Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
290.7 / 4.1
1897 / 1437
4 December 2019
Update| Sector: Technology
TP: INR2,030 (+22%)
Upgrade to Buy
Bounce back on the horizon
Over the past four years, LTI has continuously strengthened the moats around its
business through a slew of measures. Client specific issues, which led to muted
performance over 9MCY19, now seem to be largely behind.
Despite the cautious IT spending trend, the recent large deal wins and client
additions give us the confidence to expect strong revenue CAGR of 11% (USD) over
FY19-21E. Lower exposure to disrupted horizontals (e.g. legacy IMS, BPO, etc.) and
scale benefits should help negate some of the macro/vertical headwinds.
As growth returns, we expect utilization to increase by ~200bp, which should be a
key near-term margin lever. Multiples have corrected ~27% from its peak on
concerns related to key clients and immediate integration with Mindtree.
As these concerns are largely behind, we upgrade the stock to Buy. Our TP of
INR2,030 implies 7% re-rating to 19x 1-year forward P/E, at 15% discount to TCS.
The rich multiples should be supported by high ROCEs (42% in FY19) and industry-
leading earnings growth. Key risk: Leadership attrition.
Financials & Valuations (INR b)
Continuously strengthening the moats around its business
Decentralization of decision making to 7 business units (BUs) has meaningfully
improved the company’s agility. In addition, (1) marquee client connects, (2)
sales driven by multiple units (e.g. alliances, customer success, large deal teams),
(3) strong focus/expertise in a few segments (e.g. CIB and WM in BFSI), (4)
optimal scale and (5) a high quality management team remain the key
competitive advantages of the company.
Client specific issues seem largely behind
Over 9MCY19, LTI has witnessed deceleration in growth (~9pp YoY) and drop in
utilization (~300bp) due to issues faced at three of its key clients. Further, in
conjunction with rising attrition (18% over last 12 months), investments, etc.,
EBIT margin contracted ~360bp. While client specific issues seem to be largely
behind, the key question is whether growth and margins will bounce back in a
cautious spending environment.
Recent large deal wins + client addition gives confidence
The recent large deal wins hint at growth accelerating over the next 12-18
months. Besides, over the last one year, LTI’s client addition across buckets was
the strongest and broad-based v/s comparable prior periods. Given the
company’s account mining capabilities, this should provide good headroom for
Sudheer Guntupalli – Research analyst
(Sudheer.Guntupalli@motilaloswal.com); +91 22 50362749
Anmol Garg – Research analyst
(Anmol.Garg@MotilalOswal.com); +91 22 7193 4271
Mohit Sharma – Research analyst
(Mohit.Sharma@MotilalOswal.com); +91 22 6129 1531
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.