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Price band Rs51-59
Diversified loan book; growth has been strong in the recent past
L&TFH through its subsidiaries L&T Finance and L&T Infra Finance offers a broad spectrum of financial products and services. The consolidated loan book of the company could be broken into infrastructure finance (40%), retail finance (37%), corporate finance (20%) and others (3%). Over the past two years, the consolidated loan book has witnessed 57% CAGR. More importantly, the book has become more diversified with the share of retail and corporate finance segments combined having declined from 69% in FY09 to 58% in FY11.
Wide pan-India presence; exploring opportunities to leverage it
As of May 2011, L&TFH had 837 points-of-presence spread across 23 states thereby enabling the company to cater to a large customer base (especially in rural and semi-urban areas). Company further plans to strengthen its reach through expansion in areas offering significant opportunities to increase revenue and giving competitive advantage. Such an extensive distribution network would be leveraged by the company to provide new products and services and also foray into new business segments. With an edge over competition in terms of reach, robust loan growth momentum is likely to continue.
Sanguine asset quality; however, some slippages may crop up
Across segments, L&TFH’s asset quality has improved substantially in FY11 despite the robust growth registered over the past few years. For L&T Finance (comprising retail and corporate finance business), the Gross and Net NPAs stood at 1.4% and 0.8% respectively at end-FY11. In L&T Infra Finance, the Gross and Net NPAs stood at 0.7% and 0.5% respectively at end-FY11. More importantly, about 71%, 91% and 90% of the Corporate, Retail and Infra segment advances are secured thereby providing high level of comfort. However, given the current challenging credit environment, one could expect some slippage in NPL ratios.
Robust profitability reflected in high return ratios; ‘Subscribe’
RoA and RoE have improved materially in the past two years for L&T Finance driven by significant expansion in NIM and improvement in asset quality. End-FY11, RoA of the company stood at 2.5%, remarkable in the light of the loan book mix. RoE was at 16% with the leverage at 5.3x. L&T Infra Finance’s RoA has been stable at 3.5% in the past two years. This is better than IDFC (like-to-like competitor) which has been earning around 3%. Further, RoE is impressive at 18%. With valuation reasonable at mean 2.5x P/BV (pre-IPO) we recommend subscribing to the IPO.
Key risks: a) Competition by banks and other NBFCs; b) Material exposure to microfinance and power sector c) Asset-liability mismatch d) Higher interest rate risk being wholesale funded
Financial summary
| Y/e 31 Mar (Rs m) |
FY09 |
FY10 |
FY11 |
| Total oper. Income |
- |
14,056 |
20,864 |
| yoy growth (%) |
- |
- |
48.4 |
| Op. profit (pre-prov) |
- |
11,954 |
17,738 |
| yoy growth (%) |
- |
- |
48.4 |
| Net profit |
- |
2,630 |
3,926 |
| yoy growth (%) |
- |
- |
49.3 |
|
|
|
|
| EPS (Rs) |
- |
1.9 |
2.8 |
| BVPS (Rs) |
- |
17.3 |
20.4 |
| ROE (%) |
- |
13.6 |
15.0 |
| ROA (%) |
- |
2.6 |
2.4 | Source: Company RHP, India Infoline Research
About the Company
L&T Finance Holdings Limited (L&TFH), the NBFC promoted by L&T Limited, has a highly diversified business model. It has a balanced mix of high growth business segments across four core business groups, namely the Infrastructure Finance Group, the Retail Finance Group, the Corporate Finance Group and the Investment Management Group, offering a broad spectrum of financial products and services. With pan-India presence (across 23 states) and extensive network (837 points of presence), the company has been able to provide service to customers from proximate locations. L&TFH specifically emphasizes on financing income-generating assets and activities in order to control and maintain a high loan portfolio quality. With superior credit rating and strong brand equity, L&TFH has been in position to borrow at competitive rates. In addition, the capital structure, which currently comprises predominantly equity share capital, provides the opportunity to grow the business by raising additional Tier II capital.
Foraying into new products & services and new lines of business; physical and geographic expansion
The company intends to introduce new products & services as well as continue identifying opportunities to expand into new business segments as done in the past (Investment Management – Jan ’10; Microfinance – Jun ’08; Financial Products Distribution – Sept ’07; Infrastructure Finance – Jan ’07). This strategy will mitigate the risk associated with product concentration and enhance the profitability, thereby ensuring consistent growth.
With an objective to increase the market penetration of the existing products and services, L&TFH continues to expand both physically and geographically, with the primary focus on rural and semi-urban areas that offer significant opportunities. The company proposes to develop its financial product distribution segment and sustain growth and profitability by cross-selling to the existing customer base.
Group Structure and Subsidiaries
Source: Company RHP, India Infoline Research
Sound Financials
On a consolidated basis, L&TFH has an outstanding loan book of Rs179.43bn as on 31st Mar ’11 as against Rs114.46bn in the previous year, recording a magnificent 57% y-o-y growth. The Company had income from operations of Rs20,864mn and PAT of Rs3,926mn during FY11 as against Rs14,056mn and Rs2,630mn during FY10, recording a 48.4% and 49.3%of y-o-y growth respectively.
Total Income during FY11
Total Loans & Advances as on 31st Mar’ 2011
Source: Company RHP, India Infoline Research
Objects of the Issue
The Company intends to utilize the proceeds of the Issue for the following objects:
Repayment of Inter-corporate deposit issued by the Promoter to the Company for an aggregate amount of Rs3.45bn;
To augment the capital base of L&T Finance and L&T Infra, by infusing Rs5.15bn and Rs54.85bn respectively, to meet the capital adequacy requirements for supporting the future growth in the business;
For other general corporate purposes including meeting the expenses of the Issue.
Key concerns
Company operates in a highly competitive environment as various public and private sector commercial banks and financial institutions deals in similar products and services. However, the Company has been able to borrow at competitive rates owing to strong credit rating, brand reputation and higher than required CARs.
L&TFH is exposed to interest rate risk and liquidity risk amid a big asset-liability mismatch in the more than 1 year maturity bucket, where the total advances are significantly above the liabilities for both L&T Infra & L&T Finance.
Company has an exposure of 6.8% (Rs4.45bn) in the Microfinance segment of its Retail Finance Group; 28.7% of the infrastructure loans are accounted by the power sector.
L&T Finance (Retail Finance & Corporate Finance Group)
L&T Finance, a wholly owned subsidiary, provides financing to its retail customers through its Retail Finance Group and corporate customers through its Corporate Finance Group. It is registered with the RBI as an NBFC-ND-SI and an AFC. Over the last five years the loan book recorded a CAGR of 40%, revenues at a CAGR of 52% and PAT at 38.5%. It accounts for 66% of the total income and 57% of the loan portfolio. With various available sources of funding, the company has been able to pull in the required amount of capital to grow and fund its business in line with its business strategy and customers’ requirements. L&T Finance has been consistently maintaining its CAR above the regulatory requirements and improving it by 90bps in FY11 to 16.3%. Net NPA ratio declined significantly from 1.7% in FY10 to 0.7% FY11 reflecting significant improvement in asset quality.
Source of funding
Higher than required CAR
Source: Company RHP, India Infoline Research
Retail Finance Group
Retail Finance Group provides financing to retail customers for the acquisition of income generating assets and activities that comprises construction equipment finance, transportation equipment finance, rural products finance and microfinance. At the end of the FY11, retail group accounted for Rs65.8bn (~37%) of the total loan book of L&TFH. Out of which, ~91% of the retail loans are secured. Its contribution towards income from operations was 48% in FY11. As on 31st Mar ’11 the company’s exposure to microfinance segment stood at Rs4.45bn, which accounts for 6.8% of the total loans of Retail Finance group. Out of this 50% are accounted by Andhra Pradesh, which may pose a threat to the asset quality.
Retail Finance Group-Products
Source: Company RHP, India Infoline Research
Corporate Finance Group
Corporate Finance Group offers financial products and services to corporate clients, and comprises the segments of corporate loans and leases (in the form of asset-backed loans, term loans, receivables discounting, short-term working capital facilities and operating and finance leases), supply chain finance (which includes vendor and dealer finance products) and capital markets products. At the end of FY11, corporate group accounted for Rs35.8bn (~20%) of the total loan book of L&TFH. Out of which, ~71% of the corporate loans are secured. Its contribution towards income from operations was Rs3.7bn during FY11 (~18%).
Retail loans and advances
Corporate loans and advances
Source: Company RHP, India Infoline Research
Corporate Finance Group-Products
Source: Company RHP, India Infoline Research
Yield on loans and advances & Cost of funds
Net Interest Margin
Source: Company RHP, India Infoline Research
Return Ratios
Average leverage
Source: Company RHP, India Infoline Research
Loan book as on 31st Mar’ 2011
NPA ratios
Source: Company RHP, India Infoline Research
L&T Infrastructure Finance Company (L&T Infra)
L&T Infra, a wholly-owned subsidiary, conducts infrastructure finance business, which provides financial products and services to customers engaged in infrastructure development and construction, with a focus on the power, roads, telecommunications, oil and gas, urban infrastructure and ports sectors in India. The Infrastructure Finance Group comprises the segments of project finance and corporate loans, equity investments and financial advisory services. L&T Infra is registered with the RBI as an NBFC-ND-SI and an IFC, which allows it to optimize its capital structure by diversifying its borrowings and accessing long term funding resources, thereby expanding its financing operations while maintaining its competitive cost of funds. In addition, L&T Infra has been notified as a Public Financial Institution (“PFI”). The income from operations of the Infrastructure Finance Group for FY11 was Rs7bn and recorded a robust CAGR of 88% over the last four years. Its contribution in the total income of L&TFH is 33.3%. The total loans and advances outstanding as on 31st Mar ’11 were Rs71.9bn. Despite slowdown in the infrastructure sector in recent past, L&T Infra had negligible net NPA ratio of 0.53% in FY11. The company has an exposure of 28.7% in the power sector. Of the total infrastructure loans, 28.7% are accounted by the power sector.
Infrastructure Finance Group-Products
Source: Company RHP, India Infoline Research
Loan book as on 31st Mar ‘11
Source of funding
Source: Company RHP, India Infoline Research
Yield on loans and advances & Cost of funds
Net Interest Margin
Source: Company RHP, India Infoline Research
Income from operations
PAT Margin
Source: Company RHP, India Infoline Research
Return Ratios
Average leverage
Source: Company RHP, India Infoline Research
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