IGI Logo

Revenue growth beats peer growth…

Larsen & Toubro Infotech (LTI) reported a healthy set of Q3FY21 numbers both on the revenues and margins front. The company’s constant currency dollar revenues increased 5.3% QoQ (above our estimate of 5.0% QoQ) and margins increased by 35 bps QoQ to 23.2% (vs our estimate of 22.9%). Digital (44% of revenues) grew 9.5% QoQ and 17.5% YoY. The company has also won two large deals with net new TCV of US$278 million.

Cloud, client mining & large deals to drive growth

LTI is expected to be a key beneficiary of recent trends of multi-year technology transformation phase. The company’s ability to deliver end to end solution right from cloud migration, core modernisation, data analytics and customer experience will lead to healthy traction in revenues over the coming years. In addition, the company’s ability to win large deals, effectively mine clients, adding fortune 500 clients and acquire new clients will enable the company to deliver industry leading revenue growth in coming years. The company has won US$278 million large deal and has healthy deal pipeline. Based on the order book, expectation of a ramp up in deals, vendor consolidation opportunity and digital acceleration, we expect the company to register 9.4% YoY growth in dollar revenues in FY21E. Further, we expect LTI to register 17% YoY growth in FY22E and FY23E each led by recovery across verticals, traction in cloud & ramp up large deals.

Margins to remain stable in long term

Q4FY21E is expected to witness headwind of wage hike (impact of 160-170 bps) adversely impacting margins in the quarter. However, considering the robust performance in EBITDA margins in 9MFY21 and operational efficiencies, we expect EBITDA margin to expand by 331 bps YoY of 22% in FY21E. In the long term the company expects to invest in SG&A to drive growth, invest in Nordics for expansion and in new data products to drive growth which may impact margins. However, considering operating levers available to the company due to revenue growth we expect margins to broadly remain flat at 22% over FY21E-FY23E.

Valuation & Outlook

LTI has outperformed its mid cap and large cap peers in revenue growth in Q3FY21. We expect the company to continue to register Industry leading growth led by it’s ability to win large deals, presence in niche verticals, effectively mine clients, adding Fortune 500 clients, ability provide end to end solution and digital prowess. However, the current price factors in most of the positives and hence we downgrade the stock from BUY to HOLD with a revised target price of | 4580 (30x PE on FY23E EPS) (earlier target price of | 3850)

To Read Complete Report & Disclaimer Click Here

For More ICICI Direct Disclaimer https://secure.icicidirect.com/Content/StaticData/Disclaimer.html

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