L&T Boss AM Naik Takes on Analysts Over Infotech IPO Scepticism
Analysts Say L&T Infotech ‘Just Another Mid-cap IT Company’, AM Naik Disagrees.
Larsen & Toubro Infotech Ltd. is not just another midcap information technology company, asserts AM Naik, in response to analysts expressing scepticism about the company’s growth prospects, ahead of its Rs 1,250 crore initial public offering.
L&T Infotech is the only IT company with experience in 82 domains that the parent company Larsen and Toubro operates in, AM Naik said in an interview to BloombergQuint. This gives the company the ability to bid for any turnkey project globally, the L&T Group executive chairman added.
The price band for the issue, which is open for subscription from July 11 to 13, has been fixed at Rs 705-710 and the final price will be determined by investor response. Retail investors will get a discount of Rs 10 per share. At the upper end of the price band, the offer will be worth Rs 1,243.50 crore. The sale will raise Rs 1,233.75 crore at Rs 705 per share.
On Friday, two days before the IPO opens, L&T Infotech raised Rs 373 crore from anchor investors by selling shares at Rs 710 each.
L&T Infotech’s Under-performance
The IT company’s prospectus says its dollar revenue grew 9.5 percent in financial year 2015-16, while the industry posted 12.3 percent growth, as per data provided by industry association NASSCOM. L&T Infotech attributes this under-performance primarily to the slowdown in the oil and gas business. Revenue growth from the vertical declined to 13 percent last year from the 20 percent plus growth it averaged in the previous two years.
Sanjay Jalona, the managing director and chief executive officer of the company says L&T Infotech’s under-performance compared to its peers should be put in perspective. Excluding the oil and gas business, the revenue grew 16-17 percent in dollar terms, Jalona told BloombergQuint in an interview. Also, opportunities to grow the oil and gas business are not subdued any more, Jalona added.
L&T Infotech IPO: Mixed Reviews
Despite the management’s bullishness, analysts have been unimpressed. Vibhor Singhal, analyst at PhillipCapital, has in a note to clients, rated the L&T Infotech IPO an ‘Avoid’.
There is nothing extra‐ordinary in the business mix, which could potentially lead to superior growth for the company, as compared to peers.Vibhor Singhal, PhillipCapital
PhillipCapital expects the information technology sector to experience subdued revenue and earnings growth over the next three years.
Sarabjit Kour, the Vice President of Research at Angel Broking, is slightly more optimistic. Kaur has rated the IPO a ‘Subscribe’ in her report to clients.
The valuations are a bit attractive in spite of the concerns related to the company’s business risk like client concentration and employee productivity.Sarabjit Kour, Vice President - Research, Angel Broking
Kour points out that if the company maintains its average rate of dividend payout, investors will get a dividend yield of 4-5 percent. But Kour caveats this optimism.
Profitability wise & dividend wise the company is good. Valuation wise if you look at return on equity there is little room, I wouldn’t say it is attractively priced and it will stupendously boost your returns, but it will surely give you decent gains around listing. Client concentration could be an issue, but it is prevalent throughout the mid-cap IT industry.Sarabjit Kour, Vice President - Research, Angel Broking
L&T Infotech maintained a dividend payout ratio of 75 percent in the last 3 years. That translates into a 46 percent return on equity, the highest among midcap and large cap IT companies.
But Naik told BloombergQuint that post the share sale, L&T Infotech’s dividend policy will align with that of the group. The L&T Group maintains a dividend payout ratio in the range of 25-35 percent.
