Despite client-specific hiccups, the healthy deal pipeline and continuous large deal wins ensure growth acceleration from Q3, after the improved Q2. LTI guided to double-digit growth in FY20.
On the ramp-up of large deals earlier won, Larsen & Toubro Infotech’s Q2 revenue, at USD 364m, was better than expected, up 2 percent q/q, 10.7 percent y/y (in CC, up 2.4 percent q/q, 11.9 percent y/y). Wage hikes, hiring and lower utilisation ate into the EBIT margin, which was down 43bps q/q to 15.5 percent. Three new deal wins of USD 100m TCV and the healthy deal pipeline offer assurance of growth.
Quarter on quarter growth in BFS was flat; on the insurance side, though, growth was 5.4 percent q/q on the ramp-up of large deals won in Q1 with net-new TCV (Q1) of USD 44m.
Top-5 client growth in the quarter (up 3.4 percent q/q, after three continuous quarters of decline) suggests budget cuts at the top account bottomed out in Q1 and recovery is likely from H2. In Q2 the company won three large deals of USD 100m TCV (two in E&U, one in BFS).
Hiring has been strong for two quarters (net addition: 1,632 in Q2, 1,178 in Q1). Margins were hit by utilisation dropping 160bps q/q to 78.9 percent (off the highs of 82 percent in Q3 FY19) along with wage hikes (170bp impact). This impact of these was counter-balanced by currency, SG&A optimisation and absence of visa costs.
On acquiring Lymbyc, the company acquired another cloud consulting company, Powerup Cloud Technologies, to augment its digital abilities. Despite client-specific hiccups, the healthy deal pipeline and continuous large deal wins ensure growth acceleration from Q3, after the improved Q2. LTI guided to double-digit growth in FY20.
Overall, the better-than-estimated quarter and the brighter outlook for H2 give us confidence of growth ahead. The stock trades at 17.5x FY21e PE, and our target is based on a target PE of 20x FY20e EPS of Rs 93.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.