There’s not much to like in Larsen and Toubro Infotech Ltd’s initial public offering (IPO). Regular changes in its leadership have throttled growth; its high client concentration poses risks; and as much as a fourth of last year’s pre-tax profit came from forex gains.

Parent company Larsen and Toubro Ltd, which is selling a 10.3% stake through the IPO, has an answer to all of this. It is selling its shares fairly cheap. At the higher end of its price band, the L&T Infotech issue is priced at 13.1 times financial year 2015-16 earnings. Other tier-II IT services companies such as Mindtree Ltd, Hexaware Technologies Ltd and Mphasis Ltd trade between 16 times and 19 times trailing earnings.

So L&T Infotech looks set for a listing pop. But according to some IT sector analysts, short-term gains aside, there’s not much going for the company to recommend it as a long-term holding. If valuations inch up to 15-16 times earnings on listing, investors may well prefer tier-II companies with better growth prospects such as Mindtree, or some larger companies such as HCL Technologies Ltd and Tech Mahindra Ltd, which trade at only around 14.5 times trailing earnings.

After all, the company has faltered on growth. In the past two years, revenues have grown by 8.5% and 9.5%, respectively. The industry grew in double-digits during this period. Mindtree’s organic revenues have grown in the healthy teens (15-16%) in these two years. While L&T chairman A.M. Naik has said he expects the IT subsidiary’s revenues to double in the next 3-4 years, this guess is best ignored. Back in June 2007, he had said that L&T Infotech will reach $1 billion in revenues in 3-4 years. The company still hasn’t reached that milestone.

Also, while most mid-tier companies have high client concentration, at L&T Infotech, the risks appear a tad higher. Its top 10 customers contributed 52.7% of revenues last year; for Mindtree, this stood at 46% last year. Analysts at Emkay Global Financial Services Ltd pointed out in a note to clients last month that when Infosys Ltd and HCL Technologies were of a similar size, back in FY04 and FY06, respectively, their top 10 customers had accounted for 36-37% of revenues. In the banking and financial services vertical, the biggest for the company, just two clients accounted for 68% of revenues.

And as pointed earlier, forex gains accounted for a fourth of pre-tax profit last year, compared to only around 5% in the case of Mindtree and Hexaware. Since the company still has a fairly high level of hedges at favourable rates, some gains may continue this year; but this clearly can’t be seen as recurring profit.

On the positive side, the company has fairly decent operating profit margins of 17.7%, in line with mid-tier companies such as Mindtree and Hexaware. And return on equity is upwards of 45%, far higher than its peers, where RoE (return on equity) is 20-30%.

But this isn’t sufficient to make the company stand out. There’s nothing that differentiates L&T Infotech from the rest of the IT services pack, in terms of its services. Emkay’s analysts describe it as a “me too" mid-tier IT services company. As such, it will be foolhardy to expect it to bridge the gap with companies such as Mindtree, which have far more exciting business models.

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