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L&T Finance Holdings (LTFH) reported Q4FY23 PAT of ~Rs5bn (+10.4% QoQ/+46.4% YoY), in-line with consensus estimates. This was driven by sequentially lower credit costs and adding back loss attributable to minority interest with respect to a subsidiary. Overall, disbursements were weak off a high base in Q3. The rapid run-down of the wholesale book resulted in overall AUM falling 8.5% QoQ to ~Rs808bn. Credit costs declined ~40bps QoQ. Retail asset quality was broadly stable, while PCR on wholesale finance rose to 55.7% in Q4 from 36.1% in Q3, resulting in wholesale NS3 rising 52bps to 3.89%. We assume coverage with a BUY rating and a Mar-24E TP of Rs125, using the excess return on equity (ERE) method. Our TP implies a Mar-25E P/BVPS of 1.2x for FY26E RoA of ~2.3% and RoE of ~12.4%. Key risks: Asset-quality shocks in wholesale finance.

Result Highlights

Retail disbursements were moderately weak sequentially (-2.8% QoQ), owing to a high base in Q3. Retail AUM stood at ~Rs610.5bn (+7.1% QoQ/+35.4% YoY). Wholesale disbursements were sharply down -34% QoQ/-84% YoY, in line with management’s strategy. Wholesale AUM stood at ~Rs195bn (-37% QoQ/-53% YoY) due to accelerated repayment and sell-down. Overall, disbursements stood at ~Rs123bn (-6% QoQ/-16% YoY), while AUM stood at ~Rs808bn (-8.5 QoQ/-8.4% YoY).

NII came in at ~Rs17.6bn (-3% QoQ/+15.7% YoY), as the sharp run-down of the highyielding wholesale finance book on account of accelerated repayment and sell-downs resulted in lower interest income (-3% QoQ). Reported margins expanded by 22bps sequentially on a low base.

Operating expenses were elevated at ~Rs7.9bn (+6% QoQ/+30.4% YoY) on account of higher employee benefit expenses (+6.3% QoQ/+30.7% YoY) and other expenses (+6% QoQ/+32.9% YoY). Opex-to-AUM stood at ~3.7% (Q3: 3.3%). Operating expenses are expected to remain elevated with LTFH continuing to invest in technology to achieve its aim of being a fintech at scale.

Overall, credit costs (adjusted for one-time wholesale finance provision in Q3) declined by ~40bps QoQ to ~2.5%. Retail asset quality was broadly stable QoQ, with GS3 and NS3 down 6bps and 2bps, respectively, at 3.41% and 0.71%. PCR stood at 79.72%. On the wholesale front, the sharp run down resulted in GS3 rising by 319bps QoQ to 8.38%. PCR rose to 55.72% from 36.13% QoQ, as LTFH increased provisions on an asset in stage 3. As a result, NS3 rose 52bps QoQ to 3.89%. LTFH holds overlays of Rs11.7bn.

An AIF held by a subsidiary of LTFH (~55% share) suffered a loss during Q4FY23 on account of mark-to-market adjustment of investments held by it. As a result, a loss of ~Rs0.84bn was added back to LTFH’s income statement for the quarter.

Management guidance: 1) Over 90% retail share in AUM by FY24. 2) CoF to rise by 30-40bps over the next few quarters. 3) FY24 AUM growth to be >25%. 4) Credit cost + opex (currently ~8%) is expected to moderate to ~7% over the next few years. 5) Retail RoA of 2.8-3% by FY26E. 6) Retail GS3 <3% and NS3 <1%. 7) Retail NIM + Fees.

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