Neutral LTIMindtree Ltd For Target Rs.6,600 By - Motilal Oswal Financial Services Ltd
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Disappointing 3Q, weak near-term outlook a drag on FY25 growth
Longer margin recovery cycle leaves little room for upside
* LTIM reported weak revenue growth of 0.7% QoQ/3.1% YoY CC in 3QFY24 vs. our estimate of 1.2% QoQ CC, despite having a meaningful pass-through component in the Manufacturing vertical. The growth was affected by higher-than-expected furloughs and a continued slowdown in discretionary spending. However, deal wins were strong at USD1.5b (up 15% QoQ/20% YoY) and management commentary on the deal pipeline was robust. The management has indicated that 4Q growth will mirror 3Q due to persistent pressure on clients’ spending.
* 3Q EBIT margin declined 60bp QoQ to 15.4%, missing our estimate by 40bp. Profitability was impacted by higher furloughs and pass-through revenues, despite lower workforce (-1.1k). Attrition continued to moderate (14.2% in 3Q), while utilization improved to 87.4%. Notably, the management has stated that its guidance of achieving 17%+ EBIT margin by 4QFY24 would be delayed by a few quarters.
* While the impact of furloughs in 3Q was higher and more widespread, strong deal wins (highest ever) indicate divergence between near-term growth and medium-term growth. While this 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 a sub-10% rate YoY in FY25, resulting in a 9.7% CAGR over FY23-26E.
* Moreover, the decision to delay the 17-18% aspirational band by three to four quarters indicates limited room for further cost optimization and the front-ended impact of a large deal scaling up in the near term. We now expect LTIM to deliver 16.5% EBIT margin in FY25 before crossing the 17% mark in FY26. This should result in a PAT CAGR of 13% over FY23-26E.
* We have lowered our FY24-26 estimates by ~1-9% after cuts in revenue and profitability. LTIM is currently trading at 29x FY26E EPS, which adequately captures growth opportunities ahead. Our TP of INR6,600 implies 30x FY26E EPS. We reiterate our Neutral rating on the stock.
Weak performance, deal flows remain strong
* Revenue stood at USD1.08b, up 0.7% QoQ CC and below our estimate of 1.2% QoQ CC. Reported USD revenue growth was 0.8% QoQ/3.5% YoY.
* The growth was majorly led by Mfg & Resources (+14.3% QoQ), while BFSI (- 1.7% QoQ), Hi-Tech, Media & Ent. (-3.0% QoQ), and Retail (-3.2% QoQ) were weak. Healthcare reported 0.8% QoQ growth.
* EBIT margin at 15.4% contracted 60bp QoQ, below our estimated decline of 20bp QoQ. Employee costs (% of rev) rose 150bp QoQ despite a reduction in headcount, which was partly offset by SG&A absorption.
* Employee metrics: Software headcount down ~1,100 (-1.2% QoQ), utilization up 80bp QoQ at 87.4%, attrition down by 100bp QoQ at 14.2%
* Order inflows were strong at USD1.5b (+15% QoQ/+20% YoY), with BTB of 1.4x.
* PAT came in at INR11.7b, up 0.6% QoQ/8.2% YoY and above our estimate of INR11.5b, aided by higher forex gains and lower ETR.
* For 9MFY24, revenues came in at USD3,218m (+5.6% YoY), while operating margin stood at 16.0% (down 50 YoY). Net Profit reported at INR34.8b (+3.2% YoY)
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 9.7% CAGR in USD revenue over FY23-26.
* Additionally, due to the company’s strategic decision to defer the aspirational margin band, we cut our earnings estimate. We estimate a PAT CAGR of 13% over FY23-26.
* We value the stock at 30x FY26E EPS. The current valuation of 29x FY26E EPS limits any meaningful upside from the CMP. We reiterate our Neutral rating with a TP of INR6,600.
For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
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