Buy Larsen and Toubro Finance Holdings; target of Rs 160: Motilal Oswal

Motilal Oswal's research report on Larsen and Toubro Finance Holdings

L&T Finance Holdings (LTFH) reported 1QFY24 PAT of INR5.3b (in line). PPOP grew ~7% YoY to INR12.4b (in line), while credit costs of ~INR5.2b translated into annualized credit costs of 2.6% (PQ: 2.5% and PY: 3.6%). Retail PAT at ~INR5.3b surged 176% YoY in 1QFY24. Reported Retail RoA/ RoE stood at ~3.1%/~15.7% during the quarter. Mr. Sudipta Roy (COO) would assume the role of MD & CEO effective Jan’24, while the current MD & CEO – Mr. Dinanath Dubhashi – has opted for superannuation. He will remain with the company until Apr’24 to ensure a seamless leadership transition. We expect that the retail mix will improve to ~95% by Mar’24 (from 82% as of Jun’23). Considering the accelerated rundown in the wholesale book, we model consolidated loan growth of 3%/22% in FY24/FY25E. We estimate a PAT CAGR of 27% over FY23-FY25, with consolidated RoA/RoE of 2.3%/~11.0% in FY25. A strong liability franchise, a well-capitalized balance sheet and a keen intent to further accelerate the sell-down of the wholesale book will enable LTFH to achieve its targets articulated under Lakshya 2026 much in advance. We have raised our FY24E/FY25E PAT by 7%/5% to factor in higher fee income and margin expansion and now model a 50% dividend payout in FY24E.

Outlook

LTFH is set to transform itself into a retail franchise, which would lead to profitability improvement and RoA expansion. Reiterate BUY with a TP of INR160 (premised on 1.6x FY25E consolidated BVPS).