>L & T FINANCE LTD. (HDFC SECURITIES)

Rationale for Investment

L&T Finance Limited (LTF) is wholly owned subsidiary of L&T Capital Holdings Limited, which is in turn a 99.99% subsidiary company of Larsen & Toubro Limited (L&T). LTF was incorporated as a Non Banking Finance Company (NBFC) in November 1994. LTF offers a spectrum of financial products and services for trade, industry and agriculture and has evolved into a multi product finance company with a diversified corporate and retail portfolio. LTF plans to enter the debt capital market on 18 August 2009 with a public issue of Non Convertible Debentures (NCDs) aggregating up to Rs. 500 cr with an option to retain over-subscription of upto Rs. 500 cr for issuance of additional NCDs.

In the current market scenario, there are limited direct debt options for the retail investor in the fixed income market. LTF offers one more opportunity to the investor. It offers a better interest rate than other alternatives with no significantly higher risk. Further, given its established track record, decent financial history, high credit rating, strong parental backing, attractive returns compared to other fixed income options, medium liquidity and safety (NCDs are 100% secured by assets of the company), we feel that risk averse investors willing to hold for between 5-10 years can participate in this issue (low to medium risk, long term investment).

In report table is given, which compares the NCD issue with other debt options available in the market.

Investors in Tata Capital NCD issue (Feb 2009) have so far earned a return of 10.3-12.3% absolute (25-30% annualized) in 5 months (in terms of appreciation in the price of the NCD on the NSE). These NCDs (all four series put together) witnesses daily volumes of Rs.45-55 lakhs. Of course, the two cuts by the RBI amounting totally to 75 bps in the repo and reverse repo rates after the issue closed has helped matters for holders of Tata Capital NCDs.

NCD issues have been well received by the Indian markets. Consider the Rs. 500 cr NCD issue by Shriram Transport Finance. The company was planning to raise Rs. 500 cr through retail NCDs with an option to retain oversubscription up to Rs. 500 cr. The issue became a runaway hit with the company mopping up Rs. 4,500 cr on the first day itself from QIB and NII category. Similarly, the LTF issue could also get a decent response (especially from Mutual Funds).

Investors should evaluate the NCDs in the light of the fact that they allow locking into a yield between 9.85% - 10.5% for a 5-10 year period, even as returns on most other fixed-income options have declined sharply in the recent past. The yield offered is less than the Shriram Transport Finance Issue (10.75% - 11.5% for a 3-5 year period) as well as the Tata Capital NCD issue (11.57%-12% for a 3-5 year period) (All three issues carry a rating of Care AA+). In addition, the duration is longer than both these issues, there is no put option available and hence investors in LTF NCDs may have to put up with duration risk premium and lower liquidity. However it needs to be appreciated that interest rates in the system have fallen since the Tata Capital NCD issue closed and some investors may perceive L&T Finance as a better company to invest in than Shriram Transport Finance.

The issue from LTF is of a longer duration, has no put option available and has no incentive for senior citizens, NRIs are not allowed to apply and the interest rate on application money is 7% vs 8% offered by Tata Capital and STFC. The issue is attractive for investors who are concerned about the brand / management credibility of the issuer company and one who feels that interest rates in India are not going to rise significantly for longer maturity corporate papers and hence is a good idea to lock into these rates at this point. (Other investors could look at options with lower maturities of 5 years).

We feel that in an economy that is growing fast, where Consumer price inflation continues to remain high and when the Govt borrowing program is aggressive; interest rates may not fall below a level.

If convinced about the merits of the issue, the investor needs to apply at the earliest as allotment is to be made on first come first serve basis.

To see full report: LTF