Q3FY24 Review: LTIMindtree: Weak Q3 and outlook; margin guidance deferred

18 Jan 2024 , 11:49 AM

LTIMindtree’s (LTIM’s) Q3 revenue growth of 0.7% cc QoQ (+3.1% cc YoY) was a tad below IIFLe of 1%; driven by higher-than expected seasonal furloughs. At 15.4% (-60bps QoQ), Ebit margins were also below IIFLe of 16%. Order book came in at a record high of USD1.5bn (+20% YoY), implying a book-to-bill of 1.4x; the deal pipeline remained healthy. However, management indicated that the overall demand environment remains soft, decision-making cycles are stretched and furloughs have extended into Q4. Headcount declined 1.3% QoQ. LTIM expects Q4 growth to be similar to Q3, and has pushed out its target to achieve Ebit margins of 17-18% in Q4FY24 by a few quarters. Analysts of IIFL Capital Services lower FY24-26 EPS by up to 5%, on the back of muted outlook. Their 12-month TP reduces to Rs5,650 (was Rs6,100), based on 24x (was 25x) 2YF EPS. Valuations are full, with the stock trading at 33.2x/26.6x on FY25/26 P/E; leaving no upside. Maintain ADD. 

Deeper and wider furloughs impact growth: 

Growth in Q3 was aided by Manufacturing (+14% QoQ), which includes higher seasonal pass through revenues. However, all other verticals were impacted by higher than-expected furloughs. Deal activity for the quarter was strong at USD1.5bn (+20% YoY), though management indicated that decision making cycles remained stretched. LTIM expects growth in Q4 to be similar to Q3, as some of the furloughs are likely to continue in Q4. Over the medium term, LTIM sustains focus on merger-related cross-sell and up-sell opportunities. 

Margin guidance deferred: 

At 15.4% (-60bps QoQ), Ebit margins were below IIFLe of 16%. Key headwinds for margins were higher seasonal weakness (-200bps), partially offset by lower SG&A (+80bps) and operational efficiencies (+60bps). Given the muted growth outlook, LTIM has pushed out its target to achieve Ebit margins of 17-18% in Q4FY24 by a few quarters. Utilisation increased to an all-time high of 87.4% (+80bps QoQ); LTM attrition declined to 14.2% (-100bps QoQ). 

Maintain ADD: 

LTIM is trading at 33x FY25 P/E, at a ~35% premium to large cap IT Services peers and in line with midcaps, despite offering similar growth in the near term. Given the muted outlook, analysts of IIFL Capital Services believe the premium should reduce in the near term. Key risk: Merger integration.