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NSE Jan 18, 2021 09:24 AM
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With resilient margins, LTI management is bullish on growth

by Suhani Adilabadkar

Larsen & Toubro Infotech (LTI) reported robust numbers for the September quarter FY21, driven by BFSI and manufacturing verticals along with strong margin performance. The management’s optimistic commentary bodes well for future growth. The stock has gained 149% from the 52-week low of Rs 1,293 it touched in March 2020.

Quick Takes:

  • Operating revenues stood at Rs. 2,998 crores in Q2 FY21 compared to Rs. 2,571 crores in the same period a year ago, rising 17% YoY.

  • EBIT came in at Rs. 596 crore during the quarter against Rs. 399 crore in the same period a year ago, soaring 49% YoY, with operating margins coming in at 19.9%.

  • Apart from margin resilience and a healthy deal pipeline, LTI reported the highest constant currency growth in YoY terms in the industry of 10.5%. This is higher than HCL TechTech MahindraWipro, and even TCS, except Infy.

  • The management reinstated the practice of giving PAT margin guidance for FY21 and expects it to be in the 14%-15% range.

September Quarter Results

LTI’s stock price jumped 5% after the company came out with healthy September quarter numbers. It reported industry-leading double-digit growth in revenues, EBIT, and net profit.

Driven by robust performance at the operating level, net profit grew 27% YoY to Rs 457 crores, and 10% sequentially. This was the strongest net profit growth in the past six quarters. Operating revenues stood at Rs. 2,998 crores in Q2 FY21 compared to Rs. 2,571 crores a year ago, rising 17% YoY. In dollar terms, revenues came in at $ 404 million rising 11% YoY, and 3.6% sequentially. 

Revenues from digital services made up 43% of LTI’s revenue mix, growing 18% YoY and 5% QoQ. The company’s EBIT during the quarter was Rs. 596 crore against Rs. 399 crore in the same period a year ago. Operating margins came in at 19.9%, expanding by 440 bps YoY, and 250 bps sequentially. The margin expansion was driven by improvement in onsite-offshore mix, employee utilization, higher working days and operational efficiencies. 

LTI – Powering the Breakaway

After a challenging H1 FY20, ridden with account specific issues, LTI saw some recovery in Q3 FY20. The company was cruising towards a strong finish to FY20, before COVID19 struck in March 2020. 

Though the quarter ended March 2020 (which saw the highest dollar revenues in FY20) had no Covid impact per se, the subsequent June 2020 quarter saw a 4.8% sequential decline in dollar revenues. On a year-on-year basis, revenues grew 10% during the June 2020 quarter and the management guided for a flat September quarter, with a positive bias. Although the quarter ended September 2020 came with a modest large deals TCV, LTI’s performance managed to beat it's top and mid-IT services peers. 

LTI’s double-digit revenue growth in Q2 FY21 was driven by strong performance in many verticals. The banking and financial services vertical (30% of revenues), helped by its top client, grew 11.7% sequentially and 22.5% YoY. 

Manufacturing (16% of revenues), which was the hardest hit in the June quarter with 17% sequential decline, recovered strongly with revenues growing 6.4% QoQ and 10.2% on a YoY basis. Growth from manufacturing clients rebounded in both US and Europe with the resumption of factories, supply chains and clients moving to new customer-centric operating models. 

CPG, retail & pharma, which makes up 11% of LTI’s revenues, saw revenues grow 6.3% YoY. LTI has a minimum footprint in this vertical, but the management expects it to grow above the company average in FY21.

High-tech, media & entertainment (10.6% of revenues) saw revenues fall 5% sequentially, but on a YoY basis, revenues rose 9.5% during Q2. Reprioritisation of work in a specific account led to sequential decline in revenues. 

The Energy vertical (10.6% of revenues) saw modest 2% revenue growth QoQ and a 2.2% YoY decline. The management says, though a comeback is visible in the energy space, client spends continue to be impacted and recovery is expected only from Q4 FY21. 

The insurance vertical (16% of revenues) continues to struggle due to covid related insured losses and declining premium volumes. This vertical saw revenues fall 3.4% QoQ and 5% YOY.

Optimism In The Air

Large deal TCV was muted in both June and September quarters at $ 20 Mn and $ 40 Mn, respectively. LTI reported large deals TCV of more than $ 300 Mn in FY20, with the quarter ended March 2020 seeing large deals worth $ 113 Mn. 

But the management does not see only large deals moving the growth engine, especially in the present volatile business environment. Speaking on this, Sanjay Jalona, CEO and Managing Director of LTI said, “Large deals alone don't drive growth. We drive growth based on four things, growth accounts, investment accounts, new accounts, as well as large deals. 

“There are four pillars to our strategy,” he continued. “Growth accounts, these are large accounts, that we need to continue mining. Invest accounts, which could become growth accounts for the future, so we need to continue to throw the kitchen sink at them. New account openings, which could become invest accounts and growth accounts in the future, and large deals”. 

Put simply, the focus is on the top 5-20 clients that earn LTI more than half its revenues, adding new clients, participating in growth accounts and enhancing its service mix to augment client mining. And lastly, a strong focus on signing large deals. In addition to this growth strategy, a higher focus on M&A (4 acquisitions in 2019), aggregation of Fortune 500 clients, and continuous improvement in margins for the past 6-7 quarters that has helped LTI achieve industry-leading growth. 

The management feels current margin levels (19.9%) are sustainable driven by higher operational efficiencies, higher utilization, and improved offshore mix (80.6%). In certain specific deals, the company is able to pitch 90-95% offshore ratios to its clients. 

It is also optimistic about future growth. Jalona says, “We have enough pipeline that gives us the confidence that we are setting ourselves for a strong FY22 as well”. 

The overall deal pipeline is up 22% YoY in September quarter FY21. With respect to the outlook for the third quarter FY21, Jalona said, “We have already surpassed our Q3FY20 revenues this quarter, and we will surpass our Q4FY20 revenue in Q3 itself. We remain committed to delivering top quartile growth in FY21 as well”. 

The management has also reinstated its PAT margin guidance for FY21, to be in the 14%-15% range, despite a salary hike in January 2021. The management’s confidence seems to have rubbed off on FIIs, who have increased their holding in LTI by 350 bps over the past one year.

Number of FII/FPI investors increased from 275 to 483 in Dec 2020 qtr.
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