Home / Markets / Mark To Market /  L&T Infotech Q2 revenue and margin growth impresses the Street

L&T Infotech Ltd (LTI) Q2 results reflect the impact of a good deal wins. The firm’s second quarter revenue, rising about 2.3% sequentially in terms of constant currency, was well ahead of the Street’s estimates. Even after a sharp run-up of 77% in 2020, the stock continued its upward march on Wednesday and advanced 4.5%.

Like other IT players, growth was driven by the banking and finance vertical which saw revenues rising about 9.5% sequentially. At 5.4%, its manufacturing vertical’s revenue growth sequentially is a good sign. However, its retail and pharma, and hi-tech and media verticals showed a sequential decline. LTI’s overall 3.6% sequential growth is pretty decent considering that the Street had pencilled in about 2-2.5% sequential growth.

The operating environment has been a step ahead as well than the Street. A better pricing environment is evident. An improvement in offshore mix drove margins. “Better pricing, utilisation and offshore mix drove the robust improvement of 250 basis points sequential and 440 basis points y-o-y in the Ebit margin to 19.9%, the highest ever," said Motilal Oswal Financial Services in a note to clients. Ebit is earnings before interest and tax. One basis points is one-hundredth of a percentage.

Given the sharply improved performance, it seems like the Street could raise upgrade earnings for the coming year, which is positive. In fact, analysts could up earnings by about 4-5% for FY21 over earlier estimates, while revenues are also expected to find upward revision too.

Of course, but how growth continues to pan out in the second half will need to be watched given that some of last quarter’s sluggish revenue growth could have also been factored in the second quarter. Note that in Q1 sequential revenue growth dipped by about 4.8%.

No doubt, some of the margin improvements are sustainable, which should help continue on the improved profitability. However, analysts see margins tapering off in the coming quarters. Besides, after the Street bakes in the improved earnings outlook, the valuations would still continue to look quite rich. In fact, the stock is trading at a price-earnings multiple of about 25 times FY22 earnings, which appears at the upper end of the IT price band for mid-tier IT company.

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