Elara Capital has a buy call on Larsen & Toubro Infotech with a target price of Rs 2,130.
The current market price of Larsen & Toubro Infotech is Rs 1,735.
Time period given by the brokerage is one year when Larsen & Toubro Infotech price can reach the defined target.
Investment rationale by the brokerage
Clear winner- 2.8 per cent organic growth vs 1.3-3 per cent among peers: L&T Infotech (LTI IN) clocked in the fastest organic growth (2.8 per cent) among mid-sized India IT Services firms (1.3-3.0 per cent) over 2QFY16-2QFY19. Under CEO Sanjay Jalona, who joined LTI in August 2015, the branding transformation has been matched by internal changes. Investment has been made in intellectual property (Mosaic platform), sales & marketing (assigned dedicated account teams for top-50 clients), industry analyst relations and deal advisory firms. This has resulted in a USD revenue CAGR of 8.0 per cent over FY12-15 improving to 13.5 per cent over FY15-18; hence, we expect a revenue CAGR of 16.3 per cent over FY18-21E.
Best traction: high ability to “penetrate and radiate”: LTIs growth has been based on a broad set of clients, verticals, horizontals and geographies. The company has been able to “penetrate” new clients across verticals and has added the most USD 1mn+ clients among peers barring Hexaware (which added one more than LTI at 30). But, more importantly, LTI leads peers in scaling clients in the USD 20mn+ bucket, having added six clients over 2QFY16-2QFY19. To cross-sell and scale up accounts (“radiate”) the way it has demonstrated, the company must have a broad and competitive services portfolio. This is reflected in strong growth across multiple service lines and incubation of new service propositions that have the potential to bring in significantly higher annuity revenue, allowing LTI to scale up its large clients further. This lays the foundation for the longest runway of growth among peers.
Differentiation evident from billing increase; sales leverage likely: Even as onsite revenue proportion has declined 70bp from 2QFY16 to 2QFY19, billing realization has improved by 16.5 per cent, indicating the differentiated value proposition developed under the new management team. EBITDA margin improvement is likely in the medium term even after excluding Rs depreciation benefits once SG&A leverage plays out.
Valuation by the brokerage: We initiate on L&T Infotech (LTI IN) with a Buy rating and a 12-month forward target price of Rs 2,130 based on 21x FY20E P/E and we expect significant earnings upgrade (we are 2.6 per cent ahead of Consensus on revenue and 5.2 per cent on PAT for FY20E). The rejuvenated franchise has ticked off all the boxes (broad-based growth, margin and return ratios) despite odds (Rs appreciation of 0.7 per cent over FY16-18 and a lackluster demand environment). We expect an earnings CAGR of 20.9 per cent over FY18-21E on a Rs revenue CAGR of 21.6 per cent and 208bp margin expansion with SG&A leverage. We see a long runway of growth for LTI as its ability to develop differentiated sales proposition and mine accounts is unparalleled.
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