L&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.
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.
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.
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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L&T Technology Services IPO – Should you subscribe