LTIMindtree needs more than just a plan

LTIM is targeting $1 billion in revenue synergies in the next 4-5 years through cross-selling opportunities. Secondly, LTIM expects its Ebit margin to reach 19-20% by FY27, aided by better utilization, improved operating efficiencies and leverage of selling, general and administrative expenses. If achieved, the margin figure would be next only to Tata Consultancy Services Ltd (TCS) and Infosys Ltd, said Jefferies India analysts. “The synergy targets seem slightly optimistic to us," they wrote in a 14 March report.

LTIM’s management hopes to bounce back to normalized Ebit margin of 17-18% in the next few quarters. In the December quarter (Q3FY23), Ebit margin took a knock due to furloughs and one-off integration costs, falling to 13.9%. As merger-related costs ease, margin is likely to improve in Q4.

“LTIMindtree is targeting 200 basis point (bps) of margin benefit from cost synergies by FY27; we estimate 100-150bps of that to accrue in the next two years itself," said Kumar Rakesh, analyst at BNP Paribas Securities India.

LTIM’s large deal pipeline remains robust with 68 large deals worth a total contract value (TCV) of $3.2 billion. According to the management, while demand for technology transformation remains secular, given the macroeconomic uncertainty due to delayed decision making, the conversion of deal pipeline to TCV is taking longer.

Even so, given the scale now, LTIM is in a better position to compete for large deals and absorb ramp-up costs. As analysts at Kotak Institutional Equities say, LTIM is positioning itself as an agile challenger to tier-1 IT, capable of catering to all aspects of client demand.

But investors may want to see concrete results first, which perhaps explains the lukewarm reaction of the stock to the meeting. LTIM’s shares were flat on Wednesday. Also, global stock market sentiment has been hit by Silicon Valley Bank (SVB) collapse. SVB is one of LTIM’s clients. However, revenue exposure to SVB and other regional US banks is insignificant, said the management. Despite the ongoing turmoil, management is upbeat on the prospects of BFSI, which contributed 37.4% to LTIM’s revenue mix in Q3.

“Given the execution track record of the LTIM management, we do not see a company-specific downside risk, as of now. But due to SVB collapse, the medium-term revenue visibility for Indian IT companies could get hampered," said Omkar Tanksale, senior research analyst at Axis Securities Ltd. So, it’s likely that SVB-led uncertainty has overshadowed LTIM’s growth plans, which can be seen in the stock’s reaction, he added.

Developments related to SVB and its impact on the BFSI sector in US, is a key monitorable for IT investors. That apart, softness in LTIM’s other verticals such as retail and high-tech are near-term dampeners.

In this backdrop, LTIM’s valuation doesn’t give comfort. The stock is trading at FY24 price-to-earnings multiple of 26 times, showed Bloomberg data. This is higher than the PE multiples of tier-1 IT firms TCS, Infosys and HCL Technologies Ltd.

Given this, sharp near-term upsides in the LTIM stock could be capped. The pace of margin revival would be crucial to drive meaningful earnings upgrades for company hereon. According to Rakesh at BNP Paribas, execution in a worsening macroeconomic environment would be key and will be the next positive catalyst for the stock.