L&T Finance junks stake-sale plan for mutual fund arm, eyes IPO

L&T Finance Holdings, the non-banking financial company of engineering and construction major Larsen & Toubro (L&T), has shelved its plan to sell a stake in L&T Mutual Fund, and is now looking to list it instead. 

The initial public offering (IPO) is likely to be an offer for sale and will give an opportunity to L&T Finance to monetise its investment, according to two persons familiar with the matter. 

L&T had shelled out about Rs 550 crore in 2012 to buy out Fidelity MF, nearly twice its asset size, valuing the latter at over 6 per cent of its assets of Rs 8,881 crore at the time. The groundwork for the IPO has begun and the company is in the preliminary price-discovery mode.

An L&T spokesperson, however, said in an emailed response that “as a matter of policy we do not comment on speculation”. 

L&T Finance had reportedly planned to sell a minority stake in the mutual fund arm last year, but the talks fell through owing to a mismatch in expectations on valuations, said sources.
“An IPO would be a better way for the promoters to monetise their investment rather than opting for a stake sale,” said Manoj Nagpal, chief executive officer, Outlook Asia Capital. 

“There aren’t any mutual funds listed at this point in time, and the IPO will allow investors to directly participate in the growth of the industry.” 

L&T MF is the 12th largest fund house with assets under management of Rs 46,137 crore as of June 30, according to Value Research data. The fund house has a high percentage of equity assets, which are considered a lot stickier than debt assets as the bulk of the equity funds come from retail and wealthy investors. L&T MF’s equity assets totalled Rs 14,871 crore as of June 30, forming nearly 32 per cent of its asset base.

L&T MF could be valued at about Rs 2,000 crore, assuming its debt assets are valued at 3 per cent and equity assets at 6 per cent, a standard industry yardstick to arrive at an asset management company’s valuations. However, experts believe that the fund house will command a premium on account of its brand name and the exponential growth of assets in the mutual fund sector. Assuming benign market conditions, the fund house could even be valued at Rs 3,000 crore, said experts.  

“The assets of the sector have grown at a CAGR of 25-30 per cent in the past three years, and this is a good time for an IPO. While mutual funds were regarded as a low margin business, the profits of large-sized fund houses are expected to grow at fast clip as assets swell and fixed costs remain the same,” observed Nagpal. 

While L&T MF has been showing losses on its balance sheet in the past few years owing to the Fidelity acquisition, the fund house is operationally profitable, said sources. 

Domestic fund managers have seen a surge in inflows in equity schemes through systematic investment plans in the last three years. India’s mutual fund industry now manages about Rs 19 lakh crore worth of assets, almost double of Rs 9.7 lakh crore it did three years ago.

L&T is not the only money manager that hopes to list on the bourses. UTI MF and Reliance Nippon Life Asset Management are also in the race, with the latter formally setting a March 2018 deadline for its share sale. 

Two L&T group companies -- L&T Infotech and L&T Technology Services -- got listed on the bourses in 2016. The former is currently trading at 10 per cent over its issue price, while the latter is down about 11 per cent.

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