IPO

Friday, July 08, 2016 Click here for Rating Reckoner
Larsen &Toubro Infotech
Has high client retention
CM RATING48/100
Incorporated in 1996 by Larsen & Toubro, a leading Indian engineering, construction, manufacturing, finance and technology conglomerate, L&T Infotech (LTIL) is the 6th largest Indian IT services company in terms of export revenue. It is amongst the top 20 IT service providers globally in 2015 according to the Everest Group's Peak matrix for IT service providers.

The company has a history of high client retention and derives a significant proportion of its revenues from repeat business. Its clients comprise some of the world's largest and well known organizations including 49 of the Fortune Global 500 companies.

The company offers an extensive range of IT services to its clients in diverse industries such as banking and financial services (26.3%), insurance (20.7%), energy and process (12.7%), consumer packaged foods, retail and pharma (9.3%), media and entertainment (6.2%), hi tech and consumer electronics (5.2%), automotive and aerospace (6.8%). Its range of services includes application development, maintenance and outsourcing (42.4%), enterprise solutions (23.7%), infrastructure management services (9.7%), testing (9.8%), digital solutions (11.1%) and platform based solutions (3.3%).

The number of employees grew from 17,000 to 20,000 in three years with employee utilization improving from 71.6% to 73.8% in FY 2016. As of May 31, 2016, it had 22 delivery centers and 41 sales offices globally.

L&T Infotech markets and distributes solutions directly through its global delivery model. 95% of revenues are accounted for by overseas clients. North America, Europe, Asia Pacific and the rest of the world accounted for 69.0%, 17.4%, 2.0% and 5.8% for FY 2016. While it intends to continue expanding presence in the United States and Europe, the Company also plans to expand its geographical reach in other markets that have been identified as having potential, including Australia, Singapore, Japan, South Africa, India and the Middle East.

On January 1, 2014, L&T Infotech sold and transferred the assets and liabilities of its product engineering services (PES) business to a group entity L&T Technology Services (LTTSL) by way of slump sale. The PES segment of L&T Infotech was providing IT services and solutions to clients in the telecom vertical. The profits after tax from the discontinued business for FY 2013 and for FY 2014, which is included in the financials, stood at Rs 51.62 crore and Rs 36.40 crore, respectively.

The Offer and the Objects

The entire issue of 1.75 crore of equity shares of face value of Rs 1each is an offer for sale being offered by L&T, which at lower price band of Rs 705 per share, the issue size works out to Rs 1233.75 crore and at higher price band of Rs 710 per share, the issue size works out to Rs 1242.50 crore.

The minimum bid lot is 20 equity shares and in multiples of 20 equity shares thereafter. The issue is made through a book building process and will open on 11 July and will close on 13 July, with anchor Investor bidding date of 8 July 2016.

The object of the issue is to achieve the benefits of listing the equity shares on stock exchanges, enhance the visibility and brand image among existing and potential customers and provide liquidity to the existing shareholders.

Minimum public shareholding requirement

The company has three year window that is available for minimum public shareholding to reach 25 percent level. Considering, the dilution that it is doing in the IPO market, together with outstanding options, stock option schemes that it has, the company on a fully diluted basis could already be at about 17-18% diluted level. So, the additional 6-7 % that will be required to meet the statutory requirement could be done over this three year window period.

Strengths

Strong parent and brand equity of the promoter. The company benefits from the strong domain expertise, understanding and experience of the L&T group in verticals such as hydrocarbons, heavy engineering, oil and gas, automotive, aerospace etc, which assists LTIL in developing and delivering IT services and solutions that benefit clients in these verticals and differentiates the company from its competitors.

L&T Infotech's constant currency dollar revenue growth in FY 2016 stood at 13.8%. The company has been delivering resilient growth in the face of a sharp decline in revenues from the energy & processes vertical, where IT spending was hit by the dramatic fall in crude prices. The share of this vertical has fallen from 22% in FY 2014 to 12.7% in FY 2016. This headwind was mitigated by strong growth in large accounts (including the top client) within BFSI, retail, CPG & pharma and auto & aerospace verticals.

The company's track record of delivering an extensive range of solutions using global delivery model, demonstrable industry and technology expertise, and sensitivity to its clients' feedback, has helped it to forge strong relationships with major clients and helps in deriving repeat orders.

With only around 2% exposure to the UK market, LTIL would be least impacted by any near-term growth volatility caused by Brexit.

Digital services revenue, which is an emerging stream of service, witnessed more than 30% CAGR in FY 2013-16 and now contributes around 11% of its total revenues as compared to only around 5% 4 years back.

Weaknesses

In FY 2016 and 2015, around 69.0% and 68.6%, respectively, of LTIL's revenue from continuing operations were derived from its North America segment. Any economic uncertainty or adverse change in laws/regulations in the USA can adversely affect its fortunes.

For FY 2016, the largest client accounted for around 14.9% of total revenues and top 10 largest clients accounted for around 53% of total revenues. The company has about 17 clients who generated above US$ 10 million in revenue, 10 clients who generated above US$ 20 million in revenue and 3 clients who generated above USD 50 million in revenue. Loss of major client or pricing pressure exerted by its top clients or any significant ramp downs by major clients could affect the business and profitability of the company.

Challenges in relation to immigration may affect L&T Infotech's ability to compete for, and provide services to, clients in the United States and/or other countries, partly because it may be required to hire locals instead of using its existing work force, which could result in lower profit margins, delays in, or losses of, client engagements and otherwise adversely affect its ability to meet its growth, revenue and profit projections.

LTIL's wage costs in India have historically been lower than wage costs in the United States and Europe for comparably skilled employees, and this has been one of its competitive advantages. Wage increases in India may diminish competitive advantage against companies located in the United States and Europe and may reduce the profit margins.

The company has a negligible presence in healthcare domain space and no presence in enterprise resource development (ERD) and engineering services, which are being handled by LTTSL.

The group has anther major company LTTSL in the IT services space, which may lead to conflict of interest. For the year ended March 2016, LTTSL reported net sales of Rs 2969.40 crore, up by 15% with PAT of Rs 434.20 crore, up by 38%.

Like any other exporter, the company is also exposed to forex volatility and uncertain global economic environment.

Valuation

For FY 2016, the consolidated net sales stood at Rs 5847.06 crore, up by 17% year on year. Lower OPM of 16% restricted the OP growth to 1% to Rs 935.34 crore. Higher forex gain resulted in other income being up by 223% to Rs 295.96 crore resulting in PBT of Rs 1147.27 crore, up by 23%. After providing total tax of Rs 224.96 crore, up by 35% and MI of Rs 0.13 crore, consolidated PAT for the year ended FY 2016 stood at Rs 922.18 crore, up by 20%. On a diluted equity share capital of the company of Rs 16.98 crore of face value of Rs 1 each, the EPS for FY 2016 works out to Rs 54.3.

At the higher price band of Rs 710, LTIL is being offered at a P/E of 13.1 times its FY 2016 earnings. Much larger companies like Tech Mahindra, Wipro and HCL Technologies are currently traded at P/E of around 15.5, 15.5 and 13.5, respectively, on their consolidated FY 2016 EPS.

Larsen &Toubro Infotech: Issue highlights

For Offer for Sale Offer size (in Rs crore)
- On lower price band1233.75
- On upper price band1242.50
Offer size (in number of shares in crore )1.75
Price band (Rs)*705-710
Post issue capital (Rs crore)17.00
Post-issue promoter & Group shareholding (%)84.7
Issue open date11-07-2016
Issue closed date13-07-2016
ListingBSE,NSE
Rating 48/100
* Discount of Rs. 10 to retail investors

L&T Infotech: Consolidated Financials

1203(12)1303(12)1403(12)1503(12)1603(12)
Net Sales3182.003851.444920.494978.045847.06
OPM (%)20.2%20.3%21.5%18.7%16.0%
OP643.69783.281055.73929.05935.34
Other in. 9.5822.10-83.3191.50295.96
PBDIT653.27805.38972.421020.551231.30
Interest34.2420.8130.5310.4210.36
PBDT619.03784.57941.891010.131220.94
Dep.44.9850.8958.9074.1673.67
PBT 574.05733.68882.99935.971147.27
EO (net of tax)0.007.91239.730.000.00
PBT after EO574.05741.591122.72935.971147.27
Tax (including Deferred Tax)140.90167.80194.30166.62224.96
PAT433.15573.79928.42769.35922.31
MI0.000.060.080.190.13
PAT433.15573.73928.34769.16922.18
EPS*25.533.340.645.354.3
*EPS is on post issue equity capital of Rs 16.98 crore of face value of Rs 1 each
EPS is calculated after excluding EO and relevant tax
#EPS is annualized
Figures in crore
Source: Capitaline Database

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