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:
- 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.
- 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 31st 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:
- 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.
- 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:
- The current ratio of L&T Info at 2.02 is sound. Quick ratio at 0.50 is poor.
- The TOL/ TNW and long-term debt-equity ratios are well within the limits.
- 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:
- L&T is generating net operating cash flows of around Rs.863 crores every year, which is very good.
- 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.