L&TI Q2- Price target of Rs.6620 with strong growth prediction of 24% expected

Growth of the different verticals

Larsen & Toubro Infotech’s key players are its three verticals- BFSI (47% of revenue), Manufacturing (16% of revenue) and Hitech (13% of revenue). Lets talk about the highest revenue earning vertical first. The BFSI vertical grew in all the regions and had a 28% YoY growth. It performed better than all the other companies in the same sector proving to be a vertical that the company can instill full confidence in. According to LTI, its digital offerings are the key reason that the vertical has grown more compared to its peers.

Manufacturing, the second highest revenue earner also had quiet a good quarter with 21% YoY growth in all the sub- sectors. According to the management, there are strong deals being entered into by the vertical which will further ensure sustainable growth in this vertical.

The Hi tech vertical has been one of the top three sectors to come out of the pandemic with flying colours due to the post pandemic flurry of tech spending. It grew by 44.9% YoY. Same as the other sectors, the growth is expected to sustain.

The demand in the retail sector in LTI has been mostly driven by the United States and grew by only 6% YoY.

Capital and productivity in the Q2

The company’s hiring for this quarter is at a 4 year high as the revenue growth had increased. 4,084 people have been hired in the second quarter of FY22. Due to the higher amount of people hired, the utilization fell from 83.7% in Q1 FY22 to 81.6% in Q2 FY22. The company has decided to increase the amount of freshers by 1000. Two wage hikes have been given to the employees. According to the employees, the production is assumed to remain stable as the ratios have stabilized now and a price increase is estimated over a medium term.

From the client’s perspective

The new client addition has increased has been increasing over the last two quarters and has been steady throughout the year. In the $10mn+ tranche of clients the number has increased from 15 to 43 and in the $20mn+ tranche, the number has increased by 3 and lastly, in the $50mn+ tranche, the number increased by 1. The Revenue per client has increased by 11% in Q2FY22.

Financial

The revenue of Q2 FY22 saw an increase of 7.9% QoQ and 25.8% YoY as it increased from Rs.405 million in Q2 FY21 to Rs.509 million in Q2 FY22. The Net profit fell by 10% YoY in this quarter from Rs.248 crore in Q2 FY21 to Rs.223 crore in Q2 FY22. This can be attributed to the fall in Interest income to Rs.2903 crore (12% YoY).

Q2 FY22 saw the highest disbursement in rural finance at Rs.4987 crore which is 51% higher than from the Q1 FY22. EBITDA value grew by 7% QoQ during this quarter but in YoY, the EBITDA value fell by 340bps. As soon as the supply side betters and becomes more manageable, the growth of EBITDA is assumed to be as high as the growth of the revenue.

Projections by analysts

A revenue growth of 24% in FY22 and 20% in FY23 has been estimated by the analysts. This growth in revenue will help the company offset the high amount of hiring taken up in this quarter. A medley of changes has been estimated to occur in the EBIT margin which touched 19.3% in FY21 and its projected to come down to 17.5% in FY22 and rise to 18.3% in FY23.

The price target has been set at Rs.6620 and a HOLD recommendation has been issued by the analysts.