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LTIMindtree Ltd>
  • CMP : 5,032.6 Chg : -14.65 (-0.29%)
  • Target : 5,320.0 (20.91%)
  • Target Period : 12-18 Month

28 Apr 2023

Aiming for double digit growth in FY24…

About The Stock

LTIMindtree (LTIM) is the merged entity formed after the merger of erstwhile Mindtree with LTI. It offers application development, IMS, digital solution services to BFSI, retail, health, media & hi-tech verticals.

  • LTIM has 700+ clients and combined annual revenue over US$4.1 bn+
  • LTIM has a combined employee strength of 84,000+ across 30+ countries
Q4FY23 Results:

LTIM reported margin recovery in Q4 results.

  • In CC terms, revenues grew 0.7% QoQ and 13.5% YoY
  • EBIT margins improved 250 bps QoQ to 16.4%
  • FY23 order book at US$4.87 bn
What should Investors do?

LTIM’s share price has grown by ~2.7x over the past five years (from ~₹ 1593 in April 2018 to ~₹ 4,400 levels in April 2023).

  • We maintain our BUY rating on the stock
Target Price and Valuation

We value LTIM at ₹ 5,320 i.e., 25x FY25E EPS

Key Triggers for future price performance
  • Merger expected to provide cross sell and up sell opportunities with scale benefits likely to kick in while participating in large deals hunt
  • Aiming for merger related benefit of US$1 bn in revenues and 200-300 bps margin expansion in the next four to five years
  • Vendor consolidation opportunity and digital acceleration. We expect LTIM to register revenue growth at 14.4% CAGR in FY23-25E
Alternate Stock Idea:

Apart from LTIM, in our coverage we like Infosys.

  • Key beneficiary of improved digital demand, industry leading revenue growth and healthy capital allocation prompt us to be positive

 

  • We have a BUY rating with a target price of ₹ 1,600

Key Financial Summary

Particulars FY20 FY21 FY22 FY23 5 year CAGR (FY18-23) FY24E FY25E 2 year CAGR (FY23-25E)
Net Sales 18,642.9 20,337.6 26,108.7 33,183.0 21.0 37,559.7 43,403.7 14.4
EBITDA 3,091.7 4,381.8 5,248.6 6,107.7 25.9 7,047.2 8,593.9 18.6
EBITDA Margins (%) 16.6 21.5 20.1 18.4 - 18.8 19.8 -
Net Profit 2,151.4 3,048.7 3,950.0 4,410.3 21.3 5,187.2 6,323.7 19.7
EPS (|) 72.6 102.9 133.4 148.8 - 175.0 213.4 -
P/E (x) 60.6 42.8 33.0 29.6 - 25.1 20.6 -
RoE (%) 25.1 26.2 27.6 26.6 - 27.0 28.3 -
RoCE (%) 27.3 31.7 32.1 32.4 - 32.5 34.2 -
Source: Company, ICICI Direct Research

Key takeaways of quarter and conference call highlights

  • The company reported constant currency growth of 0.7% QoQ while dollar revenue growth was 1% QoQ. LTIMindtree, in dollar terms, reported revenue of US$1,057.5 mn while in rupee terms revenue was at | 8,691 crore, up 0.8% QoQ
  • Vertical wise BFSI (38% of mix) grew 2.7% QoQ while retail & manufacturing reported growth of 2.4% & 1% QoQ, respectively. Hitech & Health declined for a second straight quarter reporting a decline of 1.5% & 2.2%, respectively

 

  • Geography wise North America (71.9% of mix) & RoW reported muted growth of 0.5% & 0.2% QoQ, respectively, while Europe reported sustained growth of 4.4%

 

  • EBIT margin of the company improved by ~250 bps QoQ to 16.4%. The company indicated the following tailwinds for margin improvement: a) ~80 bps reversal of furlough impact, b) 80 bps impact of lower merger integration cost and c) 90 bps impact of operational efficiency

 

  • For FY23, the company reported revenue of US$4,105.7 mn, up 17.2% (19.9% in CC terms) while in rupee terms the company reported revenue of | 33,183 crore, up 27.1%. LTIMindtree for FY23 reported an EBIT margin 16.2% compared to EBIT margin of 17.8% in FY22

 

  • The company indicated that integration of the two erstwhile companies i.e., LTI and Mindtree is now complete and it has started operating as a single entity from April 1,2023. LTIMindtree indicated that Q4 performance was impacted due to slower execution of deals due to delayed start to some of the programs, which it won recently. The company indicated that it is seeing a spill-over of the same in Q1FY24 and recovery is expected from Q2FY24 onwards. The company mentioned that it is guiding for double digit revenue growth in FY24 and the confidence of the same is coming from i) deal pipeline is healthy and the company is seeing no issue there, ii) order book continues to be healthy & order book is at US$4.87 bn, iii) the company also indicated that its large deal pipeline has increased to US$3.6 bn now compared to US$3.2 bn at the same time last year, iv) the integration is now complete and LTIM as an entity has now got a seat on a table for more large deals discussion, v) cross sell and upscale opportunities in their focus 100 clients, vi) range of industries they are catering to

 

  • The company indicated that its clients are now focusing on its costs. Hence, incremental pipeline is coming from cost take out deals and the trend is likely to continue till inflation pressure ease off. LTIMindtree also indicated that it is seeing strong opportunities in the BFSI space despite a couple of clients freezing some of the programs. The company also indicated that cost take out deals is generally slower in terms of ramp-ups as few things like vendor consolidation or client’s own restructuring often delays execution there. It mentioned that it is expecting recovery in BFSI space from Q2FY23 onwards. The company also indicated that there is some seasonality, which plays in Q1 in the form of absence of licenses revenues in the erstwhile LTI, which is also one of the reasons for weak Q1FY24 performance. The company mentioned that client’s investment interest continues in data & analytics, AI, EV, ADAS, industrial automation, sustainability and it is looking to capitalise on these opportunities and indicated that global banks and Insurance companies are already leveraging on data & analytics piece

 

  • In the BFS space, the company is seeing cost take out programs forming majority of the portion of a deal pipeline as banks are looking to conserve cash. In insurance space, transformation programs continue with continued investments in data & analytics. In Hi-tech some of the delayed decision making visible is product engineering, customer support however, the company mentioned that it has formidable position in this space due to vendor consolidation. In manufacturing, the company is seeing some vendor consolidation opportunities especially in some of its auto clients. In energy, stable commodity prices are helping growth. Also, there has been a continued investments in carbon footprint reduction and health & safety solutions. Retail has seen downward spending pattern due to higher interest rate and high inflation. The company’s growth in travel & hospitality continues to be healthy. It expects sustained momentum there, going forward as well

 

  • The company indicated that net decline in headcount addition for Q3 and Q4 should be seen in the context of merger wherein they were accessing headcount requirement from the merged entity perspective. Hence, a lot of fulfilments have been done from internal resources. The company indicated that from Q1FY24, they may go back to normal hiring cycle but indicated that hiring will be calibrated as per demand. LTIMindtree also indicated that subcontractor costs for it is already low compared to its peers but their bench strength will provide an opportunity to optimise it further. The company indicated that their aspirational EBIT margin band is 17-18%, which they will like to reach in the medium term. The company also indicated that in Q1FY24, it will have a slow start in margins and is likely pick up in the subsequent quarters. The company mentioned that wage hike will happen in Q2 and also mentioned that growth there would be lower than previous year

 

  • The company’s net employees during the quarter declined by 1,916 bringing the total number of employees to 84,546. LTM attrition of the company declined by 210 bps QoQ to 20.2%

 

  • The company during the quarter added 31 new clients. Also, on a QoQ basis it added two clients to US$50 mn+ and one client to US$20 mn+ revenue bucket list

 

  • The company declared a final dividend of | 40 per share taking its total dividend for FY23 at | 60 per share

Disclaimer

ANALYST CERTIFICATION

I/We, Sameer Pardikar, MBA, Sujay Chavan, MMS, Research Analysts Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.         

 

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