Investment Shastra

L & T Finance Holdings IPO: Should you invest in the IPO in this volatile market??

Larsen And Toubro (L&T) Finance Holdings IPO Highlights:

L&T Finance Holdings, IPO Details, price-band, issue size

So, what’s the subscription offer? Here’s the review of the Larsen & Toubro Finance Holdings IPO:

L&T Finance Holding Ltd., the financial subsidiary of the engineering giant Larsen and Toubro is coming up with its IPO to raise Rs. 1245 Cr. The IPO price band has been fixed at Rs. 51/- to Rs. 59/- per equity share. The offer opens on July 27th and closes on July 29th, 2011.

Tell me more about L&T Finance Holdings?

Incorporated in 2008, L&T Finance Holding Ltd.  is a holding company for many of the L&T group companies, mainly two fully owned non-banking finance companies (NBFCs) – L&T Infrastructure Finance(33% of its revenues) and L&T Finance(66%). Apart, from these L&TFH owns close to a 5 per cent stake in Federal Bank and City Union Bank. It also owns L&T Mutual Fund which has an asset base of Rs 5,200 Cr. as of June 2011.

Through these subsidiaries the company offers a diverse range of financial products and services. It is headquartered in Mumbai and has a presence in 23 states in India.

The company’s operations are arranged into four business groups viz. the Infrastructure Finance Group, the Retail Finance Group, the Corporate Finance Group and the Investment Management Group, each as defined below:

Group Structure and Subsidiaries of L&T Finance Holdings

Use of Proceeds…

The Company intends to utilise the proceeds of the Issue for the following objects:

L&TFH IPO: Use of the Proceeds

Apart from these the company may also utilise some amount for general corporate purposes. There is a 50 Cr reservation for employees and an additional reservation of 120 Cr. for L&T shareholders, both of whom would get an Rs 2 discount to the issue price. Out of the total, Rs 537.5 Cr. has been reserved for qualified institutional buyers (QIBs), Rs 161.25 Cr. for non-institutional investors (HNIs) and Rs 376.25 Cr. for retail investors.

What sets the company apart? Here is the analysis of LTFH…

Financial Performance

LTFH was incorporated in 2008. The company has performed fairly well since then. It has registered a growth of 48% in its operating income (Rs 2086.38 Cr.), in 2011, a major portion of which is the interest earned on the loans given by its subsidiaries. Its EPS and BVPS have grown by 45% and 25% respectively in the last year. The average Net profit/ Total Funds for the last two years is 17.10%. A Net Profit/ Total Fund of over 12% indicates that the management of the Company is efficient in utilising its funds.

L&TFH earns 99% of its revenues from two of its subsidiaries viz. L&T Finance and L&T Infrastructure Finance, thus its performance is majorly linked to the performance of these subsidiaries.

Let’s have a look at the Performance of its subsidiaries

L&T Infrastructure Finance

L&T Infrastructure Finance is a diversified company, financing power (29%), roads(roads (17%), telecom (14%), oil and gas (6%), ports and urban infrastructure (6%). The company is also into equity financing of infrastructure projects and also provides advisory services.

The net interest margin (NIM) for this subsidiary was 4.95% for the year ended March 2011(comparing to IDFC). The capital adequacy ratio of the company was 16.5%, above the stipulated norm of 15%. The net NPA ratio of this company was 0.5%, indicating a low default risk.

The company got the Infrastructure Financing Status in July 2010. These benefits should enable it to raise more funds, of longer tenors and at lower costs, and in turn to lend more to infrastructure companies.

Infrastructure development is the cornerstone for India’s growth story in this decade. The 11th Five Year Plan (Fiscal 2008 to 2012) envisages investments of $514.04 billion (Rs 22 lakh Cr.) in the infrastructure sector and 12th five year plan aims at spending $1 trillion, roughly 40-50% of which will be private sector investment. This provides huge opportunities for private financiers like LTFH.

L&T Finance

L&T Finance is an NBFC that provides financing for Retail (38% of loans and advances) and Corporate sectors (21% of loans and advances). This includes equipment financing, tractor and commercial-vehicle financing, micro-financing and lending against shares for third parties. The company has also started used-vehicle financing, which offers high yields. Its loan book is riskier compared to infra-finance as it lends to mid and small sized business, however it lends to only income generating businesses. But it is exposed to cyclicality of equipment and commercial vehicle businesses. The micro-finance exposure stands at 4.5%.

The NIM of L&T Finance was 7.9 per cent for FY11. This may reduce considering the rising interest rate and the recent RBI regulation of removal of priority lending sector status. The net NPA, as of March 2011, was 0.78 per cent.

What aids the performance of these subsidiaries??

Diversified and balanced mix of high growth businesses

With its subsidiaries catering to different segments, L&TFH has a highly diversified business model covering a variety of complementary business segments including 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.

Many of the businesses operate in industries or sectors, such as agricultural and rural development, infrastructure and energy that have been identified by the Government of India as focus areas under its latest Five Year Plan. This balanced mix of high growth businesses has provided it with the ability to produce a steady, growing revenue stream. It also helps to reduce the risks associated with product and customer concentration.

Strong distribution network, with a pan-India

LTFH has established a presence in 23 states in India. It has increased its geographic coverage from 226 points-of-presence in March 2008 to 837 points-of-presence as at May 31, 2011. This extensive network will help the company to maintain and grow its business further.

Strong parentage and brand equity of L&T

The L&T brand is one of the most well respected brands in India. This provides LTFH with a significant competitive advantage, particularly in attracting new customers, talent and easy access to capital.

But what are the concerns for these subsidiaries?

Default Risk

LTFH faces 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 company’s financial statements which may adversely affect its profitability and asset quality.

Intense competition

Given the diversity of the four core business groups and the products and services which each of those offers, LTFH faces intense competition. This competition comes from the full range of public sector banks, private sector banks (including foreign banks), financial institutions and other NBFCs.

Increasing interest rates

LTFH is affected by volatility in interest rates in both viz.  lending and treasury operations. Increasing interest rates could cause the company’s net interest income to decline and adversely affect its return on assets and profitability.

Regulatory Concerns

Over the last few months, RBI has been paying greater attention to the NBFC sector with a number of new regulations. Any adverse changes in RBI guidelines can act detrimental to the company’s growth.

So, will L&T Finance Holdings IPO live upto its name?

L&T Finance Holdings Ltd. plans to raise 1245 Cr. through the IPO at a price band of Rs. 51-59.

According to analysis, we can expect that the company will continue to grow its revenue and has a strong backing of the L&T brand name and its proven track record. But there will be pressure on the margins in near future due to increasing borrowing costs. We can expect the company to trade at a PBV multiple of 2 going forward. At the current price band, the issue is priced at a PBV band of 2.26 and 2.66.  Thus, at the lower price band of Rs. 51, the stock is fully priced. But, most likely the IPO will list at the higher price band, at which the stock is overpriced.

Thus, at this price, the IPO does not seem an attractive investment from a long-term perspective. Investors should wait for a heavy discount to IPO price band, as the IPO is over-priced.

Disclaimer:This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions.

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