LTIMindtree shares plunged 13% today. Should you sell stock post weak Q3, guidance?

Shares of LTIMindtree Ltd took a beating in Thursday's trade after a weak set of quarterly results and concerning management guidance. Analysts said the management continued to see elongated decision-making cycles, and is expecting delays in deal ramp-ups. Growth in Q4 is also expected to be along similar lines as Q3, with furloughs flowing into Q4 as well, they cited.

LTIMindtree needs to demonstrate visible translation of synergies to deals and revenue, and increase the growth gap with Tier 1 peers to justify premium valuations, said Kotak Institutional Equities.

The stock plunged 13.4 per cent to hit a low of Rs 5,436 on BSE. A shift in the outlook on demand and profitability is disappointing and drives 4-5 per cent EPS downgrades for FY2024-26E, Kotak said.  The stock trades at expensive valuations of 27 times FY2025 and will correct after poor results, it warned while suggesting a fair value of Rs 5,500 for the stock against Rs 5,910 earlier.

"EBIT margin for the quarter came in at 15.4 per cent due to higher-than-anticipated furloughs, lower working days and seasonal pass-through of revenue. The management has pushed out the Q4FY24 EBIT margin target of 17–18 per cent by a few quarters—as it expects furloughs in Q4 too along with investments in business and deal ramp-ups. FY25 margin target of 17–18 per cent too has been pushed out to ‘medium term’," Nuvama Institutional Equities said.

Motilal Oswal said the near-term slowdown in discretionary spending and its meaningful exposure to BFS would have an adverse impact on its growth performance. It expects a 9.7 per cent CAGR in dollar revenue over FY23-26.

"Additionally, due to the company’s strategic decision to defer the aspirational margin band, we cut our earnings estimate. We estimate a PAT CAGR of 13 per cent over FY23-26. We value the stock at 30 times FY26E EPS. The current valuation of 29 times FY26E EPS limits any meaningful upside from the CMP. We reiterate our Neutral rating with a target of Rs 6,600," it said.

Nomura India said LTIMindtree noted that given its utilization level has now touched 87.4 per cent and is above its comfort zone of 85 per cent it would need to start hiring. In large cost take-out deals, employee capacity has to be first built, anticipating a transition. "This will delay LTIM’s aspiration of hitting 17-18% EBIT margin in 4QFY24 by a “few” quarters. We lower our EBIT margin forecast by 20-50 bps for FY24-26F. We expect EBIT margin of 16.1-17.6 per cent over FY24-26F," it said.

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