Home / Markets / Mark To Market /  L&T Infotech’s consistent show adds heft to its valuations

IT leaders Tata Consultancy Services Ltd and Infosys Ltd may have only recently resumed double-digit revenue growth rates in constant currency terms. But the relatively smaller firm Larsen and Toubro Infotech Ltd (L&T Infotech) has been clocking strong double-digit revenue growth rate for two years now.

Revenue in the December quarter grew 20.6% in constant currency, marking the ninth consecutive quarter of double-digit growth. Alongside, profit margin expanded 3.8 percentage points in these nine quarters to 19.1% last quarter.

The performance underscores strong deal wins and execution. The company has won one large deal ($50 million-plus) in each of the last three quarters, points out Emkay Global Financial Services Ltd. While L&T Infotech told analysts there is tightness in spending at some clients, deal wins and pipeline remain strong, and it expects the growth momentum to continue. The company is confident of remaining in the top quartile of industry growth, it added.

Graph: Naveen Kumar Saini /Mint
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Graph: Naveen Kumar Saini /Mint

Tracking the strong performance, the L&T Infotech stock has gained 58% over the last year. The Nifty IT index during the time is up 16%. The steep outperformance drove up the stock valuations. So much so that at 18 times FY20 earnings estimates, it is not only trading at a premium to the sector valuations, but is also valued at a premium to some large-cap IT stocks.

Even then, analysts are not complaining. The continued growth with healthy improvement in margins is leading to earnings upgrades. With deal wins remaining strong, most analysts see L&T Infotech maintaining the growth momentum sustaining valuations. “While valuations seem to be stretched on an absolute basis, comfort comes when valuations are seen relative to growth (price to earnings growth of 1.2 times)," Emkay Financial said in a note.

So what is the secret behind the strong performance? According to Edelweiss Securities Ltd, early investments in new technologies, a strong management and a focused approach are helping the company. “Management attributed their continued growth to their focus on ‘fewer verticals, fewer customers and fewer capabilities’ and suggested this has helped them in (deal) wins against much larger peers," Elara Securities (India) Pvt. Ltd said in a note. While the strategy is yielding commendable results, the premium valuations leave little room for earnings slippages.

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