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Ample opportunities in BFSI space; Q3 to be a seasonally dull quarter

LTIMindtree Ltd. reported decent Q2FY25 revenues at $1,126.6mn, +2.3% QoQ/+4.4% YoY in cc terms (+2.8% QoQ and +4.8% YoY in USD terms) driven by broad-based sequential growth across all verticals and geographies. INR revenue stood at INR94.3bn, up 3.2% QoQ and 5.9% YoY. Q2FY25 Order book TCV stood strong at $1.3bn. PAT for the quarter came in at INR12.5bn (+7.7% YoY) while EPS stood at INR42.3. OCF to PAT was 74.3% while FCF to PAT was 54.5% in Q2.

* Q2 growth was primarily driven by the BFSI vertical, which achieved a sequential growth of 3.9%. Banks are focusing on growth and restructuring, and the strong relationships and proven execution track record have helped it gain market share in this sector. Company has a robust pipeline of large-scale opportunities in BFSI, with several deals nearing completion. More clients in this vertical are preparing their data for AI implementation. While cost optimization remains a key priority for hardware and software vendors, there’s an increasing emphasis on integrating AI and GenAI into products to enhance customer experiences. This trend is expected to accelerate as the market matures. Company is also witnessing ongoing traction in ERP solutions and capturing market share through vendor consolidation, aligned with its "AI in everything" strategy. Looking ahead to Q3, we remain cautiously optimistic about maintaining this momentum. However, historical trends indicate that Q3 often experiences seasonal headwinds, including furloughs and fewer billing days, which may temper growth. Despite these challenges, the broader macro environment remains stable, and businesses continue to adopt agile strategies to navigate economic conditions effectively.

* In a challenging macro environment, there is a pressing need for a significant pivot toward AI. To thrive in this AI-driven landscape, LTIMindtree must adopt a comprehensive AI-first approach, which is crucial for navigating these disruptive times. The company has outlined its AI strategy, centered on three core principles: integrating AI into everything, fostering an ecosystem that supports scalable AI innovation, and democratizing AI to benefit all stakeholders. Management is already witnessing positive results from this strategy, evident in the value delivered to customers and the impact on its GenAI initiatives. The "AI in everything" approach is enhancing success across service lines and industry verticals, enabling the company to secure deals by leveraging GenAI capabilities. This commitment to an AI-centric model positions LTIMindtree for continued success and growth, ensuring it remains competitive in an evolving business landscape.

* The operating margins for Q2 came at 15.5%, up 46bps QoQ mainly on account of absence of visa costs. Margin improvement levers are identified as growth, pyramid rationalisation and reduction in discretionary spends. Q3 margins are expected to remain under pressure due to annual wage hikes for all employees. The aspirational band is maintained at 17-18%.

* Valuation: The sustained deal momentum in key verticals, along with significant Q2 hiring including freshers strategically positions the company for success in the latter half of the fiscal year. The robust data practice, coupled with the innovative LTIMindtree AI platform, positions it as a major disruptor in the industry. We have introduced FY27E and expect Revenue/EBIT/PAT to grow at a CAGR of 9.2%/11.3%/12.0% respectively over FY24- FY27E. We maintain our REDUCE rating to arrive at a revised target price of INR6,642 implying a PE of 32.5x (modified) on Sep- FY27E EPS of INR204.

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