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Deal wins should support strong growth in 2HFY24

Margin recovery to support earnings; reiterate Neutral on fair valuation

* LTIM posted a revenue growth of 1.7% QoQ/4.4% YoY CC in 2QFY24 vs. our estimate of 1.4% QoQ CC. Deal wins were modest at USD1.3b (up 20% YoY). Despite wage hikes, the EBIT margin stood at 16.0%, surpassing our estimates by 30bp.

* Despite the persistent weakness in the macro environment and cautious client sentiment, the management expressed confidence in strong growth in 2HFY24. This optimism is fueled by the ramp-ups in deals secured in 1HFY24, despite higher than usual furloughs in 3QFY24. Additionally, the company benefits from a strong pipeline of upcoming opportunities. The management also suggested that deal signing activity is showing good momentum in 3QFY24. The management commentary mirrored that of its peers, acknowledging the challenging macro environment, cuts in discretionary spending and strong deal wins aided by shift in new wins towards costoptimization initiatives. The management expects growth to be broad based in 2HFY24.

* Despite a weak 1HFY24, we estimate FY24 USD CC revenue growth for LTIM at 6.9% YoY on account of stronger 2HFY24. We continue to see LTIM as well placed to gain from a healthy mix of cost-takeout deals and transformation spending. We expect a strong recovery in FY25, with a USD revenue CAGR of 11% over FY23-25E despite a weak macro environment.

* Despite wage hikes, LTIM delivered good margin performance with lowerthan-expected sequential dip in margin (70bp vs 100bp expected) on account of higher utilization and operational efficiencies. The management remained confident about 17-18% exit EBIT margin for FY24. We expect the company to deliver FY24/FY25 EBIT margin at 16.7/18.1%. This should help LTIM clock a PAT CAGR of 16% over FY23-25E.

* We have tweaked our FY24/25 estimates by ~2% to account for better margins. LTIM is currently trading at 25x FY25 EPS, which adequately captures the growth opportunities ahead. Our TP of INR5,350 implies 26x FY25E EPS. We reiterate our Neutral rating on the stock.

Good overall Q2 performance

* CC revenue was up 1.7% QoQ and 4.4% YoY, INR EBIT down 1.1% YoY, and INR PAT was down 2.2% YoY in 2QFY24.

* The performance was led by the Manufacturing segment (up 5.2% QoQ) while BFSI remained weak (down 1.1%)

* EBIT margin stood at 16.0% (down 70bp QoQ) was tad above MOFSLe of 100 bp QoQ decline.

* Order inflow stood at USD 1.3b (down 8% QoQ/up 20% YoY) vs USD 1.41b in Q1.

* PAT came in at INR 11.6b, up 1% QoQ and above our estimates due to better margins and lower ETR.

* Free cash flow stood at INR8.7b, translating to 75% of net income.

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