Whalesbook
Strong Loan Growth Prompts Early Capital Raise Plans
L&T Finance is experiencing significant momentum, on track to meet its 20% loan growth target for the current fiscal year. This trajectory is supported by a robust performance in April and May. CEO Sudipta Roy has indicated that the company may accelerate its equity capital raise, potentially moving it to late fiscal year 2027 or early fiscal year 2028. This proactive move is aimed at supporting the company's ambitious expansion plans as it continues to prioritize retail lending, which now constitutes 98% of its loan book. L&T Finance shares are currently trading around ₹269.85, with a market capitalization of approximately ₹69,050 crore. The company's P/E ratio is around 23.42, exceeding the median for the credit services industry.
Strategic Credit Tightening and Gold Loan Expansion
The company is actively refining its credit policies, implementing more stringent criteria for microfinance loans, including a strict approach to defaults. Underwriting capabilities are being enhanced via the Cyclops platform. Concurrently, L&T Finance is rapidly expanding its gold loan branch network, aiming to add 400-450 branches this fiscal year to boost cross-selling opportunities to its rural customer base. Despite potential industry challenges in gold loans, such as price volatility and regulatory changes, L&T Finance is leveraging its digital operations and in-house origination platform. The company is also taking a cautious stance in the SME loan segment, tightening credit guidelines and using the Cyclops platform for detailed risk assessment, citing concerns over energy prices and agricultural uncertainties. The loan book is balanced, with about 60% secured loans and 40% unsecured loans, and new products like 'Partially Collateralized Business Loans' are being introduced to improve yields.
Valuation Concerns and Sector Headwinds
Despite positive growth signals, L&T Finance's current valuation warrants attention. Its trailing twelve-month P/E ratio of about 23.68 is considerably higher than the credit services industry median of 13.06, suggesting a potential premium. The stock's GF Value™ of ₹231.28 is also significantly lower than its current trading price of ₹281.30. While the company is focused on retail lending and technology, its exposure to the SME segment, alongside macroeconomic uncertainties like energy price volatility and agricultural risks, presents ongoing challenges. L&T Finance's sales growth over the past five years has been modest at 6.05%, and its return on equity over the last three years has been low at 10.8%. The company's interest coverage ratio is also low, which could become a concern in a rising interest rate environment.
Long-Term Vision: Growth and Investment Strategy
L&T Finance's 'Lakshya 2031' plan targets over 20% book growth, aiming for a return on assets between 3.0-3.2% and a return on equity of 16%-18%, with credit costs expected to stay below 2%. The company has achieved record annual profit after tax and seen a substantial increase in retail disbursements. Future plans include expanding its payments platform, scaling its gold loan business, and further utilizing AI for underwriting. The recent approval to raise up to Rs 1,23,500 crore through non-convertible debentures highlights a well-capitalized strategy for future growth.