L&T Infotech rating – Reduce: A disappointing quarter for the company Larsen & Toubro Infotech (LTI) disappointed with a weak set of Q4FY22 earnings on various fronts. Revenues were way below our estimate at $570 mn (+3.6% q-o-q CC vs Isec. est. of +5.3% q-o-q CC). We would like to highlight that in LTI also (like Infy and TCS), we have seen softening of BFS growth – just 2.8% q-o-q vs average of 10% in last 3 quarters. For LTI, H1 is seasonally weak and we expect more moderation of BFS growth ahead – BFS revenue growth always moves in tandem with overall revenue growth of LTI. Even Top-5 client growth was at a six-quarter low at ~3% q-o-q (average of 6% in last four quarters). US posted soft growth of 2.5% q-o-q but Europe continued to grow at 5.8% q-o-q. Though management guided for strong demand momentum in Europe and hasn’t seen any impact on client conversations, we believe uncertainty, rising cost and wage inflation may delay client budget decisions, softening growth momentum in Europe. LTI has impressed with strong growth and rebound in large deal wins in FY22. Our view on the business is unchanged and the company is well positioned to gain market share with its strong business model but valuations of 38x/31x on FY23/24 EPS look expensive to us in the current macro environment and given likely slowdown in revenue/ earnings momentum ahead. We were below consensus estimates by ~6% for FY23/24 earlier. However, now due to a cut in our revenue/margin estimates, our EPS cuts stand at 5%/4% for FY23/24, respectively, and we believe for consensus it could be much higher. We are estimating revenue growth of 19%/16% with EPS of Rs 143/178 for FY23/24, respectively. LTI trades at an expensive valuation of 38x/31x for FY23e/24e; we downgrade to Reduce from Hold. We value LTI at 28x (vs 32x earlier) on FY24e EPS of Rs 178 to arrive at a TP of Rs 4,986 (prior: Rs 5,921).
Logistics, good or bad, are driven by the states and the commerce ministry has a LEADS (Logistics Ease Across Different States) report, based on perceptions. The 2023 version was released in December. Since states are heterogenous, in the reporting, they are divided into four groups—coastal, landlocked, north-east, and UTs. States that do well are called achievers. Nomenclature matters. Thus, states that are middling aren’t called average. They are called fast movers. States that are sub-par are called aspirers. Let me highlight coastal states, since 75% of export cargo is estimated to originate from them. Among coastal states, ones that do well are Andhra Pradesh, Gujarat, Karnataka, and Tamil Nadu. The ones that lag are Goa, Odisha, and West Bengal. While India’s logistics performance may have improved over time, that’s not true of every state. Some have slipped. Most states have a state-level logistics policy, including Goa and Odisha. West Bengal, bottom of the pecking order in the coastal category, doesn’t have one. To quote from LEADS 2023, “Looking ahead, the State (West Bengal) could benefit from formulating a State Logistics Master Plan and State Logistics Policy to drive efficiency improvements and facilitate investments within the logistics sector and undertake consultation with the logistics stakeholders for educating and informing them about the initiatives State is undertaking for the development and improvement of logistics sector.”
Logistics has been talked about for a long time and India has also focused on improving performance. We are now getting some precise data on measurement and quantification. That helps.
Bibek Debroy, chairman, EAC-PM. Views are personal.