Kotak Institutional upgrades LTIMindtree, ups target price; stock gains 4%

LTIMindtree in focus: Domestic brokerage Kotak Institutional Equities has upgraded information technology major LTIMindtree (LTIM) to ‘Add’ from ‘Reduce’ as analysts expect the company to bounce back from the trough of FY24 in the next couple of years.

“We believe that LTIM is on the path to a healthy recovery in revenue growth in the next couple of years from the trough of FY24, aided by a recovery in spending sentiments in the BFS vertical. We increase FY2025-27E dollar revenue by 0.5-1 per cent, leading to a similar increase in earnings per share (EPS) estimates. We value the stock at 28x September 2026E earnings (26x earlier), resulting in a Fair Value (FV) of Rs 6,200 (Rs 5,500 earlier). We expect LTIM to be a good compounding play with a strong and consistent EPS growth trajectory. Upgrade to ‘Add’ from ‘Reduce’.”

Meanwhile, LTIMindtree stock was buzzing in trade on the bourses. The stock rallied as much as 3.61 per cent to hit an intraday high of Rs 5,957 per share. In the past three months, the stock has zoomed 17.70 per cent.

Key drivers behind the LTIMindtree upgrade:

Anticipated recovery in key segments
 

Analysts project that dollar revenue growth for LTIM will increase to 6.5 per cent in FY25 and accelerate further to 11 per cent in FY26, up from 4.4 per cent in FY24. This growth is expected to stem from a recovery in major verticals like BFSI and hi-tech. 

Kotak Institutional Equities suggests that LTIM stands to benefit considerably from this recovery, particularly in the US market, where increased tech spending is anticipated. 

LTIM’s presence in rapidly improving areas such as capital markets, risk and compliance, and core modernisation positions it well. Additionally, LTIM is likely to gain from consolidation deals within the banking sector, including partnerships with clients like ABSA. While there are challenges in the retail and manufacturing sectors, these are expected to be manageable, analysts opined.

Expect consistent strong growth 
 

LTIM is known for its high-quality, scalable client base across various verticals. The company’s expertise in cloud computing, modern ERP, data analytics, AI, industry-specific solutions, SaaS implementation, and IT operations, analysts said, allows it to capture a broad market within clients’ IT budgets. 

The absence of a BPO segment, which is vulnerable to disruptions from generative AI, analysts believe, could be advantageous. LTIM’s position as a strong challenger vendor benefits from the increasing acceptance of niche and challenger vendors by enterprises.

Senior management attrition slows slightly
 

Leadership departures have eased slightly over the past 3-4 months following a spike in exits earlier this year. While analysts anticipate greater stability, departures remain a possibility due to high demand for senior talent. 

Notably, the head of delivery for India, APJ, and the Middle East left the company in August. 

Thus, analysts opined, maintaining a stable leadership team is essential for achieving the merger’s revenue synergy goals, though the current team still comprises many capable individuals who can drive growth.

Limited scope for Ebit margin expansion in FY25
 

However, analysts caution that earnings before interest, taxes (Ebit) margins may face pressure due to the upfront costs associated with large deals and investments. With the current utilisation rate at 88.3 per cent, above the management’s preferred range of 85-86 per cent, margin expansion could be constrained. 

Kotak Institutional Equities forecasts Ebit margins of 15.4 per cent in FY25 and 16 per cent in FY26. Although revenue growth is expected to help offset margin pressures, analysts said, the potential for margin improvement is already included in the estimates. The company’s deferred annual wage hike to Q3FY25 is also a factor to consider, they added.