Technical Indicators Signal Bullish Momentum
The primary catalyst for the upgrade stems from a significant shift in the technical grade, which moved from mildly bullish to bullish. Key technical signals underpinning this change include a bullish stance in Bollinger Bands on both weekly and monthly charts, alongside daily moving averages that continue to support upward momentum. While the MACD remains mildly bearish on a weekly basis, it is bullish monthly, indicating a longer-term positive trend.
Other technical tools such as the KST (Know Sure Thing) indicator show a mixed picture with mildly bearish weekly readings but bullish monthly trends. The Dow Theory readings are mildly bullish weekly but mildly bearish monthly, suggesting some short-term caution amid longer-term optimism. The On-Balance Volume (OBV) indicator is mildly bullish weekly, reflecting accumulation by investors, though it shows no clear trend monthly.
Overall, these technical signals collectively justify the upgrade, signalling that L&T Finance Ltd is entering a phase of stronger price momentum and investor interest.
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Valuation Adjusted to Reflect Expensive but Justifiable Pricing
L&T Finance Ltd’s valuation grade has shifted from very expensive to expensive, reflecting a recalibration of market pricing relative to its earnings and growth prospects. The company currently trades at a price-to-earnings (PE) ratio of 26.52, which, while elevated, is more reasonable compared to peers such as Billionbrains (PE 55.84) and ICICI Pru Life (PE 71.3).
Other valuation multiples include an EV to EBITDA of 15.69 and a PEG ratio of 2.61, indicating that the stock is priced at a premium relative to its earnings growth. The price-to-book value stands at 2.85, signalling that investors are willing to pay nearly three times the book value for the company’s shares. Dividend yield remains modest at 0.90%, consistent with the sector’s typical payout levels.
Return on capital employed (ROCE) and return on equity (ROE) are 8.59% and 10.24% respectively, reflecting moderate profitability. While these returns are not exceptional, they support the company’s current valuation given its market position and growth trajectory.
Strong Financial Performance Bolsters Confidence
The upgrade is further supported by L&T Finance Ltd’s impressive financial results for Q3 FY25-26. The company reported its highest-ever quarterly PBDIT at ₹2,778.18 crores and PAT at ₹759.82 crores, alongside record net sales of ₹4,578.27 crores. These figures underscore the company’s operational strength and ability to generate consistent profits.
Institutional investors have taken note, with holdings rising to 21.99%, an increase of 1.26% over the previous quarter. This heightened institutional interest often signals confidence in the company’s fundamentals and future prospects.
Market performance has been exceptional, with L&T Finance Ltd delivering a 125.82% return over the past year, vastly outperforming the BSE500 index return of 14.40%. Over longer horizons, the stock has generated returns of 238.79% over three years and 491.13% over ten years, highlighting its strong track record.
Financial Trend and Growth Considerations
Despite the positive quarterly results, some caution is warranted regarding the company’s long-term growth trajectory. Net sales have grown at a modest annual rate of 4.90%, while operating profit has increased by 4.36% annually. Profit growth over the past year was 10.6%, which, while respectable, does not fully justify the current premium valuation on its own.
The company’s PEG ratio of 2.6 suggests that the stock is somewhat expensive relative to its earnings growth, indicating that investors are pricing in expectations of sustained improvement or other qualitative factors such as market position and risk management.
Comparative Performance and Market Context
When compared to its peers in the NBFC sector, L&T Finance Ltd’s valuation is competitive. While some peers like ICICI Lombard and SBI Cards trade at higher multiples, others such as REC Ltd and Bajaj Housing are valued more conservatively. This positioning reflects L&T Finance’s blend of growth potential and established market presence.
The stock’s recent price action has been stable, with a current price of ₹300.00, slightly below the previous close of ₹303.40. The 52-week high stands at ₹329.40, while the low is ₹132.45, indicating significant appreciation over the past year. Daily trading ranges have been narrow, with intraday highs and lows at ₹304.15 and ₹296.45 respectively, suggesting consolidation at elevated levels.
Technical and Fundamental Alignment Supports Upgrade
The convergence of improved technical indicators, solid quarterly financials, and a reasonable valuation adjustment has prompted the upgrade to a Buy rating with a Mojo Score of 72.0. This score reflects a positive outlook across quality, valuation, financial trend, and technical parameters.
While the company’s market cap grade remains modest at 2, its strong institutional backing and market-beating returns provide a compelling case for investors seeking exposure to the NBFC sector with a blend of growth and stability.
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Risks and Considerations for Investors
Despite the positive outlook, investors should remain mindful of certain risks. The company’s long-term growth rates for net sales and operating profit are relatively modest, which may limit upside potential if growth does not accelerate. Additionally, the premium valuation metrics imply that any slowdown or adverse market conditions could lead to price corrections.
Furthermore, the NBFC sector is subject to regulatory and macroeconomic risks, including interest rate fluctuations and credit quality concerns, which could impact future earnings and valuations.
Nonetheless, the strong institutional interest and recent financial performance provide a buffer against these risks, making L&T Finance Ltd a compelling buy for investors with a medium to long-term horizon.
Conclusion: A Balanced Upgrade Reflecting Strength and Caution
The upgrade of L&T Finance Ltd from Hold to Buy is a reflection of improved technical momentum, solid quarterly financial results, and a valuation that, while still expensive, is more justified relative to peers and historical levels. The company’s market-beating returns and increased institutional holdings further reinforce the positive sentiment.
Investors should weigh the company’s moderate growth rates and premium valuation against its strong operational performance and technical indicators. For those seeking exposure to a well-established NBFC with a bullish technical outlook and improving fundamentals, L&T Finance Ltd now presents an attractive opportunity.
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