Analysis of L&T Finance IPO

L&T Finance has generated quite a bit of hype for its IPO. Due to lack of time, I have not been able to make a better study of the same and hence valuation. Hence, I will restrict myself to a relative valuation this time around.

For this purpose, I shall use the companies that they have mentioned in the RHP. The various figures for them is mentioned below.

	EPS	Price (as on 27/07/11)	P/E	RONW	Book Value(BV) Per Share	P/BV
Shriram Trans. Fin.	53.92	665.90	12.35	24.87%	216.37	3.08
M&M Financial Serv.	50.92	689.95	13.55	19.36%	244.70	2.82
IDFC	8.77	133.70	15.25	11.39%	76.97	1.74
Rural Elect. Co	26.18	213.60	8.16	20.15%	129.90	1.64
PFC	23.06	192.50	8.35	17.37%	132.79	1.45
Sundaram Finance	70.01	570.05	8.14	21.53%	325.22	1.75
L&T Finance	2.87	59	20.56	13.58%	20.4	2.89

No, if we consider that the issue gets listed at the upper limit (as has been the trend in recent times), then L&T Finance has a P/E ratio greater than any of the peers that they mentioned in the RHP. What more, the closest anyone comes to it is IDFC, trading at a multiple of 15.25 times earnings. Although the P/BV is not so bad if we consider the same price of Rs 59. This in turn shows an important fact: The low RONW. Among the group L&T Finance has the second lowest RONW. The next highest is at 17.37% to its 13.58%.

The higher price may reflect a very important assumption – a faster growth in earnings than its peers. This may in turn increase the RONW in the coming years. When I took a look at that, L&T Finance’s profits surged by 49.26% Y-o-Y for FY11. Compared to this, M&M Financial services’ profit surged by 35.13%, Shriram Transport Finance’s by 40.86% and IDFC’s by 26.09%. If we assume (for argument sake, these growth rates may not be replicated, but the actual growth rates might be in proportion to these), then we get the following result:

	EPS	Price (as on 27/07/11)	Fwd looking P/E
Shriram Transport Finance	75.488	665.90	8.82
M&M Financial Services	68.742	689.95	10.04
IDFC	11.0502	133.70	12.10
L&T Finance	4.305	59	13.70

Based on this, the price does not seem too high. What more, in a preferential allocation of shares in September 2010, L&T invested Rs 425 crore at Rs 67 per share.

Although this is not a straightaway value pick according to me, but you can still put some money in it.