L&T Infotech (LTI) has underperformed ~7% vs the sector YTD, given deceleration due to macro and some client-specific issues. We open a positive Catalyst Watch on LTI expecting healthy 3Q20 revenues, as some of the client-specific issues are now behind us and with ramp-up of large deals signed over the past few quarters. Further, the momentum of deal wins has continued to be decent and should provide visibility for above-sector growth outlook for FY21e. Q2 net margin was near multi-year lows but should see some improvement as growth improves, though there could still be quarter-to-quarter volatility.
Maintain Buy
LTI continues to execute well vs other midcap peers. Consistent large deal wins provide visibility. Issues related to a few large clients are largely behind. LTI appears confident of delivering double-digit growth with net margins of 14-15% in FY20e – among the best in the industry. Valuations are at ~17x 1-year forward consensus, justified, given better revenue growth vs peers and consistent large deal win record in past many quarters. Merger of LTI with MindTree needs to be monitored in the medium-term. LTI remains our top pick in the mid-cap space.
Key risks
(i) Macro slowdown impacts industry growth going forward; (ii) weakness in deal wins going forward given macro uncertainty; (iii) higher supply side challenges vs expectation hurting margins; (iv) client concentration – top 5 clients contribute ~32% of the revenues; (v) any significant rupee appreciation.