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Double-digit growth in FY24 unlikely due to weak Q1 result; retain ADD on strong growth prospects

LTIM reported Q1FY24 revenue of US$1,059mn, up 0.1% QoQ (lower than I-Sec estimate of 0.6%) and 8.2% YoY in CC terms. EBIT margin at 16.7% was 27bps higher than I-Sec estimate (of 16.4%) on account of operational efficiencies, particularly utilisation, which increased from 81.7% in Q4FY23 to 84.8% in Q1FY24. At PAT level, result was largely in line with our estimate (of Rs11.5bn) with weakness in revenue growth being offset by better margins and higher other income. In terms of leading demand indicators: a) Orderbook at US$1.4bn was strong with 4% QoQ growth and implying book/bill of 1.3x, b) deal pipeline was strong, up 10% QoQ whereas c) net headcount at 82,738 declined 2% QoQ and 1.5% YoY. LTIM management mentioned Q2FY24 would be better than Q1 in terms of revenue growth but not robust.

What to do with the stock

Against the backdrop of weaker-than-expected Q1 earnings, along with muted demand commentary for Q2 (particularly for its largest vertical, BFSI (38% of revenue in Q1FY24), which continues to face delay in decision making) double-digits growth in FY24 appears unlikely, in our view. Strong orderbook, deal pipeline, a few large deal announcements and the expectation of a revival in broader tech demand in H2FY24E make us forecast 1.7%/4.5%/4.3% QoQ growth for LTIM in CC terms for Q2/Q3/Q4 FY24E. This implies 7.7% CC (vs prior estimate of 9.8%) revenue growth for FY24E. On the back of this cut to our top-line growth in FY24E, we lower our FY24-26E EPS estimates by up to 5%. Having said that, we have not cut our outer year growth forecast of 16% in each of FY25E/26E given the synergy benefits from cross/up selling of solutions across client base of the erstwhile LTI and Mindtree along with strong management execution. We are also assuming EBIT margin to expand by 230bps over FY23-26E on the back of merger-related synergies ensuring 19% EBIT CAGR over this period. Due to lower EPS estimates, we revise downwards our 12-month target price to Rs5,325 (vs 5,582 earlier), implying 7% potential upside, leading us to maintain our ADD rating. Key risks to our positive thesis on LTIM: Any attrition in top management and further delay in decision making among its BFSI clients.

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