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On a strong footing with both revenue and cost synergies in place; remains our top pick

We attended LTIMindtree (LTIM) Investor Day 2023 (on Mar 14), wherein the management reiterated its aspiration to achieve US$1bn incremental revenue through cross-sell synergies over the next 2-4 years and reach 19-20% EBIT margins by FY27 i.e. improvement of ~200bps on pro-forma margins of the combined entity as on FY22. Mindtree is stronger in front-end digital solutions and LTI is stronger in back-end ERP related core transformation solutions. Given the complimentary service line expertise of LTI and Mindtree, LTIM aims to derive revenue synergies through cross-sell/up-sell opportunities across the existing 374 client accounts of more than US$1mn in revenue size. For the same, it is investing in strengthening service line sales leadership and capabilities (Chart 5).

Management mentioned demand for technology transformation is secular; however, in the near term, due to macro uncertainty it is seeing longer decision-making cycles in terms of conversion of pipeline to TCV and execution of TCV to revenue largely in discretionary spends. Pipeline is healthy with 68 large deals (>US$ 20mn deals) amounting to TCV of US$3.2bn. It is characterised by higher share of cost optimisation deals compared to last year. LTIM’s exposure to SVB is not material and the recent fallout of the bank does not have any material impact on it, as per the management.

We continue to assume 14.5% US$ revenue CAGR over FY23-26E given 1) strong crosssell/up-sell opportunities, 2) ability to participate in larger deals post-merger and strength in hyperscalar and SaaS partnership led sales (Chart 6, Table 1). We expect EBIT margin to improve by 260bps over FY23E-FY26E to 18.6% (in line with management guidance to improve margins to 19-20% by FY27) led by operating leverage with higher scale of operations and integration-related synergies around both employee costs and SG&A leading to 20% EPS CAGR over FY23-26 (highest in our coverage universe). We continue to value LTIM at 25x FY26E EPS of Rs253 (discounted back 1-year with WACC of 12%) to arrive at our 12-month target price of Rs5,651, implying ~24% potential upside. We see strong management execution track-records in the past at both Mindtree and LTI to become bedrock for LTIM to ensure industryleading profitable growth in coming years. LTIM remains our top pick in the sector. Maintain BUY.

Key takeaways from LTIM Investor Day 2023:

* No material impact on BFSI vertical due to SVB crisis: LTIM management mentioned it has exposure to SVB both in terms of SVB as a client and SVB as a banker. But there is no material impact on LTIM due to SVB fallout in both the aspects, as per the management. Moreover, LTIM works with 12 out of 20 GSIBs (globally systematically important banks) which are likely to be in better financial health than regional banks in current macro scenario. Additionally, its major part of work is in GRC space (governance, risk management and compliance) which is also likely to gain prominence due to the recent SVB crisis

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