31-10-2024 05:54 PM | Source: Motilal Oswal Financial Services
Buy L&T Finance Ltd For Target Rs. 200 By Motilal Oswal Financial Services Ltd

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MFI performance better than industry; in-line earnings Asset quality largely stable, aided by write-offs

* L&T Finance (LTF) reported 17% YoY growth in PAT to INR7b (in line) in 2QFY25. PPoP grew ~23% YoY to ~INR15.9b (in line). Credit costs stood at INR6.5b (vs. MOFSLe of INR6b), translating into annualized credit costs of ~2.6% (vs. 2.4% in 1QFY25 and 2.6% in 2QFY24). Write-offs stood at INR6.6b (INR4.8b in 1Q). Consol. RoA/RoE stood at 2.6%/11.7% in 2Q.

* Retail assets contributed ~96% to the loan mix (95% in 1Q). Retail loans grew ~28% YoY, led by healthy growth in 2W, home loans, LAP, and SME. LTF has started to regrow its personal loans book, up 8% QoQ. Given the sectoral stress, rural business loans (microfinance) grew 3% QoQ.

* The management anticipates 3Q to be just as challenging as 2Q, with normalization expected in 4Q. Meanwhile, the management will focus on strengthening its other retail business segments. We model a CAGR of ~25% in total loans and ~26% in PAT over FY24-FY27E, with consolidated RoA/RoE of 2.8%/~15% in FY27E.

* In 1HFY25, PAT grew ~23% YoY, and we expect PAT to grow ~18% YoY in 2HFY25. There are sectoral headwinds and stress in the microfinance segment, which will result in muted loan growth and high credit costs in this segment over the next two quarters. NIM would also moderate over the next two quarters because of a lower share of microfinance loans in the disbursement mix. Thereafter, we expect LTF to overcome these headwinds and perform relatively better than its peers.

* LTF has transformed itself into a retail franchise and will continue to deliver a sustainable improvement in profitability and RoA expansion. Retain BUY with a TP of INR200 (based on 1.6x Sept’26E BVPS). Asset quality largely stable, significant decline in PCR due to write-offs

* Consol. GS3 grew ~5bp QoQ to ~3.2% and NS3 rose ~20bp QoQ to ~0.95%. PCR declined ~5pp to ~71%. Retail GS3 increased ~5bp QoQ to 2.8%.

* The management said that credit costs could remain high for the next few quarters because of sectoral stress in the microfinance segment. The management also added that it will decide at an opportune time whether it needs to utilize macro-economic provisions. We model total credit costs (as % of average loans) of ~3.0%/2.8% in FY25/FY26. NIM contracts ~40bp QoQ; fee income higher QoQ

* Reported NIM contracted ~40bp QoQ to 8.9%. However, consol NIMs + Fees contracted only ~20bp QoQ to 10.9%, aided by higher fee income.

* Spreads (calc.) remained stable at ~8.9%, while yields (calc.) grew 25bp QoQ to ~16.1%. CoB (calc.) rose ~25bp QoQ to ~7.1%. The Management guided that NIMs + Fee will be between ~10.75%-11.25% (slight lower over the next few quarters). We model NIMs of ~9.9%/9.8% in FY25/26.

Key highlights from the management commentary

* In the microfinance segment, there was localized impact on collection efficiency due to widespread floods in certain geographical pockets of Gujarat, North Bihar and parts of West Bengal.

* LTF expects a soft landing in microfinance in the latter part of 3Q or early 4Q, because of good monsoons and resumption of social welfare schemes.

Valuation and view

* LTF has invested in process automation, security, and customer journeys. This, along with partnerships with e-aggregators, should lead to a stronger and more sustainable retail loan growth. Stress in the microfinance sector is a near-term headwind, which the company will have to navigate and come out stronger.

* We estimate a PAT CAGR of 26% over FY24-27, with consolidated RoA/RoE of 2.8%/~15% in FY27. Reiterate our BUY rating on the stock with a TP of INR200 (based on 1.6x Sep’26E BVPS).

 

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