L&T Infotech Ltd - Subscribe - IPO Note - IIFL Holdings Limited

Issue Opens: 11-July-16, Issue Closes: 13-July-16, Price Band: Rs705-710

L&T Infotech Ltd is the sixth largest Indian IT services player with revenue of US$887mn and an employee base of 20,000+. It has a diversified services portfolio with presence in fast growing areas of digital, IMS and testing. The US region comprises 69% of revenue and the BFSI vertical contributes 47% (much higher than most listed players). Offsetting the significant drag from Energy vertical by penetrating into large accounts, L&T Infotech has delivered a resilient constant currency dollar revenue growth over FY14-16. However, gross margin has declined materially during the aforesaid period and client concentration has increased with Top 10 accounts contributing 52.7% of revenue as of FY16. With only ~2% exposure to the UK market, L&T Infotech would be least impacted by any near-term growth volatility caused by Brexit. In our view, key risks to growth and margin outlook is reduction in IT spend by BFSI vertical and Top clients.

Issue overview

The entire issue of 17.5mn shares is an Offer for Sale by the promoter, Larsen & Toubro (L&T), and thus the company is not raising any capital. L&T's stake will reduce to 84.7% post the IPO.

Valuation reasonable; long term investors can Subscribe

Given the size, profile, track record and management bandwidth, L&T Infotech represents a credible investment option at the offered valuation. The mid-cap IT space (comprising mid-sized players like Mindtree, Persistent and Cyient) has traditionally had dearth of stable and scalable players and thus L&T Infotech should fit in nicely within investors' radar. At the upper end of the price band, the valuation of the company stands at 11.6x EV/EBITDA and 13x P/E on FY16 financials. The P/E ratio looks quite attractive as compared to the listed players, however, it is deflated by higher forex gain earned in the year. On EV/EBITDA, L&T Infotech's valuation is in-line with Wipro and Tech M. Long term investors wanting to add weight in the IT sector should subscribe to the issue without heavy expectations of substantial listing gains. Added sweetener is attractive dividend yield of 4.5% based on FY16 payout.

Source : Equity Bulls

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