L&T Infotech lists 6% below issue price. Should you sell?

The initial public offer (IPO) was subscribed 11 times, attracting over one million applications

L&T Infotech has listed at Rs 667, 6% below its issue price of Rs 710 per share on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The initial public offering (IPO) was subscribed 11 times, attracting over one million applications, the highest for any share sale offer in at least five years.

"Listing below par, in my opinion, is due to the recently announced June quarter results and the cautious outlook given by information technology heavyweights like Infosys, TCS and Wipro. Infosys, for instance, disappointed the Street by lowering its guidance for FY17. All this could have dented the overall sentiment for L&T Infotech as well," said G. Chokkalingam, founder & managing director, Equinomics Research & Advisory.

While the Larsen & Toubro (L&T) parentage is a key positive, L&T Infotech has been struggling with issues surrounding its senior management stability and has among the highest attrition rates in the sector.

According to a pre-IPO note by Sharekhan, banking and financial services (26.3% of total revenues), insurance (20.7%), and energy & process (12.7%) contribute more than half of L&T Infotech's total revenue. Any significant fall in the revenues of any one of these verticals may reduce the demand for the company's services, besides adversely affecting its revenue and profitability.

"At the current levels, the stock is trading around price-to-earnings (PE) multiple of 13x FY16 earnings. Most other companies in this space are trading at around 17x or 18x PE. Even if we assume a modest profit growth of 10% this year and next, it is trading at 11x one-year forward earnings," Chokkalingam adds.

A K Prabhakar, head of research at IDBI Capital feels that the company operates in a segments which are risk prone. Bigger companies in better segments within the IT domain, he says, have disappointed with their recent June quarter results.

"For L&T, the risk is very high given the segments it operates in, especially the BFSI and energy & process segments where do don't see much growth. L&T Infotech's concentration risk is also very high given the number of clients they have. While we did not advise investors to aggressively bid for the IPO, for those who have got an allotment, it is time to exit once the losses are covered," he says.

Analysts at Reliance Securities expect Mindtree to continue to command a growth premium, given industry - beating revenue growth and substantial digital exposure among the mid-cap IT players. L&T Infotech, they said in a pre-IPO note, with its revenue size, high return ratios and redoubtable parentage should command around 10% PE discount to Mindtree on inferior growth.