EUR 120.00 For Business Accounts Only

MOSL: L&T INFOTECH: 1Q beat and strong FY23 outlook, stay Neutral on valuation (LTI IN, Mkt Cap USD8.5b, CMP INR3874, TP INR4120, 6% Upside, Neutral)

• LTI reported a growth of 2.9% QoQ CC in 1QFY23 (est. 2.1%). BFS and Insurance drove growth, while Manufacturing (down 11.5% QoQ) was impacted due to seasonal pass-through (200bp revenue impact). EBIT margin dipped 130bp QoQ to 16% due to wage hikes. However, the same was 90bp above our estimate. It announced net new deal TCV of USD79m and guided at a strong 2QFY23.
• Excluding the seasonality in Manufacturing, LTI’s 1Q revenue momentum was broad based and did not indicate any impact from the macro slowdown, despite a higher exposure to the BFSI industry. While the company suggested that clients are monitoring the economy, it has not started impacting the deal pipeline or the decision cycle as tech budgets are intact. The management reiterated its industry-leading growth guidance for FY23.
• We expect LTI to deliver a strong 2Q, given the good deal wins in 1Q, but the momentum should start moderating in 2HFY23, leading to a full-year USD revenue growth of over 20% and FY22-24 USD revenue CAGR of 16%. LTI’s robust employee addition in 1Q and its target to hire over 6,500 freshers in FY23 adds to the demand visibility.
• LTI’s solid margin delivery in 1Q, growing fresher addition, and favorable pricing should help it deliver an EBIT margin of 16.7% in FY23, a dip of only 60bp YoY, despite elevated attrition and higher supply cost. This should allow it to keep its PAT margin in the middle of its 14-15% guidance band (ahead of our earlier expectation of staying in the lower band).
• LTM attrition moderated by 20bp QoQ to 23.8% in 1QFY23 (unlike TCS, HCLT and MTCL who all saw a big jump), although the management said it will take a few quarters to meaningfully moderate. Cash and investments stood at INR38.8b, while the OCF/NI ratio was lower by ~35% due to seasonality of incentives paid in 1QFY23.
• We raised our FY23/FY24 EPS estimates by ~2%/4% on higher growth and better margin. Our margin estimate remains in line with the management’s guidance. Our TP of INR4,120/share implies 22x FY24E EPS. We maintain our Neutral

 

Beat on revenue and margin

• Revenue from IT Services grew 2.9% QoQ and 26.6% YoY in CC terms, INR EBIT grew 28% YoY, and INR PAT grew 28% YoY in 1QFY23.
• BFS/Insurance (up 7.9%/4.5% QoQ CC) registered strong growth, while Manufacturing (down 11.5% QoQ CC) declined due to seasonality.
• LTI reported four large deals, with a net new TCV of USD79m. It also added four Fortune 500 clients in 1QFY23.
• PAT rose 28% YoY to INR6.3b, 8% above our estimate on higher profitability.