Subscribe with 2 yr horizon in L&T Technology Services IPO – JainMatrix

L&T Technology Services (LTTS) IPO has received Subscribe rating from Bangalore-based JainMatrix Investments. The research house has advised investors to BUY with a 2 year perspective while noting that the grey market premium (GMP) is INR95 – 96 per share for the IPO. Full report is available down the text, and here are the main points of the IPO which is going to close on 15 September:

Internal Risks

  • LTTS might engage in acquisitions that may not be successful or meet expectations.
  • LTTS’s business could be adversely affected if they fail to develop new services and solutions or enhance existing services and solutions or if they fail to keep up with customer expectations.
  • Inflation and urban costs increase affects the resource oriented business such as LTTS. It will have to ensure that costs and attrition remain in control.
  • Exchange rate fluctuations could impact financials. Revenues in USD and in Euro amounted to 76.2% and 11.3% of revenues in FY16. LTTS does not hedge against all forex risks. As of now, they have outstanding unhedged forex receivables of Rs 733 cr. and unhedged forex payables of Rs 17.6 cr.
  • The sister company, L&T Infotech operates in the IT services space and has global clients. While these 2 firms have well defined spaces, there will be many areas of overlap or where coordination among them is required and sales conflict.

Read Also: GNA Axles IPO Review: Solid growth story at wrong time?

External Risks

  • The changes in technology can be rapid, and if LTTS does not move fast enough, the firm can be rendered obsolete within a few years.
  • Europe and Middle Eastern regions seem to be facing a slow growth or even recession.
  • A reduction in the R&D budgets of their existing and prospective customers could affect LTTS pricing and volume of work. Similarly customers may stop or reduce the scope of outsourced ER&D work or may set up captive R&D centers, which may result in a reduction in their volumes of work.
  • 94.6% of revenue in FY16 came from existing clients whereas revenue from new customers was only 5.4%. This could be a sign of weak new business and sales pipeline.
  • LTTS has mentioned that it wishes to take up acquisitions in future. However the firm has a limited history of acquisitions and the task of M&A integration is complex and risky.

Read Also: L&T Tech IPO Review: Technology isn’t just IT

Overall Opinion

  • After the IT services sector growth over the last 2 decades, the ER&D sector appears to be the next generation opportunity for more advanced, sector specific product R&D services delivery. There are big opportunities for India in the global ER&D market. India is already a hub for global small car design, innovation and mfg. It is possible that the ER&D can extend this success to other auto sub sectors, telecom, industrial products, etc.
  • The govt. has set up a Make in India program to grow mfg. However ER&D services seems a more likely candidate for success as it speeds global mfg. and innovation.
  • LTTS has excellent group credentials in the ER&D space with access to L&T knowledge and skill base, and customer networks from L&T and L&T Infotech.
  • So far, the 2 year old company has shown good signs of business solidity. It is the leader in the Indian ER&D space. The larger peers are software + ER&D players.
  • At a FY16 PE of 25.4 times, the valuations just seem to be fair. However the projected FY17 forward PE of 17.7 times based on the current run rate, looks attractive.
  • JainMatrix rates the LTTS IPO a medium risk, medium return type of offering. Investors may BUY with a 2 year perspective.


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