Buy Larsen and Toubro Finance; target of Rs 200: Motilal Oswal

Motilal Oswal's research report on Larsen and Toubro Finance

L&T Finance’s (LTF) reported 4QFY25 PAT grew 15% YoY to INR6.4b (in line). FY25 PAT grew ~14% YoY to INR26.4b.  Consol. credit costs stood at INR6.2b (in line), translating into annualized credit costs of ~2.55% (PQ: 2.5% and PY: 3.2%). The company utilized macroprudential provisions of INR3b in 4QFY25 and ~INR4b in FY25. Before the utilization of macro-prudential provisions, credit costs for the quarter stood at ~3.8% (PQ: 2.9%). The company now has unutilized macro provisions of ~INR5.75b. Write-offs stood at ~INR7.4b (PQ: ~INR5.9b). Retail assets contributed ~97.4% to the loan mix. Retail loans grew ~19% YoY, led by healthy growth in HL, LAP, and Personal Loans. The company has resumed growth in its personal loans book, which grew ~11% QoQ. Rural Business Loans (MFI) were flat, while 2W declined ~3% QoQ. LTF highlighted that the stress in the MFI industry has likely bottomed out. The implementation of MFIN Guardrails 2.0 is expected to have a limited impact, as the company has a relatively low proportion of overleveraged customers. Management also highlighted that it expects a structural decline in credit costs after 1-2 quarters, with credit costs in 2HFY26 expected to be lower than in 1H.

Outlook

We estimate a CAGR of ~22% in total loans and ~23% in PAT over FY25-27E, with consolidated RoA/RoE of 2.6%/~14% in FY27E. While FY26 will be a year of transition toward the targeted loan mix and implementation of Cyclops in Tractors, PL and SME segments, we expect LTF to deliver a sustainable improvement in profitability and RoA expansion from FY27 onward. Retain BUY with a TP of INR200 (based on 1.6x Mar’27E BVPS).

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