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  • Stock Recommendation | L&T Infotech - ADD - Target price : 2,000

    Publish date: OCTOBER 25, 2018

    Another robust quarter. LTI reported robust 3.5% sequential and 22.9% yoy revenue growth rate in c/c. Revenue growth was led by ramp-up of large deals won in a couple of verticals in the past 2-3 quarters. Margin performance was robust led by a mix of Fx and operational improvements. Operating cash generation increased in the quarter to 97% of net profit. Large deal momentum continues with net-new signings of US$55 mn. Deal momentum lays the platform for growth in FY2020E. Our EPS goes down marginally due to fresh grant of stock options. Maintain ADD rating with target price of ₹2,000 valuing the stock at ~19X September 2020E earnings.

    LTI reported c/c revenue growth of 3.5% (KIE: 4%) and 22.9% yoy. Revenue growth was led by ramp-up of two specific large deals—(1) Exxon contract signed in April 2018. Energy and utilities vertical grew 9.1% sequentially and (2) ramp-up of a large deal signed in December 2017 quarter in the CPG, retail and pharma vertical. This vertical grew 15.4% qoq and 39% yoy. Other verticals also registered growth. LTI is settling into a nice rhythm of growth comprising mining of existing client and bolstered ramp-up of a large deal every quarter. EBITDA margin increased by 110 bps sequentially and aided by—(1) 5.4% depreciation of INR against USD providing a margin kicker of 190 bps and (2) lower visa cost tailwind of 60 bps. These two factors offset 140 bps impact of wage revision. Net profit of ₹4 bn (+11.5% qoq and 75% yoy) beat our estimate by 7% due to higher-than-expected EBIT margin and Fx gains (₹711 mn).
    Operating cash generation stood at ₹3.86 bn or 97% of net profit. Strong cash generation was led by reduction in receivables collection cycle to 102 days from 112 days in June 2018 quarter. LTI’s receivables days have been pretty volatile depending on the mix of revenues (large deal ramp-up vs usual T&M business) and revenue recognition from government contracts. Receivables collection cycle reduction is largely due to stabilization of new ERP system. LTI’s DSO is higher than competition and has scope for reduction. Cash generation in the quarter would have been even better but for seasonal payouts of annual incentives.
    A rich client base, focus (verticals, accounts and competencies), strong digital capabilities and lesser drags will continue to power strong revenue growth. We forecast strong 17.8% growth in FY2019 and 14-15% in the subsequent two years. Strong growth shall translate into margin expansion (which did materialize in the quarter). However, we expect the company to reinvest the gains to create a more sustainable revenue growth engine. We marginally cut FY2020-21E EPS due to dilutive impact of fresh stock options. Strong growth deserves premium multiple. We value LTI at ~19X September 2020E earnings resulting in target price of ₹2,000 ( ₹2,100 earlier). Maintain ADD rating.
    Digital services grew 11.7% qoq and now contributes 37% to overall revenues. Digital revenues grew across multiple clients and through aggregation of multiple small and large engagements with existing clients. More important, some of the digital initiatives of the company such as ADEA (analytics and digital in every account) are paying rich dividends. Key digital offerings such as analytics, AI and cognitive grew 22.3% sequentially. Further enterprise integration and mobility grew 26.3% qoq.
    LTI secured a new large deal from a global pharma company with new TCV of US$55 mn. From a new large deal every two quarters, the company has managed to increase the frequency to one every quarter. The deals have been won across various verticals. Pipeline of large deals is robust. The company has also signed two new G-500 logos in the quarter. The pace of new large deal signings coupled with high quality logos signed every quarter lays the platform for a strong FY2020E. We forecast revenue growth rate of 14.6% and 13.7% for FY2020E and FY2021E.
    ▶ Revenues grew 3.5% qoq and 22.9% yoy in c/c terms. In USD terms revenues grew 2.7% yoy to US$329 mn. BFS revenues were essentially flat but will rebound in the subsequent quarters, courtesy strong deal wins. All verticals grew in the quarter. Energy & utilities and CPG, retail & pharma grew at a 9.1% and 15.4% sequentially, courtesy ramp-up of large deals won in the earlier quarter. From service offering standpoint, IMS grew 4.8%, analytics, cognitive & AI by 22.3% and enterprise integration and mobility by 26.3%. Other services were either flat or declined on sequential comparison. Growth was welldistributed across various geographical markets.
    ▶ Client metrics showed further improvement. Revenue growth from top five, 10 and 20 clients stood at 15.6%, 19% and 20.5%, respectively. The company added one client to the US$20 mn bucket. There was no change to US$50 mn and US$100 mn client buckets.
    ▶ EBIT margin increased 700 bps yoy and 130 bps qoq. Sequential EBIT margin increase can be attributed to—(1) 190 bps tailwind from INR depreciation against USD and (2) lower visa cost of 60 bps. This was offset by lower 140 impact of wage revision.
    ▶ Hedging gain of Rs711 mn was ahead of our expectation. Fx gains are largely emanating from translation of debtor to period end rates. The company hedges 70-90% of net cash inflow over 12 months. The company will not realize any Fx gain in 2HFY19 as the spot rate and hedged rate have converged. Hedge gains will start flowing again in FY2020E as the forward contracts that the company entered into recently is above the spot price and will start maturing in FY2020E.

    Definitions of ratings

    BUY - We expect this stock to deliver more than 15% returns over the next 12 months.
    ADD - We expect this stock to deliver 5-15% returns over the next 12 months.
    REDUCE - We expect this stock to deliver -5-+5% returns over the next 12 months.
    SELL - We expect this stock to deliver

    Our target prices are also on a 12-month horizon basis.


    Other definitions

    Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.


    Other ratings/identifiers

    NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
    CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
    NC = Not Covered. Kotak Securities does not cover this company.
    RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
    NM = Not Meaningful. The information is not meaningful and is therefore excluded.


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