SP Tulsian analysis:
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New issue (IPO) Analysis:
‘Left on the Table’ pricing
L&T Infotech is entering the primary market on Monday 11th July 2016, with an offer for sale (OFS) of upto 1.75 crore equity shares of Re. 1 each, in the price band of Rs. 705 to Rs. 710 per share, with Rs. 10 per share discount for retail investors. Entire OFS is by promoter L&T, currently holding 94.94% stake, which will shrink to 84.65%, post issue. Representing 10.31% of the post issue paid-up capital, issue will raise Rs. 1,228 crore and Rs. 1,236 crore at the lower and upper price band respectively and will close on Wednesday 13th July.
Engineering major L&T’s 94.95% IT subsidiary, L&T Infotech, has 22 delivery centres (9 in India, 13 outside India) and 41 sales offices globally, serving key markets of North America (69% of revenue) and Europe (17%). Banking and financial services (26% of revenue), insurance (21%), energy and process (13%), consumer packaged goods, retail and pharmaceuticals (9%), automotive and aerospace (7%) are company’s important business verticals with application development, maintenance and outsourcing being the largest service line, contributing ~42% of revenues, followed by enterprise solutions, accounting for 24% of revenues.
Established in 1996, company has a current headcount of 20,072 employees and 258 clients (of which, 3 are greater than USD 50 million and 49 of which are Fortune 500 companies). Although it was India’s sixth largest software exporter in 2015, it trails fifth ranked Tech Mahindra by a huge gap, due to latter’s annual revenues of Rs. 26,500 crore, post Satyam buy.
Company’s FY16 consolidated revenue in USD terms grew at a healthy rate of 9.5% YoY, from USD 810 million in FY15 to USD 887 million in FY16, resulting in 17.5% YoY growth in Rupee revenue to Rs. 5,847 crore. EBITDA for the year rose 21.5% to Rs. 1,332 crore, leading to EBITDA margin of 22.8%. Net profit growth of 19.9% in FY16 resulted in PAT of Rs. 922 crore and diluted EPS of Rs. 56.13.
Despite the good growth, it lags peers on a few other parameters. Utilisation level of 76% (excluding trainees) for FY16 is one of the lowest in the peer set, whereas attrition rate of 18.4% and 19.5% for FY16 and FY15 are on the higher side, having shot up drastically from 13.2% in FY14. Client concentration risk, with largest client Citibank accounting for 15% of revenues, while top 10 clients contributing 53% of revenues is another negative attributable to the company.
As on 31-03-2016, its equity is very tiny at Rs. 16.98 crore (FV Re.1 each) with net worth of Rs. 2,023 crore. Total debt of Rs. 54 crore and cash and equivalents of Rs. 246 crore translate into net cash per share of Rs. 11. At the upper end of the price band of Rs. 710, company is seeking market cap of Rs. 12,059 crore and EV of Rs. 11,853 crore. This leads to EV/EBITDA multiple of 8.9x and 7.6x for FY16 and FY17 respectively and PE multiple of to 13x and 11x for FY16 and FY17 respectively.
Below is a comparative analysis with some listed peers:
Data for FY16 Revenue Data for FY16
Revenue(in cr) YOY Grout Net Profit Net Profit Margin Employees Attrition EV/EBITDA multiple PE multiple
TCS 1,08,646 14.8% 24,292 22.4% 3,53,843 15.5% 13.8 19.1
Infosys 62,441 17.1% 13,491 21.6% 1,94,044 18.7% 14.4 17.6
HCL Tech 40,913 14.6% 7,354 18.0% 1,04,896 17.3% 11.0 13.1
Tech Mahindra 26,494 17.1% 3,118 11.8% 1,05,432 21% 9.4 14.7
Mphasis 6,088 5.1% 669 11.0% 22,302 NA 8.8 14.3
L&T Infotech 5,847 17.5% 922 15.8% 20,072 18.4% 8.9 13.1
Mindtree 4,690 31.7% 603 12.9% 16,623 15.7% 12.2 18.5
Mphasis, with headcount of 22,300 and FY16 topline of Rs. 6,100 crore, of which ~60% is from BFSI segment, is a direct peer to L&T Infotech. It currently trades at EV/EBITDA and PE multiple of 9x and 14x times respectively, on historic basis, despite its margins (EBITDA 18% and net 11%) being poorer than L&T’s (EBITDA 23% and net 16%).
Another listed peer Mindtree, with 348 clients and 16,623 employees (as on 31-03-16) reported FY16 consolidated revenue of Rs. 4,690 crore and earned EBITDA margin of 19.4%. Its current EV of Rs. 11,150 crore leads to EV/EBITDA multiple of 12.2x and PE multiple of 18.5x, which are again at a premium to L&T Infotech’s valuations.
The issue pricing is attractive not only in relation to the bellwethers TCS and Infosys, but also smaller peers, with similar industry exposure. Hexaware Tech, with BFSI segment accounting for ~54% of Rs. 3,200 crore topline, is trading at historic EV/EBITDA and PE multiples of 12x and 17x respectively – again premium to the current issue pricing. Thus, issue has left fair amount of gains on the table for prospective investors.
Healthy balance sheet, steady margins, credible brand and management team, coupled with attractive pricing, one can subscribe to the IPO for listing gains, as well as for the short term investment perspective.
Disclosure: No Interest.
Zerodha (Trading & Demat Account)
RHP
IPO Guru (6600+ Posts, 21900+ Likes)
