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India's L&T Technology gets tepid reception in trading debut

MUMBAI (NewsRise) -- L&T Technology Services, a unit of India's industrial conglomerate Larsen & Toubro, made a lackluster debut on the stock exchanges as investors remain wary of the stock's valuation and the software industry's prospects amid slowing growth.

L&T Technology, an engineering services and research and development company, opened trading with a 4.6% gain from the issue price at 900 rupees a share ($13.5), before erasing gains to close down 3.9%. The stock performance contrasts the smart debut of some recent issues in India's initial public offering market that is witnessing a boom.

In recent months, small microfinance firm Equitas Holdings saw it shares soar as much as 34% on the first day of trading. Indian companies raised as much as $1 billion in the first half of this year, according to researcher Prime Database.

L&T Technology's $134 million IPO earlier this month saw demand outstripping the number of shares offered by 2.5 times. The company had priced the shares between 850 rupees and 860 rupees apiece. The offer, which was subscribed for four days until Sept.15, received bids for 18.38 million shares, or 2.5 times the 5.56 million shares on offer.

Still, the subscription paled against the demand for other IPOs such as staff firm Quess Corp. whose issue was oversubscribed 145 times on the final day of the sale.

This is the second IPO from L&T's stable in the last three months. L&T Infotech, the software services unit of Larsen, had a weak trading debut in July amid concerns of a slowdown in India's information technology industry.

L&T Technology shares closed at 865.10 rupees, while shares of L&T Infotech lost 0.11% in Mumbai on Friday. Parent Larsen and Toubro closed 0.15% down, while the benchmark S&P BSE Sensex closed 0.36% lower.

A.M. Naik, the group executive chairman of the Mumbai-based Larsen, remains bullish about L&T Technology's prospects. In interviews to local television channels after the listing, Naik reiterated his outlook for the company saying L&T Technology will contribute $1 billion in revenue in the next five years. A major part of that revenue is likely to be spurred by acquisitions.

In the fiscal year that ended in March, L&T Technology reported a profit of 4.16 billion rupees on sales of 31.43 billion rupees, the company said in a regulatory filing.

Larsen is betting on the prospects of its technology and financial services businesses, hoping that it will help offset the slowing growth in its core infrastructure division.

Many analysts have advised investors to stay away from L&T Technology, citing its expensive valuation, compared with peers.

ICICI Direct said L&T Technology is available at 15.5 times its fiscal year 2018 estimated earnings per share, which is at a premium to other IT companies such as HCL Technologies and smaller Cyient Technologies that have a presence in the engineering and R&D sector. "We believe current valuations leave limited upside."

To be sure, some say the company's long-term prospects remain strong as "it is not a run-of-the-mill IT company."

"L&T Tech is a pure-play on the engineering and R&D sector which has been growing well for the large IT companies," Urmil Shah, an analyst at IDBI Capital, told local television channel CNBC TV18. "This is an area where it can leverage more from its group's presence, more than what its sister-concern L&T Infotech can."

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