In the ongoing consolidation, the management indicated LTI is on the positive side. It is optimistic on continued growth momentum.
Top client rebound and encouraging deal wins are key positives for L&T Infotech. Continue expecting industry leading growth; robust growth in the top account alleviates concerns around client-specific issues. Besides, strong/ broad-based client addition across buckets and encouraging deal wins will likely translate into industry leading growth. We see further scope for margin expansion driven by better utilisation. We upgrade our EPS estimate by ~6% for FY20-22, given the large deal win momentum and the decent outlook in the top client. Reiterate ‘buy’.
Revenue increased 14.2% y-o-y (our estimate: +10.2%), Ebit margin came in at 16.2% (our estimate: 15.7%), while PAT growth was stagnant (our estimate: -3%). Organic revenue exclusive pass-through increased 6.4% q-o-q CC. Growth was broad-based across most verticals and service lines. The uptick in spends at the top client, combined with a few large deal ramp-ups among the top 10 clients, is the key growth driver. Growth in Europe (+1.8% q-o-q CC) was surprisingly soft. Ebit margin expanded ~70bp q-o-q, largely driven by operating leverage, higher utilisation and currency benefit. Key margin headwind was lower margins associated with pass-through revenue. In line with the industry trend, attrition moderated by 70 bp to 17.7%.
Strong growth in the top account was led by a new project. In the ongoing consolidation, the management indicated LTI is on the positive side. It is optimistic on continued growth momentum. The firm is seeing a rise in spending in discretionary areas of BFSI. Concerns about US presidential polls have so far not come up in conversation with clients. LTI will continue to be a growth company with focus on S&M investments. It sees some more headroom for operating leverage with growth. Industry leading growth will defend rich multiples. Moderating attrition also comes in as a positive. Recent large deal wins hint at strong growth over the next 12 months. Besides, LTI’s recent client addition across buckets was the strongest and broad-based v/s comparable prior periods. Industry leading growth + prudent capital allocation should defend rich multiples. We arrive at a fair valuation of 19x one-year forward P/E, at a 15% discount to TCS. Maintain ‘buy’.