by Suhani Adilabadkar

Larsen & Toubro infotech (LTI) reported resilient June numbers, moving forward with double digit growth momentum. LTI's share price jumped 7% after its Q1FY21 results came out. Started 20 years ago as an IT arm of parent Larsen & Toubro mainly to retain IT talent, LTI has evolved as the sixth largest IT company in India. Thought as 'just another IT service company' and listed at a discount in 2016, LTI has proved to be a disrupter, growing in double digits for a fourth consecutive year and trebling investor wealth over the past four years. 

Quick Takes:

• Larsen & Toubro Infotech reported operating revenue at Rs. 2949 rising 19% YoY and operating profit growing 29% YoY. 

• Margins expanded 164 bps YoY and PAT jumped 17% YoY in Q1 FY21.

• LTI has zero exposure to the worst Covid hit businesses, travel and hospitality, and limited footprint in retail.

• Mr Sanjay Jalona, MD and CEO, LTI said, “As we stand today that we see the trough behind us, Q2 will be flat to a positive bias”. On the whole, the company says that the deal pipeline is holding up well and is up 19% YoY compared to the same period last year.

June quarter performance impresses analysts

Larsen & Toubro infotech reported an operating revenue of Rs. 2949 crore in Q1 FY21, against Rs. 2485 crore same period previous year rising 19% YoY.  In dollar terms, revenues stood at $ 390 mn, a growth of 9.5% YoY and falling 4.8% sequentially. North America contributed 70%, Europe 14%, India 7% and ROW 8% to the June quarter revenue basket.

Operating profit came out at Rs. 592 crore in June quarter FY21, compared to Rs. 458 crore in the corresponding quarter the previous year, growing 29% YoY. Margins expanded 164 bps YoY, reported at 20.07% and aided by lower product pass-throughs, tight cost controls in SG&A and rupee depreciation. The PAT or net profit stood at Rs. 416 crore in June quarter FY21 against Rs. 356 crore same period previous year growing 17% YoY. Speaking on LTI’s Covid-19 strategy, Mr. Sanjay Jalona, CEO and MD, LTI said, “We have developed a 3 x 3 strategy to ensure that we respond to this crisis in a holistic manner. Our strategy covers these three key aspects – customer first thinking, resilience in operations and protecting our P&L”. 

LTI is emerging as a resilent midcap player

LTI witnessed a weak H1 FY20 restrained by sudden ramp-downs, budgets cuts by clients and lower utilization leading to lower profitability, a negative 2% and 10% PAT growth in June and September quarters FY20 respectively. Though the December quarter witnessed recovery, a strong growth trajectory was evident in March with revenue and operating profit growth of 21% and PAT rising 13% YoY with negligible Covid-19 impact.

Management however signaled mid-single digit decline in revenues in June quarter FY20 and LTI consequently reported sequential revenue decline of 4.8% in dollar terms and constant currency in Q1 FY21, though YoY growth momentum was intact. The IT sector is facing both demand and supply headwinds as clients delay decision making, reduce their discretionary spend and hold up deal size increases. Irrespective of size, business segmentation and client penetration, Covid-19 has struck one and all, though severity is variable to resilient business model, balance sheet strength and agile operational infrastructure.  LTI belongs to this category of resilient players and the street expects this mid-cap to continue with its outperformance even in the current challenging Covid-19 environment. The stock has in fact risen 67% over the past three months since early May. 

Covid Impact

It is a dynamic operating environment as clients witness disruption in working capital cycles and higher operating expenditure coupled with demand outage. The company has acted swiftly to reassure its clients and Mr Jalona clarified, “We have provided some of our customers with specific time bound commercial concessions that will enable them to continue their IT programs with us. These are largely one-time discounts, which will enable us to revert to the earlier commercials once things settle down”.

LTI has also been able to enhance its margin expansion in June by tight cost control in SG&A, and operational efficiency. The management expects to maintain its margins with reduced travel costs, hybrid model of work from home, reduced capex and decline in costs such as depreciation, amortization, rent and conveyance allowances even if growth returns to normal levels.

With its clientele base driven by cloud acceleration and digital transformation, LTI is cautiously optimistic for the September quarter FY21: “As we stand today we see the trough is behind us. Q2 will be flat to a positive bias”.

The management has given this positive outlook as all its verticals reported positive performance in Covid disrupted June quarter. BFSI grew 9.4% YoY contributing 28% to revenue mix as its top client continued to grow and the company’s multi-million, multi-year deal in Q1 FY21 belonged to this vertical. Insurance segment driven by cost optimization and legacy systems modernization in the post Covid scenario has risen 4% YoY contributing 17% revenues while hi-tech, media & entertainment expanded 2% YoY with 11.6% revenues. Manufacturing vertical grew 14% YoY putting in 16% in revenue basket, while CPG, retail & pharma, its most resilient vertical jumped 13.4% YoY contributing 11.5% revenues and lastly, energy vertical with 11% in revenue mix expanded 10% YoY.

From the vertical deal pipeline perspective, manufacturing, oil & gas and automotive pipeline has been soft expecting growth returning in the second half of the year while pipeline growth in other verticals continues to be healthy with CPG and pharma expected to grow above company average.

On the whole, the deal pipeline is holding up well and is up 19% YoY compared to the same period last year. With zero exposure to worst Covid hit businesses, travel and hospitality, and limited footprint in retail and strong client mining ability. LTI generated 94.3% of its revenue from existing clients in FY20 compared to 96.6% in FY19.  So far, LTI wears the crown of the 'best performing mid-cap player', lightly.