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Key beneficiary of the US banking recovery

But margins remain a key concern We upgraded LTIMindtree (LTIM) to BUY on 18th July, 2024, following its 1QFY25 Results. The nascent recovery in the US BFSI was a key consideration, but our decision was also driven by LTIM's superior offerings in data engineering and ERP modernization, along with its strong ecosystem partnerships. These factors position the company well for clients’ next-gen and pre-GenAI spending. Since the upgrade, the stock has outperformed both the Nifty 50 index and Nifty IT index (LTIM gained 11.0% vs. ~2.5% for Nifty 50 and ~5.0% for Nifty IT). Going forward, we believe that the US BFS recovery will remain a key monitorable, with clients resuming ‘high-priority’ projects in this vertical (BFSI accounts for ~35% of the revenue). This, coupled with the resumption of ERP modernization projects, could catapult revenues higher for LTIM. However, the margin expansion and churn at the top-level management remain key concerns to our thesis. We value LTIM at 35x Sep’26E EPS. We reiterate BUY with a TP of INR7,400, implying a 16% upside potential.

Leveraging strengths to stay ahead of the next-gen technology curve

LTIM’s strong offerings in areas such as data engineering, data estate modernization, and ERP modernization position it well for the next technology up-cycle. The company is capitalizing on these strengths to maintain a leading position in next-gen technology advancements. Following a prolonged period of subdued client activity, this development sets a positive trend for pre-GenAI investments. We believe that the successful adoption of GenAI will largely hinge on clients' preparedness in cloud and data infrastructure, suggesting that the initial investments will be centered on data, cloud, and digital infrastructure, and LTIM is well-placed to leverage this emerging opportunity.

Early signs of growth in key verticals

* In 1QFY25, LTIM experienced greenshoots in some client pockets, deploying savings and budgets to high transformation programs, especially in BFSI (LTIM’s largest vertical). In our view, this bodes well for LTIM.

* In 1QFY25, the BFSI vertical (contributes 35% of revenue) returned to 2.8% QoQ growth after four consecutive quarters of decline, whereas the Hi-tech & Telecom vertical (contributes 25% of revenue) grew 8.0% QoQ.

* Growth momentum could sustain going forward as deals won in previous quarters are ramping up according to the plan.

* The company is also experiencing renewed traction in short-cycle deals. Additionally, transformation projects that were delayed or paused last year are now being resumed.

Sustained growth in manufacturing to continue

* The Manufacturing & Resources vertical (contributes 18.5% of revenue) grew 1.8%/10.5% on a QoQ/YoY basis, driven by a focus on ERP transformation, data modernization, and Industry 4.0.

* The company is seeing good momentum in manufacturing. Going forward, we believe that this momentum is likely to sustain as a rate cut cycle to further spur investments in technology.

Margins remain a key monitorable and the biggest risk to our thesis

* Margins remain a concern and the biggest risk to our thesis. It is apparent that post-merger synergies have not been realized to the extent previously anticipated, and a challenging demand environment has made it tougher to improve margins.

* LTIM’s re-rating depends on significant margin recovery, driven primarily by volume recovery, as we do not see many levers apart from the revenue growth. Any further hiccups in execution could result in downside risks to our estimates.

* We believe that the utilization levels are too high (~87%) and in the event of an outsized growth recovery, LTIM would need to hire so as to effectively execute. Headcount addition has been meek in the past four quarters and ramping up hiring could lead to margin pressures.

* While we anticipate some operating leverage from revenue recovery, there is downside risks to our numbers.

Top-level attrition continues to pose a risk

* As shown in Exhibit 1, the merger has resulted in numerous top-level exits, leading to a high attrition rate among the senior management. We believe that integration challenges at LTIM could have been better managed. However, we believe that the worst is behind and the top-level management churn is likely to remain benign going forward.

IMPACT Framework

* LTIM has emerged as one of the top performers in our IMPACT evaluation framework with a total score of 24. Its top-tier ecosystem partnerships and excellent technology readiness position it well for next-gen and pre-GenAI expenditures. The company balances top client relationships with effective new client acquisitions.

* Industry Exposure (5/5): Clients in banking, financial services, and insurance are starting to invest in high-priority transformation projects once again. Moreover, we view exposure to manufacturing and energy as a positive factor.

* Margin Expansion Scope (1/5): Margin performance remains a key concern for LTIM. It is apparent that the post-merger synergies have not been realized to the extent previously expected, and a challenging demand environment has made it tough to improve margins.

* Partnerships (5/5): The company has top-tier ecosystem partnerships, particularly in niche areas such as Snowflake, Databricks, Google Cloud, and Azure.

* Automation Threat (5/5): Its portfolio comprises top-tier modernization offerings and very little legacy burden.

* Client Strategies (3/5): LTIM needs to acquire more clients in the USD100m+ range at its scale.

* Technology Readiness (5/5): LTIM would be the key beneficiary of nextgen/pre-GenAI spending owing to its superior next-gen readiness.

Valuations and View

* We reiterate our BUY rating on LTIM due to its superior offerings in data engineering and ERP modernization, positioning it well to capture pre-GenAI expenditures. Further, clients are resuming ‘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/FY27. However, margins remain a concern and headwind to our thesis.

* We expect LTIM to clock a CAGR of ~10.0%/13.7% in USD revenue/INR PAT over FY24-27E. We value LTIM at 35x Sep’26E EPS. Our TP of INR7,400 implies a 16% upside potential..

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