Initiating Coverage | December L&T Infotech · 2016. 12. 14. · expect 8.3% revenue CAGR over FY16-19. We also expect 0bp decline in 18 EBITDA margin over the next two years resulting

Initiating Coverage |14 December 2016 Sector: Technology

L&T Infotech

Proficient minerSagar Lele ([email protected]); +91 22 3982 5585

Ashish Chopra ([email protected]); +91 22 3982 5424

Investors are advised to refer through important disclosures made at the last page of the Research Report.Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

L&T Infotech

14 December 2016 2

Contents Summary ............................................................................................................. 3

Story in charts ...................................................................................................... 6

Portfolio has weighed on execution… ................................................................... 8

Augmenting Digital Presence .............................................................................. 13

Potential to continue mining-led growth… .......................................................... 16

Financial performance expectations .................................................................... 19

Initiating coverage with a Buy rating, TP of INR800 .............................................. 22

SWOT Analysis ................................................................................................... 27

Company description .......................................................................................... 28

Key management personnel ............................................................................... 29

Vertical Heads .................................................................................................... 30

Key risks ............................................................................................................. 31

Financials and Valuations ................................................................................... 32

L&T Infotech

14 December 2016 3

L&T Infotech (LTI IN) is a provider of technology services and solutions. With USD887m in revenue in FY16, it is the sixth largest IT services company in terms of export revenue. It offers an extensive range of services spread across diverse industries such as Banking and Financial Services, Insurance, Energy and Process, and others. LTI was incorporated in 1996 and is headquartered in Mumbai. Its promoter is L&T, a leading Indian conglomerate in Engineering, Construction, Manufacturing, Finance and Technology.

Proficient Miner A combination of proven abilities and marquee customers

L&T Infotech (LTI) is India’s sixth largest IT Services provider in terms of export revenue, with top line of USD887m in FY16. It is primarily focused on the verticals of Banking & Financial Services (BFS; 26%), Insurance (21%), and Energy & Utilities (E&U; 13%), which together form ~60% of total revenue.

Revenue CAGR of 12.1% over the last three years has been in line with the

industry. Excluding E&U (which declined at a 5% CAGR during this period),

revenue CAGR for LTI would have been 15.7%. Revenue growth has been a function of LTI’s ability to scale up key accounts

including Citi, Chevron and Barclays over the years. Top-10 accounts contributed 62% to incremental revenue over the last three years.

While E&U is stabilizing, macro challenges have impacted client spending in BFS. At LTI, BFS has slowed to 6.3% in FY16, from 13.1% in the previous year.

LTI’s exposure to BFS and E&U may weigh on revenue growth in the near future,

which we bake in our estimated revenue CAGR of 8.3% over FY16-19, compared to

11.1% EBITDA CAGR and 5.7% earnings CAGR during this period. Excluding forex

gains, earnings CAGR over FY16-19 would be 11.5%. We value LTI at 13x FY19E EPS (translating into a target price of INR800), given: [1]

revenue growth in line with industry and margins similar to like-sized peers, [2] superior cash conversion, [3] superior return ratios, and [4] target multiples of 11-14x for our tier-2 IT companies.

Deterioration in profitability on the back of any policy changes around H-1B visa immigrants is a key risk to our earnings and valuation thesis.

India’s sixth-largest technology services company LTI is India’s sixth largest IT Services provider in terms of export revenue – in

FY16, it had revenue of USD887m. Its revenue CAGR of 12.1% over the last three years has been in line with the industry.

LTI was incorporated in 1996 and is headquartered in Mumbai. Its promoter, L&T is a leading Indian conglomerate in engineering, construction, manufacturing, finance and technology.

As part of a business restructuring exercise conducted by L&T, all engineering services businesses were consolidated under a separate subsidiary, LTTSL. As part of this restructuring, on January 1, 2014, LTI sold and transferred the assets and liabilities of its PES business to LTTSL.

Initiating Coverage | Sector: Technology

L&T Infotech

CMP: INR660 TP: INR800(+21%) Buy

BSE Sensex S&P CNX 26,602 8,182

Stock Info Bloomberg LTI IN Equity Shares (m) 175.0 52-Week Range (INR) 716/595 1, 6, 12 Rel. Per (%) 6/-/- M.Cap. (INR b) 111 M.Cap. (USD b) 1.6 Avg Val, INRm 201.0 Free float (%) 15.4

Financial Snapshot (INR b) Y/E Mar 2016 2017E 2018E

Net Sales 58.5 64.6 72.6 EBITDA 10.4 12.5 13.4 PAT 9.2 9.6 10.2 EPS (INR) 52.4 55.1 58.5 Gr. (%) 21.5 5.1 6.1 BV / Sh (INR) 115.6 144.3 174.7 RoE (%) 45.3 42.4 36.7 RoCE (%) 39.9 45.5 39.4 P/E (x) 12.6 12.0 11.3 P/BV (x) 5.7 4.6 3.8

Shareholding pattern (%) As On Dec-16 Dec-16 Promoter 84.6 84.6 Public 15.4 15.4 Others -- --

L&T Infotech Proficient Miner

+91 22 3982 5585 [email protected]

Please click here for Video Link

http://institution.motilaloswal.com/emailer/ComplianceAlert/LT.zip

L&T Infotech

14 December 2016 4

Outperformance aided by scaling up of strategic accounts At the end of FY16, LTI had 258 active clients, of which 49 were Fortune Global

500 companies. Its relationship with marquee customers has been a key ingredient in brewing above-industry growth rates.

Over FY13-16, LTI’s top-10/20 clients contributed 62/76% of incremental growth compared to 19% for our coverage universe. This has helped LTI achieve 12.1% revenue CAGR v/s 8.8% for our coverage universe.

In FY15, Citi, LTI’s largest customer (15% of total revenue) went through a vendor consolidation exercise. LTI was on the winning side of this activity – it grew in this account by 16.8% in FY15 and 15.7% in FY16.

Strong senior level relationships, and dedicated account managers, consultants and delivery managers for each strategic account have helped LTI extract continued growth in key accounts.

Successful mining track record can be replicated further… LTI intends to replicate its client mining success beyond top-20 accounts. Large

number of G-500 customers in LTI’s portfolio lends opportunity for the same. Investments towards the same have ramped up in past few months, with hiring

of new sales personnel, account managers, consultants, and digital evangelists. Higher relevant penetration is also being ensured through initiatives like ADEA –

Analytics and Digital in Every Account, which aims to have a digital presence across accounts.

Its track-record in being able to scale up accounts and rigor on penetrating these customers with relevant offerings hold potential for continued outperformance.

…but exposure to BFS and E&U may keep growth in check While LTI’s internal efforts have been bearing fruit, macro concerns that hit IT

spending in E&U and more lately BFS have impacted the company’s revenue growth performance:

[1] Energy woes: Revenue CAGR over the last three years has been 12.1% for LTI. However, revenue in the E&U vertical declined 20% in FY15 and 14% in FY16. Excluding this, LTI achieved revenue CAGR of 15.7%.

[2] BFS volatility: Revenue growth in BFS slowed down to 6.3% in FY16 from 13.1% in FY15. However, growth in Citi (57% of BFS revenue) was robust at 15.7% in FY16 (16.8% in FY15). Excluding Citi, BFS revenue declined by 3.9% in FY16, reflecting weakness in other areas. The situation reversed in 1HFY17, where Citi revenue declined by 2.2% YoY, but BFS ex. Citi grew by 14.6% YoY. Overall, the portfolio performance remains compensated by multiple factors.

Because of the heavy dependency on top customers and prospective issues in top verticals, we are being cautious on growth, despite the potential that can be ignited from internal efforts.

Valuation and view: Geared for any turnaround; Low risk to our growth estimates Expect revival going forward: Though E&U is seen stabilizing; we see a risk to

overall growth from BFS. Performance in BFS has already been volatile with oscillating performance in both Citi and other accounts. High dependency on top customers aggravates the potential risk. Embedding this into our estimates, we expect 8.3% revenue CAGR over FY16-19. We also expect 180bp decline in EBITDA margin over the next two years resulting out of pricing pressure and investments made to drive the next leg of growth. Consequently, we expect 5.7% earnings CAGR over FY16-19 (11.5% ex. post tax forex gains).

L&T Infotech

14 December 2016 5

Attractive despite conservatism: We value LTI at 13x FY19E earnings – at adiscount to peers such as PSYS and MTCL (which have demonstrated potential innewer services), but at a premium to peers such as MPHL, KPIT and NITEC (givenstrong positioning, superior return ratios and track record), translating into atarget price of INR800 – 21% upside.

Key risks: Any policy change around H-1B visa immigrants is a key risk to ourearnings and valuation thesis. Other risks include: Impact of macroeconomicuncertainties on revenue from BFS, high client concentration playing out for theworse, near-term margin pressure on account of elevated investments.

Exhibit 1: Valuations attractive, given revenue growth relative to peers

Source: MOSL, Company, Bloomberg

Exhibit 2: Earnings CAGR bogged down by margin decline and forex movement


Exhibit 3: Valuations attractive

CMP (INR)

Reco. TP

(INR)

Revenue CAGR

(FY16-18E)

EBITDA margin

expansion (FY16-

18E,bp)

Earnings CAGR

(FY16-18E)

PE (FY17E)

PE (FY18E)

ROE (FY17E)

ROE (FY18E)

Dividend yield

(FY17E)

Dividend yield

(FY18E)

TCS IN 2,201 Neutral 2,500 9% (111) 9% 16.6 14.9 33.2 31.7 2.0 2.4 INFO IN 990 Buy 1,250 9% (42) 8% 15.9 14.3 23.0 22.9 3.1 3.0 WPRO IN 464 Neutral 560 7% (32) 5% 13.4 11.7 17.8 18.9 2.6 2.6 HCLT IN 800 Buy 960 12% (52) 11% 13.9 12.3 26.8 25.8 2.5 2.4 TECHM IN 484 Buy 550 8% 1 6% 15.1 12.4 19.7 20.7 1.9 1.9 MPHL IN 519 Neutral 560 4% 104 26% 12.4 9.5 13.6 16.5 7.2 4.3 LTIT IN 660 Buy 800 8% 71 6% 12.0 11.3 42.4 36.7 4.6 3.8

MTCL IN 492 Neutral 520 10% (218) 1% 18.2 13.3 18.2 22.3 2.7 2.6 KPIT IN 134 Neutral 165 5% 42 7% 9.9 7.9 17.9 18.8 1.4 1.4 HEXW IN 209 Neutral 230 10% (3) 11% 15.0 12.9 27.9 28.2 2.7 2.0 CYL IN 502 Buy 600 14% 101 23% 14.5 11.1 15.2 17.3 2.2 2.9 ZENT IN 1,000 Buy 1,250 7% 203 18% 14.1 10.6 20.7 23.4 1.5 1.9 NITEC IN 431 Neutral 450 4% (65) 5% 11.2 8.6 14.2 16.6 2.7 2.7 PSYS IN 599 Neutral 700 17% 57 10% 15.8 13.3 17.4 19.1 1.8 1.8

Source: MOSL, Company

LTIT

MPHL

HEXW PSYS

KPIT

MTCL

NITEC

CYL

ZENT

6

8

10

12

14

0% 5% 10% 15% 20%

LTIT

MPHL

HEXW PSYS

KPIT

MTCL

NITEC

CYL

ZENT

6

8

10

12

14

16

0% 5% 10% 15% 20% 25% 30%

L&T Infotech

14 December 2016 6

Story in charts

Exhibit 4: High exposure to BFSI and E&U (~60% of portfolio)


Exhibit 5: E&U declined in FY15, FY16 and 1HFY17…


Exhibit 6: …excluding which growth would be better than industry


Exhibit 7: BFS spending in recent quarters is an overhang...


Exhibit 8: …especially with a concentrated portfolio?


Exhibit 9: Risks embedded in our revenue growth estimates


Banking and

financial services ,

26

Insurance , 21

Energy and Process ,

12

CPG, Retail and

Pharma , 8

High-Tech, Media &

Entertainment , 11

Auto Aero & Others ,

22

164 131 113 55

26%

-20%-14%

-5%

FY14 FY15 FY16 1HFY17

Revenue in Energy & Utilities (USDm) Growth (YoY, %)

18.5%

8.5% 9.5% 8.9%

16.6%

16.5% 14.1%

10.9%


Revenue growth (YoY, %)Revenue growth - Ex. E&U (YoY, %)

51 56 56 56 55 60 61

57

58 63

6.0

16.9 16.4 12.1

8.5 7.2 8.0

2.3 5.4 4.7

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

Revenue - BFS (USDm) Growth (YoY, %)

Citi, 57% Canadian

SaaS platform,

15%

Barclays, 12%

Others, 17%

630 747 810 887 957 1,038 1,127

7.5

18.5

8.5 9.5 7.9 8.4 8.6

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

ERevenue (USDm) Growth (YoY, %)

L&T Infotech

14 December 2016 7

Story in charts

Exhibit 10: Client concentration has been high…


Exhibit 11: …but execution has ensured continued growth


Exhibit 12: …from superior client mining abilities (average revenue per customer per year, USD m)


Exhibit 13: The intent now is to replicate this success in the top 50 accounts


Exhibit 14: Investments may weigh upon margins…


Exhibit 15: PAT CAGR of 6% over FY16-19E (11.5% ex. forex gains)


22 18 22

40 51 53

43

58 57

39 49 53

46

INFO

WPR

O

HCLT

TECH

M

LTIT

MPH

L

MTC

L

HEXW CY

L

KPIT

ZEN

T

PSYS

NIT

EC

Revenue from top 10 clients (% of total revenue)

12.1% 14.9%

8.9% 7.9%

Revenue CAGR - FU13-16 Revenue CAGR in Top 10 - FY13-16

LTI Coverage universe mean

101

36

12

10

1.2

98

43

16

10

1.6

114

47

20

11

1.4

132

50

27

14

1.2

Top Top 2-5 Top 6-10 Top 11-20 Non Top 20

FY13 FY14 FY15 FY16

12

22

28

14

24

Topcustomer

Top 2-5 Top 6-10 Top 11-20 Non Top 20

Contribution to incremental revenue: FY13-16 (%)

6,6

12

8,6

43

10,

358

10,

118

10,

359

12,

461

13,

376

14,

203

20.8 22.4

21.1 20.3

17.7 19.3 18.4

17.5

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7E

FY1

8E

FY1

9E

EBITDA (INRm) EBITDA margin (%)

5,159

5,408

7,550 9,171

9,642 10,229 10,838

27.5

4.8

39.6

21.5

5.1 6.1 6.0

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

PAT (INRm) Growth (YoY, %)

L&T Infotech

14 December 2016 8

Portfolio has weighed on execution… …Exposure to EAS and E&U has hurt growth in otherwise impressive show

Vertical mix dominated by BFSI and E&U Banking & Financial Services, Insurance, and Energy & Process are the three largest verticals for LTI, constituting 25%, 22% and 11% of revenue from continuing operations, respectively as of June 2016. Together, these verticals form ~60% of LTI’s revenue and at first glance, this comes off as a major risk factor, given the macroeconomic uncertainties facing these verticals.

Factors like low interest rate regime, increased regulatory pressures, threat of new entrants, and Brexit amongst others have been leading to increased uncertainty, delays in decision making, severe cost pressures, and transformation in spending patterns in BFSI. Increasingly, peers have cited multiple pressure points for growth in the BFSI vertical.

Similarly, IT spend (discretionary and operational) in Energy & Utilities has been waning on account of low oil prices. Despite stability seen in oil prices at current levels, technology spend has failed to make a comeback.

While the negative impact on performance in the Energy and Process vertical has been profound over the last two years, LTI’s Banking and Financial Services, and Insurance verticals have performed well, contributing to 47% of the incremental revenue over FY13-16. A deeper view of the composition of these verticals unfolds the reason behind the relative buffer against industry headwinds.

Exhibit 16: BFSI and Energy form a majority of the revenue mix for LTI


BFS – few clients and relevant services The portfolio for LTI is highly concentrated in BFS. The three parts forming most (not all) of the business are:

[1] LTI’s largest customer - CitiCiti is the largest customer for LTI and formed 15% of total revenue in FY16. Itformed a bulk of the BFS revenue for LTI (57%) in FY16. The primary areas ofengagement for LTI in Citi are:

Banking and financial services

, 26

Insurance , 21 Energy and Process , 12

CPG, Retail and Pharma , 8

High-Tech, Media & Entertainment ,

11

Auto Aero & Others , 22

L&T Infotech

14 December 2016 9

Risk and compliance Capital markets / investment banking Cost efficiency programs

Following the financial crisis of 2007-09, multiple regulations have been introduced across geographies, aimed at safeguarding the banking industry and consumers’ interest. The key drivers for increased technology spend on risk and compliance, in this backdrop, have been the attempt made by banks to avoid fines and penalties arising from non-compliance, and de-fragmentation and automation of risk management processes.

Worldwide spending on risk and compliance technology is expected to reach USD97.3b by 2018, from USD79.2b in 2015, according to IDC.

The key areas in which there has been an increased adoption of technology are: Overhauling of IT infrastructure to support regulatory requirements of stress

tests. Making provisions for providing real-time data to employees for making

decisions related to regulations such as KYC and AML.

The nature of work with Citi has resulted in an increased wallet share for LTI over the last few years. Citi underwent a vendor consolidation exercise in the previous year, and LTI turned out on the winning side of this. Moreover, it recently won an additional deal in this account recently, resulting in strong growth in the last two years, and confidence around the sustenance of this trend, despite the challenges faced by the industry at large.

Exhibit 17: Growth in top customer above company average in the last two years


[2] Canadian SaaS platformLTI has a SaaS-based transfer agency solution called Unitrax, which is used by 180fund houses in Canada. This business was acquired in FY11, and was a unit ofCitigroup, named Citigroup Fund Services Canada Inc. This was later renamed asLTIFST.

Unitrax is used in the Canadian investment fund industry for services around administration, transfer agency and record keeping. The platform is a transfer agency record keeping system that enables mutual funds and insurance companies to manage their investment products. It provides a number of solutions to handle common fund industry and transfer agency issues, including maintaining client

98 114 132

-3.6%

16.8% 15.7%

FY14 FY15 FY16

Top customer revenue (USDm) Growth (YoY, %)

L&T Infotech

14 December 2016 10

records and facilitating the associated administrative processes. These maintenance and processing procedures include transaction entries, generating account investment values, interfacing with external systems and producing various client communications, such as tax receipts, reports, letters, statements and transaction confirmations.

Growth in the platform has been a challenge, given its exposure to Canada and difficulty in taking this capability to other geographies. However, several capabilities/functionalities like business intelligence & analytics, and automation have been launched, giving additional growth opportunities within the current market (Investor Trax/Advisor Trax 3.0, BPM Case Management Workflow, TA Process Automation, TA reporting Platform).

In FY16, revenue from the platform formed 15% of LTI’s BFS revenue. Together, the largest customer and the platform form 72% of total BFS revenue.

Exhibit 18: Growth in top customer above company average in the last two years FY16 (INR m)

Revenue 2,297 PBT 271 PBT margin (%) 11.8% Tax 77 PAT 193


[3] Operations in South Africa for a European bankRelationships with a Nordics Bank, which is the second largest BFS customer for LTI(and fifth largest customer overall) forms a majority of the rest of the BFS revenue.

LTI has recently started working with 5-6 more banking customers. However, theserelationships are yet in a nascent stage and maturity/deepening of relationships canadd to incremental growth. These customers are large institutions with multi-billiondollar IT budgets, giving ample room for LTI to scale them up.

Slowing growth in BFS needs to be watched BFS, which constitutes 26% of total revenue, has been under pressure for most other service providers. LTI, however, hasn’t seen any pressure in the vertical, stemming out of macroeconomic uncertainty or client-specific issues. Growth rates, however, suggest otherwise.

Exhibit 19: BFS revenue growth has come off lately


Exhibit 20: Performance ex. Citi is volatile


51 56 56 56 55 60 61

57

58 63

6.0

16.9 16.4

12.1

8.5 7.2 8.0

2.3 5.4 4.7

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17

Revenue - BFS (USDm) Growth (YoY, %)

96 105 101 57

17.6

9.3

(3.9)

14.6

FY14

FY15

FY16

1HFY

17

Revenue - BFS, ex. Citi (USDm) Growth (YoY, %)

L&T Infotech

14 December 2016 11

Insurance – marquee clients and new-age services LTI’s Insurance practice is primarily in P&C. The largest US insurance player is the second largest customer for LTI. Of LTI’s top 10 customers, three are in Insurance, suggesting a high amount of concentration in this vertical, too.

The service offerings in Insurance are high growth / new-age in nature, and include Duckcreek implementation, commerce enablement, and management of Digital Assets.

The company also has two IPs in Insurance: AccuRUSI and iCEOn – the former is a framework for transforming underwriting capabilities for insurance companies, and the latter is a cloud-based Employee Benefits Management solution for brokers.

Exhibit 21: Growth in Insurance has consistently been higher than company average


Energy & Utilities – Stabilizing with the worst behind the company We believe the worst is over in Energy & Utilities for LTI, as revenue from the vertical has declined by 20% in FY15 and 14% in FY16. This has led to the share of revenue from Energy & Utilities coming down to 12.7% in FY16, from 22% in FY14. The YoY decline, however, has been reducing over the quarters.

Exhibit 22: The Energy vertical has been stabilizing slowly, with a steady reduction in the quantum of decline


25.2%

15.4% 13.4% 14.4%

18.5%

8.5% 9.5% 8.9%


Insurance growth (YoY, %) Company growth (YoY, %)

164 131 113 55

26%

-20%-14%

-5%



36 33 31 32 29 29 27 28 28 28

-6%

-23%-29%

-23% -20.1%

-11% -13% -13%

-3.8% -5.3%

1Q

FY15

2Q

FY15

3Q

FY15

4Q

FY15

1Q

FY16

2Q

FY16

3Q

FY16

4Q

FY16

1Q

FY17

2Q

FY17


L&T Infotech

14 December 2016 12

Enterprise Application Services – high exposure to most challenged segment LTI gets 25% of its revenue from ERP. This has been a problem area for the industry on account of cloud migration, and the consequent absence of large implementation deals, resulting in erosion of the revenue base. LTI’s exposure to ERP is in the verticals barring BFS and Insurance. This would imply some portfolio related pressure points in other verticals too.

Exhibit 23: Growth in Insurance has consistently been higher than company average


ADM , 43

ERP , 25

IMS , 8

Testing , 10

Digital solutions, 11

Platform based solutions , 3

L&T Infotech

14 December 2016 13

Augmenting Digital Presence Automation I Products I Platforms I MOSAIC

Cloud already constitutes ~25% of LTI’s enterprise application revenue. The company also has strong expertise in the areas of digital commerce and S/4 HANA, which should offset the pressures on packages moving to the cloud.

In Application Development and Management (ADM), LTI has a higher exposure to Development, compared to Maintenance. Maintenance constitutes ~40% of the revenue in this service line. Strides taken in the area of Enterprise Digital Transformation should aid growth in Application Development, while the Maintenance piece would stabilize the portfolio, protecting against the evaporation of large on-site implementation deals, or their fragmentation into relatively smaller size and duration deals.

The company also has a strong presence in Digital, with it contributing to 26% of total revenue.

Five key investment areas LTI is focused on investments in five key areas – [1] Digital, [2] Analytics, [3] IoT, [4] Cloud, and [5] Automation. Growth rates in these segments are much above the company average, and they are consistently forming a larger part of the overall pie. The company has more than 2,000 people working on Digital, and 1,200 on Automation projects, of the total 19,300 employees.

Social, mobility and analytics together contribute 11.5% of total revenue. In all, 22% of all effort is Digital. The contribution to revenue may be higher since Digital has a higher onsite mix, which would lead to better billing rates, and higher revenue.

LTI launched an IP-based platform and digital framework called MOSAIC – Mobile, Online, Social, Analytics, IoT, Cloud. This is expected to be a differentiator in LTI’s positioning in Digital. Although a presence in these areas wasn’t new for LTI, it recently institutionalized its practices to package them better, bring tools under a framework, and aid selling/positioning better.

The company has also launched a new initiative called ADEA (Analytics and Digital in Every Account) for better penetration of newer/focus areas in existing accounts, giving a thrust to client mining.

LTI’s bet in automation has been in robotic process automation (RPA). It has the ability to get highly aggressive in this space as it doesn’t have a BPO practice, and hence, wouldn’t lose out on any existing revenue because of cannibalization. The company has been working with more than 20 customers on automation, primarily in the verticals of BFSI and Travel. It has chosen the partnership route for RPA, rather building and selling proprietary platforms. It has several partnerships with market leaders in specific areas: EMC and KOFAX (document management),

L&T Infotech

14 December 2016 14

Software AG and TIBCO (Landscape orchestration), GridGrain and Spark (Machine Learning), Blue Prism, Automation Anywhere (UI).

Apart from RPA, automation initiatives are being used extensively to increase the productivity of employees. Benefits arising from them can be realized to a larger extent in fixed price contracts, which can be used as a margin lever over the course of the contract. Fixed price contracts constituted 45% of total revenue, up from 37% in FY14.

Exhibit 24: Proportion of fixed price contracts has increased over the last two years


Zinnov has placed LTI in the Execution Zone for overall Digital ratings. The rating scale from highest to lowest is as follows: Leadership Zone, Execution Zone, Breakout Zone, and Nurture Zone.

Zinnov evaluates service providers across five service lines: [1] Digital Consulting and Transformation Services (Leadership Zone)[2] Design and Experience Services (Execution Zone)[3] Digital Application Engineering Services (Execution Zone)[4] Digital Platform Integration Services (Execution Zone)[5] Data Management and Analytics Services (Execution Zone)

37 40

45

FY14 FY15 FY16

Fixed price contracts (% of revenue)

L&T Infotech

14 December 2016 15

Exhibit 25: LTI placed in the Execution Zone in Zinnov Ratings

Source: Company, MOSL

Parentage plus points One of the key strengths for LTI is its access to group companies under the L&T parentage. This would give it access to industry-specific knowledge, vertical/domain expertise, and customers. This would be particularly relevant in the areas of manufacturing, construction, energy, utilities, machinery and heavy industries.

It routinely brings in experts from various group companies to aid solution building, consulting and sales. This would also help in development of Digital solutions that are better suited for specific industries, and relevant in the current environment of changing trends. The parentage would give benefits of an elevated understanding of the intersection of Digital and Physical – giving an edge in playing the industrial IoT opportunity.

L&T Infotech

14 December 2016 16

Potential to continue mining-led growth… …as the focus set expands to include more accounts

Client concentration highest amongst Tier-II vendors… LTI has high client concentration, with the top 10 contributing 53% of total revenue. At USD887m, It has the second highest revenue in the Tier-II bracket (annual revenue between USD350m and USD1b), after Mphasis. Yet, it has the second highest client concentration after Hexaware. Usually, client concentration has reduced, as companies have grown larger. Top 10 clients contribute 19-42% of total revenue for Tier-I vendors (annual revenue >USD4b).

Exhibit 26: 51% of total revenue from top 10 customers (as of 2QFY17)


…reflecting successful mining Client concentration can positively or negatively impact a company’s overall

performance depending on the client’s business, service provider’s relevancewithin the client, and issues specifically relating to the service provider. If allthese factors are in place, it generally results in high growth in overall revenueand in the revenue from top customers.

For LTI, top 10 customers have grown at a CAGR of 14.9% over FY13-16, which isthe highest amongst vendors we’ve considered (barring Mindtree). This hasresulted in revenue CAGR of 12.1% over the same period, which also puts LTI inthe top quartile when it comes to a three-year revenue growth performance.

Top 10 clients have contributed to 62% of the incremental growth over FY13-16,reflecting successful client mining, and subsequently, robust performance.

Exhibit 27: LTI has seen the highest growth in Top 10 customers (after Mindtree)


22 18 22

40 51 53

43

58 57

39 49 53

46

INFO

WPR

O

HCLT

TECH

M

LTIT

MPH

L

MTC

L

HEXW CY

L

KPIT

ZEN

T

PSYS

NIT

EC

Revenue from top 10 clients (%)

8.7%

5.7%

11.2

%

15.3

%

12.1

%

-2.7

%

18.0

%

10.0

%

7.9%

6.1%

5.2%

13.9

%

4.2%

5.5%

1.4%

7.1%

8.2%

14.9

%

0.3%

17.0

%

12.5

%

7.0%

3.1%

8.3%

12.9

%

4.1%

INFO

WPR

O

HCL

T

TEC

HM LTI

T

MPH

L

MTC

L

HEX

W

CYL

KPI

T

ZEN

T

PSY

S

NIT

EC

Revenue CAGR - FY13-16 (%) Revenue CAGR in Top 10 - FY13-16 (%)

L&T Infotech

14 December 2016 17

Exhibit 28: 62% of the incremental growth over the last 3 years contributed by Top 10


Exhibit 29: Best example of high growth from client mining


What’s worked so far? In its top 20 customers, LTI sees no risk arising out of its relationships with customers. There is risk of business uncertainty at the customers’ end, which is inevitable. Spend on technology (traditional) has come off for several customers; however, LTI’s share in these accounts has not reduced. This can be attributed to, Robust senior leadership relationships Anchor accounts in each vertical Account mining programs launched for top accounts Dedicated account managers, delivery personnel and consultants for each of the

top 20 accounts Relevance of presence in accounts (for example, risk, compliance, digital, cost

optimization for Citi)

This has resulted in the top 20 customers together contributing 62% of the incremental revenue growth achieved over FY13-16. This has resulted out of a steady increase in the revenue per customer in all the top customer brackets for LTI over the last three years.

The non-top 20 customers, however, contributed 24% of the incremental growth over FY13-16, and didn’t see a material change in the average revenue per customer, which ranged between USD1.2m and USD1.6m. The company has, however, added more customers during the period – net addition of 60 customers, taking the total to 258 at the end of FY16.

15% 5%

15% 25%

62%

-5%

44%

66%

46%

22%

69%

43% 32%

INFO

WPR

O

HCL

T

TEC

HM LTI

T

MPH

L

MTC

L

HEX

W

CYL

KPI

T

ZEN

T

PSY

S

NIT

EC

Top 10 clients' contribution to incremental growth: FY13-16 (%)

INFO WPRO

HCLT TECHM

LTI

MPHL

MTCL

HEXW

CYL

KPIT

ZENT

PSYS

NITEC

Top

10 c

lient

s' c

ontr

ibut

ion

to in

crem

enta

l gro

wth

(F

Y13-

16)

Revenue CAGR (FY13-16)

L&T Infotech

14 December 2016 18

Exhibit 30: All top client buckets have seen an increase in average revenue per customer


Exhibit 31: Top 20 clients contributed 76% of the total incremental revenue over FY13-16


Repeating the same for the Top-50 With substantial success seen in mining of Top-20 accounts over the last three years, and the consequent benefits reflecting in overall revenue growth, LTI intends to replicate this process in its Top-50 accounts. Several steps have been undertaken to enable this, including ADEA – Analytics and Digital in Every Account Sales team overhauled over the last year Sales team now better structured and organized to achieve end goals;

performance targets set accordingly Performance management revamped – incentive plans targeted not only at

revenue, but also based on DSO, CSAT, profitability Higher priority given to selling Digital and winning large deals Hiring of 30-40 new employees in sales, with a consulting background to better

align selling with technology trends and changing market dynamics

101

36

12

10

1.2

98

43

16

10

1.6

114

47

20

11

1.4

132

50

27

14

1.2

Top

Top

2-5

Top

6-10

Top

11-2

0

Non

Top

20

FY13 FY14 FY15 FY16

12

22 28

14

24

Top

cust

omer

Top

2-5

Top

6-10

Top

11-2

0

Non

Top

20

Contribution to incremental revenue: FY13-16 (%)

L&T Infotech

14 December 2016 19

Financial performance expectations Exposure to E&U has weighed upon performance; BFS may be next!

Stabilizing E&U, and slowing BFSI Revenue growth has been in high single digits for LTI in three out of the last four years. During the same period, however, revenue growth was bogged down by the decline in Energy & Utilities.

In FY15 and FY16, revenue from the Energy & Utilities vertical declined by 20% and 14%, respectively. Excluding this, revenue growth in FY15 and FY16 would have been 16.5/14.1% (versus actual overall revenue growth of 8.5/9.5%). Excluding the performance of Energy & Utilities, LTI outperformed the larger industry performance.

With the vertical bottoming out, we expect revenue here to stabilize, although not bounce back to growth. In the rest of the company (mainly in BFS and Insurance), although the company has not cited any weakness in any of its customers, we are building in some slowdown, given that the demand environment and macroeconomic uncertainty have hit the entire industry.

Taking into account the uncertainties/issues in the BFSI/E&U verticals, we are building in 8.3% revenue CAGR over the next three years.

Exhibit 32: Growth has been strong excluding Energy & Utilities


Exhibit 33: Expect revenue CAGR of 8.3% over FY16-19


18.5%

8.5% 9.5% 8.9%

16.6%

16.5% 14.1%

10.9%


Revenue growth (YoY, %) Revenue growth - Ex. E&U (YoY, %)

630 747 810 887 957 1,038 1,127

7.5

18.5

8.5 9.5 7.9 8.4 8.6

FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Revenue (USDm) Growth (YoY, %)

L&T Infotech

14 December 2016 20

Pricing pressure and investments likely to aggravate We expect pressure on industry margins on account of increasing pricing pressure on traditional services and higher investments in newer technologies, accompanied by changing onsite/offshore mix. While LTI has been targeting productivity improvement through the adoption of automation, it is distant from being able to move the needle. We expect pressure on LTI’s EBITDA margins to be two pronged: [1] Pricing, and [2] Investments.

Exhibit 34: Expect 180bp margin decline in FY18/19


We believe LTI’s high client concentration that leads to dependency on its largest customers is likely to act against it and reduce bargaining power on pricing. For instance, as per our checks, LTI’s top customer was offered some pricing comfort for volume commitment. Many service providers have been seen giving discounts for an increase in volume, with the intent of making up for the loss through productivity gains over a longer duration.

Moreover, it has been investing in beefing up its sales and marketing functions to tap the next set of growth accounts, and investing in products, capabilities and IP to better align offerings with shifting technology trends. According to the company, three-quarters of the sales and marketing transformation has already been carried out, with a bit left for the coming quarters. While S&M would inch up in the near-term, LTI has some lever in G&A costs as a percentage of revenue. We expect the net impact of these two factors to offset one another over a longer duration.

Exhibit 35: Expect 180bp margin decline over FY18 and 19


6,6

12

8,6

43

10,

358

10,

118

10,

359

12,

461

13,

376

14,

203

20.8 22.4

21.1 20.3

17.7 19.3 18.4

17.5

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7E

FY1

8E

FY1

9E


443

166

(139) (73) (261) 156

(85) (94)

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7E

FY1

8E

FY1

9E

EBITDA margin change (YoY, bp)

L&T Infotech

14 December 2016 21

Exhibit 36: S&M and G&A likely to offset one another in the near term


Other factors that could support margins from current levels are: Utilization: The desirable range of 78-80% suggests some improvement from

current levels. We expect utilization to continue inching higher throughsustained efforts to improve operational efficiency.

Pyramid rationalization: The proportion of employees with less than three yearsof experience is expected to touch 30% in FY17, up from 28% in FY16.

Leveraging the bench: LTI’s bench is being trained on new technologies andskills, leveraging the MOSAIC academy, in turn optimizing productivity.

Exhibit 37: Utilization has scope for improvement


Earnings growth impacted by forex gains We expect earnings CAGR of 5.7% over FY16-19E. However, LTI saw massive gains from its hedge position in FY16. Forex gain post tax was at INR13 per share (on an EPS of INR52 per share; 24% of EPS). We expect this to reduce over FY17-19, weighing earnings growth down, and making it optically subpar. Excluding forex gains post tax, earnings CAGR over FY16-19E would be 11.5%.

5,440 6,175 9,649 8,358 9,238 10,470 11,834 12,724

17.1 16.0 19.6

16.8 15.8 16.2 16.3 15.7

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7E

FY1

8E

FY1

9E

SG&A (INRm) SG&A (% of revenue)

69.4 71.3 71.6

73.4 73.8

76.7 77.0 78.0

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Utilization (%)

L&T Infotech

14 December 2016 22

Initiating coverage with a Buy rating, TP of INR800 Attractive despite risks from vertical mix and client concentration

Mining of Top-20 accounts has been robust…: Growth and scale for LTI hasbeen primarily driven by the Top-20 accounts in the last few years. Successfulaccount mining, and focused penetration in anchor/target customers has aidedstrong growth. Account managers, consultants and delivery for top accountshave ensured all-round servicing despite the size of LTI leading to the Top-20contributing 76% of the incremental growth achieved in the last three years.

…and future success will depend on replicating this in Top-50: The formula forsuccess is now being replicated in the Top-50 accounts. Several employees havebeen hired for the next stage of growth and account mining. The sales andmarketing functions and senior leadership have been heavily augmented in thepast year to aid this process. Moreover, initiatives like ADEA (Analytics andDigital in Every Account) and thrust on MOSAIC are likely to result in penetrationin these accounts in newer technologies, enabling higher growth, along with arebalanced portfolio of services.

Portfolio may continue to weigh on growth…: LTI’s revenues are heavilyskewed towards BFS, Insurance and E&U. These verticals together constitute~60% of total revenue. While E&U has been facing the brunt of lowertechnology spend on account of plummeting oil prices, the outlook for BFS andInsurance has been getting sour lately, led by macroeconomic uncertainties –upcoming elections in the US, impact of Brexit, and low interest rate regime.Although the concentrated BFS and Insurance portfolios of LTI, and its presencein the relatively shielded areas of risk, compliance, digital and cost optimizationauger well in this scenario, macro risks yet envelope this and pose prospectiverisks and fluctuations in performance, which we have embedded in ourestimates. We expect revenue growth of 8.5% in both FY18 and FY19.

…with pricing and investments compounding impact on earnings: To facilitatethe successful mining of the Top 50 accounts, LTI has hired resources in severaldimensions. This is likely to continue, as the right ammunition gets built up toensure successful execution of this strategy. Although some levers exist in theform of G&A optimization, improved utilization, pyramid rationalization, andhigher operational efficiencies, we expect margins to face the headwinds ofpricing in traditional services and renewal deals, especially given the highdependency of LTI on some key customers. Together, we expect these factors tonegatively impact EBITDA margins by 180bp in FY18 and FY19

But expect industry-average performance at the least: Despite ourconservative estimates around growth in BFS, we expect 8.3% revenue CAGRover the next two years, which places LTI in line with the industry. Marginpressures around LTI too are common with the ones seen impacting the sectoroverall. We believe this is factored into valuations, as despite the conservatism,LTI is trading at 11.3/10.7x FY18/19E earnings.

L&T Infotech

14 December 2016 23

Exhibit 38: Risks factored into revenue growth estimates


Exhibit 39: Pricing likely to adversely impact margins


Value LTI at INR800 per share Strong cash flow generation to command some premium: We believe LTI

warrants a premium to its peers considering: (1) successful track record ofaccount mining and potential growth, driven by next set of target accounts, (2)higher than industry growth rates (ex E&U), (3) better margin profile comparedto peers, (4) higher return ratios than peers, and (5) strong cash conversion.

We value LTI at 13x forward EPS to arrive at a fair value of INR800/share (21%upside). Our valuation is at a 10% discount to peers such as PSYS and MTCL(which have developed strong capabilities in newer services, and demonstratedconsistent stronger-than-industry growth), 30% discount to INFO, but at a 20%premium to peers such as MPHL, KPIT and NITEC, given strong competitivepositioning and strategy to drive the next leg of growth.

Deterioration in profitability on the back of any policy changes around H-1B visaimmigrants is a key risk to our earnings and valuation thesis

Exhibit 40: Valuations attractive, given revenue growth relative to peers


Exhibit 41: Earnings CAGR bogged down by margin decline and forex movement


630 747 810 887 962 1,044 1,132

7.5

18.5

8.5 9.5 8.4 8.5 8.5

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

Revenue (USDm) Growth (YoY, %)

6,612 8,643 10,358 10,118 10,359 12,623 13,521 14,255

20.8 22.4

21.1 20.3 17.7

19.4 18.5 17.5

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7E

FY1

8E

FY1

9E


LTIT

MPHL

HEXW PSYS

KPIT

MTCL

NITEC

CYL

ZENT

6

8

10

12

14

0% 5% 10% 15% 20%

LTIT

MPHL

HEXW PSYS

KPIT

MTCL

NITEC

CYL

ZENT

6

8

10

12

14

16

0% 5% 10% 15% 20% 25% 30%

L&T Infotech

14 December 2016 24

Exhibit 42: Valuations attractive

CMP (INR)

Reco. TP

(INR)

Revenue CAGR

(FY16-18E)

EBITDA margin

expansion (FY16-

18E,bp)

Earnings CAGR

(FY16-18E)

PE (FY17E)

PE (FY18E)

ROE (FY17E)

ROE (FY18E)

Dividend yield

(FY17E)

Dividend yield

(FY18E)

TCS IN 2,201 Neutral 2,500 9% (111) 9% 16.6 14.9 33.2 31.7 2.0 2.4 INFO IN 990 Buy 1,250 9% (42) 8% 15.9 14.3 23.0 22.9 3.1 3.0 WPRO IN 464 Neutral 560 7% (32) 5% 13.4 11.7 17.8 18.9 2.6 2.6 HCLT IN 800 Buy 960 12% (52) 11% 13.9 12.3 26.8 25.8 2.5 2.4 TECHM IN 484 Buy 550 8% 1 6% 15.1 12.4 19.7 20.7 1.9 1.9 MPHL IN 519 Neutral 560 4% 104 26% 12.4 9.5 13.6 16.5 7.2 4.3 LTIT IN 660 Buy 800 8% 71 6% 12.0 11.3 42.4 36.7 4.6 3.8

MTCL IN 492 Neutral 520 10% (218) 1% 18.2 13.3 18.2 22.3 2.7 2.6 KPIT IN 134 Neutral 165 5% 42 7% 9.9 7.9 17.9 18.8 1.4 1.4 HEXW IN 209 Neutral 230 10% (3) 11% 15.0 12.9 27.9 28.2 2.7 2.0 CYL IN 502 Buy 600 14% 101 23% 14.5 11.1 15.2 17.3 2.2 2.9 ZENT IN 1,000 Buy 1,250 7% 203 18% 14.1 10.6 20.7 23.4 1.5 1.9 NITEC IN 431 Neutral 450 4% (65) 5% 11.2 8.6 14.2 16.6 2.7 2.7 PSYS IN 599 Neutral 700 17% 57 10% 15.8 13.3 17.4 19.1 1.8 1.8


Exhibit 43: Return ratios higher than peers


Exhibit 44: FCF margins have been healthy


13.6

42.4

18.2 17.9

27.9

15.2 20.7

14.2 17.4 16.5

36.7

22.3 18.8

28.2

17.3 23.4

16.6 19.1

MPH

L IN

LTIT

IN

MTC

L IN

KPIT

IN

HEXW

IN

CYL

IN

ZEN

T IN

NIT

EC IN

PSYS

IN

ROE (FY17E) ROE (FY18E)

(2.5)

5.6

9.3

18.6

9.2

12.8

8.6 7.6 7.5

FY11

FY12

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7E

FY1

8E

FY1

9EFCF/Revenue (%)

L&T Infotech

14 December 2016 25

Scenario analysis – Favorable risk reward

Exhibit 45: Scenario analysis suggest ~50% upside in bull case v/s ~15% downside in bear case Bear case Base case Bull case

FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 Revenues (USDm) 943 1,006 1,083 957 1,038 1,127 976 1,083 1,213 Revenue growth (%) 6.3 6.7 7.6 7.9 8.4 8.6 10.0 11.0 12.0 Revenues (INRm) 63,688 70,389 77,993 64,641 72,602 81,216 65,904 75,775 87,393 EBITDA 11,273 12,107 13,025 12,461 13,376 14,203 12,805 14,722 16,980 EBITDA margin (%) 17.7 17.2 16.7 19.3 18.4 17.5 19.4 19.4 19.4 Dep/int/other income 239 370 401 249 428 485 303 530 669 PBT 11,034 11,736 12,624 12,212 12,948 13,719 12,502 14,192 16,311 Tax 2,322 2,465 2,651 2,570 2,719 2,881 2,631 2,980 3,425 PAT 8,712 9,272 9,973 9,642 10,229 10,838 9,871 11,212 12,885 EPS 49.8 53.0 57.0 55.1 58.5 61.9 56.4 64.1 73.6

Target PE (x) 10 13 14 Target price (INR) 540 800 970 Potential return (%) -17 22 47


Exhibit 46: Scenario analysis suggests ~50% upside in bull case v/s ~15% downside in bear case Bear Base Bull

FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19

BFS 3.5% 4.0% 5.0% 3.5% 5.0% 5.0% 5.9% 8.0% 10.0% Insurance 11.1% 10.0% 10.0% 12.7% 12.0% 10.0% 13.1% 12.0% 12.0% E&U -6.7% -6.0% -3.0% -4.8% -4.0% -1.6% -2.4% 0.8% 3.8% Others 9.9% 10.0% 10.3% 12.3% 12.0% 12.0% 15.3% 15.0% 15.0% Total 6.3% 6.7% 7.6% 7.9% 8.4% 8.6% 10.0% 11.0% 12.0%

Bull case suggests ~50% upside from current levels Our sensitivity analysis suggests that in the bull case, LTI could generate EPS of ~INR74 (v/s INR62 in base case). Valuing LTI at 14x forward earnings (in line with peers like MTCL and PSYS v/s 13x in base case – 10% discount to peers) yields a fair value of INR970 (v/s TP of INR800), implying upside of 47%.

Stability in E&U: Revenue in the E&U vertical declined by 20% in FY15 and 14%in FY16. The pressure generated here resulted in overall revenue growth of8.5/9.5% in FY15/16, excluding which growth was 16.5/14.1%. LTI believes theworst is behind and expects stability going forward. While the sequential declinereduced to 1.9% in 1QFY17 (v/s 11.1% in 1QFY16), the YoY decline has reducedto 5.3% in 2QFY17, v/s 10.5% in 2QFY16. In our bull case, we are assuming aseizure of decline at current levels, and gradual improvement, going forward.

No impact in BFS and Insurance: BFSI, which constitutes 47% of total revenue,has been under pressure for most other service providers. LTI, however, hasn’tseen any pressure in the vertical, stemming out of macroeconomic uncertaintyor client-specific issues. Assuming no impact for LTI would lead to industry-leading growth rates.

Valuation multiples in line with peers rather than at discount: In our base case,we have assumed target multiple of ~13x (10% discount to peers like MTCL and

L&T Infotech

14 December 2016 26

PSYS). MTCL and PSYS have been commanding higher multiples amongst mid-cap peers on account of their presence in new-age services, and the fact that this expertise has led to outperformance to industry. Improvement in traction and scaling up of smaller accounts can lead to sustained industry-leading growth for LTI, resulting in a higher multiple.

Bear case analysis indicates 17% downside from current levels Our bear case sensitivity analysis shows that LTI could generate EPS of ~INR57 (v/s INR62 in base case). Valuing LTI at 10x forward earnings (30% discount to peers like MTCL and PSYS and in line with KPIT/NITEC v/s 13x in base case) yields a fair value of INR540 (v/s TP of INR800), implying downside of 17% from CMP.

E&U woes continue: In our bear case assumptions, we assume that the E&Uvertical continues going through pain, and declines by 3-6% in FY17/18/19 each

BFSI growth decelerates: In FY16, BFS grew by 6.3%, which is below companyaverage of 9.5%, and below FY15 BFS growth rate of 13.1%. Assuming pressurein BFSI spend, and its impact on LTI too, we would arrive at a lower growth ratecompared to the base case. If LTI gets impacted by these factors, the impact onit could be aggravated compared to peers because of higher dependency on alower number of clients in this vertical.

Valuation multiple gap to broaden to 30% discount to peers: In this case, wehave assumed target multiple at 10x v/s 13x in the base case. This multiple, wehave witnessed for peers with sub-par revenue growth, margin pressures and arecovery lifecycle.

L&T Infotech

14 December 2016 27

SWOT Analysis

Strengths Customer relationships: LTI gets 68% of its total revenue from its top 20 customers. It has

strong relationships with these customers, which have grown in size and quality over theyears. Over the last three years, the top 20 clients have contributed to 76% of theincremental revenue for LTI. In cases like Citi, LTI gained tremendous share in vendorconsolidation exercise proving its criticality.

Parentage: LTI’s promoter is L&T, which is a leading Indian conglomerate in engineering,construction, manufacturing, finance and technology. The parentage provides LTI withaccess to professionals with deep industry knowledge in the sectors it is present in,corporate and business culture and corporate governance practices.

Business to IT connect model: The model leverages domain experience of L&T groupacross industries to assist LTI in developing and delivering services and solutions, providingan advantage over competition by being able to capitalize on strategic opportunities at afaster pace.

Weaknesses Portfolio composition: With ~60% of total revenue from BFSI and E&U, LTI’s business

faces risks of downturn in these industries. Its performance has weakened over the lasttwo years because of weakness in E&U, which declined by 20/14% in FY15/16. Thepressure generated here resulted in overall revenue growth of 8.5/9.5% in FY15/16,excluding which growth was 16.5/14.1%.

Hunting capabilities: Hunting has lagged over the years in LTI, as the prime focus has beento mine strategic accounts and scale them to drive overall growth. This has resulted in adominance of revenue and incremental growth from top customers. Non top 20customers only drove 24% of the incremental growth between FY13-16.

Opportunities Strategic accounts: LTI’s success in its top 20 accounts can be replicated for the next set of

strategic accounts, leading to higher revenue growth going forward. Superior accountmanagement, dedicated teams for multi-dimensional growth and reference cases can help LTI maintain industry-leading growth rates.

Automation: LTI’s bet in automation has been in robotic process automation (RPA). It hasthe ability to get highly aggressive in this space as it doesn’t have a BPO practice andhence wouldn’t lose out on any existing revenue because of cannibalization.

Expansion of Digital services: Social, mobility and analytics together contribute to 11.5%of total revenue. In all, 22% of all effort (and 26% of revenue) is Digital. Given growth seenin this space, and LTI’s positioning, efforts, capability addition and new initiatives, overallgrowth can be boosted further from these areas.

Threats Cloud migration in ERP: Cloud already constitutes to ~25% of the enterprise application

revenue for LTI. The company also has very strong expertise in the areas of digitalcommerce, and S/4 HANA. However, pressure in the rest of the ERP portfolio because ofreducing deal sizes and duration can amount to pressure on growth.

Client concentration: LTI gets 15/38/53/68% of its total revenue from its top 1/5/10/20customers. Any customer facing issues (because of macroeconomic conditions or issuesspecific to the customer) can lead to pressure on LTI's overall revenue growth andperformance.

Costs overshooting revenue in the near-term: The company is currently in an investment-mode as it gets ready to capitalize on new opportunities. This requires investments in theform of people, capabilities, solutions and reorganization. Investments may lead tomargin pressures if revenue growth follows with a lag.

Company name

14 December 2016 28

Company description

L&T Infotech (Bloomberg: LTI) is a provider of technology services and solutions. With USD887m in revenue in FY16, it is the sixth largest IT services company in terms of export revenue.

It offers an extensive range of services spread across diverse industries such as banking and financial services, insurance, energy and process, consumer packaged goods, retail and pharmaceuticals, media and entertainment, hi-tech and consumer electronics and automotive and aerospace.

The company’s range of services includes application development, maintenance and outsourcing, enterprise solutions, infrastructure management services, testing, digital solutions and platform-based solutions.

LTI was incorporated in 1996 and is headquartered in Mumbai. Its promoter is L&T, which is a leading Indian conglomerate in engineering, construction, manufacturing, finance and technology. The parentage provides LTI with access to professionals with deep industry knowledge in the sectors it is present in, corporate and business culture and corporate governance practices.

As part of a business restructuring exercise conducted by L&T, all engineering services businesses were consolidated under a separate subsidiary, LTTSL. As part of this restructuring, on January 1, 2014, LTI sold and transferred the assets and liabilities of its PES Business to LTTSL.

Exhibit 47: Revenue composition by verticals and services


Banking and

financial services ,

26

Insurance , 21

Energy and Process ,

12

CPG, Retail and Pharma

, 8

High-Tech, Media &

Entertainment , 11

Auto Aero & Others ,

22

ADM , 43

ERP , 25

IMS , 8

Testing , 10

Digital solutions,

11

Platform based

solutions , 3

L&T Infotech

14 December 2016 29

Key management personnel

Sanjay Jalona, Chief Executive Officer & Managing Director He has over 25 years of experience in the IT industry. Prior to joining LTI, he worked at Infosys Limited as the Executive Vice President and Global Head of High-Tech, Manufacturing and Engineering Services. He also served as a member of the Board of Lodestone Holding AG and has also chaired the Board of Infosys Technologies (China) Company Limited and Infosys Technologies (Shanghai) Company Limited.

Aftab Ullah, Chief Operating Officer He has over 20 years of experience in the IT industry. Previously, he worked with BA Continuum India Private Limited in various capacities including Senior Vice President and Head, Global Delivery Centre of Expertise, India as well as Whole Time Director.

Ashok Kumar Sonthalia, Chief Financial Officer He has over 24 years of experience in the areas of strategic financial planning, treasury and finance and accounts in various industry verticals. Previously, he has worked at senior finance positions in L&T Power IC, Greaves Cotton Limited and Tata Group Companies – Tata Inc (USA), and Tata Chemicals Limited.

Manoj Biswas, Global HR Head He has had business stints, where he has lead successful business /product verticals in the US, in his earlier assignments. As Managing Director Human Resources with Accenture, and IBM, he has led a successful people transformation journey, and has worked for them, not only in India, but also outside the country.

Subramanya Bhatt, Company Secretary He has over 44 years of experience in various fields such as banking, corporate finance, legal and corporate compliance. Prior to this, he has worked with Bank of India, Chemical Terminal Trombay Limited, a subsidiary of Tata Power Company Limited, and Godrej Industries. He was appointed by L&T as the Chief Legal Advisor on May 2, 2009, a position he holds currently.

Peeyush Dubey, Chief Marketing Officer Peeyush joined LTI in 2015 and has been leading marketing organizations since 1999. Prior to this, he has worked with Mindtree, Infosys, iGate and IDS NEXT.

Sudhir Chaturvedi, President – Sales Sudhir joined LTI in September 2016. Prior to this he was the Chief Operating Officer at NIIT Tech, responsible for global sales and delivery of all technology and business services. Before this, he worked with Infosys in several roles, the last being responsible for heading Financial Services in Americas; and the others including Head of UK, Head of Sales for Europe and Head of Manufacturing vertical for Europe.

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Vertical Heads

Anil Vazirani, Chief Business Officer – Insurance & Testing, Americas Harsh Naidu, Chief Business Officer – BFS, Americas Siddharth Bohra, Chief Business Officer – Tech, Media, CRP & Digital, Americas Rohit Kedia, Chief Business Officer – Manufacturing & ERP, Americas Makarand Deolalkar, Chief Business Officer – Europe Sarbajit Deb, Chief Business Officer – Nordic Region Rajat Mathur, Chief Business Officer – Emerging Markets

Exhibit 48: Organization structure


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14 December 2016 31

Key risks

Policy changes: Any policy change around H-1B visa immigrants is a key risk toour earnings and valuation thesis.

Cloud migration in ERP: Cloud already constitutes ~25% of the enterpriseapplication revenue for LTI. The company also has very strong expertise in theareas of digital commerce, and S/4 HANA. However, pressure in the rest of theERP portfolio because of reducing deal sizes and duration can amount topressure on growth.

Client concentration: LTI gets 15/38/53/68% of its total revenue from its top1/5/10/20 customers. Any customer facing issues (because of macroeconomicconditions or issues specific to the customer) can lead to pressure on LTI’soverall revenue growth and performance.

Costs overshooting revenue in the near-term: The company is currently in aninvestment mode as it gets ready to capitalize on new opportunities. Thisrequires investments in the form of people, capabilities, solutions andreorganization. Investments may lead to margin pressures if revenue growthfollows with a lag.

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Financials and Valuations

Income Statement (INR Million) Y/E Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Net Sales 31,820 38,514 49,205 49,780 58,471 64,641 72,602 81,216 Change (%) 33.1 21.0 27.8 1.2 17.5 10.6 12.3 11.9 EBITDA 6,612 8,643 10,358 10,118 10,359 12,461 13,376 14,203 EBITDA Margin (%) 20.8 22.4 21.1 20.3 17.7 19.3 18.4 17.5 Depreciation 1,049 1,232 1,300 1,579 1,740 1,869 2,163 2,325 EBIT 5,563 7,411 9,058 8,538 8,620 10,592 11,213 11,879

Interest 342 208 305 216 158 0 0 0 Other Income 96 221 -833 915 2,960 1,620 1,735 1,840 Extraordinary items 138 -395 -440 -2 0 0 0 0 PBT 5,454 7,029 7,480 9,235 11,422 12,212 12,948 13,719 Tax 1,409 1,870 2,072 1,683 2,250 2,570 2,719 2,881 Tax Rate (%) 25.8 26.6 27.7 18.2 19.7 21.0 21.0 21.0 Min. Int. & Assoc. Share 0 1 1 2 1 0 0 0 Reported PAT 4,045 5,159 5,408 7,550 9,171 9,642 10,229 10,838 Adjusted PAT 3,907 5,554 5,847 7,552 9,171 9,642 10,229 10,838 Change (%) 24.7 42.1 5.3 29.2 21.4 5.1 6.1 6.0

Balance Sheet (INR Million) Y/E Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Share Capital 161 161 161 161 170 175 175 175 Reserves 10,892 13,227 15,942 20,102 20,057 25,071 30,390 36,026 Net Worth 11,054 13,388 16,103 20,263 20,227 25,246 30,565 36,200 Debt 2,688 2,336 1,100 2,175 545 545 545 545 Deferred Tax 97 148 412 228 1,204 1,204 1,204 1,204 Total Capital Employed 13,839 15,874 17,617 22,670 21,981 27,000 32,319 37,954 Gross Fixed Assets 9,287 11,004 11,733 13,379 14,210 17,210 20,210 23,210 Less: Acc Depreciation 2,965 4,013 5,245 6,545 7,835 9,785 11,948 14,273 Net Fixed Assets 6,322 6,991 6,488 6,834 6,375 7,425 8,262 8,937 Capital WIP 1,076 1,424 567 252 195 195 195 195 Investments 571 487 1,688 1,036 429 429 429 429 Current Assets 13,290 14,696 18,262 22,449 27,568 31,872 36,741 42,059 Inventory 0 0 0 0 0 0 0 0 Debtors 7,741 8,744 10,504 12,446 15,448 16,647 18,300 20,026 Cash & Bank 1,321 1,194 1,589 2,009 2,034 4,598 6,905 9,573 Loans & Adv, Others 4,228 4,758 6,169 7,994 10,087 10,626 11,537 12,460 Curr Liabs & Provns 7,419 7,723 9,388 7,900 12,587 12,921 13,309 13,666 Curr. Liabilities 5,750 5,842 6,880 4,981 7,292 7,626 8,013 8,371 Provisions 1,670 1,880 2,508 2,919 5,295 5,295 5,295 5,295 Net Current Assets 5,871 6,973 8,874 14,549 14,981 18,950 23,433 28,393 Total Assets 13,839 15,874 17,617 22,670 21,981 27,000 32,319 37,954

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Financials and Valuations

Ratios Y/E Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Basic (INR) EPS 24.0 30.6 32.1 44.8 52.4 55.1 58.5 61.9 Cash EPS 30.2 37.9 39.8 54.2 62.3 65.8 70.8 75.2 Book Value 65.6 79.4 95.6 120.2 115.6 144.3 174.7 206.9 DPS 15.1 18.0 32.7 28.5 31.2 22.0 23.4 24.8 Payout (incl. Div. Tax.) 63.0 53.4 67.5 62.9 59.6 40.0 40.0 40.0 Valuation(x) P/E 12.6 12.0 11.3 10.7 Cash P/E 10.6 10.0 9.3 8.8 Price / Book Value 5.7 4.6 3.8 3.2 EV/Sales 1.9 1.7 1.5 1.3 EV/EBITDA 11.0 8.9 8.1 7.5 Dividend Yield (%) 4.7 3.3 3.5 3.8 Profitability Ratios (%) RoE 36.1 42.2 36.7 41.5 45.3 42.4 36.7 32.5 RoCE 40.8 50.3 55.0 43.1 39.9 45.5 39.4 35.6 Turnover Ratios (%) Asset Turnover (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Debtors (No. of Days) 89 83 78 91 96 94 92 90 Inventory (No. of Days) 0 0 0 0 0 0 0 0 Creditors (No. of Days) 0 0 0 0 0 0 0 0 Leverage Ratios (%) Net Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cash Flow Statement (INR Million) Y/E Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Adjusted EBITDA 6,612 8,643 10,358 10,118 10,359 12,461 13,376 14,203 Non cash opr. exp (inc) -778 349 -531 -5 1,867 0 0 0 (Inc)/Dec in Wkg. Cap. -1,402 -819 -1,408 -922 -936 -1,405 -2,176 -2,293Tax Paid -1,068 -2,096 -2,141 -2,767 -2,657 -2,570 -2,719 -2,881Other operating activities 0 0 0 0 0 0 0 0 CF from Op. Activity 3,363 6,076 6,279 6,423 8,633 8,486 8,482 9,030 (Inc)/Dec in FA & CWIP -1,594 -2,479 -950 -1,939 -1,141 -2,919 -3,000 -3,000Free cash flows 1,769 3,597 5,329 4,484 7,492 5,568 5,482 6,030 (Pur)/Sale of Invt 588 208 -1,122 794 675 0 0 0 Others 35 30 3,875 117 25 1,620 1,735 1,840 CF from Inv. Activity -971 -2,242 1,803 -1,029 -441 -1,298 -1,265 -1,160Inc/(Dec) in Net Worth 0 0 0 0 69 5 0 0 Inc / (Dec) in Debt 488 -377 -1,229 1,013 -1,663 0 0 0 Interest Paid -61 -98 -102 -56 -58 0 0 0 Divd Paid (incl Tax) & Others -2,960 -3,487 -6,356 -5,931 -6,516 -4,628 -4,910 -5,202CF from Fin. Activity -2,533 -3,962 -7,686 -4,974 -8,167 -4,623 -4,910 -5,202Inc/(Dec) in Cash -141 -127 396 420 24 2,565 2,307 2,668 Add: Opening Balance 1,462 1,321 1,194 1,589 2,009 2,034 4,598 6,905 Closing Balance 1,321 1,194 1,589 2,009 2,034 4,598 6,905 9,573

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14 December 2016 35

N O T E S

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