Key Takeaways from L&T Infotech pre IPO meet

·         L&T Infotech generated revenues of $887m in FY16, up 9.5% yoy (13.8% in constant currency)

·         FY16 EBIT margin for L&T Infotech was 14.7% (after excluding other income from operating income)

·         Its new CEO, Sanjay Jalona (ex Infosys SVP) is very impressed with the industry contacts of L&T – he claimed to have met more CEOs in a week in Nordics as L&T  Infotech CEO that in a year at Infosys

·         Mr. Naik mentioned that L&T Infotech generated close to 60% of revenues from L&T connections and expect this to continue in future also

·         The company generated close to 70% revenues from North America and 17% from Europe (UK only 2%)

o   Euro denominated revenues are only 9% for L&T Infotech

·         BFSI generated close to half of company’s revenues – BFS – 27% and Insurance – 21%

o   Citibank is the largest customer for L&T Infotech. They also have other large customers like Barclays

·         Energy (O&G) has been declining for last two years, coming down from 22% of revenues in FY14 to 13% in FY16

o   They have now started seeing traction coming back in the segment from Q4 onwards as oil prices have stabilized

·         Enterprise solutions contribute 24% of L&T Infotech’s revenues and the company repeatedly highlighted its capability in the segment. According to them, SAP HANA is seeing very high traction, which is good for them

·         ADM contributed 42% of sales and Digital is 11% currently

·         L&T Infotech believes that it has the best tools in automation and are also using outside vendors like Blue Prism for the same

·         L&T Infotech provided 8% salary hikes last quarter and has attrition of 18%, out of which they were concerned about only 12%

·         Stake dilution to 25% – company expects 7% unvested ESOPs to get vested and will manage rest through either acquisitions or market action

·         There was limited clarity on the relationship with L&T Technologies, another L&T subsidiary which is separate from Infotech unit. This business with work on R&D outsourcing (a fast growing vertical) and company expects close collaboration with L&T technologies in future. We are not clear on how this will impact potential business for L&T Infotech

The IPO will open on July 11^th with a price band of INR 705-710 per share. L&T is diluting 10.3% stake in L&T Infotech to raise Rs 12.3-12.4bn, valuing the company at Rs 120-121bn. Post IPO L&T’s stake in L&T Infotech would reduce from current 95% to 84.7%.

The valuation on a trailing P/E multiple is 12.6x at this price level. This includes a one-time FX gain of INR2.8bn in FY16 (vs INR 685mn last year).

Courtsey : Haitong Securities India Private Limited