L&T Technology Services Will Double Its Revenue In 5 Years: AM Naik
L&T Technology’s Rs 894 crore IPO opens September 12, closes September 15.
Larsen & Toubro Technology Services Ltd., whose initial share sale opens today, is looking to double its revenue in the next five years.
The company is targeting 15 percent revenue growth per year, Larsen & Toubro Ltd. Group Executive Chairman, AM Naik, told BloombergQuint in an interview. The L&T subsidiary will also look to diversify to mitigate industry specific headwinds, Naik added.
The IPO Fineprint
LTTSL has announced an initial public offering of 10,400,000 equity shares, at a price band of Rs 850-860 per share. The promoter holds 100 percent stake in the company and is giving up 10.23 percent of its stake, L&T said in a filing to the stock exchanges. The company is looking to raise as much as Rs 894 crore from the issue, which closes on September 15.
Up to 50 percent of the share issue has been reserved for qualified institutional buyers, 15 percent for high networth individuals and 35 percent for retail investors, the company said in its draft red herring prospectus.
L&T Technology Services’ Business
LTTSL was carved out of the recently-listed L&T Infotech and parent company Larsen & Toubro. As part of the restructuring plan, L&T Infotech’s product engineering services business and L&T’s integrated engineering services were transferred to LTTSL from April 1, 2014.
LTTSL provides engineering, research and development services in transportation, industrial products, telecom and medical devices segments, according to the red herring prospectus. The company has more than 8,000 engineers, and over 200 customers, including more than 50 Fortune 500 companies.
Acquisitions
In 2014, LTTSL acquired 74 percent stake in Thales Software India Pvt Ltd. for Rs 6.4 crore and the engineering services division of Dell India for Rs 1.36 crore.
Revenue Sources
In the financial year 2015-16, LTTSL added 36 new customers who contributed 5.4 percent of the total revenue of the company, according to the red herring prospectus. The major chunk of the income comes from the transportation business followed by the industrial products segment.
While the company currently derives over 80 percent of its business from North America and Europe, L&T Group Executive Chairman, AM Naik, told BloombergQuint that LTTSL is looking to expand its revenue share from Asian countries like Japan and South Korea.
Financial Health
- LTTSL is a debt free company with a networth of Rs 1,126.8 crore.
- It clocked Rs 3,142.7 crore revenue in financial year 2015-16, an increase of 18.9 percent compared to the previous year.
- Revenue for the first quarter of financial year 2016-17 stood at Rs 833.4 crore.
- The company’s net profit in FY16 rose 34 percent to Rs 416.6 crore, while for the first quarter of FY17, profit stood at Rs 123.7 crore.
At the upper end of the price band of Rs 860, the earning per share for FY16 stands at Rs 40.97, while the price to earnings ratio stands at 21 times, according to BloombergQuint’s calculations. At the lower end of the price band of Rs 850, the P/E multiple stands at 20.7 times.
In terms of business and revenue, LTTSL’s closest listed competitor is Cyient Ltd.
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Anchor Investor Allocations
LTTSL allotted 31,20,000 equity shares to anchor investors at Rs 860 per share, according to exchange filings. Sundaram Mutual Fund was allocated 9.31 percent of the total anchor investor portion, followed by Copthall Mauritius Investment Ltd.
Five mutual funds, Sundaram Mutual Fund, DSP Blackrock Focus 25 Fund, Canara Robeco Mutual Fund, HDFC Trustee Company, and Tata Mutual Fund acquired 35.22 percent of the total anchor investors’ portion.
ICICI Prudential Life Insurance, which is coming out with an IPO on September 19, was also allotted 6.98 percent of the total anchor investor portion.
Brokerages Verdict
PhillipCapital India Research has recommended an ‘avoid’ to this issue in its note to clients citing high valuations.
We expect the growth of Indian IT Services companies to be under pressure over the next few years. However, we expect engineering, research and development segment to buck this trend and companies like LTTSL and Cyient to be beneficiaries of the same. But the asking valuations for LTTSL appear highly expensive.
Angel Broking expects LTTSL to trade at a premium to its peers. The brokerage house has recommended a ‘subscribe’ to this issue in its note to clients.
LTTSL has strong growth potential, which is ahead of some of the industry peers, coupled with 38 percent return on equity levels in FY16, average cash flow from operations of Rs 446 crore and strong 64 percent dividend payout (translating to 4 percent dividend yield), we are of view that LTTSL stock has the potential to trade at premium to the peers. However, if we consider the average of the three peers, then LTTSL stock has been priced at discount.