Emkay Global Financial Services has maintained a "REDUCE" recommendation for L&T Finance Holdings (LTF), reflecting an informed caution despite recent business momentum. The firm has set a revised 12-month target price of Rs190 per share, upgraded by 6% from previous forecasts in light of the company's resilient first quarter and dynamic AUM and disbursement growth. Margin and profitability improvements are expected in the second half of the fiscal year as MFI stress wanes and new technological initiatives take root. Key risks and valuation headwinds remain, including macroeconomic uncertainties and elevated credit costs in the near term.

Emkay's Stance: Cautious Optimism, Maintain "REDUCE"

Recommendation Remains Unchanged
Emkay retains its "REDUCE" call on L&T Finance, reflecting the research house’s view that the current share price largely captures future growth and profitability. This stance is driven by a blend of anticipated moderation in credit costs, strong AUM expansion, and the potential for heightened volatility from the attrition of legacy wholesale loans and election-driven headwinds.

Target Price Upgraded
The revised target price is now Rs190, a 6% hike, attributed to incrementally better operational performance and marginally upgraded outlook for disbursement and margins. However, with a current market price of Rs203, the implied downside stands at approximately 6.4%, reinforcing a conservative outlook.

Robust Q1 FY26 Performance: Operational Metrics Shine

Assets Under Management Cross Rs1 Trillion
L&T Finance reported a milestone achievement with its consolidated AUM crossing Rs1.02 trillion, reflecting a 15% YoY growth led primarily by retail segments, comprising micro loans, gold loans, and diversified retail disbursals.

Retailization Accelerates
The company’s sharp pivot from wholesale to retail lending continues, with retail AUM now accounting for 98% of the total book. The integration of the acquired gold loan business supported this surge, alongside advances in farm equipment, housing, and SME lending.

Profitability and Growth Metrics

Net profit for Q1FY26 registered at Rs7.01 billion, slightly under Emkay’s estimate, yet reflecting stable operational efficiency.

Disbursements in Q1 stood at Rs175.2 billion, up 17.5% QoQ.

Net Interest Margin (NIM) improved by roughly 7 basis points, benefiting from moderated cost of funds after an RBI rate cut.

Industry Dynamics: Macro Buffers and Credit Quality in Focus

Macro Buffer Utilization
L&T Finance drew down Rs3 billion from its macro prudential buffers in Q1 to address lingering MFI stress, with Rs2.25 billion still retained. The management intends to replenish these buffers through recoveries from the SR book as resolutions materialize over FY27-28.

Credit Cost and Asset Quality Trends

Credit costs for Q1FY26 were elevated at 2.53% but expected to normalize in H2 with the scaling of Cyclops—a tech-driven credit control program.

Asset quality ratios (GS3/NS3) remained steady at 3.31% and 0.99% respectively, underscoring relative portfolio stabilization.

Second Half Outlook: Momentum, Risks, and Management Guidance

Growth Guidance Maintained
Management maintains an ambitious outlook, projecting FY26 AUM growth at 22–25%, contingent on easing MFI stress, full deployment of technology upgrades, and robust festive demand.

Yield and Margin Trajectory
While the yield is expected to moderate by 20-30bps due to the pivot towards prime and near-prime customer segments, overall profitability could improve as credit costs subside and the retail book’s risk profile is enhanced.

Tech-Driven Transformation

Project Cyclops, now fully operational in two-wheeler and partially in tractor financing, has delivered notable improvements in early default rates, with further rollouts across product lines poised to advance risk controls.

Project Nostradamus, an AI-powered real-time portfolio monitoring tool, is scheduled for a beta launch, underpinning long-term asset quality initiatives.

Valuations: Fairly Priced with Limited Upside, Key Stock Levels

Valuation Multiples Signal Tapering Upside

At the CMP of Rs203, the stock trades at FY27E P/B of 1.6x and P/E of 13.3x, which Emkay deems close to fair value, given current market dynamics and competitive pressures.

The revision in the target price to Rs190 implies a P/B of 1.6x for FY27E, with downside risk at present levels.

Investor Positioning Table

Key Financial Forecasts and Metrics

Solid Topline Expansion, Improving Return Ratios Ahead

FY26-FY28E AUM growth is projected at 18.4% to 21.5%.

Earnings per share (EPS) expected to grow at 13.1% to 27.6% p.a. over FY26-28E.

FY26 and FY27 estimated RoEs are 11.3% and 13.6%, respectively, trending towards management’s long-term ambition of 15.6% by FY28.

Important Financial Benchmarks

Takeaways: Tactical Caution Despite Operational Resilience

Addressing the Upside and Risks
Emkay’s analysis recognizes L&T Finance’s transition towards a high-quality, retail-driven model and the demonstrable improvements in credit monitoring and collection efficiency. However, the call to “REDUCE” hinges on the limited valuation upside from current levels, persistent sectoral headwinds in microfinance, and the execution challenges tied to rapid tech-driven transformation.

Investor Considerations
Market participants should expect L&T Finance to deliver steady performance with gradually improving returns, but not enough to warrant aggressive accumulation at current market prices. Investors are advised to monitor key metrics—AUM growth, credit costs, RoA trajectory, and execution of tech initiatives—while staying vigilant to macro and regulatory developments that could materially shift the risk-reward calculus.

In conclusion, while the company exhibits durable operational progress and forward-thinking management, Emkay’s caution suggests patience for a more attractive entry point—or clear signs of sustained earnings surprise—before considering a more bullish stance on L&T Finance Holdings.