L&T Technology IPO to open on Sept 12: What you need to know before investing

NEW DELHI: L&T Technology Services (LTTS), the engineering and research and development (ER&D) arm of engineering major Larsen & Toubro (L&T), is set to hit the market with an initial public offering (IPO) on September 12.

L&T, which recently listed its technology arm L&T Infotech, has set the price band for the IPO at Rs 850-860 a share. At the upper end of the price band, LTTS will raise Rs 894.40 crore by selling 1.04 crore shares. This includes the anchor investor portion.

The retail category with be allotted not less than 36.40 lakh shares while the non-institutional category will get not less than 15.60 lakh shares. The quota limit for qualified institutional buyers (QIB) is set at 52 lakh shares.

Out of this, up to 21.20 lakh shares will be allotted to anchor investors and the balance 20.80 lakh shares to other QIBs. As many as 1.04 lakh shares will be reserved for mutual funds. Since it will be an offer for sale (OFS), the amount fetched will go to existing shareholders.
The issue will close on September 15. The company is focusing on driving solutions-oriented engineering services across verticals. It is looking to increase investment in innovation labs and is keen on expanding its geographical footprint through selective acquisitions.

Here is a list of factors you need to know while considering investment in the IPO:

Peers and valuations: The firm can be compared with listed entities such as Tata Elxsi and Cyient. At the upper end of the price band at Rs 860, the PE for L&T Technology at 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 (both basic and diluted). (See table)

Fundamentals: The company reported a profit after tax of Rs 434.23 crore for FY16 compared with Rs 315.17 crore reported for the previous year, registering a 37.17 per cent growth. Revenue for the year grew 14.84 per cent to Rs 2,969.40 crore compared with Rs 2,585.62 crore in FY15. Average return on net worth stood at 34 per cent for the past three years against 40 per cent for Tata Elxsi and 17.4 per cent for Cyient. The attrition rate at the company stood at 12.1 per cent in FY16 and 14.3 per cent in FY15. The company had a total outstanding debt of Rs 195.45 crore. Cash and bank reserve for FY16 stood at Rs 84.03 crore in FY16 (from Rs 112.20 crore in FY15)
Business segments: The company operates in five industry segments: telecom and hi-tech, transportation, industrial products, process industry and medical devices. Three segments, namely process industry, medical devices and industrial products together accounted for 50.3 per cent of the company’s revenue in FY16. (See table)

Focus area: The company helps technology, manufacturing and process engineering companies in developing products, processes and infrastructure required to deliver services to their end customers. It derives 80.2 per cent of its revenues from North America and Europe. The two geographies account for over 73 per cent of about $1 trillion corporate ER&D services spend in 2015.

Client concentration and reach: The company said its global customers include 43 of the top 100 global ER&D spenders. Globally, the 100 spenders contribute 66.3 per cent of the G500 ER&D spend. The company has 12 global delivery centres and a total of 27 sales offices. It has 31 laboratories in India. As of March 31, 2016, it had 8,000 engineers (total employees from nine nationalities serving over 200 customers, including more than 50 Fortune500 customers. The average age of its employees is 31 years.

Key strengths and weaknesses

Strengths

►Niche segment: The company is a pure-play ER&D player. It has some advantage over general IT services companies which provides similar services.
P&G, Rockwell among clients: The company’s clients include P&G, Rockwell Automation, UTC, Calsonic Kansei, Eaton and Danaher. Some customers have been with it for the past 10 years.​

►Investment in new technologies: The company is venturing into engineering analytics, IoT power electronics and M2M in a bid to capitalise on key growth areas and trends.

► Strong parentage: With engineering major L&T as parent, the company enjoys some competitive advantages. It benefits from the promoter’s global network and its potential business opportunities.

Weaknesses

►The company has a limited operating history.

► The ER& segment is competitive and could affect the way the company prices its products.

► A total of 2000 of 9,406 employees of the company are stationed abroad. Any restrictive immigration measures or violation in visa norms could trouble the company.

► The company receives dollars and euros given it focus on overseas market. Revenues denominated in dollar and in Euro amounted to 76.2 per cent and 11.3 per cent of our revenues from operations in FY 2016. A fluctuation in exchange rate may thus hit the company’s revenues.

► Limited number of customers makes active client engagement key to business. The company’s top 20 customers contributed 53.8 per cent of its revenues in FY2016.

► Cut in R&D budgets by existing and prospective customers may hurt pricing. Set up of captive research and development centres by clients may reduce orders.

► North America and Europe accounts for a major chunk of revenues. Weakness in these geographies may dent the company’s growth prospects.