Subscribe. Larsen & Toubro Infotech Ltd RETAIL EQUITY RESEARCH IPO NOTE. Price Range : Rs Set to march ahead!

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1 IPO NOTE GEOJIT BNP PARIBAS Research RETAIL EQUITY RESEARCH Larsen & Toubro Infotech Ltd Sensex : 27,127 Nifty : 8,323 Subscribe Price Range : Rs th July, 2016 Set to march ahead! Larsen & Toubro Infotech Ltd (LTIL), a wholly owned subsidiary of L&T (the engineering conglomerate), is one of India s global IT services & solutions companies. Together, the US and Europe account for about 85% of LTIL s revenue. Based out of Mumbai, the company has a network of 22 delivery centres and 41 sales offices globally. Total number of employees at LTIL was ~20,000 in FY16. LTIL generates major chunk of revenue by providing application development, maintenance & outsourcing services (42.4% of FY16 revenue) and enterprise solutions (23.7%). Further, the company s investments in building capabilities in newer technologies has led to rising contribution from the digital business to 11.1% in FY16 from 9.5% in FY15. Besides US and Europe, LTIL intends to enhance its geographical presence in high potential markets including Australia, Singapore, Japan, South Africa, India and the Middle East. Further, LTIL is looking to grow inorganically in markets like Germany, France and the Nordic region. LTIL s revenue & PAT has grown at a CAGR of ~13% & ~18% respectively over FY Also, the company has been consistently maintaining strong return on equity (above 40%) and EBITDA margin (more than 15%) over the years. We are positive on the stock given the rising contribution of digital business, focus on expanding presence, leveraging parentage and increasing use of automation across projects to bring in operational efficiencies. At upper price band of Rs710, it is available at an attractive valuation of 13x FY16 earnings as compared to its peers. Hence, we recommend Subscribe to the issue, with a medium-to-long term perspective. Purpose of IPO At the upper price band, total issue size stands at Rs1,242.5crores. L&T (the parent company) plans to sell up to 1.75crore shares through an offer for sale (OFS). LTIL will not receive any proceeds from this offer and the main objective of the issue is to achieve the benefits of listing shares on stock exchanges. Key Risks... Increasing competitive intensity could have a bearing on the pricing. Exchange rate fluctuations mainly in USD & Euro coupled with high concentration, particularly in the US. High client concentration Top 10 clients contribute 52.7% to revenues in FY16. Issue Details Date of Opening 11 th July 2016 Date of Closing 13 th July 2016 Total no. of Shares offered (cr) 1.75 Post Issue No. of shares (cr) Price Band (Rs10 discount to retail investors) Face Value Bid Lot Listing Lead Managers Registrars Issue size (at upper price) Rs Rs1 Multiples of 20 shares BSE & NSE Citigroup Global, Kotak Mahindra, ICICI Securities Link Intime Rs cr Offer for sale 1,242.5 Net Issue 1,242.5 Shareholding (%) Pre Issue Post Issue Promoters Others Total Issue structure Allocation % Size Rs cr (at upper band) Retail Non Institutional QIB Total 100 1, Y.E March (Rs cr) FY14 FY15 FY16 Net Sales 4,920 4,978 5,847 EBITDA 1,147 1,004 1,036 Adj.PAT ROE (%) EPS (Rs.) P/E (x) Peer Valuations Company Sales FY16 (Rs cr) MCap (Rs cr) FY15 FY16 Mindtree 4,690 10, Hexaware* 3,123 6, L&T Infotech 5,847 12, Source: GBNPP Research, Bloomberg; Note: Valuations of LTIL are based on upper end of the price band * December ending FY16 PE (x) FY16 ROE% EPS

2 Company Description Incorporated on December 23, 1996, Larsen & Toubro Infotech Ltd is one of India s leading global IT services and solutions company. It provides an array of IT services to its clients across industries such as banking and financial services, insurance, energy, consumer packaged goods, retail & pharmaceuticals, media & entertainment, hi-tech & consumer electronics and automotive & aerospace. The company s services include application development, maintenance and outsourcing, enterprise solutions, infrastructure management services, testing, digital solutions and platform-based solutions. LTIL has nine delivery centres (all of which act as sales offices) in India and thirteen others are spread across United States (6), Canada (1), Costa Rica (1), Philippines (1), Singapore (1), South Africa (1), Unite Kingdom (1), Germany (1) as of May 31, LTIL s verticals & services contribution Business Verticals FY14 FY15 FY16 Service Lines FY14 FY15 F Y16 Banking & Financial Services 26.0% 27.1% 26.3% Insurance 18.8% 20.0% 20.7% Energy & Process 22.0% 16.2% 12.7% Consumer Packaged Goods, Retail & Pharmaceuticals 8.4% 9.3% 9.3% Hi-Tech & Consumer Electronics 7.4% 6.9% 5.2% Automotive & Aerospace 4.2% 5.7% 6.8% Media & Entertainment 4.6% 5.4% 6.2% Others 8.6% 9.4% 12.8% Total 100.0% 100.0% 100.0% Application Development, Maintenance and Outsourcing 43.0% 43.4% 42.4% Enterprise solutions 27.5% 24.8% 23.7% Infrastructure Management Services 8.0% 8.7% 9.7% Testing 8.5% 9.5% 9.8% Digital Solutions 7.5% 9.5% 11.1% Platform-Based Solutions 5.5% 4.1% 3.3% Total 100.0% 100.0% 100.0% Source: RHP, Geojit BNP Paribas Research Strong brand equity and domain expertise Being a part of the L&T group, the company enjoys the benefit of strong parentage which has expertise and experience in diverse verticals such as hydrocarbons, heavy engineering, finance, oil & gas and automotive & aerospace. This has helped L&T Infotech develop and deliver specialised IT services and solutions for the clients in these verticals. Further, the promoters renowned brand and strong global network has helped LTIL in attracting best talent and acquiring new clients apart from mining the strategic global clients, vendors and partners of the L&T group. This provides the company a competitive edge over its peers. Long standing client relationships The company has forged long standing relationships with several clients which is clearly visible from the robust revenue generation from its existing clients. The revenue contribution from existing client stood at 96.9%, 98.1% and 96.9% in FY16, FY15 and FY14, respectively. While LTIL s largest client Citibank accounts for 14.9% of its total revenues, top 5 & top 10 clients contribute 37.5% & 52.7% respectively. It has over 100 clients for more than three years and two of the largest clients have been more than ten years. The company s established relationships with clients is evident from the fact that 17 of its clients generated revenue in excess of USD10mn, 10 clients generated above USD20mn and three clients generated revenue over USD50mn in FY16.

3 Banking on emerging technologies LTIL is witnessing strong traction in Digital Services business and thus is aggressively expanding its digital presence. The contribution of digital solutions business to the total revenues (from continuing operations) has increased from 9.5% in FY15 to 11.1% in FY16. It is focusing on new age technologies in the areas of Social, Mobile, AIM (Analytics and Information Management), Cloud Computing, Big Data, iot (Internet of Things), Enterprise Integration, Business Process Digitalisation, User Experience, Cognitive Computing among others. Besides, LTIL s investments in emerging technologies have received recognition from various industries. Its MyCar application, MediaHub (digital media management platform) and Financial Crime EDD Automation Solution was acclaimed as the most innovative product of the year, most promising new product technology and best innovation in information technology respectively by the World Innovation Congress in Seeks to grow globally Besides, expanding its presence in US and Europe, LTIL is also planning to augment its geographical reach in other markets including Australia, Singapore, Japan, South Africa, India and the Middle East. Further, the company is also pursuing strategic acquisitions in markets like Germany, France and the Nordic region. In the past, LTIL has made various successful acquisitions. In 2007, LTIL acquired GDA Tech, a US-based electronic design company followed by the acquisition of transfer agency business unit of Citigroup Fund Services Canada in Further, it has acquired Information Systems Research Centre in US in These acquisitions have helped the company to further develop its technological capabilities along with strengthening the service portfolio. Experienced top management L&T Infotech has a highly skilled senior management team. A.M. Naik is the non-executive chairman of the board. He has been a director of this company since December 23, Further, he holds graduate degree in mechanical engineering from the Birla Vishvakarma Mahavidyalaya, Sardar Patel University of Gujarat. Sanjay Jalona is the chief executive officer and managing director of the company. He has more than 25 years of experience in the IT industry. In the past, he served as an executive vice president and global head of high-tech, manufacturing & engineering services at Infosys. He has also worked with Lodestone Holding AG (now known as Infosys Consulting Holding AG) as a member of the Board. He holds a degree of Master of Science (Technology) in computer science from the Birla Institute of Technology and Science, Pilani. Robust growth outlook for IT-BPM industry According to NASSCOM (National Association of Software and Services Companies), the Indian IT-BPM industry s revenue grew 8.5% YoY in FY16 to USD 143 bn. The domestic market grew at a muted pace of 3.2% in FY16 to USD35bn primarily impacted by strengthening of US dollar. However, going forward, the growth in the domestic market is expected to be driven by outsourcing, cloud services and increasing technology adoption by industries. Further, the government s digital India & e-governance initiatives would boost the domestic growth. With the growing expectations of the government s investments in digitization, infrastructure improvement, implementing technology in healthcare, manufacturing and agriculture sectors, IT services sector is expected to witness an opportunity of around USD5.9bn. With regards to exports, growing demand of disruptive technologies viz; SMAC (social, mobility, analytics, cloud), the Internet of Things (IoT) and robotics, among others is driving the growth of industry. According to NASSCOM, exports revenue witnessed a growth of 10.3% YoY to USD108bn in FY16 driven by ER&D (Engineering, Research and Development) and product development (the fastest growing segment at 12.6%). This is witnessing traction driven by growing demand of IoT/connected devices and disruptive innovation. Thus, with SMAC and other emerging technologies driving the growth of the industry, NASSCOM expects Indian IT-BPM industry to achieve USD225bn revenue by 2020.

4 Financials (Consolidated) Profit & Loss Account Y.E March (Rs cr) FY13A FY14A FY15A FY16A Sales 3,851 4,920 4,978 5,847 % change 21.0% 27.8% 1.2% 17.5% EBITDA 870 1,147 1,004 1,036 % change 26.2% 31.8% -12.4% 3.1% Depreciation EBIT 747 1, Interest cost Other income 22 (83) PBT ,147 % change 33.6% 20.7% 2.7% 23.7% Tax Tax rate (%) 25.0% 22.9% 18.0% 19.6% Reported PAT Adj Adjusted PAT % change 33.9% 24.0% 9.3% 21.2% No. of shares (cr.) Adj. EPS (Rs.) % change 33.9% 24.0% 9.3% 15.1% Balance Sheet Y.E March (Rs cr) FY13A FY14A FY15A FY16A Cash Accounts Receivable ,090 1,166 Inventories Other Current Assets Investments Net Fixed Assets CWIP Intangible Assets Deferred tax assets (net) (15) (41) (23) (120) Other non-current assets Total Assets 2,345 2,659 3,034 3,336 Current Liabilities ,121 Provisions Total debt Other non-current liabilities Equity Capital Reserves & Surplus 1,323 1,594 2,010 2,006 Shareholder s Fund 1,339 1,610 2,026 2,023 Minority Interest Total Liabilities 2,345 2,659 3,034 3,336 BVPS (Rs.) Cash Flow Y.E March (Rs cr.) FY13A FY14A FY15A FY16A Pre-tax profit ,147 Depreciation Changes in W.C (82) (141) (92) (94) Others 28 (52) (75) (84) Tax paid (210) (214) (277) (266) C.F.O Capital exp. (254) (118) (196) (129) Change in inv. 21 (112) Other invest.cf C.F - investing (224) 180 (103) (44) Issue of equity Issue/repay debt (38) (123) 101 (166) Dividends paid (349) (636) (593) (652) Other finance.cf (10) (10) (6) (6) C.F - Financing (396) (769) (497) (817) Chg. in cash (13) Closing cash Key Ratios Y.E March FY13A FY14A FY15A FY16A Growth (%) Net Sales EBITDA (12.4) 3.1 Net Profit Profitabl. & Return EBITDA Margin (%) EBIT Margin (%) PAT Margin (%) ROE ROCE W.C. & Liquidity Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Levg. Gross asset turnover (x) Int. Covg. Ratio (x) Adj. debt/equity (x) Valuation ratios * EV/ Sales (x) EV/ EBITDA (x) P/E (x) P/BV (x) * Valuation ratios

5 Investment Rating Criteria Large Cap Stocks; Mid Cap and Small Cap; Buy - Upside is 10% or more. Buy - Upside is 15% or more. Hold - Upside or downside is less than 10%. Accumulate* - Upside between 10% - 15%. Reduce - Downside is 10% or more. Hold - Absolute returns between 0% - 10%. Reduce/Sell - Absolute returns less than 0%. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. * For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. 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