L&T Infotech: On a digital overdrive - Buy

Rising digital revenues, traction in its large verticals and large-deal wins are key positives

Most bluechip IT services companies have faced challenges to revenue growth and erosion in margins as well. However, select mid and moderately large software players have been able to distinguish themselves with their strong focus on digital delivery, with the result that they have managed to grow much faster than the industry rates.

L&T Infotech (LTI) is one such IT company in the $1-billion revenue club that has grown consistently at 3-4 percentage points faster than the industry rate over the past few years.

Little wonder then that the stock’s value has almost doubled over the last year.

A steady rise in the proportion of digital revenues, increasing contribution from high-margin offerings, traction in its large verticals and healthy large-deal wins are positives for the company. Key metrics such as utilisation and attrition have also improved.

 

 

Despite the run-up in the price, the stock (at ₹1,392) is available at a reasonable 18 times its likely per share earnings for FY-19, which is cheaper than the multiples that Mindtree and Hexaware Technologies trade at (19-21 times). Investors with a two-year perspective can consider buying the company’s shares.

In the nine months of FY-18, LTI’s revenues rose 13.2 per cent over the same period in FY-17 to ₹5,614 crore, while net profits went up nearly 15 per cent to ₹823 crore. In dollar terms, the revenue growth has been even better at 15 per cent.

Multiple growth drivers

The company has consciously increased its focus on digital offerings with global clients transitioning from traditional modes of service delivery.

Digital revenue now accounts for nearly a third of LTI’s overall pie, up from 28 per cent in December 2017.

This proportion is among the best in the industry, as even the bluechip names derive only 20-25 per cent of their revenues from digital offerings.

The company’s higher-margin offerings such as enterprise solutions, analytics, AI & cognitive and enterprise integration & mobility have grown at a much faster pace than LTI’s revenue rate.

The growth rate for these service lines has been in the 21-35 per cent range. These offerings account for around 44 per cent of overall revenues. LTI has reduced focus on traditional low-margin application services, infrastructure management and testing. But these offerings too have grown in double-digits. Thus, the service mix is fairly optimal.

As a result, even as realisations come under pressure, the company has still been able to maintain EBITDA margins at healthy levels of 17-18 per cent.

 

 

 

 

Broad-based traction

All of LTI’s verticals have been growing. Large verticals such as BFS (banking and financial services), energy & utilities and CPG, retail & pharma have grown in excess of 20 per cent Y-o-Y in recent quarters.

Revenues from key geographies such as North America and Europe have been improving steadily.

Interestingly, India is a very significant region for LTI, accounting for about 8 per cent of revenues.

Last October, the company won a $100-million deal from the Central Board of Direct Taxes (CBDT).

The deal involves the company helping the CBDT identify non-compliant tax payers using social media analytics.

Thus, the company’s growth trajectory has been sustained due to the broad-basing of its revenue streams.

Improvement in key metrics

In the last one year, LTI has been able to add three new customers in the $20-million category and eight in the $5-million bucket. These wins suggest that the deal pipeline has been fairly steady.

Despite the trend of companies having to recruit onsite with the governments in the US and many other European countries insisting on hiring locally, the proportion of LTI’s onsite efforts is still under 24 per cent. If there is greater demand to deliver projects from client locations overseas or to hire locally, there is still reasonable leeway for the company to do so without having to face a dent in its margins.

Utilisation, at 81.5 per cent, has been increasing steadily and compares favourably with most peers.

Attrition, a key operation risk, has been decreasing steadily over the past four quarters, down from 18.1 per cent to 14.6 per cent in the recent December quarter.

One mild concern would be the increase in effective tax rate for the company.

With many of the special economic zones where it operates moving out of the exemption phase, the effective tax rate is expected to increase from 23 per cent to 25 per cent over the next couple of years.

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