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Friday, July 22, 2011

Subscribe to L&T Finance IPO at cut-off Price

The L&T Group's financial services subsidiary L&T Finance Holdings that controls five separate entities will hit the capital markets on July 27 to mobilise up to Rs 1,245 crore from the primary markets by diluting up to 17% of its stake.

The issue, which opens on July 27 and closes on 29th, will be priced in the range of Rs 51 to 59. This is the first public issue from the house of L&T since the parent's listing way back in 1950.

L&T Finance Holdings Ltd (LFHL) is promoted by Larsen & Toubro Ltd ("L&T") one of the leading business corporate in India, with interests in engineering, construction, Electrical & Electronics manufacturing and services, IT and financial services.

LFHL is a financial holding company of L&T offering a wide & diverse range of financial products and services across the corporate, retail and infrastructure finance sectors. It is registered with the RBI as a Systemically Important Non-Deposit Taking Non-Banking Financial Company (NBFC). Main operations of LFHL is under four business groups, Infrastructure Finance, Retail Finance, Corporate Finance and the Investment Management Group.

Investment Rationale

1. Strong parentage and brand equity of L&T:

L&T brand is one among the most well trusted & valued brands in India which provides a significant competitive advantage, particularly in attracting new customers and talent and accessing capital. L&T enjoys a high level of trust, admiration and esteem with the general public.

2. Diversified and balanced mix of high growth businesses:

LFHL has well diversified its business model covering variety of many complementary, high growth business segments across four core business groups, including infrastructure, construction equipment, transportation equipment, rural products, microfinance, corporate loans and leases, supply chain finance, capital markets. Many of its segments, such as agricultural and rural development, infrastructure and energy have been identified by the GOI as focused areas under its latest Five Year Plan. We believe that this balanced mix of high growth businesses has provides the ability to produce a steady, growing revenue stream.

3. Strong distribution network:

The Company has established presence in 23 states in India. As on date it has 890 points-of presence across India, comprising 113 branch, 330 meeting centers, 33 Sales points and 414 customer care centers across all business groups and segments. This pan-India presence allows LFHL to cater to a large customer base across various business segments, from retail customers and small and medium enterprises to large companies.

4. Good financial and capital position:

LFHL has strong credit ratings from both CARE and ICRA. On Feb, 2011, L&T Finance had a CARE rating of AA+, ICRA rating of LAA+ and L&T Infra a CARE rating of AA+ (which offer high safety for the timely servicing of debt obligations and carry very low credit risk). These credit ratings, coupled with strong brand equity enables LFHL to access funds at competitive rates from a wide variety of market participants across a diverse array of products, including secured and unsecured loans from banks and financial institutions, commercial paper and long term debentures in the institutional and retail markets.

Saral Gyan Recommendation

When compared with its peers in the same segment on P/BV basis Shriram Transport and M&M Finance are trading at 3.2x and 2.8x as on date, while LFHL has arrived with competitive pricing model ranging with a price band of Rs 51–59 which is below its peers considering the post IPO money.

LFHL is a pure play in the burgeoning high growth business segments like infrastructure financing and construction equipment, transportation equipment financing space. We are positive on the business outlook of diversified and balanced mix of LFHL businesses.

With the above rationale like Strong brand, track record and management expertise, we believe IPO will oversubscribe by atleast 20 times in retail category and investors can get 30% listing gains. Long term investors need to stay invested for decent returns in long term.

Saral Gyan Team recommend investors to subscribe for LFHL IPO at cut off price of Rs. 59.