‘Neutral’ on L&T Infotech with revised TP to Rs 3,910

LTI is up ~130% since its inclusion in our model portfolio (in 3QFY20) and is currently the most expensive (28x FY23 EPS) IT company within our coverage universe. While we continue to deem it among the best-in-class IT services companies on execution and management quality, we believe the stock more than factors in the potential; hence, we downgrade the stock to neutral.

In our view, LTI is in an enviable position – it benefits from its position as a company with enough scale to compete with larger players, but is still small enough to leverage the array of small deals to grow ahead of its peer group.
LTI also has a well-diversified portfolio of service lines – ADM, ERP, and IMS contribute 36%, 31%, and 14%, respectively, to total revenues. It has a good presence in all the major verticals, with BFS contributing 30% to total revenues.

The combination of a size- and industry-relevant portfolio has helped the company win deals (large deal pipeline of $1.9b) across service lines and geographies. LTI has clocked a 16.3% revenue CAGR in the past three years, among the highest in the IT services pack.

Aligning itself with customers’ digital transformation initiatives, LTI has structured its executive focus on cloud and data products. This, along with a capable sales team, has allowed it to both mine existing accounts as well as hunt for new accounts (beyond the top 20 clients). We expect LTI to continue to gain from these capabilities and deliver industry- leading revenue growth in the medium term (+14% USD CAGR over FY20–23E). This, coupled with strong margin improvement from FY21, would result in 20% INR PAT growth over the same period.

LTI is expected to deliver strong sequential growth (4.5% q-o-q USD) in a seasonally weak quarter, led by a ramp-up in deal wins in the previous quarter. After a strong margin performance in 2Q (EBIT margin up 370bps y-o-y), we expect stable margin performance in 3Q.

LTI currently trades at 28.0x our FY23 EPS estimates v/s the sector average of 24x and at a peak relative to its history. While we remain confident of the company’s execution capabilities, we downgrade the stock to neutral, led by the recent rally in stock price (130% in one year). We value the stock at 26.5x FY23 EPS (+2 ST Dev median P/E). We revise our TP to Rs 3,910, implying a 6% downside.