Recommendation From Construction & Engineering Products Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

Larsen & Toubro Infotech (L&TI) 

INVIGORATE YOUR PORTFOLIO WITH L&T INFOTECH 

HERE IS WHY
Good order pipeline
Growth visibility
Premium pricing over competitors 

Larsen & Toubro Infotech (L&TI) is a global technology consulting and digital solutions company. Its operations span across 30 countries. On the consolidated financial front, the company reported revenue from operations of `2,486 crore in Q4FY19 as against `2,001.2 crore in Q4FY18, posting a YoY growth of 24.22 per cent. EBITDA stood at `476.6 crore in Q4FY19 versus `291.9 crore in Q4FY18, registering an increase of 63.27 per cent. EBITDA margin rose to 19.2 per cent in Q4FY19 from 14.6 per cent in Q4FY18, thereby rising 458 bps YoY. Operating profit or EBIT rose 71.7 per cent YoY to `439 crore in Q4FY19 from `256 crore in Q4FY18. Net profit stood at `378.5 crore in Q4FY19 in comparison to `289.4 crore in Q4FY18, posting a growth of 30.78 per cent. 

The top performing verticals were hi-tech media & entertainment and manufacturing. These verticals posted a growth of 11.3 per cent and 8.1 per cent, respectively. Meanwhile, BFSI declined by 3 per cent, while insurance showcased a mediocre growth of 1.6 per cent. L&T Infotech's business witnessed growth across all geographies. Its business in India grew 6.8 per cent, US grew 1.3 per cent and Europe grew a mere 0.6 per cent. Meanwhile, the rest of the world grew 4.6 per cent.

The margins were impacted mainly on account of rupee appreciation as well as a decline in utilisation. Its utilisation plummeted to 80.1 per cent in Q4FY19 from 83 per cent in Q3FY19. The verticals of BFSI and CPG, and retail & pharma witnessed a steep fall in margins. However, the same was fortunately offset by the margin growth in hi-tech M&E and E&U verticals. The growth in the fourth quarter was driven by enterprise solutions and testing services. The offshore volumes and growth in onsite realisations also contributed to the same. L&TI announced 2 large new deals with net TCV in excess of US$ 100 million in the insurance and manufacturing vertical. We can expect the deals to ramp up in Q2FY20 and pickup fully in Q3FY20 and Q4FY20. The company showcased sustained strength in business momentum outside its largest account. It registered double digit YoY CC growth in Q4FY19 across all verticals. Even within the BFSI vertical, the company expects robust growth, but outside its top account. Furthermore, LTI’s pipeline of large deals expanded further since December 2018; it was up 25 per cent YoY in December 2018. 

L&TI has retained its net margin outlook of 15 per cent, which is an indication of lower operating margins as the company is investing in sales capacity. Nevertheless, for FY20, the management has provided a growth outlook of top quadrant growth. On March 15, 2019, the company acquired 100 per cent shares in Ruletronics Systems Pvt. Ltd. with an enterprise value of `54 million. Owing to its strong pipeline and order book, large deal wins and traction in core modernisation projects, the company’s growth visibility is looking up. The company has seen one of the best executions among Tier-II IT. As a result, we can expect the company to continue charging a premium as compared to its competitors. By virtue of these factors, we urge our reader-investors to BUY this stock