Concall Summary Q1FY2024-25
L&T Finance Limited Q1FY2024-25 Investor/Analyst Meeting
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This document is a transcript of an investor/analyst meeting for L&T Finance Limited’s Q1FY2024-25 financial performance and strategy update.
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The meeting was held on July 18, 2024, and the transcript was released on July 25, 2024.
Attendees
- The meeting was attended by Mr. Sudipta Roy (Managing Director & Chief Executive Officer), Mr. Sachinn Joshi (Chief Financial Officer), Mr. Raju Dodti (Chief Operating Officer), Mr. Karthik Narayanan (Head – Strategy and Investor Relations), and other members of the senior management team.
Meeting Overview
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The meeting began with a welcome from the moderator and a disclaimer regarding the sharing of unpublished price-sensitive information.
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Mr. Sudipta Roy then provided an overview of the company’s performance and strategy going forward, highlighting the investments made to strengthen the company and upgrade its capabilities.
Company Performance
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The company’s core business franchise is in a satisfactory shape, evidenced by the highest ever quarterly PAT in Q1FY25.
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The company expects to continue its steady performance trajectory in FY25.
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The company achieved its Lakshya 2026 goals at the Retail level two years in advance in Q3FY24 and has re-oriented itself for convergence at the consolidated level by FY26.
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The company achieved a Retailisation of over 95% in Q1FY25, exceeding its Lakshya goal.
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The company achieved a Retail book growth of 31% YoY in Q1FY25, meeting its Lakshya goal of maintaining Retail book growth at over 25% CAGR.
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The company is working towards converging Consol GS3 & NS3 below 3% & 1% respectively, while maintaining Retail GS3 & NS3 levels within the threshold levels.
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The company’s Consol RoA for Q1FY25 stands at 2.68%, up 55 bps YoY, exceeding its Lakshya 2026 target of 2.8%-3.0%.
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The company achieved the highest ever quarterly Consol PAT of Rs. 686 Cr, a growth of 29% YoY.
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The company achieved quarterly Retail disbursements of Rs. 14,839 Cr, a growth of 33% YoY.
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The company’s Q1FY25 Retail book stood at Rs. 84,444 Cr, a growth of 31% YoY.
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Consolidated book growth has accelerated, reaching Rs. 88,717 Cr in Q1FY25, representing a 13% year-on-year increase.
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The company continues to execute its 5 Pillar strategy, details of which are available in the investor presentation.
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Credit parameters have improved, with Consol GS3 and NS3 reaching 3.14% and 0.79%, respectively. The Provision Coverage Ratio (PCR) stands at a comfortable 75%.
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The company achieved a record high quarterly consolidated profit after tax (PAT) of Rs. 686 crore, representing a 29% year-on-year (YoY) increase.
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LTF witnessed healthy quarterly retail disbursements of Rs. 14,839 crore, a 33% YoY growth.
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The retail book reached Rs. 84,444 crore, a 31% YoY increase, driven by strong retail disbursements in Q1FY25.
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The consolidated book stands at Rs. 88,717 crore, marking a 13% YoY growth, the first double-digit growth in a long time.
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The consolidated return on assets (RoA) reached 2.68%, a 55 bps YoY increase.
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The consolidated return on equity (RoE) reached 11.58%, a 186 bps YoY increase.
Business Segment Performance
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LTF’s Rural Business Finance segment achieved record quarterly disbursements of Rs. 5,773 crore, a 28% YoY increase, pushing the book size past the Rs. 25,000 crore milestone.
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Farmer Finance disbursements reached Rs. 1,903 crore in Q1FY25, representing an 8% YoY and 24% quarter-on-quarter (QoQ) increase. The book size reached Rs. 14,204 crore, reflecting an 8% YoY growth.
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The Urban Finance segment, encompassing Two-Wheelers, Personal Loans, and Home Loans/LAP businesses, experienced a 44% YoY jump in quarterly disbursements and a 32% YoY increase in book size, reaching Rs. 38,653 crore.
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The Two-Wheeler Finance business recorded robust disbursements of Rs. 2,621 crore, exceeding disbursements in the festive quarter (Q3FY24). This represents a 52% YoY increase. The book size crossed the Rs. 12,000 crore milestone, reaching Rs. 12,025 crore, a 31% YoY increase.
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Personal Loans witnessed disbursements of Rs. 1,178 crore, resulting in a book size of Rs. 6,667 crore, an 11% YoY increase.
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Retail Housing disbursements reached Rs. 2,245 crore, a 73% YoY increase. The book size neared the Rs. 20,000 crore milestone, representing a 42% YoY increase.
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The Home Décor finance package of The Complete Home Loans programme has seen good customer acceptance and is expected to lead to greater customer stickiness and higher portfolio yields.
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L&T Finance’s SME Finance disbursements in Q1FY25 were Rs. 978 Cr, up 61% YoY, with the book size reaching Rs. 4,471 Cr. This growth was driven by a focus on building additional channels to diversify sourcing funnels.
Macroeconomic Outlook
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The global economic outlook has improved, with growth forecasts for 2024 being raised by multilateral organizations and rating agencies.
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India’s GDP growth rate outlook for FY25 has been revised upwards to 7.2% by the RBI, and S&P Global has upgraded India’s sovereign rating outlook to ‘positive’ from ‘stable’.
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High frequency indicators suggest continued momentum in manufacturing and services sector activities in Q1FY25.
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Rural demand remains a concern, but is expected to recover with the progress of the monsoon and enhanced fiscal support.
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Urban consumption is projected to remain steady in FY25.
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Retail loan growth in the non-agri space is expected to be healthy, driven by positive macro indicators and strong demand for home loans, two-wheelers, and SME loans.
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The IMD has predicted a high probability of above normal south-west monsoon rains in 2024, with La Nina conditions likely to develop during Aug-Sep’24.
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While monsoon progression and distribution were skewed in June, they have gradually improved in July.
Challenges in the NBFC Sector
- The NBFC sector faces challenges in FY25, including access to funding at competitive rates, tight liquidity conditions, the ‘higher-for-longer’ global policy rate regime, and elevated competitive pressure from banks.
Company Strategy
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The company is focusing on deepening its customer acquisition funnel both geographically and through greater counter share at dealer points.
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The number of new villages activated for Rural Group Loans & MFI (RBF) stood at 21,832 in Q1FY25, and Two-Wheeler distribution points increased to 11,178.
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The company is continuously working on sharpening its next-generation credit underwriting models.
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The company deployed the beta version of its proprietary digital credit engine, “Project Cyclops,” which uses AI and ML to assess customer creditworthiness. This engine is currently being used by Two-Wheeler dealers and will be expanded to other business lines.
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The company is committed to becoming a technology-driven lender and has made significant progress in its technology efforts, including the launch of the BRAKE App, the PLANET 2.0 app, and the DIY Home Loan journey.
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The company has invested in building brand visibility through various initiatives, including airport and in-flight advertising, wall paintings, and melas. It also launched its first integrated marketing campaign for its Housing Finance business, “The Complete Home Loan.”
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The company has strengthened its Risk and Compliance culture by creating a 3-tier compliance structure and a separate compliance testing team. It has also been certified as a Great Place to Work for the period May 2024 to May 2025.
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LTF continues to invest in its people and culture, fostering diversity and inclusion, promoting employee engagement, and developing talent.
Analyst Questions and Responses
MFI Business
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Mahrukh Adajania from Nuvama asked about L&T Finance’s MFI business, specifically how they achieved better collection efficiency than other lenders during the first quarter, despite challenges like elections and heatwave.
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Sudipta Roy attributed L&T Finance’s strong collection efficiency to its culture of disciplined collections efforts, prudent credit assessment, and robust credit guardrails. He also highlighted that almost 40% of their customers are exclusive and non-leveraged.
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Sudipta Roy stated that L&T Finance’s collection efficiency is holding at 99.6%-99.7% levels and expects improved rural credit demand and incomes due to a good monsoon. He expressed confidence in the stability of their portfolio quality and their expected growth trajectory for the rest of FY25.
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Sudipta Roy declined to comment on the reasons for competition’s challenges in the MFI business, stating that L&T Finance focuses on onboarding low-risk and non-leveraged customers.
Security Receipts (SRs)
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Mahrukh Adajania also asked about the timing and progress of realization of security receipts (SRs).
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Sudipta Roy did not provide specific details on the timing of SR realization but indicated that L&T Finance is confident in the fair valuation and visibility of realization.
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The company has a strong portfolio management practice that monitors customer leverage levels and stops disbursing funds to customers who exceed their thresholds. This discipline helps maintain a balanced portfolio and high collection efficiencies.
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Regarding the Special Resolution (SR) book, the company is seeing progress with construction starting on projects that were previously stalled. Secondary sales of apartments in these projects have also begun, providing visibility into future cash flows. However, this is a long-term process and the company expects it to take 10 to 14 quarters for full realization of the portfolios.
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The company expects a net gain from the SR book resolution, and their wholesale banking and commercial real estate teams are closely monitoring the projects.
Interest Cost and Borrowing Figures
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Avinash Singh from Emkay Global asked about the discrepancy between the company’s reported interest cost and its borrowing figures. Sachinn Joshi explained that the reported borrowing figure is the closing book balance, while the average borrowing for the quarter is significantly lower due to the company’s growth over time.
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Joshi also explained that the average borrowing in Q1FY24 was higher due to the company operating with three separate balance sheets before the merger, requiring higher liquidity across all three.
Derecognition of Assets
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Avinash Singh asked about a Rs. 155 Cr loss on derecognition of loans at amortized cost, which was reported in the Ind AS filing. He questioned the source of this loss, considering only one loan of Rs. 200 Cr was sold in the quarter.
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Sachinn Joshi explained that the credit cost comprises three components: mark-to-market adjustments for fair value changes, ECL provisions, and foreclosure losses. The difference between the book value and the recovery amount from foreclosure contributes to the credit cost.
Microfinance and Personal Loans
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Nischint Chawathe inquired about the top state exposures in microfinance and the company’s approach to personal loans, given concerns about rising delinquencies and customer leverage in the sector.
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Sudipta Roy responded that the top states for microfinance are Tamil Nadu, Karnataka, and Bihar, with stable asset quality in all three. The company is aiming to reduce overdependence on these states and expand into less penetrated areas.
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Regarding personal loans, Sudipta Roy stated that the company focuses on prime and near-prime salaried segments. The new credit engine for personal loans will be launched later in the year. The company has tightened credit policies and increased underwriting standards, resulting in a 1% year-on-year growth in personal loans. Manual underwriting has been introduced for larger loan amounts, ensuring a risk-calibrated approach.
Home Loan Yields
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Nischint Chawathe asked about the average yield on home loans.
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Sudipta Roy stated that the average yield for their loans is close to 9%, focusing on the prime and near-prime segments.
Two-Wheeler Segment Growth
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Chintan Shah inquired about the sustainability of the company’s 25% growth in the two-wheeler segment, considering the single-digit growth of the overall sector.
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Sudipta Roy explained that the company’s focus on prime and near-prime segments, along with their new credit engine “Cyclops,” helps them achieve this growth.
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He highlighted their efforts to increase dealer penetration from 75% to 85%, build a loyalty program for dealers, and reduce the “approved but not disbursed” rate.
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Sudipta Roy emphasized that the growth in two-wheeler AUM is driven by both the number of financed vehicles and the average price of those vehicles, which has been increasing.
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He pointed to slide 18 in the investor deck, showing an increase in average ticket size from Rs. 85,000 in June 2023 to Rs. 98,000 currently.
Business Growth Strategies
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Two-Wheeler Finance: The company is focusing on increasing distribution, improving quality, reducing rejections, and increasing ticket sizes for two-wheeler loans. They are hopeful that a good monsoon will lead to increased demand for two-wheelers, and they are well-positioned to capitalize on this growth.
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Micro Loans: The company is pursuing a risk-calibrated growth strategy for Micro Loans, focusing on existing markets like Bihar, Tamil Nadu, Karnataka, and Kerala, as well as expanding into new markets like Telangana, Maharashtra, and Western UP. They plan to open 250-300 new Micro Loans branches, each of which generates approximately Rs. 1 crore in revenue within 6-8 months. The company is confident that this expansion, along with deepening existing distribution channels, will sustain growth in the Micro Loans business. Asset quality in the Micro Loans business remains stable, with strong collections discipline.
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Secured vs. Unsecured Loans: The company is calibrating its secured and unsecured loan portfolio. While there has been a recent focus on Home Loans and Loan Against Property (LAP) due to the successful launch of the “Complete Home Loan” campaign, the company has also strengthened guardrails in its Personal Loans business, focusing on salaried customers. The company expects continued growth in its Rural Business Finance business, risk-calibrated growth in Personal Loans, and growth in secured businesses driven by strong demand for Home Loans, LAP, and Two-Wheelers. They have also piloted a Rural Micro LAP product in Tamil Nadu, which has been successful.
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The company has a significant presence in Tamil Nadu and is expanding its operations in Maharashtra, Gujarat, Karnataka, and Telangana.
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The company expects to maintain the current trajectory of secured and unsecured loan growth for the next few quarters.
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The company anticipates that the incremental yield for wholesale loans will be around 11.5% to 12%, while the overall retail book yield will be approximately 15% to 16%.
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The company’s strategy prioritizes growing its secured loan portfolio, particularly in Home Loans and LAP, before expanding its unsecured loan portfolio, which includes Rural Business Loans, Rural Micro LAP, SME, and Personal Loans.
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The company expects yields to remain within the current range for the next 3 to 4 quarters, with a balanced approach to growth in secured and unsecured loans to maintain profitability.
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The company is exploring ways to improve yields, such as increasing Two-Wheeler loan rates in certain markets and leveraging the traction of its Home Decor Finance product, which currently offers an 11% yield.
MFIN Guardrails
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The company is aware of the recent MFIN guardrails regarding the number of lenders per customer and the maximum MFI loan amount.
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The company is monitoring its portfolio for any potential impact from these guardrails and is adjusting its lending practices accordingly.
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Sudipta Roy, from AM, states that the new MFIN guardrails do not impact the company as they already follow stricter guidelines.
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AM has a strong risk control unit team and a separate verification process to ensure customer information accuracy.
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AM’s prime IRRs are around 15% and non-prime IRRs are around 19%, with an overall mix of 17.5%.
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The prime portfolio, which comprises 52% of AM’s portfolio, has decent yields due to lower collection costs and projected loss rates.
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Sudipta Roy confirms that AM has conducted a bureau wash on retail overlap and found that close to 60% of their customers in most markets have negligible retail overlap.
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AM has been tracking center meeting discipline and attendance, but Sudipta Roy does not provide specific data on the current discipline levels.
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Sudipta Roy emphasizes the strict discipline and high attendance rates among employees at the company. He mentions that the first 12 days of the month are dedicated to collections, and employees report for work at 6:30 a.m.
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Roy highlights the company’s on-due-date collection rate of 96% and the recent salary hike for Rural Business Finance employees, which has led to a significant decrease in attrition.
Cost Management and Compliance
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Regarding the cost-to-income ratio, Roy states that it is currently around 40% and has decreased sequentially. He emphasizes the company’s focus on maintaining a stable cost trajectory while investing in key areas like marketing.
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Roy mentions that the company’s credit cost plus operating expenses are expected to be around 7%, and they are committed to this trajectory. He also highlights ongoing cost control initiatives across various departments.
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In terms of provision coverage ratio, Roy expresses confidence in the current level of 75% and believes it is sufficient for the future.
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The company has established a comprehensive compliance structure, including central, business, and regional compliance teams.
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Compliance personnel are now embedded within each business unit to ensure adherence to all applicable regulations.
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Regional compliance teams are deployed across four regions to facilitate granular on-ground monitoring.
Conclusion
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Roy concludes by expressing optimism about the company’s future and its progress towards achieving its Lakshya 2026 goals. He emphasizes the importance of the ongoing monsoon season for the company’s business and the continued focus on credit cost management and compliance.
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The company is optimistic about continued growth in FY25, driven by a favorable monsoon season and a strong festive quarter.
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L&T Finance Ltd. remains dedicated to delivering expected returns to its investors and promoters.
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