Deal wins were robust. In Q1, LTTS won seven deals with contract values of more than $10 million, including a $50 million plus deal and four $15 million deals. However, Ebit (earnings before interest and tax) margin at 18.3% fell 30 basis points (bps) sequentially because of lower utilisation, among other factors. Q2FY23 should reflect the wage hike impact, though LTTS aims to maintain Ebit margin above 18% for FY23.
Tier-I and Tier-II IT companies that have reported Q1 earnings so far have seen their margins moderate sequentially. However, a big disappointment in LLTS’ Q1 was the jump of 280 bps in its attrition rate measured on last twelve months (LTM) basis, to 23.2%. In Q1, the LTM attrition for Tata Consultancy Services Ltd and HCL Technologies Ltd rose 190 bps and 230 bps, respectively, versus Q4FY22. Among midcaps, Mindtree Ltd saw this metric rise 70 bps while L&T Infotech Ltd saw a drop of 20 bps in its LTM attrition, sequentially.
“LTTS has seen a higher surge in attrition than peers, which is a sentiment dampener for the stock," said an analyst with a domestic brokerage house requesting anonymity. This comes even as the LTTS management expects the rate of attrition to ease. Plus, commentary on demand is robust. “We expect the stock to be under pressure in the near-term because of the risk of steeper earnings downgrades," said the analyst.
Prabhudas Lilladher has cut its FY24 dollar revenue estimate by 3.3% on the back of a potential cut in engineering research and development budgets. LTTS has maintained its FY23 dollar revenue growth guidance of 13.5-15.5% year-on-year (constant currency growth guidance: 14.5-16.5% year-on-year). “We do not expect further upgrade in guidance for the coming quarters given macro headwinds such as inflation, supply chain issues, and currency headwinds," said Prabhudas Lilladher in a report on 16 July.
So far in CY22, the LTTS stock has fallen by nearly 45% vis-à-vis the 32% drop in Nifty IT index. According to Bloomberg, the stock trades at 18 times estimated earnings for FY24. In general, fears of a recession-led lower revenue growth have taken a toll on all IT stocks. But, the decline in LTTS’ shares may also be because investors are now downbeat towards midcaps.
