LTIMindtree Q2 Earnings: 10.3% Profit Growth, Stock Falls 6.2%, Targets Revised

LTIMindtree Q2 Earnings: 10.3% Profit Growth, Stock Falls 6.2%, Targets Revised

Margin worries tag along with profit at LTIMindtree Q2 Earnings The IT consulting company had yesterday reported 10.3% growth in its profit to ₹1,251.6 crores and 3.2% revenue growth to ₹9,432.9 crore as its shares fell 6.2% with the stock closing at ₹6,004, against ₹6,401.50.

The company report reflected healthy momentum in all verticals and regions, with a notable $200 million deal closure. According to the chief executive officer, Debashis Chatterjee, the continuation of deal momentum and significant hiring, especially that of freshers, would put the company well on track to reach success in the latter half of the fiscal.

However, LTIMindtree EBIT margins expanded by a penny from 15% to 15.5%, and this is in the middle of pressures on margins continuing. The factors comprise wage hikes, large deal ramp-ups, and increased hiring which raise concerns for profitability going forward.

Performance and market response to the stock

This was not taken well by the market, as the stock of LTIMindtree plunged. At ₹1.79 lakh crore in market capitalisation, investor fears related to margin pressures, amongst other near-term headwinds reflected.

Even as it continued to be positive on LTIMindtree and maintained the price target at ₹7,400, the company cited margin pressure concerns primarily on the back of growth in headcount and wage inflation. The brokerage continues to expect margin pressures to stay elevated in 2H FY25, driven by key operational headwinds.

This, on the other hand, Choice Broking had a ‘Reduce’ call with the target at ₹6,642 wherein it spoke about good deal momentum of the company but had concerns on sustaining the margins and growth. It has revised its estimates and expects a PE of 32.5x based on estimates for FY27.

While supportive, Nuvama has a ‘Buy’ with a price target of ₹7,550. It sees LTIMindtree boasting significant cost takeout potential in BFSI and Hi-tech space where it is at a strong pace to deliver good Q2 performance. Analysts at Nuvama believe steady growth will be the case; however due to margin concerns, they have lowered the earnings estimates for FY25.

Multi-Year Deals Attract Strong Q2 Performance

A high revenue growth in the dollar and a strong Q2 performance have enabled LTIMindtree to book 2.8% across the company’s dollar revenue bookings for the quarter, according to a company statement. “Broad-based growth across our key markets and verticals BFSI, retail and technology-helped us deliver growth for the firm,” said Debashis Chatterjee, CEO. The company was able to manage multi-year deals; it signed one deal above $200 million in this quarter.

Management spoke quite a lot on aggressive hiring strategy where the company has added 3% headcount in the quarter. That includes many freshers, and it would be a good position for the future while keeping operational agility to face the rising demands of the clients. An aggressive hiring plan that focuses more on very young talent will work well for a long way in sustaining its digital transformation projects.

Margins: The Key Challenge Ahead

While there is minor expansion in the EBIT margin of LTIMindtree to 15.5%, growth of 50 bps, analysts question whether it can be sustained at this level because of rising operational costs.

The margin trajectory has remained volatile at LTIMindtree, says Motilal Oswal. They remain 200 bps above the comfortable utilization range of the company, and further hiring, including freshers, is likely to put additional pressure on the profit margin.

As the second half of the fiscal is expected to witness wage hikes and large deals kicked off, LTIMindtree’s operating expenses may outpace revenue growth. For that reason, the company must strive to optimize its cost structure and operational efficiencies to prevent risks of wage inflation and talent acquisition.

Dividend Declaration and Cash Flow Information

The board at LTIMindtree has also come with an announcement of an interim dividend of ₹20 per share. That indicates there is no issue from the health perspective of the financial side. It, therefore, attempts to give some kind of consolation to investors with the declaration of interim dividend announcement despite the fall in the stock due to a cut in earnings declaration.

Free cash flow of ₹681.9 crore was reported by the company for July-September. This is against ₹1,005.3 crore for Q1. Free cash flow declined mainly because of higher capital expenditure and working capitals in Q2. Still, analysts are hopeful that LTIMindtree’s deals pipeline and strategic investment in technology will help sustain cash flows in the coming quarters.

Deal Momentum Continues

Sector Outlook

LTIMindtree’s Q2 results thus attest to its prowess in keeping pace with the changing needs of the IT services industry. Such multi-year, high-value deals won in BFSI, retail and technology will fuel long-term growth for the firm. It is well placed in the fast-emerging digital transformation landscape with AI-powered solutions supported by large investment in data analytics.

Going forward, analysts feel that the growth juggernaut for this company would be continued deal momentum. The ability of LTIMindtree to provide cost-effective solutions driven by AI will be an advantage in the marketplace where clients are looking at optimizing the cost of their IT budgets amidst global economic uncertainty.

The company needs to improve its operational efficiencies in order to overcome the challenges that margin faces due to wage hikes and large deal implementations. LTIMindtree’s performance during Q2 clearly reflects its strategic vision and capabilities in terms of efficient execution. Its investors though waiting to see the cost structure and profitability management of the coming quarter. Reactions from buyers and Sellers are mixed.

Healthy outgo in Q2 by LTIMindtree, though mixed views from the broking community put a question mark on the near-term trajectory of the stock.

Motilal Oswal: Maintain Buy with target price of ₹7,400: The positives on growth are pitched, but the margin alert has been sounded.

Choice Broking: Upgrade to Reduce rating, with a target price at ₹6,642, primarily based on margin pressure and growth slowdown.

We maintain our Buy rating with a target price of ₹7,550, as though good deal flow and sector momentum have now emerged, reduced earnings visibility related to margin concerns have diminished.

Sharekhan by BNP Paribas: The two successive quarters of decent growth, strong headcount addition, and deals closures on a H2 FY25 y-o-y basis bode well for the long-term view on LTIMindtree.

Conclusion: LTIMindtree's Road Ahead

It’s similar as LTIMindtree enters the remainder of FY25, when quite meaningful opportunities will be accompanied by corresponding challenges. Its deal pipeline is healthy and strategic investments in AI-driven solutions well set for growth, but pressures on margins will be an important area of focus for the management.

Investors will have to weigh the short-term headwinds from pay hikes, addition of headcount and ramp-up of big deals against the long-term growth prospect for the company. With solid fundamentals and continued innovation, LTIMindtree still remains a good prospect for people willing to ride through the volatility in the IT services sector.
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All above recommendations are of the market analysts. Neither the author, nor the brokerage firm, nor Stockstoday.in will be responsible for any loss arising out of any such decision taken based upon this information. All users are cautioned to take their own expert advice prior to making any investment decision.

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