LTFH is well on track in line with Lakshya 2026. Buy for target price of Rs 155 (17% upside)

L&T Finance Holdings (LTFH) reported strong performance for Q2FY24 across business parameters as strong earnings growth supported by healthy NIM while credit cost declined on improved assets quality. Consolidated PAT was reported at Rs. 594 crore, which grew at 65% y-o-y/12% q-o-q to Rs. 596 crore on the back of strong NIM. NIM (as of avg. AUM) rose to 9.4% in the reported quarter as compared to 8.8% in last quarter. Management viewed borrowings cost to rise further ~20 bps in the near term which may weigh on margin. Opex remained elevated at 32% y-o-y/16% q-o-q due to higher investments in physical presence and tech infra. Management expects opex may remain elevated in the near term. PPOP growth, however, eased to 11% y-o-y/1% q-o-q (vs total income at 19% y-o-y/7% q-o-q) as elevated opex weigh. Credit cost (as of avg. AUM) declined to 2.3% in Q2FY24 (vs 2.6% q-o-q) on improvement in the assets quality as GS-3 ratio reduced to 3.27% (vs 4.04% q-o-q). PCR rose to 76% v/s 71% in the last quarter. As per management, stress is building in low ticket, unsecured personal loans (Key positives

► Strong retail disbursements trend

► Expansion in NIM and decline in credit cost

Key negatives

► Elevated opex leading to lower PPOP growth

► Running down of wholesale book contained overall AUM growth

Management Commentary

► Management said despite a traditionally weak quarter, the company achieved highest ever quarterly retail disbursements. It guided for retail share to rise beyond 90% by Q3FY24.

► Management expects contained credit cost trajectory to continue on the back of better credit underwriting engine, strong collection team on ground and focus on zero DPD collections.

► Opex to remain high in the near term led by higher investments in physical and tech infra.

► Management guided that borrowing costs may inch up by ~20-25 bps in the second half of this fiscal.

Our Call

Valuation – We maintain our Buy rating with an unchanged PT of Rs. 155: At the CMP, the stock trades at 1.2x/1.1x FY2025E/FY2026E BV estimates. LTFH is well on track in line with Lakshya 2026 to transform into the retail franchise. Retail book mix rose to 88% of AUM which may further inch up to 95% by FY24 on strong retail disbursements and acceleration in the running down of wholesale book. We are optimistic about the company’s future prospect as RoE is expected to enter into the double digit trajectory on contained credit cost and likely strong NIM driven by retalisation of the book. However, stress scenario in unsecured personal loan segment to be monitor cautiously. As per our estimates, PAT is estimated to grow at a CAGR of 28% over FY23-26E which will drive 560 bps expansion in RoE to 15.0% in FY26E.

Key Risks

Economic slowdown can lower retail growth momentum, building stress in unsecured personal loans and a higher-than-estimated write-off in wholesale book.