Comments
ICICI Securities
L&T Infotech (Buy)
CMP: ₹1,650.3
Target: ₹1,905
We had downgraded L&T Infotech LTI) to ‘Hold’ (from ‘Add’) post Q3FY19 results as we saw client-specific issues in the BFS vertical limiting upside to consensus revenue estimate for FY20. In addition, we saw EBIT margins as having peaked in Q3FY19 at 19.1 per cent given investments to be made in capacity creation (driving lower utilisation) and Sales & Marketing. The stock is down about 9 per cent since reporting Q3FY19 results versus Nifty IT Index being up 4 per cent over the same period.
We see current valuation of 16.9x FY20E EPS (versus Mindtree trading at 18.1x) as more appropriately capturing the risks and accordingly upgrade the stock to ‘Buy’ with a target price of ₹1,905 based on 18x FY21E EPS. We also see it less likely for any stake acquisition in Mindtree to happen from LTI’s balance sheet (if at all it were to happen). We see limited fundamental risk to our $ revenue growth estimate of 14 per cent and EBIT margin of 17.6 per cent for FY20E.
Key risks to our call are: i) Macro weakness in the key markets of the US and Europe; ii) sharper than expected decline in margins; and iii) significant appreciation in the USD/INR exchange rate.
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