L&T Finance Holdings coming with an IPO to raise Rs 1245 crore

23 Jul 2011 Evaluate

L&T Finance Holdings Limited

  • L&T Finance Holdings is coming out with a 100% book building; initial public offering (IPO) aggregating to Rs 1245 crore.
  • Up to 50% of the issue shall be allotted on a proportionate basis to Qualified Institutional Buyers ('QIBs') including 30% may be allocated Anchor Investors on a discretionary basis out of which one-third for domestic Mutual Funds.
  • The issue will open on July 27, 2011 and will close on July 29, 2011.
  • The shares will be listed on BSE and NSE.
  • The company has fixed a price band of Rs 51-59 per share. The face value of the share is Rs 10 and is priced 5.1 times of its face value on the lower side and 5.9 times on the higher side.
  • Joint Global Coordinators and Book Running Lead Managers (BRLMs) to the issue are JM Financial, Citigroup Global Markets India and HSBC Securities and Capital Markets (India); BRLM to the issue are Barclays and Credit Suisse. Equirus is the co-BRLM and Sharepro Services (India) is the Registrar to the issue.
  • Compliance Officer for the issue is N. Suryanarayanan.

Company Profile:

L&T Finance Holdings was originally incorporated as L&T Capital Holdings Limited on May 1, 2008 under the Companies Act, as a public limited company, to carry on the business of investment/finance. The company received the certificate of commencement of business on May 15, 2008. The company subsequently changed the name to L&T Finance Holdings Limited pursuant to a special resolution passed by the shareholders at a general meeting dated September 1, 2010. Pursuant to the change of name, a fresh certificate of incorporation was granted to the company by the Registrar of Companies on September 6, 2010. The company was registered with the RBI as an NBFC-ND-SI under Section 45-IA of the Reserve Bank of India Act, 1934, as a non-banking financial institution. The company has applied to the RBI for registration as a systemically important CIC

L&T Finance Holdings is headquartered in Mumbai and have a presence in 23 states in India. Till February, company had 890 points-of-presence across India, comprising 113 branch offices, 330 meeting centers, 33 KGSK centers (refer to the section titled 'Sales and Marketing', below) and 414 customer care centers across all business groups and segments. The network of offices has been established to cater to the growing business needs of the diverse customer base.

The company offers diverse range of financial products and services across the corporate, retail and infrastructure finance sectors, as well as mutual fund products and investment management services, through direct and indirect wholly-owned subsidiaries.

L&T Finance Holdings operations are arranged into four business groups, being the Infrastructure Finance Group, the Retail Finance Group, the Corporate Finance Group and the Investment Management Group.

L&T Finance Holdings holds the investments in Federal Bank Limited and City Union Bank approx. 5%; 8.90% interest in Invent ARC; 8.90% interest in the Invent/10-11/S3 Trust; 30% interest in NAC Infrastructure & Equipment.

IPO grading

This Issue has been graded by Credit Analysis & Research Limited and ICRA Limited, and has been assigned 'CARE IPO Grade 5' indicating 'Strong Fundamentals' and and 'IPO Grade 5' indicating 'Strong Fundamentals respectively.

Proceed is being used:

  • Repayment of inter-corporate deposit aggregate Rs 3,450 million issued by promoter to the company.
  • To augment the capital base of L&T Finance and L&T Infra, to meet the capital adequacy requirements to support the future growth in their business primarily the loan portfolio, compliance with regulatory requirements and for other general corporate purposes, including meeting the expenses of the issue.
  • To fund expenditure for general corporate purposes.

Industry Overview:

India's financial services industry consists of commercial banks, Non-Banking Finance Companies, specialized financial institutions, securities brokers, investment banks, insurance companies, mutual funds and venture capital funds. The RBI is the central regulatory and supervisory authority for the Indian financial system.

NBFCs are a group of institutions which perform the function of financial intermediation in a wide variety of ways. NBFCs are an important component of the overall Indian financial system. NBFCs accept deposits, draw loans and advances and finance leasing and hire purchase transactions.

Infrastructure is a core industry and has to be built up efficiently with adequate investments. Financial institutions, public sector banks and other public sector institutions, private banks, foreign banks and multilateral development institutions are the primary lenders to this industry. In February 2010, the RBI introduced IFCs as a new category of infrastructure funding entities.

Retail Finance Industry in India has grown effectively providing financial assistance to the key sectors thereby contributing to the over economic growth. The retail finance industry provides finance to Construction, Transport Equipment Finance, Rural Finance, Micro Finance etc.

The financial products in India are distributed through corporate houses specialized in broking and distribution, as well as by individuals. The key financial products are equity and futures and options, mutual funds, life insurance policies, fixed deposits of NBFCs and corporate and general insurance policies (such as health insurance and motor insurance).

Mutual Fund industry has grown significantly over the past decade. Many Asset Management Companies and Banks have entered into this industry. In July 1993, Kothari Pioneer (now merged with Franklin Templeton) became the first registered private sector mutual fund. The number of mutual fund providers steadily increased and many foreign mutual funds started setting up funds in India. The industry also witnessed a phase of consolidation among privately owned mutual fund providers.

Pros and strengths:

Diversified and balanced mix of high growth businesses: L&T Finance Holdings has highly diversified business model covering a variety of many complementary, high growth business segments across four core business groups. The company offers a broad spectrum of financial products and services and also caters to the needs of a diverse customer base, from construction equipment hirers, truck owners, farmers and shopkeepers in the small-business segment, to medium-sized vendors, dealers, contractors and fleet owners and large infrastructure developers and companies, including multi-national corporations. The business model includes infrastructure finance, construction equipment finance, transportation equipment finance, rural products finance, microfinance, corporate loans and leases, supply chain finance, capital markets finance, the distribution of financial products and investment management products and services.

Strong distribution network and Pan India presence: The company has established a presence in 23 states in India. The company was having around 900 points-of-presence across India, comprising 113 branch offices, 330 meeting centers, 33 KGSK centers (refer to the section titled 'Sales and Marketing', below) and 414 customer care centers across all business groups and segments. The network of offices has been established to cater to the growing business needs of the diverse customer base. The pan-India presence enables L&T Finance Holdings to cater to a large customer base across various business segments, from retail customers and small and medium enterprises to large companies. The extensive network also enables company to maintain and grow business, diversify risk profile and service and support customers from proximate locations, thus providing customers with convenient access to the products and services.

High quality loan portfolio: The quality of asset portfolio, which comprises the funding of primarily income-generating assets and activities, is one of the company’s major strength. The company has established a strong credit check and asset valuation framework to evaluate and monitor credit risk at the time of origination. L&T Finance Holdings’ philosophy is to focus on originating and retaining portfolio with the objective of maintaining asset quality according to its own standard. The company emphasizes on financing income-generating activities and assets as a means of controlling portfolio quality, as this has a direct bearing on the quality of loan portfolio, both by reference to repayment (as the asset or activity financed should generate sufficient revenue and cash flow for customer to service the loan) and recovery. In addition, both L&T Infra and L&T Finance have developed their own respective floating 'prime lending rates', which are used to model the pricing of loans and advances. The asset-liability management committee of Retail and Corporate Finance Groups has established a pricing matrix which reflects the marginal costs of borrowing.

Strong parentage and brand equity of L&T: L&T brand is one of the most well respected brands in India and this has provided L&T Finance Holdings with a significant competitive advantage, particularly in attracting new customers and talent and accessing capital. L&T, which was established in Mumbai in 1938, is one of the leading companies in India in various industries, including engineering, construction, electrical and electronics manufacturing and services, information technology and financial services. L&T has a demonstrated track record of consistent year-on- year growth in business, and is currently one of the largest companies in India by market capitalization. The L&T Group has provided access to management talent and professionals with deep industry knowledge in those sectors for which L&T Finance Holdings provide financing, such as infrastructure and construction equipment. L&T, promoter, has also made significant capital contributions to the business, infusing a total share capital, including share premium, of Rs 17,785.92 million into the company.

Risks and concerns:

Significant concentration in certain sectors: The company’s Infrastructure Finance Group has a significant concentration in certain sectors and to certain borrowers. As at March 31, 2011, its five largest single sector exposures, ten largest borrowers and ten largest borrower groups in the aggregate accounted for 72.28%, 27.48% and 36.65% of the total exposures, respectively. As at March 31, 2011, our five largest single sector exposures were in the power, roads, telecommunications, oil and gas and urban infrastructure, which constituted 28.66%, 17.30%, 13.80%, 6.36% and 6.16% (aggregating to a total percentage exposure of 72.28% for these five sectors), respectively, of the total exposure of Rs  7,186.49 crore. If these exposures become non-performing, such exposure could increase the level of non-performing assets in company’s portfolio and materially and adversely affect the business, future financial performance and results of operations.

Risk of default and non-payment: As an NBFC, L&T Finance Holdings face the risk of default and non-payment by borrowers and other counterparties. Any such defaults and non-payments would result in write-offs and/or provisions in the financial statements which may materially and adversely affect the profitability and asset quality.  The Non-Performing Assets (NPA) of Infrastructure Finance Group, Retail Finance Group and Corporate Finance Group has increased year-on-year, the continuation of which may materially and adversely affect profitability and asset quality. The loan portfolio consists of loans provided to large corporates, small and medium enterprises and individuals, with the latter segment constituting a significant portion of portfolio; large sized single exposures to corporate customers can impact profitability and result in higher NPAs on a small number of defaults.

Require certain statutory and regulatory approvals: The Company requires certain statutory and regulatory approvals for conducting business and failure to obtain, retain or renew them in a timely manner, or at all, may adversely affect its operations. NBFCs in India are subject to strict regulation and supervision by the RBI. Thus, it requires certain approvals, licenses, registrations and permissions for operating business, including registration with the RBI as an NBFC-ND. L&T Finance, L&T Infra and India Infrastructure Developers - registered as an NBFC-ND with the RBI. The RBI has classified L&T Finance as an 'asset finance company', and L&T Infra as an 'infrastructure finance company'. L&TIM has been issued licenses by the SEBI in relation to the business of Investment Management Group. The Company has filed an application with the RBI for being granted a CoR as a CIC-ND-SI. In the event the RBI refuses to grant such CIC-ND-SI status, our Company would need to comply with the RBI norms applicable to an NBFC-ND-SI, as it would cease to be eligible for the exemptions available to a CIC-ND-SI. In such an event, if the Company is unable to comply with the RBI norms applicable to an NBFC-ND-SI within the specified time limit, or at all, the Company may be subject to regulatory actions by the RBI including the levy of fines or penalties and/or the cancellation of the Company’s registration as an NBFC, which will adversely affect the business, prospects, results of operations and financial condition.

Increasing competition: The financing industry is becoming increasingly competitive as more financial institutions target products and services similar to L&T Finance Holdings. Due to this growth will depend on company’s ability to compete effectively and maintain a low effective cost of funds. At present, it faces increasing competition from public and private sector Indian commercial banks and from other financial institutions that provide finance products or services. L&T Finance Holdings also faces significant competition from companies seeking to attract customers' financial assets, including traditional and online brokerage firms, mutual fund companies, other NBFCs, commercial banks and financial institutions who have a broad geographic presence and strong brand names. As company’s forays into new markets in the financial services industry, it is likely to face additional competition from such entities who may be better capitalized, have longer operating histories, have a greater retail and brand presence, and more experienced management in such new markets. If it is unable to compete with these entities effectively in these new markets, this could materially and adversely affect business, future financial performance and results of operations and it might impede competitive position and profitability.

Peer Group Comparison (Rs. in Millions)

Company NameYear EndNet SalesPBDITPATEPSPBIDTM %PATM %ROCE %RONW %

Shriram Trans. Fin

201103

52301.48

39250.60

12298.80

54.38

75.05

23.52

17.50

28.36

IBull Fin

201103

20496.96

15434.68

6086.91

19.57

75.30

29.70

9.86

14.83

L&T Finance Holdings

201103

54.37

3.02

1.35

0.00

5.55

2.48

0.03

0.01

Mah. Finan

201103

19739.34

13397.96

4631.09

45.20

67.87

23.46

13.39

21.96

Kotak Mahindra Prime Ltd.

201103

13244.91

11076.54

3178.63

909.42

83.63

24.00

11.66

23.92

Outlook

L&T Finance Holdings has established a strong reach in rural areas in India, where company maintains more than 500 points of presence (predominantly in the form of meeting centers, KGSK centers and customer care centers) in order to service the customers of the rural product finance and microfinance segments of Retail Finance Group.  The company’s ability to secure reliable and steady sources of capital enabled it to grow and fund businesses in line with business strategy and customers' requirements. Above all it is having a strong patronage of L&T, which has a demonstrated track record of consistent year-on- year growth in business, and is currently one of the largest companies in India by market capitalization.

On the concern side the company being an NBFC, face the risk of default and non-payment by borrowers and other counterparties. Any such defaults and non-payments would result in write-offs and/or provisions in our financial statements which may materially and adversely affect our profitability and asset quality. It is a holding company and all its business operations are conducted through its Subsidiaries and the performance of the Subsidiaries may adversely affect the results of operations. Further credit losses on its significant single borrower and group exposures could materially and adversely affect the business, future financial performance and results of operations.

L&T Finance Holdings is coming with a public issue and has fixed price band at Rs 51-59 per equity share. The company plans to mobilise Rs 1,245 crore through the issue and is aiming for a 17% stake dilution Based on the basic EPS of Rs 2.87 for the year ended March 31, 2011 the P/E at the lower price band comes at 17.77x while at the higher price band it comes at 20.56x. The company plans to pump Rs 570 crore in L&T Finance and Rs 535 crore in L&T Infrastructure Finance Company from the issue proceed. The company has a diversified loan book, strong distribution network, experienced management team, strong backing of brand name. L&T Finance Holdings is having strong consolidated financial position and has reported PAT of Rs 230 crore on total income of Rs 1,398 crore during FY11. It is having comfortable liquidity position with strong resource raising ability and also its subsidiaries are having its good asset quality. LTF was incorporated in 1994 and has a track record of more than 16 years of operations and has well diversified fund based activities across various segments. The company raised Rs. 330 crore via pre-IPO placement. It issued 60mn shares at Rs 55 a share to US-based PE fund of Capital International. L&T Finance is the first of the independent companies from L&T’s umbrella to hit the capital market with an initial public offer after L&T went public in 1950. The issue has been competitively priced and the company’s business prospects are having wider growth outlook so, we will recommend to go for the issue.

Financial Highlights (Rs. in Millions)

ParticularsMar 2011Mar 2010

Net Sales

54.37 

0.00 

Total Income

56.93 

53.64 

PBIDT

5.58 

28.75 

PBT

2.15 

28.75 

PAT

1.35 

28.12 

Reserves and Surplus

3646.20 

27.95 

Net Worth

17816.44 

13563.87 

Total Debt

3560.00 

0.00 

ROCE

0.03 

0.21 

RONW

0.01 

0.41 

PATM(%)

2.48 

NA 

CPM(%)

2.48 

NA 

CEPS

0.00 

0.02 

Enterprise Value3557.02 -0.06 

L&T Finance Holdings Share Price

158.85 0.00 (0.00%)
28-Mar-2024 16:01 View Price Chart
Peers
Company Name CMP
Bajaj Finance 7240.35
Shriram Finance 2360.20
Aditya Birla Capital 175.70
SBI Cards AndPayment 682.45
Chola Invest & Fin. 1163.70
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