Home / Markets / Mark To Market /  Will L&T Infotech’s strong deal pipeline revive its stock’s fortune

Larsen and Toubro Infotech Ltd’s (LTI’s) shares have had a rough ride this year, falling by about 6%, at a time when the Nifty IT index has risen about 10%. The company has been trying to send a message that it was on a recovery path. In a post-earnings call with analysts in October, the management had exuded confidence of acceleration in revenue growth in the second half of FY20.

The management backed up the claim at its latest analyst meetL&T Infotech. Deal flow remains strong. The overall order pipeline is 42% higher than last year, it said, adding that execution was gaining pace. “Well-oiled sales engine is improving visibility and could reflect in better 2H FY20E growth vs H1 and influences our constructive view," analysts at Elara Securities (India) Pvt. Ltd said in a note.

Graphic by Naveen Kumar Saini/Mint
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Graphic by Naveen Kumar Saini/Mint

LTI’s strategy of adding new business clients is progressing well. New clients constitute 35% of the deal pipeline, up from 19% last year.

Large deals pipeline is also notably higher than last year. More than half of the deals were in the “proposal-plus" stage, implying a potential closure within six months. The strong pipeline makes LTI more hopeful of returning to the top quartile of the industry-level growth rates in FY21, said analysts at JM Financial Institutional Securities Ltd.

The strong commentary and possible improvement in performance should hold the stock in good stead. But valuations at 17 times the FY21 earnings per share estimates are not particularly cheap.

Also, profitability has been under pressure, with the company continuing to invest in the business. Despite the revenue growth slowdown in the first half of FY20, LTI did not scale back investments. Better revenue growth should help the company absorb the costs better, improving profitability. The management alluded to this in the September quarter results earnings call.

Also adding to the concern is the recent visit by the US department of homeland security to LTI’s office in New Jersey, purported to be about H-1B visa petitions. Analysts fear an adverse ruling on this front can impact the company. “While such investigations are not singular for Indian IT services companies, the settlement timelines are long and may have financial implications (penalties/settlement charges)," JM Financial analysts said in a note.

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