AI In Everything Framework And Key Partnerships Will Expand Future Offerings

Key Takeaways

• Strategic investments in AI and partnerships with major tech companies are poised to stimulate revenue growth and enhance technology offerings.
  
• Efforts on vendor consolidation and cost management aim to improve operational efficiency and net margins in the long run.
  
• Despite strong deal momentum, LTIMindtree faces margin pressure due to wage hikes and AI focus, risking revenue and earnings amid external economic uncertainties.

Catalysts

A technology consulting and digital solutions company, provides information technology services and solutions in India, North America, Europe, and internationally.

• The company is actively expanding its AI strategy with the AI in Everything framework, which is driving innovation and winning deals. Engaging with the majority of its customer base on AI initiatives is expected to enhance revenue growth by increasing market share and driving AI-led transformations.
  
• Record Total Contract Value (TCV) signings, especially in the BFSI and manufacturing verticals, with notable large deals, suggest strong future revenue streams. This indicates a healthy pipeline and increased deal activity, which should positively impact future revenue.
  
• Significant focus on vendor consolidation and cost takeout deals indicates an effort to improve operational efficiency and margins. While initial impacts may appear dilutive due to passing productivity benefits to clients, gains from operational efficiencies and market share expansion are likely to improve net margins over time.
  
• The company is making strategic investments and partnerships in AI and digital transformation initiatives with major players like GitHub, Microsoft, and AWS. This will potentially enhance technology offerings and attract new clients, stimulating revenue growth and improving earnings.
  
• A growing workforce and ongoing fresher recruitment to build bench capacity signal preparation for future project demands. This anticipates increased business opportunities and projects, which could improve revenue and earnings as new deals ramp up.

LTIMindtree Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LTIMindtree's revenue will grow by 11.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.3% today to 14.2% in 3 years time.
• Analysts expect earnings to reach ₹72.4 billion (and earnings per share of ₹243.76) by about January 2028, up from ₹45.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.6x on those 2028 earnings, up from 38.1x today. This future PE is greater than the current PE for the IN IT industry at 32.8x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.57%, as per the Simply Wall St company report.

LTIMindtree Future Earnings Per Share Growth

Risks

• Despite strong deal momentum, LTIMindtree is experiencing pressure on its EBIT margins, primarily due to wage hikes and its strategy of passing AI-driven productivity gains to clients, which could hinder both margins and overall earnings.
  
• The company is witnessing a significant reduction in its earnings per share, which fell from ₹42.3 in Q2 FY '25 to ₹36.7 in Q3 FY '25, indicating potential challenges in maintaining profitability levels in the short term.
  
• The heavy focus on AI could lead to cannibalization of traditional revenue streams, as stated in their outlook, suggesting a risk to revenue if AI-driven transformations do not result in immediate compensatory deals or business growth.
  
• The decline in utilization rates from 87.7% to 85.4% implies potential inefficiencies or underutilization of staff, which could further affect operating margins and earnings.
  
• External economic and political uncertainties, particularly in key markets like the US, present risks that could lead to unpredictable customer spending patterns, directly impacting revenue and earnings projections.

Valuation

• The analysts have a consensus price target of ₹6279.3 for LTIMindtree based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹7700.0, and the most bearish reporting a price target of just ₹4595.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹508.1 billion, earnings will come to ₹72.4 billion, and it would be trading on a PE ratio of 38.6x, assuming you use a discount rate of 14.6%.
• Given the current share price of ₹5882.75, the analyst's price target of ₹6279.3 is 6.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.