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L&T Finance Holding Ltd. – IPO Note

L&T Finance Holdings Ltd. (L&THF) offers diverse range of financial products and services across the corporate, retail and infrastructure finance sectors, as well as mutual fund products and investment management services, through direct and indirect wholly-owned subsidiaries. The company has presence in 23 states in India.

Investment Rationale 

Diversified and balanced mix of high growth businesses: The companies diversified presence in various product line, catering to the needs of a diverse customer base, from construction equipment hirers, truck owners, farmers and shopkeepers and large infrastructure developers and companies, including multi-national corporations.

Strong distribution network, with presence throughout India: Its extensive network enables them to maintain and grow business, diversify risk profile and service and support customers from proximate locations, thus providing customers with convenient access to products and services.

High quality loan portfolio: For each of businesses, they have established a strong credit check and asset valuation framework to evaluate and monitor credit risk at the time of origination. The recovery process is tailored specifically to each of lines of business and is not outsourced, which allow them to directly control the slippages improving its asset quality.

Good financial and capital position, as well as access to multiple sources of capital: CARE has assigned a ‘Grade 5’ to the L&T Finance Holdings Ltd IPO which indicates ‘Strong Fundamentals’. L&TFH with CARE rating of AA+ and an ICRA rating of LAA+ & status as a Public Financial Institution (PFI) can access new sources of funds (such as insurance companies, public trusts and pension funds) easily and at competitive rates going forward.

Concerns

It faces asset-liability mismatches which could expose it to interest rate and liquidity risks.

Any changes in regulatory requirement for NBFCs by RBI may impact its business.

Outlook & Valuation

In terms of valuation, the issue is offered at 2.4x and 2.1x its book value at upper and lower price band respectively. Other stocks within the same sector currently trades in the range of 2x-3x. The regulatory risks in the sector and the other macro factors are concerns, but we believe with diversified credit portfolio, better accounting norms L&T Finance can weather these issues better than its peers. Considering promoter’s leadership position in the market, visible brand, better operational parameters & diversified credit portfolio, we expect L&TFH can command higher premium going ahead. SUBSCIRBE

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