ANALYSIS OF L&T FINANCE IPO

L&T Finance has generated quite a bit of hype for its IPO. For this purpose, I shall use the companies that they have mentioned in the RHP. The various figures for them is mentioned below.

EPS L&T Finance 2.87

Price 59

P/E 20.56

RONW 13.58%

BV/share P/BV 20.4 2.89

Now, if we consider that the issue gets listed at the upper limit (as has been the trend in recent times), and then L&T Finance has a P/E ratio greater than any of the peers that they mentioned in the RHP. What more, the closest anyone comes to it is IDFC, trading at a multiple of 15.25 times earnings? Although the P/BV is not so bad if we consider the same price of Rs.59 this in turn shows an important fact: The low RONW. Among the group L&T Finance has the second lowest RONW. The next highest is at 17.37% to its 13.58%. The higher price may reflect a very important assumption a faster growth in earnings than its peers. This may in turn increase the RONW in the coming years. When I took a look at that, L&T Finances profits surged by 49.26% Y-o-Y for FY1. If we assume (for argument sake, these growth rates may not be replicated, but the actual growth rates might be in proportion to these), then we get the following result: EPS L&T Finance 4.305 Price (as on 27/07/11) 59 Fwd. looking P/E 13.70

Based on this, the price does not seem too high. What more, in a preferential allocation of shares in September 2010, L&T invested Rs 425 crore at Rs 67 per share. L&T Finance Holdings, subsidiary of L&T group is coming up with an Initial Public Offer (IPO) to raise upto Rs.1245 crores. This is first public issue since L&T listed way back in 1950! The IPO opens on July 27 and closes on 29, has been priced in the range of Rs.51 to Rs.59 L&T Finance Holdings is a fully-owned subsidiary of engineering giant L&T. L&T Finance Holdings owns five subsidiaries namely L&T Infrastructure Company, L&T Finance, India Infrastructure Developers, L&T Investment Management and L&T Mutual Fund Trustees. Combined assets of these group companies as of FY11 are at Rs.18,800 crore. It was up from Rs.12, 000 crores in FY10. The company had a PAT of Rs.392 crores last fiscal, it had grown from Rs.262 crores in the previous fiscal. The proposed 17% equity dilution values L&T Finance Holdings between Rs.8, 800 crore and Rs.9, 900 crores. The proceeds from this IPO will be used to fund the expansion of subsidiaries L&T Finance and L&T Infra Finance. In July, L&T Finance Holdings has raised Rs.330 crores through a pre-IPO placement in July 2011. It sold a 4% stake to Capital International Group at Rs.55 per share. This IPO price band puts the price to book value ratio between 1.7 1.9, this is comparable to similar NBFC peers like M&M Finance (2.1 2.3 P/BV) IDFC (1.7-1.8 P/BV). This IPO price does not looks very high when looked at from long term perspectives. The stock should give good returns in coming 3-4 years. Listing gains may not be very high. Cautious investors may look at the listing of IPO and then decide when to buy stocks of this holding company from engineering giant.

IPO Valuation
L&T Finance Holdings' FY11 EPS on post-issue equity stands at Rs. 2.28 and Rs.2.33 on post-issue equity of Rs. 1721.02 crore (lower band of Rs. 51) and Rs. 1688.02 crore (on higher band of Rs. 59). At the price band of Rs. 51 to Rs. 59, P/E works out to 22.4 to 25.3 times. Current book value of L&T Finance Holdings is Rs. 19.6. Pre issue P/BV at issue price of Rs. 51 comes out to 2.6, while at issue price of Rs. 59 it is 3.0. Post-issue BV works out at Rs.24.1 and Rs.24.5 at issue price of Rs.51 and Rs.59, respectively. P/BV at both the bands works out to 2.1 and 2.4 times, respectively. CARE / ICRA have assigned an IPO Grade 5 to L&T Finance IPO. This means as per CARE / ICRA, company has 'Strong Fundamentals'. This IPO price does not looks very high when looked at from long term perspectives. The stock should give good returns in coming 3-4 years. Listing gains may not be very high. Cautious investors may look at the listing of IPO and then decide when to buy stocks of this holding company from engineering giant. The proceeds of the IPO are proposed to be utilized for repayment of inter corporate deposit issued by promoter to company (worth Rs 345 crore); and augmenting the capital base of L&T Finance (by infusing Rs 570 crore) and L&T Infra (by investing Rs 535 crore), to meet the capital adequacy requirements to support the future growth in their business L&T Finance Holdings Limited has informed the share market (BSE/NSE) that the shares of its recent Initial Public Offering (IPO) will list on 12th August 2011. The IPO was open between 27th July 2011 to 29th July 2011 The price band was Rs 51 to Rs 59 and the Issue Price was fixed at near to the lower level of the price band, Rs 52 per equity share. The company had entered into primary market with an Initial Public Offering (IPO) of Rs 1,245.00 Crore. L&T Finance Holdings 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.

L&T Finance Listing

Indias L&T Finance Holdings up to 17.5 billion rupee ($392 million) initial public offering will open on July 26 and close July 29. Open Date 27-Jul-2011 Close Date 29-Jul-2011 Allotment Date 08-Aug-2011 Refund Date 09-Aug-2011

Listing Date: L&T Finance Holdings, a subsidiary of engineering and construction company Larsen and Toubro, will be listing its equity shares on exchanges on Friday, August 12. The company has fixed issue price at Rs 52 a share while the price band was 51-59 a share. The issue, which opened between July 27-29, was subscribed more than 5 times. Reserved portion of retail investors was subscribed 9.61 times while non-institutional investors portion got subscribed 6.18 times and qualified institutional buyers 1.93 times. L&T Finance received Rs 1,245 crore through the issue. Parent company L&Ts stake in the company reduced to 83% post issue. Company intends to use issue proceeds for augmenting 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.

JM Financial Consultants, Citigroup Global Markets and HSBC Securities are the joint global co-ordinators and the book-running lead managers (BRLM) to the issue. Credit Suisse Securities and Barclays Securities are the BRLMs while Equirus Capital is the co-BRLM. We examined the Balance Sheet and Profit & Loss statements of LTF to determine its capacity to pay back its investors. A companys ability to pay off its debts is known from two ratios Debt-equity ratio and interest coverage ratio. For bond holders, interest coverage ratio is supposed to act as a safety net, predicting how far a companys earnings will fall before it starts defaulting on its payments. Interest coverage ratio is given by Earnings before Interest and Taxes (EBIT) divided by Interest Expense. A value of 1.5 or above is considered to be safe. Debt-equity ratio is a measure of a companys financial leverage. It measures a companys ability to borrow and repay money. It is given by total liabilities divided by stockholders equity. The acceptable limit of the debt -equity ratio is usually 2:1. However, it can go up for companies in the business of lending and borrowings such as banks, NBFCs, etc.

The interest coverage ratio of LTF is under the acceptable limit of 1.5 and hence is a matter of concern. The debt-equity ratio is also not encouraging. It is currently at 5.43 but can soar to 6.68 once the issue is out. However, given the companys financial strengths, nil exposure to real sectors and continued capital support of its parent firm L&T, LTF is obliged to fulfil its promises to its bond holders. The company has also maintained a healthy Capital to Risk (weighted) Assets Ratio (CRAR) of 16.41 per cent as on Mar 31, 2009 against 10 per cent prescribed by the Reserve Bank of India (RBI). It has nil exposure to real estate sector, thus, is protected against any credit default which is a common occurrence these days.

CONCLUSION: In a rush to collect money from the market, companies are bringing out corporate deposits on regular basis but investors should not make haste and invest without understanding the business and financial strengths of a company. Though the rate of return on corporate deposits is 1-2 per cent (in some cases 4 per cent) more than that on bank deposits, they are not secured like the latter. Bank deposits up to Rs 1 lakh are secured under the government-sponsored Deposit Insurance and Credit Guarantee Corporation (DICGC). However, given the backing it has received from its parent firm and the availability of options, LTF NCD issue is an opportunity for all investors to make an extra buck on their investments.