L&T Finance seeks $277 million from IPO

L&T Finance Holdings has set the terms for an initial public offering that will kick off tomorrow with an offer to anchor investors.

The Mumbai-based company – a unit of Indian blue-chip Larsen & Toubro that focuses on retail, corporate and infrastructure financing as well as investment management – is looking to pocket approximately Rs12.45 billion ($277 million) from the offering in addition to the $73 million it raised from a pre-IPO placement to US private equity firm Capital International in June, resulting in a total capital-raising of $350 million.

The bookbuilding for other investors will be open from Wednesday to Friday this week.

The price range has been set at Rs51 to Rs59 per share, which straddles the Rs55 per share that Capital paid and is below the Rs60 expected in the market. This might be necessary, however, as India is the worst-performing market in Asia this year. L&T Finance is also the first Indian IPO of size this year and comes after the central bank has raised interest rates 10 times since March 2010, most recently on June 16 when it lifted the repo rate by 25 basis points to 7.5% in response to an inflation level that it still views as “uncomfortable”.

However, observers say L&T Finance is the right deal to kick-start the market since its parent company is well-known and highly regarded by investors. Founded in 1938, L&T is one of the leading construction and engineering companies in India and has a market capitalisation of about $22 billion. After the investment by Capital, L&T owns about 95.9% of the company, while the US private equity firm owns the rest.

The listing candidate also has a well-diversified and high-quality loan book that totalled about $4 billion at the end of March, most of which is to fund income-generating assets and activities. Many of its businesses operate in industries or sectors that the government has focused on in its latest five-year plan, such as agricultural and rural development, infrastructure and energy.

The company has also been preparing for the listing for a long time — it first issued a draft prospectus in October last year — which has given investors ample time to get a good understanding of it. The delay has been partly due to market conditions, but at one point the company also chose to hold off until it had published its results for the fiscal year to March 2011.

The last attempt was planned for late April to early May, but that was interrupted by a sharp drop in the overall market. Power Finance Corp, a government-controlled company that provides financing and advisory services for power projects, managed to overcome the difficult market to raise $1 billion from a follow-on offering in the second week of May, which bankers said was primarily due to its strong market position and government ownership. The government sold a 5% stake, reducing its holdings to 73.7% from 89.8%, while Power Finance Corp sold about 15% of its existing market capitalisation in the form of new shares.

By waiting, the outlook for L&T Finance’s microfinance business has also improved significantly after the government earlier this month proposed in a draft bill that all microfinance companies will be regulated by the central bank, rather than the provincial governments. Once approved by the cabinet and parliament, this should ease the lending restrictions posed on micro finance lenders in certain states, notably Andhra Pradesh. SKS Microfinance’s share price jumped by the 20% daily limit for two days straight on hopes of improved operating conditions and has risen a combined 55% since the news of the regulatory change first appeared on July 6. However, the stock is still trading at less than 40% of its highs a month after the listing in August last year.

L&T Finance’s microfinance business, which was launched in 2008, had made more than 1.2 million individual loans as of the end of May, totalling about Rs14.5 billion ($321 million).

L&T Finance hasn’t determined how many shares it will sell, but rather has set the final deal size in rupee-terms. The number of shares will depend on the final price per share, but together with the pre-IPO placement, the fund-raising will account for about 16% to 17% of the enlarged share capital, according to sources.

Of the $277 million IPO, $11 million worth of shares has been set aside for employees and another $28 million for existing Larsen & Toubro shareholders, leaving net offer worth about $238 million for the public. Half of the net offer will be offered to qualified institutional bidders, including $36 million (15% of the net offer) that will be open to anchor investors tomorrow.

The retail tranche accounts for another 35% of the net offer and the non-institutional tranche, which typically is snapped up by high-net-worth individuals, accounts for 15%.

Sources said the price range will enable the bookrunners to price the deal between its two key comparables — Infrastructure Development Finance Corp, which is quoted at about 1.7 times its estimated book value for fiscal 2012, and Mahindra & Mahindra Finance, which is quoted at about 2.4 times. Both companies saw their share price drop from mid-April to mid-June, but have rebounded in the past month, perhaps partly due to L&T Finance’s pending IPO. The company is unlikely to want to price below the Rs55 per share that Capital paid, however, as that would immediately reduce the value of its investment, so it is reasonable to assume the final price will be in the upper half of the range.

In addition to its diversified loan book, L&T Finance has a strong capital structure. At the end of March its infrastructure finance unit had a capital adequacy ratio of 16.5%, while its retail and corporate finance unit had a CAR of 16.34%. The IPO proceeds will further strengthen its capital base and will also provide the company with more money to lend to its clients. About $76 million will go towards the repayment of a deposit issued by L&T.

L&T Finance posted 51% growth in net profit to Rs3.9 billion in fiscal 2011 on the back of a 48.5% increase in revenues to Rs21.1 billion.

Following the IPO, the company intends to continue to increase the penetration of its existing services by expanding deeper into rural and semi-urban areas where it believes there is significant opportunity to increase revenues. Since March 2008 it has increased its points of presence across India more than three times, to 837 from 226. But it will also continue to expand into new products and services, including capital-raising and strategic advisory services, and it is in the process of setting up an infrastructure-focused private equity fund.

The listing is scheduled for August 12. Citi, HSBC and JM Financial are joint global coordinators and bookrunning lead managers, while Barclays Capital and Credit Suisse are joining them as bookrunning lead managers.