L&T Infotech

Cyber Security and ESG emerging as new pockets of growth – Larsen & Toubro Infotech

Update on the Indian Equity Market:

On Wednesday, NIFTY closed lower at 18,266 (-0.83%) led by CONSUMER DURABLES (-2.91%), REALTY (-2.16%) and METAL (-2.06%). PSU BANK (+1.54%) and MEDIA (+1.03%) were the only gaining sectors.

Top gainers in NIFTY50 were BHARTIARTL (+3.96%), SBIN (+2.66%) and TATAMOTORS (+1.62%). The top losers were HINDALCO (-3.94%), BPCL (-2.66%), and TITAN (-2.61%).

Edited excerpts of an interview with Mr. Sanjay Jalona, Chief Executive Officer and Managing Director, Larsen & Toubro Infotech with CNBCTV18 on 19th Oct 2021:

  • The company is seeing three key drivers of revenue growth
    • Restructuring: Every industry is reimagining its processes to deal with the new normal. All industrial manufacturing companies, which typically have been business-to-business (B2B) companies, are spending to transform from B2B to business-to-consumer (B2C) and that creates a lot of opportunities for the company in the tech world.
    • Cyber Security and environmental, social, and governance (ESG) are emerging as new pockets of growth. Work from home culture requires information security which is a big area of growth. ESG is another area having potential as every company has a goal on carbon neutrality and sustainability. So, ESG creates a lot of data opportunities for the industry, unlike in the past.
    • Great Resignation: Companies are currently seeing a double-digit attrition rate which they are not used to.
  • There has been a change in the way, format, and size of the deals. There are a lot of deals for the transformation journeys of the customers.
  • Large deals typically are consolidation deals that have taken a back seat in their (customers) priorities as customers are focusing on their digital transformation journey. The bulk of investment, time, and efforts are going into the digital transformation journey.
  • Overall, the deal pipeline will be stronger for the company. The large deal pipeline will continue to be strong for at least the next two to three years.
  • Even after giving 2 consecutive wage hikes, the attrition rate for 3QFY22 stands at ~19.6% (up 470 bps QoQ). The reason for such a high attrition rate is that the talent market is very hot currently as every company is hiring tech talent. The overall demand is high and will continue to be high for the next 2-3 years. The need for automating is creating a further gap in the skill set that is required.
  • To cope up with the high attrition rate:
    • The company have increased the freshers hiring target to 5,500 v/s 4,500 for FY22E,
    • Plans to hire additional 1000 employees on Hired Trained Deployed (HTD) basis,
    • It is also ramping up the skilling and upskilling program for the company’s talent, and
    • Evaluating ways to hire non-tech (non-engineers) bright talents across India who desire to enter the computer field to create a talent pool.
  •  The company has given guidance to cross Rs 2 bn in revenues.

 Asset Multiplier Comments

  • The company has been performing consistently well with robust and broad-based growth – across verticals, geographies, and service lines.
  • We believe that the large deal wins, strong large deal pipeline, and aggressive hiring/re-skilling plans, which would help overcome the supply-side constraints will help the company to drive profitable and sustainable growth in the medium term.

Consensus Estimate (Source: market screener websites)

  • The closing price of Larsen & Toubro Infotech was ₹ 6,960/- as of 20-Oct-21. It traded at 52x/44x/38x the consensus EPS estimate of ₹ 131/156/179 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 6,090/- implies a PE multiple of 34x on FY24E EPS of ₹ 179/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”


Net margins to remain around 14%: L&T Infotech

Update on Indian Equity Markets:

The upward momentum in Indian markets supported by RBI announcements continued on Thursday as Nifty closed the day 107 points higher at 14,725. Within the index, HINDALCO (5.7%), HEROMOTO (4.7%), and WIPRO (4.4%) were the highest gainers while UPL (-1.4%), BAJAJFINSV (-1.0%) and POWERGRID (-1.0%) were few of the losers. Within the sectoral indices, METAL (2.5%), IT (1.8%), and AUTO (1.8%) led the gainers while PSU BANK (-1.2%), PHARMA (-0.2%), and PVT BANK (-0.1%) were the only losers..

Excerpts of an interview with Mr. Sanjay Jalona, CEO, L&T Infotech (LTI) with CNBC -TV18 dated 5th May 2021:

  • The Company will focus on investing for growth and localization in FY22E. The management is confident of achieving growth in the leaders quadrant for FY22E. 
  • The energy sector has been underperforming given the shift to renewable energy. The Company is expected to witness new avenues for growth in the segment. The management also believes that the ability for insurance companies to spend on discretionary has gone down.
  • The Company reported a 320 bps YoY improvement in EBIT margin with the help of cost rationalization efforts. He highlighted that the Company is expected to produce net margins in the narrow band of around 14 percent.
  • The Company gave FY21 wage hikes in January and has advanced the FY22 wage hike cycle to April from earlier norms of July. He said that the war for talent and attrition is going up in the Information Technology space.
  • The Company witnessed lower exit velocity, record hiring, and improved customer sentiment. The attrition rate is going up for the industry and by offering early wage hikes, Company is trying to stay ahead of the industry curve.

Asset Multiplier Comments:

  • The lower attrition rates and earlier wage hikes will help Company to retain the top talent to deliver growth for the Company. Hence the Company is confident of growth in the leaders quadrant for FY22E.
  • Tailwinds of work from home and other cost rationalizations are expected to help the Company to achieve net margins target of around 14%.

Consensus Estimates (Source: market screener website):

  • The closing price of LTI was ₹ 3,814/- as of 6-May-2021.  It traded at 30x/ 26x the consensus EPS estimate of ₹ 126.2/ 144.8 for 22E/23E respectively.
  • The consensus price target is ₹ 3,960/- which trades at 27x the EPS estimate for FY23E of ₹ 144.8/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”


L&T Infotech: Aims to achieve double-digit growth in FY20E

Update on the Indian Equity Market:

On Tuesday, NIFTY closed 0.6% lower at 11,590 points; reversing the trend of the last 6 sessions. The whistle-blower complaint against Infosys was the talk of the day which dragged the markets down. Amongst the NIFTY 50 Stocks, DRREDDY (+3.5%) and ICICIBANK (+3.2%) were the top gainers while INFY (-16.7%), TATAMOTORS (-4.0%) with other banks dragged the NIFTY down. In the sector-wise performances, Pharma (+2.0%) and Financial Services (+1.0%) were the biggest gainers while IT (-4.8%) was the biggest loser for the day.

L&T Infotech: Aims to achieve double-digit growth in FY20E

Key takeaways from the interview of Mr Sanjay Jalona, MD & CEO L&T Infotech; dated 18th October 2019 on CNBC TV 18:

  • The old announced large deals are ramping up well. L&T Infotech (LTI) announced 3 more large deals in 2QFY20. LTI is confident of achieving a double-digit growth rate for FY20 despite a struggle in 1Q and 2Q of FY20.
  • There was a ~50 bps reduction in EBIT in 2QFY20. The wage hike for the LTI is effective in July. So, the entire hit comes in 2Q financials. The impact was ~160 bps in 2QFY20. The cost savings in visa expenses and other operational optimizations provided support of ~110 bps. The net margins were 13%, lower by ~30bps YoY.
  • LTI maintains the PAT margin guidance of ~14-15% for FY20E.
  • In the Banking & Financial Sector (BFS) sector, top clients saw budget cuts. LTI expects to see a recovery in 3QFY20.
  • In the BFS segment, LTI executed a deal of separation of a bank from a larger bank in FY19. It was a one-off assignment which provided the ~US $ 30-40 mn incremental revenue to LTI. The separation was completed successfully. But as this was a non-recurring one-off contract. This deal leads to a high base effect. Apart from that, in BFS; LTI is focussing on client-specific problems.
  • The International Monetary Fund (IMF) downgrade of the Global economic growth outlook from 3.8% to 3%; will lead to some nervousness in the industry. LTI continues to see the excitement and a pipeline in deals but the nervousness persists. LTI is not seeing any delays in projects.
  • Management expects the digital technology to drive change for the customer. Management is looking forward to stronger 2HFY20 and is very positive on FY21 as well. 

Consensus Estimate (Source: market screener website)

  • The closing price of LTI was ₹ 1,611/- as of 22-October-19. It traded at 19x/16x/14x the consensus EPS for FY20E/ FY21E/ FY22E of ₹ 86/ 100/ 112 respectively.
  • Consensus target price of ₹ 1,808/- implies a PE multiple of 16x on FY22E EPS of ₹ 112 /-