L&T tech image1 L&T Technology Services (LTTS), the engineering and research and development (ER&D) arm of country’s engineering giant Larsen & Toubro (L&T), is all set to  the capital market with an initial public offering (IPO) of 1.04 crore shares on Monday. The IPO analysis here  tries to help investors to decide if they should subscribe to the IPO issue or not.
IPO date :  September 12 , 2016 – September 15, 2016
Price Band : Rs 850-860 per share.
Merchant Bankers : Kotak Mahindra Capital Company, DSP Merrill Lynch, JM Financial Institutional Securities and SBI Capital Markets

 About the Company:

L&T Technology Services provides innovative engineering as well as research and development services across various sectors and has revenues of the order of  $500 million. As per consultancy firm Zinnov report. the company is a  leading global pure play ER&D (Engineering Research & development)  services company.  ER&D services are 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.

The  global corporate ER&D spend  amounted to US$1,007 billion in 2015, of which the ER&D spend of the top 500 global ER&D spending companies was US$614 billion in 2015. The estimated addressable ER&D outsourcing opportunity for ER&D service providers was US$365 billion of the G500 ER&D spend in 2015. (Source: Zinnov Report) US$67 billion of the corporate ER&D spend of US$1,007 billion is currently addressed, which represents a penetration of 6.7% and offers potential growth opportunities. (Source: Zinnov Report)

The company is focusing its Engineering R&D on five verticals that include industrial products (IP), medical, transportation, telecom and high-tech, and process industries (consumer industries).L&T Technology Services also offers engineering analytics, Internet of Things and automation solutions. Certain businesses of L&T Infotech, including telecom and high-tech product engineering services businesses, were transferred to L&T Technology Services. The company has filed 34 patents and co-authored 134 patents with others.  It has more than 200 employees operating out of its onshore delivery centers in the US, and more than 8,000 engineers from nine nationalities serving over 200 customers, including more than 50 Fortune 500 customers, globally.

The company derives  80.2% of its revenues from customers in North America and Europe, which are the two largest regions of corporate ER&D spend its key global customers include 43 of the top 100 global ER&D spenders. Besides offices in California, Illinois, Iowa, New Jersey, Texas, and Ohio in the United States, the company has engineering centres in Bengaluru, Chennai, Hyderabad, Mumbai, Mysuru, and Vadodara in India.  L&T Technology Services has also opened a new engineering centre in Dublin.

L&T Technology Services deliver its services through a network of delivery centers located across the U.S. and India and from our customers locations. The majority of our work is executed by employees based out of delivery centers in India using an offshore delivery model. L&T Technology is recognized in the “leadership zone” in eight industry verticals (industrial automation, construction and heavy machinery, medical devices, aerospace, automotive, rail and marine, telecom, energy and utilities) and two horizontal service offerings (embedded systems and mechanical) by consultant Zinnov.

In 2014 the company made two strategic acquisitions. It acquired a 74% equity stake in Thales Software India Pvt. Ltd, to strengthen its avionics business.   It made a strategic Acquisition of U.S.-based Dell Product and Process Innovation Services to strengthen L&T Technology Services’ global position in $4 billion Transportation Engineering Research & Development (ER&D) market

Financials:

Particulars Year ended 31-03-2016 Year ended 31-03-2015
Rs. In Millions
Revenue from operations 30,665.06 26,186.27
Other income 762.18 252.6
Total Revenue 31,427.24 26,438.87
EXPENSES
Employee benefit expenses 17,230.73 14,866.10
Operating expenses 2,656.39 2,300.86
Sales, administration and other expenses 5,573.66 5,031.95
25,460.78 22,198.91
OPERATING PROFIT 5,966.46 4,239.96
Finance cost 24.93 33.84
Depreciation on tangible assets 371.78 333.93
Amortisation of intangible assets 217.41 150.7
PROFIT BEFORE TAX 5,352.34 3,721.49
PROFIT AFTER TAX 4,166.46 3,111.09
EPS Basic 55.55
EPS Diluted 32.1
NAV 145.7
Ronw % 38.85
PE ratio 26.79

Comparison with peers :

As per prospectus the company has stated  Tata Elxsi and Cyient as its peer group companies.  While Tata Elxsi enjoys rich valuations , Cyient is not fancied much by the market.

Name of company FV      EPS   NAV       P/E RONW
Basic Diluted (%)
L&T Technology Services Limited 2 43.52 32.1 145.7 38.85
Peers
Cyient Limited 5 29 29 170 14.7 17.4
Tata Elxsi Limited 10 49.7 49.7 123.9 37.8 40.1

Assessment:

  • The company is a not  a general IT company but a niche ER&D  (Engineering Research & Design) player.  Hence it merits better consideration than IT players.
  • L&T Technology services is recognized by consultancy firm Zinnov,  in the “leadership zone” in eight industry verticals (industrial automation, construction and heavy machinery, medical devices, aerospace, automotive, rail and marine, telecom, energy and utilities) and two horizontal service offerings (embedded systems and mechanical)
  • The majority of company’s work is executed by employees based out of delivery centers in India using an offshore delivery model, giving it an competitive advantage in terms of talent pool availability and lower costs compared to US and European competitors.
  • Company has reputed clients like  P&G, Rockwell Automation etc. and many of these have a long association with the company.
  • The company enjoys the strong backing of one of the largest engineering conglomerate in India i.e. L&T
  • The pricing of the issue is n bit tough and factors its presence in niche segment. However it is not exorbitant.
  • On the negative side, despite a right pricing and decent Q1, its predecessor from the same group L&T  Infoech  continues to give a subdued performance on the bourses which may discourage many retail investor from this IPO.
  • Even as the pricing is tight,  the company is in segment that stands out and could give reasonable returns to medium term investors.
  • The company has strengthened its position in ER&D segment by acquiring Thales  in May 2014 to make inroads into avionics field. Avionics are the electronic systems used on aircrafts, artificial satellites, and spacecrafts.
  • In Nov 2014, L&T Technology services acquired  engineering services vertical of US technology company Dell which strengthens its position in $4 billion ER&D services market for transportation customers in North America.
  • Despite bad experience with L&T Infotech in terms of its market price vis a vis issue price , grey market which saw little activity, later gave this issue  a premium of Rs. 80-90/- which is went  down to 50-60 levels and a day before opening due to expected market crash, the GMP has vanshied.. The Form application / Kostak rates continued to be low at 300-400 as after L&T Infotech fiasco, operators are expecting less subscription for the issue.With feared market crash this alos is down to little activty.
  • L&T Technology Services Ltd. has littl;e history but has an impressive RONW and of it can sustain the same it can get closer to the unique spot enjoyed by Tata Elxsi, else it may go down with numerous other IT players. While company performance appears good, hazy outlook for IT sector is hanging like a Damocles sword on company’s immediate listing prospects.
  • Though company is a ER&D play, yet -ve  sentiments of IT scetor & post returns by predecessor L&T Infotech are likely keep pressure on the company.
  • The issue cannot be said to be entirely safe for retail investors.
  • I do not intend to apply for this IPO

Standard disclaimer:  I am not a SEBI registered analyst. I may have vested interest in every stock I discuss. Please do your own due diligence as stock market investments have high degree of inherent risk.

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