Buy Larsen and Toubro Finance Holdings; target of Rs 240: Motilal Oswal

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26 Aug, 2025 12:21

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

L&T Finance Holding’s (LTFH) 2QFY18 PAT grew 45% YoY to INR3.6b (12% above estimates). Robust core disbursement growth of 81% YoY (excluding IPO financing, which is more opportunistic), a pick-up in fee income across lending segments and a low tax rate were the key highlights of the quarter. Rural business: There was a clear uptick in disbursements in all segments, including microfinance, leading to 88% YoY growth in disbursements (highest-ever quarterly disbursements in each segment). Asset quality improved on a sequential basis (GNPL ratio down 45bp QoQ). PCR is improving, but remains inadequate at 39%, in our view. Management guides to improving asset quality in 2HFY18. An interesting thing to note is the sharp pick-up in fee income (+69% QoQ, 3x YoY).  Housing business: Disbursement growth in the retail home loan/LAP segment remains sluggish, but was compensated by 54% disbursement growth in the builder loans segment. The share of builder loans in the housing finance segment now stands at 48%. Management has guided that the current INR15-18b quarterly run-rate of disbursements will continue.  Wholesale business: In line with the trend of the prior quarters, growth in the infrastructure finance segment was robust at 182% YoY – the key driver being the DCM desk. Note that management’s strategy is to generate and sell-down loans in order to drive strong fee income. This is evident from the 3x YoY jump in fee income. LTFH continues to be opportunistic with IPO funding.

Outlook
LTFH has scripted an impressive turnaround over the past six quarters, with a renewed focus on profitable segments. It has delivered strong growth and consistent improvement in profitability. We are also encouraged by the strong fee income traction– we believe this will play a key role in achieving 18%+ RoE by FY19/20. We marginally upgrade FY18-20 EPS estimates by 1-3% and our target price to INR240 (3.7x Sep-2019E BVPS, 21x Sep-2019E EPS). Buy.
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