L&T Finance Holdings Limited IPO Review by MLR Sec (Apply)

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Review By MLR Securities Private Ltd on July 28, 2011

Issue Period: 27th July - 29th July
Price Range: INR 51-59
Issue Size: INR 1,250 Cr
Mcap: INR 8,610-9,960 Cr
IPO Grading: ICRA IPO Grade 5
Grey Market Premium: INR 5-6.5
BRLM: JM Financial, Citi, HSBC
Listing: BSE,NSE

LTFH is a holding company and has no direct operations. It provides financial services across the corporate, retail and infrastructure sectors and has presence in mutual fund products as well as investment management services through direct and indirect wholly owned subsidiaries viz. L&T Finance ltd and L&T Infrastructure Finance ltd. LTFH has applied for registration with the Reserve Bank of India (RBI) as a 'Core Investment Company'. The company is registered with RBI as an NBFC-ND-SI promoted by Larsen & Toubro Limited, one of the leading companies in India, with interests in engineering, construction, electrical and electronics manufacturing and services, information technology and financial services.

As at May 31, 2011, the company through its subsidiaries had 837 points-of-presence across India, comprising 117 branch offices, 269 meeting centers, 37 KGSK centers (Kisan Gaurav Seva Kendra) and 414 customer care centers across all of its business groups and segments.

LTFH raised Rs 330 Cr via pre-IPO placement of 6 Cr equity shares. US-based Capital International PE Fund subscribed shares at Rs 55/share. Also, LTFH has received commitment of Rs 153 Cr from anchor investors at Rs 56/share. Tioman Investments (Khazanah) of Malaysia has subscribed Rs 88.8 Cr worth of equity shares. DSP BlackRock subscribed for equity shares worth Rs 38.9 Cr and Capital International Rs 25 Cr.

Financials

• Profitability: Prior to March 31st,2009 LTFH had minimal operations in the form of passive investments. Therefore effectively, FY10 was the first year of reporting consolidated numbers for LTFH. Both LTF and L&T Infra witnessed strong growth in business during FY11 which helped LTFH report strong growth in total income and profit. The company's consolidated total income and PAT jumped by almost 50% to Rs 2,114 Cr and Rs 393 Cr respectively in FY11 from previous year.
• Income Contribution: Majority of the income was through financing activity under LTF contributing more than 66% of total income for FY11 while income from infrastructure financing contributed 30% of total income for FY11.
• Healthy Margins & Improving Asset Quality: The company improved its net interest margin (NIM) to 7.88% in 2011 as against 7.83% in 2010. It also brought down its non-performing assets (NPAs) at gross as well as net level from 2.42% to 1.11% and from 1.69% to 0.67%, respectively. Currently, the company depends on banks for around 60% of its borrowings.
• Diversified Loan Book: LTFHL's loan book grew 59% to 17,506 Cr by the end of FY11. Of which, the share of Infrastructure Finance Group was 40% at Rs 7,186 Cr, Retail Finance Group contributed 37% at Rs 6,579 Cr, Corporate Finance Group 20% at Rs 3,578 Cr.
• CAR well above RBI's 15% requirement: The Capital Adequacy Ratio of L&T Finance improved to 16.34% in FY11 from 15.43% in FY10, against the RBI's mandatory requirement of 15%. While L&T Infra has a CAR of 16.5% as of FY11 which fell from 23.3% inFY10.Leveraging level of the company is at 5.5 which will come down to 3.9 post issue.
• Return Ratios: L&T Infrastructure Finance did an RoE of 18% which is well above its peer IDFC which reported an RoE of 14.7% as of FY11. L&T Finance posted an RoE of 16.2% in FY11 which is quite low compared to its peers as the company has made a higher provisioning for microfinance loans. While Return on Total Assets was at 2.4% and 3.5% for L&T Finance & L&T Infrastructure Finance, respectively as of FY11.
• High Credit Security: Under the Retail Finance Group 91% of the loan book is secured while in the Corporate Finance Group 72% of the loan book is secured. Infrastructure Financing loan book is 100% secured. The security is in the form of charges over the project assets, a project escrow account, debt service repayment accounts and/or residual cash flows of the borrower, or collateral such as guarantees from the project promoters or sponsors, corporate guarantees or pledges of shares, or a combination of one or more of these forms of security.
• Investments: The company has less than 5% stake in Federal Bank & City Union Bank each and 30% interest in NAC Infrastructure & Equipment which is a joint venture between NCC & L&T Finance. LTFH holds 8.9% interest each in Invent ARC and Invent Trust which is aimed at raising funding for the acquisition of distressed assets from banks and financial institutions.
• Exposure to Microfinance Sector minimal: LTF also provides microfinance loans spread across seven states in India including Andhra Pradesh. As of FY11 the total microfinance loan book is Rs 460 Cr which is just 7% of the total Retail Finance loan Book. Exposure to Andhra Pradesh accounted to Rs 199 Cr which is 45% of the microfinance loan book.

Valuations

LTFH is asking for a market cap of Rs 8,609-9,959 Cr on a price band of Rs 51-59. The price to book value comes to 2.3 post issue on an upper price band of Rs 59 which is in line with its peers like IDFC and M&M Financial Services which are trading at P/BV of 2-2.8 times. LTFHL's better asset quality, higher margins, established track record makes it a decent bet for the long term.

Management

L&TFH's top management is drawn from the promoter group (L&T). The management team comprises of senior managers having wide experience with the L&T group. Mr. Y. M. Deosthalee, Chief Financial Officer of L&T has been appointed as the Chairman of L&TFH and Mr. N. Sivaraman, Senior Vice President, Financial Services, L&T, is the President and Wholetime Director of L&TFH and looks after operations of L&FH and oversees the businesses of its subsidiaries.