ICICI Direct Research has issued a BUY recommendation for L&T Finance Holdings with a target price of ₹225, reflecting a potential upside of 20% from its current market price of ₹187. L&T Finance, a diversified retail-focused non-banking financial company (NBFC), has shown a robust growth trajectory, with a sharp focus on consumer loans, home loans, and small and medium enterprise (SME) lending. The company's goal of doubling its assets under management (AUM) over the next four years, coupled with improving profitability metrics, makes it a compelling investment for investors seeking growth in the Indian financial sector.

Key Financial Performance

- Revenue Growth: The company's net interest income (NII) is projected to grow at a compound annual growth rate (CAGR) of 21%, reaching ₹10,401 crore by FY26. - Net Profit: Profit after tax is expected to grow at a CAGR of 24%, with a target of ₹3,559 crore by FY26, up from ₹2,320 crore in FY24. - Return on Assets (RoA): Expected to improve from 2.3% in FY24 to 2.9-3% by FY25-26. - Asset Quality: Gross non-performing assets (GNPA) for retail loans stand at 2.79%, and net non-performing assets (NNPA) are 0.62%, reflecting strong asset quality management.

Investment Rationale

1. Retail Growth Strategy: L&T Finance has achieved a 95% retail growth goal in its portfolio, focusing on consumer loans, home loans, farm equipment, and SME financing. The company’s retail-heavy focus provides stability and improved yield potential.
Growth in AUM: The company’s AUM stood at ₹88,717 crore as of June 2024. Management has laid out plans to double AUM to ₹2 lakh crore in the next four years, implying a CAGR of 18-20%.

Customer Expansion and Digital Innovation: L&T Finance has invested significantly in enhancing the customer experience through digital initiatives. This includes the launch of its next-generation credit underwriting engine, Cyclops, which leverages external data for improved credit risk assessment.

Target and Valuation

ICICI Securities values L&T Finance at **2x FY26E adjusted book value**, with a target price of ₹225 per share, reflecting a 20% upside from current levels. The company’s strong earnings growth potential, prudent lending practices, and diversified product portfolio underpin this valuation.

Risk Factors

1. Exposure to Unsecured Loans: While L&T Finance has managed its asset quality well, its exposure to unsecured loan segments may present higher risks, particularly during economic downturns.
Delinquency Concerns: Any increase in delinquency rates within the unsecured loan portfolio could pressure earnings and asset quality, although high provision coverage at 75% provides some protection.

Cost of Borrowing: A rise in borrowing costs, if not adequately offset by improved lending yields, could impact the company's margins.

Growth Projections

- Net Profit CAGR of 24% over FY24-26E, driven by improved operational efficiency and reduced credit costs. - AUM CAGR of 20% over the same period, with a targeted AUM of ₹2 lakh crore by FY28.

Conclusion

L&T Finance's transformation into a retail-focused NBFC, combined with its solid financial performance and growth outlook, makes it a strong candidate for investment. The company's focus on digital innovation and diversification of its product mix adds resilience to its business model. ICICI Securities' recommendation to **buy** with a target price of ₹225 reflects confidence in L&T Finance's ability to sustain its growth trajectory while maintaining strong profitability and asset quality metrics over the next 12 months.