Buy L&T Finance Ltd for the Target Rs.330 by Motilal Oswal Financial Services Ltd
Strong execution; insurance distribution income needs firm offset Lower CoB keeps NIM stable; tractor, 2W and MFI need closer monitoring
* L&T Finance’s (LTF) 2QFY27 PAT grew 32% YoY to INR9.7b (in line). NII grew ~33% YoY to INR31.9b (in line). Opex grew ~28% YoY to ~INR13.7b (in line). Cost-income ratio increased ~20bp QoQ to ~38.9% (PQ: ~38.7%). PPoP grew ~31% YoY to ~INR21.5b (in line).
* Credit costs stood at INR8.3b (in line). Reported credit costs declined 8bp QoQ to 2.46% (PQ: 2.54%). Consol. RoA/RoE stood at ~2.6%/13.6%.
* LTF aims to sustain a 20%+ AUM CAGR through FY31, underpinned by a calibrated shift toward a more diversified, scalable and higher-yielding business mix. Improving distribution and productivity, supported by the expansion of multi-product Sampoorna branches, Hercules-led crossselling, digital acquisition capabilities and the payments platform, should deepen customer engagement, enhance revenue diversification and support sustainable growth.
* The company expects its NIM+fee trajectory to remain in the 10-10.5% range over the next two quarters, supported by proactive liability management, a lower borrowing cost base and a calibrated business mix. The reduction in borrowing costs to ~6.95% (as of Sep’26) provides a cushion against the anticipated hardening of interest rates.
* LTF’s healthy disbursement momentum, improving asset quality and proactive liability management provide a solid foundation for sustainable growth. Continued expansion across retail lending, disciplined risk calibration and technology-led efficiencies should support credit cost moderation and improve profitability, keeping the company on track to deliver its targeted growth and return objectives.
* We estimate a CAGR of ~24% in the loan book and ~28% in PAT over FY26- FY28E, with consolidated RoA/RoE of 2.6%/15% in FY28E. We expect LTF to deliver a structural improvement in profitability and RoA going forward. Reiterate BUY with a TP of INR330 (based on 2.2x Sep’28E BVPS).
Proactive liability management helps keep NIM + fee income stable
* Spreads (calc.) rose ~30bp QoQ to ~8.9%. Yields (calc.) declined ~8bp QoQ to ~15.5%, while CoF (calc.) fell ~40bp QoQ to 6.6%. Reported yields were broadly stable QoQ at 14.8% and CoB declined ~25bp QoQ to 6.95% (PQ: 7.2%). Reported NIM + fees were stable QoQ at ~10.5%.
* The 25bp decline in CoB was driven by favorable liquidity conditions and lower market rates during Jul-Aug’26, which enabled the company to refinance high-cost borrowings and raise incremental funds at more attractive rates. Higher CP issuance across 6M-12M tenures and timely mobilization of even medium-to-long-term borrowings helped LTF secure a ~25bp QoQ decline in its weighted cost of borrowings. We expect LTF to deliver NIMs of ~9.9%/9.7% in FY27E/FY28E (FY26: ~9.4%)
Improving asset quality with credit costs expected to moderate further
* Consol. GS3 declined ~10bp QoQ to ~2.75%, while NS3 declined ~5bp QoQ to ~0.85%. Retail GS3/NS3 stood at ~2.43%/0.73%.
* LTF expects credit costs to moderate toward the guided range of 2.0-2.2% by 4QFY27, supported by improving credit metrics across businesses, disciplined underwriting and AI-led collection efficiencies. Calibrated rural disbursements and insurance-backed portfolio protection (CGFMU and parametric insurance) should further strengthen risk management as growth momentum improves. We model credit costs of ~2.5%/2.3% for FY27E/FY28E
Valuation and view
* LTF’s healthy 2QFY27 performance and calibrated expansion across growth businesses provide a solid foundation for the coming quarters. Continued improvement in credit costs, disciplined underwriting and technology-led efficiencies are expected to support earnings growth and enhance return ratios, while the expanding gold loan franchise and diversified revenue streams provide further levers for improvement in the RoA trajectory in the coming quarters.
* The company currently trades at 1.8x FY28E P/B. We estimate a CAGR of ~24% in the loan book and ~28% in PAT over FY26-28E, with consolidated RoA/RoE of 2.6%/15% in FY28E. The final guidelines on insurance distribution commissions (if implemented in its current form) can result in significant revenue impact for LTF (and the broader NBFC industry). However, management remains confident of offsetting the impact through revenue diversification (through cross-sell and other levers) and adjustments to the business model. Maintain BUY with a TP of INR330 (based on 2.2x Sep’28E BVPS).
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