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Strong execution in Retail with RoA expansion

Wholesale rundown executed well without undue impact on P&L

* L&T Finance Holdings (LTFH) reported 2QFY24 PAT of INR5.9b (7% beat). PPOP grew ~9% YoY to INR12.9b (in line), while credit costs of ~INR5.2b translated into annualized credit costs of 2.5% (2.6% in 1QFY24/2QFY23).

* Retail PAT at ~INR6b grew 86% YoY in 2QFY24. Reported Retail RoA/RoE stood at ~3.3%/~16.3% in 2QFY24.

* Mr. Sudipta Roy (ex-ICICI) will succeed the current MD/CEO Mr. Dinanath Dubhashi in Jan’24 and will look to leverage his vast experience to further strengthen the franchise.

* We expect that the retail mix will improve to ~95% by Mar’24 from 88% as of Sep’23. Considering the accelerated rundown in the wholesale book, we model consolidated loan growth of 19% and PAT CAGR of 33% over FY23- FY26, with consolidated RoA/RoE of 2.7%/~15% in FY26E.

* A strong liability franchise, a well-capitalized balance sheet and a keen intent to further accelerate the sell-down of the wholesale book will help LTFH achieve its Lakshya 2026 targets much in advance. We have raised our FY24E/FY25E PAT by 5%/12% to factor in higher loan growth, broadly stable NIM and a lower effective tax rate.

* LTFH is set to transform itself into a retail franchise, which would lead to profitability improvement and RoA expansion. Reiterate BUY with a revised TP of INR170 (premised on 1.6x Sep’25E consolidated BVPS).

Asset quality improved sequentially

* Consol. GS3 declined ~80bp QoQ to ~3.3%, while NS3 declined ~40bp QoQ to 0.8%, driven by an increase in PCR to ~76% during the quarter.

* Retail GNPA/Wholesale GNPA declined 15bp/~310bp QoQ to ~3.1%/4.5% as on Sep’23

Asset quality improved sequentially

* Consol. GS3 declined ~80bp QoQ to ~3.3%, while NS3 declined ~40bp QoQ to 0.8%, driven by an increase in PCR to ~76% during the quarter. ? Retail GNPA/Wholesale GNPA declined 15bp/~310bp QoQ to ~3.1%/4.5% as on Sep’23.

Key highlights from the management commentary

* The management expects Retail RoA to improve to ~3.5% over the next two quarters. Consol. RoA was below 2.4%, and the convergence of consol. RoA to Retail RoA will happen soon.

* It has guided that moderation in credit costs will continue, aided by strengthening underwriting practices, strong collection teams which will aid recoveries and rollback of accounts which slip into forward buckets.

Valuation and view

* LTFH has been effectively utilizing the Cloud technology for scalability. It has invested in process automation, security and customer journeys through both assisted and direct-to-consumer (D2C) Planet app. This, along with partnerships with e-aggregators, should lead to stronger and sustainable retail loan growth

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