Why should you invest in L&T Finance IPO?
Bangalore: L&T Finance Holdings (L&T Finance) is coming out with an initial public offering (IPO) at a price band of 
51-59 per share (face value of 10) to mobilise 1,245 crore. The company plans to use the proceeds to repay the holding company's inter-corporate deposit of 345 crore and to augment the capital base of L&T Finance and L&T Infrastructure Finance (L&T Infra) by 515 crore and 485 crore respectively.
Sharekhan has the following suggestion for investing in L&T Finance. The issue opens for subscription on 27 July 2011 and closes on 29 July 2011. It has been given a rating of 5/5 by CARE, ICRA.
Key investment positives
Diversified and balanced mix of high-growth businesses
The company has a highly diversified business model covering a variety of many complementary, high-growth business segments across its 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. It offers a broad spectrum of financial products and services, and is also able to cater to the needs of diverse customers in the small business segment to medium-sized vendors, dealers, contractors and fleet owners and large infrastructure developers and companies, including multi-national corporations. The company is planning to focus on construction equipment finance, infrastructure finance, rural finance and microfinance which are aligned with the growth story of India.
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, from retail customers and small and medium enterprises to large companies. The company has also established a strong reach in rural areas in India where it maintains more than 500 points of presence in order to service the customers of the rural product finance and microfinance segments of its retail finance business.
High quality loan portfolio
The company focuses on funding income-generating assets and activities. For each of the businesses, the company has established a strong credit check and asset valuation framework to evaluate and monitor the credit risk at the time of origination. The company lays emphasis on financing income-generating activities and assets as a means of controlling its portfolio quality.
Strong funding profile
The company has access to multiple sources of funding such as non convertible debentures (NCDs), infrastructure bonds, commercial papers, bank loans etc. The company carries high credit rating from the rating companies which helps to access funds at competitive rates thereby cushioning the margins. L&T Finance had a CARE rating of AA+ and an ICRA rating of LAA+. The RBI has granted L&T Infra the status of an Infrastructure Finance Company (IFC), which enhances the ability to raise funds at lower costs compared to other NBFCs. The company in June 2011 was also given a PFI status (public financial institution).
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- performing asset (NPA) ratio of 1.11percent as compared to 2.42 percent for FY2010. The NPA of the bank has also reduced from 1.69 percent in FY2010 to 0.67 percent in FY2011.
Strong parentage and brand equity of L&T
The brand name of L&T provides the company with a significant competitive advantage, particularly in attracting new customers and talent as well as in accessing capital. The L&T group also provides the company with management talent and professionals with deep industry knowledge in those sectors for which the company provides financing, such as infrastructure and construction equipment.
Key risks
Exposure to the MFI sector
The company has micro finance institution (MFI) exposure of about Rs400 crore of which the share of Andhra Pradeshis about 50 percent. Regarding the MFI exposure, the company has made a provision of Rs60 crore during FY2011 of which Rs54 crore is for the loans expended to the state of Andhra Pradesh.
Macro risks
The key macro concerns can affect the company's performance. For example, a sharp increase in the interest rates may squeeze the margins and contribute to its NPAs.
51-59 per share (face value of 10) to mobilise 1,245 crore. The company plans to use the proceeds to repay the holding company's inter-corporate deposit of 345 crore and to augment the capital base of L&T Finance and L&T Infrastructure Finance (L&T Infra) by 515 crore and 485 crore respectively.
Sharekhan has the following suggestion for investing in L&T Finance. The issue opens for subscription on 27 July 2011 and closes on 29 July 2011. It has been given a rating of 5/5 by CARE, ICRA.
Key investment positives
Diversified and balanced mix of high-growth businesses
The company has a highly diversified business model covering a variety of many complementary, high-growth business segments across its 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. It offers a broad spectrum of financial products and services, and is also able to cater to the needs of diverse customers in the small business segment to medium-sized vendors, dealers, contractors and fleet owners and large infrastructure developers and companies, including multi-national corporations. The company is planning to focus on construction equipment finance, infrastructure finance, rural finance and microfinance which are aligned with the growth story of India.
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, from retail customers and small and medium enterprises to large companies. The company has also established a strong reach in rural areas in India where it maintains more than 500 points of presence in order to service the customers of the rural product finance and microfinance segments of its retail finance business.
High quality loan portfolio
The company focuses on funding income-generating assets and activities. For each of the businesses, the company has established a strong credit check and asset valuation framework to evaluate and monitor the credit risk at the time of origination. The company lays emphasis on financing income-generating activities and assets as a means of controlling its portfolio quality.
Strong funding profile
The company has access to multiple sources of funding such as non convertible debentures (NCDs), infrastructure bonds, commercial papers, bank loans etc. The company carries high credit rating from the rating companies which helps to access funds at competitive rates thereby cushioning the margins. L&T Finance had a CARE rating of AA+ and an ICRA rating of LAA+. The RBI has granted L&T Infra the status of an Infrastructure Finance Company (IFC), which enhances the ability to raise funds at lower costs compared to other NBFCs. The company in June 2011 was also given a PFI status (public financial institution).
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- performing asset (NPA) ratio of 1.11percent as compared to 2.42 percent for FY2010. The NPA of the bank has also reduced from 1.69 percent in FY2010 to 0.67 percent in FY2011.
Strong parentage and brand equity of L&T
The brand name of L&T provides the company with a significant competitive advantage, particularly in attracting new customers and talent as well as in accessing capital. The L&T group also provides the company with management talent and professionals with deep industry knowledge in those sectors for which the company provides financing, such as infrastructure and construction equipment.
Key risks
Exposure to the MFI sector
The company has micro finance institution (MFI) exposure of about Rs400 crore of which the share of Andhra Pradeshis about 50 percent. Regarding the MFI exposure, the company has made a provision of Rs60 crore during FY2011 of which Rs54 crore is for the loans expended to the state of Andhra Pradesh.
Macro risks
The key macro concerns can affect the company's performance. For example, a sharp increase in the interest rates may squeeze the margins and contribute to its NPAs.