10 things to know in L & T Infotech IPO

The original post appeared in Business Standard and is available here.

L&T Infotech will not be enjoying the proceeds of the present issue as this being an offer for sale, the entire sale amount of around Rs 1,200 crore will go the parent L&T.

With an aim to unlock value of its subsidiary and realise the benefit of listing, engineering giant L&T is offering its holding in its subsidiary L&T Infotech for sale. This marks the listing of a sizeable IT company in India after a long time. The issue will be priced around Rs. 705-710 per share and will be hitting the market on July 11, 2016.

We take a closer look at the company, its operations and positioning among its peers. Here are 10 key points to note in L&T Infotech:

1. L&T Infotech will not be enjoying the proceeds of the present issue as this being an offer for sale, the entire sale amount of around Rs 1,200 crore will go the parent L&T.
2. As per industry body NASSCOM, L&T Infotech is ranked as the sixth largest Indian IT services company in terms of export revenues. It is amongst the top-20 IT service providers globally in 2015. As of December 31, 2015, the company has 22 delivery centres and 44 sales offices globally.
3. In terms of geographies covered, L&T Infotech derives the largest chunk of its revenue from North America at 69.4% followed by Europe at 17.2%. Asia Pacific accounts for only 2.2% while the remaining 6.2% of the revenue is contributed by rest of the world.4. Post the restructuring of its engineering business which the parent hived off into a separate company, L&T Infotech has employee strength of 21,073. Around 52.5% of these employees are working onsite while 47.5% have offsite assignments.
4. Post the restructuring of its engineering business which the parent hived off into a separate company, L&T Infotech has employee strength of 21,073. Around 52.5% of these employees are working onsite while 47.5% have offsite assignments.5. Because of its close linkage with its parent, L&T Infotech offers a “Business-to-IT Connect” model primarily leveraging the domain experience and institutional knowledge of the L&T group across industries to assist us in developing and delivering IT services and solutions. The Business-to-IT Connect model is supplemented by the knowledge sharing of subject matter experts from L&T group companies to facilitate the development of solutions driven by business context and domain knowledge.
5. Because of its close linkage with its parent, L&T Infotech offers a “Business-to-IT Connect” model primarily leveraging the domain experience and institutional knowledge of the L&T group across industries to assist us in developing and delivering IT services and solutions. The Business-to-IT Connect model is supplemented by the knowledge sharing of subject matter experts from L&T group companies to facilitate the development of solutions driven by business context and domain knowledge.6. As per L&T Infotech’s annual
6. As per L&T Infotech’s annual report the company is working with 248 clients including 49 Fortune 500 clients. Looking at their client contribution, 20 clients generated above $10 million in revenue, eight clients generated above $20 million in revenue and three clients who generated above $50 million in revenue. Though the company does not have any clients contributing $100 million in revenue its retention rates are impressive. In 2015, around 97.9% of its business was generated from existing clients across various verticals. The company has been engaged with over 100 clients for more than three years and had been doing business with two of its largest clients for over ten years. Top five clients account for 37.7% of the revenue, while its top client alone accounts for 15.5% of the revenue in 2015.7. L&T Infotech offers a suite of business solutions which includes technology consulting, enterprise solutions, systems integration, custom application development, application maintenance and production support, infrastructure management, independent testing and validation, Cloud ecosystem integration and among others. The company has been changing with times and is working closely with clients in developing capabilities in emerging technologies under digital solutions. This division accounts for 11.2% of the revenue in the nine months ended period December 31, 2015. Application development, maintenance and outsourcing accounts for 41.9% of the company’s revenue, followed by Enterprise solutions which contribute 24.2%, testing at 10% and Infrastructure Management Services at 8.8%.
7. L&T Infotech offers a suite of business solutions which includes technology consulting, enterprise solutions, systems integration, custom application development, application maintenance and production support, infrastructure management, independent testing and validation, Cloud ecosystem integration and among others. The company has been changing with times and is working closely with clients in developing capabilities in emerging technologies under digital solutions. This division accounts for 11.2% of the revenue in the nine months ended period December 31, 2015. Application development, maintenance and outsourcing accounts for 41.9% of the company’s revenue, followed by Enterprise solutions which contribute 24.2%, testing at 10% and Infrastructure Management Services at 8.8%.8. Though the company claims to follow a ‘Business to IT Connect’ model, nearly 26.9% of its revenue comes from Banking and Financial Services and another 20.5% from insurance. Energy and processes
8. Though the company claims to follow a ‘Business to IT Connect’ model, nearly 26.9% of its revenue comes from Banking and Financial Services and another 20.5% from insurance. Energy and processes accounts for 12.9% while consumers, retail and pharmaceuticals clubbed together account for 9.2%. Automotive and aerospace touches 6.8% of the revenue and Hi-tech and consumer electronics is 5.3%. Media is 6.1% of the revenue while others which include plant equipment, utilities, engineering and construction account for the remaining 12.3% of revenues.
9. On a consolidated basis the company posted revenue of Rs 4,978.4 crore in FY15 and a net profit of Rs 760.6 crore. In terms of revenues the company is the sixth largest in revenue placed after Tech Mahindra but above Oracle Financial. For the nine month ending December 31, 2015 the company posted revenue of Rs 4,293.8 crore and a profit of Rs 687.6 crore. However, in operating parameter L&T Infotech has superior performance. Its operating margin stands at around 22% while that of Tech Mahindra is 18.3%.10. The issue price of Rs 705 discounts its FY15 earnings of Rs 45.91 by 15.36 times. But the annualised
10. The issue price of Rs 705 discounts its FY15 earnings of Rs 45.91 by 15.36 times. But the annualised nine month EPS of Rs 42.53 works out to Rs 56.7 and discounts the issue price by 12.43 times. The top five player’s trade between a price to earning band of 20 and 13.7 with the lowest being that of HCL Tech which is facing perception issues in the market. Based on the price the issue seems to be attractively priced leaving room for listing gains.