L&T Finance’s retail portfolio expansion is on track, but credit cost, asset quality need tracking

Disbursements in the retail loan portfolio rose a strong 25% year-on-year (YoY) to ₹11,193 crore, driving a 34% expansion in the company’s retail book size. The growth spans across all retail sectors, encompassing farm equipment, microfinance, two-wheeler finance, and consumer loans. While the growth in the retail loan book moderated sequentially, analysts attributed this to seasonality.

The company is concentrating its efforts on rural markets in its retail book diversification, launching new products and broadening its geographical reach. Notably, it introduced kisan suvidha top-up loans and refinancing options for farmers to boost customer retention.

Under its Lakshya 2026 strategy, L&T Finance aims for a loan mix with over 80% in the retail segment. As of June, the retail portfolio comprised approximately 82%.

This uptick in the retail business contributed to the stable NIM, which was unchanged sequentially at 9.89% in Q1. However, management foresees a 30-40 basis point increase in cost of funds over the next two quarters, which warrants monitoring. In asset quality, the company’s retail gross non-performing assets (NPAs) showed improvement, with gross stage 3 assets dropping to 3.21% in Q1 from 3.41% in Q4FY23 and 3.61% in Q1FY23.

Nevertheless, L&T Finance’s Q1 performance did not enthuse investors, and its stock has dropped nearly 4% since Thursday. Near-term concerns include a potential drag on the overall asset under management growth due to the ongoing rundown on the wholesale book. Over the past few years, L&T Finance has been reducing its exposure and offloading its wholesale book, a process in which greater-than-expected write-offs and recovery uncertainties may pose risks.

Further potential obstacles include the company’s expansion into unsecured businesses and rural markets, where a monsoon-induced slowdown could affect asset quality and growth. An increase in credit costs could also pose challenges. “Although we model a moderate opex at 4.3-4.2%, credit cost is likely to inch up to 3.4% due to an increase in the share of unsecured loans in the retail portfolio," noted a report by Kotak Institutional Equities.

Despite these concerns, the company’s prospects remain promising due to favourable credit demand and increasing return on assets (RoA). With ample cross-selling opportunities, the company can mitigate business seasonality. “While the balance sheet retailization may boost NIMs, in turn aiding RoA expansion, excess capital on the balance sheet would imply return on equity restricting to 12% and RoAs at about 2.2% by FY25E," said analysts at Elara Securities (India).