L&T Infotech IPO

About the issue

Company is issuing up to 17.5 million shares in the price band of Rs 705 to Rs 710 per share. The issue will be open from July 11 to July 13, 2016. The offer is available at a discount of Rs 10 for the retail investors.
 
Purpose of the IPO

The purpose is to get listed and gain brand equity. It also aims to give autonomy to the company in its operations. The company will not get the proceeds, as the objective of the IPO is to carry out sale of upto 17500000 equity shares by the selling shareholders.

IT Industry

India is the world’s fastest growing Digital Hub. IT services industry contributes 9.3 per cent share in India’s GDP. Total revenue of IT services industry has been USD 1.43 lakh crore in FY16. India exports its IT business majorly to USA (62 per cent) and in this larger portion is contributed by BFSI services at 41 per cent. SMAC (Social Mobile Analytics Cloud) services are trending in recent times. E-governance, e-education, e-commerce, etc., are major demand drivers along with traditional IT services. CADM (Custom Application Development and Maintenance); and Testing services have grown with CAGR of 9.8 and 11.7 per cent, respectively in FY16. L&T is sailing in the same boat of trending and traditional IT services.

Company Business

Larsen & Toubro Infotech follows the “Business-To-IT” business model. L&T has global presence across the world which includes North America, Europe, Middle East, Asia, Australia and APAC region. Revenue contribution by North America, Europe, Asia Pacific, India and RoW (round the world) is 69, 17.4, 2, 5.8 and 5.8 per cent respectively in FY16. In Euro Zone, revenue share from United Kingdom is 2 per cent so company is less exposed to currency fluctuation risk after Brexit. Major Business is from USA, so strong dollar will eventually benefit company.

Company’s service wise revenue chart is as follows-



Enterprise solution and ADM have shown steady growth of 23.7 and 42.4 per cent, respectively in FY16 as compared to 24.8 and 43.4 per cent, respectively in FY15. At the same time its Digital Solution and IMS services revenue share has risen up to 11.1 and 9.7 per cent, respectively in FY16 as compared to 9.5 and 8.7 per cent, respectively in FY15. These two service categories are based on SMAC (Social Mobile Analytic Cloud), which is already in demand nowadays. Company aims to grow in these IT services.

Company enjoys healthy relationship with old clients due to efficient performance and global pricing model strategy. Company’s 97 per cent of revenue comes from retained clients and 3 per cent from new clients in FY16. We can see same pattern of client revenue since last three years. L&T has 100+ clients with more than 3 years contracts out of 258 active clients in FY16. Citibank, Barclays, Chevron, Time Warner are some large and old clients of the company. Company also aims towards expansion at APAC, MEA and LATAM under Enterprise solution services. 

The business model for company is tilting towards fixed price, with revenues from this pacing up from 37% in FY14 to 45% in FY16. This is positive for the company as it provides revenue visibility. We see company has high exposure to North America (69%) and the share of Europe has been shrinking from 20.1% in FY14 to 17.4% in FY16.

Management changes

Company has witnessed many senior management changes recently. This we believe in short term is going to create the uncertainty and might lead to attrition. However, as per management the company is steering to create innovative culture and this should in the longer term benefit the company.

Financial performance

Company has been seeing growth in revenue at a CAGR of 17.8% over 2012-16. In FY2016, revenue has increased by 21.2% YoY and fared better than 5% growth in FY15. Operating profit and PAT also have increased by 23.4% and 21.4% YoY respectively and margins have expanded marginally.

We see that company in FY17 will be pressurised to maintain the growth and the margins. We see some green shoots in Auto sector, Energy and Power. On the technology front, PAS, Digital solutions and ADM should drive growth.

Valuation

We see that company’s revenue has grown at the CAGR of 17.8% over 2012-16 which is higher than Infosys. On the margin front also, company lies in the median range with its peers. However, company has high RoNW of 49.52, and enjoys an edge over TCS.

Looking in the light of P/B and P/E ratio of 0.61x and 12.9x, company looks attractive compared to its peers. We believe with good growth prospects, diversified portfolio and commitment towards innovation, company is a good fit for customers’ portfolio. Seeing that company is undervalued, we can see listing gains to the tune of 15% at this level.