Larsen & Toubro Infotech Limited (LTI) is a global technology consulting and digital solutions company helping more than 420 clients succeed in a converging world. With operations in 32 countries, LTI goes the extra mile for its clients and accelerates their digital transformation with LTI’s Mosaic platform enabling their mobile, social, analytics, IoT and cloud initiatives. Founded in 1997 as a subsidiary of Larsen & Toubro Limited, the company has real-world expertise to solve the most complex challenges of enterprises across all industries.
Strong deal wins
LTI’s deal pipeline has risen 19% YoY at the end of Q1FY21; while deal pipeline
continues to be strong, win rate has improved. LTI continues to receive new deals,
except in the area of manufacturing, oil & gas and automotive which are expected
to revive in H2FY21. LTI has added 16 more clients across a number of sectors during
the quarter and won a large deal with a financials company in UK in Q1FY20.
Strategy in place in respond to Covid
LTI’s 3X3 strategy 1) Customer first, 2) Resiliency in operations, 3) Protect
P&L - is working well.
Revenue impact has been minimal because of low exposure to travel and hospitality, which have been negatively impacted due to Covid. LTI has provided some of its customers with specific time bound commercial concessions that will enable them to continue their IT programs with LTI. LTI’s strong focus remains on driving operational efficiency. LTI’s “GRIT Alliance” framework has a strong focus on growth, increasing resilience, innovation and teamwork.
Strong operating performance
LTI has delivered stable operating margins. For Q1FY21 margins expanded 71bps QoQ
to 17.4%. LTI expects to close some large deals during the Sep’20 quarter.
Management indicated that they believe the worst is behind and expect Sep’20
quarter revenues to be flat with a positive bias. LTI remains confident on delivering
a strong performance in H2FY21.
Well diversified portfolio
LTI has de-risked its portfolio with strong diversification across verticals. Banking
& Financials services vertical contributed 27.6%, insurance at 17.8%, Manufacturing
at 16.8%, Energy and Utilities at 11.4%, Consumer packaged foods, Retail & Pharma
at 11.3%, while Hi-tech & Media contributed 11.2% of total consolidated revenue
of FY20. Geography wise North America contributes 69% of total consolidated revenue,
while Europe and Rest of the World contributes 15.8% and 15.3% respectively.
The Global IT-BPM market excluding hardware and Engineering R&D grew 5.6% over the last year and stood at USD 1.5 trillion in CY19. Indian IT-BPM industry revenues including hardware and ER&D spend stood at USD 191 billion in FY20. The industry added ~USD 14 billion in incremental revenues last year, representing year-on-year growth of ~ 7.7% in USD terms. IT-BPM export revenues for the industry for FY20 are expected to reach USD 147 billion, recording growth of 8.1% over the past year.
Share of Digital in industry revenues has jumped from ~20% last year to 26%-28%. Nine digital technology areas will emerge as fastest-growing and highest-impacting, with the combined potential to deliver one-third of the USD 100 trillion. The nine areas include three foundational technologies – Big Data, Analytics and Cloud.
Particulars | FY18 | FY19 | FY20 | FY21 E | FY22 E |
---|---|---|---|---|---|
Net Sales | 7306.50 | 9445.80 | 10878.60 | 11422.50 | 13021.70 |
Employee Cost | 4328.90 | 5466.80 | 6516.60 | 6853.50 | 7813.00 |
Other Expenses | 1822.90 | 2095.70 | 2332.70 | 2239.40 | 2418.50 |
Total Costs | 6151.80 | 7562.50 | 8849.30 | 9092.90 | 10231.60 |
EBITDA | 1154.70 | 1883.30 | 2029.30 | 2329.60 | 2790.10 |
Depreciation & Amortization | 156.30 | 147.20 | 273.00 | 286.70 | 301.00 |
Other Income | 426.10 | 302.30 | 329.20 | 329.20 | 329.20 |
Interest & Finance Charges | 15.70 | 10.60 | 82.60 | 86.70 | 91.10 |
Profit Before Tax | 1408.80 | 2027.80 | 2002.90 | 2285.40 | 2727.30 |
Tax Expense | 329.10 | 512.30 | 482.40 | 571.40 | 654.50 |
Net Profit | 1079.70 | 1515.50 | 1520.50 | 1714.10 | 2072.70 |
EPS | 65.00 | 87.00 | 87.00 | 98.00 | 118.00 |
LTI has delivered consistent financial performance over the years, with a strong management team. LTI is the best placed structural bet on a midsized IT service company. LTI has the potential to deliver mid-single USD revenue growth for FY21. While deal wins were tepid in Q1FY21, the management is confident of new deal wins in Q2FY21. We are bullish on LTI, given high growth in digital solutions, strong deal pipeline and limited exposure to travel, hospitality and retail. We value LTI at 23x FY22 E earnings to arrive at target price of Rs.2750.