MFI pain impacts performance; better placed among peers
About the stock: L&T Finance Holding (LTFH) is a leading NBFC catering to the diverse financing needs of underserved customers in urban and rural areas.
• LTFH is engaged in consumer loans, 2 wheeler loans, home loans, MFI, farm & SME loans.
• Distribution network remains strong with substantial dealer penetration (2500+ dealers in farm equipment & 6500+ tie-ups in 2-wheeler segment)
Q3FY25 performance: L&T Finance reported a subdued performance in Q3FY25. Stress in rural finance segment impacted business growth, margins as well as led to higher credit cost thereby impacting profitability. Retail book expanded 23% YoY (4% QoQ) to ₹92,224 crore, and consolidated AUM increased 16% YoY (2% QoQ) to ₹95,120 crore. Rural business finance faced a sharp decline of 16% YoY (15% QoQ), given stress in micro-finance segment. Margins remained under pressure, with NIMs+Fees declining 60 bps YoY (53 bps QoQ) to 10.33%, reflecting an unfavourable shift in asset mix. Profitability was impacted (2% YoY & 10% QoQ) at ₹626 crore, while RoA contracted ~25 bps YoY (33 bps QoQ) to 2.27%, underscoring lower margins and rising credit costs amid stress in rural finance. Credit costs saw a notable increase, standing at 2.91% before utilization of ₹100 crore macroprudential provisions, up from 2.59% in Q2FY25, marking a 32 bps rise.
Investment Rationale
• Stress in rural finance book limits growth; gradual shift towards prime segment: Slowdown in rural finance (sharp decline in disbursement of 15% QoQ) has impacted credit growth (23%), margins (-44 bps QoQ decline) and credit cost (2.49%). Expect further deceleration in 2 wheeler and rural finance segment in coming quarters, which is to be offset by traction in personal loans, primarily to the prime category customers. Expect credit growth at ~24-25% in FY25-27E. Gradual shift towards prime segment is seen to impart some pressure on yields, though expected to be offset by lower opex and credit cost, thus aiding RoA. Expect RoA at 2-2.2% in FY25-27E.
• Collection efficiency gaining traction, provision seen to peak: Credit cost remained elevated at 2.49% (post utilization of ₹100 crore from prudential provision buffer). Management expects overall pain in microfinance segment at ₹950-1000 crore. Expect relatively faster revival in MFI portfolio owing to 1) No disbursal to overleveraged borrowers in last 3 quarters leading to exposure to borrowers (4+ lenders) at ~4%, 2) employing dedicated 900 personals in collections, 3) ₹875 crore of prudential provision of which ₹300-350 crore could be utilized in Q4FY25.
Rating and Target Price
• Relatively better quality of MFI book, provision buffer and gradually increasing proportion of prime customers bodes well. Current valuation remains attractive on risk reward basis.
• Thus, we maintain our target to ₹180, valuing the stock at ~1.5x FY27E ABV. Maintain Buy rating.
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