L&T Infotech: Maintain ‘buy’ with a TP of Rs 1,175

We attended L&T Infotech’s (LTI) Analyst Day, and reiterate our positive hypothesis. LTI’s growth will be driven by (1) Scalability of its strong client portfolio (54 from Fortune-500, with addressability of $54 billion across verticals), (2) New wins, with addition of 65 new logos (digital and enterprise solutions-led), (3) High client penetration in digital services (32% of rev), with an increasing deal size (>$1 mn accounts expected to increase to 120 in a year from 99 currently), (4) Investments to augment S&M and leadership in Europe, (5) Acquisitions supplementing capabilities (‘Augment IQ’ for IPs and Syncordis for core banking).

Management’s FY18 revenue growth outlook is to surpass FY17’s revenue growth (10% y-o-y CC in FY17 and 11.7 % y-o-y CC in 1HFY18), and PAT% guidance at 14 to 15%, supported by a stable operating margin. We expect revenue/EPS CAGR of 12/10% over FY17-20E. Revise EPS higher by 4/3% for FY19/20E, and maintain ‘buy’ with an increased TP of Rs 1,175, 16x Dec-19E EPS (13x earlier). Positives for the company include (1) A favourable delivery mix, (2) Industry-leading return ratios (highest in midcap IT), strong cash generation (100% FCF/PAT) and increasing payout, and (3) Strong leadership bandwidth.

Within the new logos added, 17 were from the CPGRetail-Pharma vertical (9% of rev), 14 in BFS (27% of rev), 11 in E&U (12% of rev), 8 in Insurance (21% of rev), 7 in Hi-tech Media & Ent. (11% of rev), and 6 in Manufacturing (16% of rev). LTI’s digital strategy includes (1) Embedding digital in business operations, (2) Digitising the back-end/core, (3) Pivoting on platforms (4% of rev), supported by partnerships, and (4) Customising UX.

Syncordis’ acquisition will augment core banking capabilities and LTI’s European presence, supported by a large number of client additions. Near-term outlook: Ramp-up of large wins and new deal momentum to support growth in 2HFY18.

Larsen & Toubro Limited