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Expect retail mix at ~95% by Mar’24; RoA guidance of 2.8-3.0% by FY26

-      L&T Finance Holdings (LTFH) reported PAT of INR6.4b (in line) in 3QFY24. PPOP grew ~7% YoY to INR13.4b (in line), while credit costs of ~INR5.1b translated into annualized credit costs of 2.5% (vs. 2.6% in 2QFY24 and 2.7% in 3QFY24). In 9MFY24, PAT grew ~58% YoY to INR17.7b.

-      Consolidated RoA/RoE rose 10bp/55bp QoQ to ~2.5%/~11.4% in 3QFY24. Retail RoA also improved ~10bp QoQ to ~3.4%.

-      Retail loans grew ~8% QoQ/31% YoY, propelled by healthy growth in MFI, Home Loans and 2W. Personal loans exhibited a temporary blip in growth momentum but should resume the growth trajectory from 4QFY24 onward.

-      Mr. Sudipta Roy (ex-ICICI Bank) has succeeded Mr. Dinanath Dubhashi as MD and CEO. Mr. Roy will look to leverage his extensive experience to further strengthen the franchise.

-      We expect that the retail mix will improve to ~94-95% by Mar’24 from 91% as of Dec’23. Considering the accelerated rundown in the wholesale book, we model consolidated loan growth of 18% and PAT CAGR of 34% over FY23-FY26E, 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 have helped LTFH achieve its Lakshya 2026 targets much in advance. LTFH has transformed itself into a retail franchise, which would lead to profitability improvement and RoA expansion. Retain BUY with a TP of INR200 (based on 1.8x FY26E BVPS).

Minor improvement in asset quality; guidance of 2.5-2.7% credit costs

-      Consol. GS3 declined ~5bp QoQ to ~3.2%, while NS3 remained flat at ~0.8%. PCR declined ~40bp QoQ to ~75%. Retail GNPA declined ~10bp QoQ to 2.95% and NS3 stood stable at ~0.65%.

-      The management has guided for retail credit costs of 2.5%-2.7%. We model credit costs of 2.6%/2.7%/2.7% in FY24/FY25/FY26.

Key highlights from the management commentary

-      Subsidiaries L&T Finance and L&T Infra Credit have been merged into LTFH. The combined entity will be renamed as L&T Finance, which will be the only entity for all the lending businesses of the company.

Valuation and view

-      LTFH 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. Over the past few quarters, the company has consistently delivered strong growth in its Retail loan book, even as it has accelerated the sell-down in the wholesale book.

-      We estimate a PAT CAGR of 34% over FY23-26, with consolidated RoA/RoE of 2.7%/~15% in FY26. Maintain BUY with a TP of INR200 (based on 1.8x FY26E BVPS).

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