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Analyst Corner: ‘Reduce’ on L&T Infotech with fair value of Rs 4,150

Retain ‘reduce’: LTI is among better placed mid-tier IT companies heading into a possible slowdown/recessionary scenario.

Analyst Corner: ‘Reduce’ on L&T Infotech with fair value of Rs 4,150

BFSI led growth in a seasonally weak quarter: L&T Infotech (LTI)’s sequential revenue growth of 2.9% in constant currency (c/c) was marginally lower than our estimate. Growth was led by the financial services vertical. On expected lines, gross margins hit an all-time low. Deal wins were steady, while management guided for strong second quarter. LTI is better positioned than peers to gain wallet share courtesy strength in core modernization and digital capabilities. Stock at 24X FY2024E trades at full valuations.

Sharp margin contraction due to wage hikes and cost inflation: LTI reported a 1.7% quarter-on-quarter growth to $580 million. Constant currency growth of 2.9% was marginally lower than our estimate. YoY growth in c/c was 26.6%. The revenue growth was reasonable in developed markets and led by the banking vertical, which grew 7.9%. Gross margin declined to an all-time low of 29.1%. EBIT margin contracted 130 bps QoQ and 40 bps YoY owing to headwinds from wage hikes (300 bps) and higher travel and visa costs (70 bps), partially offset by 240 bps tailwind from both rupee depreciation and operational efficiencies.

H1 to pan out in reasonable fashion: FY2024 Revenue growth in 2QFY23 will be strong, per management. While we expect strong growth in FY2023E (19%), we forecast moderation in FY2024E. Management indicated that BFSI spends are expected to remain healthy. Strength in core modernization, quality F-500 client base and ability to win large deals with proposition of efficiency and transformation in IT operations can lessen impact of global slowdown/recession. We factor in 10.5% revenue growth in FY2024 and 15.7% in FY2025.

Retain ‘reduce’: LTI is among better placed mid-tier IT companies heading into a possible slowdown/recessionary scenario.

However, current multiples do not provide an adequate safety cushion, given risks from Mindtree’s portfolio of services that is more weighted towards discretionary spending on the experience layer and from risks in the integration process. We await a better entry price to recommend the stock. We bring down revenue forecasts a tad, resulting in a 0-2% cut in FY2023-25 EPS estimates. We retain ‘reduce’ on the stock with a revised fair value of `4,150, valuing the stock at 24x FY2024E.

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