Muted earnings by other larger peers indicate that they are also facing the heat of global demand slowdown, especially in the BFSI sector.
However, the pain could last relatively longer for LTIMindtree, which is the result of a 2022 merger between Mindtree Ltd and L&T Infotech.
The management is confident that revenue contraction seen in Q4FY24 was a one-off and in Q1FY25, the ramp-up of deals should aid revenue growth.
While this should boost medium-term revenue growth and margin, short-term growth acceleration could be slow.
However, the pace of deals converting into revenue growth remains crucial.
IT company LTIMindtree's stock fell around 2% on Thursday, following dismal March quarter (Q4FY24) results. Revenue in constant currency terms fell 1.3% sequentially, marking the first decline in many quarters.
Growth was marred by two BFSI project cancellations as clients continued to be cautious about discretionary IT spending. Muted earnings by other larger peers indicate that they are also facing the heat of global demand slowdown, especially in the BFSI sector.
However, the pain could last relatively longer for LTIMindtree, which is the result of a 2022 merger between Mindtree Ltd and L&T Infotech.
“Both LTI and Mindtree, even before the merger, had a larger exposure to discretionary spends compared to many of its larger peers and that has hit the combined entity when that spending came under pressure," said a Nirmal Bang Institutional Equities report.
The management is confident that revenue contraction seen in Q4FY24 was a one-off and in Q1FY25, the ramp-up of deals should aid revenue growth. Further, the company continues to pivot its portfolio towards non-discretionary spending.
While this should boost medium-term revenue growth and margin, short-term growth acceleration could be slow. Its order inflow for FY24 stood at $5.6 billion, up nearly 16% over FY23. However, the pace of deals converting into revenue growth remains crucial.
Ebit margin slid 70 basis points sequentially to 14.7%, impacted by project cancellations and elevated costs. Headwinds to margin are seen from potential wage hikes, among other factors. Plus, the management indicated that its targeted margin band of 17-18% would be achieved once growth returns. Thus, it refrained from defining any timeline. In short, margin revival is likely to be delayed further.
Consequently, a slew of brokerages have cut their earnings per share (EPS) estimates for the stock. The management’s commentary is in-line with its large-cap peers, but LTIMindtree still has to demonstrate growth benefits from the expansion of teams across its strong verticals, said Motilal Oswal Financial Services report. “We have reduced our FY25/26 earnings estimates by ~6/9% after cuts in revenue and profitability," it added.
Meanwhile, the stock has declined 26% so far in 2024, much steeper than the sectoral Nifty IT index’s 5.5% decline. The weak performance captures the Street’s worries to a large extent.
The stock trades at FY25 price-to-earnings multiple of 26 times, showed Bloomberg data. This is higher than some large-cap peers such as Infosys Ltd and HCL Technologies Ltd. LTIMindtree's valuation multiple has moderated lately as meaningful synergy benefits of the merger seem to have been delayed. Still, the valuation doesn't offer comfort in the current backdrop.
Also read: How L&T is engineering an AI-driven conglomerate
