Target: ₹209

CMP: ₹166.70

Had it not been for one-time prudential provisions on notional loss on security receipts (SR) of ARC book at ₹175 crore, L&T Finance Holdings’ (LTFH IN) Q4-PAT would have exceeded our estimates. For Q4, margin accelerated given lower funding costs with continued wholesale piece rundown.

While retailisation of balance sheet at 94 per cent is reflecting on yields and book expansion, the uptrend should prop FY25 earnings momentum. L&T Finance also saw robust asset quality improvement, with credit costs falling to 2.4 per cent. To elaborate, with total provisions of ₹720 crore for notional loss on SR investments, o/w ₹550 crore pertains to provisions towards on-book infra and remainder ₹175 crore provisions are a buffer on fair valuation on investments. Such provisions are one-time, prompting us to retain RoA estimates.

The next round of valuation re-rating is an inevitable outcome of execution and enhancement of return profile. The halving of wholesale piece and vigorous 4x incremental addition in retail AUMs in FY22-23 with anticipated retail share at 98 per cent may drive NIMs+ fees (140-150bps expansion), operating leverage with opex/AUM at average 4.9 per cent, promising <4% GNPA, steady-state 2.7 per cent credit cost, in turn driving RoA to 2.8 per cent and RoE to 14 per cent by FY26.

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