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LTFH reported consolidated profit of INR5.95bn (+12% QoQ, 47% YoY) above our estimate of INR 5.9bn. NII stood at INR17.3bn (+5% QoQ, +11% YoY,+5.5% JMFe) and PPOP at INR13.2bn (+11% YoY/QoQ, +6% JMFe). Overall loan growth remained flat sequentially as retail assets grew sharply by (+8% QoQ, +33% YoY) which was offset by (-34% QoQ, -75% YoY) de-growth in wholesale book. Retail assets now form ~88% of total loans. Mgmt. remains confident on scaling up its retail portfolio to ~90% of the overall lending book by next quarter led by continued traction in its identified segments of consumer loans (+63% YoY), rural micro/group loans (+37% YoY) and home loans (+34% YoY). Reported NIMs improved +56 bps QoQ at 8.62% as yields moved up +49bps QoQ at 15.2% and CoFs remained steady at 7.8%(+2bps QoQ). Asset quality outcome was also favourable with 77bps QoQ decline in GS3 led by 311bps QoQ improvement in wholesale GS3 and 16bps QoQ improvement in retail GS3. Mgmt. believes focus on analytics, cross sell to existing customer base and continued investments in its tech prowess should aid LTFH in delivering its targeted RoA of 2.8-3% on an overall level (with GS3<3%, NS3<1%). While LTFH’s scale up of retail portfolio is encouraging, valuation upsides are contingent on sustainable RoE improvement and continued steady asset quality under the new leadership. We build in RoAs of 2.4% by FY25E. Maintain BUY with a TP of INR 145(1.3x FY25e P/BV).

Continued scale up in retail loans: While overall loan assets growth remained steady (+0.2% QoQ, -13% YoY), retail assets grew sharply by (+8% QoQ, +33% YoY) which was offset by (-34% QoQ, -75% YoY) de-growth in wholesale book. Retail book presently stands at ~88% of the loan book as against ~58% in 2QFY23. The growth in retail was led by SME Finance (+36% QoQ), rural micro/group loans (+37% YoY, +10% QoQ), LAP (+14% YoY, +8% QoQ), consumer loans (+63% YoY, +8% QoQ) and home loans (+34% YoY, +8% QoQ) whereas exposure to wholesale business was brought down (-75% YoY, -34% QoQ). Mgmt. had targeted to reach ~90% of total loans retailization by FY26 which is likely to reach by next quarter itself. We have built in a total AUM growth of 19% CAGR for FY23-25E with 30%+ retail book growth.

Margins inch up on the back of higher yields: NII stood at INR17.3bn (+5% QoQ, +11% YoY,+5.5% JMFe) as reported NIMs improved +56 bps QoQ at 8.6%. Yields moved up +49bps QoQ at 15.2% and CoFs moved up +2bps QoQ at 7.8%. Reported NIMs+Fees for retail book stood at 12.2% (+45bps QoQ). Higher opex on account of tech investments and employee costs led to a PPoP of INR 13.2bn (+11% YoY/QoQ both) and a PAT of INR 5.95bn (+12% QoQ/ +47% YoY/ +1.3% JMFe). While the slight inch up of 20-30bps in CoFs is expected, mgmt. remains focused on limiting any meaningful rise in its borrowing costs by using short term borrowings (CPs) while strong traction in its retail book would keep the yields range-bound. Opex is also likely to remain at similar levels as they continue to invest in tech while the decline in credit costs would lead to earnings CAGR of 39% for FY23-25E entailing 2.2%/2.4% ROAs for FY24E/FY25E

Healthy improvement in asset quality; large on-book provisions offer cushion: LTFH’s GS3 assets stood at 3.27% (down 77bps QoQ) primarily led by sequential decline of 311bps in wholesale GS3 at 4.5% and 16bps decline in retail GS3 at 3.1%. The provision cover on the same stands healthy at 76% (+424bps QoQ). Credit costs (annualized) moved up (+25bps QoQ) at 2.63% of total AUM. We have built in an average credit cost of ~2% over FY24-25E. We believe the current PCR on stage.3 book is more than sufficient to absorb any major shocks in case going forward while the wholesale rundown infuses further comfort to the asset quality. Thus the retail book performance will be a key monitorable going forward given the strong growth trajectory in the segment.

Return metrics on the mend; maintain BUY: We believe a) benign credit environment, b) tapping of underpenetrated customer base via cross sell products c) shift from wholesale to high return retail book d) healthy asset quality outcomes from reduction in wholesale book and e) reinforcement of new leadership would aid in improving RoAs of 2.2%/2.4% by FY24E/FY25E. Maintain BUY with a target price of INR145 (1.3x FY25e P/BV).

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