 "L&T Finance-Bain Capital deal: positive for the stock")
Buy the rumour, sell the news is an adage, probably as old as the markets. Once again it has come true. This time around L&T Finance proved it. After touching a 52 week low of Rs 58, the stock moved up to Rs 69.5 in less than a month. The run up was on account of market rumours that there will be a stake sale in the company. But on the day the company announced a 10 per cent stake sale, the stock closed nearly 3 per cent lower.
ALSO READ: Bain Capital buys 10.2% in L&T Finance
L&T Finance announced that Bain Capital has acquired a 10.3 per cent stake through a mix of various instruments. Under the deal, L&T Finance issued 95.3 million fresh shares and warrants to Bain Capital at Rs 74 per share, amounting to a 5.3 per cent dilution in the company’s equity capital. Further, Bain Capital acquired a five per cent stake from L&T, the parent company at Rs 70 per share, taking its holding to 10.3 per cent in the company.
In a conference call on the development, the company’s management said that the money will not be available at one go but over a period of 18 months. Analysts have given a thumbs up to the development as L&T Finance gets about Rs 700 cr to meet future growth demand. It may be noted that L&T Finance will receive money for only 5.3 per on account of the issue of fresh shares and warrants, the remaining will go to the parent company L&T.
In a report on the stake sale, broking firm India Nivesh says that the capital infusion by Bain capital is positive for the company as it will help in growing its loan book. Further key positive is issue of shares at a premium to current market price is likely to limit dilution, says the report.
There is a bigger question that needs to be addressed in the case of fund raising by L&T Finance. The lending sector is expected to see a series of fund requirement going forward as banks rush to meet their Basel III guidelines.
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Finance ministry estimates government-owned lenders require Rs 1.8 trillion in new capital to meet global Basel III banking norms. The government plans to inject Rs 700 billion over four years into the lenders, while the remainder is expected to be raised in the market.
Banks, especially public sector banks have been struggling to meet their capital adequacy requirement and are barely managing to get through every year. The bigger banks have already announced their plans and taken shareholders permission to raise money during the year. India’s largest bank, State Bank of India has plans to raise Rs 15,000 crore during the year; similarly ICICI has decided to raise Rs 50,000 crore during the year.
However SBI deffered its plans to raise funds and ICICI Bank lowered its limit from Rs 100,000 crore last year to Rs 50,000 crore this year, but is yet to raise money. Same is the case with IDBI Bank. Volatile markets and state of the economy has been cited as the reasons for the delay.
However, banks like HDFC Bank have been able to raise money in the same environment. HDFC Bank raised nearly Rs 10,000 crore in February this year, when Indian markets were peaking out.
But L&T Finance raising funds at a time when markets are more volatile with scepticism over the India growth story is an indicator of the financial and management strength of the company. Rather than waiting for other lenders to crowd the market asking for money, both these companies have jumped the line and raised money when they could and not when they want it.
In the conference call, L&T Finance management highlighted that now they have enough capital to grow till March 2017. The company expects its loan book to increase at a compounded annual growth rate of 20 per cent to 25 per cent over the next three years. Kotak Securities in a note less than a week back had pointed out that L&T Finance is focusing on select low-risk (and low-yield) segments to drive its medium-term growth.
Within the infrastructure finance business, the company will continue to focus on renewable projects and increase its presence in the transportation sector. In the retail space, housing and SME/mid-market loans will drive growth. Two-wheeler loans, tractors (one of its niche segments for over a decade) and microfinance loans will drive its yields and profitability.
L&T Finance, the Kotak note says, is consciously reducing its exposure to thermal power projects and other segments of infrastructure finance in light of high risk and limited opportunities. Within the retail segment, LTFH is going slow in car finance and large CV fleet operator funding due to intense competition, which has resulted in low yields in these segments.
The market segment for the banks and L&T Finance is the same. Yet L&T Finance has been able to grow, raise money and earn better margins despite charging higher interest rates from its customers. The company is capitalising on the status quo approach by the banks and using it to grow itself. Their growth is not only a testimony of the growth and role of the non-banking finance sector but also brings out the weakness in the banking sector, who despite low cost of funds are losing market share.
More than its ability to raise funds, the company has displayed its ability to raise capital when others are finding it difficult. Like HDFC Bank it has proved that there is demand for high quality companies, irrespective of the market condition.