LTI Q4FY22 review - Muted revenues on lower onsite volumes

What’s Buzzing:

L&T Infotech (LTI) reported muted revenue growth for Q4. It guided for 290 bps QoQ EBIT margin impact in Q1FY23 due to annual salary increments.

Context:

The company’s constant currency revenues were up 3.6% QoQ while dollar revenue increased 3.1% QoQ to US$570.4 million (mn). EBIT margins came in at 17.3% (down 60 bps QoQ). EBIT margin was impacted on wage hikes (-40 bps impact) and lower working days (-60 bps) while it was mitigated by lower SG&A and business mix (+40 bps). In terms of CC growth, retail, energy & utilities & insurance reported strong growth of 7,7%, 4.1% and 3.8% QoQ, respectively, while 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. The company added 2448 employees in Q4, taking its headcount to 46,000. Attrition was up 150 bps QoQ to 24%. Total dividend for FY22 was at Rs 55 per share (42% payout).

Our Perspective:

The demand environment continues to be strong for the foreseeable future. However, in the near term there could be few headwinds in terms of high energy prices, high inflation and continued geo-political tensions. The company indicated that attrition will continue to be elevated for the foreseeable future and will not cool down immediately. LTI added 5,200 freshers in FY22 and is looking to add 6,500 freshers for pyramid optimisation, which is expected to support near term margins. Another margin lever is price hike as LTI has been getting price hikes in a few pockets and expects benefits to continue in FY23 as well, albeit in a gradual manner. Onsite volume decline situation is expected to normalise in couple of quarters. We estimate 17%, 23%, 19% Revenue, EBITDA, PAT CAGR, respectively, for FY22-24E.