Buy Larsen and Toubro Finance; target of Rs 170: Motilal Oswal

Motilal Oswal's research report on Larsen and Toubro Finance

L&T Finance (LTF), much like its MFI industry peers, is also navigating a tough period in microfinance but has admittedly exhibited much better asset quality performance (or lower credit costs) in the current MFI credit cycle. While there are still events such as the Karnataka Ordinance (which has disrupted industrywide collections in the state) and the upcoming implementation of MFIN guardrails 2.0, which would make the MFI stress linger around for longer (than currently expected), LTF could eventually emerge relatively less impacted compared to other MFI lenders. LTF recently forayed into the gold loans business through a proposed inorganic acquisition of Paul Merchants Finance on a slump sale basis. This acquisition will enhance the company’s secured retail portfolio, extending its footprint across 11 states with 130 branches and a customer franchise exceeding 98K. This acquisition will accelerate its gold loan business’ time-to-scale by 36 months. We expect gold loans to start contributing to LTF’s retail loan growth by end-FY26.

Outlook

We estimate a loan CAGR of ~21% and PAT CAGR of ~22% over FY24-FY27, with a consolidated RoA/RoE of 2.7%/~14% by FY27. Beyond the current stress in MFI, the company will continue to deliver an improvement in profitability and RoA expansion. Reiterate BUY with a TP of INR170 (based on 1.4x Sept’26E BVPS).