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LARSEN & TOUBRO INFOTECH LIMITED IPO Views - 08th Jul 2016

IT | Published on Jul 08th 2016

IT

L&T InfoTech (LTI) is one of India’s global IT services and solutions companies. In 2015, NASSCOM ranked the company as the sixth largest Indian IT services company in terms of export revenues. The company is a subsidiary of engineering and construction giant Larsen and Toubro (L&T). L&T holds close to 95% in LTI and is launching an IPO to offload 10.3% of its stake. Its clients comprise some of the world’s largest and well-known organisations, including 49 of the Fortune Global 500 companies. One of the leading mid-tier IT companies: LTI has been one of the leading players in the IT industry with it having posted a 20.1% CAGR in sales during FY2011-2015. A small part of the same was driven by acquisitions that the company made during the period. Among the acquisitions were Citigroup’s IT platform (acquired in Jan 2011; had revenues of ~Rs204.8cr) and Otis Elevator Co’s IT arm (ISRC) (acquired in Oct 2014; had revenues of ~Rs56.5cr). In USD terms, LTI outperformed the industry by posting a 12.1% CAGR in sales as against an 11.2% sales CAGR posted by the Indian IT industry during FY2011-2015. Good capital allocation: LTI generates a healthy RoE of ~40% compared to the peer group’s average of ~30%. This is mainly because the company holds a relatively low amount of cash on its books vis-a-vis its peers by following an aggressive dividend policy. LTI has had a dividend pay-out ratio as high as ~75% over the last five years, while the commensurate figure for its peers stood at 30-50% over the same period. On capital invested basis also, the company earns a ROIC of around 46%, again outperforming its mid-cap peers, which earn ~35-40%. Outlook and Valuation: LTI has reported a strong CAGR of 20.1% and 23.1% on the revenue and net profit fronts respectively over FY2011-2015. At Rs710, which is the upper end of the offer price band, the company is available at ~13x its FY2016E earnings, which is at a slight discount to its mid-cap peers trading at an average PE of ~15x FY2016E earnings. Plus, assuming that the company maintains its historical average rate of dividend payouts, it would translate into a yield of 4-5% for the investor. Apart from the favorable prospects of the company, we also foresee decent gains on listing. Thus, we recommend a SUBSCRIBE to the issue.

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