Growth and margin woes likely to keep a lid on LTI Mindtree stock

The LTI Mindtree (LTIM) stock has seen a deep correction due to uncertainty related to the appointment of a new chief executive officer (CEO), poor margins and earnings downgrades.

 

There has been the impact of a full quarter of pass-back of productivity gains to a hi-tech customer, which could continue, pushing down growth assumptions of the January-March quarter (Q4) of the financial year 2025 (FY25).

 

However, the October-December quarter (Q3) of FY25 record deal-intake of $1.68 billion (up 29 per cent quarter-on-quarter or Q-o-Q) could aid growth in Q4FY25.

 

Leadership change and associated realignment could also lead to temporary loss of focus.

 

Earlier projections assumed demand uptick in the BFSI (banking, financial services and insurance) industry. But tariff-led uncertainty and near-term realignment of roles, are key risks. There may also be more requests of pass-back of productivity gains by other customers.

 

Slower-than-expected discretionary pickup, revenue decline in Microsoft, and uncertainty over margins are all risk factors. However, as valuations drop, the stock may become attractive, given that fundamentals are good and growth is ok.

 

LTIM now trades at a 10 per cent discount to its five-year average price-earnings (PE) ratio. It may match large IT caps in growth rates even after downgrades.

 

The post-merger top-level attrition and uncertainty around succession have been bearish factors. The appointment of Venugopal Lambu does clear the fog and may stem the attrition. But the new management will take time to settle in and drive growth. 

 

Margins remain a key monitorable and the biggest risk. So far, post-merger synergies have been disappointing. There are potential SG&A (selling, general & administrative expenses) benefits to drive operating leverage. But sales focus and investment in SG&A would prolong margin recovery.

 

The operating margin could see an advance of only 40-50 bps in FY26 over FY25. This is a much slower growth rate than projected earlier.

 

Despite this, LTIM retains its strong position with good offerings in data engineering and ERP modernisation, positioning it to match or outperform its large-cap peers. 

 

If discretionary spending fails to drive demand in the near future and tech-spend revival is delayed, LTIM is projected to see much lower Constant Currency growth in FY26 and even FY27, with Ebit margins of 14.7 per cent and 15.0 per cent, respectively.

 

This could translate into an earnings CAGR of 9.4 per cent implying further downgrades for FY26 and FY27 earnings and PE multiples. EBIT stands for earnings before interest and tax, and CAGR for compounded annual growth rate.

 

On the upside, an upcycle in demand could push Ebit margins up to 16 per cent and that could improve valuations and upgrades also.

 

LTIM’s Q3 revenue grew 1.8 per cent Q-o-Q on a constant currency (cc) basis. Strong sequential growth in Manufacturing (over 9 per cent cc) and Rest of World (over 10 per cent) verticals suggest growth was led by pass through. BFSI growth (over 4.2 per cent) was good but the decline in Hi-tech (down 5.5 per cent), driven by AI-led productivity pass-back, was a concern.

 

Ebit margin declined by 170bps Q-o-Q to 13.8 per cent.

 

PAT or profit after tax came in at ₹1,087 crore. Free cash flow/PAT ratio improved from 55 per cent in Q2FY25 to 107 per cent in Q3FY25.

 

While AI creates new use cases, it also leads to productivity led volume deflation for IT Services. This is reflected in clients’ productivity pass-back demands. Management indicated this will continue in Q4 as well, and possibly beyond. This was reflected in -0.7 per cent Q-o-Q decline in top-5 accounts.

 

LTIM will need to ramp its large deal efforts to offset deflation. Management says recoup of wage hike impact (down 220bps) could take 2-3 quarters, retarding margin expansions.

 

In the absence of strong double-digit growth, margin recovery will be a grind. While some analysts retain buy/hold recommendations, every analyst has cut earnings projections and reduced target price and valuation.