Q2FY24 Review: LTIMindtree: Sequential improvement to ensure healthy exit

19 Oct 2023 , 12:44 PM

LTIMindtree’s (LTIM’s) Q2 revenue growth of 1.7% cc QoQ (4.4% cc YoY) was in line with IIFLe, driven by broad-based growth across verticals, geographies and client buckets. At 16% (-70bps QoQ), Ebit margin was above IIFLe of 15% despite the full impact of wage hikes. Order book at USD1.3bn (+20% YoY), implying a book-to-bill of 1.2X; deal pipeline remained healthy. Despite higher-than-usual furloughs in Q3, management expects H2 sequential growth to be better than H1, driven by ramp-up of previously won deals. Margins are expected to continue to trend higher and exit FY24 at 17-18%. Analysts of IIFL Capital Services  tweak FY24-26 EPS estimates and maintain their 12-month TP at Rs5,700, based on 23x 2YF EPS. Maintain BUY on improving H2 outlook and potential cross-sell/upsell synergies. 

Broad-based pickup in sequential growth: 

Growth in Q2 was broad based across Manufacturing (+5.1% QoQ), Health (+3.2%), Retail (+2.9%) and Hi-Tech (+2%) while BFSI (-1.1%) remained soft. Deal activity for the quarter remained healthy at USD1.3bn (+20% YoY), implying book-to-bill of 1.2X. Management indicated that while clients continue to prioritise cost-optimisation deals and decision-making cycles are longer, the existing order book gives them confidence of sequential growth accelerating in H2. Over the medium term, LTIM is well-placed to benefit from merger-related cross-sell and up-sell opportunities. 

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

At 16.0% (-70bps QoQ), Ebit margin was better than IIFLe of 15%, as the full impact of wage hike was partially offset by higher utilisation and operational efficiencies. Management expects 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. LTM attrition declined to 15.2% and headcount increased by 1% QoQ. 

Maintain BUY: 

LTIM is trading at 24x FY25 P/E, in line with 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.