Larsen & Toubro Infotech - How high is high? - ICICI Securities

Of late, high multiples have become the primary street concern on LTI (33x FY22E EPS, in line with TCS). This pushback is valid given that Tier II stocks seldom traded at par or premium to the industry leader on a sustainable basis. However, this needs to be seen in the context of ~19% YoY revenue growth (USD, I-Sec est.) Larsen & Toubro Infotech (LTI) is expected to deliver in FY22E notwithstanding a relatively taller base in FY21E (9.5% YoY, I-Sec). LTI's FY20-FY22E EPS CAGR will be the highest in industry and that too by a wide margin (20% vs 8% for TCS and 10% for Infosys) despite the earlier concerns around tepid large deal flow. Overall, LTI is one of the very few companies witnessing a significantly higher business momentum vs pre Covid. On return ratios, it (avg. RoCE 29%) trails TCS (~34.5%) by just a few percentage points. Optimal scale, focus and leadership in a few segments, and lower legacy exposure should translate into continued growth differential vs industry. In addition, data products should present a good optionality (refer earlier note). In the backdrop of a growth-deprived and liquidity-fuelled world, the high multiples of a very high growth company like LTI need not necessarily be seen as high!

- In-line revenues and margins; revenue growth of 5.3% QoQ (CC). It should be noted that H2 is seasonally the stronger part of the year for LTI, unlike the rest of the industry. Barring insurance, energy & utilities, which reported revenue decline, other verticals reported strong growth. Unlike the rest of the industry, margin expansion was not meaningful. Sequentially, EBITDA margin expanded by a meagre ~30bps. Key margin movers during the quarter were: reduction in SG&A and depreciation (+60bps impact), increase in utilisation and offshore effort (+60bps impact), higher pass-through and lower working days (-50bps impact). Covid discounts in the previous quarters tapered off providing some tailwinds on pricing / margins.

- Strong outlook for FY22E despite tall base in FY21E. Company announced two large deal wins with net new TCV of US$278mn (includes Middle East deal) during Dec-20. This addresses some of the earlier concerns of the street about the tepid large deal flow. As these deals ramp up over H1FY22, we expect LTI to again deliver industry-leading revenue growth (~19% YoY, USD) notwithstanding the relatively taller base in FY21 (9.5% YoY, I-Sec). Given its growth focus, management hinted at a continued net margin guidance band of 14-15%.

- Multiples should remain elevated. LTI's FY20-FY22E EPS CAGR will be the highest in industry and that too by a wide margin (20% vs 8% for TCS and 10% for Infosys). Overall, LTI is one of the very few companies witnessing a significantly higher business momentum vs pre Covid. Optimal scale, focus and leadership in a few segments and lower legacy exposure should translate into continued growth differential vs industry. In the backdrop of a growth-deprived and liquidity-fuelled world, the high multiples of a very high growth company like LTI need not necessarily be seen as high!

Shares of Larsen & Toubro Infotech Ltd was last trading in BSE at Rs.4100 as compared to the previous close of Rs. 4093.1. The total number of shares traded during the day was 20327 in over 4960 trades.

The stock hit an intraday high of Rs. 4239 and intraday low of 4065. The net turnover during the day was Rs. 84448946.

Source : Equity Bulls

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