Stock Fundamentals

L&T Infotech has run up sharply. Should investors bet on it?

Vivek Ananth | Updated on July 05, 2020 Published on July 05, 2020

Well-poised to benefit from faster adoption of technology by businesses post-pandemic

In a world wrecked by Covid-19, economies are in a tailspin. But one sector that could gain in the long term is technology and IT services. Aside from tier-I Indian IT services companies, some tier-II firms will also benefit from the faster adoption of technology and digitalisation of many businesses post-pandemic.

L&T Infotech (LTI) is one such company. The stock has run up a lot in the past few weeks and, hence, at current prices is a little expensive. The stock is trading at 23 times its 12-month trailing earnings, higher than its three-year trailing PE multiple of 20 times. Its peers Mphasis, Hexaware and Persistent Systems are trading at 12-month trailing PE multiples of 14 times, 15 times, 14.3 times, respectively.

The only mid-cap name that is trading near the same PE multiple as LTI is group firm Mindtree (25 times).

Given the expensive valuations, investors can wait and accumulate the stock in dips.

Stellar performance

LTI has delivered stellar revenue growth over the past four years.

The company’s revenue grew 18.8 per cent CAGR between 2016-17 and 2019-20 to ₹11,208 crore, while net profit grew 16.1 per cent CAGR to ₹1,520 crore.

Over 40 per cent of LTI’s revenues comes from digital services.

Even though the whole industry has been impacted by lockdowns, LTI was nimble enough to move its employees to a work-from-home schedule. This has helped its financial performance in the January-March 2020 quarter, where it posted a 7.2 per cent quarter-on-quarter rise in revenue in rupee terms. Consolidated net profit grew 13.5 per cent sequentially, mainly on account of forex gains.

For the quarter ended March 31, 2020, the company posted an earnings before interest margin of 16.7 per cent, up around 50 bps over the previous quarter.

LTI’s financial performance in FY20 was better than that of its peers despite the company facing headwinds in the April- September 2019 period due to client-specific issues. This was because the company posted robust sequential revenue growth in the last two quarters of FY20.

The company has also bagged around $100 million worth of deals in the January-March 2020 quarter. LTI is also expected to announce some large deal signings it did in the April- June period in the ensuing quarterly results. The company’s decent pipeline of projects and deals provide good revenue visibility for 2020-21.

In all, LTI seems to be well-placed to tide over the near-term pandemic crisis.

Pandemic impact

The management expects most of the impact due to the economic meltdown caused by the pandemic to be felt in the first quarter of this fiscal.

The impact is likely to be on the energy and utilities, and manufacturing verticals. These two make up over 28 per cent of the company’s revenues.

The lockdown has caused oil prices to crash and as a result many oil companies have cut production. Also, manufacturing activity has been hit across the world because of lockdowns. This is expected to impact client spending from these verticals.

The company also expects some softness in banking and financial services, and insurance verticals during the second half of financial year 2020-21. This vertical makes up nearly 46 per cent of its total revenues.

Hi-tech, media and entertainment, CPG (consumer packaged goods), retail and pharma verticals will be relatively less impacted by the pandemic.

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Published on July 05, 2020
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