L&T Infotech IPO opens; Is it a fair deal?

Larsen & Tourbo Infotech- the sixth largest Indian IT service provider in terms  revenue, has come up with an Initial Public Offering (IPO ) of 1.75 crore shares via 100% book building process with a offer size of Rs. 1,230 crore to Rs. 1,240 crore.

The IPO opens on Monday July 11, 2016 and will close on Wednesday July 13, 2016. The price band for the issue has been fixed at Rs. 705 to Rs. 710 (discount of Rs10/sh on issue price to eligible retail applicants). The IPO type is offer for sale from existing shareholders and it is expected to dilute around 10.3% in promoter’s stake to 84.6% from the current 94.94%.

The issue involves 50% of Qualified institutional buyer (QIB)  with net offer size of 8,750,000 shares available for QIB anchor investors; while Non-Institutional Investor will hold minimum 15% with net offer not less than 2,625,000 equity shares and the remaining 35% from retail individual investors with net offer around 6,125,000 equity shares.

Should you select L&T Infotech IPO?

According Urmil Shah, an analyst of IDBI Capital : At the top-end of the IPO price band of Rs. 710, L&T Infotech’s implied FY16 PER is around 13x. If adjusted for the forex gain, the implied FY16 PER is 17x. We believe that the valuation is fair compared to 18x that of Mindtree and 14x-15x for large-caps like Wipro, HCL Technologies and Tech Mahindra.

L&T Infotech’s reasonable valuation is the key reason for our recommendation. However, we believe that its undifferentiated business model would limit any substantial re-rating in the near term. M&A would be an upside trigger as discussed above, says IDBI Capital.

According to Centrum: At the higher price band of ₹710, the issue is valued at 11.4x enterprise value (EV) to EBITDA (earnings before interest tax depreciation and amortisation) and 13.1x P/E (Price to equity ratio) on FY16 basis. This is similar to other midsized IT companies like HCL Tech (EV/E of 11.8x and P/E 13.7x), Tech Mahindra (EV/E 9.6x and P/E 15.6x), Mindtree (EV/E 12.8x and P/E 19.9x).

LTIL is similar to mid-sized IT firms as apart from superior return ratios, other financial metrics are comparable. Its operating margins at 17.7% are in line with peers (Tech Mahindra 16.6%, Mindtree 17.7%, HCL Tech at 21.5%), says Centrum report.

Also, during FY16 LTIL had a forex gain of ₹280 crore (due to favourable hedges) boosting PAT. We believe that the stock may not command superior valuations and post listing price performance would be dependent on the overall growth in the IT sector, added Centrum.

According to BP Wealth report: At the upper end of the price band Rs 710, L&T Infotech is available at 12.7x to its FY16 earnings, which is at a discount to its domestic peers. We are positive on the company’s outlook and cross selling opportunities through Larsen & Turbo. Management stated that it is targeting to double its revenues in the next three to four years through acquisitions and organic growth.

The company has a good growth opportunity and we recommend our investors to SUBSCRIBE this issue with the long term time horizon, explained BP wealth.

According to Advise Sure: At an upper price band of Rs. 710, the stock is available at a low PE of 12.6x (FY 16) as compared to its competitors.  Mindtree  and Mphasis  are available at PE of 18.9x (FY16) and 17.7x (FY16) respectively. The return on equity (ROE) of 45.6% (FY16) generated by L&T Infotech Limited is one of the best in the industry.

With the expansion in new geographies and development of new technologies and service lines will help the company to generate good revenue and profits in the coming years. Thus, we recommend subscribing for an IPO for moderate returns with a medium term view, as per Advise Sure.

As per Reliance Securities: The company is reasonably valued at at Rs705-Rs710 per share, LTIL’s stock will trade at 13.0x-13.1x trailing FY16 EPS. This is at a discount to comparable peers like Mindtree & Hexaware, which trade at 18.4x & 17.4x trailing EPS, respectively.

Notably, LTIL is 24% & 83% larger than Mindtree & Hexaware, respectively in terms of revenue, and earns considerably higher RoE. Admittedly, Mindtree commands a growth premium, which is justified, says Reliance Securities.

Nonetheless, we believe a company like LTIL with its revenue size and redoubtable parentage should command ~10% discount to Mindtree, while the price band reflects a higher discount of 25-30%, which we believe is likely to contract at least to some extent post listing, stated Reliance Securities.

Key Highlights :

The company draws majority of its revenue from Banking, Financial Services and Insurance (BFSI, 47% - 26.3% BFS, 20.7% insurance), followed by Energy & Process (12.7%), CPG, Retail & Pharma (9.3%), Automotive & Aerospace (6.8%), Media & Entertainment (6.2%) and Hi-Tech & Consumer Electronics (5.2%). It counts 49 Global Fortune 500 companies as clients involving names such as Citibank, Chevron Corp, Barclays, Honda North America and Time Warner.

During financial year 2016, the digital service accounted for 11.1% of revenue. LTIL witnessed a $887 million revenue; while clocking CAGR (compounded annual growth rate) of 9% over FY14-FY16.