Surge in L&T Fin Holdings not sustainable: Espirito Santo

Moneycontrol Bureau

Brokerage house Espirito Santo is doubtful if the recent surge in L&T Finance Holdings stock can sustain in the absence of any convincing trigger.

The stock has gained 65 percent in just 15 days and closed at Rs 83.55 on Friday. Espirito Santo has raised its fair value target of the stock to Rs 64 from Rs 56 earlier, but has downgraded its rating on the stock to 'sell' from an earlier 'buy'. 

Brokers attribute the spectacular rally has been attributed to market talk of the company acquiring a general  insurance company and to getting RBI approval to merge with a bank. However, according to Espirito Santo
the steep rally does little to justify valuations given the consolidated ROE (return-on-equity) will  remain below 17 percent.

Espirito Santo also rubbished news of the company being granted a licence to acquire a bank as there is no  precedence of the RBI, in its entire history, of having allowed a NBFC (non-banking finance company) to
acquire a bank.

Espirito Santo also added that whilst new bank licences are dependent on the Banking Regulation Act  being amended in the Winter Session, it will still take at least six months before a licence is issued.

The attribution of the acquisition of a stake in a general insurance company to have caused such a steep rally falls flat as the company has on record denied to have made any acquisition. Even if a banking licence is granted by the RBI, Espirito Santo explains that the foray into the banking
sector will involve considerable costs of meeting priority sector targets,  regulatory requirements and operations such as running branches, hiring manpower and deployment of technology.

Also, the creation of a  strong CASA (current and savings account) franchise is far from easy as evinced by YES Bank's eight-year struggle to create a meaningful CASA franchise.

Espirito analysts Santosh Singh and Nidhesh Jain doubt the sustainability of stock's valuation at 2.3 times of the expected book-value of the company in FY14 and 17 times the expected earnings of the company in the  FY14 with an estimated ROE of 16 percent on a consolidated basis, in the light of the above information.