IGI Logo

Growth focus to keep margins tethered

Valuations continue to factor in performance

* L&T Infotech (LTI)’s 1QFY22 USD revenue growth stood at 4.8% QoQ CC, above our est. of 3.4% QoQ CC. Growth was largely led by deal ramp-ups in Hi-Tech (Injazat) and BFSI (Islamic Bank), which grew 13.2 and 8.2%, respectively. The 1Q EBIT margin contracted 300bp QoQ to 16.4% (in line with estimates). The margin decline was primarily led by a 340bp impact of wage hikes and promotions to manage attrition.

* Despite the absence of large new deal wins in 1Q, LTI highlighted a strong demand environment, led by a robust deal pipeline. It continues to report small-, medium-, and large-sized deals and would continue to lead growth in the industry. We continue to expect LTI to deliver revenue growth on the higher end of our Coverage Universe (FY21–23E USD revenue CAGR of 18%), aided by deal traction, a strong client mining ability, and a supportive demand environment.

* LTI’s LTM attrition spiked c300bps QoQ in 1Q, even after a second consecutive quarter of wage hikes. The management expects to service upcoming demand through a combination of more hiring, including freshers, and enhanced training capabilities for the workforce in Cloud and Digital.

* We expect net margins to remain in the guided range of 14–15%. This should happen despite a 170bp drop in the EBIT margin for FY21–23E. Margins would moderate on account of additional S&M investments, required to fuel the business growth rate.

* 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 capabilities. This should result in industry-leading growth. However, saturated metrics and the required investments should keep margins in the narrow range. Our TP of INR4,280 implies 29.0x FY23E EPS. Maintain Neutral.

Revenue above estimates; margins in-line

* LTI reported revenue (USD) / EBIT / adjusted PAT growth of 20%/11%/19% YoY v/s our estimate of 19%/8%/9%.

* Revenue growth of 4.8% QoQ CC was ahead of our estimate (+3.4% QoQ CC). In USD terms, revenue growth stood at 5.1% QoQ.

* Growth was led by Hi-Tech/BFSI/Insurance (+13.2%/+8.8%/+5% QoQ CC), while Manufacturing was a drag (-6.7% QoQ CC).

* In terms of geography, growth was led by RoW / North America/ Europe (+19.1%/+6.2%/+4.9% QoQ CC). India declined 19.9% QoQ CC.

* LTI added one/three new clients in the over USD50m/USD10m bracket in 1QFY22. The total active clients increased to 438 (v/s 427 in 4QFY21).

* Growth in 1QFY22 was led by the non-top 20 accounts (up 8.2% QoQ).

* The EBIT margin fell 300bp QoQ to 16.4% (in line with our estimate of 16.3%) due to a wage hike taken in 1QFY22.

* Utilizations stretched to 84.1% (+190bp QoQ). The offshore mix rose 140bp QoQ to 57.3%.

* PAT increased 19.3% YoY to INR4.9b, 9% above our estimate, led by higher other income.

* Overall DSO (including unbilled) increased by 4 days QoQ to 98 days.

* Attrition rose 290bp QoQ to 15.2%.

* In 1QFY22, headcount increased by 2,307 to 38,298.

* LTI announced a special dividend of INR10/share.

Key highlights from management commentary

* The company added 32 new logos during the quarter. Among the verticals, BFSI reported strong growth of 13.2% QoQ, driven by existing clients and a large deal announced last year. Growth in Hi-Tech was led by the Injazat deal. Within Manufacturing, the decline during the quarter was attributable to the absence of pass-through revenues. This also reflected the decline in India revenues due to the second COVID wave.

* LTI is a growth company with stable margins. However, two subsequent wage hikes have led to margin decline. Management maintained its guidance for PAT margins at 14-15%.

* 1Q was a very strong start to FY22, and the pipeline remains strong, with a healthy mix of deals. The management is confident of the business outlook.

Valuation and view – industry-leading growth, but punchy valuations

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

* However, 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.

* While we remain confident of the company’s execution capabilities, we remain on the sidelines on the stock on account of significant multiple expansions recently. We value the stock at 29.0x FY23 EPS (in line with our TCS valuation, given LTI’s industry-leading growth). We maintain Neutral, with TP of INR4,280.

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