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Shares of L&T Infotech Ltd (LTI) have outperformed peers in the past three months, largely because of the company’s inclusion in the MSCI indices. As the inclusion results in higher foreign fund flows into a stock and given an already low free float, LTI’s shares have risen 38% in the past three months. The Nifty IT index has risen 23% during the same period.

As a result, the stock became not only the most expensive midcap IT stock, but also the most expensive IT stock, according to research published by Motilal Oswal Financial Services Ltd ahead of the results season.

Prima facie, it seems the premium valuations are justified. LTI reported year-on-year (y-o-y) constant currency revenue growth of 7.4% in the December quarter. This compares with a mere 0.4% growth in the case of Tata Consultancy Services Ltd and 6.6% growth in the case of Infosys.

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However, according to an analyst at a multinational brokerage, “Lately, LTI’s growth rates are slacking a bit and the earnings beat isn’t as high as peers. Besides, its commentary on deal wins is relatively softer. When compared with its rich valuations, this seems out of tune."

Adjusted for unusually high growth in the Indian business, the rest of LTI’s business grew 3.5% sequentially, the analyst points out, much lower than the overall growth of 5.4%.

Also, overall growth was slightly higher than the Street’s estimates, compared to large outperformance from peers such as TCS and Infosys.

Revenues of some key verticals such as insurance and energy and utilities were flat or even declined last quarter. There are also some concerns about the company’s deal win trajectory. LTI announced two large deals with a net new total contract value of $278 million. Analysts point out that these are the best ever signings, with the previous best being $113 million.

“Investors should note that a large part of this is from a deal won in partnership with another technology firm in Abu Dhabi," says the analyst mentioned above.

However, not all analysts are worried about this. In a report dated 10 December, analysts at Edelweiss Securities Ltd had said, “We believe that while LTI’s large deal wins have been a bit tepid in the previous two quarters, its recent AED760 million (six-year) deal with a Middle East client will provide the much-needed fillip to its large deal momentum."

On the valuations front, the LTI stock is trading at around 28 times FY23 earnings, compared to 26 times in the case of TCS, according to Motilal Oswal’s earnings estimates. With a valuation multiple higher than even large-cap peers, it isn’t surprising that some analysts worry about LTI’s valuations being stretched.

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