ICICI Securities has maintained a “BUY” rating for L&T Finance (LTF) with a revised target price of Rs 200. The firm highlights the transformative potential of LTF’s AI-driven initiatives, such as Project Cyclops and Nostradamus, aimed at improving underwriting, operational efficiency, and risk management. Despite challenges in the microfinance (MFI) sector, LTF is positioned to capitalize on digital advancements, robust AUM growth, and its five-pillar execution strategy. This article delves into LTF's strategic shifts, financial performance, and actionable guidance for investors while examining risks and opportunities in its core operations.

Strategic Initiatives: The Cyclops Revolution

AI-Driven Underwriting: LTF’s Project Cyclops, launched in June 2024, leverages alternate data sources—trust signals, geo signals, and account aggregator data—alongside traditional bureau scores. This multi-dimensional approach aims to enhance approval rates, reduce credit costs, and boost return on assets (RoA).

Promising Results in Two-Wheeler Financing: Cyclops has increased the prime share in disbursements for two-wheeler loans to 64% in October 2024 from 54% in June 2024. Encouraged by its success, LTF plans to extend Cyclops to other product lines except for joint liability group (JLG) loans.

Future Outlook: As Cyclops scales across offerings, it promises a dual benefit of higher operating leverage and access to new-to-credit customers, opening new avenues for growth.

Microfinance: Navigating Industry Headwinds

Prudent Lending Practices: LTF has adopted tighter credit guardrails to mitigate risks in the over-leveraged MFI sector. Measures include restricting lending to customers with fewer than two external associations and optimizing the loan officer span for better monitoring.

Resilient Portfolio:

LTF’s portfolio shows 99.5% collection efficiency (CE) in rural business finance.
Customers with high leverage (>=4 associations) have been reduced from 7% in June 2024 to 5% by October 2024.
Growth Outlook: While MFI growth may stabilize around 20% (below historical rates of 30–40%), LTF’s focus on lower-leveraged customers and untapped geographies provides a resilient growth path.

Technology as a Growth Driver

Advanced Risk Management: LTF is developing Nostradamus, an automated risk management system to launch by Q2 FY26. This platform is expected to lower credit costs and improve early warning systems.

Digital Expansion:** LTF’s Planet app now boasts 2.4 million rural users, with monthly active users doubling to 1.9 million over the past year.

Operational Improvements: AI models and facial recognition technology for MFI group meetings have streamlined customer on-boarding, ensuring a paperless, efficient process.

Financial Highlights: Solidifying Growth Trajectory

Revenue and Profitability Trends:

Net Interest Income (NII) is projected to grow at a CAGR of 14% to Rs 114 billion by FY26.
PAT is estimated to rise 30.6% YoY to Rs 37 billion by FY26, driven by cost efficiencies and improved credit guardrails.
Return Ratios:

RoA is expected to reach 2.7% by FY26 (up from 1.4% in FY23).
RoE is forecasted at 13.7% by FY26, reflecting stronger profitability metrics.

Target Price and Valuation

Revised Valuation: ICICI Securities has revised the target price for LTF to Rs 200, valuing the stock at 1.8x its FY26E adjusted book value (ABV).

Attractive Risk-Reward: With a current market price of Rs 141, the revised target implies a potential upside of 42%, making LTF an attractive buy for investors.

Support and Resistance Levels

Technical Analysis:

Immediate Support: Rs 134 (52-week low).
Major Support: Rs 140 (current market price).
Immediate Resistance: Rs 150 (near-term hurdle).
Major Resistance: Rs 194 (52-week high).
Actionable Strategy:

Buy above Rs 150, targeting Rs 180 and Rs 200, with a stop-loss at Rs 134.
Long-term investors should accumulate near Rs 140, leveraging LTF’s digital transformation potential.

Risks and Challenges

Sector Headwinds: Rising leverage in the MFI sector and natural calamities (e.g., unseasonal floods in Bihar) pose risks to asset quality and credit costs.

Loan Growth Uncertainty: Slower-than-expected AUM growth could affect profitability targets.

Conclusion: A Transformative Journey Ahead

L&T Finance's strategic investments in AI-driven underwriting and digital tools position it well to navigate market challenges and deliver sustainable growth. With a focus on risk mitigation, technology adoption, and operational efficiencies, LTF is poised for a brighter future. The revised target price of Rs 200 underscores its attractive valuation, making it a compelling buy for investors seeking exposure to India’s evolving NBFC landscape.