The stock is quoting at a price-earnings multiple of 19.4 times, which is quite stiff for a mid-tier IT firm
The LTI stock continues to trade at rich valuations
Larsen & Toubro Infotech Ltd (LTI) picked up pace in the third quarter clocking a revenue growth of about 8.3% quarter-on-quarter in constant currency terms. With the numbers being much higher than what analysts had estimated, the LTI stock gained about 2.2% on Wednesday.
LTI completed the acquisition of PowerupCloud in Q3, which helped its growth. But even after adjusting for it, revenue growth was impressive at about 6.4% q-o-q, which is still higher than what analysts expected.
Revenue growth was led by the company’s top 5 clients, which grew by 12.1% q-o-q. LTI clocked a decent growth in some of its verticals, which had de-grown over the past few quarters. Growth in L&T Infotech’s key banking and finance vertical stood at 11.3% on a q-o-q basis. Note that this vertical de-grew by about 0.3% q-o-q in the second quarter, and contributes about 27% of its overall revenues.
In the first half, L&T Infotech had seen a ramp down in this vertical due to shrinking IT spends by some top clients.
Among its other important verticals, insurance has seen marginal growth of about 2.6% q-o-q in Q3, though manufacturing has grown picked up pace with a growth rate of about 15.7%. The management expects strong growth to continue in the second half.
Nevertheless, the street is not quite gung-ho about the operating margin performance. Despite the strong revenue beat, Ebit margin increased by only 70 basis points q-o-q. On a year-on-year basis, Ebit margins contracted by about 290 basis points, which is a tad disappointing. The management clarified that some of this due to an increase in sub-contracting costs. Ebit is earnings before interest and tax.
Meanwhile, the LTI stock continues to trade at rich valuations. The run-up in the stock of about 17.9% in the past one month compared to the Nifty IT index’s gains of 7.5% makes the stock a tad expensive. Analysts have pegged earnings for FY21 at about ₹99. That would mean the stock is quoting at a price-earnings multiple of about 19.4 times, which remains quite stiff for a mid-tier IT company.