LTIMindtree stock slides after profit drops 16%, brokerages cut target price

Revenue in dollar terms grew by 2.4 percent quarter-on-quarter (up 14 percent YoY) to $1,046.7 million for December FY23 quarter, with revenue in constant currency rising 1.9 percent sequentially for the quarter gone by, said LTIMindtree, which is the entity formed from the merger of L&T Infotech and Mindtree in November 2022.

The LTIMindtree stock was trading in the red on January 23 following a disappointing Q3 show despite the market posting some handsome gains.

The IT services unit of infrastructure major Larsen & Toubro registered a 16 percent sequential fall in consolidated profit at Rs 1,000.7 crore for the quarter ended December FY23, with a double-digit fall in operating profit and a sharp increase in other expenses (up 37 percent quarter-on-quarter).

Consolidated revenue from operations for the quarter at Rs 8,620 crore rose 4.8 percent over the previous quarter and 25.3 percent year-on-year, the company said in a BSE filing.

Revenue in dollar terms grew 2.4 percent quarter-on-quarter (up 14 percent on-year) to $1,046.7 million for the December quarter, with revenue in constant currency terms rising 1.9 percent sequentially, said LTIMindtree, the entity formed by the merger of L&T Infotech and Mindtree in November 2022.

At 11.22 am, the LTIMindtree share was trading at Rs 4,253.10, down Rs 16.75, or 0.39 percent, on the BSE. It touched an intraday high of Rs 4,321.55 and an intraday low of Rs 4,120. Volumes were at 29,477 shares, compared to its five-day average of 15,359 shares, an increase of 91.92 percent.

On the operating front, quarterly EBITDA (earnings before interest, tax, depreciation and amortisation) at Rs 1,374.8 crore was down 16 percent sequentially. The operating profit margin fell to 15.95 percent in Q3FY23 from 19.88 percent in Q2FY23.

In an interview to CNBC-TV18, CEO and managing director Debashis Chatterjee said that margin impact of 130 basis points (bps) was due to furloughs and lesser working days, while 100 bps margin impact was due to integration costs.

“The company expects 200-250 bps improvement in margin in Q4 and expects operating margin to get back to pre-merger level. Momentum in pipeline and deals suggest growth in Q4 which will be better than Q3,” Chatterjee said.

He said that deferral in projects will not be client- and vertical-specific, adding that across portfolios, no deals were cancelled while some furloughs are likely to extend into Q4.

“The purpose of the merger was to generate more synergies in the marketplace. We are very confident about the next 4-5 years for the company. We expect 200 bps of cost synergies over 4-5 years,” the CEO added.

Brokerages’ view 

Jefferies has an “underperform” rating on the stock and has cut its target to Rs 3,710 per share, 14 percent below the current market price. The brokerage firm is of the view that revenue growth and margin missed estimates even as the order book remains healthy.

“Management highlighted rising caution and delayed decision-making across sectors while it targets $1 billion revenue synergies and 200 bps margin synergies over 4-5 years. We have cut EPS (earnings per share) estimates by 3-7 percent to factor margin miss,” Jefferies added.

Merger after-effects 

CLSA has an “outperform” rating with the target at Rs 4,920 a share. “Revenue miss was due to higher-than-expected furloughs and could correct in Q4. The sharp drop in the margin may take a few quarters to recover. We believe revamped organisation structure is still settling down. We have lowered FY24/FY25 EPS estimates by 3.8 percent/0.9 percent on softer near-term margin outlook,” it added.

LTIMindtree received an “underweight” rating from JPMorgan with the target cut to Rs 3,700 per share. The research firm is of the view that Q3 print missed sharply across revenue, margin and EPS. Constant current (CC) growth displayed sharp deceleration while higher client cautiousness across sectors led to the deferral of projects.

“EBIT margin fall was led by furloughs/seasonality and integration costs. It declined due to unexpected staff costs and fresh employee stock ownership plan (ESOP) grants. We have cut margin by 60-80 bps, driving 3-4 percent cut to EPS over FY23-25,” the firms said.

Japanese research firm Nomura has a “reduce” rating on the stock and has cut the target to Rs 3,840 per share. According to the brokerage firm, Q3 results missed consensus as furloughs and holidays impaired growth, while the margin miss was sharper than expected with a recovery partly in Q4 and the rest slowly in FY24.

“We remain watchful of a smooth merger with the stock currently trading at 22x FY25 EPS,” it added.

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