Buy LTM Ltd for the Target Rs.5,050 by Motilal Oswal Financial Services Ltd
Growth moderates; margins capped FY27 growth and margins to track FY26 levels
* LTM reported revenue of USD1.2b in 2QFY27, rising 1.1% QoQ in constant currency (CC) vs. our estimate of 0.9% QoQ CC. EBIT margin at 15.6% was largely in line with our estimate of 15.7%. Adj. PAT came in at INR14b, declining 6.0% QoQ but remaining flat YoY and below our estimate of INR15b.
* In INR terms, revenue/EBIT/adj. PAT grew 15.7%/19.1%/8.1% YoY in 1HFY27. In 2HFY27, we expect revenue/EBIT/adj. PAT to grow 9.7%/10.6%/10.9% YoY. We reiterate BUY with a TP of INR5,050 (valuing at 21x FY28E EPS), implying ~15% upside
Our view: Consolidated margin expansion to remain muted
* Revenue growth was relatively soft in 2QFY27, with the Middle East impact expected to weigh on FY27 performance. We do not expect growth acceleration in FY27 and maintain our 5.1% YoY CC growth estimate, as the Middle East business weighed on 2QFY27 QoQ CC growth by ~60–70bp. Excluding this, growth would have been ~1.7–1.8% QoQ CC. However, we believe that the outlook for FY28 remains positive.
* Limited margin expansion: In 1QFY27, management expected continued organic margin expansion, with consolidated margins at FY26 levels or higher. However, in 2QFY27, it adopted a more cautious stance, guiding for FY27 margins to remain closer to the FY26 level of 15.4%, including Randstad, citing acquisition-related amortisation. Traditional-services pricing pressure and an unfavorable revenue mix could further constrain expansion. We lower our FY27 EBIT margin estimate by ~20bp to 15.6%.
* AI-led deals are shorter-tenured and offer faster revenue conversion: TCV stood at USD1.3b, with a significant proportion comprising ACV rather than traditional multi-year TCV. AI-led engagements involve faster revenue realization, given shorter transition periods and quicker deployment. AI revenue increased 40% YoY to 13.4% of revenue in 2QFY27, compared with ~12% in 1QFY27. The gross margin profile of AI projects is higher than that of traditional services. The CBDT engagement contributed to 2QFY27 revenue, with a gradual ramp-up expected as hardware availability has improved.
* Randstad integration remains on track: Approvals for the acquisition of Randstad’s digital businesses in Europe and Australia are expected by the end of 3QFY27, followed by closure and integration. The acquired capabilities are expected to support expansion into newer markets.
* Cash conversion was affected by timing-related outflows: OCF to PAT declined to 39% in 2QFY27 from 79% in 1QFY27, primarily due to gratuity funding against provisions recognized in 3QFY26, advance-tax payments in India and the US, and TDS on the final dividend paid in 1QFY27. Most gratuity funding has been completed, although some outflow may continue in 3QFY27; cash conversion is expected to normalize progressively.
Valuation and changes to our estimates
* We believe LTM’s FY26-28 USD revenue CAGR of ~6% remains ahead of most large-caps peers, despite the Middle East impact. We expect growth and margins to improve in FY28 as deal TCV pivots toward short-term AI deals, which convert into revenue faster and offer higher margins.
* We maintain our EPS estimates for FY28, while lowering FY27 EPS estimates mainly due to continued foreign exchange losses for the next two quarters, which will lead to slight under-delivery of earnings. We value LTM at 21x FY28E EPS (20x earlier) due to better growth and margin outlook for FY28, resulting in a revised TP of INR5,050, implying ~15% upside. We reiterate BUY.
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