L&T Finance Holdings is entering the capital market on 27th July 2011 to raise Rs. 1,245 crore via a fresh issue of equity shares of Rs.10 each, priced between Rs. 51 to Rs. 59 per share. While Rs. 120 crore of the issue size is reserved for L&T shareholders, Rs. 50 crore is reserved for L&T group employees, the employees alone being offered a discount of Rs. 2 per share, reducing the net IPO size to Rs. 1,075 crore. The issue represents 12.5% of the fully diluted post issue paid-up capital of the company at the upper end of the price band and closes on 29th July.

Although the Rs. 51 to 59 is a wide price band of 16%, the effective price band should be read as Rs. 55 to Rs. 59 per share for all practical purposes, since the company has concluded a pre-IPO placement of 6 crore shares at Rs. 55 per share in early-July, raising Rs 330 crore for 4% equity dilution. All these prices are however much lower than L&T's subscription to 6.3 crore shares of the company at Rs. 67 per share in September 2010.

A 95.94% subsidiary of L&T Limited, it is the holding company for the following three businesses conducted via wholly-owned subsidiaries:

1. L&T Finance - retail and corporate finance lending with loan book of Rs. 10,157 crore as of 31-03-11
2. L&T Infra - infrastructure financing with loan book of Rs. 7,186 crore as of 31-03-11
3. L&T Investment Management - mutual fund business with AUM of Rs. 5,200 crore.

This IPO from L&T group is the first since 1950, when L&T went public. As a gesture to reward the 8 lakh plus shareholders of L&T, a reservation of about 10% of the issue size is being made for them, which is a shareholder friendly move.

L&T Finance Holdings has a strong retail reach with 837 points-of-presence spread across 23 states. It reported total income of Rs. 2,111 crore and earned PAT of Rs. 393 crore in FY11, resulting in EPS of Rs. 2.87 on equity of Rs. 1,417 crore, as of 31-03-11. With a networth of Rs. 2,891 crore and BVPS of Rs. 20.40, the company's loan book stood at Rs. 17,400 crore of which 41.44% was towards infrastructure financing and balance towards retail and corporate financing. For FY11, company's RoE stood at 13.58%.

While the company's CRAR was 16.34% versus RBI-requirement of 15%, its asset quality has not been compromised with growth. While the business has grown steadily, net NPAs have declined over the years. Net NPAs of Rs. 40 crore (0.53%) in infrastructure finance group and Rs. 79 crore (0.78%) in the retail and corporate finance groups are well within industry standards.

With an IPO grade of 5 on 5, representing strong fundamentals, Rs. 1,575 crore raised via the IPO and pre-IPO placement will be utilized to repay inter-corporate deposit issued by L&T to the company of Rs 345 crore and Rs. 515 crore and Rs. 485 crore will be infused in L&T Finance and L&T Infrastructure Finance respectively. L&T's shareholding in the company will decline to about 83.92%, post-listing, if the book is discovered at the upper end, from the present 95.94%.

Coming onto the valuations of the issue, at the upper band of Rs. 59 per share, shares are being offered to public on a price-to-book value (PBV) of 2.23x, on a post-money basis. On listing, company will command a market cap of Rs. 9,960 crore, at a price of Rs. 59 per share. This is an attractive valuation for an NBFC, when compared with other listed peers. Although no apple-to-apple comparison can be made with L&T Finance Holdings since no company, presently in the listed space, offers both infra and retail and corporate loans on a significant basis, a blended valuation of few NBFCs will help in the benchmarking.

IDFC, India's leading infra financer with Rs. 37,000 crore of outstanding infra loans, is ruling at a historic PBV of 1.9x while the country's largest commercial vehicle financing NBFC Shriram Transport Finance with AUM of Rs. 36,000 crore is currently ruling at PBV of 3.2x. M&M Financial Services, another NBFC with strong retail presence and AUM of Rs. 15,200 crore, is quoting at PBV of 2.9x. Thus, taking a composite view on the price-to-book multiple, the IPO pricing seems attractive.

With NBFCs currently being the flavour of the season among marketmen, as we have seen good performance for stocks such as Bajaj Finance, Shriram Transport, M&M Financial, to name a few, coupled with L&T's unparallel brand and parentage, the company looks promising given its historic growth and the impetus which the additional capital inflow will provide to the business in the coming quarters.

We recommend the IPO and advise subscription at the upper band of Rs. 59 per share.