We initiate coverage on L&T Infotech (LTI) with an ‘Outperform’ rating and a TP of `1,900 (16% upside). LTI has the ‘makings of a quality large cap’ given sector leading client hunting skills, a growth focused mindset, a new and hungry team at the helm and its ability to scale up new accounts and smaller verticals.

Over FY16-19, LTI has exhibited best-in-class revenue growth and margin performance, something we expect it to sustain over the medium to long term. Numbers tell the story; LTI has numerous sector leading metrics. We compared LTI versus its large cap and mid cap peers on various key metrics: client hunting and mining, profitability and return ratios, growth, M&A strategy, and employee productivity trends.

LTI prevails over peers on nearly all of these. After a muted 1Q across the sector (including LTI), it seems FY20 growth will moderate for companies. However, from a medium-term perspective, LTI’s execution remains strong – accelerating client addition and steady growth in non-top accounts (slowing for peers) is heartening.

FY20 will see some challenges but fundamentals remain solid. After a strong 22% earnings CAGR over FY16-19, we expect FY20 to see flattish earnings given temporary headwinds from the top client and some pull back in margins from all-time highs. However, starting FY21, we expect LTI to once again start delivering sector leading revenue/EPS growth at a respectable ROCE. Key risk remains the higher client concentration vs large caps.

Valuations have cooled off; offers good entry point. LTI’s valuations have had a massive reset over the last 12 months with its P/E multiple having corrected 30%. In line with most peers, LTI will see a slowdown in growth rates in FY20. However, the weakness is largely limited to its top account and outside of that, fundamentals remain solid. Current valuations at 17x FY21 (~30% discount to TCS) look reasonable for a potential compounder. Key risks: client concentration; high exposure to BFS; slowdown in global macro; sharp rupee appreciation vs the US dollar.