By Suhani Adilabadkar
Larsen & Toubro Infotech (which is in 17 stock screeners) has recently taken some hits in share price from investors. The company is a relative stock market newbie, with just a two-year history on Indian bourses, but has been on an aggressive mode since listing with strong inorganic growth opportunities always in focus. Presently, L&T Infotech, the largest midcap Indian IT player, is at an inflexion point growing in both directions irrespective of global headwinds and inherent business volatilities.
Quick Takes:
- Founded in 1997, L&T Infotech (LTI) has an envious parentage, and has evolved as the sixth largest Indian IT service company standing among the top 20 globally.
- Revenue grew 31% YoY at Rs. 2330 Mn against Rs. 1778 Mn with strong sequential growth of 5% in the December quarter.
- Operating Profit at Rs. 464 Mn reported robust momentum growing 65% YoY at 20% margin and PAT grew at 36% YoY in Q3 FY19.
- Digital revenues comprising analytics, IOT, automation and cloud constituted 37% of total revenues growing at 33% YoY.
- LTI has made four acquisitions, AugmentIQ, Syncordis, Ruletronics and NIELSEN+PARTNER (N+P) in the past two and a half years.
- FIIs and DIIs have raised their shareholding from 8.31% in December 2017 to 15.21% by December 2018, a whopping 690 basis points increase YoY.
Mapping L&T Infotech
Founded in 1997, L&T Infotech (LTI) has evolved as the sixth largest Indian IT service company standing among the top 20 globally. Created mainly to stem the high attrition rate the parent company was facing, with talent flowing towards the IT industry, LTI has uniquely positioned itself as a global technology consulting and digital solutions company operating in 30 countries and catering to 300 clients globally.
The company’s expertise runs across the Banking & Financial Services which contributes 30% of the total revenue basket followed by Insurance and Manufacturing at 18% and 16% respectively. Other business verticals, Energy, Retail-Pharma-CPG and High-Tech-Media are almost equal contributors at 11%. Shifting gears to service specifics, Application Development Maintenance and Enterprise Solutions generate 60% of total revenues followed by Infrastructure Management Services and Analytics-AI providing 11% whereas Testing and Enterprise Integration contribute 8% equally.
With respect to its geographic revenue distribution, North America is the major benefactor with 68% revenues followed by Europe and India at 17% and 8% respectively.
Though LTI at first glance seems to be like any other IT service company, it has distinguished itself on two major counts, first by offering both IT and OT (operating technology) services provided by very few Indian IT peers and further created a headroom through differentiated services such as regulation-related offerings in banking sector, underwriting-related offerings in property and casualty insurance sector and digital operations management for Oil & Gas, Automotive etc.
Thought to be just another IT service company by the Analyst community at the time of listing, the company proved all dismal growth scepticism wrong in the last two years, moving from a 6% discount listing at Rs.667 to investor wealth trebled in just 32 months.
Stellar Quarterly Performance
LTI reported broad based revenue growth across all key verticals along with strong operational performance in a traditionally weak December quarter. Revenue grew 31% YoY at Rs. 2330 Mn against Rs. 1778 Mn with strong sequential growth of 5%. Operating Profit at Rs. 464 Mn saw robust momentum growing 65% YoY at 20% margin against 16% same period previous year. Operational performance was mainly driven by utilization and lower SG&A.
On the profitability front, sequential growth was hampered by negative currency movement whereas yearly growth was strong at 36% rise in PAT in Q3 FY19. Net Profit Margin at 15.6% expanded 53 basis points YoY, moving above the guidance range of 14-15%. Digital revenues comprising analytics, IOT, automation and cloud constituted 37% of total revenues growing at 33% YoY.
LTI has been consistent with one large deal win for the past three quarters, exhibiting near to medium term growth stability and long-term profitability. In the current quarter, Nets, a leading payments company in the Nordic region has chosen LTI as its primary IT partner.
Apart from this large deal, Mr. Sanjay Jalona, CEO & MD added, “ In Q3, we added one client each to the $50 million and $20 million bucket and three in the $5 million bucket. Accounts outside of top 20 grew at 24.4% on a YoY basis. Movement in client buckets and acceleration in growth beyond top 20 accounts reflects the success of our Minecraft and ADEA (analytics and digital in every account) programs”.
Such sustained growth momentum and a focused acquisition strategy for the past two and a half years has created a formidable mid-tier IT player with a market cap higher than Mphasis, Mindtree, Hexaware and Oracle Financial Services Software, its sizable peers at the time of listing.
Focussed Acquisition Growth Strategy
LTI has made four acquisitions in the past two and a half years indicating strong desire for inorganic growth as and when opportunities present on favourable parameters. The company continues to beef up its differentiated service offerings. First in line, MAXIQ, a big data platform, accessed through AugmentIQ acquisition, services banks and credit bureaus globally.
LTI also acquired Ruletronics in early Jan 2019, to enhance its Pega Consulting capabilities which helps customers by providing innovative BPM and CRM solutions especially in banking and insurance segments.
With razor-sharp focus on capability led transactions Syncordis was acquired in 2018 to enter into core banking and world class banking product Temenos buffeting its core banking implementation capabilities. The Luxembourg-based, Syncordis SA, a pure play Temenos specialist with its subsidiaries in UK and France, is expected to reap benefits of higher IT spend by banking sector for implementing core banking programmes mainly in Europe.
To make further inroads in the fast growing Temenos market, NIELSEN+PARTNER (N+P), an independent Temenos WealthSuite specialist has been the latest acquisition. Synergising with Syncordis, NIELSEN+PARTNER has strong expertise in the front office of Temenos WealthSuite strengthening LTI’s position as an end to end Temenos player in banking and wealth management segment globally. With respect to company’s inorganic growth, Mr. Jalona clarified, “Our inorganic strategy is focused on augmenting our digital capabilities and addressing the white spaces in our portfolio. This is a common theme that is visible in all the acquisitions that we have done in the last 2.5 years”.
FIIs and DIIs have raised their shareholding from 8.31% in December 2017 to 15.21% by December 2018, a whopping 690 basis points YoY.