We initiate coverage on L&T Infotech (LTI) with a buy rating and target price of R800, valuing the company at 12X FY2019E earnings. LTI’s business model is designed for scale with solid presence in scale verticals of banking, insurance and manufacturing, large account management capabilities and excellent client base. The company is building automation and digital capabilities, an important growth driver. Key risks: adverse H-1B visa regulations, high client concentration and tilt of portfolio towards legacy services.
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LTI has many attributes of scale strong account management despite modest size. The company manages four relationships of over $50 million including one account above $100 million in size, breadth of capabilities. This shows in diversified base of service offerings, acceptance of which is visible from the size of large accounts, and strong client base. LTI works with 51 F-500 clients. Deepening of relationships with large clients, benefits of improvement in the front-end sales and digital 28% of revenues growing at about 20% y-o-y will be key growth drivers.
We expect stable margins over the next three years; investments in digital and pricing pressure can be managed through SG&A efficiency and use of traditional levers such as utilisation and role ratios account. We expect earnings CAGR of 11% over FY2016-19E.