L&T Finance Holding (LTFH) is a leading NBFC catering to the diverse financing needs of served and underserved customers in urban as well as rural areas. LTFH offers financial assistance in various segments including consumer loans, two-wheeler loans, home loans, micro loans, farm loans and SME loans. Backed by a strong parent, the lender has been assigned “AAA” rating by rating agencies. Its distribution network remains strong with substantial dealer penetration (2500+ dealers in farm equipment and 5500+ tie-ups in two-wheeler segment), 2 crore customers (database) spread across 21 states and one union territory.
In April 2022, LTFH announced “Lakshya 2026”, which was targeted towards retailisation and a shift from product based approach to customer focused approach to pedal business growth as well as improve return ratios. As per the plan, the recalibrated product growth strategy was adopted with customised products in mature markets [farm equipment, rural group loans (MFI) and two wheeler finance] with focus on newer retail segment (consumer loans, home loans, LAP and SME loans) with substantial growth potential.
The management aimed to run down the wholesale book and increase retail share in total loans. Accordingly, in the last four quarters, the share of retail loans has increased from 51% to 75% while the proportion of wholesale book has declined from 49% to 25% (from ₹ 43257 crore to ₹ 19840 crore). Induction of new Chairman SN Subrahmanyan in February 2022 hastened the process of restructuring further.
Going ahead, AUM growth is expected to be driven by the retail segment – newer segments seen driving faster traction while existing mature segments are expected to witness steady growth with a gradual gain in market share. Increase in retail proportion will continue to aid NIMs trajectory (calculated NIMs at 7.5% in FY23 vs. 6.3% in FY22), which is expected to improve to ~8-9% levels.
LTFH has been focusing on accelerating retailisation and, thus, leveraging fintech capabilities through automation in order to make the customer journey hassle free and quick. All this should aid sustainable retail AUM growth (31% YoY in FY24E and 24% YoY in FY25E) and gradual improvement in efficiency. However, CI ratio could remain elevated at ~40-41% in the initial phase and subsequently witness improvement at ~38-39% level.
LTFH’s transformation process includes a leaner, simpler organisation structure and hierarchy. LTFH, in its second cycle, has simplified its corporate structure as well as business model. It has exited unfocused business lines (sold its L&T AMC business segment for ₹ 4249 crore), stopped growing in the real estate vertical and is in the process of consolidating L&T Finance and L&T Infra Credit wherein NCLT approval is awaited. A leaner structure will enable improved focus thereby resulting in healthy growth and improved performance.
Focus on new business segments will aid yields and, thus, expansion of NIMs. With continued investment in tech, people and branch addition, efficiency is seen improving gradually. Focus on accelerating business growth & provision buffer of ~2% is expected to keep credit cost largely steady, thus aiding earnings momentum. We expect return on AUM (RoAUM) to improve from ~2% in FY23 to ~2.6-2.7% by FY25E.
With the retail loan book gaining traction to almost >90% of outstanding AUM by FY24E, valuation multiple should witness a re-rating. Further, contained GNPA, NNPA guidance of <3%, <1%, respectively, provide comfort. At the CMP, LTFH currently trades at ~1x ABV offering room for further expansions as RoE, RoA are expected to reach ~10%, ~2.1%, respectively, in FY23-25E. Hence, we ascribe a target price of ₹ 125/share, valuing at ~1.3x FY25E ABV and recommend BUY rating on the stock.