IGI Logo

Driving growth through digital excellence

Leveraging AI, digital innovation and customer centricity to shape its future We attended the Digital Investor Day hosted by L&T Finance (LTF) where it showcased how it is trying to redefine financial services with its technology and customer-first solutions. The company highlighted its digital transformation, AIdriven initiatives including its Project Cyclops (new underwriting engine), and broader technological advancements, which will shape the next phase of its journey. We believe that these digital initiatives will strengthen LTF’s financial services offerings. Key takeaways on the business front: 1) LTF has historically avoided lending to new-to-credit customers but aims to address this segment with innovations like “undiscovered prime” and “Project Cyclops” for more confident decisionmaking. 2) It is targeting sustainable RoA of 2.8%-3.0% through cost reductions, fee profile improvements, and operational efficiency despite a change in the product mix and pressures on yields. 3) In its MFI business, Nov’24 collection efficiency (CE) is expected to be stable MoM, with a positive bias towards improvement. If the same trends sustain in Dec'24 as well, then it will be safe to assume that the MFI industry stress has bottomed out. 4) LTF expects the overall credit costs in the MFI business to remain below ~INR10b in FY25. It has ~INR9.75b of macro provisions and if needed, it will utilize those reserves. 5) In personal loans (PLs), Project Cyclops will be launched by FY25 end, and it will soon be launching a new partnership with a mega partner for PLs.

Rural Business Finance: Tracking better than most of its MFI peers

* Over the years, the company has embraced a digital-first approach, implementing app-based customer journeys, real-time credit assessments, and 100% paperless on-boarding. Tools like geo-spatial technology, AIdriven decision-making, and predictive analytics have enhanced operational efficiency and customer experience. A unified sourcing and collection app integrates customer insights and collection strategies, contributing to faster processing times and enhanced field operations.

* Tailor-made pre-approved offers and dynamic customer segmentation allow for risk-based pricing and better customer targeting. Introduction of new offerings like micro LAP loans, catering to secured lending needs, will diversify the product portfolio.

* A robust early warning signal (EWS) framework, combined with AI and ML capabilities, allows for proactive risk identification and mitigation. Stringent sourcing norms ensure reduced customer leverage, with 87% of the portfolio having fewer than two external associations.

* Field efficiency has been significantly improved through automated route mapping, streamlined collection processes, and a focus on employee engagement. The company has strengthened its feet-on-street to enhance collections and maintain portfolio quality, with a 16% increase in manpower between Jul’24 and Oct’24.

* Despite challenges like floods and political disruptions, LTF has maintained 0dpd CE at 99.3% and 0-90dpd CE at 98.1% in Oct’24. As of Oct’24, ~5.0% of its outstanding book had customers with LTF+ >= 4 associations, where it saw regular CE of 97%.

Farmer Finance: Market leader innovating for sustainable growth

* LTF is a leading tractor financier and strategic partnerships with all major tractor OEMs has ensured market leadership and deep customer penetration.

* Initiatives like Farm Cyclops (to be implemented) and STP (Straight Through Processing) will integrate data from multiple sources, including account aggregators, credit bureaus, and hyperlocal demographics, ensuring comprehensive customer assessments. The implementation of video personal discussions and minimal documentation requirements has enhanced convenience and reduced risk.

* In warehouse receipt finance, real-time price monitoring and API-integrated data flows have enabled faster disbursements, with sanction times reduced from 7-20 days to just 24-48 hours. In this product, LTF has disbursed ~INR11b since inception and has zero overdue accounts.

* Real-time insights into farming patterns, soil types, and meteorological data have improved customer profiling and asset verification processes.

* Disbursement TAT has been reduced to two hours in the D2C journey.

Urban Finance: Digital evolution at its core

* LTF’s roadmap in its urban finance product segments reflected a robust alignment of technology, strategic partnerships, and customer-focused policies, for delivering strong risk-adjusted credit growth.

* The company showcased its transformation into a digitally driven organization, focusing on seamless customer experiences. It has a 100% digital journey across two-wheeler financing, home loans, and personal loans, and significant advancements in automation, such as conditional loan approvals in under two minutes. AI and machine learning integration refines underwriting, targeting prime and salaried customers.

* In 2W, Project Cyclops has increased prime customer base penetration to ~64% as of Oct’24 and has driven customer premiumization. Through its valued partner program (VPP), the company is enhancing dealer relationships with digital tools for better inventory funding and performance insights.

* In addition to cross-selling of PLs to its 2W customers, it is also leveraging largescale partnerships with mega partners (customer base more than 10m) to upsell and cross-sell products.

SME Finance: Scaling up well; expects to add supply chain finance soon

* SME finance is now offered across 110+ locations with a total loan book size of ~INR52b. This product segment, which started with term loans, has expanded its offerings to include dropline OD, hybrid OD, and top-up loans and is expected to introduce supply chain financing (SCF) in Dec’24. SCF will first start with leveraging partnerships in the L&T ecosystem and will subsequently be expanded to dealer finance, vendor finance and bill discounting.

* SME business has been built on a digital native business model and is enabled through APIs, data-based location selection, and robust credit guardrails. It has over 20 APIs integrated for KYC and on-boarding. It uses early warning systems and predictive models.

* The segmentation of customer journeys is based on risk profiles. It has high portfolio quality, with only 2.1% first-time bounces (1HFY25). Majority of the SME portfolio is in prime (55%) and prime-plus (21%) segments.

Valuation and View

* LTF has moderated its MFI business growth and expects the industry to grow at 15%-20%. Importantly, this moderation has been done by choice (looking at the stress in the sector) rather than any duress in its own MFI book. It is expanding into AP and Telangana, which it expects to be growth markets for its MFI business.

* The company achieved highest-ever tractor disbursements in Oct’24. Management shared the rural cash-flows have been improving and multiple government schemes, which had been paused (prior to and during elections), have been resumed, bringing cash flows back in the hands of customers.

* LTF’s strategic focus on digital innovation, prime customer acquisition, operational efficiencies, and risk-adjusted growth, will position it well to become a leading retail financial services player.

* We expect LTF’s MFI business to fare better than most of its MFI peers in the current credit cycle. As investors gain more confidence in the company’s ability to navigate the current MFI credit cycle with MFI credit costs at <4% in FY25, we believe that the stock will be ripe for a rerating and recoup the correction that was seen after its last earnings release. We maintain our BUY with a target price of INR180 (1.5x Sep’26E P/BV). The key risk is the MFI credit cycle continuing beyond FY25, resulting in high credit costs for far longer than currently envisaged.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412