L&T Infotech - Giant in the making?

A big IPO is opening next week. L & T Infotech is coming up with its IPO to raise about INR 12,425 Million. This will be through an Offer of Sale by the promoters to the tune of 17.50 Million shares at a price range of INR 705-INR710. The IPO will be open from 11-Jul-2016 to 13-Jul-2016. Shares can be applied in lots of 20 shares and the retail investors will be allotted 35% of the total issue. The company will not get any proceeds from the IPO as promoters are selling a stake from the company.

The company offers a suite of business solutions including technology consulting, enterprise solutions, systems integration, custom application development, application maintenance and production support amongst others. The company is also working with its customers to develop capabilities in emerging technologies. This accounts for about 11% of the company’s revenue. Application development, maintenance and outsourcing accounts for nearly 42% of the revenue followed by enterprise solutions which accounts for 24%.

From a sectoral perspective, BFSI sector accounts for nearly 47.50% of the revenues while Energy and processes account for nearly 13% of the revenues with the other sectors taking the rest of the share of revenue. L&T Infotech’s revenues are very concentrated geographically with the US accounting for 66.80% of the revenues with Europe accounting for 17.40% of the revenues. That said, Brexit doesn’t have an impact on the company as the Nordic countries account for 11% of the 17% of the revenues from Europe.

L&T Infotech’s consolidated financial performance (in INR Million)
Details	FY12	FY13	FY14	FY15	FY16
Total revenue	31,915.00	38,735.00	48,371.00	50,695.00	61,430.00
Total expenses	24,922.00	29,809.00	37,732.00	39,735.00	48,114.00
Net Profit	4,193.00	5,100.00	6,598.00	7,600.00	9,223.00
Net Profit Margin	13.14%	13.17%	13.64%	14.99%	15.01%

The revenues have been growing at a CAGR of about 18% in the four years between 2012 and 2016. The profits, however, grew at higher rate of 22% in the same period. Also, the net profit margin has been consistent at 15% in the last couple of years, up by a couple of hundred basis points. The company’s RONW is also very high at 45% even beating the Jambhavaans of the industry like TCS and Infy. The company also has a very strong balance sheet (hardly any debt).

L&T Infotech’s business thrives on customer retention and repeat business from its clients. This could prove to be quite risky especially when the top 10 clients contribute to nearly 53% of the total revenue of the company with specifically Citi contributing to nearly 15% of the company’s revenue.  This could turn tricky. One good thing for the company is that it’s parent company Larsen & Tourbo has global operations and helps the company get long term contracts at good rates to ensure the growth continues.

The company had a diluted EPS of Rs. 56.13 per share for the year ending March 2016 giving a PE (Price to Earnings) range of 12.64 higher spectrum of the issue price. The company has provided a INR 10 discount for retail customers which makes the PE 12.47 for the retail customers. NASSCOM has ranked L&T Infotech as the 6^th largest exporter of IT Services and hence comparable to the likes of HCL Technologies, Wipro and Tech Mahindra. All these companies enjoy a PE of 15 and above based on their March 2016 earnings. It is also worth noting that these companies have a far less RONW (20%-30%) than L&T Infotech (45%).

Considering the robust growth and good margins, L&T Infotech is a sure pick. Whether one wants to enjoy a quick listing gain or want to hold it long term is a personal choice.  Either way, go for it.