L&T Infotech continues to leave rivals trailing in its wake

Stock has risen 89% so far in 2021 and is up nearly 4x since March 2020

Larsen & Toubro Infotech has continued its big bull-run on the bourses, with its share price rising 16.8 per cent on Tuesday after it reported better-than-expected growth in revenues in the September quarter of financial year 2021-22 (Q2FY22).

The stock has risen around 20 per cent so far in October, beating its rivals and the broader market. In comparison, the benchmark NSE Nifty50 has risen 4.5 per cent this month, while the Nifty IT index that tracks the market capitalisation of the top 10 IT firms, including L&T Infotech, has advanced 6 per cent.

The stock’s recent performance remains in line with its big outperformance since the outbreak of Covid-19. L&T Infotech’s price has risen 89 per cent so far in calendar year 2021 (CY21) and it has jumped nearly four times (x) since March 2020, from Rs 1,429 a share to Rs 6,900 on Tuesday. In comparison, the Nifty IT Index is up 3x during the period, while the Nifty50 is up 115 per cent. (See adjoining chart)

Analysts attribute this outperformance to the strong double-digit growth in revenue posted by the company.

“L&T Infotech reported another strong quarter in terms of both revenues and profitability. Importantly, growth is broad-based and there is significant upward traction across client buckets,” write analysts at HSBC Securities in their report on the company after its Q2 earnings.

And, most analysts expect it to maintain this growth momentum. “The demand environment continues to remain robust for the firm and we expect it to be among the growth leaders in the tier-2 IT companies,” write analyst at YES Securities.

The company’s net sales were up 22.3 per cent year-on-year (YoY) in Q2FY22, growing at the fastest pace in 11 quarters. Its net profit, on the other hand, was up 15.6 per cent YoY during the quarter, hit by a faster growth in operating expenses.

The company’s operating expenses were up 31.2 per cent YoY in Q2, growing at the fastest pace since the firm started reporting quarterly numbers in 2016. As a result, it took a hit on its operating or Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins, which was down 167 basis points (bps) to 22.4 per cent of net sales in Q2FY22 from 24.1 per cent a year ago.

The company’s Ebitda margin in Q2FY22 was in line with its five-year average of 22.3 per cent. Margins were adversely affected by a sharp rise in employee attrition, which is forcing the company to spend more on recruitment. The employee attrition rose to 19.6 per cent in Q2FY22 from 15.2 per cent in the Q1FY22.

Analysts, however, expect strong revenue growth by the company to take care of margins in forthcoming quarters. “The management mentioned that the deal pipeline is robust with a number of large deals, and without supply constraints LTI would have grown at a much higher rate, given the extremely strong demand environment,” write analysts at Prabhudas Lilladher.

On the flip side, the rally has, however, made L&T Infotech one of the most expensive stocks in the industry which raises the downside risk in case of a bad quarter and caps the upside. The stock was trading at a price-to-earnings multiple of 57x on Tuesday, up from 32x a year ago and nearly 50 per cent premium to Tata Consultancy Services’ price-to-earnings multiple of 37x.