Reduce Larsen and Toubro Finance; target of Rs 150: Emkay Global Financial

Emkay Global Financial's research report on Larsen and Toubro Finance

LTF reported a mixed Q2FY25 result with PAT of Rs6.96bn broadly in line with our estimates, whereas it was ~3% above Consensus estimates. However, on the asset quality and credit cost front, the difficulties have started to emerge with: 1. Credit cost (on AuM) jumped by 36bps QoQ to 2.86% and was the highest in 8 quarters; 2. GS3 increased by 5bps QoQ to 3.19%, while NS3 jumped by 17bps QoQ to 0.96%, reflecting ~5ppts QoQ reduction in PCR to 70%; and 3. MFI disbursements declined 5% YoY (first YoY decline in the last 15 quarters). We see the pain in MFI segment in terms of asset quality and credit cost (despite the Rs9.8bn macro-prudential buffer) affecting overall growth and profitability meaningfully over the next few quarters.

Outlook

We have cut our FY25-27E EPS by 10-13% and downgrade the stock to REDUCE from Add with our revised Sep-25E TP of Rs150 (vs Rs210 earlier), implying FY26E P/ABV of 1.4x.