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Larsen & Toubro Infotech Ltd - Set to march ahead! - Subscribe - GEOJIT BNP PARIBAS

Posted On: 2016-07-08 22:49:52

Larsen & Toubro Infotech Ltd (LTIL), a wholly owned subsidiary of L&T (the engineering conglomerate), is one of India's global IT services & solutions companies. Together, the US and Europe account for about 85% of LTIL's revenue. Based out of Mumbai, the company has a network of 22 delivery centres and 41 sales offices globally. Total number of employees at LTIL was ~20,000 in FY16. LTIL generates major chunk of revenue by providing application development, maintenance & outsourcing services (42.4% of FY16 revenue) and enterprise solutions (23.7%). Further, the company's investments in building capabilities in newer technologies has led to rising contribution from the digital business to 11.1% in FY16 from 9.5% in FY15. Besides US and Europe, LTIL intends to enhance its geographical presence in high potential markets including Australia, Singapore, Japan, South Africa, India and the Middle East. Further, LTIL is looking to grow inorganically in markets like Germany, France and the Nordic region. LTIL's revenue & PAT has grown at a CAGR of ~13% & ~18% respectively over FY14-16. Also, the company has been consistently maintaining strong return on earnings (above 40%) and EBITDA margin (more than 15%) over the years. We are positive on the stock given the rising contribution of digital business, focus on expanding presence, leveraging parentage and increasing use of automation across projects to bring in operational efficiencies. At upper price band of Rs710, it is available at an attractive valuation of 13x FY16 earnings as compared to its peers. Hence, we recommend "Subscribe" to the issue, with a medium-to-long term perspective.

Purpose of IPO

At the upper price band, total issue size stands at Rs1,242.5crores. L&T (the parent company) plans to sell up to 1.75crore shares through an offer for sale (OFS). LTIL will not receive any proceeds from this offer and the main objective of the issue is to achieve the benefits of listing shares on stock exchanges.

Key Risks

- Increasing competitive intensity could have a bearing on the pricing.
- Exchange rate fluctuations mainly in USD & Euro coupled with high concentration, particularly in the US.
- High client concentration – Top 10 clients contribute 52.7% to revenues in FY16.


Source: Equity Bulls

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