LTIMindtree investors need to brace for slower-than-expected revival

“This is the first quarter when BFSI revenue has declined on a sequential basis since the company started reporting its results as a merged entity,” pointed out a report from Emkay Global Financial Services Ltd. 

According to the company management, the BFSI vertical put up a muted performance as some clients continued with hiring freezes, protracted decision-making, and slow project acceleration. 

On a brighter note, the company recorded a respectable $1.41 billion in deal wins, marking an almost 17% year-on-year (YoY) growth, with a steady book-to-bill ratio of 1.3x.

Further, there was sequential improvement in EBIT margin of 32 basis points led by lower SG&A cost. The management also assured that planned wage hikes in July wouldn’t hamper its projection of a 17-18% exit margin. It also forecast a dip in LTM attrition, given that the quarterly rate has stabilised.

Notwithstanding these assurances, the LTIMindtree stock tumbled almost 4% on the National Stock Exchange in early deals on Tuesday. Investors appeared skittish, given the lack of clear revenue projections from the company. 

During an earnings call, the management acknowledged that while deal pipelines are robust, decision-making among clients remains sluggish. It also noted that discretionary spending pressure persists and clients are showing a preference for projects guaranteeing tangible returns on investment. As a result, LTIMindtree’s revenue growth recovery has been slower than anticipated due to delayed deal closures, slower project ramp-ups, and changes in the deal mix. 

“We lower FY24-26E earnings per share by 0.2-1.2%, factoring-in the Q1 performance and the anticipated slower recovery,” added the Emkay report.

Also, this sluggish start to the financial year raises concerns about the company’s ambition to achieve double-digit revenue growth. “With flat sequential revenue performance in Q1, the ask rate is substantial (>4% CQGR) for LTIM to achieve its ‘aspirational’ double-digit growth for FY24E,” said analysts at HDFC Securities Ltd. CQGR is short for compound quarterly growth rate.

Despite these concerns, LTIMindtree has proven its mettle in 2023 by outperforming the Nifty IT index with a 16% return. The firm’s strong partnerships with hyperscalers and robust domain capabilities position it well for future growth. However, the stock’s near-term surge is held back by global macro concerns impacting the sector’s revenue growth forecast.