About Hinduja Leyland Finance Limited

1. Business Model

HLF primarily operates as a Non-Banking Financial Company (NBFC) under the Hinduja Group. Its business model revolves around providing tailored financial solutions across various segments, particularly in:

1. Vehicle Financing: A core focus area with disbursements primarily in commercial, passenger, and two-wheeler segments.
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3. Loan Against Property (LAP): Leveraging real estate collateral for credit.
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5. Portfolio Buyouts: Acquiring existing portfolios to expand asset management.
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7. Housing Finance: Operated through its subsidiary, Hinduja Housing Finance Limited, focusing on affordable housing loans.

The company adopts a customer-centric approach backed by a robust IT framework to manage risks and operational efficiency, with a widespread presence in 21 states and 3 union territories covering 1,550+ locations.

2. What Does the Company Do?

HLF provides financial services tailored to individual and institutional needs, including:

1. Financing for commercial vehicles, tractors, two-wheelers, and construction equipment.
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3. Small-ticket loans for customers in rural and semi-urban areas.
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5. Housing loans through its subsidiary.
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7. Focus on asset-backed financing to ensure low risk.

The company caters to diverse industries with a significant emphasis on automotive, leveraging its association with Ashok Leyland to expand reach and operational synergies.

3. Financial Statement Analysis (FY23 vs. FY24)

Key Financial Metrics:

1. Total Income: Increased from INR 3,502 Cr in FY23 to INR 4,660 Cr in FY24 (+33%).
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3. PAT: Grew from INR 490 Cr in FY23 to INR 636 Cr in FY24 (+30%).
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5. AUM: Expanded significantly from INR 36,906 Cr in FY23 to INR 49,235 Cr in FY24 (+33%).

Profitability Metrics:

1. The profit margin remained robust with a PAT margin of approximately 14% in FY24.
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3. EPS rose to INR 11.89 in FY24 from INR 9.15 in FY23, indicating enhanced shareholder value.

Asset Quality:

1. Gross Stage III Assets reduced from 3.34% to 2.7%, highlighting improved portfolio quality.
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3. Provision coverage ratio increased from 117% to 201%, reflecting stronger risk buffers.

Capital Adequacy:

1. Capital Adequacy Ratio stood at 17.26% (well above the statutory minimum of 15%).

4. Valuation

At a valuation of INR 270 per share , Valuation of INR 14450 Cr and an AUM nearing INR 50,000 Cr, HLF's price-to-AUM multiple of 0.28x indicates a deeply undervalued position relative to industry peers. Key valuation points include:

1. Price-to-Earnings (P/E): 22x, significantly below competitors like Capri Global (66.67x) and Poonawalla Fincorp (37.73x), indicating attractive entry levels.
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3. Price-to-Book (P/B): 2x, showcasing reasonable valuation against net worth.
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5. Market Cap/Topline: 2.8x, reflecting scalability opportunities.

Given the growth trajectory, market presence, and brand value, the valuation appears attractive for long-term investors.

5. Risks in the Business Model

HLF faces certain risks that investors must consider:

a) Credit Risk:

1. Exposure to economically sensitive sectors like automobiles and housing could lead to defaults during downturns.
2. Gross Stage III assets, though declining, pose a potential risk in economic slowdowns.

b) Interest Rate Risk:

1. Fluctuations in borrowing costs can affect margins, especially as the company scales its debt.

c) Regulatory Risk:

1. Stringent RBI guidelines on NBFC operations, including capital adequacy and asset quality norms, require consistent compliance.

d) Competition Risk:

1. The vehicle financing space is highly competitive, with major players like Bajaj Finance and Poonawalla Fincorp posing significant challenges.

e) Operational Risk:

1. Dependence on IT infrastructure increases vulnerability to cybersecurity threats.

f) Geographical Concentration:

1. Although the company has a national presence, over-reliance on specific regions for vehicle finance may expose it to localized risks.

Conclusion

HLF exhibits a compelling case as a good opportunity with its strong financial performance, robust asset quality, and undervalued market position. However, potential investors should weigh its credit and regulatory risks while leveraging its growth potential for core portfolio allocation.