IGI Logo

Growth outlook turbocharged by cloud spend

Talent supply over near term remains key hurdle

* We attended LTI’s Analyst Day, where the management a) reiterated its guidance for strong broad-based growth for the coming 3–5 years and b) highlighted ‘The Great Restructuring’ as a key driver of the demand tailwind.

* The management remains confident about this growth trajectory and mentioned six factors that would drive growth – demand, capability, talent, sales and marketing, team, and operational resilience.

* The company continues to expect faster growth than the industry average growth of 9%+ as digital transformation led demand fuels client spending. It sees talent as the only limiting factor in its aspiration to double revenues to USD4b over the next few years.

* LTI’s large-deal pipeline (new only) of USD2.07b v/s USD1.9b in FY21 (USD1.2b excluding mega deals) was relatively modest, but primarily consisted of smaller deals – unlike the three mega deals (one converted) that inflated FY21 figures. 44% of this large deal pipeline is contributed by new logos. It also mentioned the pipeline including renewals is meaningfully larger.

* The company reiterated its stance to maintain net margins at 14–15% as it continues to focus on reinvesting to capture incremental market share rather than the margin uptick. We see this as an indication of the company’s willingness to absorb pricing pressure, unlike peer commentary on price hikes.

* Although LTI has hired a record number of employees recently, it continues to see the supply side as a concern over the near term. LTI expects the situation to ease over the next 4–6 quarters.

Updated product and strategy should add to growth

* LTI recently launched ‘Fosfor,’ a suite of five products focused on data monetization. ‘aLTlus,’ LTI’s cloud offering, is also seeing good growth on the back of its cloud capabilities.

* With strong capabilities in cloud – it has top-tier partnerships with 80% of the strategic hyperscaler partners – LTI believes it now has industry-leading capabilities in both the Cloud and Data spaces, which now account for 40% of its revenues.

* Under its new CHIP (Consolidate, Harvest, Incubate, and Programs) strategy, the management has incorporated various sales-focused programs to drive its future growth plans. Additionally, LTI GoMx is focused on rewarding, awarding, and training employees. This is expected to drive the next leg of growth for the company.

Demand environment remains strong

* The management highlighted three factors driving the current strong demand environment, namely 1) ‘The Great Restructuring’, 2) new spend areas, and 3) ‘The Great Resignation’.

* According to the management, after the Great Depression and Great Recession, we are now witnessing ‘The Great Restructuring’. LTI is well-positioned to capture the growth from this event.

* There are new spend areas such as ESG; Cybersecurity; and Cloud, Digital, and Data Services.

* ‘The Great Resignation’ stems from various factors. There are 10.5m job openings in the US v/s only 7.4m unemployed professionals. According to Gallup, 48% of employees are actively searching for new opportunities. Annualized wages are also rising at 4.5–5%, the highest in the last 20 years. These would drive demand for IT services outsourcing in the scope of innovation, capability, and efficiency requirements.

Promising growth trajectory

* The management reiterated the company would continue to make investments in new-age technologies, partnerships, talent, and ESG to capture future market share and growth.

* Gartner has strong forecasts for IT spends across verticals and service lines (Exhibits 1 and 2). The CAGRs for IT spend projections for FY19–25E are as follows: Software – 12%, IT Services – 9.1%, and Overall IT – 6.1%.

* The large-deal pipeline continues to be strong at USD2.07b v/s USD1.9b last year. 44% of this pipeline is contributed by new logos; net new TCV from new logos stands at around 56%.

* The addition of new logos remains strong. Large deal invites (CY2021) stood at 23 and must-have logos on digital channels stood at 150. Fortune-500 logos stood at 71 v/s 68 last year.

Digital, Data, and Cloud

* The new wave of deep digital transformation among enterprises would drive demand. Experience transformation is another area that would gain importance in the near future.

* IT spends on the cloud are forecast to see a CAGR of 32.3% over FY19–25E, according to Gartner.

* More than 40% of the company portfolio is in the new-age areas of Cloud, Data, and Digital. More than 50% of the revenue is driven by these three business verticals. Over the last five years, the company has seen 8x the growth in Cloud.

* For aLTlus, LTI has built strong Tier-1 partnerships with AWS, Azure, Google Cloud, IBM, Snowflake, and ServiceNow. The company has built dedicated teams for each of these partnerships. It believes it now has industry-leading capabilities and relationships with hyperscalers.

* LTI launched ‘Fosfor,’ a database management tool. This is a suite of five product offerings built around the megatrends depicted by Gartner. LTI is the only company to have all five of these products in its bouquet of offerings. The company is getting strong endorsements, indicating strong customer retention.

* Typically, 60–70% of companies’ total spending is towards organizing unstructured data. ‘Aspect,’ one of the five products under Fosfor, is built to address this.

Expanding talent and capabilities

* The company has added around 6.3k employees in 1HFY22 and plans to add 5.5k employees.

* The company has made disproportionate investments in capabilities and made seven acquisitions to date (each one to boost its capabilities). The company’s initiatives to expand the sales team, introduce new leadership, and make global delivery units are working well.

* LTI has gained USD23m worth of commitments from partners to build its capabilities on the back of strong tier-1 partnerships.

* LTI GoMx, the company’s new sales program, focuses on rewarding, awarding, and training employees. Under CHIP, the management has various sales-focused programs to drive future growth.

Valuation and view – industry-leading growth to defend rich valuations

* LTI’s deep domain capabilities, strong partnerships with hyperscalers, and robust sales engine would continue to drive industry-leading growth rates for the company. We expect a USD revenue CAGR of 22% and INR PAT CAGR of 21% over FY21–24.

* While we remain confident about the company’s execution capabilities, we remain on the sidelines on the stock due to the significant valuation re-rating.

* We are introducing our FY24 estimates in this report. We are also rolling forward our target multiple to FY24E, leading to new Target Price of INR6,640, as we value the stock at 35x FY24E EPS. Maintain Neutral.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer