L&T Finance : Call Transcript Q4 FY23

L&T Finance Holdings Ltd.

Q4 FY23 Earnings Call / Investor cum Analyst Meet

Transcript

May 2, 2023

Management Personnel:

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

Mr. Sachinn Joshi (Group Chief Financial Officer)

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

Page 1 of 23

PUBLIC

Moderator:

Good morning, everyone. On behalf of L&T Finance Holdings, I welcome you all to the Investor and Analyst meet for the financial year 2023. Thank you all for gracing us on this occasion. We have with us today our Managing Director and CEO - Mr. Dinanath Dubhashi and other members of our senior management team.

Before we proceed, as a standard disclaimer, no unpublished price sensitive information will be shared. Only publicly available documents will be referred to for discussions during this meet. While all efforts will be made to ensure that no UPSI is shared, in case of any inadvertent disclosure, the same would in any case form part of the recording. Further, some of the statements made during today's meet may be forward looking in nature. A note to this effect is provided in the results presentation on the website.

I would now like to invite Mr. Dinanath Dubhashi to please come on stage and provide us with a detailed perspective on our journey towards 'Lakshya 26' and the way forward towards creating a Sustainable Retail Fintech@scale. Over to you, sir.

Dinanath Dubhashi:

Thank you, Charmi. Good morning, everybody. Hope all of you had a good breakfast and in a good mood to listen to this presentation. I am very happy to stand in front of you one more year after we presented the Lakshya plan, last year. I hope many of you were present at that time. It was a meet that we had after a long time, after a long COVID period and we set a few guidelines for us, a route for us for the Lakshya plan in the quest to make us a leading retail NBFC which is totally digitally enabled.

Last 1 year has been very, very good for us, not just because of the results. It is because the way we executed the plan, the way we worked on almost every aspect of the plan and progressed on that. So, what my endeavor will be today is not only to showcase what we have done, I think that we have done in the presentation. All of you would have gone through the presentation, we had a 3-day gap in between. So, I am not going to talk more about that.

But more importantly, to try and talk to you about how this is sustainable, how we will continue on this path that we have set in this 1 year, how we will continue on the path that we have set for 'Lakshya 26' as we go ahead. I mean, obviously I won't tell you how results will look but will at least give you enough material to have confidence to draw up the results line and see how various financial parameters, business parameters will look. Most importantly, we'll try and convince you that the success we have had during 2022-23, we will continue on that route, continue that success not only in the next year but the year after that and so on and so forth.

Let me just start. So, this is what we spoke about. Each word of this slide is important and I will explain as we go ahead. It is important that we are now a Retail company. As you would have seen, at the beginning of the year, we were 51% Retail, we are already 75%. I will talk about the speed that we are gathering as we go ahead. Digital, that also I will talk viz. what all we now do digitally, which is actually almost everything.

And last but not the least, sustainable. Sustainability has to be looked in 2 ways. One is how our ESG is working to make the world sustainable and our ratings as well as awards show that. But importantly how this journey is sustainable. We would like to convince you that it is not just 1 year performance, but you can actually look at this performance repeating as we go ahead.

We talked about digitally-enabled and the product focus to customer focus. Now this is very important, it is not just words. Again, as we talk, I will explain the presentation. I will talk to you about the strategic importance of going from product focus to customer focus. So, we were a tractor finance company or we were a micro loans company or we were a two-wheeler company. From that, how are we becoming a Retail finance company is what we would like to talk about.

So, just to refresh your memories, just 1 slide from the presentation 1 year back. These were the targets that we had set for ourselves. Basic 4 targets:

• Retailisation: > 80% would be Retail
  As you would know, we started last year with 50:50. So, we set a very aggressive target that we will become more than 80% Retail in the next 4 years. We not only wanted to achieve this Retailisation just by reducing wholesale, but also growing Retail in a way as to generate value

Page 2 of 23

PUBLIC

• And the way Retail finance was growing, we set a target of a CAGR of 25% over the next 4 years at that time, 2022 to 2026 for ourselves.
• Asset quality, the important number here is net stage 3 of less than 1% is what we aimed for, retail asset quality.
• And last but not the least, after all this to deliver a ROA of 3%

Let me now just take you through the results that we've achieved in just 1 year. This is slide from the presentation, actually all the slides are from the presentation, you would have seen them.

• As I said, Retalisation, instead of 51%, which was 51%, we have actually already achieved more than 70%. And hence the goal of 80% looks very much in near term and in fact, we are already revising that target upwards, I will talk about it as we go ahead.
• Instead of 25% growth, we grew by 35%. I always call it the Virat Kohli model, not the M.S. Dhoni model. I don't like to take it deep. It is better to achieve good growth when the going is good and also create the right environment, the right tools, the right products, right digital infrastructure, physical infrastructure to see that this kind of growth continues as we go ahead.
• Net Stage 3, great story. We are already at 0.71%. Not only has the Gross Stage 3 reduced, but the Net Stage 3, we have actually already overcome that 1% mark. And at 0.71%, within companies which are at least 50% rural out of total retail, you know the industry better than me, that's very clearly a benchmark.
• And last but not the least, the ROAs have reached 2.46% for the whole year and especially for Q4FY23, we were within the touching distance of 3%.

I think we are pretty satisfied with the results that we have been able to deliver and there is something that we say internally in the company when we say that 'okay, we will celebrate what we have achieved', immediately the question should be 'what next?' And that's what we will talk about today; that within the general direction of Lakshya, where we are going, how we have created the right kind of infrastructure to grow in the future.

Now, let us talk about each of these items a little bit in detail.

We talked about the book mix. This slide is very important. It absolutely shows how things augur well in the future. On the left side of the slide, we said from 51%, Retail has become 75%. And how this shows the possible future of the company which you have to analyze, you have to put in your models, that with this move, the profit has moved to 85% profit coming from Retail. What does it obviously mean is even with the provision coverages (PCR) that we have, as you know, our Retail provision coverages are very, very high at 80%, this is the kind of profits that Retail delivers. It is very important that when you compare across the industry, we also see provision coverages. And with 80% provision coverage, we are delivering 85% of the total profit which at Rs. 501 Cr and Rs. 1,623 Cr is already moving in the right direction. 85% of that is contributed by Retail and hence, we are quite sure that as Retail percentage keeps going from 75% upwards, profit growth will be better than that. That's the whole idea of showing this slide.

Retail Disbursements:

Now let us talk about the growth and how we have achieved this growth. So, total Retail disbursements, just disbursements moved from ~Rs. 25,000 Cr to ~Rs. 42,000 Cr, which is a 70% growth. And more importantly, it is contributed quite well across business lines and across products. As you know, we have 4 business lines - Farmer Finance, Rural Business Finance, Urban Finance and SME. And the numbers there on the screen, I am not going to repeat them, shows that the growth has been achieved quite well across businesses, right? And I have listed the strengths that we have under each of the businesses. This is again nothing new, but sometimes it is important to put it there to feel confident that this is not a one-time performance, that these are the strengths based on which we can continue to grow.

Well, the only thing I would like to talk about here is Rural Business Finance, this 70% growth has to be taken in perspective that the first quarter of FY22 (last year) was almost 0 disbursement, right? So, FY22, we did some disbursements but were largely 9 months. So, just to remind you, point that out, that we were still within COVID, that was the COVID second wave, FY22. Will we grow by 70% next year, disbursements? Definitely not. But it will be a strong growth nonetheless as we go ahead.

The important thing here is in every business there are particular milestones that we achieved.

Page 3 of 23

PUBLIC

Tractors, we achieved a disbursement of 1 lakh new tractors for the first time. It is really particularly satisfying for me who came here in the very early days in L&T Finance, came to the country in the early days of starting tractor finance and I remember in the first year, we had done 2,000 tractors in the whole year and within 15 years, we have touched a mark of 1 lakh tractors, it is particularly satisfying for me personally.

Rural Business Finance, I think this ~Rs. 1,500 Cr, within March, we did actually ~Rs. 1,600 Cr. But more important and more satisfying number is 30 lakh new customers were added within 1 year and that shows the capability, the capacity to add new customers as well as do business with existing customers as we go ahead.

Various milestones in Urban Finance. The big milestone I would say is Consumer Loans, a product which is just 2-year-old is really, really catching speed now and we have crossed some real good milestones in this disbursement.

And last but not least, SME, that growth is extraordinary, but obviously because last year, we were still in the pilot phase. So, practically, FY23 was our first year of doing SME disbursements and we have done decently well.

Retail Book:

The book growth largely reflects this. We would also see that mathematics will work. All of you work your excel sheets and till last year, till FY23, the book growth was lower than the disbursement growth because of the previous years. The previous years where the disbursements were very low because of COVID, this year the book growth of even 35% is lower than disbursement growth naturally. Your models itself will show that even for a 2-year or a 3-year product, we are now getting into the good phase of growth where because of current book being high, the book growth will now catch up very fast with disbursement growth. So, I mean there's nothing for me to tell you, all of you know your models and that's how we see that the growth will actually be excellent going ahead, no new points here, but again particularly satisfying book growths have happened which have been a very important part of this Retailisation journey.

Wholesale Book:

Now I am going to come to a slide which we believe was a surprise to the market, is the way we reduced our Wholesale Finance book.

So, somewhere in the beginning of Lakshya, we said okay, we are going to become a Retail company. We are looking at transactions, we are looking at selling our Wholesale Finance book, both Infrastructure Finance as well as Real Estate Finance. I have said it during calls, but I will repeat it once again. But this is the important slide that we started with the idea that we will be able to do transactions where we will be able to sell the Real Estate Finance as well as the Infrastructure Finance platform. We had different kind of issues. Real Estate, there was a structure, a particular private equity had thought of and we didn't get regulatory permission for that structure, one. Infrastructure Finance, the issue was that of perhaps the issue of plenty, that we hired our investment banker, we did the transaction, we got a bite actually, complete due diligence was done and then we realized that a private equity player who is wanting to buy a $4 billion-$4.5 billion book could easily cut a $1 billion cheque for equity, that was not a problem. But raising $3 billion-$3.5 billion debt was next to impossible for that person from the Indian market and they wanted our guarantee. And obviously, that served no purpose. If we give guarantee for the debt, then the purpose of selling the book doesn't do.

So, we did 2 things. We decided that we are now going to sell rapidly, even asset by asset. It's okay if you don't get too much value, we will sell because the Lakshya objective was important, one. Second, now that we are saying that we will sell asset by asset, there is a chance that the person or persons who are buying it may ask for some discounts or because of interest rates going up, we may have to give any discounts. And that is why when we sold Mutual Fund, the entire profit coming from that we kept aside to enable us to give the team the confidence that we can sell down rapidly. And I am happy to see the result and the result is there. Our Wholesale Finance book has reduced totally to less than Rs. 20,000 Cr. Even we had not expected in the middle of the year that we will be at less than Rs. 20,000 Cr. Even we had not expected that Retailisation will be at 75%.

And now I can confidently tell you that the way we have planned, the way we are seeing visibility of sell down, by 2024, we will reduce the Wholesale Finance book to such a small number that all Retail ratios, Retail profitability will slowly start converging with the overall profitability.

Page 4 of 23

PUBLIC

To give a specific number, we are very confident of taking Retailisation to more than 90% by FY24 itself. And clearly, if I'm saying it from the stage, it is very clearly something that we are very confident of, reaching a 90% Retailisation in 1 year. So, that is one target that we are sure to achieve and overachieve 2 years before i.e. Retailisation.

Okay. On this, there were a couple of more questions coming, and I will handle some of those questions on those slides. There was a question about some Rs. 84 Cr entry in our results. So, we have given a number, and then there is Rs. 84 Cr, which is added back. Just to clarify, some of you had asked this question, right? So, just to clarify, we have a small AIF, very small, the book is just about Rs. 200 Cr, it doesn't matter. But when we did mark-to-market, we wrote down some investment in that AIF. That AIF, we own 55%, other investors own 45%. That Rs. 84 Cr is added back because it is the share of those other investors, Rs. 45 Cr. In the original results, an entire 100% hit is taken and then 45% hit is added back to that, obviously. So, just a number. So, the Rs 501 Cr number that you see is the net number to us, final profit, okay? And Rs 1,623 Cr is the final profit to us. These are standards of Ind AS that we have to follow. I believe I have explained it correctly. If you have not understood that is largely because I also don't understand Ind AS. So, my CFO will be on stage after some time, and he can be more accurate, okay? But what I understand that out of total loss, whatever was for 'others' was Rs. 84 Cr, that was added back. Which means that, that AIF now is just about Rs. 200 Cr, completely marked down to market. We are confident of doing those deals and closing it. So, one more of those old problems over this year. One by one cleanup is happening. That was 1 question.

The second question was interesting. How much of the provision we have used, okay? So, again, just to explain the way I understand, it was not like we created that ~Rs. 2,700 Cr of provision from which we keep using. We actually valued assets, all the assets and wrote those assets down by that much amount, okay? So, as we sell the remaining, we will sell something above that, so that will get revised. Then the remaining assets will keep getting revalued. So, plus/minus, plus/minus, will keep happening. And during the next year, it will be completely confusing to do that. The most important thing is management assuring you that we believe after every month taking a review that there is not any substantial shock of any type or any provision coming into the Wholesale line from now. Whatever Wholesale provisions, a little bit you will see, that is another Ind AS standard that you have to recognize income on GS3 and then derecognize it again. So, no real provisions happening. It is only that interest income.

So, that's what we have done. Actually, if you add back ~Rs. 4,900 Cr disbursements that we have done in Wholesale Finance for 2 reasons. One is we are a going concern. There are commitments given to Wholesale, which we have to keep and as I said, for the first 7 months, we were trying to keep up the platform and sell as a platform. So, obviously, we were doing disbursements. If you actually add back the Rs. 4,900 Cr disbursements we did, we have sold ~Rs. 28,000 Cr of Wholesale assets this year. And even with half that speed you see that, that 90% number is very easily possible, right? And that's what we are confident of. With your permission, I'll go ahead.

These are the 3 big strategic things that we wanted to do. I spoke about 2 already. Now I will speak about the third one and it is of great strategic importance, which is the merger, okay? Once again, reminding you when we started this journey in 2016, you remember this - 'Right Products, Right People, Right Structure'. And we said that ultimately, we are moving to create 'one company'. And I'm happy that finally during FY24, that will be possible. Why did it take so much time? I think the first merger that we did was of all the ICCs, all the loan companies, we finished doing the merger. Then there was the Infrastructure Finance company, there was a Housing Finance company, which, obviously, you will understand had structural regulatory advantages of their own. But we were very clear that we wanted simplicity and transparency more than anything else, right? Especially when you had a large wholesale book, lots of questions about in which company it is parked, what it is, et cetera. The best way to end all those questions was to have 1 balance sheet.

And hence, we merged the Infrastructure Finance Company and the HFC 3 years ago. Then only 2 were remaining. What was IDF that time, which is now ICL and L&T Finance. And you would ask why we did not sell it. The reason was very simple. We had a Mutual Fund and RBI was not giving permission to any operating NBFC to have a Mutual Fund. And hence, we had to wait until the Mutual Fund was sold. The moment the Mutual Fund was sold, we applied for this merger. The stage is this - RBI, we have got final approval. SEBI always gives in-

Page 5 of 23