After 'Best-Ever' Q2, L&T Infotech Expects Better Growth In Second Half Of This Fiscal

L&T Infotech Ltd. reported its “best ever” second-quarter constant-currency revenue growth, which was broad-based and came on a high base.

The software services provider saw its revenue rise 9% sequentially in constant-currency terms. The company expects the demand to grow and is optimistic about maintaining margins despite wage hike pressures.

Sanjay Jalona, chief executive and managing director at L&T Infotech, spoke to BloombergQuint’s Niraj Shah on the earnings and the company’s outlook.

Here are the key highlights from the conversation:

Medium-Term Demand Looks Strong

The company expected the growth numbers in the second half of the fiscal to be better than the first, improving the pace for the full FY22, according Jalona. In fact, he is confident that it will be strong for the next three years.

Going by brokerage estimates, L&T Infotech’s dollar revenue may grow 28% in FY22, after clocking a compounded annual growth rate of 18% from September 2019 to September 21.

Jalona cited some of the potential key drivers:

• Clients working on new business models and wanting partners who can “cocreate” with them—something he called ‘Great Structuring’.

• Changing customer expectations and emergence of new areas like ESG and cloud security.

• A significantly high attrition at the client side and the resultant spike in wages or “Great Resignation”, forcing clients to turn to automation.

Margin Resilience

The EBIT margin for the company stood at 17.21% versus 16.41% in the preceding quarter.

The share of offshore revenue increased 90 basis points sequentially to 83.6%, helping with margin resilience in a post wage-hike quarter, Jalona said.

Jalona maintains that the offshore effort share will stay elevated on the back of the ‘Great Resignation’ theme playing out globally.

Larsen Infotech, however, would like to be known as a growth company, and would maintain margins in the 14-15% band and reinvest the excess in business growth, he said.

Good Client Addition

The company reported a deal in Europe with total a total contract value of $30 million, and multiple smaller deals with strong banners this quarter. Jalona said deal pipeline is robust with a number of large deals. The growth is constrained only because of supply constraints and would have been much better otherwise given extremely strong, secular and sustainable demand environment, he said.

Typical seasonality of the second half is better than the first, and Jaloan expects that to be true this year.

Brokerage view

ICICI Securities

• Confident commentary and stable margin outlook despite the impending
  cost pressures are encouraging.

• Upgraded FY22E-FY24E EPS by up to 11% on back of the strong beat and solid outlook.

• The stock remains its top midcap ‘buy’, and the brokerage values it at about 40 times its estimated earnings per share for September 2023.

Kotak Institutional Securities

• Citing strong revenue growth and outlook, the brokerage increased FY2022-24 revenue estimates by 4-8%.

• Raised the target multiple to 34 times the estimated EPS for September 2023 (28X earlier), causing the fair value to increase to Rs 6,000(from Rs4,500 earlier).

• Stock trades at full valuations; maintains ‘reduce’.

JM Financial

• Maintains ‘hold’ with a revised target price of Rs 5,850, which is lower than the Monday’s close of Rs 5,905 apiece. The stock surged more than 17% on Tuesday.

• Earnings estimates unchanged at 33 times the December 2023 forecast.

• The results till date in the current earnings season have negated some of the street concerns on margin hit due to increasing supply-side concerns and are in-line with expectations.