L&T Infotech: New initiatives, deal wins to help maintain growth trajectory

Valuations, however, discount near-term gains on revenue visibility, execution

With a return of 75 per cent over the past six months, L&T Infotech has been a major gainer, outperforming the BSE Teck Index returns of 41 per cent. It also outdid Wipro and Infosys, the best performing tier-1 IT stocks, which made investors richer by 68 per cent over this period.

The outperformance has put the stock’s valuations in the expensive zone. At the current price, it trades at 28 times its financial year 2021-22 (FY22) estimated earnings, which is at 4-5 per cent premium to that of Tata Consultancy Services.

While the best growth metrics and improving margins have been the reasons for it continuing to command a premium over its peers, analysts believe this is likely to stay given the deal wins and pipeline, its track record of execution and ability to scale up.

What could power its commitment to its industry leading growth metric is the plan for the digital or Cloud business. The company is looking at a six-fold jump in Cloud business to $1 billion over the next three years, from the current revenue run rate of $180 million.

In the near term, growth will be driven by the recent deal wins and the pipeline. The company announced a deal with a contract value of $200 million with the UAE-based service provider Injazat, a Mubadala portfolio company. Its large deal pipeline stood at $1.9 billion, up 62 per cent year-on-year (YoY). This would offer revenue visibility at a time when some of the large deals are witnessing delays.

Despite higher investments across multiple areas, including sales and marketing, and reskilling of workforce, as well as setting up separate business units for Cloud and data product segments, the company indicated it will be able to maintain net profit margins at 14-15 per cent.

Though analysts believe the company will outperform on the growth front, given the sharp uptick in price, investors will have to wait for a better entry point for meaningful gains.