LTIMindtree - 3QFY23 Result Update

 LTIMindtree Result Update

LTIMindtree (LTIM) revenue stood at US$1.1bn, broadly in line with our estimate of US$1.04bn during the first quarter reporting financial of merged entity. It delivered 1.9% QoQ constant currency growth, below our estimate of 2.9% QoQ. However, EBIT margin came in at 13.9% (down 362bps QoQ /down 464bps YoY), 187bps below our estimate of 15.8%. Adj. net income stood at Rs10bn (down 16% QoQ/down 5% YoY), 11.9% below our estimate of Rs11.4bn. Net income margin stood at 11.6%, as against our expectation of 13.2%. Management expects strong demand environment for medium term. We are positive on the medium-term revenue growth resiliency, though uncertainty persists on FY24 outlook. We expect margins to expand from current level as attrition has started falling and hiring would moderate going forward, while pricing is better. At CMP, the stock trades at 21.6x FY25E EPS. Considering the likely US recession, major global slowdown and lower earnings growth trajectory, we have a HOLD on LTIM with a Target Price of Rs4,650. We believe that current valuation fully captures the medium-term growth prospects, leaving limited upside, we have HOLD on LTIM.

Manufacturing Vertical aids Growth; Annualised Attrition drops to 18%

Among verticals, the revenue growth was led by Manufacturing & Resources (10.5% QoQ) and BFSI (5.7% QoQ). Among geographies, the revenue growth was particularly strong in RoW (5.4% QoQ) and Europe (4% QoQ). (2) LTM attrition stood at 22.3% vs. 24.1% in the previous quarter while quarterly annualised attrition dropped to 18%. (3) Total headcount stood at 86,462 in 3QFY23.

Transition Process Impacts Margins; Profitability to Improve Gradually

EBIT margin came in at 13.9% (down 362bps QoQ /down 464bps YoY), 187bps below our estimate of 15.8%. We expect FY23E margins to be impacted due to the higher SG&A cost, and increasing employee cost (retention cost for mid level engineers with special skill), furlough, adverse forex and one time merger related cost. We believe that likely US recession and global slowdown would impact IT services to some extent, while improving supply situation and falling attrition coupled with synergy benefit from Mindtree merger would aid margin expansion over next 2-3 years gradually. We estimate an EBIT margin of 15.8%/16.2%/17% for FY23E/FY24E/FY25E.

Outlook and Valuation 

We believe LTIM will report an industry-leading double-digit revenue growth rate over FY23E-25E, while on better operating margins, we expect LTIM to report an EPS of Rs202.2 in FY25E. We introduce our FY25E estimates and roll forward our valuation to FY25E with a revised valuation multiple of 23x from 25x earlier. We expect the company to report FY22-FY25E EPS CAGR of 15%. We expect synergy benefit by cross selling over next 3-4 years and expect incremental margin benefit of synergy to the tune of 100-150bps over 4-5 years. However, we believe that current valuation fully captures the medium-term growth prospect and majority of the positives, with limited upside, we have HOLD on LTIM with a Target price of Rs4,650 at a valuation of 23x FY25E earnings.

Conference Call – Key Takeaways 

• EBIT Margin dropped to 13.9% from 17.5% in 2QFY23 due to impact of integrated related cost (100bps), furlough (130bps) and salary intervention expense (130bps). 

• Among verticals, the revenue growth was led by Manufacturing & Resources (10.5% QoQ) and BFSI (5.7% QoQ). Among geographies, the revenue growth was particularly strong in RoW (5.4% QoQ) and Europe (4% QoQ). 

• In employee metrics, utilization without trainees was at 82.9%, compared to 83.5% in the last quarter. Headcount stood at 86,462 with LTM attrition declining to 22.3% and quarterly annualised attrition dropping to 18%. 

• The company expects the attrition rate to further decline in 4QFY23. 

• Management targets to regain its pre-merger EBIT margin territory of 17-18% in FY24E as slowly merger related cost would go away and better pricing, better utilisation and moderate hiring would support margins next year. 

• Moreover, management aims incremental revenue of US$1bn on synergy over the next 4-5 years and margin benefit of 200bps over and above pre-merger combined EBIT margins over the same period.

• LTIM reported an overall order inflow of US$1.25bn and indicated that it witnessed higher-than-anticipated furloughs in certain client accounts in 3QFY23. However, its overall pipeline remains healthy with strong growth in large deal wins.

• The company declared an interim dividend of Rs20/share.

Key Risks

• Major change in spending by global banks and financial institutions

• Higher-than-expected variation in cost on R&D and marketing expenses

• Lower-than-expected payoff from acquired assets

• Higher than expected currency movement on either side