L&T Finance Holdings Limited (L&TFH) Q3 FY23 Earnings Concall Transcript

L&T Finance Holdings Limited (NSE: L&TFH) Q3 FY23 earnings concall dated Jan. 16, 2023

Corporate Participants:

Dinanath Dubhashi — Managing Director and Chief Executive Officer

Sachinn Joshi — Chief Financial Officer

Analysts:

Saurabh — JP Morgan — Analyst

Kunal Shah — ICICI Securities — Analyst

Rikin Shah — Credit Suisse — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the L&T Finance Holdings Q3 FY ’23 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. [Operator Instructions] Please note that this conference is being recorded.

We have with us today Mr. Dinanath Dubhashi, Managing Director and CEO; and other members of the senior management team. Before we proceed, as a standard disclaimer though and published price-sensitive information will be shared delivering the call, on the publicly available documents will be referred to fall discussions during interaction in the call. While all of which will be made to ensure that no unpublished price-sensitive information will be shared, in case of any inadvertent disclosure, the same word in any case, form part of the recording of the call.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 Q3 results presentation sent out to all of you earlier.

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 — Managing Director and CEO

Thank you. Very good morning to everybody. And let me, at the outset, wish you all a very, very Happy New Year. We at L&T Finance entered this New Year with immense zeal and passion as the Q3 FY ’23, for this quarter, particularly, following the previous two quarters has been excellent for us. On account of multiple reasons, we have touched new highs on the business side, again in this quarter across various business verticals that we operate in. And I have also performed well on driving various Lakshya’s strategic initiatives. All of which have immensely motivated us to keep delivering great results in the future also.

My presentation to you today will revolve, hence around these two themes. Number one, update on business parameters that is our strengths, business performance for the quarter, et cetera. And more importantly, how are we driving the organization towards the retail growth and retailization. Number two, which is quite particular to this quarter, is about Lakshya’s strategic initiatives. Specifically speaking, sale of mutual fund, enhance retailization through an accelerated sell-down of wholesale book, and last but not the least, the proposed merger of our various entities. It has been now close to eight months since we unveiled our strategic plan, Lakshya 26. We did that in May 22, wherein we shared our strategic goal to make L&T Finance our top-class digitally-enabled retail finance company. Moving forward from a product-focused or the product excellence approach to a customer-focused approach, especially by creating a fintech at scale, now every word of — this line is important and we have worked on every word, in fact, every decision we have taken ever since, have been taking in mind — keeping in mind the targets of Lakshya 26. Though all our goal, and In fact, our goal is to achieve our targets by FY ’26, we continue to strive and drive our efforts towards achieving them well before that, here, that is much before FY ’26.

The last time when we met at the end of the Q2 FY ’23 results, I had reiterated the confidence thus as we traverse on the path of Lakshya 26, we will deliver the results promised, while continuing to improve our products and services we offer to our customers. With every passing day, we are working towards making our company one of the top NBFCs in the country that caters to rural, urban mass affluence, aspirers and SME segment of the country, broadly does — does broadly covering the whole gamut of the retail lending space. Our strategy of retaining our customers and using them for cross-selling and up-selling our offerings has been working well. And this has — I mean, one capturing new customers, as well as farming existing customers is enabling us in our efforts to deliver consistent results. Through a better understanding of our customer needs, we are firmly etching our sense in the mind of our customers and we believe are creating ongoing strong customer franchise.

Today I can see this would firm belief that with the strong business, liability and fintech front that we have created and a well-defined strategic roadmap in place, L&T Finance is strongly position to fully transform itself into a top-class retail finance company. The scaling up of retail business over the past three quarters has been made possible due to the strong retail franchise that we have built actually over the past seven years and kept on and — particularly strengthened it over the last two years on the foundation of digital and data analytics.

So now, allow me to talk about a few numbers here for FY — for the quarter three FY ’23. Retail book has reached now 57,000 crores, which is a 34% Y-o-Y growth and a 10% Q-on-Q growth, which is comparing very, very well with our target of at least 25% cagr. Now, the retail portfolio has reached 64% of our total book already.

Retail disbursements reached an all-time high of INR11,607 crores in the quarter, up 53%. And this is actually the first time that we have crossed INR11,000 crore level in the quarter. Improvement has been witnessed across asset quality parameters with retail GS3 now, down by 38 basis points Y-o-Y to 3.47%, and NS3 down 45 basis points Y-o-Y 0.73%. Let me point out that our Lakshya goal is less than 1%. We are already there and very confident of maintaining and improving it. PCR — retail PCR is at 79%.

We have delivered a total PAT of INR454 crores, up 39%. And the retail PAT now is almost 87% of the total PAT at INR394 crores. Retail return on assets is already 2.6% in Q3 FY ’23 with ROE — that is retail ROE, reaching 14.97% during the quarter, again, reminding you our FY ’26 goal is 3% ROA. So actually, if you see the retailization — retail growth, GS3, NS3 and ROA, numbers are quickly approaching of our FY ’26 target, which make us confident that we will probably achieve or exceed these targets much earlier than that.

I would take this opportunity now to pause for a moment and explain a bit about the Retail ROA3 that we aspire to not only achieve, but sustainably achieve. With the current pace of retailization, our retail ROAs are trending well towards the targeted 3% range where as I said, for Q3, it is already 2.61%. Accordingly, our guidance for a steady state ROA is as follows. Retail NIMs, which you would see that is at 11.4%, through ups and downs, interest rates, et cetera, et cetera. We clearly expect this to be a minimum of 11%, a trend towards that number and the opex plus credit cost number, in the medium term, should start trending to about 7%, thus yielding a pretax ROA of 4% and the post-tax ROA of 3%. That’s what we are targeting towards, obviously, work is on every aspect.

We have promised — as far as growth is concerned, we have promised at the beginning of Lakshya 26 at the cagr of our retail book, we will be at least 25%. The growth we have been able to achieve in the first nine months of the financial year, makes us very confident that we will be able to exceed this target comfortable. This consumer confidence stems from our on-ground capabilities, we are building in our existing products, the rapid scale-up we have been able to achieve in recently launched products and the product launches we have got planned over the next couple of quarters. And last but not the least, the geoagnostic PLANET app capabilities that we are building. So as I said, ROA trending as I indicated, and retail growth we expect to comfortably be above the 25% target. These are the numbers we are working towards and are confident of delivering consistently. That’s our idea of a top-class retail finance company, powered by digitization and data analytics.

Having spoken about the retail franchise, let me now make a mention of other strengths that we have built over the years, which have emerged as sustainable differentiators. Just to count a few, a AAA rating — rated liability franchise with a strong CREA, transformational digital and data analytics where we have integrated now 100 plus FinTech partners with 40 plus algorithms, which has helped us in transforming our digital and data analytics, a granular customer franchise and distribution network with a database of about two crore customers and a strong distribution network of 16,000 plus partner touch points, we are now formally etching ourselves in the minds of the customer, as well as in the geographies.

High customer retention, we have a customer retention now of prepaid business of more than 30%, which has helped us in cross-selling and up-selling our products. And I’m talking about this only loan products repaid business. For insurance products what we do CLI and other business. Obviously, we are much, much higher.

I would specifically like to talk about the PLANET app, which is augmented customer-facing interface. Our D2C app, which is named PLANET, were launched in March ’22, and have already crossed 17 lacs downloads, and as witnessed, more than INR970 crores of disbursements till December. This is including the website app also. While processing rupees of almost INR117 crores of payments, that is collections. This application is available both on App Store and Play Store, and has been rated 4.3. Having other features like credit scorecard in Q1 FY ’23 and InstaLoan for consumer loans in Q2 FY ’23, we launched the following additional features in Q3, which is mandi price for our farmers, customers and wellness insurance. Going forward, the company will continue reimagining customer engagement by incorporating features like self-driven customer journeys for two-wheeler loans. This will actually include a end-to-end journey, where you can choose a two-wheeler, you can choose the dealer, you can book a test drive, you can book the loan, and — I mean, there are only two physical parts in it; one is the test drive, which you have to drive on a physical two-wheeler and then take the delivery of a physical two-wheeler, everything is will be done on the app. Rewards and referrals, utility payment, hospi cash insurance, et cetera, making it closer to a full-fledged fintech app, and now slowly taking it towards the complete marketplace. We envisioned this app, developing into a full-fledged marketplace, enabling prospection customer onboarding, customer retention, and most importantly, what we are concentrating is customers servicing for a seamless service experience. In addition to that, it will also have many value-added services making it attractive for our customers to use it.

Now coming to some of the updates on our delivery of strategic initiatives, which were three parts; one, unlocking value by sale of mutual fund, accelerated retailization and merger to form a unified operating lending entity. So, let me discuss these one by one, the sale of mutual fund. As you’re well aware, L&T Finance Holdings has entered into a — had entered into a definitive arrangement with HSBC AMC on 23rd of December, 2021, almost one year back, to sell 100% stake in its mutual fund AUM to HSBC the sale was finally completed after all the regulatory approvals on 25th of November 2022. As a part of the transaction, we received a sale consideration of INR3,485 crores and the surplus cash balance, which we could take out of INR764 crores thus totaling the total consideration to INR4,249 crores. This amounts to 5.7% of the AUM of the mutual fund as on the closing date. The capital gains realized from the above amounted to a post-tax number of INR2,160 crores — post-tax number after capital gains tax of INR2,160 crores. This according to us clearly indicates the strength of business we had built over the years and the value unlock from it will clearly help us in furthering our Lakshya objectives.

The second part was focused retailization. Our retailization transformation journey is a mix of two key pillars, organic strong retail growth and the reduction of the wholesale portfolio. As far as the strong retail growth is concerned, I briefly spoken about it and we’ll do a deeper later as well in the later part of the call.

As far as a second pillar, reduction of wholesale portfolio is concerned, we had earlier communicated our intent to explore the divestment of the wholesale book through sale and realizing value et cetera not having concluded the above accessories. The wholesale book reduction is now envisaged to be achieved through a combination of various means and that took fairly rapidly like repayments, prepayments, sell-down of loans et cetera. In this regard, it is important to highlight two major parts aspects; first, the wholesale portfolio now. In October onwards we actually started this rapid sell-down — rapid reduction. The wholesale portfolio has sharply reduced to about INR31,000 crores now as compared to INR41,000 crores approximately a year back, and even just three months back, that is as of 30th September, it was INR37,597 crores. So this book reduction now is happening quite rapidly, 18% Q-on-Q. And it mainly comprises of prepayment, repayments of about INR4,000 crores — INR4,200 crores and sell-down volumes of about INR2,900 crores odd. Simultaneously, in accordance with the renewed strategy in order to pivot towards digitalization, we have now decided to change the business model in wholesale to enable an accelerated sell-down. To reflect the change in business model under Ind AS, the assets in wholesale are now reclassified from amortized cost through a fair value through profit and loss, and we have tried to explain this in details in our investor presentation as well as financial investments. In line with this, a fair valuation of the wholesale assets was conducted by independent value. Since the book is quite good, at the first stage, the valuer evaluated the fair value largely the same as there was no change in the underlying asset quality. However, given a shift to the accelerated sell-down of the wholesale book, certain illiquidity to discounts were to be considered during the sell-down and it is possible that there will be illiquidity discounts to be given to a buyer during the sell-down. To give effect to this a one-time provision of exactly INR2,687 crores have been created on account of this reclassification consequent to the change in business model and a fair valuation of the wholesale book to facilitate the rapid sell-down process. Through this accelerated sell-down, while we have promised to achieving the retailization of 80% by the end of FY ’26 as per our original Lakshya plan, we expect to sell-down the wholesale book in a much more rapid manner, which we believe will help us achieve much higher than that 80%, perhaps closer to 90% retailization by end of FY ’24. We firmly believe that these provisions will be sufficient — the provisions that we have created will be sufficient to cover any downside risk of such accelerators sell-down, thereby not impacting retail growth or retail profitability going forward. I hope that you have got ample clarity now on what we propose to do as far as the business strategy for increased retailization and reducing whole is concerned.

Now the merger process, that is transforming to a unified operational retail entity — lending entity. One of the top most priorities that we are going to focus now is to make L&T Finance into a unified operational lending entity. I will explain the background of this proposed merger. Since 2016, LTF, which has embarked on a strategic retail — rationalization of companies — this particular initiative comprising merger of various subsidiary entities through the right structure initiative. This led to reduction of number of lending entities from seven in 2016 to two by 2022, that is L&T Finance Limited and L&T Infra Credit Limited, which resulted in simplification of corporate structure along with the announced government governance and controls. In continuation of our guidance towards moving to a one company structure LTF’s post the sale of mutual fund now has proposed a merger of its subsidiary lending entities, that is L&T Finance Limited and L&T Infra Credit Limited with the non-lending listed holding company L&T Finance Holding Limited. Since the holding structure is not relevant anymore after the sale of mutual fund. So just to explain very clearly, the regulator was not in favor of operating NBFC holding the mutual fund. And hence the CIC structure was relevant, now that we have only lending business that is not relevant and hence, there will be only one monolithic NBFC in the group.

What this would result in the simple one entity structure, which goes in line with our entail to have a right structure, leading to optimal utilization of capital and effective utilization of management bandwidth. Needless to say, of course, that this merger would be subject to necessary, statutory and regulatory approvals and clearances. We believe that it will take a good part of FY ’24 for it to finally happen. Excuse me.

Now, allow me to deep dive into some of the operating numbers. As I’ve said, we have seen the highest-ever retail disbursement. Retail disbursement stood at INR11,600 crores, up 53% Y-o-Y. This has resulted in the retail book growing 34% Y-o-Y and 10% Q-on-Q. Overall retail mix has grown to 64% from 50% last year and 58% in Q2 FY ’23 itself, and we hope to show you a much higher percentage even by the end of this year. These numbers indicate the strengths of the business franchise we have built over the years. I would like to take a moment here to highlight that we have successively posting — we’ve been successively posting highest-ever quarterly retail disbursements, first in Q1 FY ’23, which has then surpassed Q4 FY ’22 levels, followed by Q2 and then now in Q3. Of course — I mean, there are a lot of businesses, which are seasonal, but we expect overall a trend of good strong retail disbursements to continue.

At this juncture, I would like to give you a flavor of how performance of various macroeconomic variables, which have a bearing on our businesses have been taken into account, while arriving at various decisions. At L&T Finance, we are greatly influenced by the inputs of our Chief Economist team on all the relevant variables that have a decisive influence on the agricultural cash flows, especially rural cash flows like slowing progression, water reservoir status, mandi prices, employment levels, inflationary trends, liquidity pressures et cetera. These insights are of immense value, not only for business planning, but even for actual resource allocation as well as credit decision making. Also they serve as very good early warning signals for us to be better prepared for future.

Broader moment of macroeconomic variables suggest that rural demand this year is expected to stay reasonably buoyant in the remaining of FY ’23, and at least in the first half of FY ’24 and then, of course, we will have to see the months ahead. Healthy rabi sowing, good kharif procurement, and hopefully, likely exports of wheat have kept the investment sentiment a bit in rural areas. We see good progression in rabi sowing season with higher water storage levels and improved soil moisture. During the first three months of rabi sowing season, that is till December, the total sown areas surpassed the normal area of all major crops with all stage reporting higher rabi acreage barring five states which are Telangana, Haryana, Gujarat, Punjab and Uttarakhand. Other than this, all other states have reported higher area under sowing of rabi. Leading to higher chances of a bumper rabi crop. This progress in rabi sowing gives us tremendous hope that it will offset that dent in total food grain production, which we have seen during the kharif season. The 2022 Northeast monsoon progression has now already in the surplus with a cumulative rain precipitation being 19% above normal. The water service — storage positions across reservoirs is not only higher than normal, but also higher on a Y-o-Y basis. All regions have now reported healthy water storage positions barring some Eastern and Southern regions on a Y-o-Y basis. Over the past few weeks, however, of course, the storage position has moderated, but still we believe that this will lead to a good rabi season. The MGNREGA Statistics until December ’22 show that all-India daily average rate under the MGNREGA scheme is higher than the previous year. Thanks to the ongoing rabi sowing, the job demand in rural areas is largely met according to CMI, while the urban unemployment rate rose to 10.09 from 8.96, the previous month, in December, the rural unemployment rate has actually declined from 7.55 to 7.44. The same statistics indicate that until December ’22, the all-India daily average wage rate under the MGNREGA scheme is also higher than the previous year. As such, all indicators are trending to reasonably positive. So as far as the overall rural growth is concerned, I am pretty sure that the momentum is a sustained on and the rural demand in different geographies will present us with good opportunities to grow our rural business in future.

Let me now talk about the performance of the respective businesses, rural business finance, which was previously known as Micro Loans. This business recorded highest ever Q3 disbursement of INR4,281 crores. This was with the book growing 46% Y-o-Y. Today stands at around INR17,500 crores. This growth was aided with help of initiatives like focus on the repeat customer convert — conversion only for our zero DPD customers, exclusive customer loans that customers who are exclusive only to L&T Finance, calibrated geostrategy, a best-in-class turnaround time and data-based credit algorithms. And we were — I would like to point out that we were clearly the pioneers of data credit algorithms in this business, while continuing to maintain a collection discipline of timely execution and strengthening the product portfolio entering various product portfolio monitoring metrics. The monthly disbursement rate has been maintained at around INR1,400 crores with fresh and repeat disbursements, respectively at 49% and 51%.

As explained in the earnings call of Q1 FY ’23, subsequent to the master directions issued by RBI, on this business, we swiftly modified our sourcing digital app for calculation of household income and made changes in the processes. Lending could happen using advanced credit metrics now in households with an income of more than three lakhs. They’ve opened us tremendous opportunities at good credit costs — at acceptable credit cost. Going forward in this business, the company expects to sustain the momentum by launching new products like rural, loan against property. That is the first one of the ground in addition to whatever group loans product.

Farmer finance — from being one of the leading financers in this segment, today L&T Finance has a leadership position in farmer finance with about 15% market share. This has been done with the help of a well-diversified footprint of 170 branches across 16 states and the vintage now of about 17 plus years. We have built our partnerships with a tie-up with more than 2,500 dealers. As a result, we achieved a highest-ever monthly disbursement of INR900 crores, the best ever in — the best ever quarterly retail disbursement — disbursements of about INR2,057 crores in Q3 FY ’23 and the highest ever quarterly disbursement of about 40,000 units. Repeat customer disbursements have grown from about INR160 crores to INR273 crores — INR270 crores in Q3 FY ’23. The book size now has crossed INR12,000 crores mark. So again, this business doing extremely well.

As we come to urban finance, which comprises of two-wheeler, consumer loans, and home loans stroke lab business, we saw 55% jump in overall disbursement, resulting in a 34% Y-o-Y increase in book size. Our two-wheeler business saw the highest ever quarterly disbursement of INR2,146 crores, up 31% Y-o-Y. We in October — actually we achieved highest ever monthly disbursement of INR1,000 crores. Q-on-Q growth in unit disbursed stood at 14%. The book size stood at INR8,716 crores, which is now 19% growth Y-o-Y. Our two special products, which is [Foreign Speech] Loans and the VIP scheme, which according to us is very customer-friendly product increases finance penetration and more importantly, much more improves our portfolio quality and reduces collection costs. These two products, now penetration stands at 23% in Q3 of the total disbursement in Q3 FY ’23.

As a step towards expanding geographically, we have been opening new branches. As a result of attractive customer offerings and schemes, L&T finances disbursements have grown at 31% Y-o-Y, which was better than the industry average of 22%. By maintaining a strong focus on customer value, building preferred dealer OEM relationship with more than 5,000 dealers to grow our market share, the business is delivering on a strategy built around dominating counter share of preferred partners and offering mutual value by leveraging the increased application of data analytics.

I would like to add here something very interesting that adding to our endeavor to create customer-initiated journeys and reimagining customer engagement, we now proposed to launch a digital two-wheeler journey on PLANET app, wherein the customer can purchase the two-wheeler from the comfort of his home without visiting the dealer outlet. This would cover the entire customer journey for selection test drive of the two-wheeler, onboarding and digital sanction along with insurance payment and setting the bank mandates followed by delivery of the two-wheelers. With this, we believe that experience of purchasing a two-wheeler by a customer would undergo a significant shift on the back of technology and digital process. We, of course, believe that the takeoff of this will be slow. But like all things digital, we believe the pickup after that to be pretty rapid and fast.

Our consumer loans, which is one of our newest products, and our digital native products have now had a monthly run rate of about INR400 crores per month during this quarter. Our digital aggregator partnership now — have now crossed INR100 crores on a monthly basis. Disbursements stood at INR1,228 crores in Q3. The business continues to build significant scale by cross-selling to L&T Finance’s existing customers as well as open market customers. Repeat customer base increased to 44% now Q-on-Q on account of active analytics engagement. The company increased its customer funnel through channels like new partnerships with new aggregators and instaloans for potential customers. In this segment too, we are working on initiatives like starting new programs for higher ticket salaried PL and, of course, new to credit through banking products and increasing the spectrum of digital partners by utilizing the digital stack.

Retail housing side, the retail housing disbursements now stood at around INR1,200 crores, up 83% Y-o-Y and 7% Q-on-Q. We remain focused on enhancing disbursement volumes like by deepening geographical presence, solid DSA partnerships and increasing customer retention. We have also worked incessantly towards reducing our book attrition — what is called BT out through a proactive and improved proposition. The share of the self-employed segment in the overall HL disbursement increased to 33% now as against 12% in last year.

Last but not the least, actually the newest product that we have is SME Finance. The pilot of SME product, which was launched in Q3 FY ’22 has witnessed a steady pickup ever since. In Q2 FY ’23 quarterly disbursements crossed — in Q3 FY ’23, excuse me, quarterly disbursement crossed now 200 — monthly disbursement crossed INR200 crores. For the quarter, the disbursement stood at INR538 crores, and the book size increased to INR838 crores. This was led by significant geographical and channel expansion. We also launched a new product in November 22 in addition to our — what we have unsecured business loan. The new product is called dropline overdraft facility in order to provide added value to our SME customers. The business has been operationalized in multiple locations now till December ’22, and we expect it to significantly scale up in times to come.

On the collection side, L&T Finance witnessed best-in-class collections in Q3 FY ’23 across all business verticals, led by the company’s consulted on field efforts, analytics-led prioritization and use of propensity based data analytics to channelize resources. Collection efficiencies across businesses have trended extremely well. Given the way collection efficiencies and performance of portfolios across various buckets is trending coupled with operational efficiencies, which are expected to kick-in in the medium term. We are confident that the retail opex plus credit cost will trend towards the targeted 7% range in the medium term.

On the liability side, with the change in interest rate trajectory through successive hikes by RBI. The industry is obviously experiencing increase in cost. L&T Finance continued to approach its approach of locking in adequate medium- and long-term borrowings, which has helped us to contain the increase in weighted average cost.

Overall, the quarterly WAC that is rated average cost for Q3 FY ’23 stood at 7.54% against 7.33% in Q2. Obviously, the increase in WAC was due to the repricing of floating rate liabilities and higher cost of incremental debt. Here, the point of highlight is that the quantum of long-term funds we raised was about INR6,500 crores in Q3 as against INR8,200 in Q2 and, last Q3 was just about INR2,000 crores. Average CP proportion was kept low at around 9%, and this holds us in good state because with wholesale going, the overall ALM will work in our favor with the overall duration of asset side coming down. And that will obviously work in moderation of the increase in interest costs on the liability side. Given our product mix, as well as the pricing power, and this change in ALM — now rapid change in ALM and the duration of asset size that we have been talking about, we are confident to maintain our NIMs plus fees level at least 11% despite any increase in weighted average cost.

Last but not the least, the asset quality, our GS3 now stands at 4.21% from 6.69% last year, NS3 stands at about 1.72% with a PCR of 60%. And as I already said, the retail NS3 stands at 0.73% with a PCR of close to 79%.

In summary, our established business strengths and proven business models with highest quarterly retail disbursements leading to consisting NIM plus fees. Best-in-class collections, along with a strong retail liability franchise, resulted in excellent profitability and a stable and well-protected book. Also, the resilient and well-capitalized balance sheet positions us strongly for future growth. I would dare to say that whatever we have been preparing over the last four quarters, whether it is a strong balance sheet, a strong liability franchise, business strength, retailization, we believe this Q3 is, I think, the first quarter in which the profitability is very clearly directionally coming forward, and we obviously expect to improve it Q-on-Q.

Having spoken about the quarter in details, let me refer to the pillars of our Lakshya 26 plans, which are four which are having sustained profit and growth engine, demonstratable strength in the risk management and collections, creating a fintech at scale and a sustainable future growth through ESG. I’ve already talked in details now about the first three pillars, so let me talk about the fourth pillar, which is ESG and let me come to the conclusion.

L&T Finance has been one of the pioneers in ESG standards in the financial services industry. A big achievement in Q3 was L&T Finance receiving the CDP score of B level in the recently released CDP score report of climate change 2022, which is a significant improvement over the previous core of D received in 2021. The score signifies that the company is taking coordinating actions in climate issues and highlight the step taken by the company towards sustainable processes and systems. And more importantly, also highlights the way we report that and the seriousness which we take this. I would also like to highlight that the score is higher than Asia regional average of C and the financial services sector average of B minus. I would like to also share with you that we continue to work towards carbon neutrality in line with, which we have adopted the use of green power across many tranches in Maharashtra, including our head office in Kalina, which will help us reduce the carbon emissions. We also worked on carbon sequestration through Project Prakruti with the initiation of plantation of 50,000 trees and have been recognized with awards like Social and Business Enterprise Responsible Award, SABERA, in the gender diversity and inclusion category; and UBS Forum awards in the women empowerment category for our Digital Sakhi project. ESG continues to be an important driver of our strategy and growth, and we are committed to build and report a ESG-conscious organization.

To summarize, I would like to say that we have stayed true to our commitments and have been able to deliver consistent performance. The efforts which we put every day are guided by the overarching goal of making L&T finance a top-notch retail NBFC. We have laid out a path for achieving multiple — of our launching multiple offerings in the future, which will supplement the strength of our current offerings. Looking at our performance in Q3 FY ’23, I can confidently say that we strive and drive our efforts towards achieving and exceeding the targets of Lakshya 26 well ahead of them.

With this, I once again extend my good wishes to all of you, apologize for taking around 45 minutes, but I think they were very important things to highlight in my opening comments, may the New Year bring all of you and your loved one immense happiness good health and a lot of success. I thank you for a patient hearing, and open the floor for questions. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Saurabh from JPMorgan. Please go ahead.

Saurabh — JP Morgan — Analyst

Hi, sir. Congratulations. So this seems to be the clearing quarter for you guys. Just have three questions. So three questions, sir. What would be your market share now in this — in the tractors and two-wheelers? Microfinance, I think you’ll be Number 3. What will be your market share? And are you holding to that top two or three position? The second is if you can help with the write-off and the slippage in the quarter, so your gross Q3 has gone up a little bit. I’m just wondering what was the slippage? And the third is — did I hear you right that you said 90% retail by March ’24 is the internal target, even though the Lakshya target is higher? And if that is the case, then how are you thinking about the excess capital, which will probably be there on your book?

Dinanath Dubhashi — Managing Director and CEO

Okay. Let me answer one by one. So the market share in tractors approximately 15%, market share in two-wheelers will be 11% approximately. In micro loans, it depends on how people measure it, but it is around 5.7%. We are Number 4 in micro loans, not Number 3.

Saurabh — JP Morgan — Analyst

Okay. And tractor and two-wheelers, sir, what will be the market share?

Dinanath Dubhashi — Managing Director and CEO

— as of December. What was your second question, I forgot. I remember your third question.

Saurabh — JP Morgan — Analyst

Sir, tractors and two-wheelers, what will be your market position now?

Dinanath Dubhashi — Managing Director and CEO

Number four, two-wheeler also.

Saurabh — JP Morgan — Analyst

Okay. And tractors?

Dinanath Dubhashi — Managing Director and CEO

Tractors, number one, as of December end. But having said that, us and the next competition is a difference of a few hundred tractors. So we keep having fun every month, measuring it. But it doesn’t matter. I mean there are 2, 3 players who are at the top, especially the two NBFCs that you know.

Saurabh — JP Morgan — Analyst

Okay. Okay. I understand. And what will be the write-off and the slippage in that quarter?

Dinanath Dubhashi — Managing Director and CEO

I will just answer about this — because I can’t give numbers, which we have not given. But GS3 increase, I will just explain to you. There is a rapid drop in book, right? So the percentages will happen like that. And in fact, you will see heard me guiding more and more on the retail ROA, pre-retail balance sheet. Because if I guide you on the total number, the better I do in our wholesale sell-down, some of these numbers in short-term will actually look worse, right? So I don’t want to guide you on the total PAT and anything that’s for you to calculate because even today, I don’t know how fast my wholesale book will come down quarter-on-quarter. Based on that total ROA, total PAT, total leverage, everything will depend on that, right? And I can’t obviously give very specific numbers for next quarters because I don’t know. I mean, if I knew exactly how much wholesaler will sell next quarter, I would have sold it this quarter. So that would be the imponderable. And that’s where our guidance comes. What we will strive at, I will not like to talk about us specifically as internal targets, et cetera. We now believe that with the onetime provision that we have taken in order to deal with any, let me say, discounts that the buyer may ask for illiquidity discount. It can be pretty fast. And, yeah, maybe we hope to touch about 90% by the end of the year. And hence, now to actually take up your other question. Yes, in ’24 then the calculations will show that the more rapidly we go towards the Lakshya goal of reducing wholesale and retailization. The capital may look excess in this particular year. It may look excess. The Board still has to take a decision whether we will give a special dividend, et cetera. That is also subject to regulatory approvals. As you know that any specific dividend more than a particular amount in CISE. We’ll have to take special approvals, et cetera. So that’s the — that’s the guidance on the total leverage. And that is why if you would see through my speech, I talked about the retail balance sheet, and the retail P&L. So yes, FY ’24, maybe this year, where if I rapidly reduce wholesale to, say 10%, to say 10%, the leverage may be limited at — in FY ’24, but then 25% onwards the leverage will only go upwards as retail grows. That is why I tried and guided you without giving a number about the retail growth that we are seeing. So you would see that all indications are that the CAGR, at least for the first couple of years, can be well in excess of 25%, right? So those are the indicators that I would like to put.

Saurabh — JP Morgan — Analyst

Okay. And if that were to happen in your fiscal ’25 ROA could hurt at 2.83%, I mean, if assuming — correct?

Dinanath Dubhashi — Managing Director and CEO

ROA — ROA, that is retail ROA? Yes, we are quite confident of even approaching close to 3%, retail ROA.

Saurabh — JP Morgan — Analyst

No. I was talking at the company level, so — by 90% by March ’20.

Dinanath Dubhashi — Managing Director and CEO

Exactly. So Saurabh, that’s why. So it is everybody’s calculation and guess how rapidly I reduced wholesale book. Correct?

Saurabh — JP Morgan — Analyst

Yeah, sir. Yeah.

Dinanath Dubhashi — Managing Director and CEO

So I mean I don’t want to give you all the analysts, their excel sheets, right? And particularly for the reason that even I don’t know. So this is a very funny thing that the metric, which is total profit will actually flow in the opposite direction of how well I do, right? If I reduce it very rapidly, the upside of the balance sheet in FY ’25, even be — even better. But FY ’24 leverage will be lower — and FY ’24 profit coming out of wholesale will be lower. But the important thing to consider, I would invite all of you to think like that the retail growth trending definitely more than 25%. Retail ROA trending to 3%, well below before time, and most importantly, because of this onetime provision we have taken, which we really wonder whether we will use it totally, but let’s see. We don’t want to — this is based on valuations that we have done, we have kept it. But because of that, as I said in my speech, we are very confident that any sell-down in wholesale will not come and have any splinters or hurt to the retail profitability. And hence, the retail profitability is very quickly approaching satisfactorily, right? And I believe that FY ’25 onwards, when the retail balance sheet is say 90% or around 90% of the total balance sheet, the growth will be starting to see clearly.

Saurabh — JP Morgan — Analyst

I understand. Thanks. Thank you.

Dinanath Dubhashi — Managing Director and CEO

Thank you. I mean, this is as clear answer that I can give and very frankly, as much I can estimate. So I will try my hardest to reduce the wholesale book as much as possible. But unfortunately, what will happen because of that is leverage will be that much lesser. So we should not be worried about that and look towards maintaining and growing the retail book profitably for FY ’24, so that then FY ’25 growth will catch up.

Saurabh — JP Morgan — Analyst

Thank you. Very clear. Thank you.

Dinanath Dubhashi — Managing Director and CEO

Thank you.

Operator

Thank you. The next question is from the line of Kunal Shah from ICICI Securities. Please go ahead.

Dinanath Dubhashi — Managing Director and CEO

Hi, Kunal. How are you?

Kunal Shah — ICICI Securities — Analyst

Yeah. Hi, sir. Good, sir. Happy New Year. So firstly, I think, last time, our indication was we’ll be utilizing this money more towards the macro prudential. And now it seems to be more like a complete markdown, okay, and a fair valuation. So this is more kind of realized or something which we expected to go through. And compared to that of the macro, the utilization or maybe the write-backs from this could be relatively on the lower side. So how should we look at that change in transform say macro potential to a fair value — fair valuation, yeah?

Dinanath Dubhashi — Managing Director and CEO

I have not indicated macro potential at any point of time. I had said the world — used the word strengthen the balance sheet. Because we had to also make up our mind as to how we will use it, right? So let me explain the difference of very clearly between macro prudential or any credit provisions and the provisions that we have taken, right? So today, the whole book is around INR31,000 crores. Even if you calculate SRs, which are outstanding, it is around INR35,000 crores, INR36,000 crores. So that’s the total book. Now when we say that this total book — we will start at resolving husk rapid prepayments, rapid sell-down, et cetera, actually, the value, as I said in my speech, in the value or when they looked at this overall portfolio, even the — even whatever is the NPA and all that, when they looked at the value, fair value, it came actually quite close to the hold-to-maturity value, okay? But then we felt and we also spoke to the value of our auditors that trying and being what is — trying and being very ardent about not passing on any discount though we — we actually — I mean the team carries the target of selling things at par value. But we recognize that the more rapidly we sell, perhaps the buyer may need some discounts on certain things. And interest rates have also gone up, various things have happened. And because of that, we have put this illiquidity value. So very clearly, if the book would have remained with us, at the same pace or reduced at, say, normal pace of INR2,000 crore, INR3,000, INR2,000 crores or so per quarter, we don’t think that we had to give this illiquidity discount. Because we plan — I mean, I indicated —

Kunal Shah — ICICI Securities — Analyst

Yeah.

Dinanath Dubhashi — Managing Director and CEO

— that we hope that we will come to 90%. So you can do your calculation that how much the retail growth is likely to be. And for that to be 90%, how much the wholesale book will be. I don’t want to give out internal numbers, but it is very easy to calculate. It will based on your projection of our retail growth and that is how it will come. But you will see that whatever number you come will be a very small fraction of the today’s book. And because that we want to achieve that within a short period of 14.5 months, we believe that this will provide us with the cushion to be able to do that. That is how you will have to look. Whether there will be writebacks or things like that, we will know after 14.5 months, I will put it this way.

Kunal Shah — ICICI Securities — Analyst

Okay. And it’s fair to look at it in terms of the next few months markdowns —

Dinanath Dubhashi — Managing Director and CEO

Kunal, sorry. On the other side, whether there will be any further hit to the retail P&L because of this, that we are very, very confident. So as I always say, management has to hope for the best, we have to be optimistic, but provide for the worst. And that is what we have done that we have provided for a worst-case scenario that we may have to lose INR2,700 crores while selling, which as you would see as a percentage of, let’s say, INR31,000 crores with a very large percentage and that to INR31,000 crores of a good book. Sorry.

Kunal Shah — ICICI Securities — Analyst

Okay. And if you have to look at it in terms of the markdown, so between the real estate and infra. How should we look at it? Because maybe still out of INR31,000 crores odd, real estate is INR7,300. So — and in place till ’23, ’24. So I think infra would not be so vulnerable to the markdowns compare to that of real estate and in terms of the proportion between the two, how could be markdown proportion would be?

Dinanath Dubhashi — Managing Director and CEO

I don’t want to give specific proportion, but generally speaking your conclusion is right.

Kunal Shah — ICICI Securities — Analyst

Okay. Okay. True. And secondly, in terms of OpEx, the credit cost you said 7% odd — or really —

Dinanath Dubhashi — Managing Director and CEO

7% for retail. Today, it is around 7.5% odd, right? And that is how we trend — why I’m putting — also see why I’m putting this together, right? Because I believe and we firmly believe that especially collection costs and credit costs are very fungible costs. It is — there are times when we have to funge one for the other, right? And the more we spend on collections, credit costs can be controlled at the very base. And that is why we would like to see how these two trend. We will try to do better than that, but that’s what — so very simple, as I said, right, where 11.38 precisely today’s NIMs plus fees. How are things going to happen? Costs are going to increase slowly as we go ahead, even though now RBI may not increase it that much as we reprice our liability, definitely WAC will go up not rapidly but slowly. That is what will happen. Our product mix, even if it remains same, but probably little bit secured loans will grow. So that’s what will happen. On the other side, however, the tenor of wholesale will come down and hence, our ability overall ALM — ability to raise shorter terminals, that is say, two years, 2.5 years, overall, vis-a-vis say five years will increase in the ALM. So all these together, we are conservatively saying that NIMs plus fees should be around 11%. You would also see that our fees have also a little bit come down this quarter, okay? I would upfront like to say that we are also talking to some of our insurance partners about looking at various other arrangements of booking the full potential of fees — we are also — this board passed a resolution to apply as a corporate agent. Till now, we were a master policy holder. We will now be applying for a corporate agent and which would enable us to get the full potential of fees. So all these things together, we are very confident of a minimum 11%. And hence, if we have to target for a 3% ROA expenses plus loss credit cost has to be around 7%. It’s just very simple arithmetic is what we are looking for.

Kunal Shah — ICICI Securities — Analyst

Yeah. Okay. Okay. And what could have been the reason for lower net worth in Q3 compared to that of Q2, particularly on the retail side, both almost INR400 crores of PAT in retail?

Sachinn Joshi — Chief Financial Officer

Just allocation.

Dinanath Dubhashi — Managing Director and CEO

My CFO will take this question.

Sachinn Joshi — Chief Financial Officer

Kunal, this is just allocation between the three businesses. As you would have seen, the provisions come in one entity. The gain is sitting in the holding company. So it is clearly the allocation reaches.

Dinanath Dubhashi — Managing Director and CEO

I would say Kunal, ’24 onwards, you will start seeing proportionality of the book. And that is why Saurabh’s question, you take note of my answer that retail leverage will actually — otherwise, what I was there, 3% and close to 5%, say, 4.75% debt equity, I would be comfortably above 15% ROE. But that will not happen because the moment the wholesale book comes down, the leverage of retail will also come down.

Kunal Shah — ICICI Securities — Analyst

Yeah.

Dinanath Dubhashi — Managing Director and CEO

And that will happen over FY ’24. And hence, the conversion of ROA to ROE and hence going that ROE to high teens will perhaps more happen in FY ’25. But I would invite you to say the potential of doing that by reaching statistic ROAs pretty soon.

Kunal Shah — ICICI Securities — Analyst

Sure. Okay. And one last data point, if you can share Stage 2 for retail because this —

Dinanath Dubhashi — Managing Director and CEO

You know what reduced –this demand has been there throughout. And I would — I promised to you last time that we will soon give it.

Kunal Shah — ICICI Securities — Analyst

Yeah.

Dinanath Dubhashi — Managing Director and CEO

I would reiterate my promise. We were not wanting to start giving some data in the middle of the year. From the next quarter, next financial onwards, we will give very detailed breakup of our portfolio.

Kunal Shah — ICICI Securities — Analyst

Great. That would be very helpful. Yeah, so it helps in terms of the increase.

Dinanath Dubhashi — Managing Director and CEO

Absolutely. Because now we are — I used to give out these numbers. Now you know that the new regulations don’t allow me to do that, unless I put it in the investor presentation.

Kunal Shah — ICICI Securities — Analyst

Yeah.

Dinanath Dubhashi — Managing Director and CEO

So we will start putting it from next FY onwards.

Kunal Shah — ICICI Securities — Analyst

Okay. Thanks. Thanks and all the best. Yeah.

Dinanath Dubhashi — Managing Director and CEO

Thank you.

Operator

Thank you. The next question is from the line of Rikin Shah from Credit Suisse. Please go ahead.

Rikin Shah — Credit Suisse — Analyst

Hi. Good afternoon, sir. Thanks for the opportunity.

Dinanath Dubhashi — Managing Director and CEO

Good afternoon, Rikin. How are you?

Rikin Shah — Credit Suisse — Analyst

I am well, sir. Thanks for the opportunity. I had three questions. First one was on the NIMs. So of course, the consolidated NIMs have gone up due to higher utilization. But even if I look at the retail yields in particular, they have increased 65 basis points sequentially. So my question is, are there any specific products, which are driving higher yields quarter-on-quarter? Is it mainly microfinance related or you have been able to take price hikes across the product? That’s the question number one. Question number two is relating to the provisioning pertaining to the wholesale book. On that particular point, I wanted to understand the provisioning amount that we arrived at was illiquidity discount the only variable, which we use to estimate this number? Or were there any other variables and if you ask what were there? And thirdly, just more of a question from an understanding perspective, while I believe that taking this provisioning was completely prudent, given that the Lakshya 26 required wholesale rundown to be done over the few years. And if the book is indeed performing, wouldn’t it have been better that rather than accelerated sell-down, if we could have recovered more amounts and what pay up for this illiquidity discount. This is particular because the provision that we have taken is substantial, 13% of the net worth, could more number have been recovered if we would have run it over 2, 2.5 years rather than just next 14 months? That’s all from my end, sir.

Dinanath Dubhashi — Managing Director and CEO

Excellent question. I will take the last question first. Okay. So for simple, in my speech also, in the opening comments also, I said that it is mainly illiquidities, largely, because when the valuation was done based on credit quality, et cetera, given the provisions we have already made, the value add didn’t think it’s necessary that the value is very different. So have we been conservative? I believe perhaps, yes, I don’t want to make too many comments about that. But, yes, I would believe that it will be almost completely illiquidities. So that is — that to answer your first question. Second, it’s a matter of P&L versus value, right? And the Board and the management is completely convinced that if you look at valuation of peers. We believe that peers, who perhaps retail business may not be of the same quality as us, get much bigger — much better value. Finally, our job is to maximize the value for the shareholder. And hence, the management as well as the Board believes that earlier we are recognized as a retail finance company, the better. And that’s the reason. This doesn’t mean that we will necessarily take huge losses or anything like that. But we wanted to give very clear strategic direction to this. Also secondly, what happens that as much as we believe in the portfolio, you know that something happening can give some problem in wholesale portfolio. [Foreign Speech] — some things here and. And it has always weighed down on investor feelings, perceptions, et cetera. Clearly, we want to finish this as early as possible and reduce wholesale to a level where all investors are confident that it is a very small percent of the book now. And also, if at all any further reductions or losses have to be taken, they have been already taken and finished. The retail P&L, you can look at a pure pristine P&L which — with no fear because many times, I mean, I will come to vernacular. Many times, I was told [Foreign Speech] all those things were fair. We want to now ensure that there is no negative circles coming to the balance sheet at any point of time. This is in coequal words, it is a dry powder that we have learned this from analysts only — dry powder that we have created for any such issues coming up in the future. So that’s how you need to take it. It’s the — how the overall P&L will progress vis-a-vis value. We believe and hope that all of you will now give better value to this.

Rikin Shah — Credit Suisse — Analyst

And, sir, on P&L side.

Dinanath Dubhashi — Managing Director and CEO

Yes. I’ll take it. So, yes, it is not just micro loans. There are three products, which saw very rapid increase this time. And all our good yielding products, right, mirco loans, surely, that is rural business finance, consumer loans, farm and two-wheelers. This saw very, very good increase. So yields have gone up. As far as passing on is concerned, I will be frank. Maximum pass on actually has happened in infra loans and HL, where the yields are so less than we can’t afford to absorb. So we have passed on completely — in the other micro loans, for example, we have stayed at 24% through the entire 225 basis points rise because we believe that we are adequately priced and don’t do that. So that is how it has moved. Product mix has moved to — in retail, moved to a little bit more high-yielding products, but definitely not necessarily only micro loans.

Rikin Shah — Credit Suisse — Analyst

Perfect, sir. That answers all my questions.

Dinanath Dubhashi — Managing Director and CEO

We give product mix numbers in detail. So you can see that. You can —

Rikin Shah — Credit Suisse — Analyst

Yeah, that was from the loan book perspective, I wanted to just understand from yield perspective. But anyways that answers all my questions. Thank you, sir.

Dinanath Dubhashi — Managing Director and CEO

Thank you. Thank you.

Operator

Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Dinanath Dubhashi for closing comments.

Dinanath Dubhashi — Managing Director and CEO

Thank you. As I will only say that let FY ’23 during all of us the country itself very good luck in many things. We are now seeing soon we’ll have the budget. We’ll soon hopefully off major issues, major problems. We look at the economy with hope. We believe that not only through the plans we have, the initiatives we have taken, but also performance that we have shown. We believe that we have earned a much increased confidence from all of you and very grateful for you for the support you have given. And with folder hands would ask you to continue the support to us and give us the credit that hopefully we deserve. Thank you. Thank you very much.

Operator

[Operator Closing Remarks]