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Robust growth in revenues continues…

Larsen & Toubro Infotech (LTI) reported a healthy set of Q4FY21 numbers Constant currency (CC) dollar revenues increased 4.4% QoQ (vs. our estimate of 4.5% QoQ). However, margins declined 133 bps QoQ to 21.9% (vs. our estimate of 21.5%). Digital (~46% of revenues) grew 7.5% QoQ, 22.3% YoY. The company has also won two large deals with net new TCV of US$66 million. LTI declared a dividend of | 25/share.

Strong deal wins, digital prowess to drive growth

Despite healthy growth in the previous two quarters, the company saw robust 4.4% QoQ growth in Q4FY21. LTI registered industry leading growth in FY21 despite headwinds. This was mainly led by the company’s ability to deliver end-to-end solutions right from cloud migration, core modernisation, data analytics and customer experience. Going forward, we expect LTI to be a key beneficiary of recent trends of multi-year technology transformation phase. In addition, the company’s ability to win large deals, effectively mine clients, adding Fortune 500 clients (added two this quarter) and acquire new clients will enable LTI to deliver industry leading revenue growth in coming years. With this, coupled with ramp up of deals won, vendor consolidation opportunity and digital acceleration, we expect LTI to register 16.1% CAGR in FY21-23E.

Expect margins to remain stable

The company registered a 133 bps decline in EBITDA margins mainly led by wage hikes partially offset by operating efficiencies. LTI plans to give wage hike in Q1FY22E, which will impact its margins. In the long term, the company expects to invest in SG&A to drive growth, invest in Nordics for geographic expansion and in new data products to drive growth that may impact margins. However, considering operating levers available to LTI due to revenue growth we expect margins to broadly remain flat at 22% in FY21E-23E.

Valuation & Outlook

LTI’s ability to deliver end-to-end solutions right from cloud migration, core modernisation, data analytics and customer experience have enabled it to register industry leading growth. In addition, with the company’s ability to win large deals, presence in niche verticals, effectively mine clients, adding Fortune 500 clients, and digital prowess bode well for long term revenue growth. This, coupled with healthy margins and recent correction in the stock prompt us to upgrade the stock from HOLD to BUY. We maintain our target price of | 4580 (30x PE on FY23E EPS).

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