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Last Updated : Jul 11, 2016 04:18 PM IST | Source: Moneycontrol.com

Big ticket IPO: Should you subscribe L&T Infotech on valuation

L&T Infotech‘s sales and profit have grown at a CAGR of 13.50 percent and 18.20 percent respectively through FY 14-16.

 
 
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The much-touted L&T Infotech intial public offer (IPO) will open for subscription today. The IT arm of Larsen & Toubro group is aiming to raise Rs 1243 crore through an initial share sale offer.

The price band for the issue is fixed at Rs 705-710. The issue will close on July 13. The IPO comprises an offer-for-sale of up to 1.75 crore equity shares by L&T Ltd. It constitutes 10.3 percent of the post offer paid-up equity share capital of the company. It has already raised Rs 373 crore from 22 anchor investors by selling shares at a price of Rs 710 apiece.  


So, should you subscribe?


Most analysts are upbeat on the issue and recommend subscribing it on reasonable valuation.

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Reliance Securities is positive on L&T Infotech IPO stating that at the price band of Rs 705-Rs 710 per share, the offer comes at a price equity of 13.0x-13.1x
trailing (FY16) earning per share (EPS), which is at 25-30 percent discount to peers like Mindtree & Hexaware. L&T Infotech is 24 percent and 83 percent larger than Mindtree & Hexaware, respectively in terms of revenue, and earns substantially higher returns on equity (RoE). It feels L&T Infotech with its revenue size, high return ratios and redoubtable parentage should command 10 percent PE discount to Mindtree on inferior growth, while the IPO price band indicates a much larger discount.


"The promoters have left something on the table for the investors in terms of valuations, which we view as a major positive factor in favour of the IPO. We recommend subscribe to the IPO on the back of scale, redoubtable parentage, high return ratios and reasonable valuation," it says in a report.


L&T Infotech is India’s seventh largest IT services firm by revenue draws majority of its revenue from Banking, Financial Services and Insurance (BFSI, 47percent - 26.3 percent BFS, 20.7 percent insurance), followed by energy & process (12.7 percent), CPG, retail & pharma (9.3 percent), automotive and aerospace (6.8 percent), media & entertainment (6.2 percent) and hi-tech & consumer electronics (5.2 percent). Digital services accounted for 11.1 percent of revenue in FY16.

Aditya Birla recommends subscribe on L&T Infotech for the medium term prospects as reflects, in a an industry which has started to struggle for growth. "At the higher price band of `710, the stock is valued at 2times and 13times of its FY16 sales and earnings respectively, which is at a sharp discount to its listed peers. It has strong management background, established brand, and strong growth statistics and return profile," it says in a report. The brokerage firm is impressed that its group company provides the company a competitive edge over others in attracting new clients and exploring the potential business opportunities across various geographies and segments.


L&T Infotech’s sales and profit have grown at a CAGR of 13.50 percent and 18.20 percent respectively through FY 14-16.

Ajcon Global is bullish on the issue as at the upper end of the price band of Rs 710, the IPO is valued at 12.6x at FY16 Post issue PE which is cheap as compared to its immediate peers. However, the brokerage firm is worried about L&T Infotech's high client concentration risk. It states that loss of a major client or a significant reduction in the services performed for a major client could result in a significant reduction of revenue.

"Significant pricing or margin pressure exerted by its large clients would also adversely affect its business, financial condition and results of operations," Ajcon adds. L&T Infotech’s ten largest IT services clients accounted for approximately 52.7 percent, 49.5 percent and 46.8 percent of its revenue from continuing operations in Financial Years 2016, 2015 and 2014, respectively.

It also points out that wage increases in India may diminish L&T Infotech’s competitive advantage against companies located in the United States and Europe and may reduce its profit margins.


GEPL Capital recommends to subscribe the issue but warns that forex fluctuations may pose key risk as majority of the revenue comes from international territories.


The company derived 94.2 percent and 95.8 percent of its total revenues in FY16 and FY15, respectively from overseas sales, while 42.2 percent and 41.3 percent of its total operating expenses in the FY16 and FY15,respectively were incurred in Indian currency.


Sharekhan is also worried that appreciation of the rupee against foreign currencies may have a material impact on the company’s reported results but the positive factor is that it has no major exposure to the UK, which kept it immune from the Brexit issue.


The brokerage firm feels its valuation at the offer price looks attractive, given its strong parentage, healthy return ratios and high dividend payout. "Continued traction in the key verticals like BFSI and improvement in the energy vertical, coupled with stronger growth in the digital and IMS space will be key earnings drivers for the company going forward," it says in a report.


Antique expects the company to continue to grow at industry rate if not more driven by a strong parentage in the form of L&T Group and increasing wallet share
amongst top clients. "While it is currently trading at multiples similar to other mid-sized Indian IT players, we expect it to post growth inline with industry if not more, driven by benefits from increasing digital contribution, L&T parentage and subsiding concerns in the energy space," it adds.


Angel Broking advises to go for it as it expects decent gains on listing apart from favourable prospects of the company. Assuming that the company maintains its historical average rate of dividend payouts, it expects L&T Infotech to translate into a yield of 4-5 percent for investors.


It adds further that L&T Infotech generates a healthy RoE of 40 percent compared to the peer group’s average of 30 percebt. "This is mainly because the company holds a relatively low amount of cash on its books vis-a-vis its peers by following an aggressive dividend policy. L&T Infotech has had a dividend pay-out ratio as high as 75 percent over the last five years, while the commensurate figure for its peers stood at 30-50 percent over the same period. On capital invested basis also, the company earns a return on capital (ROIC) of around 46 percent, again outperforming its mid-cap peers, which earn 35-40 percent," Angel Broking says.


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First Published on Jul 11, 2016 08:12 am
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