OPEN APP
Home / Markets / Mark To Market /  L&T Infotech stock: Priced to perfection

Larsen & Toubro Infotech Ltd (LTI), a mid-cap information technology services provider, foresees robust demand conditions driving broad-based growth for the company over the next few years. The next leg of revenue growth will be driven by cloud, data and digital services, the management said at its recent analyst meeting.

LTI’s cloud offering aLTIus is already seeing strong traction, according to the company’s management. More than 40% of LTI’s portfolio comprises cloud, data and digital products. Over the past five years, LTI’s cloud segment has seen eight-fold growth. The company is hopeful of meeting the $1 billion revenue target from the cloud business.

Robust revenues
View Full Image
Robust revenues (Mint)

Another takeaway for LTI’s investors was the company’s large deal pipeline, which stood at $2.07 billion, up 9% year-on-year. Demand has shifted towards medium-sized short-cycle deals, which are driven by discretionary spends, the management pointed out.

Conversion of the FY21 pipeline to large deals was weak, analysts from Kotak Institutional Equities said in a report on 10 December, noting that many deals were shelved and there was a skew towards a few large or mega deals.

“The current pipeline has many deals that are smaller in size with higher probability of reaching a decision stage as opposed to being shelved," the report said.

LTI has been steadily expanding its client base, which has helped reduce its revenue concentration in the top-five clients, the share of which has decreased from more than 35% in FY16 to 28.2% in Q2FY22.

Small wonder that the LTI management is confident of delivering industry-leading revenue growth performance in FY22. Investors are also oozing with optimism, as the handsome returns on the stock suggest.

LTI’s earnings performance has been stellar in the past few quarters and investors have not shied away from allocating brownie points. So far this calendar year, shares of LTI have appreciated as much as 81%, comfortably beating the sector index, Nifty IT, which is up 48% in the same time-frame. The stock is trading at a rich one-year forward price-to-earnings of around 43 times.

This is making some analysts uncomfortable. The stock’s punchy valuations keep JM Financial Institutional Securities Ltd’s analysts on the sidelines, despite LTI’s confidence of sustaining consistent performance. The domestic brokerage house finds better risk-reward in peers Persistent Systems Ltd and Mphasis Ltd among the tier-2 technology stocks.

The Kotak report concurred. “LTI has delivered strong industry leading growth in the past 3-4 years, drivers of growth are intact and position LTI well to be among industry growth leaders in the medium term. We stay constructive on the business, but find valuations of 41 times FY2023E earnings a tad expensive," it said.

However, high valuations are not the only concern for LTI’s investors. There is one crucial downside risk. Despite massive hiring in the recent quarters, the LTI management has cautioned about talent crunch remaining a near-term concern for the company, as well as the industry. In Q2FY22, LTI hired 4,034 employees, a record high. The company aims to hire 5,500 freshers in FY22 to meet high demand. The management expects the tight supply situation to ease over the next four-six quarters, it said at the analyst meeting.

Despite the supply side pressures, LTI expects its net profit margin to remain in the 14-15% range. Nonetheless, while this issue is not unique to LTI, against the backdrop of rich valuations, it does add to the discomfort.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Close
Recommended For You
×
Get alerts on WhatsApp
Set Preferences My ReadsFeedbackRedeem a Gift CardLogout