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A dose of cautious optimism

Management remains guarded despite strong numbers

* LTIMindtree (LTIM) delivered a revenue growth of 2.3% QoQ/ 4.4% YoY in constant currency (CC) terms vs. our estimate of 3.0% QoQ in CC. In USD terms, revenue came in at USD1.1b (up 2.8% QoQ/4.8% YoY), which was slightly below our estimate. EBIT grew 6.4% QoQ/2.5% YoY to INR14.5b (below our estimate of INR14.9b). PAT stood at INR12.5b, up 10.3% QoQ/7.7% YoY and largely in line with our estimate of INR12.4b. For 1HFY25, revenue/PAT grew 5.5%/3.1% compared to 1HFY24, while EBIT declined 1.6% in 1HFY25

Our view: LTIM a key beneficiary of ERP and data-led recovery

* Growth was broad-based across verticals. In addition, a USD200m+ deal win in manufacturing, which ramps up in 3Q, should protect downside from furloughs.

* Despite the large deal wins, a strong deal pipeline, and healthy TCV, the commentary from LTIM was surprisingly cautious and indicated a slower pick up in discretionary spending.

* Nevertheless, we believe that ERP and data are leading the client transformation priorities right now, and LTIM should benefit the most from this.

* Margins: Concern around margins is a key downside risk for the stock; 2QFY25 saw a modest margin expansion of 50bp over a muted 1Q. 2HFY25 will face margin headwinds such as wage hikes, large deal ramp ups, and hiring.

* The management is at least 200bp above its comfortable utilization range, and while 2Q (net headcount growth of 3%) was a step in the right direction, we expect hiring to put pressure on margins going forward.

* SG&A is a key margin and gives us comfort; however, SG&A remains ~130- 150bp above the pre-Covid levels. However, continued recovery in revenue should lead to some operating leverage, more than offsetting the pressures mentioned above

Valuation and change in 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. We anticipate LTIM to outperform its large-cap peers and expect a low double-digit CC growth for FY26. However, margins remain a concern and the biggest risk to our thesis.

* Our estimates are largely unchanged; FY25/FY26e EPS estimates are revised down by a minimal 1% owing to margin pressures. We value LTIM at 35x Sep’26E EPS. Our revised TP of INR7,400 implies 15% upside potential.

Miss on revenue and margins; broad-based growth across verticals except manufacturing

* Revenue stood at USD1.1b, up 2.3% QoQ CC and below our estimate of 3.0% QoQ CC. Reported USD revenue growth was 2.8% QoQ/4.7% YoY.

* The growth was primarily fueled by Healthcare & Public Services (5.9% QoQ), followed by BFSI (4% QoQ), Technology, Media & Comms (1.9% QoQ), and Retail (2.6% QoQ). Manufacturing & Resources was muted for the quarter.

* EBIT margin at 15.5% expanded 50bp QoQ, below our estimate of 80bp sequential expansion.

* Employee metrics: Software headcount rose ~2537 (3.3% QoQ), utilization declined 60bp QoQ to 87.7%, while attrition was stable QoQ at 14.5%.

* PAT came in at INR12.5b, up 10.3% QoQ/7.7% YoY and largely in-line with our estimate of INR12.4b.

* The company declared a dividend of INR20 per share

Key highlights from the management commentary

* LTIM witnessed continued deal momentum in key verticals; cautiously optimistic about maintaining momentum in 3Q. Key focus on transformation and efficiency deals. It closed a few cost-takeout deals. Playing on both sides—transformation and cost takeout are important pivots.

* 2H should see a ramp-up of deals closed in 1HFY25, barring seasonal impacts.

* Cautious on discretionary spend. Once the U.S. elections are over, there may be some client initiatives regarding discretionary spending. However, currently, aside from AI-related investments, where LTIM is actively participating, there are no significant discretionary spend areas.

* Key projects: 1) efficiency and cost-takeout programs; 2) new applications (revenue-facing, front-end) – considered pure discretionary spending; and 3) regulatory compliance deals.

* Post-US elections, more clarity on discretionary spending is expected.

* GCCs have been a key focus for several years. The company must coexist with GCCs and serve clients that have them.

* The target margin of 17-18% has been extended due to external challenges. The current focus is on maintaining margins while waiting for growth to return

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.

* Our estimates are broadly unchanged; we trim our FY25/FY26 EPS estimates by a minimal 1% owing to margin pressures. We value LTIM at 35x Sep’26E EPS. Our revised TP of INR7,400 implies 15% upside potential.

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