Buy LTIMindtree Ltd For Target Rs.7,700 by Motilal Oswal Financial Services Ltd
A robust quarter
Productivity pass-back in top hi-tech client key reason for a cautious tone
LTIMindtree (LTIM) delivered revenue growth of 1.8% QoQ/5.6% YoY in constant currency (CC) terms vs. our estimate of +1.5% QoQ in CC. In USD terms, revenue came in at USD1.1b (up 1.1% QoQ/5.1% YoY). EBIT margin at 13.8% beat our estimate of 13.4%. PAT stood at INR10.8b, down 13.2% QoQ/7.1% YoY and largely in line with our estimate of INR11b. For 9MFY25, revenue grew 6.1% compared to 9MFY24, while EBIT/PAT declined 2.4%/0.3% in 9MFY25. We expect revenue/EBIT/PAT to grow 12.0%/11.8%/ 12.0% in 4QFY25 YoY. We value LTIM at 35x FY27E EPS. Our revised TP of INR7,700 implies a 29% upside potential.
Our view: Cautiously optimistic as headwinds from the top client remain
* Good growth and deal wins, but cautious optimism led by productivity pass-back in a top client: LTIM's 3Q CC growth of 1.8% was largely in line; US BFS was strong as expected, whereas manufacturing (excluding pass-through revenue as well) was healthy too. We expect retail to recover in line with the industry in the short to medium term, but productivity pass-back in a top client could lead to another quarter of weakness in the Hi-tech vertical.
* Deal wins still not reflecting discretionary tilt, but double-digit growth in FY26E possible: LTIM's business has historically been tilted toward discretionary spending; however, we were surprised by a lack of discretionary deal wins in the quarter despite a 30% QoQ increase in TCV. That said, we expect a recovery in discretionary spending and anticipate LTIM to deliver double-digit growth in FY26.
* Productivity pass-back in a top Hi-tech account to spill over to 4Q: Management indicated that the Hi-tech vertical's decline of 6% would drag on to 4Q. Positively, the "AI-driven" productivity gain is being generated internally and then passed on, mitigating the adverse impact on margins. While 4Q is certainly a headwind, we believe Hi-tech growth could recover in FY26.
* The worst for margins could be behind: Margins were a key concern for LTIM going into this quarter, and we believe the worst for margins may now be behind. A meaningful recovery in FY26 is contingent on double-digit growth (which remains our base case); however, we believe utilization levels are now comfortable, and major stressors for margins are behind.
* LTIM remains our top idea for CY25 (LTIM: Asymmetric risk-reward potential), backed by its significant exposure to BFSI and Hi-tech verticals— both projected to rebound strongly over the next 12-18 months. The company’s capabilities in data, ERP, and application modernization further underpin its ability to seize incremental demand in these segments. Despite current uncertainties around management succession and near-term margin headwinds, we anticipate meaningful margin recovery by FY27 and leadership clarity by 1HCY25.
Valuation and changes to our estimates
* 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. Our estimates are largely unchanged. We value LTIM at 35x FY27E EPS. Our revised TP of INR7,700 implies a 29% upside potential.
Beat on revenue (in line with consensus) and margins; TCV up 30% QoQ
* Revenue stood at USD1.1b, up 1.8% QoQ CC above our estimate of 1.5% QoQ CC (in line with consensus). Reported USD revenue growth was 1.1% QoQ/5.1% YoY.
* Order inflows stood at USD1.68b up ~30% sequentially.
* The growth was primarily fueled by Manufacturing & Resources (up 8.1% QoQ) & BFSI (up 3.4% QoQ). Hi-Tech declined 5.8% QoQ, while Retail and Life-sciences & Healthcare were flat.
* EBIT margin at 13.8% beating our estimate of 13.4%.
* Employee metrics: Software headcount rose ~2,267 (2.8% QoQ), utilization declined 230bp QoQ to 85.4%, while attrition was down 20bp QoQ at 14.3%.
* PAT came in at INR10.8b, down 13% QoQ/7% YoY and largely in line with our estimate of INR11b. PAT miss was owing to lower forex revenue and other income, as well as higher ETR.
Key highlights from the management commentary
* Growth momentum continued in 3Q, building on trends from the last few quarters, and the momentum is expected to persist into 4Q. The company recorded YoY growth across all verticals, with notable traction in BFSI.
* There has been a promising increase in deal activity, driven by a client focus on cost reduction and vendor consolidation.
* FY26 is projected to be better than FY25. Clients are in the process of finalizing their budgets for CY25.
* Revenue growth in the short term is expected to be driven by deal ramp-ups and the reversal of furloughs.
* New client logos were added in manufacturing, along with two significant deals in the BFSI vertical. There are specific short-cycle deals, such as regulatory deals in BFS, alongside some discretionary spending in this vertical.
* EBIT stood at 13.8%, a decline of 170bp QoQ, primarily due to a 220bp impact from wage hikes effective from 1 st Oct’24. This impact was partially offset by 50bp from operational efficiencies, despite challenges posed by furloughs. The absorption of wage hikes may take 2-3 more quarters in the current environment.
Valuation 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. 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.
* We value LTIM at 35x FY27E EPS. Our revised TP of INR7,700 implies a 29% upside potential.
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