Tuesday, October 5, 2010

L&T FINANCE IPO - Can a Broad NBFC Succeed Like Niche NBFCs?

India’s largest heavy engineering firm, Larsen & Toubro (BSE: 500510, NSE: LT), is finally taking their diversified financial services division public, through a Rs. 1500 crore IPO. Better hedging of risks due to generalised portfolio, strong parentage, proven capital market stewardship for wealth creation, an investment business apart from financing, a strong investment portfolio, and a possible banking licence are all pluses for this NBFC, provided the IPO is on investor-friendly valuations. But the million dollar question before investors is whether a broad based NBFC like L&T Finance Holdings can succeed as much as niche NBFCs that thrive solely around their super-specialised core competencies.

If you are an average investor, you have heard of Shriram Transport (BSE: 511218, NSE: SRTRANSFIN). You have heard of Cholamandalam (BSE: 511243, NSE: CHOLAFIN). You have heard of Manappuram (BSE: 531213, NSE: MANAPPURAM). And you have heard of SKS Microfinance (BSE: 533228, NSE: SKSMICRO). And how they created significant wealth for themselves and their shareholders using transport finance, leasing, infrastructure finance, gold loans, microfinance and all those specialised financing. Now, here comes the antithesis to these niche plays.

ALSO READ: Punjab & Sind Bank IPO - Valuation Attractive, Momentum Doubtful, Timing Problematic

Name any happening NBFC sector, and you will find L&T Finance Holdings there. Not exactly this one company, but its four subsidiaries serving diverse finance needs. For example, their infra finance subsidiary, L&T Infrastructure Finance Company Ltd provides financial support to infra development and construction sectors, with special emphasis on high-growth sectors like power, roads & bridges, telecom, oil & gas, & ports.

Another subsidiary, L&T Finance Ltd, undertakes retail finance and corporate finance activities. Retail business include financing most income-generating activities and assets including transport finance, construction equipment finance, rural products finance, and, of course, microfinance.

Corporate business include extending corporate loans, term-loans, leases, discounting, working capital, supply chain finance, vendor /dealer finance, capital market offerings etc.

The next two subsidiaries are indirect ones - they are subsidiaries of L&T Finance Ltd - but they make the group holding company now going for the IPO a lot more than a finance company. Because, between them, these two subsidiaries, L&T Investment Management Ltd and L&T Mutual Fund Trustee Ltd are investment companies serving retail and corporate requirements.

Two things stand out, when analysing these myriad connections. One is that prospective investors in the holding company going in for the IPO now will get the full benefits from the subsidiaries as they are all wholly owned subsidiaries, including the two indirect subsidiaries.

Secondly, the holding company, L&T Finance Holdings has created these subsidiaries from a judicious mix of organic growth and inorganic acquisitions. Whenever an acquisition made more sense - like for getting a ready customer base - the Group opted for it and the best example remains how DBS Cholamandalam AMC Ltd and DBS Cholamandalam Trustee Ltd were acquired and integrated as the Group’s investment business arms.

And if you thought all these subsidiaries sums up L&T Finance Holdings Ltd, there is a bit more. The holding company is parent to also a sizeable SPV by name of India Infrastructure Developers Ltd, created for financing a single captive power project.

A further attraction for potential investors include the holding company’s significant investment portfolio that includes 5% stake in Federal Bank (BSE: 500469, NSE: FEDERALBNK) , 5% stake in City Union Bank (BSE: 532210, NSE: CUB), a nearly 9% stake in Invent Asset Reconstruction Company, and a 30% stake in NAC Infrastructure & Equipment Ltd.

Of comfort to investors will also be the strong parentage and capital markets stewardship of Larsen & Toubro (BSE: 500510, NSE: LT), which is not only India’s largest heavy engineering company by all metrics - sales, profits, & assets - even ahead of PSU behemoth BHEL (BSE: 500103, NSE: BHEL), but also a heavyweight in Sensex & Nifty, and even while not being an outperformer this year, was stable with its 25% year-to-date returns.

However, on a longer horizon - if you count the last two decades - L&T has been one of the most ardent wealth creators, having multiplied investors money by more than a 100 times. As an aside, the IPO of the finance arm can provide a much needed boost to the L&T scrip.

L&T’s unique lead investors - LIC and the L&T Employees Welfare Fund - also provide stability to both this heavy engineering major and its finance arm going public now.

If provided on investor-friendly valuations, this is one NBFC IPO to watch out for, especially since not many generalised NBFCs that hedge risks better than niche segment NBFCs is coming to the market these days. Not to mention is the possible banking licence due to generalised operations.

And if L&T Finance Holdings can steer clear of the jack-of-all-trades-but-master-of-none syndrome, this IPO will not only be about immediate gains, but sustained long-term gains.

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