L&T Finance – Transformation-led re-rating in play
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L&T Finance represents a classic Vaikarya multi-bagger setup — a company with a legacy discount, mispriced due to short-term headwinds, yet executing a strategic transformation under new leadership to change its orbit towards Tier 1 NBFC. The company has transitioned into a retail-focused, cutting-edge tech-enabled lender with improving RoA, resilient asset quality, and high-conviction management.
Source: Trading Veiw
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As we highlighted in our December 2024 letter (see chart above), we closely tracked the MFI cycle, which was causing dislocations in stocks such as LTF – a potential multi-bagger over the years. We had a position under 2% in LTF at the beginning of 2025. We scaled up the position to 9+% by early April. With substantial gains over the last 3 months, we trimmed exposure due to SEBI’s 10% ceiling but continue to hold LTF as a core position for long-duration compounding.
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Beneath the near-term clouds of a microfinance credit cycle, we believe the market has been misunderstanding the speed and effectiveness of LTF’s transformation. The market? Still stuck on the lost decade till 2023 with the stock, followed by microfinance noise, and yesterday’s headlines.
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Meanwhile, the company has gone almost fully retail (97% of the loan book!), shut down its legacy wholesale business, and brought in a top-tier CEO from ICICI Bank who’s reshaping the house faster than anyone expected.
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The new LTF is using proprietary AI (tools called Cyclops and Nostradamus) to underwrite smarter and cut losses before they show up. In just one year, delinquency in two-wheelers has reduced by 120 bps, and high-risk loans were proactively flagged, and their share in new loans was reduced from 11% to 3%. Even farm indexed bounce rates improved from 159% to 38%. That’s not just cleanup — it’s a full-system upgrade. These outcomes, while not yet fully appreciated by the market, provide early evidence that LTF’s new tech-enabled approach is delivering tangible credit benefits. Regulatory tailwinds, such as the adoption of Account Aggregator frameworks, further strengthen LTF’s ability to compete effectively, even against many banks, given its low cost of funds (AAA rating).
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They're also entering high-ROA, low-risk products, such as gold loans (via a strategic acquisition), and launching micro-LAP. With 9 million active customers and growing, the cross-sell opportunity is massive and profitable. LTF isn’t just surviving the microfinance storm — it’s quietly becoming the last man standing with 3-lender cap. As weaker MFIs fade, LTF’s credit costs could fall fast, and what looks like a messy loan book today might be a great value in future.
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Here’s the kicker: even after delivering 2.44% RoA during peak MFI stress, the stock still trades at ~1.6x book and ~13x earnings — vs Tier 1 NBFCs trading at 3.5-4.5x book - not expensive for an NBFC, let alone one reinventing itself with tech, prime customer focus, and a shot at 3.0% RoA and nearly doubling the balance sheet over the next 3 years.
Source: Ace Equity. Stock prices indexed to 100 from respective turnaround years — Bajaj Finance (2011), Cholamandalam Finance (2014), L&T Finance (2023). Y-axis is in log scale.
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