Despite good prospects, valuations concerns may cap upside in L&T Infotech

L&T Infotech's new deal wins and pipeline indicates strong demand environment.

The country’s sixth largest software company by market capitalisation, Larsen & Toubro Infotech (L&T Infotech) hit a growth hurdle in the March 2022 (Q4FY22) quarter. After strong sequential growth of 8 per cent for the prior couple of quarters, the IT major fell short of street estimates as it reported a sequential growth of 3.6 per cent on a constant currency basis for Q4FY22. 

Growth was pegged back by muted volume performance due to onshore attrition. Volume growth was flat for the quarter as compared to 2-4 per cent sequential growth in the previous quarters. Banking, manufacturing and hi-tech sectors were the key verticals which pulled down overall growth. 

Despite the March quarter miss, the management indicated that the underlying demand remains robust as reflected by order bookings and deal pipeline. The company announced four net new large deals with a total contract value (TCV) of over $80 million in the March quarter and is in advanced stages of signing up another four contracts. There has been a pick-up in the TCV as the company had bagged $62 million of new large deals in 9MFY2022. 

Say Kawaljeet Saluja and Sathishkumar S of Kotak Institutional Equities, “Large deals are positive and provide visibility to growth, especially in an environment where headwinds could emanate from a deteriorating macro. After delivering 25.8 per cent revenue growth in FY22, the management believes it can deliver industry-leading growth in FY23. Hiring numbers support growth outlook with net headcount addition of 2,448 employees, a sequential growth of 5.5 per cent.”

The other metric the street will track is margin trajectory. The operating profit margin moderated by 60 basis points sequentially to 17.3 per cent due to lower working days and revenue mix. Given wage hikes, the company expects an impact of 290 basis points in Q1FY23. The company hopes to maintain net profit margins of 14-15 per cent in FY23 though it faces headwinds on employee remuneration, higher investments in sales and return of travel and facility costs. 

The stock shed 5.8 per cent in trade on Wednesday due to downward revision in earnings estimates. It is down over 20 per cent since its highs last month. While prospects given the healthy pipeline remain strong, most brokerages believe that valuations are on the higher side. Say analysts at Motilal Oswal Research, “While we remain confident of the management’s execution capabilities, we stay on the sidelines in the stock, led by a significant valuation re-rating.” 

Overall, analysts believe that investors can consider the stock, which has gained 30 per cent over the past year, on dips.