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All-round performance

* LTI’s Q3 operating performance beat our expectations. Revenues grew by 8.7% QoQ to USD553mn (9.2% CC), above our estimate. EBITM expanded by 70bps QoQ to 17.9% on the back of revenue growth-led operating leverage and favorable currency movement.

* Revenue growth was broad-based, driven by Manufacturing (19% QoQ CC), BFS (10.4%), CPG, Retail & Pharma (7.8%), E&U (7.0%), Hi-Tech, M&E (3.1%) and Insurance (2.2%). All geographies, except RoW, reported over 6% QoQ CC growth, led by India (~44% contribution to incremental revenue).

* Management is confident of delivering a top-quartile revenue performance in FY22 on the back of strong broad-based demand, conversations with clients, and good progress on client mining. LTI signed a USD32mn TCV deal in US (new logo in Pharma vertical) in Q3.

* We raise our FY22-24 EPS estimates by 1.0%-2.4%, factoring in the Q3 performance beat. We expect LTI to deliver a top-quartile revenue/earnings performance, but the valuation remains rich. We maintain Hold with a TP of Rs6,800 at 37x Dec’23E EPS.

What we liked? Strong broad-based revenue growth, continued strength in BFS (10.4%/39.6% CC QoQ/YoY), and good progress across client buckets.

What we did not like? Uptick in attrition (LTM attrition rose to 22.5% vs 19.6% QoQ) and poor cash conversion (51.8% OCF/EBITDA).

Strong revenue performance; confident of delivering top-quartile growth in FY22: LTI’s Q3 revenues grew 8.7% QoQ (highest ever since listing) to USD553mn, above our estimates. Management said that seasonal pass-through revenue in India contributed ~2% to sequential revenue growth in Q3. Volume growth stood at 6.5% QoQ in Q3 (onsite 4.1% and offshore 7%), while blended realization improved 2%. Among geographies, growth was led by India (59.7% QoQ CC), Europe (8.7%) and North America (6.3%). Management is fairly confident of sustaining the growth momentum and delivering a top-quartile revenue performance in FY22E on the back of 1) strong broad-based demand environment, 2) traction in new areas of spending like Cloud, Security, Data, 3) healthy deal pipeline, 4) healthy new logo additions (added 27 new logos in Q3, including 1 Fortune 500 logo), and 5) steady progress on client mining. The company’s Top-5, Top-10 and Top-20 clients registered impressive QoQ growth rates of 9%, 7.8% and 9.6%, respectively, in Q3. The company added 1,818 employees in Q3 (8,209 in 9MFY22) to meet strong demand.

EBITM up by 70bps QoQ to 17.9%: LTI’s Q3FY22 EBITM expanded by 70bps QoQ on the back of revenue acceleration and operating efficiencies (+40bps) and favorable currency movement (+30bps). LTI remains confident of sustaining 14-15% NPM in FY22, considering strong revenue growth, offshore shift and SG&A leverage, partly negated by higher backfilling costs due to attrition and planned investments in sales and capability augmentation.

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