Finance subsidiary is first out of L&T cradle

When the monolithic AT&T was carved up into eight companies in 1984, the original ‘Ma bell’ gave birth to seven subsidiaries called ‘baby bells’. These seven subsidiaries became leaner, more efficient machines and went on to outperform the parent company and the broader market.

On Thursday, Indian monolith Larsen & Toubro (L&T) announced the initial public offer (IPO) of one of its babies — L&T Finance Holdings — at  Rs51-59 a share.

Expectations are history will repeat itself.

“It is always good to separate your son and allow him to grow in a free environment. Making it independent will be a positive and help the company grow better,” said D D Sharma, vice-president - retail research, Anand Rathi Financial Services.

“Such cases have often resulted in value unlocking in the case of other corporate. This is a trend, which is expected to repeat itself for L&T Finance,” said John Perinchery, senior analyst at Asian Markets.

Analysts are also drawing parallels with Reliance Industries —- ironically a company that attempted to take over Larsen and Toubro during the time of Dhirubai Ambani in the late 1980s and early nineties. After Dhirubai passed away, the brothers Anil and Mukesh Ambani split their empire in 2006 when the total market capitalisation of the group was Rs1.58 lakh crore. The subsequent listing of spin-offs and value unlocking that followed has resulted in the capitalisation of the two brothers to increase to Rs3.64 lakh crore today.

In addition to the potential for value-unlocking, L&T’s listings are also because the company is becoming unwieldy, say analysts.
L&T has 10 operating divisions, including engineering, ship-building, information technology, power and railway projects.

“The company is becoming too big to handle and difficult to value as well,” said one analyst, seeking anonymity.

The first of the issues will be open from July 27-29, with the main institutional investors, called anchor investors, coming in on July 26.    

The company will raise Rs1,245 crore through the issue which will result in a dilution of up to 17% in the stake of the parent company.

“The share price of Larsen and Toubro includes a valuation of Rs.118-137 for L&T Finance. The spin-off could result in a growth in the business which could also positively impact the share-price of the parent company as well,” said Deven Choksey, managing director at K R Choksey Securities.

L&T Finance had raised an additional Rs.330 crore by a pre-IPO placement of shares with Capital International at a share price of Rs55.

The total Rs1,575 crore is lower than the planned Rs1,750 crore, a reduction which is said to be based on weak market conditions.
The proceeds of the IPO will be used to repay a Rs345 crore debt from the parent company as well as infusion of capital into the asset and infrastructure financing companies of Rs515 crore and Rs485 crore, respectively.

There is a Rs50 crore reservation for employees, who will be given a Rs2 discount on every share. There is an additional reservation of Rs120 crore for its shareholders.

The two rating agencies, which graded the IPO, have both given it a grade of 5, indicating strong fundamentals.

The merchant bankers involved in the issue are JM Financial Consultants, Citigroup Global Markets, HSBC Securities and Capital Markets, Barclays Securities, Credit Suisse Securities and Equirus Capital.

L&T has four subsidiaries, which are into asset financing, infrastructure financing, a mutual fund business and an infrastructure developer which has been set up to focus on working capital financing for corporate borrowers.

The next subsidiary in line for a listing may be L&T Infrastructure Development Projects Ltd (L&T IDPL), which develops roads, bridges, ports and other infrastructure, and might just have the scale required for a listing, said R Shankar Raman, senior vice-president, Larsen and Toubro.

“We could see a listing from the company over the next 12-24 months,” he said.

L&T has come a long way since its two founders set up base in an office so small that only one of them could use it at a time. Henning Holck-Larsen and Soren Kristian Toubro, school-mates in Denmark started the company in 1938.