MOSL: L&T INFOTECH (Neutral)-Spending weakness transcends beyond just the top customer
L&T INFOTECH: Spending weakness transcends beyond just the top customer
(LTI IN, Mkt Cap USD3.8b, CMP INR1514, TP INR1700, 12% Upside, Neutral)
- Soft 1QFY20 performance on expected lines: Revenues in constant currency (CC) grew 12.9% YoY (in-line), INR EBIT grew 4.1% YoY (in-line) while PAT grew 1.6% YoY (2.7% miss). Performance during the quarter was dragged by volatility in top accounts. Revenues from the top 6-10 clients declined 6.7% sequentially. EBIT margin during the quarter stood at 16%, declining 170bp sequentially. Decline in margins was led by (a) visa cost - 100bp, (b) sales and marketing investments - 100bp, and (c) currency movement - 20bp. The decline was partially offset by higher working days and adoption of IND-AS, which contributed +25bp to the margins.
- Specific client issues span beyond the largest customer: LTI's BFS revenue has suffered over the last couple of quarters due to spending cuts in its top account. While this bottomed out in 1QFY20, there are other top accounts with specific issues, which would weigh down near-term revenue growth. Completion of project from a large African client and ramp-down in certain sizeable accounts should offset the revenue visibility from net-new deals in 2QFY20. For now, LTI expects normal growth to resume from 3QFY20. Assuming a flattish 2QFY20, LTI would have to grow at a CQGR upwards of 4% in 2HFY20 to reach a double-digit growth rate.
- Valuation View: We expect LTI to grow its USD revenues at a CAGR of 10% and earnings at a CAGR of 8% over FY19-21E. LTI has seen one of the best executions among Tier-II IT, as a consequence of which, we expect it to continue commanding a premium to its peers. But, we have cut our multiple from 18x to 17x on account of muted recent performance and near-term uncertainty. Our price target of INR1,700 discounts forward earnings by 17x and implies an upside of 12%. Maintain Neutral.
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