Thus, we initiate coverage on the stock with a ‘buy’ recommendation and a target price of `1,950 per share based on 18xFY21E EPS.
By ICICI Direct
L&T Infotech (LTI), a subsidiary of Larsen & Toubro, is among the top 20 global IT service companies and the sixth-largest Indian IT firm. The key drivers of its growth have been winning large deals, new logos, client mining and its continuous efforts to drive the same. This is visible in LTI’s financial performance wherein revenues and PAT have grown at a CAGR of 13% and 15%, respectively, over FY16-18.
On a TTM basis, digital witnessed an average growth of 40% year-on-year ahead of LTI’s growth of 21% y-o-y. On CGQR basis too, digital revenue (in dollar terms) grew at 9.7% vs the firm’s growth of 4.1% in the last 11 quarters. LTI, with its faster adoption and strong execution capabilities, could be a major beneficiary of rising digital proportion, ensuring healthy profitability in future. We expect digital to grow at a CAGR of 32.4% in FY18-21E for LTI. Based on the deal pipeline and robust growth in digital revenues, we expect LTI to register dollar revenue CAGR of 16.7% over FY18-21E. LTI’s overall Ebitda margins are in the 19-21% range against mid-cap peers like MindTree (14-16%), NIIT Tech (15.8-18.6%) and Persistent (14.8- 19.7%). We believe this is mainly due to higher share of organic growth, digital proportion, offshore revenues and better pricing. Going forward, we expect the firm to continue maintaining industry leading margins (19.3% in FY21E vs peer average of 17.6%).
We like LTI given its: 1) digital story acceleration, 2) focus on client mining, 3) healthy deal pipeline and 4) strong management foothold. We expect LTI to witness healthy double-digit revenue growth of 16.7% CAGR in FY18-21E in dollar terms with stable Ebitda margins of 19.3% and net profit margins of 15% in FY21E. Thus, we initiate coverage on the stock with a ‘buy’ recommendation and a target price of `1,950 per share based on 18xFY21E EPS.