5 January 2021
Company Update | Sector: Technology
L&T Infotech
BSE SENSEX
48,438
S&P CNX
14,200
CMP: INR4,150
TP: INR3,910 (-6%) Downgrade to Neutral
Top-quartile business, but valuation leaves little room
LTI is up ~130% since its inclusion in our model portfolio (in 3QFY20) and is currently the
most expensive (28x FY23 EPS) IT company within our Coverage Universe. While we
continue to deem it among the best-in-class IT services companies on execution and
management quality, we believe the stock more than factors in the potential; hence, we
downgrade the stock to Neutral.
Stock Info
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
LTI IN
172
722 / 9.2
4198 / 1208
19/75/111
727
FY23E
168.9
19.0
26.0
147.5
16.1
556.8
29.2
24.0
35.0
28.0
7.4
18.0
1.3
Right size, right positioning…
Financials Snapshot (INR b)
Y/E Mar
FY21E FY22E
123.7 147.1
Sales
18.6 18.8
EBIT Margin (%)
18.3 22.4
PAT
104.1 127.0
EPS (INR)
20.1 22.1
EPS Gr. (%)
377.6 460.3
BV/Sh. (INR)
Ratios
30.5 30.5
RoE (%)
24.2 24.4
RoCE (%)
35.0 35.0
Payout (%)
Valuations
39.7 32.5
P/E (x)
10.9
9.0
P/BV (x)
25.8 21.3
EV/EBITDA (x)
0.9
1.1
Div Yield (%)
In our view, LTI is in an enviable position – it benefits from its position as a
company with enough scale to compete with larger players, but is still small
enough to leverage the array of small deals to grow ahead of its peer group.
LTI also has a well-diversified portfolio of service lines – ADM, ERP, and IMS
contribute 36%, 31%, and 14%, respectively, to total revenues. It has a good
presence in all the major verticals, with BFS contributing 30% to total
revenues.
The combination of a size- and industry-relevant portfolio has helped the
company win deals (large deal pipeline of USD1.9b) across service lines and
geographies. LTI has clocked a 16.3% revenue CAGR in the past three years,
among the highest in the IT Services pack.
Aligning itself with customers’ digital transformation initiatives, LTI has
structured its executive focus on cloud and data products.
This, along with a capable sales team, has allowed it to both mine existing
accounts as well as hunt for new accounts (beyond the Top 20 clients).
We expect LTI to continue to gain from these capabilities and deliver industry-
leading revenue growth in the medium term (+14% USD CAGR over FY20–23E).
This, coupled with strong margin improvement from FY21, would result in 20%
INR PAT growth over the same period.
LTI is expected to deliver strong sequential growth (4.5% QoQ USD) in a
seasonally weak quarter, led by a ramp-up in deal wins in the previous quarter.
After a strong margin performance in 2Q (EBIT margin up 370bps YoY), we
expect stable margin performance in 3Q.
LTI currently trades at 28.0x our FY23 EPS estimates v/s the sector average of
24x and at a peak relative to its history.
While we remain confident of the company’s execution capabilities, we
downgrade the stock to Neutral, led by the recent rally in stock price (130% in
one year). We value the stock at 26.5x FY23 EPS (+2 ST Dev median P/E). We
revise our TP to INR3,910, implying a 6% downside.
…with strong execution
Shareholding pattern (%)
As On
Sep-20 Jun-20 Sep-19
Promoter
74.4
74.5
74.6
DII
6.4
7.3
8.2
FII
11.2
9.8
7.7
Others
8.0
8.5
9.5
FII Includes depository receipts
Stock Performance (1-year)
L & T Infotech
Sensex - Rebased
4,200
3,400
2,600
1,800
1,000
Expect strong performance in seasonally weak quarter…
…however, we downgrade to Neutral on punchy valuation
Mukul Garg– Research analyst
(Mukul.Garg@MotilalOswal.com)
Anmol Garg - Research analyst
(Anmol.Garg@MotilalOswal.com) /
Heenal Gada - Research analyst
(Heenal.Gada@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.