Company Overview:

L&T Finance Holdings was originally incorporated as L&T Capital Holdings Limited on May 1, 2008 under the Companies Act, as a public limited company, to carry on the business of investment/finance. The company received the certificate of commencement of business on May 15, 2008. The company subsequently changed the name to L&T Finance Holdings Limited pursuant to a special resolution passed by the shareholders at a general meeting dated September 1, 2010. Pursuant to the change of name, a fresh certificate of incorporation was granted to the company by the Registrar of Companies on September 6, 2010. The company was registered with the RBI under Section 45-IA of the Reserve Bank of India Act, 1934, as a non-banking financial institution. The company is promoted by Larsen & Toubro Limited, one of the leading companies in India, with interests in engineering, construction, electrical and electronics manufacturing and services, information technology and financial services, as a holding company for its financial services business. L&T Finance Holdings is one of India’s most valued and fastest-growing Non-Banking Financial Companies (NBFCs). The company offers a diverse range of financial products and services in rural, housing and infrastructure finance sectors. It also offers Investment management services.

L&T Finance Holdings Ltd (LTFH) offers housing, rural, and wholesale financing, and wealth management solutions. As of March 31, 2023, it had assets of INR1063.6 billion and equity of INR215.3 billion. It has operational presence in 21 states and one union territory including major cities, urban and semi-urban locations with 93 branches and more than 16,000 partner touchpoints. LTFH operates four segments: Retail finance, Wholesale Finance, Defocused Business and Others.

Strong momentum in retail disbursements with 32% YoY growth

• Total disbursements grew 24% YoY to INR136b, driven by 32% YoY growth in retail disbursements to INR135b. In line with its stated strategy, the wholesale disbursements declined 76% YoY to INR1.9b.
• Total lending book remained flat QoQ and declined 13% YoY to INR787b, due to continued run-down in wholesale portfolio that fell 34% QoQ/75% YoY to INR93b (INR140b in 1QFY24). Wholesale Real Estate book dipped 70% YoY to INR28b.
• Retail assets contributed 88% to the loan mix (82% as on Jun’23). Retail book grew 8% QoQ/33% YoY, propelled by strong growth in MFI, Home Loans, SME and Consumer Finance.
• LTFH aims to utilize digital technology for personalized cross-selling and upselling, leveraging data analytics, targeted marketing, and seamless omni-channel experiences to enhance customer engagement and drive successful conversions.

Strong momentum in retail disbursements with 32% YoY growth

• Total disbursements grew 24% YoY to INR136b, driven by 32% YoY growth in retail disbursements to INR135b. In line with its stated strategy, the wholesale disbursements declined 76% YoY to INR1.9b.
• Total lending book remained flat QoQ and declined 13% YoY to INR787b, due to continued run-down in wholesale portfolio that fell 34% QoQ/75% YoY to INR93b (INR140b in 1QFY24). Wholesale Real Estate book dipped 70% YoY to INR28b.
• Retail assets contributed 88% to the loan mix (82% as on Jun’23). Retail book grew 8% QoQ/33% YoY, propelled by strong growth in MFI, Home Loans, SME and Consumer Finance.
• LTFH aims to utilize digital technology for personalized cross-selling and upselling, leveraging data analytics, targeted marketing, and seamless omni-channel experiences to enhance customer engagement and drive successful conversions.

Technical View: L&T FINANCE HOLDING LTD:

Strong execution in Retail with RoA expansion

• L&T Finance Holdings (LTFH) reported 2QFY24 PAT of INR5.9b (7% beat). PPOP grew 9% YoY to INR12.9b (in line), while credit costs of INR5.2b translated into annualized credit costs of 2.5% (2.6% in 1QFY24/2QFY23).
• Retail PAT at INR6b grew 86% YoY in 2QFY24. Reported Retail RoA/RoE stood at 3.3%/16.3% in 2QFY24.
• A strong liability franchise, a well-capitalized balance sheet and a keen intent to further accelerate the sell-down of the wholesale book will help LTFH achieve its Lakshya 2026 targets much in advance. We have raised our FY24E/FY25E PAT by 5%/12% to factor in higher loan growth, broadly stable NIM and a lower effective tax rate.
• Mr. Sudipta Roy (ex-ICICI) will succeed the current MD/CEO Mr. Dinanath Dubhashi in Jan’24 and will look to leverage his vast experience to further strengthen the franchise.

Asset quality improved sequentially

• Consol. GS3 declined 80bp QoQ to 3.3%, while NS3 declined 40bp QoQ to 0.8%, driven by an increase in PCR to 76% during the quarter.
• Retail GNPA/Wholesale GNPA declined 15bp/310bp QoQ to 3.1%/4.5% as on Sep’23.

Performance against Lakshya 2026 Goals

Vision: To be a top-class digitally enabled retail finance company by moving from a product-focused to a customer-focused approach Lakshya 2026 Goals: The four-year journey started from Apr’22 and the company has made good progress toward the articulated targets.

• Retail Loans grew 33% YoY. Retail GS3/NS3 at ~3.1/0.67%.
• Management guides that it will deliver ~95% retailization by Mar'24 without any negative surprises in the P&L.
• Reported Retail RoA of ~3.3% and will improve from hereon.

Key conference call highlights

• The management expects Retail RoA to improve to 3.5% over the next two quarters. Consol. RoA was below 2.4%, and the convergence of consol. RoA to Retail RoA will happen soon.
• It has guided that moderation in credit costs will continue, aided by strengthening underwriting practices, strong collection teams which will aid recoveries and rollback of accounts which slip into forward buckets.
• Investment in physical infrastructure and manpower to accelerate growth; Investments in Ads/Promotions and cutting-edge technology will continue.

Valuation and strategy :

LTFH is set to transform itself into a retail franchise, which would lead to profitability improvement and RoA expansion. LTFH has been effectively utilizing the Cloud technology for scalability. It has invested in process automation, security and customer journeys through both assisted and direct-to-consumer (D2C) Planet app. This, along with partnerships with e-aggregators, should lead to stronger and sustainable retail loan growth. MFI, Home loans and Consumer businesses witnessed sequential improvements in disbursements. Over the past few quarters, the company has consistently delivered strong growth in its Retail loan book, even as it has accelerated the sell-down in the wholesale book. We see stock outperforming its peers going ahead, technically as well as fundamentally, going ahead L&t holding is expected to post EPS of 11.35 for F.Y 2025-26 as compare to 9.33 for F.Y 2024-25. We recommend to add dips and buy this stock for price target of 205 with strong support near levels of 150-144.