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Elevated valuation fairly captures in future growth performance

Growth focus to keep margin tethered in FY22E

* L&T Infotech’s (LTI) 4QFY21 USD revenue growth of 4.4% QoQ CC was broad-based, barring Insurance and E&U verticals. EBIT margin was down 120bp QoQ to 19.4%, despite the impact of a wage hike and 190bp dip in utilization (on increased hiring). With a large deal TCV of USD66m in 4Q, its FY21 large deal TCV was USD404m, an increase of 22% YoY.

* We continue to expect LTI to grow in the top quadrant of our IT Services coverage, especially among largecap IT Services names – aided by large deal traction, a strong client mining ability, and a supportive demand environment. With a strong double-digit (17.5%) topline growth in FY22E, LTI should be able to deliver FY21-23E USD revenue CAGR of 17%, the highest among its largecap peer group.

* While LTI’s topline performance remains outstanding, the management’s commentary and decision to provide back-to-back quarters of wage hikes should result in a pullback in profitability in FY22E. We anticipate a 160bp YoY EBIT margin decline in FY22E due to investments in growth and workforce management. We now expect it to deliver net margin at the midpoint of its guided range of 14-15% in FY22E, implying a PAT growth of 9.7% over FY21-23E.

* We continue to view LTI as one of the best performing companies in our IT Services coverage, but view the current valuation of ~28x FY23E P/E as more than factoring in industry-leading growth.

* We have largely kept our estimates unchanged. As Digital turns mainstream, we expect LTI to benefit from continued investments in Digital capabilities, strong client additions, and mining abilities. This should result in industryleading growth. However, saturated metrics and required investments should keep margin in a narrow range. Our TP of INR3,680/share implies 26x FY23E EPS. Maintain Neutral.

Operationally above our estimate

* LTI reported revenue (USD)/EBIT/adjusted PAT growth of 9%/26%/14% YoY v/s our estimate of 9%/21%/14%. The same in FY21 stood at 10%/36%/24% YoY.

* Revenue growth of 4.4% QoQ CC was ahead of our estimate (3.9%). In USD terms, revenue growth stood at 4.6% QoQ

* BFS, Manufacturing (+5% QoQ CC), Hi-Tech, Media and Entertainment (+15.8%) grew, while the company faced a drag from ENU (-5.3% QoQ) and Insurance (flat QoQ).

* Growth was led by Cloud Infra and Security (+10.9% QoQ CC), Enterprise Solutions (+7.1% QoQ CC), and ADM and Testing (+3.5% QoQ CC). Other service lines saw a sequential decline during 4QFY21.

* Digital revenue stood at 45.6%, up 7.5% QoQ and 22.3% YoY.

* In terms of geography, growth was led by RoW (+17.5% QoQ CC), India (+7.9%), and Europe (+7.2%). US grew modestly by 1.9% QoQ CC.

* LTI added three new clients in the over USD10m bracket in 4QFY21. Total active clients increased to 427 (v/s 419 in 3QFY21).

* Growth during 4QFY21 was led by non-top 20 accounts, which grew 8.2% QoQ.

* The company announced two large deals with a cumulative net new TCV of USD66m.

* EBIT margin dipped 120bp QoQ to 19.4% (above our estimate of 18.7%), led by a wage hike in 4QFY21 and 190bp sequential decline in utilization. The same was partially offset by a 30bp increase in the offshore effort mix.

* Attrition was flat QoQ at 12.3%.

* Headcount increased by 1,528 to 33,983 in 4QFY21.

* PAT, at INR4.9b (excluding one-off earn out reversals), is in line with our estimate.

* DSO (including unbilled) increased by a day QoQ to 94 days. On a YoY basis, DSO reduced by 12 days.

* The company reported an OCF growth of 46% in FY21, with the OCF/EBITDA ratio at 88%. FCF grew 52% YoY, with the FCF/PAT ratio at 110%.

* LTI announced a final dividend of INR25/share.

Key highlights from the management commentary

* The company won two large deals during 4QFY21. The first was on the back of vendor consolidation in its existing logo in the Insurance space in North America for a period of five years, with net new TCV of USD21m. The second was with a new logo in the BFS space for two years with a TCV of USD45m.

* Top 10 clients have been impacted by the COVID-19 pandemic and some are in the Insurance and Oil and Gas segment, where LTI needs to perform better. Five-year CAGR has been healthy, and the management is excited about its growth prospects.

* LTI has rolled out wage hikes to all its employees (excluding senior executives) from 1st Apr’21 instead of its normal cycle starting from July. The management in confident of sustaining utilization levels.

Industry-leading growth, but valuations punchy

* LTI has deep domain capabilities, strong partnerships, and low exposure to segments that faced headwinds (legacy IMS and BPO). This is helping the company secure industry-leading growth rates.

* On the margin front, we expect some normalization from current levels on account of the easing of utilization levels and investments needed by the management in S&M to drive growth.

* Despite being confident of the company’s execution capabilities, we remain on the sidelines, led by significant multiple expansions. We value the stock at 26x FY23E EPS (in line with our TCS valuation, given LTI’s industry-leading growth). Our TP of INR3,680 per share implies a 6% downside. Maintain Neutral.

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