Larsen & Toubro Infotech (LTINFO)

CMP: | 4092 Target: | 4580 (12%) Target Period: 12 months HOLD

January 21, 2021 Revenue growth beats peer growth… Larsen & Toubro Infotech (LTI) reported a healthy set of Q3FY21 numbers both on the revenues and margins front. The company’s constant currency

dollar revenues increased 5.3% QoQ (above our estimate of 5.0% QoQ) and Particulars margins increased by 35 bps QoQ to 23.2% (vs our estimate of 22.9%). Particular Amount Digital (44% of revenues) grew 9.5% QoQ and 17.5% YoY. The company Market Cap | 71838 crore has also won two large deals with net new TCV of US$278 million. Total Debt | 32 crore Cloud, client mining & large deals to drive growth Cash and Investment | 2744 crore

EV | 69126 crore Update Result LTI is expected to be a key beneficiary of recent trends of multi-year 52 week H/L 4500 / 1208 technology transformation phase. The company’s ability to deliver end to Equity Capital | 17 crore end solution right from cloud migration, core modernisation, data analytics Face Value | 1 and customer experience will lead to healthy traction in revenues over the coming years. In addition, the company’s ability to win large deals, Key Risk effectively mine clients, adding fortune 500 clients and acquire new clients will enable the company to deliver industry leading revenue growth in  We expect LTI to register healthy coming years. The company has won US$278 million large deal and has growth based on its digital healthy deal pipeline. Based on the order book, expectation of a ramp up in prowess and ability to win large deals, vendor consolidation opportunity and digital acceleration, we expect deals. However, inability win the company to register 9.4% YoY growth in dollar revenues in FY21E. large deals and deceleration in

Further, we expect LTI to register 17% YoY growth in FY22E and FY23E each digital will impact company’s

led by recovery across verticals, traction in cloud & ramp up large deals. financial adversely

Margins to remain stable in long term  We expect the company to re- invest some of its cost savings Q4FY21E is expected to witness headwind of wage hike (impact of 160-170 to drive revenue growth and bps) adversely impacting margins in the quarter. However, considering the hence expect margins to be flat robust performance in EBITDA margins in 9MFY21 and operational over FY21E-FY22E. However, if efficiencies, we expect EBITDA margin to expand by 331 bps YoY of 22% in LTI is able to improve margins FY21E. In the long term the company expects to invest in SG&A to drive with operational efficiencies it growth, invest in Nordics for expansion and in new data products to drive will boost company’s

growth which may impact margins. However, considering operating levers Research Equity Retail profitablity. available to the company due to revenue growth we expect margins to – broadly remain flat at 22% over FY21E-FY23E.

Research Analyst

Valuation & Outlook Devang Bhatt [email protected] LTI has outperformed its mid cap and large cap peers in revenue growth in Q3FY21. We expect the company to continue to register Industry leading growth led by it’s ability to win large deals, presence in niche verticals, Securities ICICI effectively mine clients, adding Fortune 500 clients, ability provide end to end solution and digital prowess. However, the current price factors in most of the positives and hence we downgrade the stock from BUY to HOLD with a revised target price of | 4580 (30x PE on FY23E EPS) (earlier target price of | 3850) Key Financial Summary ses (| Crore) FY19 FY20 FY21E FY22E FY23E CAGR (FY20-23E) Net Sales 9,445.8 10,878.6 12,345.8 14,426.1 17,125.7 16.3% EBITDA 1,883.4 2,029.4 2,711.4 3,133.7 3,767.6 22.9% EBITDA Margins (%) 19.9 18.7 22.0 21.7 22.0 Net Profit 1,515.5 1,520.5 1,900.5 2,226.5 2,644.4 20.3% EPS (|) 87.3 86.6 108.3 126.8 150.6 P/E (x) 46.9 47.2 37.8 32.3 27.2 RoE (%) 31.0 28.1 28.8 28.3 28.1 RoCE (%) 40.4 30.7 32.5 32.0 31.8 Source: Company, ICICI Direct Research Result Update | Larsen & Toubro Infotech ICICI Direct Research

Exhibit 1: Variance Analysis Q3FY21 Q3FY21E Q3FY20 YoY (%) Q2FY21 QoQ (%) Comments

Constant currency (CC) revenues increased 5.3% QoQ mainly led by banking financial services (up 7.5% Revenue 3,152.8 3,149.4 2,811.1 12.2 2,998.4 5.1 QoQ), manufacturing (9.2% QoQ), High-Tech, Media & Entertainment (up 5.8% QoQ), and others (up 10.8% QoQ)

Employee expenses 2,050.7 2,047.1 1,918.8 6.9 1,953.7 5.0

Gross Margin 1,102.1 1,102.3 892.3 23.5 1,044.7 5.5 Gross margin (%) 35.0 35.0 31.7 321 bps 34.8 11 bps Other expenses 370.1 381.1 364.9 1.4 359.1 3.1

EBITDA 732.0 721.2 527.4 38.8 685.6 6.8

EBITDA margins expanded 35 bps QoQ 11 bps QoQ increase in gross margins (led by higher utilisation up EBITDA Margin (%) 23.2 22.9 18.8 446 bps 22.9 35 bps 210 bps QoQ and increase in offshoring up 220 bps QoQ) and operating leverage

Depreciation & amort 81.9 89.9 70.9 15.4 89.9 -9.0 EBIT 650.2 631.3 456.5 42.4 595.7 9.1 EBIT Margin (%) 20.6 20.0 16.2 438 bps 19.9 75 bps Other income 49.2 28.6 43.3 13.6 17.4 182.8 PBT 699.4 659.9 499.8 39.9 613.1 14.1 Tax paid 180.1 168.3 123.1 46.3 156.3 15.2 PAT was higher than our expectation mainly led by PAT 519.3 491.6 376.7 37.8 456.8 13.7 better performance at operating level

Source: Company, ICICI Direct Research Exhibit 2: Change in estimates FY21E FY22E FY23E Comments (| Crore) Old New % Change Old New % Change Old New % Change

We expect acceleration in digital Revenue 12,123 12,346 1.8 14,138 14,426 2.0 16,642.8 17,126 2.9 technologies to drive revenue growth

EBITDA 2,618 2,711 3.6 3,063 3,134 2.3 3,650.5 3,768 3.2 We expect margins to stabilise at EBITDA Margin (%) 21.6 22.0 37 bps 21.7 21.7 5 bps 21.9 22.0 7 bps 22% in FY23E PAT 1,859 1,900 2.2 2,220 2,226 0.3 2,619.2 2,644 1.0 EPS (|) 105.9 108.3 2.2 126.5 126.8 0.3 149.2 150.6 1.0

Source: Company, ICICI Direct Research

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Conference Call Highlights

 FY21E outlook: LTI is seeing healthy traction in banking, financial services, manufacturing, CPG, retail, pharma and hi tech, media & entertainment. The company has added one Fortune 500 client in CPG, retail, pharma which will drive growth in coming quarters. Further, the company’s top client (in BFSI) continues to grow and is expected to do so in coming quarters. LTI expects FY21E to register high single digit growth. The company won two large deal in the quarter of US$278 million which includes US$205 million won in UAE (Injazat) and US$74 million in Energy & Utility segment. The ramp up of same is expected in Q1FY22E. This coupled with traction in cloud we expect the company to register healthy double digit growth in coming years.

 Margins: The company registered healthy growth in margins, up 35 bps QoQ led by higher utilisation, increase in offshoring and SG&A optimisation partially offset by lower working days. LTI plans to give wage hike in Q4FY21E and expects impact of 160-170 bps (with wage hike of 6-7% offshore & 1-2% onsite). In the long term the company expects to invest in SG&A to drive growth, invest in Nordics for geographic expansion and in new data products to drive growth which may impact margins. However, considering operating levers available to the company due to revenue growth we expect margins to broadly remain flat at 22% over FY21E-FY23E.

 Digital business: Digital business, now comprising 44% of revenues in Q3FY21, saw an increase of 9.5% QoQ (up 17.5% YoY) in the quarter

 Vertical commentary: This quarter the company saw healthy growth in BFS led healthy growth in top client. BFS is seeing growth in core infra, building utilities (like front end pay app) and retail banking. Manufacturing is seeing healthy recovery and the company added one Fortune 500 client in CPG, retail & pharma segment. The company witnessed improvement in hi tech and media mainly due to Injazat deal. The company witnessed a deal win of US$74 million in energy & utility but still is cautious in the vertical.

 Deal wins: The company won two large deal in the quarter of US$278 million which includes US$205 million won in UAE (Injazat) and US$74 million in Energy & Utility segment.

 Employee details: The company added 1528 employees in Q3FY21 taking the total employee count to 33,983. LTI’s attrition dipped 110 bps to 12.4% while utilisation (ex- trainees) increased 210 bps QoQ to 84.1%

 Other highlights: DSO days (including unbilled) decreased by 1 day QoQ to 93. The company added two clients in the US$20 million bucket while the company saw US$50 million bucket decline by 1 client. The company has added one Fortune 500 clients in the quarter taking the total to 69

Key Metrics

Exhibit 3: Geography wise break-up

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Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Revenue by geography (%) North America 69.5 68.9 70.8 68.7 67.9 Europe 15.6 15.1 14.4 16.1 16.1 India 7.6 8.1 7.9 6.9 8.6 ROW 7.4 7.8 6.9 8.2 7.4 Revenue growth across geographies in quarter and led by America & Europe except Rest of the World Growth QoQ (%) (RoW) North America 9.7 3.0 -2.2 0.6 4.5 Europe 3.1 0.6 -9.2 15.9 5.8 India 37.3 10.8 -7.1 -9.5 31.8 ROW -9.9 9.5 -15.8 23.2 -4.6

Source: Company, ICICI Direct Research

Exhibit 4: Vertical wise break-up Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Revenue by vertical (%) BFS 27.8 27.6 27.7 29.9 30.6 Insurance 17.7 16.8 17.2 16.0 15.0 Manufacturing 17.5 18.0 15.8 16.2 16.8 Energy &Utilities 11.3 11.4 10.8 10.6 10.0 CPG,Retail&Pharma 11.2 11.2 11.5 11.0 10.9 HTME 10.8 11.0 11.6 10.6 10.6 Others 3.7 4.0 5.4 5.7 6.0 Growth in revenues mainly led by manufacturing, BFS, HTME Growth QoQ (%) BFS 11.2 3.2 -4.4 11.9 8.2 Insurance 2.6 -1.4 -2.5 -3.6 -0.8 Manufacturing 15.7 6.9 -16.4 6.3 9.7 Energy & Utilities 1.2 4.8 -9.8 1.7 -0.2 CPG, Retail & Pharma 5.6 3.9 -2.2 -0.9 4.8 HTME 8.4 5.9 0.4 -5.3 5.8 Others 14.6 12.4 28.5 9.4 11.3

Source: Company, ICICI Direct Research; HTME: High-Tech, Media & Entertainment

Exhibit 5: Service offering wise break-up Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Revenue by service offering (%) ADM* 35.8 34.7 35.6 36.0 33.6 Enterprise Solutions 28.7 32.5 29.7 30.8 31.4 IMS 11.5 12.6 13.6 14.4 14.3 Analytics, AI & Cognitive 12.8 11.6 12.5 10.6 11.9 EIM 8.5 8.7 8.6 8.3 8.8 Infrastructure management services (IMS), Enterprise Integration & Mobility (EIM) and Analytics, AI & Cognitive drove revenues in the Growth QoQ (%) quarter ADM 7.5 0.7 -2.3 4.8 -1.3 Enterprise Solutions 5.5 17.7 -13.0 7.5 7.8 IMS 12.3 13.9 2.8 9.7 5.0 Analytics, AI & Cognitive 22.8 -5.8 2.6 -12.1 18.7 EIM 2.4 6.4 -5.9 0.0 12.1 Source: Company, ICICI Direct Research; *ADM: Application Development Maintenance is now combined with testing hence certain quarters are not comparable, IMS: Infrastructure Management Services, EIM: Enterprise Integration & Mobility

Exhibit 6: Client & human resource matrix

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Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21

5 Million dollar + 48 53 59 61 60 10 Million Dollar + 28 27 30 32 32 The company added two clients in US$20 million 20 Million dollar + 18 16 16 16 18 plus category, however, the US$50 million plus 50 Million dollar + 6 6 6 6 5 category declined by 1. Attrition dipped and 100 Million dollar + 1 1 1 1 1 utilisation improved in the quarter

Total Headcount 31419 31437 31477 32455 33983 Utilisation 81.3 80.6 79.6 82.0 84.1 Attrition 17.7 16.5 15.2 13.5 12.4 added Source: Company, ICICI Direct Research

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Financial story in charts

Exhibit 7: Dollar revenues may grow at 14.4% CAGR in FY20-23E 23% 2500 21% 2283 25% 2100 17% 18% 1949 19% 17% 17% 20% 16% 1668 14% 1525 1700 14% 13% 10% 9% 1349 15% 11% 11% 11% 1300 1132 9% (%) ($ mliion) 970 8% 9% 887 10% 900 394 410 390 405 428 500 320 329 347 354 357 364 5%

100 0%

FY16 FY17 FY18 FY19 FY20

FY21E FY22E FY23E

Q1FY19 Q4FY19 Q1FY20 Q2FY20 Q1FY21 Q2FY21 Q3FY21 Q2FY19 Q3FY19 Q3FY20 Q4FY20 Dollar revenue Growth, YoY Source: Company, ICICI Direct Research

Exhibit 8: Revise our margin estimates 24.0 22.9 23.2 22.0 21.7 22.0 22.0 20.5 20.6 19.9 20.1 19.4 19.2 19.2 20.0 18.9 18.8 18.7 18.4 18.1 17.5 (%) 18.0 16.3 16.0

14.0

12.0

FY16 FY17 FY18 FY19 FY20

FY21E FY22E FY23E

Q1FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q1FY21 Q2FY21 Q3FY21 Q2FY19 Q3FY19 Q4FY20 EBITDA Margin Source: Company, ICICI Direct Research

Exhibit 9: PAT trend 3000 60% 47% 2644 2600 36.2% 37.8% 2226 33% 31% 40% 2200 26.8% 25.0%1900 1800 35% 1516 152117.1% 17.2%18.8% 1113 12.9% 20% (%) 1400 (| crore) 971 0.3% 0.3% 837 16.1% -2% 1000 14.5% 0% 9.9% -10% 519 600 361 400 376 379 356 360 377 427 416 457

200 -20%

FY16 FY17 FY18 FY19 FY20

FY21E FY22E FY23E

Q1FY19 Q3FY19 Q4FY19 Q1FY20 Q4FY20 Q1FY21 Q2FY19 Q2FY20 Q3FY20 Q2FY21 Q3FY21

Adjusted PAT Growth, YoY Source: Company, ICICI Direct Research

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Exhibit 10: Three-year chart

15,000 6,000 13,000 5,000 4,000 11,000 3,000 9,000 2,000 7,000 1,000

5,000 0

Jul-19 Jul-20 Jul-18

Oct-18 Oct-19 Oct-20

Apr-20 Apr-18 Apr-19

Jan-20 Jan-21 Jan-18 Jan-19

Nifty (L.H.S) Price (R.H.S)

Source: Company, ICICI Direct Research

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Financial summary

Exhibit 11: Profit and loss statement | crore Exhibit 12: Cash flow statement | crore (Year-end March) FY20 FY21E FY22E FY23E (Year-end March) FY20 FY21E FY22E FY23E Total Revenues 10,879 12,346 14,426 17,126 PBT 2,003 2,554 2,989 3,550 Growth (%) 15.2 13.5 16.9 18.7 Add: Depreciation 273 333 390 462 Employee costs 7,359 8,091 9,417 11,115 (Inc)/Dec in current assets (592) (312) (442) (574) Total Operating Expenditure 8,849 9,634 11,292 13,358 Inc/(Dec) in current liabilities 360 145 206 268 EBITDA 2,029 2,711 3,134 3,768 CF from operations 1,644 2,020 2,333 2,743 Growth (%) 7.8 33.6 15.6 20.2 (Inc)/dec in other investments (357) (689) (664) (628) Depreciation & Amortization 273 333 390 462 (Inc)/dec in Fixed Assets (243) (173) (202) (240) Other Income (net) 247 176 244 244 Other investing cash flow 6 5 8 13 PBT before Exceptional Items 2,003 2,554 2,989 3,550 CF from investing Activities (652) (857) (858) (855) Growth (%) (1.2) 27.5 17.0 18.8 Issue of equity - - - - Tax 482 654 762 905 Inc/(dec) in loan funds (178) 0 - (0) PAT before Exceptional Items 1,521 1,900 2,226 2,644 Dividend paid & dividend tax (568) (716) (935) (1,111) PAT 1,521 1,900 2,226 2,644 Others (4) - - - Growth (%) 0.3 25.0 17.2 18.8 CF from Financial Activities (890) (856) (1,055) (1,211) Diluted EPS 86.6 108.3 126.8 150.6 Net cash flow 102 307 420 677 EPS (Growth %) (0.8) 25.0 17.2 18.8 Effect of exchange rate changes 9 - - -

Source: Company, ICICI Direct Research Opening cash 415 525 832 1,253 Closing cash 525 832 1,253 1,929

Source: Company, ICICI Direct Research

Exhibit 13: Balance sheet | crore Exhibit 14: Key ratios | crore (Year-end March) FY17 FY20 FY21E FY22E FY23E (Year-end March) FY20 FY21E FY22E FY23E Liabilities Per share data (|) Equity 17 17 17 17 EPS 86.6 108.3 126.8 150.6 Reserves & Surplus 5,387 6,571 7,862 9,396 Cash Per Share 30.2 47.6 71.7 110.4 Networth 5,404 6,588 7,879 9,413 BV 307.8 375.3 448.8 536.2 Long term Liabilties & provisions 1,089 1,234 1,440 1,708 DPS 28.0 41.0 53.5 63.5 Total Debt 32 32 32 32 Operating Ratios (%) Source of funds 6,526 7,855 9,353 11,154 EBITDA Margin 18.7 22.0 21.7 22.0 PBT Margin 18.4 20.7 20.7 20.7 Assets PAT Margin 14.0 15.4 15.4 15.4 Net fixed assets 1,211 1,278 1,314 1,313 Turnover Ratios Net intangible assets 132 43 (60) (182) Debtor days 78 78 78 78 Goodwill 637 637 637 637 Creditor days 23 23 23 23 Other non current assets 517 587 686 814 Return Ratios (%) Unbilled revenue 442 502 586 696 RoE 28.1 28.8 28.3 28.1 Debtors 2,312 2,624 3,066 3,640 RoCE 30.7 32.5 32.0 31.8 Current Investments 2,219 3,019 3,819 4,619 RoIC 46.4 59.4 64.1 71.8 Cash & Cash equivalents 525 832 1,253 1,929 Valuation Ratios (x) Other current assets 831 943 1,102 1,308 P/E 47.2 37.8 32.3 27.2 Trade payables 695 789 922 1,094 EV / EBITDA 34.1 25.1 21.3 17.3 Current liabilities 1,604 1,821 2,127 2,525 Market Cap / Sales 6.6 5.8 5.0 4.2 Application of funds 6,526 7,855 9,353 11,154 Solvency Ratios

Source: Company, ICICI Direct Research Debt/EBITDA 0.0 0.0 0.0 0.0 Debt/Equity 0.0 0.0 0.0 0.0 Current Ratio 1.6 1.6 1.6 1.6 Quick Ratio 1.4 1.4 1.4 1.4

Source: Company, ICICI Direct Research

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Exhibit 15: ICICI Direct coverage universe (IT) EPS (|) P/E (x) RoCE (%) RoE (%)

Company Cmp (|) TP (|) Rating Mcap (| Cr) FY20 FY21E FY22E FY23 FY21 FY22 FY23 FY20 FY21E FY22E FY23E FY20 FY20 FY21E FY22E FY23E E E E E HCL Tech (HCLTEC) 997 1,150 Buy 2,70,459 40.8 49.4 54.3 63 24 20 18 16 23.0 24.0 24.3 24.7 21.6 21.9 20.8 20.6 Infosys (INFTEC) 1,339 1,610 Buy 5,70,358 38.9 47.6 54.5 63 34 28 25 21 30.8 34.9 36.1 38.2 25.2 28.0 29.2 30.9 TCS (TCS) 3,308 3,600 Buy 12,41,269 86.2 89.0 107.7 124 38 37 31 27 43.5 44.0 46.9 49.2 37.5 35.7 39.3 40.9 Tech M (TECMAH) 1,019 1,105 Buy 98,585 45.9 50.0 58.8 69 22 20 17 15 19.1 18.7 19.8 20.9 18.5 18.3 18.9 19.5 Wipro (WIPRO) 445 490 Hold 2,60,680 16.6 19.8 21.8 24 27 23 20 18 19.3 22.4 24.6 27.2 17.4 19.9 22.0 24.5 Mindtree (MINCON) 1,792 1,970 Buy 29,535 38.3 66.9 75.3 88 47 27 24 20 23.0 33.4 32.5 32.7 20.0 28.4 27.2 26.9 LTI (LTINFC) 4,092 4,580 Hold 71,838 86.6 108.3 126.8 151 47 38 32 27 30.7 32.5 32.0 31.8 28.1 28.8 28.3 28.1 Coforge (NIITEC) 2,628 2,690 Hold 15,820 71.4 75.7 94.4 110 37 35 28 24 23.0 25.5 27.0 27.6 18.5 20.1 22.0 22.6 Infoedge (INFEDG) 5,168 4,090 Buy 66,452 26.8 23.8 33.1 39 193 217 156 132 18.0 9.1 11.9 13.3 13.5 6.8 9.0 10.0 Teamlease (TEASER) 2,778 2,840 Buy 4,749 20.5 47.2 64.9 83 136 59 43 34 15.0 13.8 15.9 17.2 6.5 12.7 14.7 15.9

Source: Company, ICICI Direct Research

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RATING RATIONALE ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

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ANALYST CERTIFICATION

I/We, Devang Bhatt, PGDBM, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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