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Better MFI asset quality outcomes than peers

Stress in non-MFI retail product segments still evident

* L&T Finance’s (LTF) 3QFY25 PAT declined 2% YoY to INR6.3b (~6% beat). PPoP grew ~11% YoY to ~INR14.8b (in line).

* Credit costs stood at INR6.5b (in line), translating into annualized credit costs of ~2.5% (PQ: 2.6% and PY: 2.5%). The company utilized macroprudential provisions of INR1b during the quarter. Including macroprudential provisions, credit costs stood at ~2.9%. LTF has guided for macro-prudential provision utilization of INR3b-3.5b in 4QFY25.

* Retail assets contributed ~97% to the loan mix (PQ: 96%). Retail loans grew ~23% YoY, led by healthy growth in tractors, HL, LAP, and personal loans. The company has started re-growing its personal loans book, up ~9% QoQ. Rural business loans (MFI) and 2W remained flat QoQ.

* Management shared that the stabilization of the MFI business is expected to take two-three more quarters, given ongoing turbulence at the industry level. Additionally, as the company shifts its focus to prime segments in 2W and expects a lower proportion of MFI in the loan mix, NIMs may contract. However, this NIM contraction can be mitigated from improvements in productivity, reductions in collection costs, and lower credit costs.

* LTF has maintained a disciplined approach to MFI business. Management expects stable MFI industry growth at ~15%-20% after the implementation of MFIN guardrails. We estimate a CAGR of ~21% in total loans and ~24% in PAT over FY24-FY27E, with consolidated RoA/RoE of 2.8%/~15% in FY27E. The company will continue to deliver a sustainable improvement in profitability and RoA expansion. Retain BUY with a TP of INR180 (based on 1.5x Sept’26E BVPS).

Asset quality largely stable; Retail GS3 stands at ~2.85%

* Consol. GS3 rose ~5bp QoQ to ~3.25% and NS3 was stable QoQ at ~1%. PCR was stable at ~71%. Retail GS3 was stable QoQ at 2.85%.

* We model credit costs (as % of average loans) of ~2.9%/2.8% in FY25/FY26E (compared to ~2.7% in FY24)

NIM contracts ~45bp QoQ; fee income down sequentially

* Reported NIM contracted ~45bp QoQ to 8.5%. However, consol. NIM + fees declined ~50bp QoQ to 10.3%, driven by lower fee income and lower MFI share in the loan mix.

* Spreads (calc.) declined ~10bp QoQ to ~8.8%. Yields (calc.) rose ~10bp QoQ to ~16.2%, while CoF (calc.) rose ~20bp QoQ to 7.3%. Management guided that NIMs may remain under pressure over the next few quarters as the proportion of MFI in the loan mix continues to decline. We model NIMs of ~9.8%/9.7% in FY26/27E (FY25E: ~10%).

Key highlights from the management commentary

* Management expects MFI credit costs at ~INR9.5-10b in FY25. Additionally, the advance estimate of the utilization of macro prudential provisions in 4QFY25 is ~INR3.0-3.5b.

* LTF is working to increase its insurance distribution and is also putting together a technology platform for the same.

* Cyclops is set to be implemented for PL and SME business loans in the coming quarters. In this year, the company will prioritize operationalizing Nostradamus, an innovative, first-of-its-kind AI-driven portfolio management engine.

Valuation and view

* LTF has invested in process automation, security, and customer journeys. This, along with large partnerships in products like PL, should lead to stronger and more sustainable retail loan growth. While there are signs of stress in non-MFI retail segments like 2W, tractors and PL, we expect the stress to subside and be provided for over the next two quarters. Stress in the microfinance sector is a near-term headwind, which the company will navigate and come out stronger.

* We estimate a PAT CAGR of 24% over FY24-27, with consolidated RoA/RoE of 2.8%/~15% in FY27. Reiterate our BUY rating on the stock with a TP of INR180 (based on 1.5x Sep’26E BVPS).

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