We see a weak Q2FY20 as adequately discounted in the current stock price of L&T Infotech (LTI) and would expect the fundamentals to improve meaningfully in H2FY20. H2 visibility is backlog driven with strong underlying business momentum to be evident from the fact that overall sequential revenue growth might accelerate modestly in Q2FY20 despite the impact of multiple client specific headwinds. Impact of client specific issues over the past three quarters (including Q2FY20) have masked the superior execution of LTI across its key strategic imperatives of large deal wins, new logo acquisition and client mining. We see the risk-reward as attractive at current prices and upgrade the stock to a BUY rating with a target price of Rs 1,700.
Headline growth to be modest in Q2FY20 given client specific headwinds; underlying business momentum strong and to be evident in H2. Client specific issues with two of the largest BFS clients and loss of a hi-tech client has had a material bearing on the revenue growth of L&T Infotech over the past three quarters including Q2FY20. However, we expect revenue growth to pick-up materially in H2FY20 with growth likely to be in double-digits on a CC basis in FY20. Revenue visibility for H2FY20 is driven from the backlog with large deals in the banking and manufacturing verticals signed in prior quarters expected to ramp-up fully over the course of H2FY20. Underlying business momentum should be visible from the fact that BFS revenues are expected to grow sequentially in Q2FY20 (though modestly) despite spending issues at the second largest banking client. We expect revenue growth to accelerate sequentially to 1.2% QoQ in USD terms (~1.5% in CC terms) vs 0.8% in Q1FY20 (1% in CC; 0.5% organic) despite these specific client issues.
Margins a tad weaker but investment led; to trough in Q2FY20. Apart from wage hikes which are expected to depress margins by 170bps QoQ, utilisation might also take a hit in Q2FY20. As such EBIT margin may decline by 70bps QoQ to 15.3%.
However, we see capacity creation as bearing a positive signalling for demand in H2FY20.