After quite a lull, a big IPO is going to hit the market on 27th July 2011, and it will give a good indication to other companies of how much retail appetite is there for IPOs, and of course it gives me an opportunity to write a post with pretty pie charts.
L&T Finance Holding is a NBFC (Non Banking Finance company) holding company, which means that it has fully owned subsidiaries which operates its business, and their revenues and expenses roll up to the parent company.
They are present in three main lines of business:
- Corporate and Retail Financing
- Infrastructure Financing.
- Investment Management.
Of these, the corporate and retail segment is the biggest, infrastructure funding is the second biggest, and at present, the investment management part of the business is miniscule and contributes less than 1% to the overall pie.
Since it is a holding company, it has the following 3 direct subsidiaries:
1. L&T Infrastructure Finance Company: This company invests in the infrastructure sector, had a total income of Rs. 7.03 billion in fiscal 2011, and forms 33.29% of the total company. The total gross outstanding loans for this business were Rs. 71.8 billion.
2. L&T Finance: L&T Finance conducts the retail and corporate finance of the company. The retail part also includes the micro finance business, and the micro finance business comprises of the 4.5% of total unsecured loans of the retail segment. The total income of this group was Rs. 13.9 billion in fiscal 2011, and formed 66.08% of the total revenue. The total gross outstanding loan of this business were Rs. 101 billion.
3. India Infrastructure Developers Limited: This subsidiary doesn’t do any business right now, but they plan to start financing small and medium corporate entities by fiscal 2012.
Further, it has two indirect subsidiaries as well – L&T Investment Management Limited, and L&T Mutual Fund Trustee Limited. Here is the company structure from the offer document.
The L&T Finance IPO price has been set up between a range of Rs. 51 – 59, and this is good because just before this IPO they did a pre – placement with a US Private Equity Investor – MACE CIPEF Limited, and sold about 4% of their stake at Rs. 55. So, retail investors will get about the same deal as the PE players.
L&T Finance is a fairly large company with revenues of Rs. 21.14 billion and net profit of Rs. 3.925 billion in fiscal 2011. In fiscal 2010, the revenues and net profit were Rs. 14.29 billion, and Rs. 2.63 billion.Â Both the operating subsidiaries have a good Capital Adequacy Ratio of over 16%, and when you look at that number with the size, and growth it’s easy to see why this IPO has been graded 5 out of 5 by the credit rating agencies.
The Diluted EPS for 2011 was Rs. 2.83, and for 2010 it was Rs. 2.17. It was a negative of Rs. 0.05 in 2009. At the EPS of Rs. 2.83, and the higher range of Rs. 60, the P/E multiple comes out to be about 21.2, which I think is not too rich, but not cheap either. Especially so because their own prospectus lists down their competitors and their respective P/E ratios on the closing price of July 1 2011, and basic EPS of 2011.
There will be 2 main uses for the funds raised from this IPO. They are going to pay off some of their parent’s loans, and strengthen the capital base of the subsidiaries. In the prospectus, L&T Finance say that they are going to raise Rs. 15,750 million, and use it to recapitalize, and pay off parent company’s debt in the following ratio.
So, about a fourth of the money is going to repay debt from the promoter which is probably a good thing since this debt is at a relatively high 9% interest rate.
Overall, this is an interesting IPO to watch because of the size, and the timing. It is getting launched at a time when the markets are at reasonable valuations, but the volumes are quite thin. To add to that – India has been one of the worse IPO markets globally in the last year, so the environment is a bit jittery. The government has lined up a series of disinvestment candidates later in the year, so the performance of this IPO will affect the timing of the other ones down the line.