ICRA assigns 'IPO Grade 5' for L&T Finance Holdings IPO

ICRA has assigned an 'IPO Grade 5', indicating strong fundamentals to the proposed initial public offering of L&T Finance Holdings Limited (LTFHL). ICRA assigns IPO grading on a scale of IPO Grade 5 through IPO Grade 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals. LTFHL is proposing to come out with an Initial Public Offer through issue of a yet to be determined number shares of face value Rs 10/- at a yet to be determined premium, subject to a total issue size of Rs. 1,500 crore. Larsen & Toubro (L&T) is LTHFL's parent with a 99.99% stake. The offer would be made through the 100% book building route. Of the net offer, 50% is reserved for Qualified Institutional Buyers (QIBs), 15% for non-institutional investors and 35% for the retail investors. Post IPO, the shares will be listed on the National Stock Exchange and Bombay Stock Exchange. The objects of the offer are to augment the capital base of subsidiary companies L&T Finance Limited (LTF) and L&T Infrastructure Finance Company (LTIF) by Rs. 600 crore each in order to support their capital requirements arising out of the expected growth in their assets and for also compliance of their regulatory capital adequacy requirements. The balance proceeds are intended by to be utilized towards other general corporate purposes or further capital support in the subsidiary companies. While assigning the IPO grade to LTFHL, the holding company, ICRA has evaluated the company's consolidated financials, which includes its subsidiaries L&T Finance Limited (LTF), L&T Infrastructure Finance Limited (LTIF) L&T Investment Management Limited (LTIM)* and India Infrastructure Developers Limited (IIDL) to evaluate its business fundamentals as well as financial strengths.

The strong fundamental grading factors in high growth prospects for the subsidiaries of LTFHL, their good competitive position to exploit the growth opportunities on the strength of their sound knowledge, good linkages in the infrastructure space, good systems and processes, access to long term funds at competitive rates and strong financial flexibility. During FY 2010 LTFHL's combined loan book (on books) registered a healthy y-o-y growth of 51%, while during H1 2011 the portfolio registered a 21% growth over March 2010 levels. As on September 30, 2010 the company had a loan portfolio of Rs.13,335 crore, out of which 61% were larger ticket exposures, balance 39% were retail loans. The proposed IPO would improve the group's position to take higher exposures (consolidated Net worth would increase to at least Rs. 4200 crore post the IPO) as well as provide capital for funding growth. Leveraging level of the company is at a 4.55 times as on September 30, 2010, while the Tier 1 capital % for LTF and LITF is at 14.45% and 18.04% respectively as against the regulatory Tier 1 capital requirement of 8% (total capital requirement of 12%†) for LTF and 10% (total capital requirement 15%) for LTIF, therefore the company could improve on its return on equity through higher leveraging. Further, increase in the scale of non fund based businesses including portfolio management services, mutual fund and insurance distribution and project advisory services could improve the return on equity, which was at 16% (annualized) for 6 months ending September 2011. Financial services is one of the core verticals of L&T and LTFHL is likely to continue to benefit from the close supervision, monitoring and support of L&T's management and board over its operations. The grading also benefits from strong financial profile of the lending subsidiaries, which are rated at LAA+( stable) / A1+ by ICRA and good corporate governance practices at L&T.

As on September 30, 2010 the company's large loan book was predominantly in the infrastructure segment (45% of portfolio), followed by Corporate and Receivable discounting loans, vendor and dealer financing loans, and Loan against Share (LAS).

In the infrastructure lending segment, where ticket sizes are fairly large (ranging from Rs. 100 crore - Rs. 200 crore), LTFHL through its subsidiaries has a diversified loan portfolio across various industries including power generation, telecom, roads, Oil and gas, urban infrastructure etc and as on March 31, 2010 and September 30, 2010 the company registered a strong y-o-y portfolio growth of 101% and 68% (YTD-Sep-10 growth of 24%) respectively (against a y-o-y banking system growth in infrastructure of 41% and 47% respectively). While the infrastructure segment is subject to competition from other lenders, LTFHL through its subsidiaries is expected to be in a position to take advantage of the current and expected thrust on infrastructure development in the country and grow profitably on account of its strong relationships in the segment and strong technical and operational expertise it enjoys from L&T. The company is a relatively new player in the infrastructure segment, however close association with L&T provides it with access to strong project assessment skills which mitigates the risk.

LTFHL through its subsidiaries offers corporate loans Corporate / SME customers and has been able to maintain good asset quality in the segment. In the corporate lending segment, LTFHL through its subsidiaries also benefits from the strong linkages from its parent L&T by financing participants within its supply chain (bill discounting & vendor financing), which puts it in a superior position to assess credit quality of customers while expanding its book profitably. In the LAS segment the company primarily targets the promoter funding segment and maintains conservative lending norms to mitigate the risks associated with this business.

In the retail customer segment, which accounted for 39% of total portfolio as on September 30, 2010, LTFHL focuses on financing income generating assets and the portfolio consists of loans in the Construction Equipment segment (CEF) , the Commercial Vehicle segment (CV) , tractor segment and Micro finance segment. While in the past the company had faced issues on asset quality in the CV and CEF segments, following a subsequent tightening of lending and appraisal norms, re-alignment of disbursements towards strong credit profiled customers and re-structuring of recovery and collection initiatives, the company has been able to improve its asset quality on the fresh originations. LTFHL has an established and wide distribution network, which along with the company's established franchise should enable it to be in a position to tap the growth potential in the CV and CEF segments, which are closely linked to economic indicators. However it would be important for the company to ensure a strict control over its asset quality in order to maintain its risk adjusted returns as it expands in the retail segment. ICRA has evaluated the company's exposure to the Micro Finance segment, and its exposure to the state of Andhra Pradesh, where since October 2010 operations and recovery rates across the industry have been significantly disrupted on account of the issue of the "Andhra Pradesh Micro Finance Institutions Ordinance, 2010" by the government of Andhra Pradesh. In ICRA's view the size of LTFHL's exposure in Andhra Pradesh is not significant in relation to the overall size of the company's balance sheet and is not likely to have material impact on its financial profile.

Source : Equity Bulls

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