LTIMindtree: Creating roadmap for long-term growth

12 Apr 2023 , 08:59 AM

Recommendation: Buy

Target Price: Rs 5500

 

Analysts at IIFL Capital Services hosted Debashis Chatterjee (CEO), Sudhir Chaturvedi (President, Sales), Vinit Teredesai (CFO) and Nitin Mohta (Head, IR) for LTIM’s first NDR in the US, post merger. Key messaging was that the merger-related changes are behind and the company is looking to drive revenue and cost synergies over the medium term. Management reiterated that by FY27, they expect to drive US$1bn of revenue synergies and 200-300bps of margin expansion over the pre-merger Ebit margins of 17-18%. However, revenue synergies will precede margins, which will be more back-ended with FY24 exit at 17-18%. Partnerships and alliances will be core to revenue synergies, while complimentary portfolio offers enough cross-sell and up-sell opportunities. Although Q4 may see modest growth, margins will improve over 200bps in the absence of merger-related one-off costs and initiatives taken.

US$1bn revenue synergies by FY27:

Growth will be driven by mining top 100 clients, cross-selling to existing clients given the limited overlap, combination of LTI’s Engineering and Mindtree’s Experience DNA giving end-to-end capability for larger deals, and stronger alliances and partnerships. LTIM has integrated the GTM model to focus on larger deals by aligning the service-lines sales with vertical and geography units. The pre-sales and large deal teams have also been integrated across both the companies.

Ebit margin target of 19-20% by FY27, but more back-ended:

LTIM is targeting 200bps of cost synergies by FY27 driven by: i) Improving utilisation, sub-con and pyramid rationalisation, ii) SGA leverage through cross-selling and rationalisation of tail accounts, iii) Operational efficiency through rationalisation of duplicate facilities and internal systems. Cost synergies are likely to take time to play out and hence, will be back-ended. LTIM believes they have ring-fenced senior employees through ESOPs.

Play on synergy optionality, maintain BUY:

Analysts at IIFL Capital Services forecast LTIM to deliver 15%/21% USD revenue/EPS Cagr over FY23-26, and do not factor in any major synergy benefits in our forecasts. Despite that, at 20.8x FY25 P/E, the stock offers 15% potential upside and offers optionality from synergies as they execute their plans over the medium term. Any potential senior management exit would remain as a key risk.