L&T Infotech Shares Surge To A Record As Q2 Revenue Beats Estimates; Analysts Cautious On Valuations

Shares of L&T Infotech Ltd. gained as much as 15% to a record as its sales jumped surpassing estimates on higher demand for software services in the second quarter.

The technology services company's revenue was up 9% sequentially at Rs 3,767 crore in the three months ended September, according to its filings.

Other Q2 highlights (QoQ):

• Profit rose 11% to Rs 551.7 crore.

• Ebitda up 14% at Rs 648.2 crore.

• Margin at 17.2% against 16.4%.

• Declared an interim dividend of Rs 15 per share for FY22

The company has reported its strongest sequential revenue growth and "best ever" second-quarter growth of 8.9% in constant-currency terms, Sanjay Jalona, chief executive and managing director at L&T Infotech, said in a statement accompanying the filing. "We are witnessing strong demand and are rapidly scaling up on the supply side with our headcount up 31% year-on-year."

Shares of L&T Infotech gained 15%, the most since Oct. 12 last year, to a record of Rs 6,791.7 apiece. Buoyed by the company's performance, group stocks Larsen & Toubro Ltd. and L&T Technology Services Ltd. gained as much as 3.6% and 9.5%, respectively, to hit fresh all-time highs.

Of the 39 analysts tracking L&T Infotech, 21 have a ‘buy’ rating, while nine each suggest a ‘hold’ and a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies a downside of 10%.

Here's what brokerages made of L&T Infotech's Q2 earnings:

Edelweiss

• Maintains 'buy' rating, raises target price to Rs 7,505 from Rs 6,459, implying a potential upside of 27%.

• The company reported stronger-than-expected results driven by robust demand across verticals and geographies. Management believes current demand trend is once-in-a-century opportunity.

• The unprecedented demand trend is driven by three levers: higher discretionary spending as companies across industries and geographies go through once-in-a-century technology-led transformation of business; emergence of new areas of spending such as environmental, social and governance factors and cloud security; and a fundamental shift in supply side as demand for talent is higher than supply.

• The company maintained that demand trend continues to be robust and best-ever seen. It is confident of comfortably crossing the revenue milestone of $2 billion in FY22.

• Believes LTI will continue to deliver industry-leading growth.

• Key risks to the company are rapid changes in technology, intense competition in IT services and high dependence on limited clients.

Kotak Institutional Equities

• Maintains 'reduce' rating, revises fair value to Rs 6,000 from the earlier Rs 4,500, implying a potential upside of 1.5%.

• Takes cognisance of the strong revenue growth and outlook and increases FY2022-24 revenue estimates by 4-8%. Ebit margin estimates are largely unchanged.

• LTI’s strengths in core modernisation, robust client base, smart sales and marketing, strong account mining and holistic participation in cloud and digital transformation journey of clients will benefit from the demand uptick for the industry on a sustained basis.

• LTI’s business model is resilient and designed for scale and will be a top beneficiary of industry demand uptick but the stock trades at expensive valuations.

Motilal Oswal

• Maintains 'neutral' rating, raises target price to Rs 6,490 apiece, implying a potential upside of 9%.

• Despite the absence of large new deal wins in recent quarters, LTI’s growth momentum is one of the strongest in its history, indicating the broad-based nature of the demand environment.

• Continues to view LTI as one of the best-placed companies in its coverage universe, with a strong client mining ability. Expects it to deliver 23% revenue compound annual growth rate in dollar terms over FY21- 23, one of the highest in its tier-II coverage.

• As digital turns mainstream, Motilal Oswal expects LTI to benefit from continued investments in digital capabilities, strong client additions, and mining abilities. This should result in industry-leading growth.

Prabhudas Lilladher

• Maintains ‘buy’ rating, raises target price from Rs 5,902 to Rs 6,710, implying a potential upside of 13.6%.

• Without supply constraints, LTI would have grown at a much higher rate given an extremely strong, secular and sustainable demand environment.

• LTI continues to remain one of our preferred picks in the midcap IT space.

• The company’s demand momentum is strong, broad-based, and sustainable over the next 3 years.

ICICI Securities

• Maintains ‘buy’ rating, raises target price to Rs 7,050 from Rs 6,000, implying a potential upside of 18.5%.

• In a seasonally not-so-strong quarter, the company impressed with robust and broad-based growth across verticals, geographies and service lines.

• What differentiates LTI from most other IT companies is the strong growth despite a tall base in FY21.

• Good client additions across key buckets is commendable. Typical seasonality of the second half of the year being better than the first half is expected to continue in FY22. If LTI is able to achieve such exit-rate in the second half of the year, revenue growth in FY23E too will remain robust even if demand moderates during FY23.

• Confident commentary and stable margin outlook despite impending cost pressures are encouraging. We upgrade our FY22E-FY24 earnings per share by up to 11% on the back of the strong beat and solid outlook.

• LTI remains our top midcap buy.

Emkay Financial

• Maintains ‘hold’ rating, with a target price of Rs 6,400, implying a potential upside of 8.5%.

• We raise our FY22E/FY23E/FY24 earnings per share by 2.7%/4.9%/4.7%, factoring in Q2 performance. Expect LTI to deliver top-quartile revenue/earnings performance over FY21-24.

• We retain our gold rating, considering the rich valuation.