Healthy deal wins; Stable commentary
Continue to expect industry leading ‘growth’; Reiterate Buy
* Strong exit growth in FY20 coupled with healthy deal wins reiterates our confidence that L&T Infotech (LTI) could be one of the few outliers reporting revenue/earnings growth in FY21. The company’s twisted seasonality (better 2H) should also help it dodge the peak COVID-19 impact (expected over 1H) to an extent. Notwithstanding some price concessions, we expect net margins to remain close to the lower end of the normal year guidance band (14-15%). Top clients/BFSI performance is a key monitorable.
* We keep our estimates largely unchanged and expect LTI to be a key beneficiary of the accelerated digital adoption in the post COVID-19 world. Reiterate Buy
Better-than-expected and broad-based performance
* In 4QFY20, revenue (USD)/EBIT (INR)/PAT increased 16%/15%/13% YoY (v/s est. 14%/10%/2% YoY). For FY20, Revenue (USD) / EBIT (INR)/PAT increased by 13%/1%/0% YoY.
* Reported growth (4.7% QoQ, CC) was stronger than our expectations (3%). Further, growth was broad-based across geographies and verticals. While RoW (18.1% QoQ, CC) growth was lumpy partly due to the low base, core geographies reported healthy growth despite the COVID-19 impact.
* Growth in the top-5 (-1% QoQ, CC)/Top-10 (2% QoQ, CC) accounts was weak due to the high base in Dec’19. Overall growth during Mar’20 was driven by (1) addition of new clients, and (2) mining/scaling up of small accounts.
* Adjusted for one-time donation to PM-CARES fund, EBIT margin improved 110bp QoQ. Major drivers were INR depreciation (50bp impact) and favorable calendar (50bp impact).
Key highlights from management commentary
* Even as management anticipates demand pressures, they remain optimistic on performance given the strong order book and deal pipeline. The company expects a revenue dip in Jun’20, in line with industry.
* Management hinted toward potential announcements of deal closures in Jun’20, despite some delays and deferrals being witnessed currently.
* Across verticals, Manufacturing, Automotive and Oil & Gas would be the most impacted, while CPG and Pharma are expected to outperform the company’s growth in the coming quarters.
* Within BFS – even as no impact is expected in the near future – rising defaults in banks could affect performance over 2HFY21.
* While pricing is expected to be largely stable, management has hinted at near-term challenges on account of client specific concessions.
Valuation view – industry leading growth to defend rich multiples
* LTI’s recent client addition across buckets was the strongest and broadbased v/s comparable prior periods. It has recently added several marquee logos (e.g. Standard Chartered). Given its proven account mining capabilities, this should provide good headroom for incremental growth.
* Industry leading ‘growth’ plus prudent capital allocation should defend its rich multiples. Our fair valuation is 19x 1-year forward P/E, at 15% discount to TCS. Reiterate Buy.
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