India's Digital Transformation And Urbanization Will Expand Retail Lending

Key Takeaways

• Rapid improvements in credit costs, digital partnerships, and cross-selling in new geographies are set to drive superior margins, revenues, and scalable loan growth.
  
• Resolution of legacy assets has the potential to generate significant unmodeled cash flows, enabling higher provisions or shareholder payouts, further enhancing profitability.
  
• Dependence on wholesale funding, lagging digital transformation, asset quality issues, and rising regulatory and socio-economic risks threaten profitability and long-term competitiveness.

Catalysts

A non-banking financial company, provides various financial products and services in India.

• Analyst consensus expects significant credit cost reductions from Project Cyclops, but recent data shows initial results are even stronger, with net non-starter rates dropping rapidly; at scale, this could drive structural credit cost improvement below current 2.3%-2.5% targets, materially boosting net margins for multiple years ahead.
  
• Analysts broadly expect the gold loan business to drive incremental secured yields, but management targets rapid scaling to 300+ branches by FY26 and extensive cross-selling into a large rural customer base, which could unlock high double-digit retail AUM growth and a much larger fee and interest income tailwind than currently modeled.
  
• The company is on the cusp of leveraging new digital partnership channels-such as Amazon Pay, PhonePe, and CRED-which deliver lower acquisition costs and higher scalability; as digital origination rises to over half of all personal/SME loans, customer growth and operating leverage could accelerate, supporting a step-up in revenue and profitability.
  
• As India's economy formalizes and credit demand rises, L&T Finance's pivot to newly-penetrated under-leveraged geographies (Eastern Maharashtra, AP, Telangana, Assam, Western UP) combined with a prime customer focus positions the company for long-term outperformance in loan growth and best-in-class asset quality, fueling sustained increases in revenues and earnings.
  
• Overlooked optionality from the resolution of legacy wholesale (SR) assets could unlock large one-off cash flows over FY27-FY28, enabling outsized provisioning buffers or shareholder payouts, which is likely to be a substantial EPS and book value catalyst not yet reflected in current valuations.

L&T Finance Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on L&T Finance compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming L&T Finance's revenue will grow by 35.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 34.1% today to 27.4% in 3 years time.
• The bullish analysts expect earnings to reach ₹52.8 billion (and earnings per share of ₹21.24) by about July 2028, up from ₹26.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, down from 19.9x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 28.4x.
• Analysts expect the number of shares outstanding to decline by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.21%, as per the Simply Wall St company report.

L&T Finance Future Earnings Per Share Growth

Risks

• Heightened competition from fintechs and digital lenders poses a threat to L&T Finance's long-term market share and can compress lending spreads, especially as digital origination partnerships are still nascent and the company's own digital transformation may lag behind more agile players, which could ultimately slow revenue growth.
  
• The company remains largely dependent on wholesale funding rather than lower-cost retail deposits, exposing it to increased interest expense risk if liquidity conditions tighten or if interest rates rise, negatively impacting net margins and overall profitability.
  
• Persistent asset quality challenges, particularly in rural and microfinance portfolios-as evidenced by repeat utilization of macro prudential provisions and ongoing PAR 31–90 issues-signal a structural vulnerability that could keep credit costs elevated and erode earnings over time.
  
• Increasing regulatory scrutiny and evolving norms for NBFCs require higher provisioning, capital adequacy, and stringent asset classification, leading to higher compliance costs that are likely to reduce profitability and possibly depress net income.
  
• Socio-economic and climate-related shifts, such as changing rural credit demand, regional policy shocks like those seen in Karnataka, and the volatility of customer repayment behavior, present ongoing credit risk management challenges that may lead to higher non-performing assets and increased provisioning, with a direct negative effect on earnings and return on assets.

Valuation

• The assumed bullish price target for L&T Finance is ₹253.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of L&T Finance's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹253.0, and the most bearish reporting a price target of just ₹140.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ₹192.6 billion, earnings will come to ₹52.8 billion, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 14.2%.
  
• Given the current share price of ₹213.51, the bullish analyst price target of ₹253.0 is 15.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.