Maintain ADD on L&T Infotech - Q4FY20 Results Review - HDFC Securities

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities.

L&T Infotech (Q4FY20 Results Review): Growth outperformance & operational resilence. Maintain ADD.
(TP Rs 1,800, CMP Rs 1,784, MCap Rs 311 bn)

Maintain ADD on L&T Infotech (LTI) based on strong 4Q and its relative & broad-based outperformance. LTI's (1) Strong & diversified portfolio, (2) Stability in top accounts (recovered in 2H following budget cuts in 1H), and (3) Large deal wins (strong sales engine) & steady ramp-up schedule are likely to support its growth outperformance in the sector. Our TP of Rs 1,800 is based on 16x FY22E EPS (at historical avg. & 15x earlier) with growth outperformance compared to peers.

Ramp-up of large deals led revenue outperformance: LTI's 4Q rev stood at USD 409.9mn, +4.7/17.4% QoQ/YoY CC (14.2% CC in FY20). Growth was led by higher onsite realisation with (1) Optimal onsite FTE as large onsite programs transitioned to steady state, and (2) Better pricing in new onsite deals. Growth was supported by pass-through revenue and inorganic (PowerupCloud full-qtr consolidation) contributing ~2.5% QoQ (est). Digital contributed 40.7% to the rev and 4Q revenue had negligible supply-side impact from covid-19 (currently WFH at 98%).

Broad-based growth & large deals tracking well: Growth in 4Q was broad-based across verticals ex-Insurance. Growth in E&U was supported by ramp-up of large E&U deal won in 3Q (4Q large deal wins also included E&U ITO deal). NN large deal wins were strong with TCV of USD 100mn (Govt. & E&U vertical). BFS is expected to be supported by recent deal wins (including StanC's Temenos deal), even as medium-term trajectory may flatten. Within service-lines IMS and Enterprise solutions led the growth. LTI also deepened its partner ecosystem (Pega, Mulesoft, SAP) further.

Margin resilience & improving cash generation: EBIT margin was in-line at 16.7%, +48bps QoQ, higher CSR impact of -60bps QoQ was offset by +60bps impact from one-time gains in Hi-tech vertical. APAT at Rs 4.28bn was supported by higher forex gain of Rs 0.40bn and lower ETR in 4Q. Cash generation improved in FY20 with OCF/EBITDA and FCF/APAT increasing to 81% and 91% in FY20 respectively, as compared to 74% and 81% in FY19.

Valuation and view. We've factored USD rev growth of 5.4/15.0% and EBIT% at 15.7/17.0% in FY21/22E. Our FY21 estimates factors -5.5% QoQ in 1Q (E&U/Mfg at -10% QoQ each), followed by +1.3/3.4/3.5% QoQ over 2Q/3Q/4Q. Strong RoIC (~40%), FCF yield (~4.5%) and growth outperformance over peers to support LTI's current valuations of 20.7/15.8x FY21/22E. Changes to key management personnel and onsite regulatory clampdown are key risks.

Shares of Larsen & Toubro Infotech Ltd was last trading in BSE at Rs.1783.6 as compared to the previous close of Rs. 1669.15. The total number of shares traded during the day was 34471 in over 4966 trades.

The stock hit an intraday high of Rs. 1832 and intraday low of 1705.55. The net turnover during the day was Rs. 61625223.

Source : Equity Bulls

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