Margin and valuation concerns could limit upsides in L&T Infotech

Revenue growth trajectory however is expected to remain robust

L&T Infotech ended FY21 on a strong note outperforming its mid-cap peers with steady revenues and best-in-class margins. Though growth in the quarter was broadbased, the 4.4 per cent sequential uptick on a constant currency basis was driven by hi-tech and media sectors with the former benefiting from the $204 million Injazat deal.

Even in FY21, the company’s growth of 9.5 per cent in dollar terms was in the top quadrant led by the financial services space and recovery in other verticals. Earnings before interest and tax (EBIT) margins for the financial year also improved 350 basis points to 19.6 per cent.

Going ahead the street will look at the ability of the company to sustain margins and growth. Margins in the March quarter were ahead of estimates gaining 270 basis points y-o-y despite the impact of the wage hike. Though margins on a sequential basis declined from record levels reported in Q3FY21, the company was able to offset the wage inflation with lower sales, general and administrative expenses as well as higher offshore mix.

While the management has indicated that it would maintain utilisation rates and there are growth leverage and cost optimisation levers available to it, the street is cautious given consecutive quarters of wage hikes. Say analysts at Motilal Oswal Research, “While LTI’s topline performance remains outstanding, the management’s commentary and decision to provide back-to-back quarters of wage hikes should result in a pullback in profitability in FY22. We anticipate a 160 basis points y-o-y EBIT margin decline in FY22 due to investments in growth and workforce management.” The company however, indicated that its net profit margin would be at 14-15 per cent with steady utilisation.

Higher valuations too could limit near term upside for the stock. At the current price, the stock is trading at 24 times its FY23 earnings estimates. Some of the concerns on margins and valuations are reflecting on the stock which has corrected by 8 per cent since its highs over the past week. While growth is expected to be strong at over 17 per cent in dollar terms over the next couple of years led by strong deal wins and healthy pipeline, how the margins move will be a key thing to watch out for. Investors can consider the stock on further correction.