LTIMindtree Q4 Preview: Lower pass-through revenue seen impacting growth marginally

“Growth may be impacted by the absence of pass-through revenue, gradual reversal of furloughs in Q4 FY24 and weak discretionary spending overall,” Phillip Capital India said in a pre-earnings research report. Pass-through revenue refers to the revenue generated from third-party services or expenses, which are directly passed on to clients without any markup. A furlough, in this instance, refers to a situation where clients in markets such as the US and Europe refrain from compensating outsourced employees from Indian IT companies for specific days when operations are suspended, typically during the Christmas and New Year break.

Axis Capital pointed out that the reversal of furloughs and a higher number of working days could partly negate lower pass-through revenue.

ICICI Securities and InCred Equities highlighted that LTIMindtree’s revenue could be impacted by longer-than-expected furloughs in the Banking, Financial Services and Insurance (BFSI) and Hi-Tech verticals.

ICICI Securities also said that pricing discounts from Q3 FY24 were stretched into Q4, which could also cause revenue to contract.

Axis Capital was an outlier, saying LTIMindtree could see its revenue rising in the March quarter. “We expect a 0.7 percent QoQ revenue growth for Q4FY24 as a reversal of furloughs and higher number of working days partly negate lower pass-through revenue,” the brokerage said.

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Margins under scrutiny

According to the average of 13 brokerages, the EBIT margin of LTIMindtree is likely to expand by 33 basis points (bps) on a quarterly basis.

Some brokerages, such as Axis Capital and ICICI Securities, expect an expansion in the EBIT margin due to the absence of wage hikes and higher working days.

Some brokerages expect LTIMindtree's EBIT margin to decline quarter on quarter due to a decline in revenue, peaking utilisation rates, transition costs of large deals, and investments.

“We expect the margin to decline by 50 bps QoQ, largely led by an increase in utilisation and a large deal transition,” said Antiques Stock Brokers.

“Margins shall be down 40 bps QoQ due to furloughs and ramp up of deals,” said Nuvama.

Key monitorables

The 17-18 percent EBIT margin outlook given by LTIMindtree for FY24 was pushed back by a few quarters after the December quarter results. Investors will be awaiting management commentary on the path and timeline to reach the target margin range of 17-18 percent.

According to Emkay Global, among the things to watch for are LTIMindtree 's FY25 revenue and margin outlook; management commentary on recovery in discretionary spending; 2024 IT budget and spending pattern; and the deal intake and pipeline.

Commentary on the BFSI, manufacturing, and retail verticals; deal conversion; artificial intelligence (AI) initiatives in Q4 FY24; and reasons for the continued leadership churn have also been highlighted as key things to watch out for.

Brokerages anticipate a robust order book for LTIMindtree. Jefferies specifically forecasts the order book to be approximately $1.4 billion.

At 2.30 pm, LTIMindtree's shares were up 1 percent at Rs 4,719.45 on the NSE.

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