Indian information technology (IT) companies’ June quarter (Q1FY24) earnings released so far, paint a bleak picture. The commentary by LTIMindtree Ltd reaffirmed prevailing caution among clients on discretionary technology spending akin to trends highlighted by large competitors such as Tata Consultancy Services Ltd (TCS) and HCL Technologies Ltd.
LTIMindtree’s crucial revenue generator—banking, financial services, and insurance (BFSI) vertical—was a pain point in Q1 as some clients continued with hiring freezes. The manufacturing and retail segments performance was disappointing, too.
The company’s deal pipeline was healthy at $1.41 billion, up nearly 17% year-on-year, driven by cost optimization and transformation deals. However, ramp-up is slow, leading to delayed revenue conversion, the management said. Consequently, revenue growth was flat sequentially in constant currency terms in Q1. In the earnings call, the management said many of these large and long-term deals are vendor consolidation deals, so the revenue conversion cycle begins once the transition is over. That is leading to a considerable divergence between the company’s total contract value and revenue growth, the management said.
This lag means that the company’s ambition to clock double-digit revenue growth in FY24 is at risk. The management acknowledges that achieving double-digit growth would be challenging. A muted start to the financial year would make it a tall order. “While we think revenue growth is likely to improve from Q1 level, achieving double-digit entails a strong ~4.5% quarter-on-quarter growth in the next three quarters of FY24F, which we view as very difficult,” said Nomura Financial Advisory and Securities (India). In the wake of near-term demand uncertainty, the management did not reiterate this guidance. It just said its performance in FY24 would be in the leader’s quadrant of industry. “The cut in double-digit growth guidance for FY2024E is not surprising; it was an aggressive one to start with,” said analysts at Kotak Institutional Equities in a report. To account for weaker demand trends, brokerage has cut its FY24-26 revenue growth estimate by 1-2%.
Ebit margins at 16.7% was ahead of consensus expectations of 16.2% aided by lower SG&A costs. Management said wages will be hiked in July, as planned and at par with industry standard, and it is confident of delivering 17-18% exit margin even after factoring in wage hikes. But the path may not be easy. With wage hikes from July 2023, Nirmal Bang Institutional Equities expects Q2 margin to remain muted, with H2 expected to do most of the heavy lifting. “We foresee worsening macro and pricing pressure in H2FY24, leading us to believe that LTIM may achieve margin at bottom end of 17-18% range indicated for FY24,” said the broking firm.
LTIMindtree does enjoy a wider geographic footprint, increased capabilities to win large orders on synergy benefits and the-reby compete with other tier-1 IT firms for market share gains. But currently, the sector’s lack of revenue visibility is more in focus. Reacting to Q1 results, LTIMindtree’s shares closed 2.6% lower on Tuesday, although the stock is up almost 15% so far in 2023, beating the Nifty IT index. “We believe that the current rally in IT stocks is more a positioning and a FOMO (fear of missing out) rally, which will taper off when there is no improvement in fundamentals,” Nirmal Bang report added. Plus, valuations are expensive. Bloomberg data shows the LTIMindtree stock is trading at FY25 price-to-earnings multiple of 24.9 x, a tad higher than industry bellwether TCS’ valuation. To justify these high valuations, LTIMindree’s revenue growth needs to turnaround meaningfully.
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Updated: 18 Jul 2023, 08:50 PM IST