L&T Technology IPO opens on Sept 12, should you subscribe
Updated on 12 Sept 2016
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L&T Technology Services (LTTS), the engineering and research and development (ER&D) arm of engineering major Larsen & Toubro (L&T), will hit the capital market with an initial public offering (IPO) of 1.04 crore shares on Monday.

At the upper end of the price band at Rs 850-860, the IPO will fetch Rs 894.40 crore. This includes allotment to anchor investors, who have been allocated 31,20,000 equity shares worth Rs 268.32 crore.

L&T's stake in the company will reduce to 89.8 per cent after the IPO. The issue will close on September 15.

The company can be compared with listed entities other such as Tata Elxsi and Cyient. At the upper end of the price band at Rs 860, the PE for L&T Technology at the basic FY16 EPS of Rs 43.52 stands at 19.76. On a diluted EPS basis, the PE of the firm stands at Rs 26.79 a share. This is against a PE of 37.8 for Tata Elxsi and 14.7 for Cyient.

What different brokerages are saying on the IPO:

IIFL: Limited room for listing gains
The brokerage said while LTTS deserves better valuations than its peers, the near-perfect IPO pricing leaves limited room for listing gains. "Long-term investors can hope for decent returns," it said. The brokerage believes the business is niche but seems to be well-priced.

IndiaNivesh Research: Valuations vis-a-vis global peers look rich
The brokerage noted that the IPO has been priced at relatively rich valuations compared with the company's listed global peers such as Alten, Harman Technologies and QuEST Global, which are trading in the 15-17 range of PE multiples.

"Due to lower penetration in niche segments, L&T Technology will get the advantage of controlling higher market share of third party businesses outsourced in India and, hence, despite expensive valuations, our take on the IPO is positive," it said.

The brokerage expects the company's profitability to improve going ahead on expansion in transportation & industrial products, investments in R&D and innovation labs, overseas growth and offshore/onshore mix.

Religare Securities: Robust return ratios and margins
The IT firm reported an 18.9 per cent YoY revenue growth at Rs 3,142 crore for FY16, while profit after tax (PAT) for the year surged 34 per cent in FY16 to Rs 416.60 crore from Rs 311.10 crore in FY15.

"Considering healthy topline growth, robust return ratios and margins and a strong balance sheet, the IPO is reasonably placed," the brokerage said.
Religare Securities has no recommendation on the IPO.

SPA Securities: Diverse presence across all verticals
The brokerage said it was positive on the prospects of the company, given its diverse presence across business verticals, focus on innovation, established relationships with clients, strong clientele and parentage and brand equity of the promoter. The IPO is favourably priced, it said.

"The company has reported strong operating margin at 17 per cent, high RoE at 38.1 per cent and has strong cash flow generation. We are slightly cautious owing to short operating history of the company. We recommend investors to subscribe to the issue for long-term gains," SPA Securities said.

Angel Broking: Potential to trade at premium to peers
The brokerage said the IT firm is likely to benefit from under-penetration, expected increase in India's market share in outsourced ER&D space, strong 13 per cent industry CAGR during FY2015-20E, multi-pronged growth strategy and operational levers such as improvement in utilisation and better onshore-offshore mix.

"We feel the LTTS stock has the potential to trade at a premium to its peers," Angel Broking said. The brokerage has a subscribe rating on the issue.

About L&T Technology Services (LTTS)
It provides Engineering and R&D sector (ER&D)services, which is defined as the set of services provided to manufacturing, technology and process engineering companies, to help them develop and build products, processes and infrastructure required to deliver products and services to their end customers. It operates in five industry segments (transportation, industrial products, telecom and hi-tech, process industry and medical devices,

Regionwise, it derives 80.2 percent of their revenues from customers in North America and Europe, which are the two largest regions of corporate ER&D spend and represented over 73 percent of the USD 1007 billion corporate ER&D services spend in 2015.

It has 12 global delivery centres in India and overseas, 26 sales offices in India, North America, Europe, the Middle East and Asia and 31 labs in India. As of the date of this Red Herring Prospectus, it has filed 35 proprietary patents and 134 patents have been filed by our customers along with our employees. As of June 30, 2016, we have more than 8,000 engineers from nine nationalities serving over 200 customers, including more than 50 Fortune 500 customers. The average age of employees is 31 years.

Its revenues are highly dependent on customers primarily located in North America and Europe as well as on customers concentrated in certain segments, notably industrial products, transportation, telecom and hi-tech, process industry and medical devices. “An economic slowdown or factors affecting these geographies or segments could materially adversely affect our business, financial condition and results of operations,” the company says.