Strong deal pipeline to sustain L&T Infotech's growth trajectory

Margins could face some pressure in the near term

The L&T Infotech stock gained over 4 per cent on Wednesday after the company posted better than expected revenue performance and record margins in the September quarter. India’s sixth largest software services firm posted revenue growth of 2.3 per cent in constant currency terms, much ahead of the street’s 1-1.5 per cent expectation.

The revenue growth was led by the banking, financial services and insurance vertical which grew 9.5 per cent on a sequential basis and accounted for 90 per cent of the incremental revenue uptick in the quarter. 

While revenues were better than expectations, earnings before interest and taxes (EBIT) margin performance was exceptional. The company posted a 250 basis points sequential uptick in EBIT margins to its highest ever of 19.9 per cent. Better pricing, higher utilisation and offshore mix was responsible for the gains which over the year ago quarter was over 440 basis points higher.

While some of the gains on the margin front will be reversed given that wage hikes had been postponed and sales and marketing costs will be higher going ahead, the company highlighted that operational efficiency gains and favourable offsite-onsite split will be sustained.                                                                    

Though the deal wins was below the trends seen in FY20, large deal win with contract value of $40 million was better on a sequential basis. The outlook however remains robust on the back of healthy deal pipeline as well as improved client mining. The digital migration of businesses and broadbased growth across verticals is expected to keep growth momentum going for the company in the coming quarters.

Analysts at HDFC Securities are positive about the company’s growth prospects and ascribe a target price of Rs 3,065 (current price at Rs 3,094) based on FY22 earnings multiple of 22 times. While they highlight the company's industry leading 20 per cent earnings growth over FY20-23 and return ratios over 45 per cent, valuations after the recent rally are on higher side. Invest on dips with a medium term investment horizon.