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Give It Time

You should wait for L&T Finance Holdings to develop a track record before investing in it…

I missed out on investing in the initial public offering (IPO) of L&T Finance Holdings. Please give your assessment of the fundamentals of the company. Should I invest in it now?
- Deepti Menon

L&T Finance Holdings has a highly diversified business model covering a variety of business segments: retail, corporate, infrastructure finance, transportation equipment finance, construction equipment finance and microfinance. It has established its presence in 23 states within India. This pan-India presence allows it to cater to a large and diversified customer base — retail customers, small and medium enterprises, and large companies. The company has a high-quality loan portfolio. It typically does not buy loan portfolios; it focuses on originating and retaining them. Strong parentage and strong brand equity are some of its key strengths that will enable it to access funds at competitive rates.

Both CARE (AA+) and ICRA (LAA+) have done the credit rating of this company. These ratings indicate that the debt instruments issued by it offer a high degree of safety for timely servicing of debt.
Growth plans. The company aims to develop new products and services within its existing lines of businesses and also identify new opportunities. It intends to grow the Retail Finance Group’s loan portfolio. Its aim is that the total loans and advances of the Retail Finance Group as a proportion of the company’s total loans and advances should increase. In the medium to long term, the company also aims to grow its business of distributing financial products. Concerns. One of the concerns about the company’s loan portfolio is that around 7.93 per cent of the Retail Finance Group’s total loans have been provided to the microfinance segment and the rural product finance segment (data as on March 31, 2011). These borrowers generally belong to low-income groups and are less financially robust than large corporate borrowers. If the company fails to continuously monitor such loan contracts, its credit portfolio could be adversely affected.

Moreover, the company’s funding cost is directly affected by the ongoing interest rate hikes. Due to rising interest rates, there is a danger of demand for loans from the infrastructure sector slowing down. The company’s financial numbers are not very impressive (see table). Moreover, financial information about the company is available for only a brief period — from FY09 to the first half of FY11. This makes it difficult to gauge its financial health with any degree of accuracy.
Going by the IPO pricing, the company is expensively valued. Peers such as Mahindra & Mahindra Financial Services and Shriram Transport Finance Company are trading at relatively lower P/Es. In our view, you should wait for the company to establish a track record of performance, and then if the valuation is also right, invest in it.

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