L&T Tech
By Geetanjali Kedia
L&T Technology Services is entering the primary market on Monday 12th September 2016, with an offer for sale (OFS) of upto 1.04 crore equity shares of Rs. 2 each, in the price band of Rs. 850 to Rs. 860 per share. Entire OFS is by promoter L&T, currently holding 100% stake, who’s holding will reduce to 89.77% post issue. Representing 10.2% of the post issue paid-up capital, issue will raise Rs. 884 crore and Rs. 894 crore at the lower and upper price band respectively and will close on Thursday 15th September.
Engineering major L&T’s wholly owned subsidiary, L&T Technology Services, provides IT services for Engineering, Research and Development (ER&D) through 12 delivery centres (6 in India, 6 overseas) and 31 labs, serving key markets of North America (64% of Q1FY17 revenue) and Europe (20%). Among industry verticals, transportation (32% of revenue) and industrial products (26%) are key, followed by telecom and hi-tech (19%), process industry (16%) and medical devices (7%). It counts the likes of BMW, Calsonic Kansai, Caterpillar, Danaher, Eaton, Intel, John Deere, P&G, Rockwell Automation, Scania, Shell and UTC among its clients.
Established in 2014, through a group restructuring exercise, company has a current headcount of 9,419 employees, with attrition rate of 13.2% (Q1FY17). FY16 consolidated revenue in USD terms grew 9.4% YoY to USD 468 million, resulting in 17% YoY growth in Rupee revenue to Rs. 3,067 crore. EBITDA margin strengthened to 19.5% from 16.2% in FY15, as EBITDA expanded 41% YoY to Rs. 597 crore. Consolidated net profit in FY16 also surged 34% YoY to Rs. 417 crore (Rs. 311 crore in FY15), yielding a diluted EPS of Rs. 32.10.
Coming on to its Q1FY17 earnings, USD revenue grew 6.9% YoY to USD 120 million, impacted by slowdown in oil and gas (part of process industry segment) and US agricultural equipment industries (part of transportation segment). Rupee revenue grew 12.6% YoY to Rs. 803 crore, while EBITDA margin improved to 23.1% leading to EBITDA of Rs. 186 crore and PAT of Rs. 124 crore, translating into net margin and diluted EPS of 15.4% and Rs. 11.02 respectively for the first quarter.
Equity, as on 31-06-2016, is tiny at Rs. 20.34 crore (FV Rs. 2 each), with net worth of Rs. 1,127 crore. Consolidated total debt (all short term) of Rs. 201 crore, while cash and equivalents of Rs. 188 crore translate into net debt of Rs.12 crore. At the upper end of the price band of Rs. 860, company is seeking market cap of Rs. 8,745 crore and EV of Rs. 8,757 crore. This leads to EV/EBITDA multiple of 14.7x and 11.0x for FY16 and FY17 respectively and PE multiple of 21.0x and 16.8x for FY16 and FY17 respectively.
Below is a comparative analysis with some listed peers:
| Company Name | Revenue | Revenue Growth | Net Profit | Net Profit | Employees | EV/EBITDA multiple | PE multiple |
|
| Q1FY17 | YoY | Q1FY17 | Margin | 30-06-2016 | FY17E | FY17E |
|
| Rs Cr |
| Rs Cr | % | Approx. | x | x (net of cash) |
| TCS | 29,305 | 14.2% | 6,318 | 21.6% | 3,62,000 | 12.9 | 18.9 |
| Infosys | 16,782 | 16.9% | 3,436 | 20.5% | 1,97,000 | 10.1 | 14.9 |
| L&T Infotech | 1,555 | 16.6% | 266 | 17.1% | 19,300 | 7.0 | 10.8 |
| Mindtree | 1,328 | 35.1% | 124 | 9.3% | 16,600 | 9.3 | 16.1 |
| Cyient | 831 | 14.4% | 74 | 8.9% | 13,000 | 9.3 | 15.1 |
| L&T Tech | 803 | 12.6% | 124 | 15.4% | 9,400 | 11.0 | 16.8 |
| Persistent | 702 | 40.2% | 80 | 11.4% | 9,000 | 8.3 | 13.7 |
| Tata Elxsi | 294 | 20.9% | 42 | 14.2% | 4,700 | 16.4 | 25.9 |
Even though L&T Technology operates in the niche space, margins are not the best in class (lags group peer L&T Infotech as also trails the biggies by good 500-600 basis points), although margins are on a rise.
On the pricing front, valuation also looks steep when compared with L&T Infotech Rs. 1,236 crore IPO, which offered shares, just 2 months back, at EV/EBITDA and PE multiples of 9x and 13x times respectively. Despite bumper subscription, L&T Infotech witnessed muted listing on the bourses, at Rs. 697, vis-a-vis IPO price of Rs. 710. Now, share price of L&T Infotech has not only corrected by 8% to Rs. 652, it is currently ruling at EV/EBITDA and PE multiples of 7x and 11x respectively, despite having higher margins than L&T Technology. L&T Infotech’s muted listing coupled with current market price below issue price, will both, weigh heavily on this IPO. Investors have not been rewarded in the earlier IPO, from the same group and the same industry, will have little incentive to throw the hat in the ring.
Moreover, over the past 2 months, market sentiments have not improved, especially for the IT sector, on account of Brexit and cross currency headwinds. Although company has barely 2% of revenue currently from UK, some of its customers do have significant business from UK, which could lead to reduced spending on ER&D services. Slow growth and macroeconomic uncertainties have contracted earnings of IT companies (seen in both Q4FY16 and Q1 FY17 results), leading to sentiment of caution on the sector among investors. DIIs now seem to be turning attention towards domestic IT players, with limited exposure to global shocks, and dominant position in domestic markets.
Despite healthy balance-sheet and improving margins, one can give this IPO a miss, given the poor show of L&T Infotech IPO as well as unattractive pricing in the current issue, coupled with negative sentiments now prevailing for IT stocks, leaving little-to-no room for appreciation.
Disclosure: No Interest