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Disappointing numbers; cautious near term outlook…

About the stock: Larsen & Toubro Infotech (LTI) offers application development, IMS, digital solution services to BFSI, retail, health, media & hi-tech verticals.

LTI has 71 Fortune-500 clients with a presence in North America & Europe

LTI has grown at 19% CAGR over FY17-22 with robust margins (>19%)

Q4FY22 Results: LTI reported weak numbers.

Constant currency revenues increased 3.6% QoQ

EBIT margin contracted 60 bps QoQ to 17.3%

Guided for 290 bps QoQ EBIT margin contraction in Q1FY23 on salary hikes

What should investors do? LTI’s share price has grown by ~8.2x over the past five years (from ~| 665 in April 2017 to ~| 5,486 levels in April 2022).

We change our recommendation on the stock from BUY to HOLD

Target Price and Valuation: We value LTI at | 6000 i.e. 36x FY24E EPS

Key triggers for future price performance:

LTI’s ability to deliver end-to-end solutions is expected to help in registering industry leading growth

Ability to win large deals, presence in niche verticals, effectively mine clients, adding Fortune 500 clients and digital prowess other key drivers

Vendor consolidation opportunity and digital acceleration. We expect LTI to register 16% CAGR revenue growth in FY22-24E

Alternate Stock Idea: Apart from LTI, in our coverage we like Infosys.

Strong revenue guidance of 13-15% in CC terms for FY23, prompts us to be positive on the stock. However, there would be pressure in the near term on margins

We have a HOLD rating with a target price of | 2000

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