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Weak quarter; near-term outlook remains bleak

Margin recovery to take time; reiterate Neutral

* LTIMindtree (LTIM)’s revenue declined 1.3% QoQ CC in 4QFY24 vs. our estimate of 1.4% QoQ CC growth. The growth was hit by two project cancellations in BFSI as clients reprioritized their spending. However, deal wins were strong at USD1.4b (1.4x Book-to-Bill), and the management commentary on the deal pipeline was robust. Management remained confident of a return to growth path in 1QFY25 aided by deal ramp-ups and referred to 4QFY24 as a one-off quarter.

* LTIM’s 4QFY24 EBIT margin contracted 70bp QoQ to 14.7%, missing our estimate by 110bp. Profitability was hit by 80bp due to project cancellations in BFSI (expected to be reversed in 1QFY25). Attrition remained stable at 14.4%, while utilization declined to 86.9%. Management indicated that utilization should further go down by 50-100bp in FY25, so that it falls within the comfort band of 85-86%. The target margin band of 17-18% would only be achieved once growth returns.

* While the management indicated a return to growth path from 1QFY25, and its commentary is in line with its large-cap peers, LTIM still has to demonstrate growth benefits from the expansion of teams across its strong verticals. We expect the company to grow at 6.1% YoY in FY25 in USD terms, resulting in a 9.7% USD revenue CAGR over FY24-26E.

* Though 1QFY25 should see some margin uptick on account of reversal of one-time impact from project cancellations and operating leverage partly offset by higher visa costs, there is no meaningful upside to margin for FY25 unless growth picks up meaningfully. We now expect LTIM to deliver a 15.9% EBIT margin in FY25 before moving to 16.8% in FY26. This should result in a 13.9% PAT CAGR over FY24-26E, aided by a margin trough in FY24.

* We have reduced our FY25/26 earnings estimates by ~6/9% after cuts in revenue and profitability. LTIM is currently trading at 24x FY26E EPS, which adequately captures the growth opportunities ahead. Our TP of INR5,020 implies 25x FY26E EPS. We reiterate our Neutral rating on the stock.

A broad-based miss!

* LTIM’s revenue decline of 1.3% QoQ CC was a big miss to our estimate of 1.4% QoQ CC growth; reported USD revenue declined 1.3% QoQ/grew 1.1% YoY.

* Technology and Healthcare (+5.1% and +4.5% QoQ) led the growth, while Manufacturing took a major hit (down 9.6% QoQ). NA and Europe were largely flat, while ROW posted double-digit decline (down 10.8% QoQ)

* EBIT margin at 14.7% (-70bp QoQ) missed our estimate of 15.8%.

* Employee metrics: Headcount declined by 821, utilization (ex-trainees) was down 50bp to 86.9%

* Order inflow remained strong at USD1.4b (1.4x BTB; -3% QoQ, +3% YoY) ? PAT came in at INR11b, down 6% QoQ (below our estimates of INR11.9b).

* The Board recommended a final dividend of INR45 per share.

Key highlights from the management commentary

* BFSI – The segment was hit by two project cancellations on account of reprioritization of spending by clients. The focus remains on regulatory and compliance spending. The impact of project cancellations should not be there in 1QFY25. Though the stance remains cautious, given the strong deals wins during the year, management is confident of returning to growth path from 1QFY25.

* Management has indicated that it has a good pipeline of deals, and the majority of them are cost-optimization and efficiency-related deals (80%). In FY24, LTIM has won a good number of larger tenure deals, which will take a few quarters to ramp up. These deals should start ramping up in 1QFY25.

* Management believes that 4QFY24 was a one-off quarter, and it is confident of returning to growth path from 1QFY25.

* The target of achieving 17-18% EBIT margin in the near term is still intact, and should be achieved as growth bounces back.

Valuation and view

* The near-term slowdown in discretionary spending and its meaningful exposure to BFS would have an adverse impact on its growth performance. We expect a 7.9% CAGR in USD revenue over FY23-26.

* Margin recovery is expected to take time. Margins should improve meaningfully only once growth revives. We estimate a PAT CAGR of 9.8% over FY23-26.

* We value the stock at 25x FY26E EPS. The current valuation of 24x FY26E EPS limits any meaningful upside from the CMP. We reiterate our Neutral rating with a TP of INR5,020.

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