India's Rural Demand And Digital Lending Will Unlock Potential

Key Takeaways

• Expanding digital initiatives, partnerships, and AI-driven credit processes are driving down costs, growing new customer segments, and enhancing profitability.
  
• Strengthening rural demand, successful gold loan integration, and improved global funding access are supporting diversified, stable loan growth and earnings.
  
• Heavy microfinance exposure, tech reliance, funding risks, and fintech competition could constrain asset quality, margin expansion, customer growth, and long-term profitability.

Catalysts

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

• The company's core retail lending businesses are expected to benefit from strengthening rural demand and expanding consumption due to favorable monsoons, improved crop yields, and India's ongoing demographic dividend, which should drive loan book growth and revenues in upcoming quarters.
  
• Ongoing digital transformation-with AI/ML-powered credit underwriting (Project Cyclops) being rolled out across all lending products-has already begun reducing credit costs and is expected to further lower risk costs and improve net margins as the portfolio shifts toward prime and near-prime customers.
  
• Fast-growing digital partnerships with platforms like Amazon Pay, CRED, and PhonePe are scaling up personal loans disbursement at lower acquisition costs versus traditional channels, which should support topline growth and enhance overall profitability by improving cost-to-income ratios.
  
• The company's successful acquisition and rapid integration of a high-yield gold loan franchise is expected to expand its reach, enable significant cross-sell opportunities to an existing large customer base, and accelerate branch-led revenue growth-all while maintaining focus on secured lending to stabilize earnings.
  
• Recent attainment of international investment grade ratings opens new, diversified global funding channels at competitive costs, potentially reducing overall funding expenses and supporting net interest margin expansion as the asset book grows.

L&T Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming L&T Finance's revenue will grow by 30.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.1% today to 27.8% in 3 years time.
• Analysts expect earnings to reach ₹48.5 billion (and earnings per share of ₹17.88) by about July 2028, up from ₹26.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹42.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, down from 19.0x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 27.9x.
• 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

• Persistent challenges in microfinance asset quality-especially in geographies like Karnataka and risks of repeat disruption in Bihar or other states-could prevent a return to normalized credit costs, straining profitability and raising credit cost volatility for longer than anticipated, thus impacting net earnings.
  
• Heavily increased repeat lending to existing customers in several segments, particularly microfinance, risks concentration and over-leveraging within the customer base, which may suppress new customer acquisition, limit growth in quality assets, and expose the loan book to cyclical vulnerabilities, thereby constraining sustainable revenue growth.
  
• Reliance on technological solutions (e.g., Cyclops and Nostradamus platforms) for risk mitigation and underwriting, while promising, could introduce model risk, operational risk, and technology implementation challenges; any failures or inaccuracies could result in asset quality slippage or operational disruptions, thereby affecting margins and earnings stability.
  
• The ongoing dependence on wholesale and market borrowings, as well as the significant portion of unresolved security receipts (SRs) tied to legacy wholesale/infrastructure assets with uncertain resolution timelines, exposes the company to interest rate risk, funding volatility, and limits capital redeployment into higher-margin retail assets, potentially capping returns and net interest margin improvement.
  
• Intensified competition from fast-growing fintechs and digital lenders-especially in personal loans, SME, and digital origination channels-could drive margin compression, increased customer acquisition costs, and reduced cross-sell effectiveness, threatening both top-line growth and long-term profitability in key segments.

Valuation

• The analysts have a consensus price target of ₹218.105 for L&T Finance based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be ₹174.3 billion, earnings will come to ₹48.5 billion, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 14.2%.
• Given the current share price of ₹203.4, the analyst price target of ₹218.11 is 6.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.