Buy Larsen and Toubro Infotech Ltd For Target Rs.5,000 - ICICI Securities
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Margin trajectory will be the key
Like Infosys across large caps, LTI has been one of the very few companies in the industry reporting an actual improvement in the underlying demand – and not a mere cyclical recovery from a low base. Its consistent performance continued with 4.8% QoQ (CC) growth aided by the Middle East deal ramp up. Quality of growth was good with most key verticals and geographies contributing handsomely.
Growth in top accounts was strong. Sharp EBIT margin contraction (300bps QoQ) was due to wage hikes and investments. Initial traction in data products segment was encouraging. Subject to successful execution, this can become a key incremental value driver for LTI. Absence of deal win announcements in Jun-21 was a key disappointment.
Nevertheless, growth outlook continued to be strong on the back of healthy pipeline. We have been ahead of consensus on LTI’s revenue growth over FY22-23E. Incrementally, like in case of Infosys, margin trajectory should be a key value driver going forward. Our FY22-FY23E EPS estimates witness 2% to 5% revision. Despite rich multiples, we maintain our BUY rating given the company’s consistency in execution, industry-leading revenue growth prospects (FY20-FY22E CAGR = 13.5%) and high return ratios (FY22E RoE = 30%).
* Beat on both revenue and margin expectations. Revenue growth (4.8% QoQ, CC) was ahead of our expectations led by ramp up of the Middle East deal. Growth was broad based across key verticals and geographies. Manufacturing, enterprise solutions and India segments reported revenue decline due to – (1) absence of pass through revenue and (2) covid 2nd wave. After remaining a drag on the performance in Mar-21, Top accounts contributed well to growth this time. EBIT margin contracted 300bps QoQ and came in 50bps ahead of our estimates. Salary hikes and investments were the key margin headwinds during the quarter. Margin movement was also impacted by a provision reversal in reported margins of Mar-21. There was no major deal win announcement in this quarter.
* One of the very few companies reporting an actual improvement in demand. Initial traction in data products segment was encouraging. Subject to successful execution, this can become a key incremental value driver for LTI. Growth outlook continued to be strong on the back of healthy pipeline. We have been ahead of consensus on LTI’s revenue growth over FY22-23E. Incrementally, like in case of Infosys, margin trajectory should be a key value driver going forward. Our FY22-FY23E EPS estimates witness 2% to 5% revision. Despite rich multiples, we maintain our BUY rating given the company’s consistency in execution, industry-leading revenue growth prospects (FY20-FY22E CAGR = 13.5%) and high return ratios (FY22E RoE = 30%).
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