LTIMindtree: Near-term outlook remains bleak

26 Mar 2024 , 02:26 PM

Analysts of IIFL Capital Services met with Vinit Teredesai, CFO, and Vipul Chandra, CFOdesignate, so as to understand about the long-term strategy and execution; apart from the near-term demand and growth outlook. Management highlighted that discretionary spend remains under pressure and there is limited visibility for a pickup in FY25 for now. Near-term Ebit margin guidance has been pushed out to invest back in business, but the long-term focus would remain to deliver profitable growth. Medium-term revenue and margin synergy targets stay on track. Analysts of IIFL Capital Services see a slow recovery in LTIM’s growth profile and forecast 12%/22% USD revenue/EPS Cagr over FY24-26. With the stock trading at 27x/21x FY25/FY26 P/E, they see a limited upside, until there are signs of demand recovery. Maintain ADD.

Near-term muted; limited visibility of a pickup in FY25:

LTIM highlighted that discretionary spend remains weak. Furloughs were much higher in Q3 and have extended to Q4 too; hence, growth is looking challenging in the near term. Clients have moved to a quarterly budgeting exercise, providing limited visibility of a demand recovery in FY25. While deal wins and ramp-ups have been on track, smaller projects and growth in existing customer base have been tough as ramp-down of discretionary spend continues. They continue to gain wallet share in their top 2 clients.

Margin levers exist, but need support from growth:

LTIM’s decision to push back 17-18% Ebit margin target by a couple of quarters, was driven by a need to invest back into the business, given lack of growth. Utilisation is stretched despite low attrition. They will benefit from the merger-related cost savings, but need an improved growth trajectory for the levers to materialise. This is because cost takeout deals are margin-dilutive upfront, while there aren’t enough discretionary projects to offset this impact.

Merger synergies playing out, despite tough macro:

From a merger perspective, initial signs of service line synergies are visible with ERP and data service line growing faster than the company average. On the Experience side, synergies haven’t played out as that is largely discretionary spend. Real estate consolidation is ongoing, benefits of which should be visible over the next few quarters. As discretionary spend comes back, management is confident of delivering on the USD1bn revenue synergies and margins.