Why CLSA Has Rated LTIMindtree 'Outperform'

CLSA initiated coverage on the stock with a price target of Rs 4,920, implying a potential upside of 11%.

<div class="paragraphs"><p>LTI listing ceremony at BSE.&nbsp; (Source: Vijay Sartape/BQ Prime)</p></div>
LTI listing ceremony at BSE.  (Source: Vijay Sartape/BQ Prime)

LTIMindtree Ltd. will be the fastest-growing listed Indian IT company with a market cap of $10-50 billion driven by strong sales, according to CLSA.

The brokerage initiated coverage on the IT company with an "outperform" rating and a target price of Rs 4,920 apiece implying an upside of 11%, as its revenue growth and return ratios are high. The relatively lower institutional holding is an added support, CLSA said.

"We believe the scale of the merged entity elevates it into the $10-50 billion (Rs 82,476 crore to Rs 4.12 lakh crore) market-cap group where investors should be evaluating it along with Wipro Ltd., HCL Technologies Ltd., and Tech Mahindra Ltd.," the brokerage said in its investor note.

CLSA expects the merged entity of Larsen & Toubro Group to deliver the highest revenue growth, aided by increased participation in large deals. It predicted a 13.5% dollar revenue CAGR for the company as against a 9-11% for its peers.

CLSA also expects LTIMindtree to report better margins than its competitors, even without the potential scale leverage that would likely be re-invested to boost revenue growth.

The balance sheet is healthy, and working capital could get more efficient after the merger, according to CLSA. "We like the structural story in LTIM, but the stock’s full valuations and integration risks, besides the sectoral concerns, could limit the upside in the near term," it said.

Mindtree's strong front-end service portfolio, coupled with L&T Infotech's enterprise services and the companies' low exposure to legacy contracts, should help sustain revenue growth ahead of peers amid macroeconomic headwinds, the note said.

The management expects to participate more actively in large deals as scale gives it headroom to absorb the initial margin drag typical of such deals, CLSA said.

Lower bench costs, employee optimization, and scale could give the software exporter incremental leverage, it said. Though its flow-through into reported margins could be slow and limited as the management is keen to reinvest gains to drive revenue growth, the brokerage said.

"We forecast 16% FY23–25 earnings per share CAGR on above-industry revenue growth/stable margin assumptions," CLSA said.

Shares of LTIMindtree declined as much as 2.86% on Thursday before closing 2.5% lower at Rs 4,331.3 per share. The benchmark Nifty 50 ended 1.3% lower at 18,414.90. The relative strength index stood at 34.

The brokerage expects the rise in share prices to be capped in the near term due to risks from the merger integration and investors' concerns about the demand outlook for the sector on the back of a macro headwind. However, the premium is justified, it said, citing the company's higher revenue growth and better return ratios.

Of the 38 analysts tracking the stock, 19 maintained a 'buy', nine analysts suggested a 'hold', while 10 recommended a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 15.1%.