L&T Infotech’s Rs 1,200 Crore IPO Fails To Excite Analysts


Investors in the primary market have reasons to cheer, with many of the recent initial public offers (IPOs) returning huge listing gains. Blockbuster listings of Dr Lal PathLabs, Alkem Labs, TeamLease Services, Thyrocare Tech and more recently Mahanagar Gas, have boosted the confidence of retail investors in IPOs.It’s no surprise that some of the recent IPOs have therefore attracted huge participation from retail investors. Earlier this month, staffing firm Quess Corp saw its Rs 400 crore IPO oversubscribed 144 times.It is in this bullish backdrop that Larsen & Toubro’s software services subsidiary, L&T Infotech’s Rs 1,200 crore IPO opened for subscription today.
Here are 10 things to know about L&T Infotech IPO:1. L&T Infotech, set up as a subsidiary of engineering and construction giant L&T in 1996, is selling 1.75 crore shares (10.3 per cent stake) in the price band of Rs 705- Rs 710 to raise between Rs 1,230 crore – Rs 1,240 crore. Retail investors are eligible for a discount of Rs 10 per share. The IPO will close on July 13.2) This is an offer for sale, which means that the proceeds from the IPO will go to the promoters and not to L&T Infotech. Post IPO, promoter shareholding will come down to around 85 per cent.3) L&T Infotech is a midcap IT company, in the league of Tech Mahindra, Mindtree and Hexaware. It earned revenue of $887 million (Rs 5,847 crore) in FY16, making it India’s seventh largest IT company after TCS, Infosys, Wipro, HCL Tech, Tech Mahindra and Mphasis. Mumbai-based L&T Infotech employs 20,000 people.4) In terms of geography, US contributes around 70 per cent to L&T Infotech’s revenue, while nearly 17 per cent of sales comes from Europe. This is a positive considering companies with greater exposure to UK/Europe are likely to be hit because of Brexit-related worried.5) In dollar terms, L&T Infotech posted a 9.5 per cent growth in FY16, which was below industry (as per Nasscom) growth of 12.3 per cent. Its topline growth was impacted by a slowdown in energy vertical, owing to the crash in global crude prices. According to Centrum Broking, energy vertical’s contribution to revenue slid to 12.7 per cent in FY16 from over 22 per cent in FY14.6) Its ebit or operating margin has been in the range of 18-20 per cent over the last three years. FY16 margin (18 per cent) was better than Tech Mahindra’s 16 per cent and in line with Mindtree and Hexaware (both 18 per cent).7) L&T Infotech’s dividend payout, or the percentage of earnings paid to shareholders as dividend, is among the best in the IT industry at over 75 per cent (last three years). As a result, its return on equity (at 46 per cent) is also among the best in the industry. According to brokerage PhillipCapital, L&T Infotech’s RoE is likely at a peak and may decline in the coming years on the back of deceleration in revenues and flat margins.8) L&T Infotech has seen four CEO/COO exits over the last five years and this history of “unstable management” is being seen by analysts as a sign of interference from parent L&T in the functioning of the company. L&T Infotech is currently headed by former Infosys executive Sanjay Jalona.9) L&T Infotech gets a major part (42 per cent) of its revenue from under-pressure application development and maintenance (ADM) service line, while fast growing and high-margin digital service line contributes just 11 per cent to its revenue, analysts say. Higher dependence (47 per cent of revenue) on BFSI (banking, financial services and insurance) vertical is another negative, considering banks across the globe are under pressure because of slower growth. High revenue concentration from top 10 clients (53 per cent) is also a drawback, analysts say.10) PhillipCapital said L&T Infotech has a “standard” business model, which is not attractive enough. It based its “avoid” rating on L&T Infotech IPO to “unattractive” valuations. Centrum Broking said that L&T Infotech may not command superior valuations and post listing price performance would be dependent on the overall growth in the IT sector. IDBI Capital however has a “subscribe” rating on the issue, citing “reasonable” valuation. But the brokerage pointed out that “undifferentiated” business model would “limit” any substantial re-rating in the near term.


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