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Data modernization to lead the recovery

Strong growth in BFSI and CMT verticals; margins remain a key concern

LTIMindtree (LTIM) reported a strong 1QFY25 revenue growth of 2.6% QoQ/ 3.7% YoY in constant currency (CC) vs. our estimate of ~1% QoQ in CC. In USD terms, revenue came in at USD1.1b (up 2.5% QoQ/3.5% YoY), which was slightly above our estimate of USD1.07b. EBITDA grew 4.6% QoQ but declined 1.8% YoY to INR16.1b (in line with our estimate of INR15.8b). PAT came in at INR11.3b, up 3.1% QoQ/down 1.5% YoY and below our estimate of INR11.6b. Deal wins were slightly subdued at USD1.4b (up 0.7% QoQ).

LTIM's commentary was particularly encouraging

among the companies that have reported so far. Clients are finally resuming the "high-priority transformation" projects, primarily focusing on areas such as data engineering, data estate modernization, and ERP modernization. Following a prolonged period of subdued client activity, this development sets a positive stage for pre-GenAI investments, with promising implications for FY26. Although cost-reduction initiatives remain a top priority, there is now a possibility of reinvesting technology dollars into pre-GenAI expenditures, and LTIM will benefit from this uptick.

We upgrade LTIM to BUY

due to its superior offerings in data engineering and ERP modernization, positioning it well to capture the pre-GenAI expenditures. We anticipate LTIM to outperform its large-cap peers and expect low double-digit CC growth for FY26.

Margins remain a concern, however

and the biggest risk to our thesis. A rerating depends on significant margin recovery, driven primarily by volume recovery, as we do not see a lot of levers apart from revenue growth; any further hiccups in execution could result in downside risks to our estimates.

We broadly maintain our FY25E EPS and raise our FY26E EPS by 2.8%.

also upgrade our target multiple to 35x (this is now at 1STD above LTIM’s fiveyear average). Our revised TP of INR7,000 implies 26% upside potential.

Revenue beats estimates; deal wins slightly subdued

* Revenue stood at USD1.09b, up 2.6% QoQ CC and above our estimate of 1% QoQ CC. Reported USD revenue growth was 2.5% QoQ/3.5% YoY.

* The growth was primarily led by Technology, Media & Comms (+7.9% QoQ), BFSI (2.9% QoQ), while Healthcare & Public Services (-7.9% QoQ), and Retail (-1.4% QoQ) were weak. Manufacturing & Resources grew 1.8% QoQ.

* EBIT margin at 15.0% expanded 30bp QoQ, below our estimate of 90bp sequential expansion.

* Employee metrics: Software headcount rose ~377 (+0.5% QoQ), utilization improved 140bp QoQ to 88.3%, while attrition was stable QoQ at 14.4%.

* Order inflows were steady at USD1.4b, with BTB of 1.3x.

* PAT came in at INR11.3b, up 3.1% QoQ/down 1.5% YoY and below our estimate of INR11.6b.

Key highlights from the management commentary

* LTIM witnessed early signs of clients deploying savings and budgets into high transformation programs and laying the foundation in AI, especially in BFSI and Telecom (LTIM’s largest verticals). Further, the ramp-up of the previously won deals also supported 1QFY25 revenue growth.

* LTIM expects growth momentum to continue in 2QFY25 as deals won in the earlier quarter are ramping up according to the plan. Some verticals, especially BFSI, have high-priority projects kicking in as well, which gives confidence for a strong 2Q.

* In BFSI, key clients are now beginning high-priority projects that were paused last year. Clients are looking to reduce technical debt. The company expects the BFSI vertical to see good momentum throughout the year.

* The company’s EBIT margin stood at 15.0%. The absence of project cancellations and improved operational efficiency provided a tailwind of 100bp, which was partially offset by Visa costs and higher SG&A expenses.

Valuation and view

Upgrade to BUY: We upgrade LTIM to BUY

due to its superior offerings in data engineering and ERP modernization, positioning it well to capture the pre-GenAI expenditures. Further, clients are finally resuming the "high-priority transformation" projects, in these areas. We anticipate LTIM to outperform its large-cap peers and expect low double-digit CC growth for FY26. Margins remain a concern, however, and the biggest risk to our thesis. A re-rating still depends on significant margin recovery, driven primarily by volume recovery.

We expect LTIM to deliver a CAGR of 8.0%/13.4% in USD revenue/INR PAT over FY24-26. We broadly maintain our FY25E EPS and raise our FY26E EPS by 2.8%. We also upgrade our target multiple to 35x (this is now at 1STD above LTIM’s fiveyear average). Our revised TP of INR7,000 implies 26% upside potential.

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