L&T Finance Holdings Ltd (L&TFH) – Subscribe
Price band Rs51-59
Diversified loan book; growth has been strong in the recent past
L&TFH through its subsidiaries L&T Finance and L&T Infra Finance offers a broad spectrum of financial products and services. The consolidated loan book of the company could be broken into infrastructure finance (40%), retail finance (37%), corporate finance (20%) and others (3%). Over the past two years, the consolidated loan book has witnessed 57% CAGR. More importantly, the book has become more diversified with the share of retail and corporate finance segments combined having declined from 69% in FY09 to 58% in FY11.
Wide pan-India presence; exploring opportunities to leverage it
As of May 2011, L&TFH had 837 points-of-presence spread across 23 states thereby enabling the company to cater to a large customer base (especially in rural and semi-urban areas). Company further plans to strengthen its reach through expansion in areas offering significant opportunities to increase revenue and giving competitive advantage. Such an extensive distribution network would be leveraged by the company to provide new products and services and also foray into new business segments. With an edge over competition in terms of reach, robust loan growth momentum is likely to continue.
Sanguine asset quality; however, some slippages may crop up
Across segments, L&TFH's asset quality has improved substantially in FY11 despite the robust growth registered over the past few years. For L&T Finance (comprising retail and corporate finance business), the Gross and Net NPAs stood at 1.4% and 0.8% respectively at end-FY11. In L&T Infra Finance, the Gross and Net NPAs stood at 0.7% and 0.5% respectively at end-FY11. More importantly, about 71%, 91% and 90% of the Corporate, Retail and Infra segment advances are secured thereby providing high level of comfort. However, given the current challenging credit environment, one could expect some slippage in NPL ratios.
Robust profitability reflected in high return ratios; 'Subscribe'
RoA and RoE have improved materially in the past two years for L&T Finance driven by significant expansion in NIM and improvement in asset quality. End-FY11, RoA of the company stood at 2.5%, remarkable in the light of the loan book mix. RoE was at 16% with the leverage at 5.3x. L&T Infra Finance's RoA has been stable at 3.5% in the past two years. This is better than IDFC (like-to-like competitor) which has been earning around 3%. Further, RoE is impressive at 18%. With valuation reasonable at mean 2.5x P/BV (pre-IPO) we recommend subscribing to the IPO.
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