Morgan Stanley Is Underweight On L&T Finance Despite A Target Hike — Check Bull, Bear, Base Case

Morgan Stanley has raised its price target on L&T Finance Ltd. to Rs 160 from Rs 143, citing improved earnings visibilitya nd operating assumptions. However, the brokerage has retained its 'Underweight' stance, underlining continued concerns over valuations, and return ratios.

Under its base case, Morgan Stanley values L&T Finance at 1.2x March 2028 book value, arriving at the Rs 160 price target. The bull case of Rs 355 assumes faster retail asset growth, stronger margin expansion and lower credit costs. In contrast, the bear case of Rs 84 factors in slower loan growth, higher delinquencies and sustained pressure on profitability.

Morgan Stanley said it has upgraded its FY26-FY28 earnings per share (EPS) estimates by 4-4.3%. The upgrade is primarily driven by a combination of slightly higher margins and tighter cost control. The brokerage raised its net interest margin (NIM) assumption to 9.0% from 8.9%, while cutting operating cost estimates by 1–2% over the same period.

At the same time, it increased credit cost assumptions to an average 2.34%, from 2.3% earlier, reflecting lingering stress in parts of the retail and microfinance lending segments.

The brokerage also rolled forward its valuation by six months to March 2027, which, along with the earnings upgrades, led to a 12–13% increase in its scenario values and price target.

Despite the improved numbers, Morgan Stanley remains cautious on the stock’s medium-term prospects. A key concern is the slowing microfinance (MFI) credit cycle, which the brokerage believes will cap overall retail loan growth.

It expects L&T Finance’s retail loan book to grow at around 20% CAGR over FY25–FY28, lower than earlier expansion phases. The brokerage also flagged excess capital and low return on equity (ROE) as structural issues, arguing that meaningful ROE recovery is likely to be delayed.

Morgan Stanley added that current valuations appear to be pricing in a faster recovery in profitability than is likely, given the pace of asset quality normalisation and margin improvement.

The risk-reward update by the brokerage firm reflects a reassessment of earnings momentum, rather than a shift in conviction on the stock itself.

The brokerage also noted that L&T Finance’s business is entirely India-focused, making performance closely tied to domestic credit conditions. While this provides long-term growth opportunity, it also increases vulnerability to cyclical slowdowns in retail lending.