Subscribe to L&T Finance Holding IPO - FairWealth Equity Research

L&T Finance Holding Ltd (L&TFHL) is a Mumbai based financial holding company offering a 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 its direct and indirect wholly owned subsidiaries. The company is promoted by L&T group which has a market cap of Rs. 1,001 billion as on May 31, 2011. The company is registered with the Reserve Bank of India (RBI) as a Systemically Important Non-Deposit Taking Non-Banking Financial Company (NBFC-ND-SI).

INVESTMENT THESIS

Strong parentage and brand equity of L&T
The L&T brand is one of the most well respected brands in India, and this provides with a significant competitive advantage, particularly in attracting new customers and talent and accessing capital.

High quality loan portfolio
The company mainly focuses on funding income generating assets. For each of its business, L&TFHL established a strong credit check and asset valuation framework to evaluate and monitor the credit risk at the time of origination. Company's philosophy is to focus on originating and retaining own portfolio with the objective of maintaining asset quality according to their own high standards.

Strong Credit Rating
As at May 31, 2011, L&T Finance had a CARE rating of AA+ (which indicates that such instruments offer high safety for the timely servicing of debt obligations and carry very low credit risk) and an ICRA rating of LAA+ (which indicates high credit quality and that the rated instrument carries low credit risk), and L&T Infra had a CARE rating of AA+ and an ICRA rating of LAA+.

Strong Distribution Network
The company has established its presence in 23 states in India. It has 837 points of presence across the country. This pan-India presence allows the company to cater to a large customer base across various business segments at a low cost.

Lower NPA Ratios
The provisioning and write-off policies of the company are more stringent and conservative than those prescribed by the RBI for NBFCs. For FY2011, the company had gross non- Rs54 crore is for the loans expended to the state of Andhra Pradesh. NPA ratio for the microfinance segment in FY11 declined to 1.4% from 2.8% in FY10.

Valuations
The IPO issue is available at price to book value of 2.90x and 2.50x on the lower and upper end respectively on its pre issue book value of Rs 20.40. On the post issue book value of Rs 23.70, P/BV will be 2.2x and 2.5x on the lower end and higher end of price band respectively. Considering the P/E valuation, the stock is priced at pre issue of 17.8x on the lower end and 20.6x on the higher end of its annualized FY11 EPS of 2.87. Hence, considering attractive valuations and the strong earnings growth potential, we recommend investors to subscribe this issue. We expect gain of 12%-18% on its listing.

Source : Equity Bulls

Keywords