Q1FY24 Review: LTIMindtree: Weak Q1; double digit growth in FY24 difficult

18 Jul 2023 , 11:10 AM

LTIMindtree’s (LTIM’s) Q1FY24 revenue growth of 0.1% cc QoQ (8.2% cc YoY) was tad below IIFLe, as macro uncertainty resulted in delayed ramp up of certain projects. Ebit margin at 16.7% (+30bps QoQ) was also a tad below IIFLe, led by lower subcontracting costs and operational efficiencies. Order book remained healthy at USD1.41bn (+4% QoQ), implying a book-tobill of 1.33X. Management expects growth in Q2 to slowly accelerate but indicated that delivering double digit growth in FY24 will be challenging. Margins are expected to continue to trend higher and exit FY24 at 17-18%. Analysts of IIFL Capital Services lower their EPS estimates by 2-5% and their 12-m TP to Rs5,200 (from Rs5,250), based on 23x 2YF EPS on the back of lower FY24 revenue growth. Maintain BUY but near term upside could be limited.

Weak growth but hopeful of better H2: 

Growth in Q1 was led by Hitech (+3.2% QoQ) and Health & Public Services (+4.1%) while BFSI (- 1.3%), Manufacturing (-1.1%) and Retail & Travel (-1.3%) remained soft. Management indicated that they continue to see instances of delayed decision-making and hiring freezes, which could impact Q2. However, deal activity remains healthy and an expansion of deal pipeline (+10% QoQ), gives them confidence of acceleration in H2. Deal TCV at USD1.41bn implies 1.33X book-to-bill. However, it will be challenging to deliver double digit growth in FY24.

Margins on track to exit FY24 at 17-18%: 

Ebit margin at 16.7% (+30bps QoQ) were driven by lower subcon costs and operational efficiencies. Management expects the margins to continue to trend higher through FY24, and the merged entity profitability to move back to erstwhile entities, exiting FY24 at 17-18% range. Q2FY24 would have impact from wage hikes and promotions. LTM attrition declined 240bps QoQ to 17.8% and headcount declined by 2% QoQ and YoY.

Maintain BUY: 

LTIM is trading at 24x FY25 P/E, at a 2% premium to mid-cap IT services peers’. Given the cross-selling opportunities, scale benefits and merger related cost synergies, analysts of IIFL Capital Services believe the multiple can expand over the medium-term. Key risk: Merger integration, Attrition.