L & T Finance Holdings - Buy

Seven months ago Construction and Engineering giant Larsen and Toubro (L&T) had decided to split into nine independent companies. Its finance subsidiary is the first to be out of its fold. It is after a gap of 60 long years that the company is reverting to the market to raise the funds in the form of an IPO. The gross issue size is of Rs 1575 crore, (the parent company’s stake would come down by 17%) but the net issue size for the public will be only Rs 1,075 crore, as the company has already raised Rs 330 crore through pre-IPO placements to the US-based private equity fund Capital International at Rs 55 per share. The issue opens on 27th July and ends on 29th July 2011 and in a price band of Rs 51 to Rs 59.

Business Overview

The objective of the issue is to repay inter-corporate deposits issued by its parent company and then form augment its capital base. Out of the total proceeds approximately Rs 345 crore would go into the repayment of inter corporate deposits issued by L&T, Rs 1105 crore would be applied towards the capital of the company and the remaining would be used for it corporate purposes. L&T Finance Holdings is a holding company having three subsidiaries; L&T Infrastructure Finance Co, L&T Finance and India Infrastructure Developers. L&T Finance Ltd itself has two subsidiaries i.e. L&T Investment management and L&T Mutual Fund Trustee. L&T Infra provides financial products and services in Infrastructure development and construction across various sectors. It also provides equity financing solutions and financial advisory services. L&T Finance operates in two groups i.e. Retail Finance group which includes construction equipment finance, transportation equipment finance, microfinance, rural product finance, etc. The corporate Finance Group includes corporate loans and lease, supply chain finance and capital market finance. L&T Finance in January 2010 acquired DBS Cholamandalam Asset Management which was later renamed as L&T Mutual Fund. It is a SEBI registered mutual fund with 23 individual schemes as on 31 May 2011. L&T Investment Management is acting as the investment manager to the various schemes.

Financials and Valuation

On the financial front the company has done extremely well. Its topline has increased from Rs 1424 crore in FY 10 to Rs 2115 crore in FY11 while the bottomline increased from Rs 263 crore to Rs 393 crore in FY11. Both of them have increased by 49% which is a very a good sign. According to the management of the company it has penetrated Tier 1 cities quite fairly and is looking at expanding further in Tier 2 and Tier 3 cities now.

What really goes in favour of this issue is that L&T Finance Holdings comes from a reputed brand L&T which has given substantial returns to investors in the past. We believe that L&T Finance Holding would also create wealth for investors provided one has long term investment horizon. Another reason for the scrip to rerate is that it may also go for a banking license as an when RBI issues new licenses. We expect L&T Finance Holding to get listed at around Rs 65. Hence we advise our readers to go for the same.