Assignment-01 L&T Finance Holdings

Introduction: L&T Finance Limited (LTF) is a subsidiary of Larsen and Toubro. It was incorporated as a Non Banking Finance Company in November 1994. Through LTF, L&T aims at making a strong foray in the ever-expanding financial services sector.As a business philosophy, we fund income generating assets/activities while maintaining a clear focus on returns. LTF offers a spectrum of financial products and services for trade, industry and agriculture. The company's focus segments are corporate products, construction equipment, CVs and tractors. Despite the turbulence in the financial services markets over the past few years, L&T Finance has adapted well to the changing market dynamics to remain consistently profitable. Like the rest of the companies in L&T group, LTF is also professionally managed. LTF shares the professional values and ethos of its parent company, and has acquired and maintained a reputation for reliability, transparency of operations and absolute integrity. A steady growth rate validates the trust that industry has reposed in the company. Larsen & Toubro Ltd is a USD 9.8 billion technology, engineering and construction group with operations spread across the globe. It was ranked as 14th by the Economic Times in their survey of the Top 500 Companies in India..

Overture: Issue Details:

Issue Price:

Rs. 51 - 59

No of Shares (FV Rs. 10): 211 million -- 244 million shares Issue Size: Issue opens-closes: Listing: Rs. 12,450 million 27th July 2011 29th July 2011 BSE and NSE

Post Listing Details:

Pre-Issue Promoter and Promoter Group Holding: 95.94 per cent Post Issue Promoter and Promoter Group Holding: 82.33 per cent Post Issue Equity Capital: Rs 17211 million Post Issue Equity Shares (no) : million shares Market Cap : Rs 87,778million Rs 99,594 million 1688 million 1721 Rs. 16880 million

Background: Promoted by the engineering and construction major, Larsen and Toubro and formerly Known as L&T Capital Holdings Ltd Holding company with a NBFC-ND SI (Systemically Important Non-Deposit taking Non-Banking Financial Companies) status. Offers a range of financial products and services across the corporate, retail and infrastructure finance sectors including mutual fund products and investment management services, through its direct and indirect wholly-owned subsidiaries. Holding company for L&T Infrastructure Finance Company (infrastructure financing business), L&T Finance (operates the retail and corporate finance business) and L&T Investment Management (indirect subsidiary, mutual fund business acquired from DBS Cholamandalam, under its arm L&T Finance).

Why is the Company making the IPO? The company intends to raise Rs 12,450 million for the IPO, it has also raised Rs 3300 million from Pre-IPO placement at Rs 55 per share to the US private equity fund Capital International. Proceeds of the issue will be utilized to: Repay the inter-corporate deposit (Rs 3,450 million) issued by its Promoter to the company

 Augment the capital base of L&T Finance (Rs 5,150 million) and L&T Infra (Rs 4,850 millions) Meeting capital adequacy requirements. The aim of L&T Finance is to get a banking license to start banking operations in India. As the Indian market opens up for more private players and organizations in the retail banking space, the requirements for obtaining a banking license will be available by March 2011. L&T Finance has already restructured itself so as to become a potential candidate to apply for the banking license.

Research Analysis: The financials of the company are not directly comparable for FY 2009 and FY 2010 as the company acquired L&T Finance (together with its subsidiaries) and L&T Infra as on March 31, 2009. Prior to that, the company had minimal operations as it was incorporated in May 2008. For the periods FY 2010 and FY 2011, total income increased by almost 50 per cent primarily on account of an increase in the operating income of its subsidiaries, L&T Finance and L&T Infra whose incomes increased by 45 per cent and 56 per cent

respectively. The resultant impact was also seen in the bottom-line of the parent (LTFH). The average yield on loans to cost of funds for L&T Finance and L&T Infra for FY 2011 was 15.19 per cent to 8.40 per cent and11.56 per cent to 8.06 per cent respectively. Thus, the net margin for the companies was over 6 per cent and 3.5 per cent for the period under review. The debt to equity ratio is around 5 times for FY 2011. Post-issue the ratio will drop to under 4 . Overall cash flow from operations has been negative as the company (read as subsidiaries) continue to meet their capital requirement from financing activities. Notably, the net cash flow from operations for FY 2011 and FY 2010 was negative Rs 59,020 million and Rs 39,140 million respectively. Pursuant to a trademark license agreement with its promoter, L&T Finance, L&T Infra and other subsidiaries (of ultimate parent) were granted a global non-exclusive, nontransferable license to use the "L&T" trademark and logo for a consideration payable by each of the licensees of up to 0.15 per cent of the assets, or 5 per cent of the PAT of each of the licensees, whichever is lower, plus service tax. This becomes applicable from the fiscal year 2012 onwards The companys exposure to the micro-finance sector has led to additional provisioning.

 At the upper end of the band, the the IPO is priced at a Price-toBook ratio of of 2 times and a Price to Earnings of over 20 times its forward earnings estimate.

Concerns for Declaring IPO 1) The earnings per share in the year in the year 2009 was Rs 69 which fell to Rs 49 and it is a bad sign for the company and it was due to increase in number of issues of the equity shares .This a very good indicator for the companys growth and it can be observed from the EPS of the company that it is in a good position. 2) Adjusted Cash EPS It can be seen that the adjusted EPS is falling in the year 2009 due to the rise in the share capital and the same happened with the adjusted cash ratio. In the present the adjusted cash ratio is increasing substantially which is a good sign for the company.

3) Dividends Paid: Dividend paid by L&T is nearly 150% of the face value of Rs 10 per share. In the year 2008 the dividend paid was very high and in 2009 the dividend paid was much less when compared with the previous year. In the year 2011 the company has paid much more dividends when compared with the previous years. This shows that the company is earning a lot of profits.

4) Operating Profit per Share: The operating profit per share is reasonably higher as compared to past 2 years but still it is less when compared to the year 2008. 5) Overall cash flow from operations has been negative as the company continues to meet their capital requirement from financing activities. Notably, the net cash flow from operations for FY 2011 and FY 2010 was negative Rs 59,020 million and Rs 39,140 million respectively. 6) The companys operating ratio has increased in the year 2011 which implies the company will be in a position to give more dividends compared to previous years. Therefore, the face value per share will also increase accordingly