IGI Logo

Strong FY23 outlook, but valuations remain rich

Demand story intact, margin guidance stable for FY23

LTI reported a growth of 3.6% QoQ CC on a high base, below our estimate of 4.2%. Growth was broad-based across verticals and service lines. EBIT margin moderated by 60bp QoQ to 17.3% in 4QFY22 (inline) due to lower working days and revenue mix.

LTI continues to benefit from one of the strongest ever demand environments and sees it continuing over the next three-to-five years. The management reassured of industry-leading growth in FY23 as demand remains strong. It doesn’t see any postponement in demand, despite a volatile macro environment and geopolitical issues. LTI is one of the best placed companies in our coverage universe, with a strong client mining ability. Moreover, robust employee addition and its target to hire over 6,500 freshers in FY23 provides further demand visibility. We expect it to deliver FY22-24 USD revenue CAGR of 21% – one of the highest in our Tier II IT Services coverage.

While LTI continues to excel on revenue growth, we expect it to maintain its profitability around current levels, given the management’s focus on driving growth with stable margin. It should continue to report net margin in its guided range of 14-15%.

LTM attrition rose 150bp QoQ to 24% (a six-year high) in 4QFY22, which remains a concern, especially with rising on-site attrition. The management said attrition is moderating on a quarterly annualized basis and that it will take a few quarters for attrition in the LTM to fall.

We have cut our EPS estimates for FY22 and FY23 by ~2% due to slower growth. Our margin estimates remain in line with the management’s guidance. As Digital turns mainstream, we expect LTI to benefit from continued investments in its Digital capabilities, strong client additions, and mining abilities. This should result in industry-leading growth. Our TP of INR5,710/share implies 30x FY24E EPS. We maintain our Neutral rating

Revenue was a miss, but margin was inline; higher other income led to a PAT beat

Revenue (USD)/EBIT/adjusted PAT grew 27.5%/17.6%/30.5% YoY v/s our estimate of 28.8%/16.9%/28.2% in 4QFY22.

USD revenue/INR EBIT/INR PAT grew 25.9%/13%/18.6% in FY22.

Revenue growth of 3.6% QoQ CC missed our estimate (+4.2%). In USD terms, revenue growth stood at 3.1% QoQ.

CPG (+7.7% QoQ) and ENU (+4.1% QoQ) drove growth. BFS/Insurance/ Manufacturing/Hi-Tech/Others grew 3.3%/3.8%/2.3%/2.2%/3.3%.

Growth was broad-based with core geographies – North America and Europe – growing 2.6% and 8.2% QoQ CC, respectively. India registered a growth of 6.4% QoQ CC even on a high base, while RoW declined by 0.3%.

Total active clients rose to 486 (v/s 476 in 3QFY22). Growth in 4QFY22 was led by the top 11-20 accounts, which grew by 5.2% QoQ, and the top five/10/20 accounts, which grew by 2.8%/3.1%/3.7%.

EBIT margin moderated by 60bp QoQ to 17.3% (inline), on account of lower working days and revenue mix.

Utilization was largely flat QoQ at 81.5%, but still continues to remain elevated. The offshore revenue mix was largely flat at 60.2%.

PAT rose 30% YoY to INR6.4b, 1.8% above our estimate on higher other income.

Overall DSO (including unbilled) stood at 94 days v/s 100 days in 3QFY22.

Attrition rose 150bp QoQ to 24%.

Headcount increased by 2,448 to 46,648 in 4QFY22.

Key highlights from the management commentary

Vertical takeaways | BFS is witnessing holistic growth across geographies with two new deal wins. Insurance has been a laggard for LTI, but logo additions will aid growth in FY23. Growth in Manufacturing was driven by a ramp-up in a few deals. In E&U, prices continue to remain high and the management said it will remain watchful of the same. In Retail, CPG, and Pharma, it is seeing good traction from existing customers and bagged one large deal. Hi-Tech benefited from a ramp-up in one of its past deals. The management said the client is on a multi-year Cloud transformation journey and this offers good headroom for future growth.

The management reassured of industry-leading growth in FY23 as demand remains strong. It doesn’t see any postponement in demand, despite a volatile macro environment and geopolitical issues.

It rolled out salary hikes effective 1st Apr’22, which will have a 290bp impact on its 1QFY23 margin. Other margin headwinds include high on-site attrition, which impacted volumes in 4QFY22, though the management is not facing any execution challenges.

Industry-leading growth to defend rich valuations

LTI’s deep domain capabilities, strong partnerships with hyperscalers, and a robust sales engine will continue to drive industry-leading growth rates for the company. We expect USD revenue CAGR of ~21% over FY22-24, which is at the top end of our Tier II IT coverage universe.

Moreover, margin has been steady, driven by growth and offshoring. While there can be some headwinds from supply-side challenges, we continue to expect strong growth and offshoring to drive margin resilience. We maintain our PAT margin estimate within the management’s guided range of 14-15% as LTI’s focus is on driving growth with stable margin.

While we remain confident of the management’s execution capabilities, we remain on the sidelines in the stock, led by a significant valuation re-rating. We value the stock at 30x FY24E EPS. Our TP is INR5,710 per share. We maintain our Neutral rating.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

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