Post Bain deal, capital adequacy to go up by 2%: L&T Fin

L&T Finance Holdings, the subsidiary of engineering & construction major Larsen and Toubro, will get Rs 708 crore from Bain Capital by issuing preferential shares and warrants.Speaking on the above deal to CNBC-TV18, N Sivaraman, President & Whole Time Director, L&T Finance Holding said after this deal Bain Capital’s holding in L&T Finance would be over 10 percent. The warrants to Bain Capital would be exercised over the next 18-month period, he said.Post this infusion, the capital adequacy for the company would go up by 2 percent from the current 14.5 percent, said Sivaraman. However, going forward the company is not looking at any further equity dilution. "With this raise along with other flexibilities that we have already put in place and the company's balance sheet should take care of us till end of March 2017 or so, unless the growth rate really shoots quite significantly," said Sivaraman.With the help of these funds, the company is looking at various growth opportunities and is confident of a 20-22 percent CAGR going forward.Talking on the business oultook going forward, he said the company has a strong desire to convert into a bank provided regulations allow.L&T Finance will issue 3,18,36,971 equity shares (1.75 percent equity) at Rs 74 per share to BC Investments VI and 6,38,20,990 warrants (3.51 percent) at Rs 74 per warrant to BC Asia Growth Investments.Below is the transcript of N Sivaraman's interview with CNBC-TV18's Anuj Singhal and Ekta Batra. Anuj: Could confirm the block deal that took place today by Bain Capital? A: From Bain's perspective we do believe that they have taken additional exposure. I think that is something which they have in addition to the 5 percent that they have taken in primary issuance. So, they have another exposure. Amuj: If you could confirm the price for us because the exchange data is showing Rs 68 but when we spoke to bankers the price that we are getting is Rs 70? A: It is around that range at which they have bought. If you look at the volumes at that point of time it will indicate you the transaction that happened between L&T and Bain Capital. Ekta: Bain's entire holding post the entire preferential share issue as well as the warrants would then come to over 10 percent? A: It will come around 10 percent. Ekta: Can you tell us in terms of the Rs 700 crore that L&T Finance Holdings is directly getting from Bain, how exactly is the capital going to be used, what will your capital adequacy ratio now look like? A: At the operating entity level our capital adequacy is at the level of about 14.5 percent plus we do have some liquidity at the holding company level. This will actually add about roughly 2 percent to the overall capital adequacy levels. Ekta: How long would it suffice your capital adequacy needs, for example can we see much more equity dilution or would this be it for some time? A: With this raise along with other flexibilities that we have already put in place and the company's balance sheet should take care of us till end of March 2017 or so, unless the growth rate really shoots quite significantly. Anuj: So, no further fund raising or would that be dynamic process and you could relook at it may be in next 6 months to one year? A: In the next 6 months to one year it is a fairly significant number and this warrant will be exercised over an 18 months period. So, any dilution during this period will not be appropriate unless these warrants are exercised. Anuj: From L&Ts point of view are they looking to sell further stake? A: I think overall as a strategy L&T would look to see how to enable the holding company to raise capital for itself. I think it is a strategy, tactical call that L&T could take from time to time depending on how things are. As we have always been maintaining there is a need for shareholding structure of L&T Finance Holdings to really get more robust with more institutional investors. While primary could be one route to really make that happen, the other option is also for L&T to participate in secondary while retaining a substantial interest in the company. There is no such target plan as to this is the dilution that L&T would like to do. It is something which is event based. Ekta: But they would continue to the majority promoters - how much would L&T be comfortable holding in  L&T Finance Holdings, you think? A: It is not appropriate for me to make response to that but I think L&T will be a very large shareholder even above 50 percent for a period of time because after the complete conversion of the warrants its shareholding will drop to about 62 percent which is still 12 percent above the 50 percent level. Anuj: So, you are hinting that L&T would be fine with another 10-11 percent dilution, may be not in the near future but over a reasonably long period? A: I am hinting nothing, I am only indicating to you that even as we raise capital there is a good distance for L&T to travel before it will happen to be 50 percent. Ekta: One of the reasons why lot of analysts were anticipating around Rs 1000 crore of additional fund raising for L&T Finance Holdings besides this Rs 610 crore that you raised by a non-convertible preferential shares recently is because you have aggressive growth targets of over 20 percent in the next three years. Can you just highlight what sort of credit growth are you recording at this point in time and what kind of targets internally might you be working with? A: We don't talk about targets because then it puts a lot of compulsion on us. We look at it as what are the opportunities available for us to grow and make sure that we get our act together to achieve those kind of outcomes. So, if one were to believe that next year is going to be one of the takeoff years for the Indian economy followed by at least two more years of strong capital expenditure in the country, it will offer us to grow the balance sheet anywhere between 25-30 percent over the next 2 years. While this year could be little subdued because the recovery doesn't seem to be in place at this point of time. Therefore, a balance sheet which will grow at about a CAGR of 20-22 percent in the next three years is on the cards. So, that is our basis of planning out this kind of capital raise. We have taken care to ensure that this capital raise is not all upfront, capital is available on call and we are able to use it as the asset growth happens. Ekta: In terms of disbursement growth right now can you apprise us of where you are seeing incremental lending happening which you are most comfortable with in terms of gross NPLs as well, say for example infra financing etc? A: As we said at the closing of the last year's financials, we have continued to focus on operational assets in the infrastructure sector in addition to renewable energy as another interesting opportunity perhaps. On the retail segment clearly housing as well as microfinance segment has been showing strong growth. So, these are the four clear focus areas around which we have built our plans for the current year. Given the monsoon situation as well as the economic cycle, the commercial vehicle (CV) as well as the tractor segment  seems to be quite muted in its growth. So, consequently the opportunity over there is limited. So, these are the four areas and we do believe that in the current year the retail book should be able to grow around 15 percent and the wholesale book in the region of about say 25 percent or so given that disbursements are lumpy. Ekta: One of the triggers for L&T Finance Holdings is the likelihood of may be converting into a bank at some point in time. Any plans on the organic or inorganic front that we can expect, that you might be working on? A: It is our desire to convert ourselves into a bank over a period of time because we do see that as a value adding opportunity and also making sure that our growth platform is more robust. At present there are no guidelines for grant of a universal licence to a large player like ourselves. While we can continue to evaluate an opportunity around the inorganic growth it is also subject to regulatory dispensation. So, we will continue to look at it very keenly and then wait for the opportunity to achieve that outcome. Anuj: Your infrastructure finance unit recently cut interest rates. We have the next policy now coming up next Tuesday. Do you get a sense that if there is a rate cut from RBI we could see further transmission in interest rates? A: This cut is on the back of the cost reduction that we have experienced in the last about three quarters or so, what we believe can be sustained in the near future. The market borrowing cost have more or less discounted a certain level of rate situation in the next 2-3 quarters. So, I am not sure whether it will be just linked to the rate cut alone by the regulator. Let us see how others also react, that will also give us an indication of how they look at the rate moving in the next 2-3 quarters, we will take a view about it.