LTI: Disappointing numbers; cautious near term outlook, ICICI Securities

Larsen & Toubro Infotech (LTI) offers application development, IMS, digital solution services to BFSI, retail, health, media & hi-tech verticals.

• LTI has 71 Fortune-500 clients with a presence in North America & Europe
• LTI has grown at 19% CAGR over FY17-22 with robust margins (>19%)

Q4FY22 results: LTI reported weak numbers

• Constant currency revenues increased 3.6% QoQ
• EBIT margin contracted 60 bps QoQ to 17.3%
• Guided for 290 bps QoQ EBIT margin contraction in Q1FY23 on salary hikes

Key triggers for future price performance:

• LTI’s ability to deliver end-to-end solutions is expected to help in registering industry leading growth;
• Ability to win large deals, presence in niche verticals, effectively mine clients, adding Fortune 500 clients and digital prowess other key drivers;
• Vendor consolidation opportunity and digital acceleration. We expect LTI to register 16% CAGR revenue growth in FY22-24E.

Key takeaways of quarter and conference call highlights
The company reported constant currency growth of 3.6% QoQ while dollar revenue growth was 3.1% QoQ to US$570 million (mn). In rupee terms, revenue grew 4.0% QoQ to | 4301 crore;

In terms of CC growth, retail, energy & utilities and insurance reported strong growth of 7,7%, 4.1% and 3.8% QoQ, respectively. Growth in banking, manufacturing & hi-tech was relatively muted at 3.3%, 2.3%, 2.2% QoQ, respectively;

In terms of geographies, growth in North America was relatively muted at 2.6% while Europe reported strong growth of 8.2% QoQ. In terms of client profile Top 5 customers reported muted growth of 2.8% QoQ vs. more than 6% QoQ growth in the last three quarters;

LTI said revenue growth for the quarter was impacted on account of continued high attrition being faced by the company on onsite, especially in US geographies. The company mentioned that on account of this, volume growth for the quarter was flat vs. 2-4% QoQ volume growth on a quarterly basis. LTI expects this situation to normalise in two to three quarters;

The EBIT margin declined 64 bps QoQ. It was impacted by wage hike impact (-40 bps) and lower working days (-60 bps), which was mitigated by lower SG&A and business mix (+40 bps). The company has given salary hikes to its employees effective April 1, 2022, and guided for 290 bps impact of the same on Q1 margins;

The company closed four large deals with net new TCV of over US$80 mn in Q4FY22. Three deals were with existing clients and one with a new logo. Vertical wise, two deals were in the BFS space, one in retail & CPG and another with a key government body in public healthcare. The deal pipeline remained at US$2 billion (bn) (net new deals);

The company added 5,200 freshers in FY22 against its guidance of 4,500 given at the start of the financial year. LTI is now looking to add 6,500 freshers in FY23. The company’s net adds for FY22 were ~10,600 employees, higher than its FY21 and FY20 net hiring put together;

The company reiterated that the demand environment continued to be strong but sounded cautious on near term client spending on account of higher energy prices, higher inflation and continued geopolitical headwinds. LTI, however, said that it has not seen any cut in client spending;

The company mentioned that they are getting price hikes in certain pockets as clients are receptive on price hikes especially on new technologies such as AI, ML and cloud. LTI expects the benefit of price hike to continue in FY23 as well;

The management indicated that on an LTM basis attrition has increased for the quarter but on a quarterly annualised basis it has come down. However, they are of the view that attrition will not cool off immediately and will take three to four quarters to stabilise.

For the complete report, click here – https://www.communicationstoday.co.in/lti-disappointing-numbers-cautious-near-term-outlook-icici-securities/

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