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L&T Technology's IPO evokes healthy response

MUMBAI (NewsRise) - The $134 million initial public offering of L&T Technology Services, the engineering, research, and development arm of industrial conglomerate Larsen & Toubro,  drew a healthy response from investors who bet on the prospects of Asia's third-largest economy.

L&T Technology's offering was oversubscribed nearly 1.91 times. India's IPO market has witnessed a surge in demand in recent months as Prime Minister Narendra Modi's government pushes ahead with policy reforms needed to spur economic growth. In the first half of this year, Indian companies raised as much as $1 billion, according to researcher Prime Database.

Still, the response to L&T Technology's IPO paled against the demand seen at some recent share sales such as Quess Corp.'s offering, which attracted bids for 145 times the shares on offer in July.

The IPO by L&T Technology, whose clients include luxury car maker BMW and heavy equipment maker Caterpillar, received bids for nearly 13.87 million shares, or 1.91 times the 7.28 million shares on offer, according to provisional data on the National Stock Exchange. The software company had set a price band of 850 rupees ($12.68) to 860 rupees a share.

The institutional part of the offer got bids for 5.97 million shares, or 2.87 times the 2.08 million shares on offer, boosted by foreigners bidding for 3.97 million shares. The retail portion got bids of 1.88 million shares, or 0.52 times the 3.64 million shares on offer for that category.

L&T will pare down 10.2% of its total ownership in the unit through the share sale. In the fiscal year that ended in March, L&T Technology reported a t profit of 4.16 billion rupees on sales of 31.43 billion rupees, the company said in a regulatory filing.

This is the second IPO from India's biggest builder of roads and power stations in barely two months. In July, Larsen's software arm L&T Infotech saw demand for its $180 million share offering jump 11 times more than the number of stocks offered.

Many analysts have advised investors to avoid buying L&T Technology, citing its "expensive" valuation, compared with listed peer Cyient, a Hyderabad-based company that draws more than two-third of its revenue from engineering services.

"While the company (L&T Technology) operates in a segment with huge growth potential, we find the asking valuations to be highly expensive," brokerage PhillipCapital said in a note.

At the upper band of the IPO, L&T Technology is priced 16 times its fiscal year 2018 earnings estimate - at a premium to all IT services companies, excluding Tata Consultancy Services, the brokerage said.

"We would have been more comfortable with a valuation in line with Cyient at 13 times fiscal year 2018 price-to-earnings ratio - leaving something on the table for the investors."

Shares of Larsen closed 0.31% down, while that of L&T Infotech fell 0.29% in Mumbai trading. The benchmark S&P BSE Sensex gained 0.14%.

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