L&T IT twins: Deal wins, client relationships offer revenue visibility

Large deal wins, client relationships, and strong presence in growth verticals offers revenue visibility

The stocks of L&T software twins, L&T Infotech and L&T Technology Services, have gained between 7 and 20 per cent over the past week, with most of the gains coming in the last couple of sessions. Analysts say the stocks prior to the recent rally were trading at reasonable valuations and given the robust outlook there was upside from those levels. Among the two, the higher gains were seen in the stock of L&T Infotech.

After the recent management update, analysts believe that there are a number of growth levers for L&T Infotech. The company indicated that its December quarter performance would come in better than those reported in the September quarter and given the deal pipeline, the outlook for FY19 remains strong. The company has over the past few quarters signed 12 large deals with contract value of about $500 million.

One of the key segments expected to drive growth is digital. The vertical has grown at an average of 10 per cent every quarter for the last 10 quarters and now accounts for 37 per cent of revenues. Analysts believe that the expertise in the digital domain, client partnerships and execution so far should help it to maintain growth momentum. What is helping the company post stronger growth rates is the turnaround in prospects of banking, financial services and insurance, energy and utilities which account for 60 per cent of the company’s revenues. The company has been posting 20 per cent plus revenue growth in each of the last four quarters.

For L&T Technology Services, which offers engineering design services with presence in key verticals such as transportation, industrial products, medical and process engineering, the large addressable market size offers revenue visibility. Given its relationship with large clients (R&D spenders) and its presence in high growth verticals, the company is expected to post revenue growth of 18 per cent over the FY18 to FY21.

Analysts expect the valuations of the two companies which are at a 25 per cent premium to peers to sustain despite the recent surge in prices given the growth visibility and execution track record.