MOSL: L&T INFOTECH (Buy)-1Q weakness offset by sanguine FY18 outlook

​L&T Infotech: 1Q weakness offset by sanguine FY18 outlook

(LTI IN, Mkt Cap USD2.0, CMP INR764, TP INR880, 15% Upside, Buy)

• In-line performance driven by Digital-led growth: LTI’s 1QFY18 revenue grew 1.5% QoQ in constant currency (CC) terms, in line with our estimate. Revenue growth was impacted by project closures and absence of pass-through revenue, resulting in a steep decline in Manufacturing (-13.3% QoQ CC) and Europe (-4.5% QoQ CC). However, growth was supported by strength in IMS and Digital, which is an encouraging sign.
• Deal wins lend visibility to sanguine FY18 outlook: Revenue growth momentum is expected to pick up in 2HFY18 as the deals won in the previous quarters ramp-up. The required rate, however, for 10% YoY growth in FY18 stands at 2%, indicating that continuation of the current momentum should be enough for the company to achieve industry-leading growth. The outlook for most verticals has been robust, barring Manufacturing (17% of revenue), which is expected to remain soft in the near term.
• Margin miss offset by outlook for 2Q: EBITDA margin (ex. forex gain) shrunk 220bp QoQ to 16.8% (70bp miss), led by INR appreciation, visa expenses, aggressive lateral hiring and higher S&M expenses. However, despite a negative impact of 150-200bp in 2Q from the upcoming wage hike, margin stability/growth is expected. Net hiring of 1,300 employees resulted in a 60bp QoQ decline in utilization, the optimization of which, coupled with absence of visa expenses, should yield positive results.