L&T Finance Holdings Limited - IPO Note - Aditya Birla Money

Key Investment Arguments:

Diversified Business Model – Keeping it immune from cyclicality in macroeconomic and industry activity - The company has a diversified business model covering a variety of high growth business segments across four core business groups, 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. The company's presence in diversified businesses across asset classes and customer segments has contributed significantly to its strong revenue growth and reduces the risks associated with product and customer concentration.

High quality loan portfolio – The Company is primarily engaged in financing of income-generating assets and activities, which helps the company to keep a check on its asset quality both with reference to repayment (as the asset or activity financed should generate sufficient revenue and cash flow for its customer to service the loan) and recovery (as the asset financed typically forms the security for the loan that the company disburse. Added to this, the company generally avoids buying loan portfolios directly and focuses on originating and retaining its own portfolio with the objective of maintaining asset quality according to its own standards. The company's current provisioning and write-off policies and principles exceed the minimum required standard for NBFCs set by the RBI which further provides the cushion against any unexpected losses.

Strong parentage and brand equity of L&T along with experienced management team - The L&T brand provides the company 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 Group also provides the company access to management talent and professionals with deep industry knowledge in those sectors for which the company provide financing, such as infrastructure and construction equipment.

Good financial and capital position, as well as access to multiple sources of capital - The Company enjoys strong credit ratings from both CARE and ICRA. As at May 31, 2011, both L&T Finance and L&T Infra had a CARE rating of AA+ and an ICRA rating of LAA+. Healthy credit ratings coupled with strong brand equity enables the company to access funds at competitive rates from a wide variety of market participants across a diverse array of products, including secured and unsecured loans from banks and financial institutions, commercial paper and long term debentures in the institutional and retail markets. Besides this, the company maintain CARs higher than those statutorily prescribed by the Non-Banking Financial. The CAR for L&T Finance and L&T Infra as at March 31, 2011 stood at 16.3% and 16.5%, respectively.

Outlook and Valuations

At the upper & lower price band of Rs.59 and Rs.51, the issue is priced at ~2.9x and ~2.5x its pre issue book value of Rs.20.4 as of March 2011. On its post issue book value of Rs.26.5 and Rs.25.9 at the upper and lower price band respectively, the issue is priced at ~ 2.2x and ~ 2.0x. The company's peer group is currently trading in the range of 1.6-3.2x with average being ~ 2.3x. We believe LTHF deserve a premium over its peers considering its strong parentage and brand name, superior asset quality (GNPA -1.1% vs Industry average – 1.4%) with conservative provisioning policies, high margins (NIM – 6.5% vs industry average – 6.4%), diversified business model and high degree of corporate governance gives it a competitive edge over its peers.

Added to this, in Sept 2010, the company has done a preferential allotment of 63.4 mn shares @ 67.0 to L&T (Promoter group) which is ~14% above the upper price band of the issue. The company have made good progression since then. This equity issue by the company to the promoter group above the current issue price gives us more comfort.

The current equity raising initiative by the company to augment its capital base will provide enough room to increase its leverage which will drive the growth in loan book going forward. Consequently the return ratios will get a further boost once the benefit of leveraging comes into play. Added to this, the company has untapped Tier 2 capital currently (L&T infra – Nil, L&T Finance - Rs.750.0 mn) which will further support the capital requirement going forward. Given the pedigree and trust, it is an excellent long term bet; however listing gains would largely be a function of market conditions and going by the current market parity, we believe the short term gains would be at best marginal. Therefore recommend long term investors to subscribe to this issue.

Source : Equity Bulls

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