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Ambit Capital
Target: ₹2,800
CMP: ₹2,485
We like LTI for its strong leadership team with experience of handling scale; best digital capabilities within tier-II; focussed execution across client mining, large deals, must-have logos, million- dollar relationships, scaling alliances and growing through digital; and strict operational control.
Medium-term consolidation with Mindtree would create an entity half the size of Tech Mahindra (75 per cent in the US) and add complementary capabilities in Digital/RCM/Hitech.
LTI has been the best performer in IT at nearly 16 per cent USD revenue CAGR (vs 8/14 per cent for tier-I/tier-II) and EPS CAGR of 16 per cent over FY17-20. We expect industry-leading revenue/EPS CAGR of 10/15 per cent over FY20-23 to continue.
While a tad punchy, current valuations could sustain on superior performance and best-in-class RoIC (45 per cent in FY20). Target price of ₹2,800 implies 23x one-year forward EPS (up to Sep-21E) of ₹122.
Lower-than-expected traction in large deals (after weak Q1), higher-than-anticipated pressure in BFSI/ENU and management churn in a potential merger with Mindtree are key risks.
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