Larsen & Toubro (L&T) will spin off its financial services vertical into an independent entity under a separate holding company. The move is aimed at facilitating its application for a banking licence when the opportunity arises.
It is through this holding firm, recently renamed L&T Finance Holding (L&TFH), that the engineering major will unlock value for its shareholders after a gap of 60 years. The process may begin as early as this week.
The two arms of L&TFH are L&T Finance, with its retail, micro-finance and corporate loan portfolio, and L&T Infrastructure Finance. The asset management company, recently bought from DBS Cholamandalam, will come under L&T Finance.
Interestingly, only the portfolio investments in banks – including over 4 per cent each in Federal Bank and City Union Bank – will come under the holding company. All remaining strategic investments will be with L&T Capital Company, which becomes the wholly-owned investment arm of L&T. The residual four per cent investment in Mahindra Satyam is on L&T’s books.
L&TFH is expected to hit the capital market to raise around Rs 1,500 crore by diluting 15-20 per cent. The money will help grow its asset size to Rs 20,000-22,000 crore in about two years, from Rs 11,500 crore in 2009-10.
Unlocking value at the holding company will also help “capture the diverse portfolio and the growth potential that each vertical has”, said YM Deosthalee, CFO, L&T. “It will also help us distribute capital effectively across the different verticals,” he added.
Analysts say this structure will also offer further opportunity to unlock future value in each vertical – from infrastructure financing to retail – as they grow bigger.
| KEY NUMBERS (In %) | ||
| 2009-10 | L&T Finance | L&T Infrastructure Finance |
| Book size (Rs crore) | 7,000.00 | 4,300.00 |
| Gross NPAs | 2.78 | 1.84 |
| Net NPAs | 1.70 | 1.66 |
| Cost of funds | 7.93 | 9.81 |
| RoA | 2.43 | 3.44 |
| RoE | 15.87 | 14.00 |
| RoA: return on assets; RoE: return on equity (shareholders’ funds) | ||
L&TFH will be led by Deosthalee as its chairman and NS Sivaraman, currently senior vice-president of financial services, with the three operating CEOs reporting into them. But to highlight the arms-length relationship with its parent, L&TFH will have a separate eight-member board, a majority of whom will be independent directors. Besides Deosthalee and Sivaraman, it will also have one nominee from L&T.
| THE STRATEGY |
| * Create arm’s-length holding firm housing financial services |
| * Dilute 15-20 per cent of equity to raise around '1,500 cr |
| * Distribute capital effectively, double asset size in two years |
| * Use structure and flexibility to be well positioned for bank |
| * Focus on ‘profitable growth’ rather than ‘volume growth’ |
“It is too premature and hypothetical to talk about what the final road map will be when it comes to the new banking licences. But this structure will give us the flexibility to examine that,” said Deosthalee.
Scaling up will be the first challenge. While CAGR at over 77 per cent looks impressive, it’s on a low base. Analysts say it will not be easy to break into the top ranks in the different business verticals. Rising competition includes from other NBFCs, many of whom also have bulge-bracket corporate backing.
With opportunities in the areas of infrastructure, vehicle, micro-finance, equipment and supply-chain financing, the company will continue to focus on “profitable growth” rather than “volume growth”, said Deosthalee.
L&TFH has grown from assets worth Rs 671 crore in 2004-05 to Rs 11,500 crore in 2009-10. L&T Infrastructure Finance, which was started in 2007, now accounts for 37 per cent of the asset book. On the other hand, L&TFH’s profit after tax has grown from Rs 24 crore to Rs 267 crore in the last five years. Less than 5 per cent of the business is dependent on L&T and its vast eco system.
The focus mainly will be on lending to income-generating assets and will avoid segments like financing of passenger vehicles and personal loans, said officials. This will help check non-performing assets and ensure healthy net interest margins. Broadly, the company hopes to sustain a return on equity in the high teens.
The company also has an independent credit appraisal team to finance infrastructure projects, which is a rare capability among project financiers in India, said Deosthalee.
Currently, the company employs about 2,800 people. It has a network of 75 branches for non-infrastructure and four branches for its infrastructure lending businesses.