L&T FINANCE is not coming cheap, its valuations are more than PFC, IDFC. Read Business standard review published today.
Experts opinion desired for uneducated retailers like us who mostly look for listing gains( Sreedhar Inc)
A long-term bet by Sheetal Agarwal / Mumbai July 27, 2011, 0:07 IST Business Standard
Promoted by Larsen and Toubro (L&T), L&T Finance Holdings operates via its subsidiaries which offer varied financial products and services. Among these, L&T Infrastructure Finance is into financing infrastructure development projects. L&T Finance lends to retail and corporate clients for equipment purchase, supply chain and capital market products. Among other key subsidiaries, L&T Investment Management operates in the mutual fund and portfolio management services space.
Out of the IPO proceeds, Rs 485 crore will be used to augment the capital base of L&T Infrastructure Finance and Rs 515 crore for L&T Finance, to help fund the future growth of these businesses. The company will also repay Rs 345 crore worth inter-corporate deposits to its parent, L&T.
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With the price band of Rs 51-59, the price to book value (P/BV) works out to 2.0-2.3 times based on the FY11 numbers and post issue capital. Though the businesses are not strictly comparable, the valuations are at a premium compared to its larger peers like IDFC, REC, PFC (trading at 1.5 to 2.0 times FY11 P/BV) and leave limited scope for appreciation in the immediate term.
ISSUE DETAILS
Price (Rs) 51-59
Size (Rs crore) 1,245
Opens on 27-Jul
Closes on 29-Jul
CARE, ICRA rating 5/5
GROWING FAST
in Rs crore FY10 FY11
Total Inc 1,423.9 2,114.8
Ebitda (%) 78.6 80.0
Net profit 263.0 392.6
Source: Company RHP
While the higher net interest margins (NIMs), sound asset quality and a diversified portfolio of the funding businesses stand the company in good stead, analysts believe L&T Finance Holdings will be able to generate higher return ratios in the future. Says Apurva Shah of Prabhudas Lilladher, “L&T Finance Holding’s business model is scalable and the growth opportunities in these segments continue to remain high. The return on equity could improve further to 16-18 per cent from the current 15 per cent.”
Overall, investors with a long-term perspective may apply.
STRENGTHS, CONCERNS
The company derives significant leverage from its parent’s brand name as well as domain knowledge. It has a pan-India network with 837 points of presence (including 500 in rural areas), which compares it well with its peers. Its loan book is also well diversified, which provides it an edge over other NBFCs, as most of these cater to specific sectors like gold loans (Manapurram and Muthoot Finance), vehicles (Shriram Transport) and power (REC, PFC).
On the flip side, as on March 2011, microfinance institutions (MFIs) formed close to 4.5 per cent (Rs 460.2 crore) of L&T Finance’s total retail unsecured loans’ book. While there are no NPAs in this loan book till March 2011, given the rising defaults in Andhra Pradesh, its asset quality in this segment can come under pressure. Also, 29 per cent of L&T Infrastructure’s loans are in the power sector, so any slowdown in this space can affect its finances.
Since, at present, the company is not taking relatively lower cost deposits, it becomes more vulnerable in higher interest rate cycles vis-a-vis banks and other NBFCs. However, it could tap into fund raising avenues like external commercial borrowings, infrastructure bonds, etc. Since, L&T Infrastructure Finance and L&T Finance enjoy high credit rankings, it will help source funds at competitive interest rates, thus protecting their margins. Further, it can leverage on the Public Financial Institution and Infrastructure Finance Company status (granted to L&T Infrastructure) to access cheaper funds.
BUSINESS
The company focuses on funding income-generating assets in the high growth infrastructure and rural segments, for which it has strong credit checks and asset valuation and recovery mechanisms in place. This is reflected in its high growth rates over the last two years and lower non-performing assets (NPA) on a consolidated basis (0.67 per cent in FY11).
Its strategy of focusing on return ratios and asset quality will help deliver consistent financials in the long term, even as it grows fast. So far, the company’s revenues and net profit has registered robust growth. Its loan book too grew by 59 per cent to Rs 17,506 crore in FY11, while NIMs have been steady at around 7.8 per cent in the last two years. Given the rising interest rates scenario, analysts believe its margins could be hit by 50-70 basis points (bps) in this financial year.
Zerodha (Trading Account)
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