Larsen & Toubro Infotech - Data products present a good optionality - ICICI Securities

LTI's aspirations for US$1bn in cloud revenue in three years implies ~78% segmental CAGR (on base of ~US$185mn). Too ambitious, we do not construe this as formal guidance. Leveraging its reference ability in the data-led services, LTI plans to take five products built around data to market. Offered also on SaaS mode on app stores / marketplaces (e.g. Appsource), these products will complement (than compete) the established likes of Snowflake. A resounding success for a services provider in product segment has been largely elusive. However, (1) commerciality of these products, (2) recent encouraging evidence (e.g. HCLT) and (3) LTI's prior execution record makes us positively biased on this optionality. Large deal win in the Middle East (~US$204mn TCV) surprised us. Nevertheless, the differences in project rhythm here is the key risk to watch out for. While the large deal pipeline increased ~62% YoY, commentary around conversion sounded defensive. Stock under-performed broader markets (by 8% vs Sensex) post our earlier downgrade (link). As we turn positive on the products-related optionality and factor-in the large deal win, we upgrade the stock to BUY.

- US$1bn cloud practice in three years is too ambitious. LTI announced addition of two new business lines around: 1) cloud, and 2) products (structured around data capabilities). Company expects these two businesses to be the key growth drivers over next 3-5 years. Currently, LTI is a Tier I partner for many hyper scalars and nearly half of its existing client base works with the company on cloud-related engagements. It envisages independent and dedicated business units for each of the hyper scalars (separate sales, solutions, consulting & delivery teams).

To avoid going to market with silo-ed solutions, there are overarching streamlining processes in place (e.g. Rainbow, senior cloud specialists leading the practice). LTI aspires its cloud revenue practice to become US$1bn in size (from current ~US$184mn) in three years implying a staggering segmental CAGR of ~78%. This is too ambitious and not be construed as formal guidance, in our view.

- However, products business presents a good optionality. Leveraging its strong credentials and reference ability in data-led services, LTI plans to take five products built around data to market. These are Decisions, ML Logistics, Agnitio, Marketplace and Leni. Management hinted at investments in engineering, R&D, sales and marketing of these products. The product portfolio is also envisaged to be offered on SaaS mode with presence on app stores / marketplaces. We noticed these products (e.g. Agnitio, Leni) are already present on marketplaces like Microsoft Appsource.

Management indicated these products will complement rather than compete with the established likes of Snowflake. A resounding success for a services provider in the product segment has been largely elusive. However, we are positively biased on the back of: 1) commerciality of these products (e.g. AI powered advanced analytics), 2) recent encouraging evidence (e.g. HCLT), and 3) LTI's prior execution record.

- Strong increase in large deal pipeline. Nevertheless, conversion is the key. LTI's deal win momentum has been tepid for some time now and was one of the key reasons for our earlier downgrade of the stock. In that context, announcement of a large deal win in the Middle East (US$~204mn TCV over six years) came as a surprise. We expect peak revenue run rate on this project to be achieved over FY22E-FY23E. Nevertheless, the differences in the project rhythm and execution challenges in the Middle East geography are key risks to watch out for.

Management hinted at a large deal pipeline of US$1.9bn, implying an increase of ~62% YoY. While the richness of the pipeline and its increase have been robust for four quarters now, conversion was the key challenge. Management outlook on this aspect sounded a bit defensive, implying it may still be some time away.

- Stable commentary on most other aspects. Management reiterated its outlook on industry-leading growth along with stable margins. Keeping aside the incremental focus on cloud and data products, LTI continues to focus on client mining, new logos and large deals. Management intends to invest back in the business in: 1) strengthening the sales team, 2) capability building, 3) reskilling & localisation, and 4) post-Covid workplaces. Despite these investments, the company intends to keep its margins stable (net margins of 14-15%) leveraging on operational efficiencies.

- Optionality in product business and large deal win make the stock attractive. Post our earlier downgrade (link), the stock underperformed broader markets (by 8%, vs Sensex) over the previous nearly two months. However, as we now factor-in the optionality related to product business and revenue booking from the large deal win in the Middle East, we upgrade our earnings estimates over FY22E-FY23E by 3%-7%. We upgrade the stock to BUY (from Add earlier) valuing it at 23x FY23E EPS.

Shares of Larsen & Toubro Infotech Ltd was last trading in BSE at Rs.3254.9 as compared to the previous close of Rs. 3266.55. The total number of shares traded during the day was 33993 in over 1462 trades.

The stock hit an intraday high of Rs. 3298.1 and intraday low of 3218.45. The net turnover during the day was Rs. 110462054.

Source : Equity Bulls

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