Analyst Corner: LTI Deal win momentum remains strong; TP at Rs 2,100

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Published: December 1, 2018 3:47:33 AM

L&T InfoTech’s Q2FY19 revenues came in below street expectation with constant currency growth of 3.5% and reported revenues of 2.7% (versus street expectation of 4.0% in cc terms).

LTI Deal win momentum remains strong; TP at Rs 2,100

L&T InfoTech’s Q2FY19 revenues came in below street expectation with constant currency growth of 3.5% and reported revenues of 2.7% (versus street expectation of 4.0% in cc terms). Weak banking vertical revenues (down 0.9% q/q) were a drag on revenue growth, albeit this has come after 4 consecutive quarters of strong growth in banking.  However, management said banking vertical will pick up in coming quarters. For FY19/20 revenue growth visibility remains strong as the company sees expansion of tech spending in the sector across multiple areas. Deal win momentum remains strong with LTI winning total contract value (TCV) in excess of $50 m for third consecutive quarter.

In terms of margins, Q2 margins were better than expectations, improving by 130bps q/q and by 450bps y/y to 19.0%. LTI reported dollar revenues of $328.5 m, up 2.7% q-o-q in dollar terms, and up 3.5% q-o-q in cc terms (versus street estimate of 4.0% q-o-q). On y-o-y basis, growth improved to 22.9% in cc organic terms. In terms of geography, growth was led by North America and ROW up 3.9% and 3.3%.

Europe underperformed declining by 1.5% in dollar terms, partially hit by cross currency impact. In terms of vertical performance, banking, insurance and manufacturing lagged behind, while energy & utilities (up 8.4% q-o-q) and CPG, retail & pharma (up 15% q-o-q) saw strong growth in Q2. Digital revenues were up 12% q-o-q and now contribute 37% of total revenues. Headcount growth was strong, up 5% q-o-q. Attrition (LTM) increase for the fourth consecutive quarter to 15.3%. Operating cash flow improved as DSO (including unbilled revenues) was down to 108 days from 113days in Q1.

We value the company at an unchanged 25x 12-month forward earnings, which is in line with our target multiple for Mindtree. Our target price of Rs 2,100 implies upside of 26.6% upside from the current share price. We continue to see L&T as one of the best managed mid-cap companies in our coverage universe in India. We estimate that LTI will post a dollar revenue CAGR of 17%/14% in FY19/20e.

HSBC Global Research

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