Q2FY24 Review: L&T Finance Holding: On track to become a retail-focused lender

25 Oct 2023 , 10:28 AM

LTFH is fast executing its retailisation strategy with the share of retail loans expected to rise to 95% by FY24. Management is confident of delivering 25%+ retail loan growth over the medium term and is investing to strengthen its underwriting practices. While profitability is improving in tandem with the rising retail mix, analysts of IIFL Capital Services expect ROEs to be constrained by excess capitalisation after five years of balance-sheet contraction and Rs30bn capital raise during Covid-19. Analysts of IIFL Capital Services expect LTFH to deliver 13.6% ROEs by FY26. Retain ADD with TP of Rs140. Rising share of unsecured loans (MFI, 2W and PL) and declining collection efficiencies in 2W and PL YoY — are a monitorable for us, given that 40% of PL is being sourced through e-aggregators (ATS: Rs172k). 

6% beat on analysts of IIFL Capital Services estimates: 

LTFH’s Q2FY24 numbers were ~6% ahead of analysts of IIFL Capital Services estimates, adj. for Rs70mn of one-time gain on the sale of noncore investments and Rs250mn of insurance commission, which is lumpy. Reported net income grew 12% QoQ (+46% YoY), led by strong growth in non-interest income (+38% QoQ; +30% YoY) and lower credit costs of 255bps (-7bps QoQ; -5bps YoY); partially offset by higher opex (+50bps QoQ). AUM was flat QoQ as rapid run-down of wholesale book offset the strong retail loan growth (+33% YoY). 

Profitability improving; excess capitalisation constraining ROEs: 

LTFH’s reported profitability is improving QoQ, as share of retail loans is rapidly increasing (88% now). Even retail business ROAs improved 10bps QoQ (adj. for one-off and lumpy non-interest income) to 3.2% in Q2FY24, on NIM improvement and benign credit costs. However, at 10.2% (adj.), consolidated ROEs are constrained by excess capitalisation after a 5yr balance-sheet contraction and Rs30bn capital raise during Covid-19. Analysts of IIFL Capital Services expect LTFH to deliver 13.6% ROEs by FY26. 

Retain ADD with TP of Rs140: 

Analysts of IIFL Capital Services raise their estimates by 1-7% for FY24-26, as they incorporate the Q2FY24 beat. They rate the stock ADD as it is already trading at 1.4x 1YF P/B (in line with its LTA) for 13% ROEs.