Stock Market

L&T Tech’s Rs 894 cr IPO opens: Should you subscribe or avoid?

Chillicious Bureau

The Rs 894-cr public issue of L&T Technology Services, the wholly owned subsidiary of engineering & construction giant L&T, has opened for subscription. The price band is fixed at Rs 850-860 per share. 

The 1.04 crore equity shares issue is an offer for sale by its parent company L&T. Hence, the engineering, research and development (ER&D) services provider will not get any money from the issue that will close on September 15. 

L&T Technology Services provides ER&D Services, which is 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. IPO

Let’s check out what the brokerage houses say about the third issue from L&T Group: 

KR Choksey 

KR Choksey said, “We like L&T Technology Services as a long term story and advise investors to subscribe the IPO.” 

The brokerage house is positive on company due to strong parentage, market growth opportunities, market penetration opportunities and likely higher share of new technologies going forward which will improve margins and drive future growth for the company. 

It believes the promoters have rightly priced the IPO which would have been as even a higher valuation would be alright given the premium it can demand due to the reputation of the parentage. 

The company has long-standing relationships with its customers, which include more than 50 leading Fortune 500 companies and technology leaders in their industry including P&G, UTC, Danaher, Eaton, Rockwell Automation and Calsonic Kansei. 

The only concern seen by the brokerage house is its failure to develop new services or solutions. 

“Our failure to address the demands of our customers and the rapidly evolving technology environment, particularly with respect to emerging technologies and technological obsolescence, could have a material adverse effect on our business, results of operations and financial condition,” L&T Tech said in its prospectus. 

Geojit BNP Paribas 

With recommending subscribe for medium-to-long term, Geojit said it was positive on the company given its in-depth engineering capability & end-to-end service offerings. Notably, its focus on strengthening the position in digital engineering & enhanced investments in innovation labs will provide scale as well as competitive edge over peers. 

India’s ER&D services industry has grown by 9.9 percent YoY in 2015 to USD 20 billion. Going forward, India’s ER&D services industry is expected to register a CAGR of around 13 percent over FY15-20 to touch USD 38 billion. This provides a strong growth opportunity for the company, the brokerage house feels. 

Overall financial performance of the company remained healthy in FY16 with net profit growing strongly by 34 percent YoY to Rs 417 crore supported by robust revenue growth (17 percent YoY) and margin improvement (174 basis points YoY). Moreover, return on equity (RoE) grew from 29.5 percent in FY15 to 38.9 percent in FY16. 

L&T Tech is strengthening its competitive position and capabilities in smart technologies through selective acquisitions. The company has a proven track record of product innovation. 

During FY15, it acquired 74 percent stake in TSIPL, a company engaged in the business of software development. Further, it acquired assets and liabilities of Dell Product and Process Innovation Services, the engineering services division of Dell USA, and also acquired its operations in India from Dell India. 

AUM Capital 

“A relatively better earnings outlook, strong parentage & the niche market it serves makes the stock investment worthy for long term perspective,” AUM said, adding the issue is available at a premium to other listed IT companies. 

Besides India, L&T Tech provides services globally and the percentage of its revenue from continuing operations from North America, Europe and the rest of the world, amounted to 63.5 percent, 20.2 percent and 9.4 percent as on June 30, 2016 respectively. 

The company operates in five industry segments transportation (30 percent of FY16 revenue), industrial products (25 percent), telecom & hi-tech (20 percent), process industry (19 percent) and medical devices (6 percent). 

Ajcon Global 

Ajcon has recommended subscribing the issue for long term as it feels at the upper end of the price band of Rs 860, its valuations are cheap compared to its immediate peers. 

Its recommendation is based on following factors:

> Underpenetrated corporate ER&D market;

> Leading global pure–play ER&D services company;

> Niche business model with very few players in India;

> Well diversified player with multi–vertical industry expertise and long standing customer relationships;

> Focused on driving innovation through in–house R&D, IP and strategic alliances;

> Strong L&T parentage and long history of engineering expertise;

> Marquee global clients;

> No Brexit impact as major operations in North America;

> Robust ROE of 38.85 percent 

Antique Stock Broking 

L&T Technology issue is fairly priced, Antique feels. It believes a P/E of 16x FY18 EPS (at Rs 860 per share) factors in the premium owing to its L&T parentage in the engineering space. 

The brokerage house said the ER&D outsourcing market, which is underpenetrated, stands at USD 365 billion of which only USD 67 billion has been tapped as per Zinnov. This along with strong domain expertise in ER&D services courtesy its parentage in the form of L&T and 43 of the top 100 ER&D spenders as clients places LTTS in sweet spot to benefit as ER&D outsourcing gains prominence. 

However execution will be key, given the increased adoption of IoT, analytics, robotics etc in delivery of ER&D services and will entail the usage of IPs and end-to-end solutions, it feels. 

SPA Securities 

SPA is positive on the prospects of the company given its diverse presence across all business verticals, focus on innovation, established relationships with its clients, strong clientele and parentage & brand equity of the promoter. 

It feels L&T Tech is favourably priced compared to its peers, Tata Elxsi and Cyient. 

The brokerage house has recommended investors to subscribe the issue for long term gains, though it is slightly cautious owing to short operating history of the company. 

Motilal Oswal 

At valuations of 21x FY16 EPS, there is some scope for re-rating when compared to its peers, the brokerage house said. 

According to the research house, key risks are: 

> Customers may set-up captive R&D centres, which may result in loss in volume of work

> Revenue depends to a large extent on limited number of clients and could decline if the company loses a major customer 


ICICIdirect is the only brokerage house that recommended investors to avoid the issue. 

“L&T Tech is available at 15.5x FY18 EPS, which is at premium to other IT players who have a presence in the ER&D space such as HCL Tech (12.3x FY18 EPS) and  

Cyient Technologies (11.9x FY18 EPS). Hence, we believe current valuations leave limited upside,” it reasoned. 

L&T Technology (LTTSL) was established through a group restructuring exercise. The Integrated Engineering Services (IES) of L&T and the Product Engineering Services (PES) of L&T’s subsidiary, L&T Infotech was transferred into LTTSL during 2013-14. 

As part of the restructuring, LTTSL brought together engineers with domain expertise in product and process industry from IES and PES to create a specialised talent pool in engineering R&D services to deliver higher value to their customers. 

The company already raised Rs 268.3 crore from anchore investors on last Friday, the day before issue opening. Bids can be made for minimum of 16 equity shares and in multiples of 16 shares thereafter. 

Equity shares are expected to list on exchanges on September 23.