IPO Note | NBFC
July 26, 2011
L&T Finance Holding
SUBSCRIBE
Issue Open: July 27, 2011
Broad horizons
Issue Close: July 29, 2011
Diversified loan mix
Issue Details
L&T Finance Holding’s (L&TFH) well diversified loan book ranging from small
Face Value: `10
ticket microfinance to big ticket infra loans, provides the company an opportunity
Present Eq. Paid-up Capital: `1,477cr
to tap into various under penetrated segments and address a broader range of
growth opportunities across cycles. In terms of reach, the L&T finance group has
Offer Size#: 21.1cr - 24.4cr Shares
presence pan India (23 states, 837 Points of presence). Also, compared to
Post Eq. Paid-up Capital#: ` 1,688 - 1,721cr
specialised lending NBFCs, L&TFH’s risk is much better spread out into the
various segments it operates, which reduces the risks associated with any
Issue size (amount): `1,245cr
particular segment or customer concentration.
Price Band: `51-59
Strong growth track record
Post-issue implied mkt cap*: ` 8,778 - 9,959r
L&TFH’s loan portfolio has grown at a CAGR of 56.6% over FY2009-FY2011,
Promoters holding Pre-Issue: 95.9%
way ahead of its peers (35.2% for IDFC, 14.5% for Shriram transport). The
Promoters holding Post-Issue*: 82.3% - 83.9%
company has its sights set on the two of the most rapid growing sectors -
Note: # At the upper and lower price bands,
Infrastructure and rural development, which gives high visibility to its loan growth
respectively, * At the lower and upper price
outlook, driven by higher government spending and substantial latent demand.
bands, respectively
The net profit of the holding company has grown by 53.4% over FY2010-11,
although on a low base.
Book Building
Strong parentage, but relatively expensive at the upper band
QIBs
Up to 50%
L&T Finance Holding looks well-positioned for growth considering its bolstered
Non-Institutional
At least 15%
capital position post-IPO, diversified loan segments and healthy track record. The
diversified loan book also reduces risk emanating from sectoral or customer
Retail
At least 35%
concentration. That said, it remains to be seen if the company can match the
ability of the niche NBFCs in profitably sourcing high-yielding loans, while
managing credit risk effectively. At present, based on FY2011 numbers, the
Post Issue Shareholding Pattern
company’s RoEs were on the lower side compared to peers. Also, there are near-
Promoters Group
82.3% - 83.9%
term macro-headwinds for NBFCs from higher interest rates, slowing credit
MF/Banks/Indian
16.1%-17.7%
demand and asset quality concerns, due to which valuations of listed NBFCs have
FIs/FIIs/Public & Others
corrected. In the context of its lower RoEs relative to peers and considering the
near-term macro-headwinds, the valuations at the upper band look a little
expensive in our view at ~2.2x post-IPO Networth (~2.0x at the lower band).
Hence, we recommend Subscribe at the lower end of the price band.
Key financials (Consolidated)
Y/E March (` cr)
FY2010
FY2011
NII (Net interest income)
726
1,039
Vaibhav Agrawal
% chg
-
43
022 - 3935 7800 Ext: 6808
Net profit
242
398
[email protected]
% chg
-
65
Shrinivas Bhutda
NIM (%) (Net interest margin)
7.8
7.1
022 - 3935 7800 Ext: 6845
EPS (`) (Earning per share)
1.8
2.8
[email protected]
P/E (x)*
26.5
18.1
P/ABV (x)*
3.6
2.6
Varun Varma
RoA (%) (Return on asset)
2.5
2.5
022 - 3935 7800 Ext: 6847
RoE (%) (Return on equity)
21.1
16.3
[email protected]
Source: RHP, Angel Research. Note *: Valuations at the lower price band and at pre issue earnings
and adjusted book value
Please refer to important disclosures at the end of this report
1
L&T Finance Holding | IPO Note
Company background
L&TFH offers 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 their direct and indirect wholly-
owned subsidiaries.
L&T Finance’s wholly owned subsidiary L&T Infrastructure Finance Company
Limited (L&T Infra), conducts infrastructure finance business which provides
financial products and services to customers engaged in infrastructure
development and construction and is registered with the RBI as an NBFC-ND-SI
and an IFC. L&T Finance Limited (L&T Finance), another wholly owned subsidiary,
conducts retail finance business and corporate finance business and is registered
with the RBI as an NBFC-ND-SI and an AFC.
Details of the issue
The IPO comprises an issue of `1,245cr, (21.1cr shares at upper band - 24.4cr
shares at lower price band) equity shares of face value of `10 each, in the price
band of `51-59 per share. The primary issue of shares would result in a dilution of
the promoter’s holding by 12.0% to 83.9% at the upper price band and by 13.6%
to 82.3% at the lower price band.
The objects of the Issue are to repay the intercorporate deposit issued by Promoters
to the Company, to augment the capital base of L&T Finance and L&T Infra to
meet the capital requirements arising out of expected growth in their assets,
primarily the loan portfolio, compliance with regulatory requirements and for other
general corporate purposes including meeting the expenses of the Issue.
For the use of L&T brand and monogram, L&TFH will have to pay a consideration
amounting to 0.15% of the assets, or 5% of the PAT, whichever is lower plus,
service tax. The payment will commence from FY2012 onwards.
July 26, 2011
2
L&T Finance Holding | IPO Note
Investment arguments
Highly diversified business model with pan India presence
L&TFH’s well diversified loan book ranging from small ticket microfinance to big
ticket infra loans, provides the company an opportunity to tap into various under
penetrated segments and address a broader range of growth opportunities across
cycles. Compared to specialised lending NBFCs, L&TFH’s risk is much better
spread out into the various segments it operates, which reduces the risks
associated with any particular segment or customer concentration.
The strong parentage and brand equity of L&T has facilitated L&TFH’s entry into
various segments, allowed it to gain operational skills in a short frame of time and
is likely to be an advantage with regards to attracting professional talent. Also, in
terms of reach, the L&T finance group has presence pan India (23 states, 837
Points of presence).
Exhibit 1: L&TFH’s loan structure - FY2011
Exhibit 2: L&T Infra loan break up - FY2011
L&T finance
(Corporate)
21%
Power
L&T Infra
27.7
28.7
Roads
L&T Infra
Telecommunications..
41%
L&T finance (Retail)
Oil and GaS
L&T finance
6.2
(Retail)
Urban Infrastructure
L&T finance (Corporate)
17.3
38%
Other
6.4
13.8
Source: RHP, Angel Research
Source: RHP, Angel Research
As of FY2011, the L&T finance’s loan book comprised 58.6% of the L&TFH’s loan
portfolio. The retail segment of L&T finance, which is mostly into construction
equipment finance, transport finance and rural based lending, comprises 37.9% of
the overall holding company’s loan portfolio (64.8% of L&T Finance’s loan book).
The corporate segment which provides financial products and services to corporate
customers comprises 20.6% of the overall holding company’s loan portfolio
(35.2% of L&T Finance’s loan book).
L&T Infra offers loans to customers engaged in infrastructure development and
construction. Conferred upon an IFC status by the RBI, the company’s operations
majorly comprises of lending to power and road projects. The exposure to power
sector is ~ 2,060cr (11.9% of the holding company’s loan book) with no exposure
to any state electricity board.
July 26, 2011
3
L&T Finance Holding | IPO Note
Exhibit 3: Product mix for L&TFH
L&TFH - Well diversified product mix
Corporate Finance
Retail Finance Group
Infra Group
Asset-backed loans
Construction equipment finance
Power
Term loans
Transportation equipment finance
Roads
Receivables discounting
Rural products finance
Telecommunications
Short-term working capital facilities
Microfinance
Oil and GaS
Operating and finance leases
Distribution of 3rd party fin. products
Urban Infrastructure
Supply chain finance
Capital markets products
Competitors
Competitors
Competitors
Shriram Transport, SKS Microfinance, Magma Fincorp,
PSU and Pvt. Banks
IDFC, PFC, REC
M&M Fin Services
Source: Company, Angel Research
Strong growth track record
L&TFH’s loan portfolio has grown at a CAGR of 56.6% over FY2009-FY2011, way
ahead of its peers (35.2% for IDFC, 14.5% for Shriram transport). The company
has its sights set on the two of the most rapid growing sectors - Infrastructure and
rural development, which gives high visibility to its loan growth outlook, driven by
higher government spending and substantial latent demand. The net profit of the
holding company has grown by 53.4% over FY2010-11, although on low base.
Exhibit 4: Loan growth CAGR FY2009-11
Exhibit 5: PAT growth CAGR FY2009-11*
(%)
(%)
60.0
60.0
50.0
50.0
40.0
40.0
30.0
30.0
20.0
20.0
10.0
10.0
0.0
0.0
L&T Fin
LICHF IDFC
PFC HDFC Shriram
L&T Fin Shriram LICHF
IDFC HDFC
PFC
Holding
Trans.
Holding Trans.
Source: RHP, Angel Research
Source: RHP, Angel Research, *note; FY10-11 growth for L&T Fin Holding
L&TFH has seen robust growth in the last 2 years, while maintaining its asset
quality. As of FY2011 the gross NPA ratios for L&T finance stood at 1.4% (2.8% in
FY2010), while for L&T infra, the gross NPA ratio stood at 0.7% (1.9% in FY2010).
The overall funding mix comprises mostly of term loans (63.0% of total borrowings
as of FY2011) and debentures (28.6% of total borrowings as of FY2011).
July 26, 2011
4
L&T Finance Holding | IPO Note
Exhibit 6: Funding Mix as of FY2011
Exhibit 7: Improvement in asset quality in FY2011
(%)
Term Loans/FIs/Promoters
Debentures
CP
(%)
FY10
FY11
100%
2.81
8.4
3.00
10.3
14.4
80%
19.1
2.50
28.6
1.85
38.0
2.00
60%
1.44
1.50
40%
1.00
0.68
70.7
63.0
47.6
0.50
20%
-
0%
L&T Infra GNPA (%)
L&T Finance GNPA (%)
2009
2010
2011
Source: Company, Angel Research
Source: Company, Angel Research
Strong credit rating with high capital adequacy
Both L&T finance and L&T Infra have strong credit ratings (AA+ from CARE and
LAA+ from ICRA) allowing them access to various sources of funds. Moreover, L&T
Infra is classified as an IFC, which allows raising low cost tax saving long term
infrastructure bonds and also lowers the risk weightage for bank loans to the
company. As of FY2011 both L&T Finance and L&T Infra had a capital adequacy
ratio comfortably above the regulatory requirements. Also, L&T Infra has till now
not raised any tier 2 capital (`75cr tier 2 capital in L&T Finance also below
regulatory limits), giving it the option of raising capital through tier 2 bonds in the
future.
Exhibit 8: Strong credit rating
CARE
ICRA
Status
CAR
L&T Infra
AA+
LAA+
IFC, PFI
16.5%
L&T Finance
AA+
LAA+
AFC
16.3%
Source: Company, Angel Research
Could be a contender for a banking license
With the RBI in the process of finalizing guidelines for issue of new banking license,
we believe the L&T group (through L&TFH) could be a strong contender for
receiving a license. In its discussion paper, the RBI had listed safeguards to address
the downside risks of industrial and business houses promoting banks. One of the
main criteria in our view was that industrial and business houses promoting banks
must have diversified ownership and no connection with real estate.
Considering that any licensee would in our view need to have deep pockets and
strong reputation, in our analysis we considered corporates with market
capitalization exceeding `10,000cr. Amongst such corporates, L&T emerges as
one of the very few where the promoter stake is less than 25% and is driven by a
strong, professional management and board. Hence, we believe amongst various
corporates who have evinced interest in a banking foray, the L&T group (through
L&TFH) could emerge as a meaningful contender for receiving a banking license.
However, it is important to note that there are several elements to this debate and
at this stage, it would not be prudent to bank on any such development while
evaluating L&TFH.
July 26, 2011
5
L&T Finance Holding | IPO Note
Investment risks
Both L&T finance and L&T infra have a wide mix of product offerings where they
compete with a host of specialized players with already established asset appraisal
skills. The product offerings by L&T finance range from working capital loans in the
corporate space to rural based lending in retail space, on the one hand making its
portfolio well diversified and shielded from slump in any particular sector i.e. it is a
positive from a sectoral risk point-of-view.
But on the other hand, a diversified loan offering, however, also implies building
asset appraisal skills (PFC in power lending, Shriram transport in vehicle loans) in
every segment. It remains to be seen if the company can match the ability of the
niche NBFCs in profitably sourcing high-yielding loans, while managing credit risk
effectively. At present, based on FY2011 numbers, even at a reasonably high
leverage, the company’s RoEs were on the lower side compared to peers.
Also considering exposure to infra (above 40% of total loans outstanding; Nil to
SEBs) and MFI (`460cr exposure, with `200cr being in Andhra Pradesh), NPA and
restructuring concerns surfacing in the short-to-medium term cannot be ruled out.
Outlook and valuation
L&TFH looks well-positioned for growth considering its bolstered capital position
post-IPO, diversified loan segments and healthy track record. The diversified loan
book also reduces risk emanating from sectoral or customer concentration. The
company is also likely to benefit from L&T’s strong corporate brand in attracting
talent and capital. That said, it remains to be seen if the company can match the
ability of the niche NBFCs in profitably sourcing high-yielding loans, while
managing credit risk effectively. At present, based on FY2011 numbers, even at a
reasonably high leverage, the company’s RoEs were on the lower side compared
to peers.
Also, there are near-term macro-headwinds for NBFCs from higher interest rates,
slowing credit demand and asset quality concerns, due to which valuations of listed
NBFCs have corrected. In the context of its lower RoEs relative to peers and
considering the near-term macro-headwinds, the valuations at the upper band
look a little expensive in our view at ~2.2x post-IPO Networth (~2.0x at the lower
band). Hence, we recommend Subscribe at the lower end of the price band.
July 26, 2011
6
L&T Finance Holding | IPO Note
Exhibit 9: DuPont Analysis L&TFH and competitors
FY11
IDFC
Bajaj Finance
M&M Finance
Shriram Transport
SKS Micro Finance
L&T FH*
Interest earned
10.5
22.0
19.9
22.9
30.6
13.4
Less: Prov
0.6
3.3
1.5
2.4
6.2
0.7
Adj interest earned
9.9
18.7
18.3
20.6
24.4
12.6
Int expense
5.9
6.1
6.5
9.6
9.1
6.6
Adj NII
4.0
12.7
11.9
10.9
15.3
6.0
Other income
1.7
0.6
0.3
0.1
2.5
0.3
Staff expenses
0.7
2.3
2.2
1.5
8.5
0.6
Other opex
0.6
5.0
2.7
1.7
4.9
1.8
PBT
4.4
5.9
7.3
7.9
4.5
4.0
Tax
1.2
2.0
2.5
2.6
1.6
1.4
ROA
3.2
4.0
4.8
5.2
2.9
2.6
PAT Equity
3.2
4.0
4.8
5.2
2.9
2.5
Leverage
4.4
5.0
4.8
5.4
2.8
5.9
ROE
14.0
19.7
22.9
28.1
8.1
15.0
Market Cap
20,709
2,670
7,428
15,800
3,859
8,778
P/BV
1.8
2.0
2.9
3.2
2.2
2.0
P/E
16.2
10.8
15.1
12.8
34.6
13.1
Source: Company, Angel Research, Note*: Post issue valuations
July 26, 2011
7
L&T Finance Holding | IPO Note
Income statement
Y/E March (` cr)
FY10
FY11
Net Interest Income
726
1,039
- YoY Growth (%)
NA
43.1
Other Income
23
56
- YoY Growth (%)
NA
137
Operating Income
749
1,094
- YoY Growth (%)
NA
46
Operating Expenses
260
372
- YoY Growth (%)
NA
43
Pre - Provision Profit
489
723
- YoY Growth (%)
NA
48
Prov. and Cont.
113
111
- YoY Growth (%)
NA
(2)
Profit Before Tax
376
612
- YoY Growth (%)
NA
63
Provision for Taxation
134
213
- as a % of PBT
36
35
PAT
242
398
- YoY Growth (%)
NA
65
Balance sheet
Y/E March (` cr)
FY10
FY11
Share Capital
1,354
1,417
Reserve & Surplus
672
1,431
Borrowings
9,727
15,916
- Growth (%)
56.4
63.6
Other Liabilities & Provisions
667
928
Total Liabilities
12,419
19,693
Investments
309
732
Advances
10,949
17,411
- Growth (%)
54.2
59.0
Fixed Assets
398
453
Other Assets
763
1,096
Total Assets
12,419
19,693
July 26, 2011
8
L&T Finance Holding | IPO Note
Ratio Analysis
Year end March
FY2010
FY2011
Per Share Data (`)
EPS
1.9
2.8
ABVPS ( 75% Coverage for NPAs)
14.1
19.6
Profitability ratios (%)
NIMs
7.8
7.1
ROA
2.5
2.5
ROE
21.1
16.3
Asset Quality (%)
Gross NPAs
2.49
1.10
Net NPAs
1.73
0.67
Valuation Ratios $
PER (x)
26.5
18.1
P/ABVPS (x)
3.6
2.6
DuPont Analysis (%)
NII
7.1
6.5
(-) Prov. Exp.
0.9
0.7
Adj NII
6.2
5.8
Other Inc.
0.2
0.3
Op. Inc.
6.4
6.1
Opex
2.6
2.3
PBT
3.9
3.8
Taxes
1.3
1.3
ROA
2.5
2.5
Leverage
8.3
6.6
ROE
21.1
16.3
Note: $ Valuations at the lower price band and pre issue earnings and adjusted book value
July 26, 2011
9
L&T Finance Holding | IPO Note
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make
such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies
referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and
risks of such an investment.
Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make
investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this
document are those of the analyst, and the company may or may not subscribe to all the views expressed within.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
fundamentals.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify,
nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While
Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory,
compliance, or other reasons that prevent us from doing so.
This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,
redistributed or passed on, directly or indirectly.
Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or
other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in
the past.
Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in
connection with the use of this information.
Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the
latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have
investment positions in the stocks recommended in this report.
July 26, 2011
10