IPO Price and Valuation:
The company opened for subscription on Monday, July 11th and closes on Wednesday, July 13th. The price band is 705-710 and the company is trading at a 10% discount to retail investors. At the 710, the company trades at 13.0x (trailing EPS), which is at a discount compared to peers. The IPO has been oversubscribed on the first day, indicative of a good response and hopefully good listing gains.
Market Sentiment:
Most investors and brokerage firms are positive and bullish. After the IPO allocation, price may rise on the secondary market as these brokerages accumulate these stocks on the secondary market. Investors must decide the duration they want to hold the stock for before purchase. In the long term, the stock seems to promise a 5-6% return, however, selling the stock before the brokerages start to sell, can lock in higher gains.
Company Summary:
L&T InfoTech, an IT firm established in 1996, headquartered in Mumbai, is India’s 7th largest IT services firm. Promoted by Larsen & Toubro Limited, a leading Indian conglomerate in engineering, construction, manufacturing, finance and technology it has a very strong presence in the country.
Industry Overview
L&T infotech is a part of information technology and business process management (“IT-BPM”) industry.
Emerging technologies such as social, mobile, analytics and cloud (“SMAC”), internet of things (“ioT”), wearable devices, are changing the face of the industry.
According to a NASSCOM report, the global spending on IT services grew at 3.5 per cent in 2015, to reach USD 657 billion, aided by the improving economies of the US and other regions. Traditional and mature verticals such as banking, financial services and insurance (“BFSI”), manufacturing and telecommunications continue to drive growth while the share of verticals such as healthcare and retail increased as SMAC adoption across industries increased. IS outsourcing and custom application development growth increased substantially, driven by SMAC adoption. The demand for IT consulting services grew, while systems integration and outsourcing dropped marginally. Increasing demand for cloud platform services and drop in hardware maintenance services also affect the segment.
Company Details
Business:
L&T Infotech provides solutions and services such as application development and maintenance, Digital Services, Infrastructure management services, enterprise solutions, testing and validation, platform based solutions etc. The company’s extensive portfolio of IT services and solutions enables it to grow it’s client relationships and scope of engagements, as well as instill it’s clients with confidence in it’s ability to address their diverse and dynamic business needs.
The company focuses on emerging technologies. Some of the technologies they consider as “new age” include:
· Social
· Mobile
· AIM
· Cloud Computing
· Big Data
· ioT
· Enterprise Integration
· Business Process Digitalisation
· User Experience
· Cognitive Computing
Investments in the digital practice allow L&T to provide clients with a competitive edge, as well as giving the company a competitive advantage in the market. The company’s digital assets have received multiple industry recognitions. For example, in 2015, the World Innovation Congress recognised their “ServiceFirstTM” application (which provides for aftermarket service management across service ecosystems) as the “most innovative Cloud platform as a service”. Moreover, in 2015, the NetApp® Innovation Awards recognised them for our efforts in “innovation in big data”.
Global Presence
L&T has strong global presence with a majority of revenue coming from overseas. The company incurs most of it's costs in India and therefore has a competitive cost advantage since it can provide cheaper services compared to international competitors.
The company is among the top 20 global IT services companies with annual revenue exceeding $887M.
L&T infotech is planning to expand our geographical reach in other markets that we have identified as having potential, including Australia, Singapore, Japan, South Africa, India and the Middle East. In the Middle East, the company intends to leverage the strong presence of the L&T group, which is engaged in the oil and gas, construction and transportation sectors. The company also wishes to endeavor into France and Germany through strategic acquisitions.
Currency fluctuation is a risk but the company enters into futures contracts to hedge this risk.
Clients
L&T has clients in a number of industries. A majority of its revenue comes from the banking, finance and insurance segment (47%). Energy sector’s contribution is 12.7% (down from 22% in the previous FY due to tumbling oil prices). Other sectors are retail and pharma (9.3%), automotive and aerospace (6.8%), media and entertainment (6.2%) and consumer electronics (5.2%). The company has over 258 clients and caters to the needs of 49 of the fortune 500 companies.
The company has a steadily increasing clientele increasing from 204 in FY14 to 258 in FY16.
However, it must be noted that the company has high client concentration, 10 of the largest clients account for 52.7% of its revenue. So an important metric to look at would be client concentration. Data indicates that the company has 95% client retention rate over the past 3 years which is a positive signal.
However, it must be noted that the company has high client concentration, 10 of the largest clients account for 52.7% of its revenue. So an important metric to look at would be client concentration. Data indicates that the company has 95% client retention rate over the past 3 years which is a positive signal.
Management
Mr. Sanjay Jalona
CEO and MD
- 25 years of experience in the IT industry
- Appointed as CEO and MD in May 2016.
- Prior to joining L&T, he worked at Infosys Limited as the Executive Vice President and Global Head of High-Tech, Manufacturing and Engineering Services.
- Prior to that, he served as a member of the Board of Lodestone Holding AG, the management-consulting subsidiary of Infosys in Europe.
- Mr. Jalona holds a masters degree in computer science from BITS Pilani.
A.M Naik
Non-Executive Chairman
- Mr. Niak has been associated with Larsen & Toubro Limited for over five decades.
- He rapidly rose to secure the position of Managing Director & CEO, followed by Chairman in 2004 and culminating in Group Executive Chairman in 2012. He recently retired from these positions.
- Mr. Naik has secured several global, national and professional honours, including the “Padma Bhushan”, “Gujarat Garima Award” – Gujarat’s highest civilian honour, “Asia Business Leader of the Year Award” etc.
- He obtained his graduate degree in mechanical engineering from the Birla Vishvakarma Mahavidyalaya, Sardar Patel University of Gujarat.
Expansion
The Company has been expanding its facilities to keep pace with revenue growth. Emphasis has been on adding capacity in SEZ locations for the new & incremental business. The new units at Mindspace SEZ- Airoli, Hinjewadi-Pune and DLF SEZ Chennai were made operational during the year ended March 31, 2016.
Financials
The company has very strong financials that are following an upward trend. Revenue increased to $887.2M in FY16 from $746.6M in FY14. Over the past five years, from 2011-2015, sales grew at a CAGR of 20.1% while profits grew at a CAGR of 18.2%. The company also has superior ratios compared to the industry. Its return on equity (ROE) is 40% compared to a peer average of 30%. The company also has return on invested capital (ROIC) at 46% which id superior to the peer average at 39%.
Summary-
Strengths:
- Sound management
- Established brand
- Market leader
- Strong growth statistics
- Not a lot of exposure to U.K.
Opportunities:

- Global Big Data market opportunity is estimated to grow at 45 per cent annually
- Platform-as-a Service (PaaS) to attain a 41 percent CAGR through 2017
- Increasing Industry-specific mobility: Mobile banking, mobile commerce, airline mobile ticketing, clinical trials on the rise
- Robotic process automation leading to declining costs
Risks:
- Wage increases in India could reduce margins
- High competition
- Currency fluctuation
Due to these strong fundamentals and positive tailwinds, L&T Infotech, in my opinion, is a subscribe/buy.
No comments:
Post a Comment