L&T Infotech’s good show has led to rich valuations, but growth is key2 min read . Updated: 13 Dec 2020, 10:33 PM IST
- Part of the reason for an increase in valuations is that the company was least disrupted by the pandemic
- LTI plans to expand from the 16 delivery centres it has at present to 40 delivery centres in the next several quarters
L &T Infotech Ltd (LTI) is among the most expensive stocks in the IT services sector and is trying hard to prop up its growth rates and keep investors interested. The company plans to bolster its cloud business towards this end. It also announced new deal wins recently.
However, the stock’s valuations are around 27.3 times one-year forward price-earnings multiple, at par with market leader Tata Consultancy Services Ltd. A year ago, LTI valuations were much lower around 16 times earnings.
Part of the reason for an increase in valuations is that the company was least disrupted by the pandemic. LTI’s revenue growth of about 15% for the past five years has also been enthusing the Street. Continuation of this growth depends largely on new opportunities such as cloud.
The management has said that its cloud business is likely to be a $1 billion opportunity from the current $150-200 million and sees this segment as the growth engine of the future. LTI’s large deal win in West Asia from the Mubadala group is worth about $205 million.
LTI also has a large deal pipeline of about $1.9 billion, which is a 62% increase year-on-year. However, the deal wins have been slow over the last few quarters. “LTI continues to note longer than usual conversion cycle from a pipeline into wins, given virtual sales closure and slower contract signing process," said analysts at Macquarie Capital Securities (India) Pvt. Ltd in a client note.
However, structural tailwinds in place for the IT industry augurs well for companies such as LTI. “They are the least affected by the pandemic, with a strong set of clients. LTI’s exposure to stressed segments during the pandemic is minimal and with the dedicated business for cloud they should continue to clock good revenue growth," said Amit Chandra, analyst, HDFC Securities.
Higher utilization levels, higher offshoring and lower sub-contracting expenses are some factors that could drive margin growth. Some of this is being reflected in its financials. Ebit margins have increased from 15.5% in the September quarter last year to 19.9% in Q2FY21.
The offshore-onshore mix is tilting in favour of the former. LTI plans to expand from the 16 delivery centres it has at present to 40 delivery centres in the next several quarters.
However, its margins’ expansion could slow in the second half. “We are building in lower margins in 2HFY21 at 18.6% vs 19.9% in 2QFY21, given the rollout of wage hikes effective from Q4, low margin pass-through revenues coming in, and investments in the new business unit," said analysts at Morgan Stanley India in a client note.
The stock’s future will hinge on how fast the company can increase its earnings, given that valuations are already pricey. “LTI is the TCS among tier II IT companies, and its rich valuations should be supported well," said Chandra.