LTIMindtree: Why this IT company appears to be a good bet going ahead

LTIMindtree's (LTIM) management has reiterated its aspiration to achieve US$1 billion incremental revenue through cross-sell synergies over the next 2-4 years and reach 19-20% EBIT margins by FY27 i.e. improvement of 200 bps on pro-forma margins of the combined entity as on FY22.

The company is the merged entity formed after the merger of erstwhile Mindtree with LTI and offers application development, IMS, digital solution services to BFSI, retail, health, media & hi-tech verticals.

LTIM has over 750 clients and combined annual revenue over US$3.5 billion. It has a combined employee strength of over 86,000 across more than 30 countries.

Mindtree is stronger in front-end digital solutions and LTI is stronger in back-end ERP related core transformation solutions. Given the complimentary service line expertise of LTI and Mindtree, LTIM aims to derive revenue synergies through cross-sell/up-sell opportunities across the existing 374 client accounts. LTIM has:

1) Strong cross-sell/up-sell opportunities,

2) Ability to participate in larger deals post-merger and strength in hyperscalar and SaaS partnership led sales.

The company's EBIT margin is expected to improve by 260 bps over FY23E-FY26E to 18.6% (in line with management guidance to improve margins to 19-20% by FY27) led by operating leverage with higher scale of operations and integration-related synergies around both employee costs and SG&A leading to 20% EPS CAGR over FY23-26 (highest in our coverage universe).

Also Read | Tech Mahindra vs LTIMindtree: Which IT stock is a better long-term investment?

The management expects EBIT margins on the back of levers such as:

1) Ensuring all resources are getting billed at right price, in line with demand for their skills,

2) Managing bench effectively and improving utilisation,

3) Optimising sub-contracting costs,

4) SG&A leverage,

5) Tail account rationalisation and operating efficiencies.

LTIM has resilient blue-chip account portfolio

The management mentioned 55% of its current revenue capability area (experience, data, cloud and cybersecurity) is unaffected by the current challenging macros. It has blue-chip clientele i.e. 95 Fortune 500 clients, and works with a number of clients across each of its industry vertical.

LTIM is investing in building cybersecurity capabilities which it sees as a high growth area largely immune to macro uncertainties. For example, its manufacturing clients' spend on cybersecurity alone is ~0.75-1% of its revenue vs IT spends of 2% of revenue.

Huge cross-sell/up-sell potential

LTIM aims to derive revenue synergies through cross-sell/up-sell opportunities across the existing 374 client accounts of more than US$1 million in revenue size. For the same, it is investing in strengthening service line sales leadership and capabilities. The management mentioned its current cross-sell ratio is 3 and this can be increased up to 9 by integrating service line expertise of both LTI and Mindtree.

The company indicated that integration of LTIMindtree is complete and it is looking to capture growth opportunities with one Go to Market (GTM) approach.

The revenue grew at 15% CAGR over FY17-22 and it does not see any challenge in replicating the same in the future with strong TCV, large deal pipeline, combined capabilities, large deal participation, etc. LTIM is looking to take EBIT margins to normalised levels of 17-18% in the near term and scale it up further to 19-20% in FY27, to be aided by bending of cost curve, operating efficiency and lower subcontracting costs, etc.

The merger is expected to provide cross-sell and up-sell opportunities with scale benefits likely to kick in while participating in large deal hunt. The company is aiming for merger related benefit of US$1 billion in revenues and 200-300 bps margin expansion in the next four to five years.

We expect LTIM to register 17.5% CAGR revenue growth in FY22-25E.

LTIM indicated it has seamlessly aligned the organisation in terms of sale, delivery and service lines while there is no change in client interfaces since there is hardly any overlapping business in terms of clients across the two organisations. The company also indicated that fitment of culture was one of the investors’ concerns earlier, which has been addressed successfully through smooth integration.

LTIM also indicated it is seeing stability in the top management as well as on the tier I leadership across the organisation while it does not expect any top management churn as of now. The company also indicated it did conduct town hall sessions across locations to highlight the purpose and opportunities for its employees in the merged entities. Hence, it does not expect any material increase in churn from current levels apart from natural attrition.

The company indicated that due to integration of two companies, it is now looking to services its clients through ‘one unified capability approach’ where it now has offering in nine services lines. The company also indicated that clients are currently using on an average three service lines of the merged entity, which means it has enough levers for growth if clients start using more service lines than the above number.

LTIM indicated that Silicon Valley Bank (SVB) is its client as well as its banker but also mentioned that the exposure to the bank is immaterial. The company also indicated it does not have exposure to start-ups in the US, which are going through a tough period.

As per the company, its BFSI clients in the US are stable and it has not seen any change in behaviour of spending. The company also indicated it is watchful on the events unfolding in US but reiterated that long term tech spending is intact.

The company also indicated large deal pipeline of US$3.18 billion (68 deals) (>US$20 million). The number is US$3.72 billion for deals which are >US$15 million.

Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar

Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related investment-related decision.