L&T Finance Holding: Management meeting takeaways

3 Apr 2024 , 10:37 AM

Analysts of IIFL Capital Services recently met with the new MD & CEO of LTFH, Sudipta Roy, and CFO to discuss his strategy and vision for LTFH. Having achieved its Lakshya 2026 targets on retail book two years in advance, LTFH is now gearing to deliver ~2.8%-3% ROAs on a consolidated basis by FY26. Incrementally, the company intends to grow the share of prime customers and is building a multidimensional credit underwriting engine for better risk assessment. Analysts of IIFL Capital Services anticipate a period of transition before the lower opex and credit costs associated with prime customers can offset margin pressures; like in case of MMFS. Retain ADD with TP of Rs165, implying 1.4x FY26 P/B for ROA/ROE of 2.8%/13.5% with excess capitalisation constraining ROEs.

Growing focus on prime customers and sharpening underwriting:

Key focus for LTFH in the coming years is to increase the share of secured and prime customers. This is evident from the rising share of prime customers in 2W and the company shifting focus from self-employed PL to salaried PL. The company is investing to build a multi-dimensional credit underwriting engine that incorporates data from bureaus, account aggregators and alternate sources, with promising initial results through better credit selection.

Widening customer acquisition funnel and strengthening talent pool:

To widen its customer acquisition funnel and drive cross-sell, LTFH is investing to improve its brand positioning (advertising and marketing), digitising operations and expanding product offerings. LTFH is strengthening its talent pool by hiring across tech, digital, credit, branding and products and has also formed an advisory council to advise and guide the senior management. The company has set up a team of developers to digitise operations and customer journeys on the app.

Retain ADD:

As LTFH reduces the share of unsecured loans (53% of retail) and increases focus on prime customers, analysts of IIFL Capital Services anticipate a period of transition before lower opex and credit costs can offset margin pressures, like in case of MMFS. LTFH’s ROEs are expected to be constrained at ~13.5% by FY26 due to low leverage and consequently retain analysts of IIFL Capital Services ADD rating.