Mumbai: After disappointing investors with lower-than-anticipated earnings growth in the last few quarters, Larsen and Toubro Infotech Ltd’s second quarter was a welcome relief. The results were in line with market expectations, with no negative surprises and a promise of better margins in the second half of FY20. That perked up the stock up in trade on Friday, with LTI gaining 7%.

Investors are clearly relieved that LTI struck the right note this time, with 2.4% revenue growth quarter-on-quarter in constant-currency terms. Also, it won three large deals in the keenly competitive tech environment, which has been well-received by the markets.

Graphic by Santosh Sharma/Mint
Graphic by Santosh Sharma/Mint


The company seems to have shrugged off some of the past negatives. “Although in trade today the stock reacted sharply to results, we believe that this was due to the absence of negative surprise, as was the case in the past 2-3 quarters," said Emkay Financial Services in a note to clients.

In a conference call with analysts on Friday, the management clarified that account-specific events had soured performance in the first half. It now expects a ramp-up in deals announced last quarter, which, coupled with the new large deals, should give growth a fillip in the second half of FY20. In fact, the management maintains a double-digit revenue growth guidance for FY20, with a corresponding improvement in margins, which analysts consider a decent outlook.

In the recent past, investors have been worried about the growth outlook. The company’s first-half dollar revenues have shrunk to about 10% year-on-year. Note that over FY17-19, LTI notched about 18% annualised revenue growth. Three of its top clients have been struggling. But lately they have shown signs of stability. Hence, the outlook announced for the full year has reassured investors.

Revenue growth in most of the company’s verticals has been steady, with about 40% of LTI’s second-quarter earnings coming from Digital services. Most of its verticals saw strong double-digit revenue growth y-o-y, which is considered good given the headwinds in banking and finance, where growth was flat y-o-y. The firm is acquiring PowerupCloud Technologies Pvt Ltd, a cloud consulting firm, and this should add artificial intelligence and data analytics to its verticals.

Still, overall margin growth has not been as desired. In the second quarter, higher operating expenses pulled the Ebitda margin down to 18.1%, from 20.5% in the corresponding quarter the year prior. Ebitda is earnings before interest, tax, depreciation and amortization. Another worry is the marginal uptick in attrition in the second quarter. A lot will depend on LTI’s ability to scale up its operations in coming quarters, while maintaining margins. Besides, investors will look for synergies from the group's other IT services company, the newly acquired Mindtree Ltd.

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