Regulatory Shifts And Fintech Competition Will Pressure Long-Term Performance

Key Takeaways

• Regulatory crackdowns and asset quality issues in rural and microfinance threaten profitability, with elevated credit costs and margin pressure likely to persist.
  
• Rising fintech competition and weaker rural demand risk dampening growth, while the narrowed business focus intensifies exposure to market downturns.
  
• Strategic digital investments, retail segment expansion, strong group backing, and fintech partnerships position L&T Finance for sustained growth, improved asset quality, and margin resilience.

Catalysts

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

• Ongoing regulatory interventions targeting microfinance and unregulated lending across key states (such as Karnataka and Tamil Nadu) threaten to destabilize L&T Finance's crucial rural and microfinance segments, leading to protracted periods of collection inefficiency and persistently elevated credit costs-this will exert sustained pressure on net margins and earnings stability well into the coming years.
  
• Rapid advances in digital platforms and the aggressive expansion by fintechs are accelerating customer disintermediation, undermining L&T Finance's long-term access to underpenetrated retail segments, eroding established revenue streams, and potentially compressing the company's net interest margins as competition escalates.
  
• Weakening demographic tailwinds, such as the slowing growth of rural incomes and the risk of adverse shifts in age distribution, could cause a structural slowdown in retail credit demand, ultimately depressing loan book growth rates and future revenue expansion for L&T Finance.
  
• Persistent asset quality challenges, especially in rural and microfinance portfolios, signal that credit costs and provisioning needs may remain structurally higher, impairing any prospect of sustained improvement in return on assets and constraining overall profitability for several years despite current technology initiatives.
  
• The company's narrowed focus following the scale-down of non-core businesses leaves it acutely exposed to downturns in its remaining lending segments, magnifying revenue volatility and limiting any offsetting growth opportunities, which will intensify downside risk to both revenue and net margin performance over the long-term.

L&T Finance Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on L&T Finance compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming L&T Finance's revenue will grow by 21.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 34.1% today to 32.1% in 3 years time.
• The bearish analysts expect earnings to reach ₹44.2 billion (and earnings per share of ₹17.68) by about July 2028, up from ₹26.4 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 bearish analyst cohort, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, down from 19.3x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 28.7x.
• 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 14.28%, as per the Simply Wall St company report.

L&T Finance Future Earnings Per Share Growth

Risks

• The company's sustained investment in digital transformation projects such as Project Cyclops for AI-driven credit assessment and Project Nostradamus for real-time portfolio risk management is already improving asset quality and reducing credit costs, which could strengthen long-term profitability and return on equity.
  
• L&T Finance is demonstrating the ability to expand its loan book in high-yield, secured retail segments such as personal loans (up 42% YoY), SME finance (up 37% YoY), and micro LAP, as well as entering gold loans, which diversifies revenue streams and supports robust revenue growth even amid sector headwinds.
  
• The firm's strong parentage from the L&T Group ensures access to low-cost capital and brand trust, providing a competitive advantage for scaling retail lending and weathering capital adequacy or regulatory changes, which could help protect and grow net margins.
  
• Despite transitory challenges in microfinance and rural finance due to regulatory changes and weather shocks, management expects a resumption of growth and normalization of credit costs by H2 FY '26, indicating that the worst of asset quality issues may be behind and earnings stability could return.
  
• Emphasis on expanding into underpenetrated geographic markets, growing prime and near-prime customer segments, and leveraging major fintech partnerships for personal loans is likely to drive sustainable loan book growth and customer acquisition, supporting long-term revenue and asset quality improvements.

Valuation

• The assumed bearish price target for L&T Finance is ₹132.0, which represents the lowest 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹225.0, and the most bearish reporting a price target of just ₹132.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹137.6 billion, earnings will come to ₹44.2 billion, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 14.3%.
  
• Given the current share price of ₹206.22, the bearish analyst price target of ₹132.0 is 56.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.