Buy Larsen and Toubro Finance; target of Rs 180: Motilal Oswal

Motilal Oswal's research report on Larsen and Toubro Finance

L&T Finance’s (LTF) 3QFY25 PAT declined 2% YoY to INR6.3b (~6% beat). PPoP grew ~11% YoY to ~INR14.8b (in line). Credit costs stood at INR6.5b (in line), translating into annualized credit costs of ~2.5% (PQ: 2.6% and PY: 2.5%). The company utilized macroprudential provisions of INR1b during the quarter. Including macroprudential provisions, credit costs stood at ~2.9%. LTF has guided for macro-prudential provision utilization of INR3b-3.5b in 4QFY25. Retail assets contributed ~97% to the loan mix (PQ: 96%). Retail loans grew ~23% YoY, led by healthy growth in tractors, HL, LAP, and personal loans. The company has started re-growing its personal loans book, up ~9% QoQ. Rural business loans (MFI) and 2W remained flat QoQ. Management shared that the stabilization of the MFI business is expected to take two-three more quarters, given ongoing turbulence at the industry level. Additionally, as the company shifts its focus to prime segments in 2W and expects a lower proportion of MFI in the loan mix, NIMs may contract. However, this NIM contraction can be mitigated from improvements in productivity, reductions in collection costs, and lower credit costs.

Outlook

LTF has maintained a disciplined approach to MFI business. Management expects stable MFI industry growth at ~15%-20% after the implementation of MFIN guardrails. We estimate a CAGR of ~21% in total loans and ~24% in PAT over FY24-FY27E, with consolidated RoA/RoE of 2.8%/~15% in FY27E. The company will continue to deliver a sustainable improvement in profitability and RoA expansion. Retain BUY with a TP of INR180 (based on 1.5x Sept’26E BVPS).