L&T Infotech shares closed 1.74% lower from their issue price, at ₹ 697.65 on BSE, while the benchmark 30-share Sensex shed 0.74% to close at 27,710.52 points.
L&T Infotech shares opened at ₹ 666.60 on Thursday, compared to the issue price of ₹ 710 per share. Earlier in the day, they touched a high of ₹ 710 and a low of ₹ 666.
The last primary issue to list at a discount was HealthCare Global Enterprises Ltd (HCG), which runs cancer care centres. The stock fell more than 20% compared to its issue price. It started trading on 30 March.
The IT unit of top engineering and construction firm Larsen and Toubro Ltd (L&T) saw its ₹ 1,243 crore initial public offer (IPO) subscribed 11.69 times. The issue was priced at the upper end of the price band of ₹ 705-710 per share.
The company had offered a discount of ₹ 10 per share for retail investors. The IPO was a pure offer for sale, with L&T selling about 10.3% of its stake in the firm.
The disappointing listing was largely because of weak earnings reported by large IT services companies, analysts said.
“I think the fact that the issue opened at a discount had a lot to do with how the IT results panned out for the industry at large," said Rajiv Mehta, assistant vice-president of research at IIFL Holdings Ltd, pointing out that a lot of IT companies let down the markets on their revenue growth when they reported their June quarter earnings.
Infosys Ltd and Mindtree Ltd in particular disappointed investors, leading to a correction in these stocks.
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Infosys, the country’s second largest software services exporter, lowered its full-year revenue forecast, prompting investors to punish the stock. Infosys shares have lost 8.12% in value since their results were announced.
Mindtree Ltd followed suit and reported poor revenue growth in the first quarter, missing analyst estimates, and started the fiscal year on a weak note.
Ever since the results were announced late on Tuesday evening, Mindtree shares have tanked 7.74%, to ₹ 566.30. On 19 July, they tumbled to ₹ 562.45, a level last seen on 18 November 2014.
On Tuesday, Wipro Ltd also joined its larger peers Tata Consultancy Services Ltd (TCS) and Infosys in reporting disappointing earnings. Some of these companies have forecast lower-than-expected growth in the current fiscal year.
Industry leader TCS reported a 3.7% sequential increase in dollar revenue for the quarter ended June. However, TCS reported a lower 3.1% quarter-on-quarter growth in constant currency terms, meaning its growth improved by 60 basis points on account of currency fluctuations.
A basis point is one-hundredth of a percentage point.
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The premium that the L&T Infotech IPO commanded eroded sharply on account of the IT sector earnings.
Before the issue even opened for subscription, its shares were quoted at a premium of ₹ 150 on the grey market, which had tumbled to a discount of ₹ 6-8 per share on Wednesday, two dealers said, requesting anonymity.
“When the issue was announced, there was a lot of interest, but the HNI (high-net-worth individuals) portion was subscribed just over 10 times, which is fine, but less than the preceding IPO. The earnings of other IT companies also weighed," said one of the dealers mentioned above.
Mehta of IIFL said he gave a “subscribe" rating to the IPO, given the strong management, and the good performance in the past two years.
“However, when the entire industry is not going through a good time, L&T Infotech is not going to be insulated," he said, pointing out that the stock is trading around 12 times fiscal year 2018 P-E (price-to-earnings), which is in line with how Tech Mahindra and Wipro are trading.
“There are a lot of concerns around the sector, not specifically from the company point of view, and L&T Infotech looks reasonably valued at this point. We do not expect much return from this stocks over the next six months," Mehta added.
There are widespread concerns on the near- to medium-term performance of the Indian IT sector.
“In our opinion, the (IT) sector is headed for an extremely challenging FY17 and we believe that expectations will continue to see lower resets ahead. Tier-II tech firms have reported a much weaker performance and thereby have seen much sharper earnings cut," Emkay Global Financial Services Ltd said in a note on Thursday.
“We clearly see a case for significant correction across the sector and Tier IIs in particular," Emkay analysts added.
Ahead of the L&T Infotech IPO, brokerages had noted that the pricing of the issue may leave scope for moderate listing gains but had cautioned about the challenges the company has faced in recent years.
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“The company seems to have struggled through recent years on account of significant leadership churn and missing several strategic inorganic growth opportunities," Emkay had said in a 11 July note.
The weak listing of L&T Infotech will also be dampener for L&T’s plans to sell a 15% stake in another unit, L&T Technology Services Ltd.
L&T Technology is an engineering, research and development services company.
So far this calendar year, 13 companies have tapped the primary markets, and made their debut on Indian bourses. The companies have raised close to ₹ 9,400 crore since 1 January, according to data from Prime Database, a primary market tracker.
Of these, only three—Healthcare Global, Quick Heal Technologies Ltd and Precision Camshafts Ltd—closed lower on debut.
About 20 firms are in the pipeline to tap the primary markets going forward. They collectively have the potential to raise close to ₹ 7,000 crore, as per Prime Database data.
L&T Finance Holdings Ltd, the only other listed subsidiary of L&T, also fell 3.94% when it debuted on the markets.
The company had issued shares at ₹ 52 in its ₹ 1,245 crore initial share sale in August 2011, and ended the first day of trading at ₹ 49.95.