A new sun shines in the L&T kingdom

For N. Sivaraman, the Eureka moment came sometime in 2007. He had been arguing his case for months to make financial services with a retail focus a core business of Larsen & Toubro (L&T). The engineering and construction behemoth's only presence in the financial sector till then was through its solitary non-banking finance company, or NBFC, L&T Finance (headed by Sivaraman) and had built an asset base of around Rs 2,600 crore in the 12 years it had been in existence. An Ernst & Young study commissioned by L&T, which called for a greater focus in financial services coupled with a buoyant Indian economy, finally gave Sivaraman's arguments the much needed boost and convinced the L&T top brass to look at the sector more seriously.

And when the Indian economy remained robust despite the global recession there was no looking back.financial services had become a core area for L&T. Today, the total assets under the financial services group, loosely called L&T Financial Services (LTFS), is expected to touch Rs 15,400 crore in 2010 and grow beyond Rs 35,000 crore in 2014 by when it will contribute 15 per cent to the parent company's bottomline. Consider this:

• L&T Finance's asset base has grown from around Rs 923 crore in 2005 to Rs 6,274 crore as on September 2009 with a clear retail focus and is projected to grow at a 30 per cent annual clip over the next five years. It offers asset backed loans against new commercial vehicles, tractors, construction equipment and the like.
• L&T Infrastructure Finance (another NBFC) was set up in 2007 to focus exclusively on infrastructure projects and has since financed projects worth Rs 9,000 crore.
• L&T Finance moved into microfinance in 2008 and in 20 months disbursed loans to the tune of Rs 700 crore. Its loan book is expected to double this year.
• L&T Finance acquired Chola DBS's AMC with assets under management worth Rs 2,600 crore for Rs 45 crore in September 2009, thus entering the mutual fund sector.
• L&T's general insurance operations will also start this fiscal.
• L&T Capital (the holding company for financial services) is rapidly scaling up its distribution network, which currently has 77 branches and 355 points of presence. This network sells mutual funds and insurance products of LIC and Royal Sundaram General.
• L&T Infrastructure Finance is also planning a private equity (PE) fund.

That apart, L&T Finance has begun borrowing retail funds, through bond issues (in August 2009 and again in February 2010), and has so far raised Rs 1,500 crore. "The tremendous retail response was an eye-opener," says Sivaraman who is now the Senior Vice President of the Financial Services group. "It validated retail faith in the L&T brand name and our ongoing strategy of tapping the existing L&T eco-system in an encompassing way."

Analysts agree that L&T is quite good in backward and forward integration. "They have a history of doing this in the manufacturing industry and being successful. Financial services is a backward extension of an ecosystem they already have," says analyst Shailesh Kanani of Angel Broking.

For instance, L&T's different business units.under engineering, construction and contracts; railways; heavy engineering; electrical and electronics; machinery and industrial products; and information and technology (IT) and engineering services. have a huge customer, vendor and contractor base who have contributed to its sales of Rs 40,607 crore (2008-09). Of this, LTFS has relationships with just 500 corporates, 8,000 contractors, 1,500 vendors, 900 dealers, 10,000 transporters, 40,000 farmers, and 7 lakh microfinance clients. "It is just the tip of the iceberg," points out Sivaraman.

Though a late entrant, L&T appears to have clearly mapped out a strategy to become a financial services powerhouse by leveraging its strengths to the hilt. Says Y.M. Deosthalee, Chief Financial Officer L&T and Director, L&T Capital Holdings: "We will not offer all the available financial services but will go deep into select areas. For example, securities trading and investment banking are not focus areas because LTFS’ customer base is predominantly semi urban and these services have little takers there."

General insurance proved to be a natural entry point thanks to L&T’s huge project base and expertise on this front. "L&T’s general insurance arm will be hugely successful and can even make profits from the first year," predicts G.S. Sundararajan, Managing Director, Shriram Capital. His confidence stems from his observation of Shriram General Insurance, which successfully tapped into its existing base of trucking customers. "Like Shriram, L&T will have a proper risk assessment of its clients, with a sensible approach to pricing that a client will not decline," he says.

L&T began to put its risk assessment capability to good use through L&T Infrastructure Finance, which focusses predominantly on project lending to small and medium business on amounts of between Rs 50 crore and Rs 250 crore. "Sixty per cent of our clients are emerging entrepreneurs, who are likely to become the big players of tomorrow," says Suneet K. Maheshwari, Chief Executive of L&T Infrastructure Finance. It is shortly starting a PE fund to take up equity in infrastructure areas such as mining, building telecom towers, and hospitals.

L&T decided to mine deeper into its substantial client base among farmers by getting into microfinance. "We wanted to do our bit for social development," says Dinanath Dubashi, who heads the retail finance of LTFS. This initiative provides loans against livelihood requirements under the joint liability model. For now, the micro finance intiative has disbursed loans of Rs 700 crore. It has a staff of 1,300 people and is present in south India and Maharashtra.

LTFS entered mutual funds to learn the art of managing large capital. Says D.D. Sharma, Vice President, Research (Retail), Anand Rathi Financial Services: "L&T Finance, if it is serious about its retail business, must learn to manage huge funds. An asset management company provides a great opportunity to manage large capital." Chola DBS mutual fund (since renamed L&T Mutual Funds after the acquisition) is predominantly known for its debt funds. The plan is to increase the fund base substantially both in equity and debt.

LTFS has its share of challenges. Selling mutual funds to a semi-urban and rural customer base would be difficult, as would be the tapping of urban clients outside of its existing base considering the severe competition in the sector. Micro-finance needs micro-management, despite technological advancements such as managing customer information through text messages on mobile phones. Quite often its success goes beyond just lending to giving a mentoring hand. BASIX, a well-known micro finance institution (MFI), offers a triad of services—livelihood promotion, agricultural and business development services, insurance and savings to rural producers.

Says Sundararajan: "Such an integrated model is needed for any MFI to succeed, and not many are doing this." Also, L&T’s attempts to widen its financial services offering by entering the life insurance sector have faced obstacles. There have been reports that Life Insurance Corporation (LIC), which is a large shareholder in L&T, has stymied the move fearing competition.

But L&T’s sudden aggression into becoming a financial powerhouse raises the question as to whether it has a bigger unsaid objective—starting a bank. The services that LTFS has entered or is getting into offer invaluable experience for a possible dive into banking as and when the Reserve Bank of India eases entry norms for starting a bank. Incidently, L&T already has strategic investments in banks like City Union Bank. But Deosthalee rules this out for the time being. "It is important for us to retain our NBFC status," he says.