Rationale

 The ratings for L&T Finance Limited (formerly L&T Finance Holdings Limited; LTF) favourably factor in the improved granularity of the loan book with increased share of retail loans in the portfolio mix (96% as on September 30, 2024, as compared with 88% as on September 30, 2023) in line with the long-term strategy (Lakshya 2026) to increase the overall retail share to >95%. This increase in share of retail loan book is driven by 28% YoY growth in retail portfolio and 56% YoY decline in wholesale portfolio during the period (September 30, 2023 to September 30, 2024). ICRA has also taken note of the improvement in earnings profile of the company with healthy indicators due to increase in share of higher yielding retail assets in the portfolio mix with return on average managed assets (RoMA) of 2.6% in H1FY2025 compared with 2.2% for H1FY2024 (2.2% in FY2024), though the sustainability of the same would be important. The ratings also factor in the comfortable capitalization profile, strong liquidity profile supported by a diversified borrowing mix and good financial flexibility. ICRA takes note of the moderate to high risk profile of the LTF’ exposure towards unsecured rural finance, personal loan finance and small and medium enterprise (SME) finance, which accounted for ~42% of the loan book as on September 30, 2024 (39% on September 30, 2023). As per ICRA, managing asset quality in the relatively higher yielding unsecured products and recoveries from the outstanding SRs shall remain a key monitorable. The rating however continues to draw comfort from the company’s market share and track record of sustainable business performance in retail loan products such as Farmer Finance, Two-wheeler and Rural Business Finance, which constitutes majority proportion of retail book. The reported asset quality has been improving over the past few years with reported gross stage 3 and net stage 3 of 3.2% and 1.0%, respectively, as on September 30, 2024 from 4.1% and 2.0% respectively as on March 31, 2022) owing to no significant increase in slippages across asset classes and some reduction on account of sale of stressed or vulnerable wholesale accounts to asset reconstruction companies (ARCs). In addition to the stage 3 provision cover of 71%, the company also maintains a provision cover of 60% on stage 2 retail assets (2.5% of retail book) as on September 30, 2024. The ratings continue to draw significant strength from LTF’s parentage, with Larsen & Toubro Ltd. (L&T, rated [ICRA]AAA(Stable)/[ICRA]A1+) holding 66.3% equity in the company as on September 30, 2024 and the expectation that support from L&T in the form of capital, liquidity support and management oversight, would continue going forward, if needed. In the past, L&T has demonstrated support in the form of equity capital infusion, with latest being capital infusion of ~Rs. 1,900 crore (out of total rights issue of Rs. 3,000 crore) in FY2021. ICRA has withdrawn the rating assigned to the Rs. 1,624.70 crore non-convertible debenture programme, Rs. 395.00 crore market linked debenture programme, Rs. 140.00 crore subordinated debt programme as there is no amount outstanding against the rated instrument and the withdrawal is in accordance with ICRA’s policy on withdrawal of credit ratings