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Larsen & Toubro Infotech (LTI) disappointed with a weak set of Q4FY22 earnings on various fronts. Revenues were way below our estimate at US$570mn (+3.6% QoQ CC vs Isec. est. of +5.3% QoQ CC). We would like to highlight that in LTI also (like Infy and TCS), we have seen softening of BFS growth – just 2.8% QoQ vs avg. of 10% in last 3 quarters. For LTI, H1 is seasonally weak and we expect more moderation of BFS growth ahead. Even Top-5 client growth was at a six-quarter low at ~3% QoQ (avg. of 6% in last four quarters). BFS revenue growth always moves in tandem with overall revenue growth of LTI (Chart 1).

US posted soft growth of 2.5% QoQ but Europe continued to grow at 5.8% QoQ. Though management guided for strong demand momentum in Europe and hasn’t seen any impact on client conversations, we believe uncertainty, rising cost and wage inflation may delay client budget decisions which may soften growth momentum in Europe (Link).

Even gross margin for FY22 stands at 31% vs average of 34% from FY16-20 vs MTCL ending FY22 at 40% – a staggering difference. EBIT margins came in at 17.3%, - 60bps QoQ, largely in line with our estimates (Isec: 17.4%). LTM attrition further increased to 24% (+150bps QoQ). Onsite volume growth was flat at -0.4% QoQ and management mentioned this will stabilise in H2FY23. Further, LTI has rolled out salary hikes effective from 1st April which is expected to have ~290bps impact in Q1FY23 and most tailwinds (cost savings, pyramid optimisations) will be backended, according to us. We believe margin pressure will likely remain elevated on account of higher demand fulfilment costs, rising cost/wage inflation and attrition. We forecast EBIT margin of 16.8%/18% for FY23/24.

LTI has impressed with strong growth and rebound in large deal wins in FY22. Our view on the business is unchanged and the company is well positioned to gain market share with its strong business model but valuations of 38x/31x on FY23/24 EPS look expensive to us in the current macro environment and given likely slowdown in revenue/earnings momentum ahead. We were below consensus estimates by ~6% for FY23/24 earlier. However, now due to a cut in our revenue/margin estimates, our EPS cuts stand at 5%/4% for FY23/24, respectively, and we believe for consensus it could be much higher. We are estimating revenue growth of 19%16% with EPS of Rs143/178 for FY23/24, respectively. LTI trades at an expensive valuation of 38x/31x for FY23E/24E; we downgrade to REDUCE from Hold. We value LTI at 28x (vs 32x earlier) on FY24E EPS of Rs178 to arrive at a TP of Rs4,986 (prior: Rs5,921)

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