L&T Technology Services IPO – Should you subscribe?

L&T Technology Services IPO – Should you subscribeL&T Technology Services IPO – Should you subscribe?


Mumbai based, L&T Technology Services IPO would open for subscription on 12th September, 2016. L&T Tech Services Limited is subsidiary of L&T and it provides ER&D services to manufacturing, technology and process engineering companies. The company revenues grew at 19% in FY16 compared to previous financial year. What are the positive factors in a L&T Tech Services IPO? What are the hidden factors about this IPO? In this article, I would review L&T Technology Services IPO.

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About L&T Technology Services Ltd


They are the leading global pure-play ER&D services company. They provide 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.

By region, they derive 80.2% of its revenues from customers in North America and Europe, which are the two largest regions of corporate ER&D spend and represented over 73% of the US$1,007 billion corporate ER&D services spend in 2015. The top 100 spenders in the G500 ER&D spend contribute 66.3% of the G500 ER&D spend and its key global customers include 43 of the top 100 global ER&D spenders, which offers significant growth opportunities for existing customer accounts. 

They operate in five industry segments (transportation, industrial products, telecom and hi-tech, process industry and medical devices, each of which represent a significant component of G500 ER&D spend. 50.3% of its revenue in FY 2016 was derived from the three segments of industrial products, process industry and medical devices. These three segments represent US$205 billion of G500 ER&D spend and have low penetration by India based third-party ER&D service providers, which gives a competitive advantage. 

Issue details of L&T Technology Services IPO


  • IPO opens: 12-Sep-2016
  • IPO closes: 15-Sep-2016
  • Face Value: Rs 2 per share
  • Issue price band: Rs 850 to Rs 860 per share
  • Issue size: Rs 900 Crores on lower price band
  • Market lot: 16 shares and in multiples of 16 shares therein with maximum retail subscription of 224 shares.
  • Minimum investment: Rs 13,760 on lower price band
  • Lead Managers: Kotak Mahindra Capital markets, BoA DSP Merillynch, JM Financial and SBI Capital Markets.
  • Listing: BSE / NSE
  • Download L&T Technology Services IPO  Prospectus at this link.

Objects of the L&T Technology Services IPO issue


  • To achieve the listing benefits Shares on the Stock Exchanges and
  • To carry out the sale of up to 10,400,000 Equity Shares by the Selling Shareholder. The company would not get any proceeds.
  • Issue expenses.

Company Financials (reinstated-Consolidated)


  • The company generated revenue of Rs 2,643.88 Crores  for the year ended Mar-15 and Rs 3,142.72 Crores for the year ended Mar-16.
  • The company posted a profit of Rs 310.89 Crores for the year ended Mar-15 and profit of Rs 416.64 Crores for the year ended Mar-2016.
  • Its restated EPS for FY 2016 is Rs 38.86 and last 3 years average EPS Rs 29.71.

L&T Technology Services IPO-Financials

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Reasons to invest L&T Technology Services IPO


  • Strong revenue growth of 19% in FY16 compared to FY15.
  • Good margins of over 13% in FY16.
  • Leading global pure-play ER&D services company.
  • 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.

Reasons not to invest in a L&T Technology Services IPO


  • They are a company with limited operating history, and therefore investors may not be able to assess its prospects on the basis of historical results.
  • Company, its Directors, Subsidiaries, Promoter and Group Companies are involved in certain legal and other proceedings.
  • Company success depends on its ability to innovate, and its business will be adversely affected if they fail to develop new services and solutions or enhance existing services and solutions or if they fail to make changes to its pricing model to keep up with customer expectations.
  • Any inability to manage company growth could disrupt its business and reduce its profitability.
  • Company success depends in large part upon the strength of its management team and other skilled engineering professionals. If they fail to attract, retain, train and optimally utilise these personnel, its business may be unable to grow and its revenue and profitability could decline.
  • A reduction in the R&D budgets of its existing and prospective customers could affect its pricing and volume of work.
  • Company revenues are highly dependent on customers primarily located in North America and Europe as well as on customers concentrated in certain segments, notably industrial products, transportation, telecom and hi-tech, process industry and medical devices. An economic slowdown or factors affecting these geographies or segments could materially adversely affect its business, financial condition and results of operations.
  • Company revenue depends to a large extent on a limited number of customers, and its revenue could decline if they lose a major customer.
  • Other risk factors (Internal and external) can be viewed in the draft prospectus from Page no. 20 onwards.

Also Read: Ways to identify blue chip stocks using fundamental analysis

Recommendation / Investment strategy – L&T Technology Services IPO


  • On the upper price band of Rs 860 and on FY16 EPS of Rs 38.85, P/E ratio works out to 22.1x. Similarly, on last 3 years EPS of Rs 29.71, P/E Ratio works out to 28.9x. Means company is asking the upper band of issue price of Rs 860 for a P/E ratio between 22.1x to 28.9x.
  • Its listed peers like Cyient is trading at a P/E ratio of 14.7 and Tata Elxi at 37.8. Hence the issue price of Rs 860 at 22.1x to 28.9x P/E ratio is reasonably priced.
  • Company revenues grew at 19% in FY16. Its margins are also good. The issue price is reasonably priced. However, it has limited operating history of just 2 years. One need to see consistant performance for 4-5 years to conclude that the company has strong fundamentals. L&T Infotech IPO which was part of L&T group which came for IPO few months back is currently trading at 10% discount on issue price. Hence, investors should re-think about this group IPO before subscription. One may enter after listing on stock exhanges after knowing which direction this stock price is going. High risk investors can still invest in this IPO considering all these risk factors indicated above.

Disclaimer: I do not have an interest in investing in this Initial Public Offering. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPOs. One should NOT constitute this as investment advice to buy this IPO. Please consult your financial advisor before you invest in such high risk investment plans.

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Suresh

L&T Technology Services IPO – Should you subscribe

9 comments

  • Santanu

    Thanks Suresh for updating every single IPO information here. Recently I am trying to understand how good it is to invest in IPO after reading various articles. I would like to know from your experience, how to understand which IPO will have good future and one shoould invest? Recently ICICI Pru IPO is going to launch and I am planning to invest on the same. But could you please share your expert opinion to judge wherher this investment could be a good one for next 10-15 years duration? Many thanks for your comments.

    • Hi Santanu, For mutual funds, there are experts to manage, hence one can invest for 10 to 20 years. However for a stock, one need to check the company performance year on year and take a call. ICICI Pru life IPO analysis is coming tomorrow on this blog. However for selecting stocks for long term one should invest in blue chip stocks. That would be ideal scenario to invest for long term.

  • Chitra Kamat

    This issue is not reasonably priced. It is fully priced leaving little to the IPO investor who applies for listing gain.Issue will be oversubscribed as usual in these days of excess liquidity and a successful RII will get 16 shares. even if it lists at a premium of Rs.100, the listing gain will be Rs1600. Nowhere near the fantastic gains in IPO like MGL, RBL and many others .In my opinion the risk reward scenario is not very attractive.History of other 2 L&T IPO ( LTFH and LTI) was very discouraging due to greed of promoter company . Wish they had priced the issue better. Risk takers can apply for this IPO for small listing gains with chances of issue trading at discount to issue price!

  • KAUSHIKI PADA CHAKRABARTI

    SIR,

    THE CMP OF PREVIOUS ISSUE OF LT IS RS. 643.00 AGAINST THE IPO PRICE RS. 710. SO SHOULD I BUY L&T AT CMP IN SECONDARY MKT. ? THE PRICES OF THE GIANT IT CO. LIKE INFY, TCS, WIPRO, TECHM, HCL TECH ETC. ARE DIMINISHING DAY BY DAY. MOREOVER LOT OF RISKS & UNCERTAINTIES ARE INVOLVED IN TECHNOLOGY STOCKS LIKE NOV. ELECTION IN USA, OUTSOURCING, DEPRECIATION IN DOLLAR, BREXIT ETC.

    THE INVESTORS ARE PUTTING THEIR HARD EARNED IN STOCK MKT.

    SO IN MY OPINION IT IS OVER PRICED ALTHOUGH LT IS ONE OF THE PIONEER IN IT SECTOR.

    YOUR QUICK RESPONSE IS HIGHLY SOLICITED.

  • vijay vaid

    you should have a demat as well as trading account with sebi registered broker to purchase from market or apply through ipo.

  • Arun Kumar Das

    Dear-Sir,plz,let me commnicate what is the procedure for the purchas e of L & T IPO? And plz, let me give the basic idea about in which sector to invest in order to get better returns?

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