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LTIMINDTREE LTD Brokerage Report: Should You Buy, Sell or Hold?

The Brokerage report is from ICICI Direct and written by Pankaj Pandey Head – Research

Below are the Key findings of the reports

Integration complete, aiming for industry leading growth…

About the stock: LTIMindtree (LTIM) is the merged entity formed after the merger of erstwhile Mindtree with LTI and offers application development, IMS, digital solution services to BFSI, retail, health, media & hi-tech verticals.

• LTIM has 750+ clients and combined annual revenue over US$3.5 bn +

• LTIM has a combined employee strength of 86,000+ across 30+ countries

Analyst day highlights:

• The company indicated that integration of LTIMindtree is complete and it is looking to capture growth opportunities with one Go to Market (GTM) approach

• The revenue grew at 15% CAGR over FY17-22 and it does not see any challenge in replicating the same in the future with strong TCV, large deal pipeline, combined capabilities, large deal participation, etc

• LTIM is looking to take EBIT margins to normalised levels of 17-18% in the near term and scale it up further to 19-20% in FY27, to be aided by bending of cost curve, operating efficiency and lower subcontracting costs, etc

What should investors do? LTIM’s share price has grown by ~3.4x over the past five years (from ~| 1,332 in March 2018 to ~| 4,595 levels in March 2023).

• We maintain our BUY rating on the stock Target Price and Valuation: We value LTIM at | 5,320 i.e. 24x FY25E EPS.

Target Price and Valuation: We value LTIM at | 5,320 i.e. 24x FY25E EPS.

Key triggers for future price performance:

• Merger expected to provide cross sell and up sell opportunities with scale benefits likely to kick in while participating in large deals hunt

• Aiming for merger related benefit of US$1 bn in revenues and 200-300 bps margin expansion in the next four to five years

• Vendor consolidation opportunity and digital acceleration. We expect LTIM to register 17.5% CAGR revenue growth in FY22-25E

Other key highlights

• The company indicated that integration of erstwhile LTI and Mindtree is now complete and it is looking to start on a strong footing from April 2023 onwards as a combined entity. The company indicated it is now looking to capture growth opportunities ahead with one go to market (GTM) strategy called LTIM One

• LTIM indicated it has seamlessly aligned the organisation in terms of sale, delivery and service lines while there is no change in client interfaces since there is hardly any overlapping business in terms of clients across the two organisations. The company also indicated that fitment of culture was one of the investors’ concerns earlier, which has been addressed successfully through smooth integration,

• LTIM also indicated it is seeing stability in the top management as well as on the tier I leadership across the organisation while it does not expect any top management churn as of now. The company also indicated it did conduct town hall sessions across locations to highlight the purpose and opportunities for its employees in the merged entities. Hence, do not expect any material increase in churn from current levels apart from natural attrition

• The company indicated that due to integration of two companies, it is now looking to services its clients through ‘One unified capability approach’ where it now has offering in nine services lines. The company also indicated that clients are currently using on an average three service lines of the merged entity, which means it has enough levers for growth if clients start using more service lines than above number

• LTIM indicated that Silicon Valley Bank (SVB) is its client as well as its banker but also mentioned that the exposure to the bank is immaterial. The company also indicated it does not have exposure to start-ups in the US, which are going through a tough period. As per the company, its BFSI clients in the US are stable and it has not seen any change in behaviour of spending is concerned. The company also indicated it is watchful on the events unfolding in US but reiterated that long term tech spending is intact

• The company also indicated it is witnessing changes in client spending behaviour where it is going through business transformations and subsequently looking for more cost saving or efficiency led programs compared to cloud transformation programs earlier. LTIM has aligned itself to cater this opportunity,

• LTIM indicated it had a strong revenue growth track record (15% CAGR revenue growth over FY17-22) in the past and it does not see any challenge on replicating the same in the future based on i) strong TCV (TCV of US$1.25 bn reported in Q3), ii) the company indicated it has resilient blue chip account portfolio and also mentioned that 55% of revenue currently in those capability areas (Experience, Data, Cloud, Cybersecurity) which are unaffected by macro, iii) incremental service line usage, iv) LTIM also indicated that in the past, it was unable to participate in the large deals as standalone entities due to scale and size. After integration, it is now competing with its Tier I peers,

• The company also indicated large deal pipeline of US$3.18 bn (68 deals) (>US$20 mn large deal definition) while that number is US$3.72 bn (>US$15 mn large deal definition). The company is also witnessing strong growth in cyber security services where it is investing and expects 10-15x growth in the next two to three years (on a small base). The company also indicated that cybersecurity spends in manufacturing clients is now approaching 0.75% of sales vs. 2% spend on IT services. LTIM also indicated it is looking at US$1 bn revenue synergies, which will be played out in the medium term. They are also focusing on top 100 clients (75% mix) for its growth,

• The company indicated that Q3 EBIT margins were hit by one-time merger related costs and expect some recovery in margins in Q4. LTIM also indicated it expects EBIT margins to return to 17-18% in the medium term while in long term they are expecting EBIT margins to reach 19-20% through i) bending the cost curve ii) SG&A leverage iii) efficiency in operations,

• LTIM also indicated that partnerships also played a role in its growth in the last few years. It mentioned that three years ago, the company did not have relationship with AWS while now it has received global collaboration award.

Target Price and Valuation: We value LTIM at | 5,320 i.e. 24x FY25E EPS.

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All Investment, including one made in equities are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from expectations as expressed or implied under this document. Past performance is used to show actual performance for that period of time and in no ways assures similar performance for investments in the future. Wiremesh does not assure any financial goals to be attained, any profits to be made, or losses to be avoided, whether directly, indirectly. Investors must therefore exercise due caution and consult their financial planner and stock broker before making any decisions. This article only incorporates recent stock-related information about the companies from the brokerage report of ICICI Direct. Wiremesh, and the author are not liable for any losses caused as a result of decisions based on the article.


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