L&T Finance IPO talks picked up steam lately. Everyone appear to be interested in the gold company primarily for its brand value. But should brand value be the only criterion while making an investment decision in such a jittery market?
L&T Finance is a holding company. Their corporate structure as given in the offer document is thus.
I generally prefer not to venture into holding companies for it is N times difficult to assess what is going on in reality than a single company. Chances of false reporting (after aSatyam saga we all should give such things a serious thought) are very high in case of holding companies.
Secondly, they are planning to use a portion of thus generated capital to pay off their debt. To me this is not a very good use of capital. In the offer document they have declared the proceeds will be used to pay off parent company's debt in the ratio as displayed in the left image. The debt is eating away only 9% and if L&T Finance is using the share capital to pay off debt, it is almost sure that they don't have a very good hope on profit generation.
Thirdly, as per my raw calculations, this IPO is little over-priced and retail investors may not get even the listing day gains. The Diluted EPS for 2011 was Rs. 2.83, and for 2010 it was Rs. 2.17. It was a negative of Rs. 0.05 in 2009. At the EPS of Rs. 2.83, and the higher range of Rs. 60, the P/E multiple comes out to be about 21.2, which I think is not too rich, but not cheap either. Especially so because their own prospectus lists down their competitors and their respective P/E ratios on the closing price of July 1 2011, and basic EPS of 2011. On the similar notes its P/B ratio too is not very encouraging to me at the given price band.
However, in the group of NBFCs, L&T Finance is still a better bet for longer term investment horizon. Currently my focus is little too short term, thus I have decided to vary of subscribing for this IPO for the time being. I will keep an eye on it on the listing day and buy up then on discount.
