AGM notes: Takeaways from the L&T Financial Services meeting

By Soumya Malani & Arun Mukherjee

(Kolkata’s Arun Mukherjee, a college dropout by choice, and Soumya Malani, a London School of Economics passout, have come to be known as smallcap aficionados in India’s investor community. They would show up at most AGMs, visit the remotest factories of a company and go chasing end-users to understand their experiences with a product in their passionate hunt for good smallcaps. Soumya and Arun would be sharing their experiences with companies and from the ground in this space every now and then. Keep watching.. )

Unlike last year, Managing Director Dinanath Dubashi was rather subdued and let Chairman Shailesh Haribhakti do a lot of the talking. He opened the proceedings by saying how the company has come a long way in the NPA front. Ever since the management shake-up of three years ago, L&T Fin Services has cleaned up its books and has increased its ROE to 18.73 per cent.

While last year Dubashi held a presentation for the investors, this time a lot of graphics from the annual report were displayed prominently. A couple of shareholders including myself asked the management why L&T Finance holdings was not in the fast-growing consumer finance business, which is practically monopolized by Bajaj Finance. To this, Dubashi said there is a team within the company which is constantly evaluating new businesses to enter all the time. "However we will enter a business only if we can be in the top three or five," Dubashi said.

He very clearly mentioned that the management's first priority was "not to do anything detrimental to the interest of the shareholders". Dubashi mentioned more than once that the company was determined not to repeat the mistakes of the past. He said reiterated that the company was looking at fee income as a sustainable source to take of volatility in profitability.

Questions were asked about the performance of the company's Wholesale Business which accounts for 56 per cent of the company's loan book. (It was 62 per cent in the previous year). Dubashi replied that provisions to the tune of Rs 5000 crores have been made towards Stage 3 NPA. Now management says the provisions have been made as a mark of prudence.

Dubashi admitted that the legacy portfolio in the Wholesale Business suffered from a problem of high NPAs. Because of this ROE on this segment has been low in FY 18. However, Dubashi said, the ROE is improving. Going forward the share of the Wholesale Business would come down to 30-40 per cent of the company's loan book, Dubashi said. He added that the company was looking at increased retaliation of its loan book.

(In the conference call after the June Quarter results, Dubashi told investors that Rs 300-350 cr provisions made for the Wholesale Business book every quarter would come down Rs 90 cr). Each of the five businesses the company was in had a different profitability profile. Company was looking at profitable growth instead of growth for the sake of growth, the MD said.

ROE is expected to be generally stable at the current levels in the coming quarters. To my query about the proposed sale of supply chain lending business to Centrum as reported in various newspapers, Dubashi did not exactly deny it. He said the Board of Directors will from time to time examine offers. L&T Fin's business model is to build something and sell it if the price is right, he added.

Our Take:
Our valued ShareBazaar app user Shiv Kumar turned up at the AGM and ensured he got everything clarified from the horse’s mouth. The company to us looks to be in solid footing. If they can continue to grow through the fixed income route(with a superior or even a stable ROE) unlike its other competitors who for sake of growth loaded up on anything and everything and now had strangle hold on them, shareholders can expect consistent decent return in the longer run.