L&T Finance Holdings Limited (LTFHL) is tapping the capital markets with its IPO which opens on Wednesday the 27th of July and closes on Friday the 29th of July. The price band is Rs 51-59 and the issue size is Rs 1,245 crs. There is a reservation of Rs 50 crs for employees who are also eligible for an upfront discount of Rs 2. Non institutional shareholders of L&T also have a reservation of Rs 120 crs in the issue, making the net offer to public as Rs 1,075 crs.
The company had done a pre-IPO placement of 6 cr shares at Rs 55. On Tuesday it has done its anchor investor allocation of 3.1 cr shares at Rs 56 per share to 8 anchor investors.
| Price Band | Rs 51 – Rs 59 |
| Issue Size | Rs 1,245 crs |
| Offer size in shares | 24,41,17,647 shares at Rs 51 to 21,10,16,949 shares at Rs 59 |
| Reservation for Employees | Rs 50 crs |
| Reservation for employees in Shares | 98,03,922 shares at Rs 51 to 84,74,576 shares at Rs 59 |
| Reservation for Shareholders of L&T | Rs 120 crs |
| Reservation for Shareholders of L&T in shares | 2,35,29,412 equity shares at Rs 51 to 2,03,38,983 equity shares at Rs 59 |
| Net issue in Rupees | Rs 1,075 crs |
| Net issue in Shares | 21,07,84,314 equity shares at Rs 51 to 18,22,03,390 equity Shares at Rs 59 |
| QIB | 10,53,92,157 equity shares at Rs 51 to 9,11,01,695 equity Shares at Rs 59 |
| HNI’s | 3,16,17,647 equity shares at Rs 51 to 2,73,30,508 equity Shares at Rs 59 |
| Retail | 7,37,74,510 equity shares at Rs 51 to 6,37,71,186 equity Shares at Rs 59 |
| Joint Global Co-ordinators and | J M Financial Consultants Private Limited |
| Book Running Lead Managers | Citigroup Global Markets India Private Limited |
| HSBC Securities and Capital Markets (India) Private Limited | |
| Book Running Lead Managers | Barclays Securities (India) Private Limited |
| Credit Suisse Securities (India) Private Limited | |
| Co-Book Running Lead Manager | Equirus Capital Private Limited |
| Isssue Opening Date | Wednesday 27th July |
| Isssue closing date | Friday 29th July |
| IPO Grade | CARE grade 5/5 and also ICRA grade 5/5 indicating Strong fundamentals |
| Anchor Investors | Alloted 2,73,30,300 Equity shares at Rs 56 |
| Paid -up Capital Pre IPO | 147,70,24,426 Equity Shares |
| Paid -up Capital Post IPO | 172,11,42,073 Equity Shares at Rs 51 to 168,80,41,375 equity shares at Rs 59 |
| Market Cap post listing | Rs 8,777.82 crs at Rs 51 to 9,959.44 crs at Rs 59 |
| Bid Lot | 100 shares |
| Bidding Amount for Retail | 3300 shares at Rs 59 or Rs 1,94,700 per application |
Business
L&T Finance Holdings Limited (LTFHL) is a 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 registered with the RBI as an NBFC-NDSI and has also applied for registration as a Core Investment Company (CIC). It is promoted by Larsen and Toubro, one of the leading companies in India, with interests in engineering, construction, electrical and electronics manufacturing and services, information technology and financial services. The parent company had a market capitalization of Rs 1,08,436crs as on close of trading on the BSE on Tuesday the 26th of July.
On a consolidated basis LTHFL has a loan asset base of Rs 17,943 crs. It disbursed loans of Rs 24,342 crs in FY2011. The company has two active subsidiaries which are wholly owned by it.
L&T Finance was incorporated in 1994 and has its focus segments as financing of construction and infrastructure equipment, tractors, retail products, commercial vehicles, vendor financing and capital market financing. It has a loan asset base of Rs 10,157 crs as of March 2011.
The company has a subsidiary L&T Infra Finance Company which undertakes project finance and advisory for infrastructure projects. It has a loan asset base of s 7,186 crs as of March 2011.
The company had in September 2009 acquired DBS Cholamandalam Asset Management Company for Rs 45 crs,. The company had assets under management of Rs 2,893 crs. The company has since been renamed as L&T Investment Management Limited and it has assets under management of Rs 3,334.4 crs as of March 2011.
The company also has a 5% stake in two old private sector banks namely Federal Bank and City Union Bank.
It may be noted here that the company LTFHL pays the parent a royalty of 5% of the net profits or 0.15% of the assets or whichever is lower for using the brand. Logo and company name.The company does do business with the parent and its vendors but it does not form a significant part of the business. The company believes in its returns and treats each transaction on a return on the amount invested and only does business if it is profitable and meets the required margins norms.
Objects of the Issue
The objects of the issue are as follows: –
| Repayment of inter corporate deposit issued by our promoter to our company | Rs 345 crs |
| Infusion of capital in L&T Finance Limited | Rs 515 crs |
| Infusion of capital in L&T Infrastructure Finance Company Limited | Rs 485 crs |
| General Corporate Purposes |
Financials
The company does business through its 837 points of presence in 23 states. It had on a consolidated basis a turnover of Rs 14239.15 million in the year ended March 2010 which increased to Rs 21148.43 million in the year ended March 2011. The net profit after tax was Rs 2630.08 million in March 2010 and Rs 3925.72 million in the year ended March 2011.
| year 2009 | year 2010 | year 2011 | |
| Income from Operations | 0.00 | 14055.96 | 20863.76 |
| Other Income | 0.26 | 183.19 | 284.67 |
| Total Income | 0.26 | 14239.15 | 21148.43 |
| Expenses | 0.42 | 10297.45 | 15032.43 |
| Profit Before Tax | -0.16 | 3941.70 | 6116.00 |
| Tax payments | 0.01 | 1340.95 | 2133.01 |
| Net Profit After Tax | -0.17 | 2600.75 | 3982.99 |
| Adjustments | 0 | -29.33 | 57.27 |
| Net Profit After Tax and adj | -0.17 | 2630.08 | 3925.72 |
The company operates on a leveraged model and believes in leveraging 5 to 6 times. The company has an exposure towards the MFI business and has a portfolio of just under Rs 200 crs in Andhra Pradesh out of a total of under Rs 400 crs in the whole country. Things in Andhra Pradesh are not doing too well and the company has provided Rs 54 crs towards NPA’s in the AP portfolio.
LTFHL has net interest margins of 7.9% and a return on assets of 2.9%. The shares are being offered in a price band of Rs 51-59. The book value of the company as on 31st March 2011 is Rs 20.4, implying a price to book value of 2.5 at the lower end to 2.89 at the upper end. The EPS for the year ended March 2011 on the old capital is Rs 2.65. On the fully expanded equity the earnings per share at the lower end of the price band of Rs 51 is 2.28 and at the upper end of the price band is Rs 2.32.
Comparisons
The company has chosen to compare itself with Shriram Transport Finance Company Limited, Mahindra & Mahindra Financial Services, IDFC, Rural Electrification Corporation (REC), Power Finance Corporation and Sundaram Finance. The company LTHFL stacks well against them but appears expensive. The fact that a Larsen Toubro company is tapping the capital markets after 61 years is certainly a reason for the high premium being demanded by thee issuer company. They have done a pre-IPO at Rs 55 which has set the bench mark or price discovery for the band which is pre-IPO price plus Rs 4 as the upper band and minus Rs 4 as the lower end of the band.
The company has done an anchor investor allocation at Rs 56 which is a premium of Rs 1 to the pre-IPO price. I believe the pre-IPO price which has a lock in of I year against the anchor investors allocation which has a lock in of merely one month, one should not be surprised if the final price fixed by the management is either Rs 56 or Rs 57. This price would offer a sustainable price post listing because the fact that the issue would get subscribed but oversubscribed a number of times is a foregone conclusion. It is important for an issue to be considered as a successful one, it needs to be not only oversubscribed, but be one where the price post listing sustains and all investors atleastmake some returns on their investment. For this to happen the share price post listing must sustain at the issue price plus the grey market premium at the minimum.
There was a bloodbath in the markets on Tuesday the 26th of July after the RBI increased the repo and reverse repo rates and this increase will directly affect the business of the issuer company.
Conclusion
The pedigree of the issuer company is never in doubt. It has very strong parentage and is in a business which has good growth prospects and is in the focus area of the country. The company has a very large presence and is doing business in 23 states currently. The prospects are good without doubt but this business is one which takes its own time to flourish and start generating returns for its investors. As mentioned by the company it believes in the gearing or leveraging game and does it 5 to 6 times the net worth. This would take time and returns for investors would be available in the medium and long term considering that the company has decided to encash its goodwill of 61 years.
The asking price is expensive without doubt and I believe that the management having done two price discoveries may as a goodwill gesture not price the issue at the top end of the price band and price it at Rs 56 or maximum Rs 57. The rational at 56 would be the anchor investors and at 57 the same would be that as there is no lock in of shares, the same is being priced at a premium to the anchor investors.
Conclusion
The name, pedigree, business and strategy for growth are all in favour of LTFHL. They are however choosing to use the goodwill of 61 years in a price which looks certainly expensive compared to its peers. The issue will garner support from all quarters but the market mood could be a dampener. Looking at the fact that the issue would generate returns only in the medium and long term as the issue is more than adequately priced currently; it may make sense to make price bids in the retail category instead of at cut-off. I suggest playing safe and applying for the issue at Rs 57.
SEBI Disclaimer: – I intend to subscribe to the above issue.
