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Larsen & Tubro Infotech Ltd. - Reserch Report

Basic Filtering Criteria:

	(Rs. One Crores [10 million])	Minimum Required	Actual (Year ending 31st March 2016)
1	Turnover	1,000	5,569.52	✔
2	Market Capitalization	1,000	10,579.55	✔
3	Price to Earnings Ratio (Based on 5 year average EPS)	Less than 15 (Ideal 10)	14.24	✔
4	Price to Book Value (P2BV) Ratio	Less than 1.5	6.44	✖
5	Dividend Yield	4-5%	5.25%	✔

Note:

1. PE Ratio:  Even though Benjamin Graham permits PE Ratio below 15, we believe in India below 10 is ideal and exceptions can be made in rare cases. In the case L&T Infotech, considering its brand and other favorable features, the exception maybe justified.
2. P2BV:  We compute book value after deducting intangible assets from the net worth. L&T Info being a service provider will not carry large assets on the balance sheet; further, the business model involves creation of significant intangible assets by way of acquisition of other companies. Again an exception may be made based on the nature of business.

Conclusion:

Considering that there is only one negative out of five filtering criteria, we decide to study one year’s financial statements for the financial year ending on 31^st March 2016. We also would like to make comparison with our most favourite benchmark share, NMDC for this one year, limited study.

A. Company Performance

Profitability Analysis

(Rs. Crore/ Rs. 10 million)	L&T Infotech Ltd. (Year ending 31st March 2016)	NMDC Ltd. (Year ending 31st March 2015)
Net Sales	5,569.52	12,356.41
All expenses other than finance cost, depreciation	4,641.16	4,578.06
EBDITA (Operating Profits)	928.36	7778.35
EBDITA (Operating Profits) %	16.67%	62.95%
Depreciation	103.45	162.23
EBITA	824.91	7616.12
EBITA %	18.21%	61.64%
Interest	10.36	0.00
Interest Cost to Sales - %	0.19%	0.00%
EBT	814.55	7616.12
EBT %	14.63%	61.64%
Net Non-Operating Income	338.61	2152.39
FINAL PBT	1,153.16	9768.51
FINAL PBT %	20.70%	79.06%
Income Tax	215.04	3346.21
PAT	938.12	6422.30
PAT %	16.84%	51.98%

Highlights:

1. Even though the operating margins of L&T Info are humble compared to NMDC Ltd., considering the consistence on a sizeable scale of operations lower margin can be accepted.
2. Compared to zero interest costs of NMDC, L&T Info also has a relatively small interest burden amounting to just 0.19% of net sales, which is comfortable for a value investor. 

Conclusion:

Despite lower margins and low interest burden, on the profitability parameter the company’s performance can be accepted and proceeded for further scrutiny.

Balance Sheet Analysis

Balance Sheet Snapshot

Rs. Crore/ Rs. 10 million)	L&T Infotech Ltd. (Year ending 31st March 2016)	NMDC Ltd. (Year ending 31st March 2015)
Short term borrowings	39.75	0
Other current liabilities	1,135.95	1,989
Total current Liabilities	1,175.70	1,989
Total term liabilities	258.62	149
Total outside liabilities (TOL)	1,434.32	2,138
Net Worth	2,022.70	32,332
Total Liabilities	3,457.02	34,470
Current Assets	2,374.81	23890
Total Fixed Assets (Net Block) + Capital Work In Progress	279.88	8,953
Investments and other non current assets	425.15	1,536
Total Intangible Assets including those under development	377.16	91
Total Assets	3,457.00	34,470

Rs. Crore/ Rs. 10 million)	Desirable/ Recommended	L&T Infotech Ltd.  (Year ending 31st March 2016)	NMDC Ltd. (Year ending 31st March 2015)
Tangible Net Worth (Net Worth – Intangible Assets)		1,645.54	32,241
Current Ratio	More than 2	2.02	12.01
Quick Assets		825.08	20,195
Quick Ratio	More Than 1	0.50	10.15
Total Outside Liabilities/ Tangible Net Worth (TOL/ TNW)	Below 3	0.87	0.07
Total Term Liabilities/Tangible Net Worth (Long term Debt-Equity) Ratio	1 or less	0.16	0

Highlights:

1. The current ratio of L&T Info at 2.02 is sound. Quick ratio at 0.50 is poor.
2. The TOL/ TNW and long-term debt-equity ratios are well within the limits.
3. There are no term loans on the L&T balance sheet. The long term liabilities represent deferred tax and other long term liabilities.

Conclusion: 

Based on Balance Sheet analysis L&T Infotech meets the required norms.

Cash Flow Analysis:

(Rs. Crore/ Rs. 10 million)	L&T Infotech (Year ending 31st March 2016)	NMDC Ltd. (Year ending 31st March 2015)
Operating Cash flows	863.30	3,999.14
Interest	(5.79)	(0.31)
Dividends	(546.73)	(2874.42)
Dividend Tax	(104.87)	(574.71)
Total Dividend Related Out Flow of Cash % Free Cash	75.99%	86.25%
Net Cash Flows from Operating Activities after paying dividends, dividend tax and interest	205.91	549.70
Cash flows from Investing activities	(102.86)	1700
Cash flows from financing activities	101.32	(3449)
Final Net Change in cash flows	42.01	2250
Cash & Cash Equivalents at the beginning of the year	1	5683
Cash & Cash Equivalents at the end of the year	11,190	7933
Interest	9115	0.14
Dividends including dividend distribution tax	7259	3449
Percentage of Cash from Operations Distributed as Dividends	18.23%	86.25%
Net Addition of fixed assets and capital work in process	49,318	2,814
Percentage of Cash from Operations Used for fresh investment	123.88%	70.37%

Note: We have modified the cash flow format from the traditional format prescribed in order to understand the cash flows better.

Highlights:

1. L&T is generating net operating cash flows of around Rs.863 crores every year, which is very good.
2. L&T has distributed a whopping 75.99% of the operating cash flows as dividends almost like NMDC, which distributed 86.25% as dividends.

Conclusion:

The cash flow analysis is shows L&T in good light with appreciable generation of free cash flows and paying a major portion as dividends.

Dividend Track Record

Past dividend payment track record of L&T Infotech is not available on the internet. Even the company’s web site does not have past annual reports. Under the circumstances we cannot comment on this parameter.

Dividend Coverage from non-operating income

	FY 2015-16
Dividend	546.73
Net Non-Operating Income	338.61
Dividend Coverage from Non-Operating Income	61.93%

Coverage for payment of dividends is adequate, even though it is not more than 100%.

On this parameter the company’s performance is satisfactory.

B.Market Condition:

Price to Earnings Ratio:

PE Ratio is 14.24, is just below the recommended 15.

The market condition as far is this parameter is concerned is just OK.

Price to Book Value per Share:

P2BV of 6.44 is far above the recommended 1.5. The poor number is more because the company being a service provider does not carry sizeable fixed assets on the books. Under the circumstances, instead of holding huge cash balances on the assets side and carrying huge reserves on the liabilities side, which would have boosted the book value per share, L&T seems to be distributing profits in the form of dividends. This is a highly appreciable company policy and we respect this.

On this parameter the market condition is deemed favorable.

Dividend Yield:

Reliance’s dividend yield is a poor 5.25% is quite decent in the light of the fact that 75.99% of free cash flows are distributed as dividends.  The only scope for improving the yield is not in the hands of the company but in those of the market.

On this parameter the market condition is OK. The prices of Information Technology sector stocks are generally high and L&T Infra is an exception. Therefore we have to accept this market reality.

Distance from 52 week high:

The 52-week low for this share is Rs.604. With a CMP of Rs.624.20 and the 52-weel high rs.710. The CMP is just 3.34% ahead of the 52 week low and a long way to the 52 week high.

The market condition as far is this parameter is concerned is favorable.

Five year Returns:

L&T Infotech made the IPO and got listed only in July 2016. Therefore there is no data to evaluate five year returns based on price increase. The IPO price was Rs.710. It listed with a loss at Rs.666.60 and today trading at Rs.624.20, which is favorable.

On this parameter the market condition there is favorable.

C. Investment Decision:

The final investment decision in very easy is to make. Even though the EBDITA and other profitability ratios are not extremely rosy they are quite decent.  The balance sheet analysis is quite satisfactory. Company is distributing 62.98% of net profits and 75.99% of free cash flows as dividends.

D. Final Advice:

L&T Infotech is a good company. Buy. Limit the amount to 5% of total stock portfolio maximum. When Lehman Brothers like situation recurs (recur it certainly will) buy big quantities to improve dividend yield and P2BV on account of lower prices.