There's no free lunch, can't promise to grow 20% in sectors with negative growth: Dinanath Dubhashi, L&T Finance

We are lending only to the best of the best in real estate now and it is a good opportunity to enter into the A plus plus category, says Dinanath Dubhashi, MD & CEO, L&T Finance. Excerpts from an interview with ETNOW.

The average AUM growth of L&T Finance was just 5%. What led to this modest growth because you have always said that you are growing and there is no problem with your business. What did not go right for the quarter gone by?
Growth always needs to be taken in perspective. I will just take a few steps back and say what are the big messages I would like to put of this quarter’s result. The first message is like we have been showing in the last five quarters. Since the so called difficulties in the NBFC sectors have started, we have shown very steady results -- be it profitability, margins, credit cost or NPAs. This is a company which has given quarter on quarter steady results.

Second, I would like to give a very positive message not only for me but also for some of our peers in the same category. On the debt side, there has always been highly rated companies with good parentage. This quarter, we are seeing that distinction becoming extremely pronounced and L&T Finance as well as some of our highly rated peers are getting money much more easily. Just to give you numbers, we have raised long-term funds from various sources -- both private and public NCDs, ECBs etc -- up to Rs 10,000 crore this quarter. Our total CP percentage has come down to single digits. That has happened while reducing the overall cost by about 6 bps.

So Q2 borrowing costs have eased by 7 bps on a sequential basis. But it still remains elevated to earlier levels. When do you expect funding costs to come back to FY18 levels?
As you are saying, the most efficient way of measuring borrowing cost is always sequential but even taking this sequentially, we have reduced it from 8.61 to 8.54. Year on year, it is up by 4 bps from 8.5 to 8.54 bps. So, first of all, I do not think we should try and analyse that too much but even if you do that, Just see from CPs. I do not exactly remember what it was a year back but I am sure it was about 16% and that has come down to 9%.

The difference between CP and the long-term funds is about 2% and we have reduced CPs and increased the long term funds in the balance sheet, which is perhaps in the today’s time the right thing to do. We may increase CPs again a little bit based on our ALM because a large part of our balance sheet asset side is also the positive cash flows in the short term. But when you see the 4 bps increase, it is a small price for a substantial improvement in the liability profile in the long term. The kind of security we have brought in the last one year on the liability side coupled with our AAA rating and parentage, make a statement that a further growth will be a function of market growth, our strengths and strategy and will not be constrained by liabilities. This is a big statement in today's market. We are quite confident of being able to raise liabilities at a good cost to support our asset side.

Which are some of the segments showing signs of higher stress and when do you feel we can expect a recovery?
Obviously, there is stress in the real estate sector and that is no secret. We ourselves have always said that real estate is not a spectators’ sport. As a lender, you should be in a very good position for appraising the developers, choosing which projects you will do, how you will monitor the projects and most importantly, when the project faces some difficulty like some of the projects are today, how to use your group strengths to resolve those projects.

If you are able to do that, you can maintain a good portfolio in real estate also. That is exactly what we are doing and it is very obvious from the way our asset quality has moved. As far as disbursement in the real estate is concerned, about 50% of our disbursements and the book is capped at around that level for the last three-four quarters. But 50% of our disbursements go towards completing our existing projects because we believe that the only way of a project to be sold and houses to be sold is when you complete them and that is what we are doing and this is a great opportunity for us to get into top names in real estate.

We are lending only to the best of the best in real estate now and it is a good opportunity to enter into the A plus plus category. We look at it hopefully, but yes the overall stress in the sector will take some time to go away but there are pockets where we can do good business in real estate and that is what I would like to speak about the real estate sector.

Since the real estate sector and HFCs are facing liquidity crunch, do you expect consolidation, with quality NBFCs gaining market share?
Most definitely. It depends on strategy, risk framework, etc. Our risk framework limits our real estate exposure to about 17-7.5% of our total book. So, it is not that if there are opportunities, we will suddenly increase our real estate exposure. It will remain in the area of what it is, so that is number one.


But yes, consolidation in the sector itself is already happening and so the stronger players are taking over projects. Here consolidation does not happen by merger. It happens by joint development agreements, DMs, etc. That is what is happening. The stronger developers are taking over projects which have good potential that is most definitely happening in terms of consolidation.

Even if you see the launches in the last one year, more than two-thirds of the launches are coming from the top 20 developers. Overall, we believe that the consolidation in the industry is definitely happening and good projects will get consolidated and completed. Projects which are bad, in bad areas with bad structure will perhaps fail. That is how the sector will develop and as NBFC it is important to see which part of this your portfolio is related to good projects and whether you have enough liquidity to get those projects completed.

As we have already said, in 97% of our projects, we are the sole lenders and we are absolutely confident of completing and selling those projects. That is how the real estate sector's resolution and further growth will take place.

Your margins as well as fee continue to improve on a sequential basis. Can we expect further margin expansion from here on?
We do not think so. Definitely not beyond this. This also includes some income from assets which comes once in a while. It is not a one time extraordinary income, it just does not repeat every quarter. We have always guided this to be around 6.7-7%. We should be able to keep it at that. I would like to put it conservatively. So, it is definitely not going up from 7.3%. It is a good level but 6.7% to 7% is also a good level and that is more sustainable.

How would you classify this quarter in terms of profitability? Also what would be your growth strategy now for the coming quarters? Are you looking at organic opportunities as well?
Absolutely. I would like to place this quarter as just a continuation in our story. What is our strategy? Our strategy is to maintain top quartile ROE and being very steady and predictable. In the last five quarters, the market has been the least turbulent and after these five quarters, we have fulfilled our promise of showing steady performance even in turbulent times.

I would put this quarter as just an additional step or additional proof of that strategy. Good companies do not try and do something completely extraordinary every quarter. Steadiness is the hallmark of companies which are here forever, for perpetuity and that is what we would try to establish always and every quarter from now on will be a step in that direction as we go ahead.

As far as growth is concerned, we are in rural, infra and housing. There is no denying that our absolute growth will be depending on the absolute growth in these areas. We will not not try and do something extraordinary or promise to grow 20% in a sector where growth is negative. There is no free lunch in financing. We will not do that. What we will try is always have enough strength to be better than the market when the bad times are there and to build such strong strength in terms of network, people, new products, innovative products, digital and data analytics to show higher than market growth when the market rebounds. That would be my answer to your question.

I do not want to guess on short-term growth because I am in a sector where absolute growth will always depend on how the country is doing but one thing we can be sure of is that we will show steady improvement in our market share every quarter and very steady performance across the ROA.