed marked weakness. Loan disbursements to companies showed healthy growth but the portfolio shrank mainly due to repayments. The overall loan book shrank 11% year-on-year.

To be sure, the company’s management has pointed out that the impact of the pandemic this time around has been milder than last year. As such, L&T Finance showed improvement in collection efficiencies during the June quarter. Therefore, on asset quality, the company was not worse off. Granted, its gross bad loans remained elevated (5.8% of the book) in June quarter but repayment collections in infrastructure improved.

Collections in the rural finance segment too showed an uptick in the month of June, according to analysts at Motilal Oswal Financial Services Ltd. With the relaxation of restrictions from June onwards, the lender is likely to see improvement in collections on the other segments as well.

That said, bringing back loan growth would be the tougher task. The lender has been consolidating its loan book for many quarters now and analysts expect the trend to continue.

The company’s shares have lost 6% since April and trade at a modest multiple of 1.2 times estimated book value for FY22.