L&T INFOTECH - Ambit Capital: Initiated 'Buy' recommendation report with a Target price of Rs. 2,800

Strongest challenger to tier-1 IT

We like LTI for its 1) strong leadership team with experience of handling scale; 2) best digital capabilities within tier-2; 3) focused execution across client mining, large deals, must-have logos, million-dollar relationships, scaling alliances and growing through digital; and 4) strict operational control. Medium-term consolidation with Mindtree would create an entity half the size of TECHM (75% in US) and add complementary capabilities in Digital/RCM/Hitech. LTI has been the best performer in IT at ~16% USD revenue CAGR (vs 8/14% for tier-1/tier-2) and EPS CAGR of 16% over FY17-20. We expect industry-leading revenue/EPS CAGR of 10/15% over FY20-23E to continue. While a tad punchy, current valuations could sustain on superior performance and best-in-class RoIC (45% in FY20). TP of Rs. 2800 implies 23x 1-year forward EPS (up to Sep-21E) of Rs. 122.

Strongest tier-2 IT leadership team with experience of handling scale

LTI has the strongest tier-2 leadership teams under their CEO Sanjay Jalona, with a mix of old timers (Banking/Insurance) and external hires from larger companies (Infosys, Cognizant, Capgemini, Atos). Experience of handling scale, right level of empowerment to business heads (e.g. pricing flexibility) and management focus on driving strategic initiatives have been success drivers.

Ranks No.1 on our digital capability framework in tier-2 IT

LTI ranks favorably in Digital Strategy & Experience, Cloud & Infra, Enterprise Solutions & SaaS, Analytics & IoT (Rank 2); Automation & App Modernization (Rank 3). Credentials have matched performance with Enterprise integration & mobility (30% CAGR), Analytics, AI & Cognitive (28%), Enterprise solutions (25%) and IMS (18%) driving 32% CAGR in Digital over FY17-20. Focused acquisitions further augmented capabilities.

Focused execution of strategy will likely drive outperformance

Over 4 years, LTI's outperformance was driven by successes in 1) Mining clients (13% CAGR in top-20), 2) Must have logos (F500 clients up from 49 to 67), 3) Adding million dollar clients (up from 89 to 164), 4) Large deals (~USD1bn in cumulative deal wins), and 5) Penetrating through Digital (>50% accounts penetrated). Execution focus/geo expansion should remain growth drivers.

Premium valuation justified on execution prowess/best-in-class ROIC

LTI's faster than peer group growth and best-in-class ROIC of 45% (2nd only to TCS) should help sustain current valuations of 21.9x FY22E. Our TP implies 23x 1 year forward P/E up to Sep-21E of Rs. 2,800. Lower-than-expected traction in large deals (after weak 1Q), higher-than-anticipated pressure in BFSI/ENU and management churn in a potential merger with Mindtree are key risks. Mphasis followed by LTI remain our top BUYs in tier 2 IT.

Shares of Larsen & Toubro Infotech Ltd was last trading in BSE at Rs.2457.55 as compared to the previous close of Rs. 2487.5. The total number of shares traded during the day was 31152 in over 785 trades.

The stock hit an intraday high of Rs. 2505 and intraday low of 2441.75. The net turnover during the day was Rs. 76639100.

Source : Equity Bulls

Keywords