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

Margins could face some pressure in the near term

L&T Infotech posted a strong September quarter performance led by better-than-expected revenue growth and record margins. 

India’s sixth largest software services firm registered a revenue growth of 2.3 per cent in constant currency terms, beating the Street’s expectation of 1-1.5 per cent. This 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.  

Earnings before interest and taxes (Ebit) margin was at all-time highs. The company posted a 250 basis points (bps) sequential uptick in Ebit margins to 19.9 per cent. Better pricing, higher utilisation and offshore mix were responsible for the gains, over 440 bps higher than the year-ago quarter.

While some of the gains on the margin front will be reversed as wage hikes were postponed to Q4FY21, and sales and marketing costs will be higher going ahead, the firm said that operational efficiency gains and favourable offsite-onsite split will be sustained. 

Though deal wins were below the trends seen in FY20, large deal wins, with contract value of $40 million, were better on a sequential basis. The outlook remains robust on the back of a healthy deal pipeline and improved client mining. Digital migration of businesses and broad-based growth across verticals is expected to help maintain growth momentum in the coming quarters. 

Analysts at HDFC Securities are positive on the company’s growth prospects and ascribe a target price of Rs 3,065 (current price is Rs 3,055) 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 the higher side. Invest on dips with a medium-term investment horizon.