L&T Infotech's expectations of better growth in H2FY20 a shot in the arm?

December quarter results are likely to provide clarity on growth prospects

The L&T Infotech (LTI) management’s expectations of better growth in the second half of the current financial year (H2FY20) comes as a shot in the arm, given the challenges that the global tech industry is facing. However, the going may not be smooth. This is why the stock, after gaining close to 2 per cent in intra-day trade on Thursday, closed the session marginally lower at Rs 1,631.25.

The company, during its analyst meet on Wednesday, had indicated that year-on-year (YoY) revenue growth during H2FY20 would be around 14 per cent in constant currency terms, higher than the 12 per cent growth recorded during H1FY20. 

With client-specific issues now behind, faster growth of its digital business as well as a healthy deal pipeline (42 per cent YoY rise in overall deals and 20-22 per cent rise in large deals), among others, should drive LTI’s top line in H2FY20. It has earlier faced issues, mainly in the banking and financial services (BFS) segment.

Granular details of the deal pipeline, in fact, provide some comfort to LTI’s objective of being a market leader in terms of revenue growth during FY21. 

However, given the overall challenging macro environment and scepticism over the deal conversion rate for the sector, achieving the desired results may not be easy. Analysts at JM Financial, for instance, have a ‘hold’ rating on the stock, mainly on account of the continued macro challenges in two of the company’s core verticals — BFS and energy (40 per cent of revenues) — even as the brokerage believes in LTI’s structural growth story. 

Some analysts believe the company’s aggressive hunt for new clients, mining of existing customers, and strategic alliance should help it achieve the growth target. However, investors should wait for the December quarter results for clarity on the company’s growth track. 

While the current valuation of 16x its FY21 estimated earnings is more than 20 per cent lower than its peak 1-year forward valuation, it is still higher than that of many other mid-cap IT players (up to 14x).