L&T Infotech premium valuations to sustain, strong show leads to rerating

Given the industry-leading growth, robust deal pipeline and favourable tailwinds, analysts are now valuing the company at about 22 times (price to earnings or P/E ratio) from the previous 18-20 times one-year forward multiple.

 

The L&T Infotech stock has been rerated after the company reported strong June quarter results. India’s sixth largest information technology (IT) services company is the only large mid-cap IT services player to have posted 20 per cent plus year-on-year growth in each of the last three quarters. Given the industry-leading growth, robust deal pipeline and favourable tailwinds, analysts are now valuing the company at about 22 times (price to earnings or P/E ratio) from the previous 18-20 times one-year forward multiple.

Analysts at Investec Securities, who have increased their earnings estimates by 13 per cent for FY19, say that the company has been able to consistently bag large deals allowing it to improve its revenue growth trajectory every quarter since Q3FY17. Given the consistent delivery, diversified profile as well as no presence in slow-growing legacy business and industry-leading growth, brokerages expect premium valuations (current P/E at 21 times) for the company to continue.

The management of the company, which gets about half of its revenues from the banking, financial services and insurance (BFSI) vertical, remains confident of growth prospects in this space. This is on account of overall growth in the US economy and tax cuts, which are expected to translate to higher spends on technology. Further, increasing compliance and regulatory requirements will also boost investments in this sector.

The company has indicated that domain knowledge and micro-vertical focus will help it win large deals. The financial services space grew a strong 11 per cent on a sequential basis in the quarter. The other area of growth has been digital services, which contributes 34 per cent to the company’s sales. This segment has grown at 45 per cent year-on-year, while overall growth for the June quarter came in at 23 per cent. Growth in this space is expected to continue with traction coming from the insurance space. 

Despite the 12 per cent year-on-year increase in the workforce, the company managed to increase operating profit margins by 180 basis points to 17.7 per cent. Analysts expect another 270 basis points improvement in margins in FY19 aided by rupee depreciation.