LTIMindtree Q3 Results Review - Disappointing, Weak Near-Term Outlook A Drag On FY25 Growth: Motilal Oswal

Motilal Oswal Report

LTIMindtree Ltd. reported weak revenue growth of 0.7% QoQ/3.1% YoY constant currency in Q3 FY24 versus our estimate of 1.2% QoQ CC, despite having a meaningful pass-through component in the manufacturing vertical.

The growth was affected by higher-than-expected furloughs and a continued slowdown in discretionary spending. However, deal wins were strong at $1.5 billion (up 15% QoQ/20% YoY) and management commentary on the deal pipeline was robust. The management has indicated that Q4 growth will mirror Q3 due to persistent pressure on clients’ spending.

Q3 Ebit margin declined 60 basis points QoQ to 15.4%, missing our estimate by 40 bp. Profitability was impacted by higher furloughs and pass-through revenues, despite lower workforce (-1.1k). Attrition continued to moderate (14.2% in Q3), while utilisation improved to 87.4%. Notably, the management has stated that its guidance of achieving 17% plus Ebit margin by Q4 FY24 would be delayed by a few quarters.

While the impact of furloughs in Q3 was higher and more widespread, strong deal wins (highest ever) indicate divergence between near-term growth and medium-term growth. While this commentary is in line with its large-cap peers, LTIMindree still has to demonstrate growth benefits from the expansion of teams across its strong verticals.

We expect the company to grow at a sub-10% rate YoY in FY25, resulting in a 9.7% compound annual growth rate over FY23-26E.

Moreover, the decision to delay the 17-18% aspirational band by three to four quarters indicates limited room for further cost optimisation and the front-ended impact of a large deal scaling up in the near term.

We now expect LTIMindree to deliver 16.5% Ebit margin in FY25 before crossing the 17% mark in FY26. This should result in a profit after tax CAGR of 13% over FY23-26E.

We have lowered our FY24-26 estimates by ~1-9% after cuts in revenue and profitability. LTIMindtree is currently trading at 29 times FY26E earnings per share, which adequately captures growth opportunities ahead.

Our target price of Rs 6,600 implies 30 times FY26E EPS. We reiterate our 'Neutral' rating on the stock.

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