Seasonal gains, deal pipeline point to strong FY23 for L&T Infotech

Near-term gains for India's sixth largest IT services company factored into valuations

The September quarter results of Larsen & Toubro Infotech (LTI), India's sixth-largest information technology services company, were better than street estimates, barring the slip in margin performance. Macro challenges were expected to impact the sector, but the same were not reflected in LTI’s show and it reported growth across verticals and geographies.

Sequential revenue growth at 4.6 per cent was led by the larger verticals of banking and financial services and insurance, which were up 4.5-5 per cent each. The two verticals together accounted for about 48 per cent of overall revenues. Energy and utilities was the best performer in the quarter with a 14 per cent growth. Technology, media and entertainment was the only vertical to witness a sequential decline (down 4.7 per cent), as a large client shifted to a global delivery structure (onsite to offshore).

Despite macro challenges, the company is confident of maintaining its performance by delivering industry-leading growth in FY23. What should help the company post higher growth in the second half of FY23 are large deal intake, a healthy pipeline and client mining. The company won four large deals in high technology, insurance, manufacturing and services with total contract value at $80 million though this is lower than the pre-pandemic range. The overall pipeline remains healthy at $2 billion. Given the guidance of a strong December quarter, good deal win traction and strong pipeline, most brokerages peg the dollar revenue growth 12-16 per cent over FY23 and FY24.

Mukul Garg and Raj Prakash Bhanushali, analysts at Motilal Oswal Research, say there is some caution among clients in manufacturing and the macro environment remains challenging, but it has not started impacting the deal pipeline and technology budgets remain intact.

Kotak Institutional Equities, too, believes the shift to cost focus by clients will lead to lower discretionary spending and impact growth of mid-tier companies, including LTI. Kawaljeet Saluja and Sathishkumar S, who work with the brokerage, however, add that there would be opportunities for growth even in a slowdown on the back of strength in core modernisation and strong execution.

While revenue growth and order pipeline are strong, LTI’s margin performance missed estimates. While operating profit margins (Ebit) was higher by 10 basis points sequentially to 16.1 per cent, it was lower than consensus estimates that had pegged the same at 16.4 per cent due to higher depreciation. What should help Ebit margins in the second half of FY23 are lower attrition, lower average premium for laterals, improved utilisation and pyramid structure.

Motilal Oswal Research has a 'neutral' rating on the stock as its target price of Rs 4,720 (at 25 times FY24 earnings estimates) offers limited upside. The LTI stock is trading at Rs 4,721.80 a share. Kotak Institutional Equities has a 'reduce' rating given that the stock is trading at full valuations.

Most brokerages are positive on the long-term prospects of the combined LTI-Mindtree entity which offers multiple benefits.