L&T Finance buys FamilyCredit for Rs 120cr

L&T Finance Holdings has acquired auto finance company FamilyCredit from its French parent for Rs 120 crore. The company has entered into an agreement with Societe Generale Consumer Finance on 19 October to buy 100% of FamilyCredit, the company informed BSE on Monday.

FamilyCredit had a loan book of approximately Rs 1,287 crore, of which two-wheeler financing constituted 53% and car financing 35% as on 30 June. It has 53 branches in 16 states in India, a presence in more than 1,400 dealer outlets, and more than 400,000 customers, N Sivaraman, President and Whole-time Director at L&T Finance Holdings told CNBC-TV18.

He sees the two-wheeler financing business growing at 25-30% in the next two-three years.

Sivaraman says the company has Rs 300 crore of additional cash lying on its balance sheet, which it may use for “selectively buying assets”. 

Earlier in May, the company had acquired the mutual fund business of Fidelity to expand its presence in the space. Sivaraman says Fidelity buy has received SEBI approval.

Below is the edited transcript of Sivaraman’s interview with CNBC-TV18. 

Q: Can you take us through the details of the contours of this acquisition? How are you funding this Rs 120 crore and how will this add to the current business of L&T Finance Holding?

A: We have about Rs 250 crore of book in the auto loan segment. With this acquisition consolidates and takes us to a total level of about Rs 1,600-1,800 crore  of overall loan book size, which becomes one step towards becoming a material player in this segment. Family Credit comes with around 53 branches and presence in about 1,500 locations, which is important prerequisite for us to be successful in this business.

With our own 100 plus branches and about additional 11 branches which are not overlapping, we create a reach which is going to get far wider than what Family Credit had. The current book size is about Rs 1,300 crore with about 53 percent of book coming in from two wheelers and about 33 percent coming in from auto cars.

Given the way the demographics are evolving in the country and the penetration of two wheeler financing to increase over a period of time as people want to own higher sized vehicle, definitely there is going be to be a large opportunity and should grow in excess of abut 15-25 percent in the next three-five years. This becomes an important opportunity for us and helps us scale up and become a fairly sized consumer financing player as well in the country.

This company has got a capital adequacy of about 16 percent for the Rs 1,300 crore balance sheet and acquisition of Rs 120 crore definitely need substantial value for us in that position. This will further be enhanced with synergy benefit which is by integrating various branches plus the use of centralised operation facility that they have build. Our own ability to bring down the borrowing cost will all make it really value for us overall.

The book quality is good, almost the entire old book has been fully provided for. Also the sourcing quality has been consistently improved. We think all of this will be extremely valued accretive for us.

Q: You all are fairly aggressive buyers. This is Rs 120 crore, before this the Indo-pacific housing was at Rs 110 crore and before that Fidelity paid by L&T Finance, quite a bit. How are you paying for all this now?

A: If you look at our balance sheet, from the proceeds that we raised; we have about Rs 300 crore of additional cash available. We have also invested Rs 200 crore of perpetual debt in L&T Finance, which can be sold and another Rs 200 crore that can be generated. Our investments in the bank today are valued around Rs 500 crore, which is available as an easy liquid resource. Also this holding company is not leveraged at all. We have an option to borrow some amount. So, this provides us with adequate capital resources to meet the needs of this acquisition. We are not being addressed; we are not buying anything that is coming our way.

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We have been very careful about our selection. Fidelity, for exampleis to scale up our mutual fund business. The current changes that have come through the regulation from the expense ratios and are helping the penetration in the 3 and 4 tier cities will definitely make it much more valuable. We believe that given their combined operations we should break with a marginal improvement in the fee structure as well as the asset growth. So, it is a calculated philosophy for fulfilling the overall vision that we have set for ourselves in becoming a comprehensive financial player over a period of time.

Q: We understand that Indo-pacific housing has received all regulatory approval. What about Fidelity? When are all regulatory approvals been received? When can we expect a full consolidation?

A: Yes, now the Indo-pacific House Finance has become our own company. We have purchased the shares, all regulatory approvals have come through and we are now operating it ourselves. The Fidelity acquisition is a SEBI approval for both the product integration as well as for the transfer of control. The equity option is open at this point. This will close around November 15 and then within 10 days we should be able to make it our own company.

Q: Let us look at the growth, Q2 over Q1 which was 5.6%. Similarly Q2 over Q1 last year was 11.6 percent. So, what should we assume as the full year growth for FY13, if possible FY14?

A: We need to see this growth in context of the environment. The retail finance segment had a balance growth of 12 percent over the previous year, with rural finance growing in excess of 30 percent on disbursement. So, that stage is quite comfortable. It is the infrastructure, corporate and also construction equipment which has suffered slowdowns.

Given the current environment that one is in, the number of opportunity or the quality of opportunities are also fluid. So, one has to be really cautious about building a balance sheet for the long-term than immediate benefit. Power sector issues are getting resolved, road projects have come up for book closure. Consequently, it also gives a push to the construction equipment segment. With all this happening we should aim at 15-20 percent growth.

Q: There were some concerns regarding brokerages. With non project based infrastructure and corporate loans of asset quality going forward there are no significant worries but there is a possibility that they would monitor it. How would you be placed on asset quality trends going forward for the company?

A: The whole environment is suffering on the asset quality given the liquidity situation as per some of the stretched situation of the developers. We are not immune to that even though we are a key player on this. We are almost reaching the bottom of the credit cycle and may have some slippages in the third quarter. But overall we believe that it will remain stable to improving by March 31, 2012. If you really look at our performance or profit growth it has been subdued to the extend that credit costs have been far higher than what we had provided in the second half of last year on our non infra group. So that has impacted our margin.

Our provisions have been higher by Rs 35 crore in L&T Finance and about Rs 20-25 crore in infrastructure. So, consequently the profit growth has been subdued but we are not closing our mind to the potential improvement that will happen in the next two quarters. We expect the profit growth to be better than the next two quarters.

Q: Should we expect any more inorganic moves from you before the year is out?

A: It depends on the good opportunities available. This (FamilyCredit) acquisition comes at a fairly good valuation and leaves sufficient value creation potential for us in our hand and from quality house.