Larsen & Toubro Infotech: Research Report by ICICI-Direct

Cloud, data, large deals key theme…

We attended the virtual analyst meet of Larsen & Toubro Infotech (LTI). The company highlighted that it aspires to achieve US$1 billion in cloud revenues in the next three years from current US$180 million implying 77% CAGR over the next three years from this unit. In addition, LTI has won a large deal in the UAE amounting to ~AED760 million (~US$205 million) over the next six years.

This, coupled with a healthy large deal pipeline (up 62% YoY to US$1.98 billion) and increased investment to drive sales growth makes the company confident of being in an industry leading revenue growth quartile (that we believe could be at least 15% YoY in coming years). Further, LTI plans to invest in sales & marketing, M&A, localisation and drive revenue growth via investments. However, despite investment, the company aims to maintain 14-15% net profit margin.

Focus on cloud, data to tap digital disruption

The company highlighted that the revenues of three hyperscalers like Amazon, Azure and Google Cloud is expected to double to US$200 billion by 2023 from current US$80 billion. To tap this opportunity, LTI plans to add a dedicated cloud unit for Amazon, Azure and Google. The company plans to have dedicated sales, solutions, consulting, delivery and partnership to tap the emerging cloud opportunity. LTI will target clients beyond Fortune 2000 to offer its cloud solutions. The company has also developed a cloud transformation platform Rainbow along with cloud specialist, R&D, labs, etc, to drive cloud growth. Based on this, the company aspires to grow at 77% CAGR to US$1 billion from current US$180 million over the next three years (continued below).

Maintaining stable margins despite investment headwind

LTI highlighted that it aims to maintain 14-15% net margins despite headwind of investment in sales, reskilling localisation and capability building.

Valuation & Outlook

LTI in its analyst meet has also highlighted focus on digital technology and a structural shift towards cloud & ancillary technologies like data & Artificial Intelligence (AI).

We believe the IT industry is on the cusp of a multi-year technology transformation phase. Considering LTI’s prowess in digital technology coupled with ability win large deal, scale existing clients, ability to execute end to end projects and adding new logos will enable it to deliver industry leading revenue growth in coming years.

This, coupled with the company’s ability to maintain 14-15% net margins despite increased investments, is another key positive. Hence, we maintain our BUY rating on the stock with a revised target price of | 3850 (26x FY23E EPS).