L&T Finance : Call Transcript Q1 FY24

L&T Finance Holdings Ltd.

Q1 FY24 Earnings Call Transcript

July 20, 2023

Management Personnel:

Mr. Dinanath Dubhashi (Managing Director & Chief Executive Officer)

Mr. Sudipta Roy (Chief Operating Officer)

Mr. Sachinn Joshi (Group Chief Financial Officer)

Mr. Karthik Narayanan (Head - Strategy and Investor Relations)

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Moderator:

Ladies and gentlemen, good day, and welcome to the L&T Finance Holdings Limited Q1FY24 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded.

Before we proceed, as a standard disclaimer, no unpublished price-sensitive information will be shared during the call. Only publicly-available documents will be referred to for discussions during interaction in the call.

While all efforts would be made to ensure that no unpublished price-sensitive information will be shared. In case of any inadvertent disclosure, the same would, in any case, form part of the recording of the call. Further, some of the statements made on today's call may be forward-looking in nature. A note to this effect is provided in the Q1 results presentation sent out to all of you earlier.

We have with us today Mr. Dinanath Dubhashi, Managing Director & CEO and other members of the senior management team. I would now like to invite Mr. Dinanath Dubhashi to share his thoughts on the company's performance and the strategy of the company going forward. Thank you, and over to you, sir.

Dinanath Dubhashi:

Thank you. Ladies and gentlemen, a very good morning to all of you. Welcome to the call. You have all seen the results and it goes without saying that we are very enthused with the results. FY23 has been a great year for us, no doubt, and the results that we achieved during FY23 actually gave us the confidence to say that the targets promised for Lakshya 2026, many of them would be achieved earlier, some of them in year 2024 itself. Since then, all of us in L&T Finance have been working relentlessly towards this goal of achieving some of those ratios, especially retailisation, asset quality, ROA much, much earlier. And I'm most happy to say other than the fact, of course, that we've shown good profits, good credit costs, but most happy to say that this quarter is indeed a testimony to that promise, which we had talked about last quarter. We are one quarter down in FY24 and I can say that the performance for this quarter is well in-line with the accelerated timelines.

Announcement about superannuation

But before I talk about the achievement for this quarter and our strengths, etc., I believe it is necessary for me to talk about a very important development regarding the company. A few things changed over the last couple of weeks. And in a way, I would like to say that not much has changed as far as the plans of the company are concerned. I will try and explain what I mean by this statement.

First, let me address what has very clearly changed. As announced on July 1, 2023, and all of you would be knowing well by now, I have personally taken the decision to superannuate from the company and will be superannuating by April end next year, that is April 30, 2024.

Let me talk about this a little bit. Many of you are my friends and well-wishers. I would really like to take a few minutes to explain this. After a lot of thinking and soul searching, I reached a decision sometime back that I would like to follow certain passions of mine, more full time and not just as a hobby, which I have been doing for quite some time. This includes, few of you are aware, is working for the cause of stray dogs. Along also, second thing is my passion for studying history and mythology.

Now I know all these seem truly as a passion and they indeed are. What encouraged me actually to take this decision was the fact that the organization was well on the road to success and was creating sustainable value for all stakeholders. Lakshya 2026 was well and truly launched and assimilated throughout the organization. And most importantly, we had worked in detail on creating a strong management bandwidth and robust succession plans and they have been put in place in the company. That was when I actually felt that now I am confident of passing on the baton and communicated to the Chairman, my desire to move on earlier than what my contract as MD was, which was 2026.

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We found a good successor to me, who brings in very complementary skills to our organization. With these building blocks well in place, I believe that the age of 58 years, which I will be in 2024, is as good a milestone as any to finally hang up my professional boots and follow my other passions.

Mr. Sudipta Roy who joins us from ICICI Bank, will take over as MD and CEO from January 24, 2024. And after that also, I will act in an advisory role as an adviser to the Chairman for 1 more quarter, until April 30, 2024. So, it's a very well-planned handover kind of process. This is when I will be signing off completely. Sudipta has already joined the LTF family as the Chief Operating Officer from July 1, 2023, so he has completed just about 3 weeks now. Over the next 2 quarters, I will be overseeing Sudipta's gradual assimilation in the organization. This is how we have planned a very smooth transition over the course of the next 6 to 8 months. I would like to assure you that we have a well thought out date-wise action plan to ensure that the entire process happens as seamlessly as possible.

Now let me explain that why I said that not much has changed. Over the last few quarters, we achieved some really tangible milestones. So much so that we could fast track Lakshya goals, many of them to FY24. This has helped in creating a strong fortress with some really unique strengths, which we call as sustainable differentiators. In addition to these building blocks, some transformational projects have also been launched within the company. These projects other than enhancing the organization's business strengths are also being instrumental in involving people in the projects which challenge and expand their skill set and get the next line ready - next line of management ready. Our target, our plan of making the company a 'leading digitally enabled retail finance company' is well on course, in fact, ahead of course. The company will draw on Sudipta's strengths and he will draw on the strengths of the significant market positions we have achieved in our flagship businesses. Needless to say, the focus is going to be on making LTF, a retail fintech giant. With this, join me in welcoming Sudipta to the LTF family. I will now hand over briefly to Sudipta to introduce himself. Sudipta, go ahead.

Address by the COO

Sudipta Roy:

Thank you, DD, for giving me the opportunity to introduce myself.

Good morning, everybody, on the call. It's an honour and privilege to speak to such an eminent group of analysts/investors, and I will take this opportunity to briefly introduce myself. I have joined L&T Finance from ICICI Bank, where I spent the last 13 years of my career and my last role was as the Group Head, managing diverse businesses like unsecured assets, cards, digital and payment solutions, student ecosystem banking, e-commerce and merchant ecosystem, and last but not the least, connected & API banking. I was also responsible for developing and operationalizing ICICI Bank's digital banking solutions for the millennial banking segment. My team and myself were responsible for growing the bank's unsecured assets business five-fold since 2017 with significant contributions to profitability for the overall organization. This was done with an extreme focus on growing it in a risk-calibrated fashion, which demonstrated an excellent resilience of the portfolio during the difficult COVID period. My team under my guidance launched the education loans and the consumer finance businesses in the bank and later extended education loans into the country's first comprehensive student ecosystem offering, which is called Campus Power.

The ICICI Bank's cards business was nurtured back to significant profitability since the difficult years post the global financial crisis and the Amazon credit card program executed by my team is now hailed as one of the most successful issuance programs in the country and a textbook case of Big Tech and Big Bank cooperation, having issued 4 million cards since inception, making it the largest co-brand program in the country. The personal loans and unsecured business loans was expanded on the back of cutting-edge analytics and has scaled significantly over the last few years. Prior to ICICI Bank, I spent about 5 years in Deutsche Bank, managing product management for the Deutsche Bank's cards business in India and China. And prior to that, I spent about 6 years in Citibank learning the ropes of financial services distribution, cards and lending product management and payments and allied risk modelling as well as digital banking.

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My strengths are in cards and retail lending distribution, retail lending technology and allied risk modelling, payments and digital banking and execution of digitization initiatives at scale alongside P&L and general management capabilities, having managed large-scale businesses in ICICI Bank.

I'm incredibly excited to join the capable and committed team of L&T Finance to take forward the retailisation journey as part of the Lakshya 2026 objectives and I'm quite certain that with the initiative and the hard work of the great team at L&T Finance, we should be able to make a substantial contribution to India's retail financial growth story in the coming years, and really demonstrate the strengths and synergies of the stated objective of becoming Fintech@Scale.

Thanks a lot, and back to Mr. Dubhashi.

Q1FY24 Highlights

Dinanath Dubhashi:

Thanks, Sudipta. So, let's now look at the performance for the quarter. It has been more than a year of unveiling our strategic plan - Lakshya 2026, wherein we said we will strive to make LTF a top-class digitally enabled retail finance company moving from 'product-focused' approach to 'customer-focused' approach by creating a Fintech@Scale. I remember telling you that every decision ever since has been taken keeping in mind these targets of Lakshya 2026. We have continued to improve not only the products we offer, but also the systems and processes we deploy within the company. In fact, every quarter, I have gone - we have gone out of our way to try and put even in the investor presentation, the specific moves that we are doing to become more and more a retail company, more and more a company absolutely entrenched in retail and digital. This investor presentation also, you would see lot of slides are actually dedicated to see how we are farming our large customer database. We have actually given it business wise and I will talk a little bit more about that as we go ahead.

Achieved most of our Lakshya goals in line with accelerated timelines:

Our strategic plan of Lakshya was largely set around, as you all remember, 4 milestones. Let's see how we have reached all the 4 milestones.

1. Now the first milestone was 80% retail. And in fact, we achieved 75% by March, and I had already indicated to you that 80% is obviously easy now, and we will, in fact, try and become 90% by FY24. And in keeping with that promise, we have already gone beyond 80%. In this June itself, we stand at 82% retailisation.
2. The second milestone was about retail growth of more than 25%. You are all aware that we had shown a 35% growth last year and now followed by a 34% growth in this quarter.
3. We had also said that our GS3 and NS3 will be below 3% and 1% each in retail. And as you would see, GS3 has already reached about 3.2%, and NS3 remained steady at 0.7%, which is well below the 1% target.
4. Last but not the least, we had put an ROA target of 2.8% to 3%. We had reached 2.95% in Q4 and in Q1, we have reached 3.08%, which I genuinely believe is a rubicon in the retail world that once you are above the 3% mark, you can look at only improving from there. And as I would explain during the presentation, you will see every component of that ROA bridge is falling well in place.

Without a doubt, I believe, we have delivered on most of our Lakshya goals in line with the accelerated timelines. Here, I would like to point out that our achievement now is in terms of attaining desired percentages. So let me explain. Some people have asked me that now you have achieved Lakshya, is there a new Lakshya in the offing, right? Let me take that straight away. If you see the Lakshya goals that we had put in place, which was 80% retailisation, obviously, there is a new goal of 90% now, which we will achieve very soon. The others, let us take a GS3 ratio or an NS3 ratio of 1% or a profitability ratio of above 3% are more ratios and the challenge and the endeavour of management over the next 3 years, will be continuing with this growth path of 25% - 30% CAGR while keeping this asset quality and these profitability targets intact. So now that we have reached 3%, there is no way that we will fall below that. And these kind of NS3 levels and credit cost levels we have reached, we will keep them sustainable while achieving this growth rate of between 25% - 30%. And that end goal with all the

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projects, all the aspects, all the business strengths that it involves remains, steadfastly remains our Lakshya 2026. So, these are just 4, I would say, ratio milestones achieved. The route from now on, the path from now on, will be keeping these profitability and asset quality achievements intact while achieving further growth as we go ahead.

Performance highlights for the Quarter

Retail Performance:

If we look at the highlights for this quarter:

• Clearly, profit after tax, if we talk retail is Rs. 533 crores. Retail profit is actually 176% up
• Retail NIMs+Fees remain very, very strong at close to 11.7% or so
• Strong retail quarterly disbursements, Rs. 11,193 crores, which is up 25% from last year
• Book size growth, retail book is now at Rs. 64,200 crores, which is above 34% Asset quality, we already talked about and
• ROA also we have already talked about and
• Retail ROE now is close to 16%

So that's where the retail performance is going.

Consolidated Performance:

If we look at consolidated performance:

• The PAT is up to Rs. 531 crores, which is up 103%
• Capital adequacy remains strong at 25.75%
• We have also declared our highest ever final dividend at Rs. 2 for this financial year

Obviously, as I always said, as the balance sheet becomes more and more retail and wholesale, we keep reducing, we are confident that these kind of ROAs and ROEs start getting converted to overall ROAs and ROEs. I would also like to point out that overall ROA has also crossed 2% and now this acceleration towards convergence to retail ROA will be faster as we keep reducing the wholesale book.

One ratio, which I keep talking about, in addition to retail NIMs+Fees, which remains strong is our opex plus credit cost ratio. I always say that to some extent, these are fungible and opex plus credit cost has already reached around 7.11%. I always guide people towards 7%, that around 7% of opex plus credit cost should be more sustainable even at these kind of growth rates and we are quite sure that we will reach that level soon and stay there and improve from there. I would say that we have performed better, not only than Lakshya but also in line with the ROA tree guidance that I have provided to you and expect to stabilize this kind of trajectory in the future. Now let me talk about how we have achieved some of the strengths. I'll take a few minutes before we open for questions.

Deep pan India franchise

Over the years, we have developed a deep pan-India franchise and our performance quarter-on-quarter bears testimony to the strength of this franchise. We have optimal mix now of physical presence, preferred channel partners, coupled with leveraging our database, and of course, our digital tools for reaching the customer. We, today have a database of about 2.1 crore customers, out of which 1.4 crores are in rural and 70 lakhs are in urban, which helps us in building a superior retail franchise. While we disbursed this quarter itself to 6.9 lakh new customers, our active customer base now stands at 89 lakhs. So out of those 2.1 crores, 89 lakhs are active, the rest have repaid and are in our database. The important thing is share of our cross-sell / upsell in the total disbursements now stands at 34%. Now this is very important to explain. We, of course, we envisage these numbers to slowly increase as we concentrate our efforts on increasing the share of cross-sell and repeat loans, like Pragati loan, Vishwas loan, Kisan Suvidha, 2-wheeler loyalty, consumer loan top-up, housing loan top-up. This is how we have built a strong cross-sell engine with great use of digital and analytics, which shows the strengths that we are building to address the additional needs of our customers. And so, it definitely benefits the customer, gives the customer the advantage of having a loan ready if the customer has been good with us. But it

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