* Stellar performance despite challenges, high base…
Larsen & Toubro Infotech (LTI) reported a stellar quarter on all fronts despite challenging times due to the Covid 19 pandemic. Dollar revenues grew 3.9% QoQ (vs. our expectation of 3.0%). In addition, EBIT margins improved 48 bps QoQ to 16.7% (vs. our expectation of 16.4%). Digital revenues continue to be strong growing 3.3% QoQ, 24.6% YoY. LTI won two large deals in the quarter with net new TCV of more than US$100 million taking the total number of large deals to eight for full year FY20
* Near term pressure but expect FY21E to be better than peers
The company is witnessing near term challenges due to the Covid-19 pandemic. LTI’s exposure to the manufacturing and energy vertical, which accounts for ~28.2% of total revenues is expected to be under pressure due to lower oil prices and client specific challenges. The company believes BFSI (that is ~45% of revenues) would face challenges in Q2FY21E and Q3FY21E. In addition, pricing pressure, delay in deal ramp ups and pressure on utilisation in the near term is expected to keep revenues under pressure. As a result, LTI expects Q1FY21E revenues to decline 5.0% QoQ. However, exposure to Hi tech, CPG, pharma and large deals won in Q4FY20 and anticipated deal wins in Q1FY21E are expected to offset some of the pressure on revenues. We expect a revival in H2FY21E leading to a growth of ~5.0% YoY in dollar revenues in FY21E and ~13% YoY in FY22E driven by recovery across segments.
* Margin to improve in FY22E
EBITDA margins expanded 43 bps QoQ to 19.2% mainly on the back of higher working days, operating efficiency and currency, partially offset by higher onsite mix and higher pass through revenue. Among verticals, margin expansion was mainly aided by increase in margins in Hi-tech, media & entertainment segmental performance that had a one-time insurance settlement. We expect margins to be slightly lower in FY21E led by pricing pressure, lower discretionary spend and lower utilisation partially offset by cost efficiency. We expect margins to register healthy growth in FY22E.
* Valuation & Outlook
It was a stellar quarter on the revenue execution front and healthy margin expansion. In the near term, we expect the company to face headwinds in terms of pricing pressure, lower discretionary spend and delay in deal ramp ups. However, we expect LTI to see a revival in H2FY21E based on ramp up in deals won and recovery in troubled verticals. Further, the company has delivered strong double-digit revenue growth consistently, delivering industry leading growth, higher return ratios and is expected to do so post crisis. Hence, we remain positive on the stock from a long-term perspective. As a result, we maintain BUY rating on the stock with a target price of | 2050/share (19x PE on FY22E EPS).
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