*LTI Q4FY22 Concall Highlights*
• Supply-side challenges and onsite attrition were challenging during the quarter
• *Margin walk:* 40 bps impact due to Employee Cost which was offset by SGA and balance 60 bps impact due to lower working days and business mix. Wage hike done on 1st April which is expected to impact margins to the tune of 290 bps in Q1FY23e itself.
• *Demand outlook* is strong which is driven by customers’ spend on business transformation initiatives and broad based across verticals, markets and service offerings.
• *Deal wins:* LTI has signed 4 net new large deal wins worth US$80mn+ in Q4FY22. 3 large deals were signed with existing F-500 clients (scope includes data and analytics) and one was with new logo (scope includes middleware transformation). 2 of these deals are in BFS, 1 in CPG and 1 with a Government body in Public Healthcare.
• *Deal pipeline:* Current large deal pipeline is US$2bn and 50% of the same is at late stage and 4 in the contracting stage. 40% of large deal wins are from new logos.
• *FY23e outlook:* LTI indicated that its FY23E US$ sales growth rate will be in the leaders’ quadrant on the back of strong momentum in large deals, highest addition of new logos, headcounts and healthy deal pipeline
• Management sounded cautious regarding impact of higher inflation globally and geopolitical concerns, however it indicated that it has not witnessed any impact on demand.
*Vertical highlights*
• *BFS:* Segment grew 3.3% sequentially in CC terms (two large deal wins in 4Q). Witnessed strong momentum across markets and service lines in the segment and is optimistic for growth in the vertical entering FY23E.
• *Insurance:* Segment grew 3.8% sequentially in CC terms. LTI believes that traction in opening new accounts will drive growth ahead in the vertical.
• *Manufacturing:* Segment grew by 2.3% sequentially in CC terms. Growth was led by ramp-up of new account openings and mining of existing accounts as per LTI.
• *Energy & Utilities (E&U):* Segment grew 4.1% sequentially in CC terms.
• *CPG, Retail & Pharma:* Segment grew 7.7% sequentially in CC terms. Growth was driven by strong demand in existing accounts.
• *Hi-Tech, Media & Entertainment:* Segment grew 2.2% sequentially in CC terms. Growth was aided by ramp-up of recently won large deals in the segment.
• *Others:* Segment, which includes Government & Defense business and Professional services, grew 3.3% sequentially in CC terms.
*Other updates*
• Employee count increased by 2,448 qoq to 46,648 employees. Attrition (LTM) further increased to 24.0% vs. 22.5%/12.3% qoq/yoy. LTI has witnessed reduction in quarterly annualized attrition in Q4 worth 200bps vs. Q3 however it is expecting another two quarters before attrition stabilizes. It has hired 5,200 freshers in FY22 and plans to hire more than 6,500 freshers in FY23E. It has rolled out wage hikes to majority of employees effective Apr’22.
• Organic capex for FY22 stood at Rs.8.59bn vs. Rs.2.72bn in FY21. Higher capex was on account of investment in purchasing premises having capacity of 7,500 people at New Mumbai location.
• CFO stood at INR 6,233 Mn for Q4FY22
• Cash & Cash Equivalents stood at INR 39,139 Mn
*Valuation & Outlook*
As per our revised estimates, LTI is trading at 35.6x / 32.2x FY23e / FY24e EPS. Management has indicated that demand environment remains strong and LTI will deliver growth in the leader’s quadrant on the back of strong deal wins, healthy pipeline and new logo additions. However, revenue growth momentum seems to have slowed down on the as witnessed by 6 quarter low average growth rate and also due to base effect of FY22.
*Therefore, we downgrade our rating from BUY to ACCUMULATE and our Target Price to 6,824 (INR 7,905 earlier) based on 40x FY24e (45x FY24e earlier).*
Although, we continue to believe in the multiyear technology transformation unfolding and the healthy demand environment therein, we rationalize our view based on moderated growth momentum vis-à-vis earlier