L&T Fin Holdings’ IPO a Long-Term Value Buy

L&T Finance Holdings’ IPO valuations are almost at par with its peers. The company enjoys a better quality loan book, has higher margins besides and the advantage of L&T parentage. However, considering the general skepticism in the market about infrastructure and infra-financing companies, the IPO will be mostly appeal to only longterm investors and existing employees, who will get 2 discount. L&T Finance Holdings (LTFHL), a subsidiary of Larsen & Toubro is approaching the capital market with an initial public offering to raise up to 1,245 crore out of which 161 crore has been raised from anchor investors. This is in addition to an institutional share placement of 330 crore which the company raised earlier at 55 per share.
The company plans to use the proceeds of the issue to repay a 345-crore inter-corporate deposit to its promoter group (L&T) besides augmenting the capital base of L&T Finance by 570 crore and L&T Infra by 535 crore.

BUSINESS
L&T Finance Holdings offers a range of financial products and services across the corporate, retail and infrastructure finance sectors.
It also offers mutual fund products and portfolio management services through its whollyowned subsidiaries L&T Finance and L&T Infrastructure Finance Company. The company's focus is on infrastructure and rural India. It has established a strong reach in rural areas through 500 points of presence.
It has a high quality loan portfolio mainly comprising of funding of income-generating assets. Both L&T Finance and Infra have a credit rating of AA+ from ICRA and CARE enabling them to access funds at competitive rates.

GROWTH DRIVERS
The greatest strength of the company is the strong backing of its brand name and an experienced management team. LTFHL has a diversified loan book and strong distribution network with 837 points-of-presence across India.
Although its sources of funds are limited at present, the company has the flexibility to raise funds through various alternatives such as external commercial borrowings, securitisation, pension funds etc. This can enable it to maintain a low cost of funds in future.
The proposed IPO would allow the corporation to increase its loan book by at least 6,000 crore, or nearly 35% of its current loan book.

FINANCIALS
The NBFC registered a healthy net profit growth of 53% in 2011 on the back of 49% growth in net sales. Two-thirds of the total income came from asset financing activity while income from infrastructure financing contributed 30% for FY11.
LTFHL’s loan book grew 59% to 17,506 crore by the end of FY11 of which 65% was accounted by large ticket exposures and the balance 35% by retail loans.
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. This could result in 50-70 bps pressure on NIM in FY12.

VALUATIONS
LTFHL’s book value per share will stand between 25.9 and 26.5 of the post IPO equity depending on the allotment price. Correspondingly, the price to book value (P/BV) ratio will stand between 2 and 2.2. This is in line with peers like IDFC and Reliance Capital that are trading at a P/BV of 2.0-2.25. LTFHL’s better asset quality and higher margins should prove attractive for IPO investors.