L&T Finance - Journey Towards Retailisation At Attractive Valuation: ICICI Direct
With retail loan book gaining traction to almost >90% of outstanding AUM by FY24E, valuation multiple should witness a re-rating.
BQ Prime’s special research section collates quality and in-depth equity and economy research reports from across India’s top brokerages, asset managers and research agencies. These reports offer BQ Prime’s subscribers an opportunity to expand their understanding of companies, sectors and the economy.
ICICI Direct Report
Investment Rationale
Re-orientation of balance sheet towards retailisation: In April 2022, L&T Finance Holdings Ltd. announced 'Lakshya 2026', which was targeted towards retailisation with customised products in mature markets [farm equipment, rural group loans (micro finance) and two wheeler finance] and focus on newer retail segment (consumer loans, home loans, loan against property and small and medium enterprise loans).
Accordingly, in the last quarters, the share of retail loans has increased from 51% to ~82% while the proportion of wholesale book has declined from 49% to ~18%.
Leaner business structure and change in leadership:
L&T Finance's transformation process includes a leaner, simpler organisation structure and hierarchy to enable improved focus on performance. L&T Finance has exited unfocused business lines, stopped growing real estate vertical and is in the process of consolidating L&T Finance and L&T Infra Credit wherein National Company Law Tribunal approval is awaited.
L&T Finance has announced superannuation of current Managing Director and Chief Executive Officer and appointment of Mr Sudipta Roy as new MD and CEO from Jan 2024; which remains in-line with focus on retailisation target articulated earlier.
Return on assets managed trajectory to improve to ~2.7-2.8% in FY25E:
Increase in retail proportion will continue to aid net interest margins trajectory (calculated NIMs at 7.5% in FY23), and is expected to improve to ~8-9% levels. Sustainable retail assets under management growth (31%/ 24% YoY in FY24E/ 25E) to aid gradual improvement in efficiency, though cost/income ratio could remain elevated at ~40-41% in the initial phase.
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 ~2.7-2.8% by FY25E.
Rating and target price
With retail loan book gaining traction to almost more than 90% of outstanding AUM by FY24E, valuation multiple should witness a re-rating.
Further, contained gross, net non-performing asset guidance of less than 3%, less than 1%, respectively, provide comfort.
At the current market price, L&T Finance currently trades at ~1.2 times adjusted book value offering room for further expansions as RoE, RoA are expected to reach ~10%, ~2.1%, respectively, in FY23-25E. Hence, we assign a target price of Rs 160/share, valuing at ~1.6 times FY25E ABV and recommend 'Buy' rating on the stock
Click on the attachment to read the full report:
DISCLAIMER
This report is authored by an external party. BQ Prime does not vouch for the accuracy of its contents nor is responsible for them in any way. The contents of this section do not constitute investment advice. For that you must always consult an expert based on your individual needs. The views expressed in the report are that of the author entity and do not represent the views of BQ Prime.
Users have no license to copy, modify, or distribute the content without permission of the Original Owner.