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Balancing business mix, Tech overhang persists

LATENTVI returned to sequential growth in Q2FY27, with USD rev. rising 2.0% QoQ and adj. EBITDA margin improving 30bps to 20.7%. Growth was led by Industrials (+21.4% QoQ), driven by expansion in automotive and auto-component clients. FS and CPG & Retail grew 3.5% and 2.7%, respectively, while Tech segment (55% of rev.) remained subdued, declining 0.3% QoQ amid client consolidation and budget rationalization. Although management believes Tech segment is nearing the bottom, but the renewal cycle remains a key monitorable for near term recovery. Margin expansion was supported by GTM and marketing cost rationalization, which more than offset the impact of higher bench and wage costs. Management reiterated its 21–22% medium-term margin aspiration while continuing to invest in AI and Databricks capabilities. Near-term growth visibility remains modest, with FY27E revenue visibility of ~USD127mn, of which ~USD125mn is backed by signed business and the balance dependent on pipeline conversion. Over the medium term, management retains its USD200mn revenue aspiration by CY28-end (postponed by 9 months), to be supported by deeper account mining, new client additions, partnerships and acquisitions. However, considering the weakness in key Hi-Tech segment due to anticipated budgetary pressure and consolidations, we cut our FY27E/FY28E USD rev. growth est. by 140bps/150bps to 5.6%/12.4%, respectively, while maintaining FY29E growth at 13.2%. On the margins front, we maintain our FY27E adj. EBITDA margin est. at 21.5%, while trimming our FY28E & FY29E est. by 10bps & 40bps respectively. We value the stock at a PE of 21x (earlier 22x) of Sept. 2028 earnings to arrive at TP of INR 270 (earlier INR 320). Inexpensive valuations and cash-rich (~30% of MCap) balance sheet limit downside, maintain BUY.

Revenue: Rev. in Q2 came in at USD 30.9 mn, up 2.0% QoQ, slightly below our est. of USD 31 mn. Segment wise, Industrial, FS and Retail segments grew by 21.4%, 3.5% & 2.7% QoQ respectively. Tech segment remained impacted by client specific headwinds and declined by 0.3% QoQ. Geography wise, USA grew by 0.8% QoQ while Europe & RoW grew by 2% & 14.7% QoQ on a low base.

Operating Margin: EBITDA margin of 20.7%, up 30 bps QoQ came below our est. of 21.2% due to wage hikes implementation impact (-190 bps) and higher employee bench for projects ramp up anticipation (-40 bps), partially offset by GTM costs rationalisation (+120 bps) and lower marketing costs (+110 bps). Management expects to maintain EBITDA margin band of 21-22% in the medium term considering the impact of continued investment in AI capabilities and senior leadership.

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