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Strong growth to sustain, but valuations remain punchy

Talent supply a near-term limitation on growth

* LTI’s revenue growth, in USD terms, stood at 8.9% QoQ CC in 2QFY22, above our estimate of 5.4%. Growth was broad based across verticals, service lines, geographies, and client buckets. Broad based industry growth was led by BFS and Manufacturing. EBIT margin expanded by 80bp QoQ to 17.2% in 2QFY22 (est. 16.7%), led by SG&A leverage, offshoring, and higher working days, partially offset by utilization and higher costs.

* The management highlighted that the demand environment is one of the strongest. It expects demand to remain strong over the next three years. Despite the absence of large new deal wins in recent quarters, LTI’s growth momentum is one of the strongest in its history, indicating the broad based nature of the demand environment. We continue to view LTI as one the best placed companies in our coverage universe, with a strong client mining ability. We expect it to deliver 23% revenue CAGR in USD terms over FY21- 23E, one of the highest in our Tier II coverage.

* We expect a better margin in 2H (v/s 1HFY22), driven by continued strong growth, which will offset the supply-side impact. The management continues to be focused on driving growth with a stable margin. We expect net margin to remain in the guided range of 14-15%.

* LTI’s LTM attrition spiked by 440bp QoQ to 19.6% (six-year high) in 2QFY22. The management said the supply-side situation continues to be challenging and is expected to remain such for the next one-year. It added that growth in 2QFY22 would have been higher if supply-side issues were not present. The company has increased its hiring targets (for fresher and those with an experience of 1-2 years) to cater to the strong demand.

* We have raised our FY22E/FY23E EPS by ~7% on the back of strong demand outlook, which led to our revenue upgrades. Our margin estimates continue to be in line with the management’s guidance. As Digital turns mainstream, we expect LTI to benefit from continued investments in Digital capabilities, strong client additions, and its mining abilities. This should result in industryleading growth. Our TP of INR6,430/share implies 40x FY23E EPS. We maintain our Neutral rating

Beat across line items

* LTI reported a revenue (USD)/EBIT/adjusted PAT growth of 25.8%/9%/21% YoY v/s our estimate of 22.2%/3%/14%.

* In 1HFY22, USD revenue/INR EBIT/INR PAT grew by 23%/10%/20%.

* Revenue growth of 8.9% QoQ CC was ahead of our estimate (+5.4% QoQ CC). In USD terms, revenue growth stood at 8.3% QoQ.

* Growth was led by Others/Manufacturing/BFS/Hi-Tech (+15%/+12.9%/+10.6%/7.0% QoQ CC), while growth in CPG, Retail, and Pharma was soft (+2.6% QoQ CC).

* In terms of geography, growth was broad based with core geographies – North America and Europe – growing 9.1% and 7.5% QoQ CC.

* LTI added one/three/five new clients in the over USD50m/USD20m/USD10m bracket in 2QFY22. Total active clients increased to 463 (v/s 438 in 1QFY22).

* Growth in 2QFY22 was led by the top 11-20/five accounts, which grew by 11.4%/8.3% QoQ.

* EBIT margin expanded by 80bp QoQ to 17.2% (above our estimate of 16.7%), led by operating leverage and offshoring, but was partially offset by utilization and higher costs.

* Utilizations stabilized at 83.7% (-40bp QoQ), but still continues to be elevated. Offshore revenue mix rose 190bp QoQ to 59.2%.

* PAT increased by 20.8% YoY to INR5.5b, 6% above our estimate, led by strong revenue and better margin.

* Overall DSO (including unbilled) was flat QoQ at 98 days.

* Attrition rose 440bp QoQ to 19.6%.

* Headcount increased by 4,084 to 42,382 in 2QFY22.

* LTI announced a dividend of INR15/share.

Industry-leading growth to defend rich valuations

* LTI’s deep domain capabilities, strong partnerships with hyperscalers, and robust sales engine will continue to drive industry-leading growth rates. We expect ~23% revenue CAGR, in USD terms, over FY21-23E, which is at the top end of our Tier II IT coverage universe.

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

* While we remain confident of the company’s execution capabilities, we remain on the sidelines on the back of a significant valuation re-rating. We value the stock at 40x FY23E EPS to arrive at our TP of INR6,430, We maintain our Neutral rating.

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