Projects Cyclops And Nostradamus Will Improve Risk Management And Reduce Credit Costs

Key Takeaways

• Strategic technology initiatives and partnerships are enhancing risk management and expanding customer acquisition, potentially boosting revenue and margins.
  
• Focus on prime customers and diversification in product offerings aim to reduce credit risk and enhance revenue growth.
  
• Economic challenges and sector-specific pressures threaten L&T Finance's revenue and earnings growth, with urban decline potentially outweighing rural recovery efforts.

Catalysts

A non-banking financial company, engages in the provision of various financial products and services in India.

• L&T Finance's technology initiatives, such as Project Cyclops and Project Nostradamus, aim to improve credit underwriting and portfolio management, which could enhance revenue and net margins through better risk management and reduced credit costs.
  
• Strategic partnerships with platforms like Amazon Pay and PhonePe are poised to enhance customer acquisition and loan origination, potentially boosting future earnings by expanding their revenue base.
  
• The shift towards prime customers in segments like 2-wheeler and Farm Equipment Finance could reduce credit risk and improve net margins as a result of lower credit costs.
  
• The gradual scale-up of new products like Micro LAP, warehouse receipt finance, and supply chain finance indicates potential for revenue diversification and growth, positively impacting overall earnings.
  
• Efforts to increase insurance penetration and other fee-based income streams represent a forward-looking strategy to support NIM plus fee income, which could stabilize and enhance net margins.

L&T Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming L&T Finance's revenue will grow by 27.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.3% today to 28.4% in 3 years time.
• Analysts expect earnings to reach ₹46.6 billion (and earnings per share of ₹18.59) by about January 2028, up from ₹25.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2028 earnings, up from 14.1x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 25.2x.
• Analysts expect the number of shares outstanding to grow by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.95%, as per the Simply Wall St company report.

L&T Finance Future Earnings Per Share Growth

Risks

• The global macroeconomic uncertainty and high policy rates in the U.S. could potentially impact L&T Finance's financial assets and liquidity, affecting future earnings growth.
  
• Domestic GDP growth has slowed, influenced by delayed government spending and credit squeezes, which could pressure L&T Finance's revenue streams.
  
• Rising inflation levels and decreasing urban consumption due to reduced disposable income may impact L&T Finance's growth in consumer finance, affecting net margins.
  
• The company's increasing reliance on rural recovery might be insufficient to offset urban consumption declines, risking their projected revenue growth targets.
  
• Challenges in the microfinance sector, increased credit costs, and the need to utilize provisions hint at potential risks to net earnings if headwinds persist.

Valuation

• The analysts have a consensus price target of ₹178.71 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 ₹237.0, and the most bearish reporting a price target of just ₹110.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹163.7 billion, earnings will come to ₹46.6 billion, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 13.9%.
• Given the current share price of ₹146.16, the analyst's price target of ₹178.71 is 18.2% 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.