L&T Finance's strategic moves paying off, strong returns & growth expected

L&T Finance is strengthening its market position with a focus on asset quality and leveraging AI-powered platforms like Project Cyclops

L&T Finance (LTF) continues to pursue a strategy of balancing growth with maintaining asset quality while utilising its proprietary platform, Project Cyclops, to maintain credit discipline. Since March 2025, the L&T Finance stock has delivered 60 per cent returns. 

The non-banking financial company (NBFC), LTF is focused on acquiring high-quality customers and mai­n­taining collection efficiency. It is leveraging technology through Project Cyclops, an AI-powered underwriting engine. All 2-wheeler disbursements are processed through Cyclops, and asset quality has seen improvement, with net defaults dropping to 0.34 per cent in Jun’25 from 2.36 per cent in Dec’24. The company is rolling out Cyclops to Farm Equipment and SME Finance segments, with full deployment targeted by end of Q2’FY26. 

LTF has also completed integration of Paul Merchants Finance’s gold loan business within two months after acquisition, adding 130 branches, and 700-plus employees to build a gold loan book of ₹ 1,300 crore. This will strengthen the retail franchise and offer cross-selling potential across the 26 million customer base. The L&T group-owned finance provider targets scaling up to 300+ gold loan branches by end-FY26. 

Given investment grade ratings of ‘BBB-/Positive’ by S&P Global Ratings and ‘BBB-/Stable’ by Fitch Ratings, LTF has access to capital at competitive costs. In a scenario of lower interest rates and stronger consumption trends, LTF could be seeking high growth while maintaining high asset quality with an acceleration expected in the second half of FY26. 

LTF is expanding its customer base by deepening penetration in segments and broadening geographical presence. 

In rural finance, disbursements are gaining momentum. The 2W finance is seeing traction. Farm Finance may pick up pace in the ongoing kharif season, while the personal loan portfolio is risk-calibrated to ensure prudent growth. Digital partnerships with Amazon, CRED, and PhonePe delivered ₹650 crore of personal loan disbursements in Q1’FY26 (₹1,240 crore till end Aug). 

Net interest margins (or NIMs) may remain under pressure through FY26, as there’s a reduced share of high-yielding MFI (microfinance) loans in the portfolio. But this will be at least partially offset by a decline in borrowing costs. The shift toward high-quality assets is expected to enhance risk-adjusted returns. The expansion of the new gold loan business, a high-yield segment, will support overall yields. 

LTF has outperformed peers in terms of maintaining asset quality with disciplined underwriting and focus on secured assets and prime customer profiles. Credit costs remain slightly elevated due to a slower-than-expected recovery in Karnataka, but LTF is seeing steady improvement, with better collection efficiency. 

LTF has cumulatively utilised ₹ 700 crore of macro-provisions, with ₹400 crore utilised in FY25 and ₹ 300 crore in Q1FY26. It has an unutilised buffer of ₹275 crore (Jun’25). It expects further utilisation of macro-provisions to address Karnataka. Over FY27-FY28, the company will re-build provision buffers. As GNPA (gross non-performing asset) is expected to improve to 2.5 per cent in FY26 from 3.3 per cent in FY25, credit costs are expected to moderate to 2.7 per cent from 2.8 per cent in FY25. 

The flagship Project Cyclops, an AI-powered credit underwriting engine, and Project Nostradamus, a predictive risk management platform, are set to revolutionise credit assessment and portfolio monitoring capabilities for LTF. In the 2W loan portfolio, Cyclops has delivered significant improvements in asset quality. Full deployment across all segments is expected by FY26-end. 

There is industry-wide stress in non-MFI retail segments like unsecured business loans and micro-LAP (loan against property), but LTF’s asset quality is better than industry peers. It targets reducing the MFI loans in the loan mix to 20-22 per cent over the long term. Risks like stress in microfinance lingering beyond the next two quarters, asset quality deterioration and unanticipated near-term pressure on NIM and fee incomes are monitorables. That said, LTF could deliver PAT CAGR of 25 per cent through FY25-27 with return on assets of 2.7 per cent and return on equity of 14 per cent. 

According to Bloomberg, 5 of the 7 analysts polled since the start of August are bullish, while one each is either bea­rish or neutral on the stock. Their average one-year target price is ₹230.57 vs Thursday’s close of ₹227.85 on the BSE.