IPO NOTE Key Details: July 5, 2016 Issue Key Highlights: Price*: `705 - `710 Issue Opens: 11 th July 2016 Issue Size*: `1228 - `1236 Cr Issue Close: 13 th July 2016 *A discount of Rs.10/- per share will be offered to retail individual bidders. Particulars No of No of Sh. at Shares higher at lower band price (Cr) band(cr) %age Higher band Amount (`Cr) Lower band Amount (`Cr) QIB 0.88 0.88 50% 621.3 616.9 Non-Inst. 0.26 0.26 15% 186.4 185.1 Retail 0.61 0.61 35% 428.8 425.7 Employees - - - - - Total Issue 1.75 1.75 100% 1,236.4 1,227.6 Issue Details: Industry IT & ITeS Promoters: Larsen & Toubro Ltd Capital Structure: Pre Issue Equity (Rs.Cr.) 16.98 Fresh Issue (@FV) NA Offer for Sale (@FV) 1.75 Post Issue Equity Capital 16.98 Total Issue as % of total capital 10.30% (Post-Issue) Face Value Re.1 IPO Grade NA All Calculations at Cap Price Issue Route Book Build Issue Bid Lot (Shares) 20 Lead Managers Citigroup Global Markets India Pvt. Ltd, Kotak Mahindra Capital Company Ltd. and ICICI Securities Ltd Registered Office Registrar Listing Key Investment Details for Retail Investors: Min No. of Shares application by Retail Investor Amount to be paid on the Min. Application (`) (considering Retail Discount of Rs.10/-) ASBA Application is mandatory Mumbai, Maharashtra Link Intime India Pvt Ltd BSE, NSE 20 14,000 Offer for Sale: Company will not receive any proceeds from the Offer for Sale and all the proceeds will go to the Selling Shareholders. Business Overview: L&T Infotech Limited (LTIL), are one of India s global IT services and solutions companies. They offer an extensive range of IT services to its clients in diverse industries such as banking and financial services, insurance, energy and process, consumer packaged goods, retail and pharmaceuticals, media and entertainment, hi-tech and consumer electronics and automotive and aerospace. Their range of services includes application development, maintenance and outsourcing, enterprise solutions, infrastructure management services, testing, digital solutions and platform-based solutions. They serve clients across these industries, leveraging their domain expertise, diverse technological capabilities, wide geographical reach, an efficient global delivery model, thought partnership and new age digital offerings. LITL growth has been marked by significant expansion of business verticals and geographies in which they do business. Besides India, they provide services globally and the percentage of revenue from continuing L&T Infotech Limited Wealth Management Subscribe operations from North America, Europe, Asia Pacific and the rest of the world amounted to 69.0%, 17.4%, 2.0% and 5.8% for FY16 respectively. Investment Rationale: Strong parentage and brand equity of our Promoter: The L&T brand is one of the respected brands in India, which provides them with a competitive advantage, particularly in: attracting talent and new clients; benefiting from Promoter s global network; exploring potential business opportunities; best corporate governance practices; accessing capital; and establishing as a thought partner with the top management of many global corporations. Established long-term relationships with our clients: Client relationships is the core of business, include many leading businesses, including 49 of the Fortune Global 500 companies. They have a track record of delivering an extensive range of solutions using their global delivery model, demonstrable industry and technology expertise, and sensitivity to their clients feedback that has helped them forge strong relationships with major clients. For example, in FY16, had 17 clients who generated above USD 10 mn in revenue, 10 clients who generated above USD 20 mn in revenue and 3 clients who generated above USD 50 mn in revenue which is reflective of such strong client relationships. They have a history of high client retention and derive a significant proportion of their revenues from repeat business built on successful execution of prior engagements. In FY 2016, 2015 and 2014, generated 96.9%, 98.1% and 96.9%, respectively, of revenue from continuing operations from existing clients across a range of business verticals. In addition, as of March 2016, had been engaged with over 100 clients for more than three years and had been doing business with two of largest clients for over ten years. Focus on a targeted client portfolio and having potential of higher total contract values: LTIL intend to continue building long-term sustainable business relationships with existing clients to generate greater revenues. This involves inter alia increasing the scope of engagements with existing clients; selling additional services to them; deploying project managers, delivery specialists and other professionals to provide value-added business solutions; and eventually become a thought partner with them in terms of their existing and future business needs by identifying priority solutions in consultation with industry experts. Also, targeting clients who have the potential to offer opportunities with large total contract values. They intend to originate large engagements by either identifying opportunities with existing client accounts or by targeting new clients whose existing engagements with IT vendors will be up for renewal. Expand our focus on infrastructure management service offerings: IMS service practice offers a wide spectrum of end-to-end services covering IT infrastructure consulting, design, managed services, migration services, operational support, desktop support, and Cloud enablement, hosting and migration. Aims to leverage their Business 1st approach with respect to IMS, which provides extensive services to clients inter alia using application development, maintenance, support and testing services, which collectively assist clients to automate their business processes through customised service delivery plans that are aligned with their business needs and objectives. Similar to approach in relation to emerging technologies, they have agreements with a number of players in delivering IMS service offerings in a technologically-agnostic way. Expand geographical presence: LTIL market and distribute solutions directly through their global delivery model. They have historically been dependent on North America and Europe for most of revenues. In FY 2016 & 2015, revenues originating from North America represented 69.0% and 68.6%, respectively of revenue from continuing operations. In FY 2016 and 2015, revenues originating from Europe represented 17.4% and 17.9%, respectively of revenue from continuing operations. While they intend to continue expanding their presence in the United States and Europe, and also plan to expand their geographical reach in other markets that they have identified as having potential, incl. Australia, Singapore, Japan, South Africa, India and the Middle East. Risks: LTIL has a large exposure to the BFSI space and may be subject to pressure if this segment underperforms, resulting in margin contraction. The Company has had to grapple with a significant proportion of employee attrition in the recent past and continuation of high attrition might pose a threat. Changes in visa regulations of various nations may affect the company. Outlook & Valuation: LTIL s revenue CAGR of 12.1% since FY12 and its PAT margin growth from 13.6% in FY12 to 15.8% in FY16 is comparable with its peers. The high ROE of 45.6% is because of large dividend payouts and this may be unsustainable. At the higher end of the price band, LTIL is available at 13.1x its FY16 EPS. Given these factors, we maintain a Subscribe on the issue from the long term perspective.
Software & services: Flat growth in 2015 2015: APAC sees fastest growth NASSCOM notes that 2015 saw continued demand for overall Indian IT-BPM exports for FY 2016 global sourcing IT-BPM exports to various countries in FY 2016 Expected increase in revenues of the Indian IT services industry Indian IT-BPM: On track to achieve its USD 225 billion target by 2020
Key Matrix: Particulars 2016 2015 2014 Business Verticals (Percentage of our revenue from continuing operations) Banking and Financial Services 26.30% 27.10% 26.00% Insurance 20.70% 20.00% 18.80% Energy and Process 12.70% 16.20% 22.00% Consumer Packaged Goods, Retail and Pharmaceuticals 9.30% 9.30% 8.40% Hi-Tech and Consumer Electronics 5.20% 6.90% 7.40% Automotive and Aerospace 6.80% 5.70% 4.20% Media and Entertainment 6.20% 5.40% 4.60% Others (Includes plant equipment, utilities, engineering and construction and travel and logistics.) 12.80% 9.40% 8.60% Service Lines (Percentage of our revenue from continuing operations) Application Development, Maintenance and Outsourcing 42.40% 43.40% 43.00% Enterprise solutions 23.70% 24.80% 27.50% Infrastructure Management Services 9.70% 8.70% 8.00% Testing 9.80% 9.50% 8.50% Digital Solutions (Digital Solutions includes AIM, Enterprise Integration and Mobility) 11.10% 9.50% 7.50% Platform-Based Solutions 3.30% 4.10% 5.50% Global Delivery Model (Percentage of export revenues) Onsite 52.30% 51.80% 53.90% Offshore 47.70% 48.20% 46.10% Geographical Segments (Percentage of revenue from continuing operations) North America 69.00% 68.60% 67.30% Europe 17.40% 17.90% 20.10% Asia Pacific 2.00% 2.40% 2.60% India 5.80% 4.20% 3.40% Rest of World 5.80% 6.90% 6.60% Revenue Concentration (Percentage of revenue from continuing operations) Top Client 14.90% 14.10% 13.10% Top 5 Clients 37.50% 37.20% 36.30% Top 10 Clients 52.70% 49.50% 46.80% Top 20 Clients 68.20% 63.60% 59.60% Number of clients and percentage of revenue from continuing operations Active Clients(1) 258 232 204 New Clients(2) 73 57 54 Revenues from new clients 3.10% 1.90% 3.10% Revenues from repeat business(3) 96.90% 98.10% 96.90% (1) Clients who contributed to our revenues in the indicated period and/or the preceding financial year. (2) Clients who contributed to our revenues during the indicated period but not in the preceding financial year. (3) Revenues excluding revenues from new clients. Brief Financials : L&T Infotech Limited Year Price (Rs.) Mcap Net Sales EBITDA Margin (%) PAT PAT Margin (%) EPS (Rs.) P/E ROE (%) P/BV FY16 705 11,974 5847.06 17.7% 922.18 15.8% 54.3 13.0 45.6% 5.92 710 12,059 5847.06 17.7% 922.18 15.8% 54.3 13.1 45.6% 5.96 FY15 4978.04 20.2% 769.16 15.5% 45.3 38.0% FY14 4920.50 23.3% 928.34 18.9% 54.7 57.7% FY13 3851.44 22.6% 573.73 14.9% 33.8 42.9% FY12 3182.02 21.7% 433.15 13.6% 25.5 39.2%
Peer Comparison: Companies FY16 FY16 FY16 FY16 Price Mcap EPS P/E P/BV Revenue EBITDM PAT PATM ROE (%) (Rs.) (Rs.Cr.) (Rs.Cr.) (%) (Rs.Cr.) (%) (Rs.) L&T Infotech 705 11,974 5,847 17.7% 922 15.8% 54.30 13.0 45.6% 5.9 710 12,059 5,847 17.7% 922 15.8% 54.30 13.1 45.6% 6.0 HCL Technologies 738 104,086 30,781 21.5% 5,643 18.3% 40.00 18.4 20.7% 3.8 Hexaware Tech. 229 6,915 3,124 17.2% 393 12.6% 13.03 17.6 27.4% 4.8 Infosys 1,175 269,994 62,441 27.4% 13,491 21.6% 58.73 20.0 21.8% 4.4 Mindtree 679 11,391 4,690 17.7% 603 12.9% 35.95 18.9 25.2% 4.8 TCS 2,483 489,198 108,646 28.2% 24,292 22.4% 123.28 20.1 37.2% 7.5 Tech Mahindra 514 49,898 26,494 16.3% 3,118 11.8% 32.11 16.0 21.7% 3.5 Wipro 562 138,892 51,631 21.7% 8,892 17.2% 35.99 15.6 19.1% 3.0 CMP as on July 5, 2016 An Indicative timetable post issue closing: Particulars Indicative Timetable Finalization of Basis of Allotment with the Designated Stock Exchange On or about July 18, 2016 Initiation of refunds/un-blocking of ASBA Accounts On or about July 19, 2016 Credit of Equity Shares to demat accounts of Allottees On or about July 20, 2016 Commencement of trading of the Equity Shares on the Stock Exchanges On or about July 21, 2016
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