India: L&T Finance to exit PE business

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L&T Finance Holdings Ltd, the financial services arm of engineering and construction group Larsen and Toubro Ltd (L&T), is consolidating its businesses as it seeks to improve shareholder returns.

The plan includes exiting four lending products and finding a buyer for investments held by the firm’s private equity fund.

In an interview, L&T Finance chairman and managing director Y.M. Deosthalee said the company will reduce emphasis on businesses that do not give adequate returns on equity. On the lending side, L&T Finance will wind down its loan book in four segments—car financing, small commercial vehicles, construction equipment finance and home loans to salaried individuals. L&T Finance is open to selling these portfolios should there be an interested buyer.

“On the retail lending side, we have a number of products. Some of these products we added in the anticipation of a banking licence in 2012-13 because they make eminent sense for a bank. However, they are not typically NBFC products,” said Deosthalee. He added that the process of de-growing these businesses has been going on for more than a year now, but the company wants to exit the businesses as soon as possible.

“It is not a case of downsizing but it is a case of ensuring that you grow competitively and you focus on reforms. These products were not adding to our return on equity. Some of these are not NBFC products and some of them we do not have competitive advantage,” he said.

According to a presentation made by the company in the first week of May, L&T Finance’s combined loan book for commercial equipment and commercial vehicles segment stood at Rs.1,569 crore at the end of March as compared toRs.2,004 crore from the year-ago period.

During the March quarter, its loans and advances grew by 22% to Rs.57,831 crore from a year earlier. Net profit on a consolidated basis for the quarter grew by 15% to Rs.237 crore.

While announcing its quarterly earings, the company said that its future strategy will be based on a single-minded focus towards improving its return on equity (RoE). Elaborating on that, Deosthalee said that the idea is to increase the RoE from about 11% to 15% first and eventually to 18% in the next few years. “The focus of the entire management team right now is on improving RoE,” he said.

While winding down certain retail lending businesses, L&T Finance will continue to focus on opportunities on the wholesale lending side including refinancing of infrastructure loans through its infrastructure debt fund. It also sees significant opportunity in lending to the renewable energy segment, where L&T Finance has a loan book of close to Rs.10,000 crore.

“Almost 60% of our wholesale financing book is operational projects. So, real project risk is restricted to 40% of the book,” said Deosthalee, adding that there is significant opportunity in the infrastructure financing segment as banks reduce their lending to this segment.

There is also no infrastructure financing-focused lender in the market anymore after IDFC Ltd converted into a bank, he said.

Does L&T Finance still harbour its own banking ambitions?

Maybe. Deosthalee says they will continue to examine the option and see if it makes sense against the backdrop of new banks and specialized banks entering the sector.

L&T Finance, which also has a number of fee-based businesses, will exit its private equity business that is largely invested in infrastructure companies.

“We are exploring the option of selling these investments. We are in talks with investment bankers and in the next few days we will shortlist the banker to handle the sale of PE portfolio,” Deosthalee said while explaining that some investments made by L&T Infrastructure Finance as part of its proprietary investment book will also be sold. “We should be able to sell these investments, if not fully then at least partly, this year,” he said.

L&T Finance is, however, not looking to exit its mutual fund business. The company may look at bringing in a minority equity partner into the business if that partner can add value, said Deosthalee.

“The company is looking for a minority partner who may take up to a 26% stake in our mutual fund business and can give us access to foreign funds in return. This is a fee-based income business and it is clearly growing. 40% of our assets under management (AUM) are in equity and 60% in fixed-income papers. A very few players have such a mix of assets,” Deosthalee said, adding that “there is no question” of giving up control in the mutual fund business.

L&T Investment Management Ltd, which had bought loss-making Fidelity Mutual Fund in 2012, has begun making profits in recent years.

With average AUM of around Rs.26,000 crore for the March quarter, L&T Mutual Fund is the 14th largest among 43 fund houses in the country.

According to an analyst at Reliance Securities Ltd, L&T Finance’s strategy to trim certain businesses may hit top line in the short term but will start to improve return on equity over the next three to four quarters.

“In the commercial equipment and commercial vehicle business, the key issue is rising bad assets. It is a trend and apart from L&T Finance many other companies too are consolidating this business or completely exiting. In the car financing space, there are already several existing leaders and it is very difficult for L&T Finance or any new company take business away from them,” said the analyst on condition of anonymity.

“L&T Finance may be right in shifting focus from such businesses to the ones in which they have stronghold,” the analyst at Reliance Securities added.

The consolidation of business lines will be accompanied by attempts to reduce cost and improve productivity, said Deosthalee, but he denied that the company had undertaken any significant layoffs.

According to a 23 April report by The Economic Times, L&T Finance Holdings has asked close to 550 employees across businesses to leave.

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These articles was first published on Livemint.com

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.