Stock Mantra | This digital solutions firm spikes over 50% in 4 months, can see 25%-30% upside

Larsen & Toubro Infotech, #Market Edge, #Stocks Views, #Technicals

Global technology consulting and digital solutions company Larsen & Toubro Infotech shares have given tremendous returns in the last four months, beating the IT index and BSE Sensex,

It has rallied 55 percent in four months to end at record closing high of Rs 5,578.40 and hit a fresh intraday record high of Rs 5,668.75 on September 14.

Having a market capitalisation of Rs 97,718.98 crore, the stock has more than doubled investors’ wealth in the past year. The BSE IT index and BSE Sensex gained 21 percent & 11 percent in the last four months and 77 percent & 50 percent in last one year, respectively.

Reasons Behind Rally

IT is one of the best-performing sectors, especially after the emergence of the COVID-19 pandemic as companies and governments increased focus on digitalisation. As a result, managements of IT companies are confident about growth in coming years amid healthy order books, experts feel.

“IT sector is a leader of the current bull run in the Indian equity market and the Nifty IT index is one of the best performing index in the world. The outlook of the IT sector is looking very strong as COVID-19 is acting as a key catalyst for the exponential growth of the Indian IT industry where managements are very confident about the coming years,” said Santosh Meena, Head of Research at Swastika Investmart.

“If we talk about the fund flows, then outflows from Chinese tech stocks due to new regulations in China may turn into inflows for Indian tech companies as there is more stability in terms of policies and that may lead to further bullish momentum in Indian IT stocks,” he said.

Expensive at current price?

Experts say valuations are expensive but justified, given its growth potential, and strong return ratios and business model.

“L&T Infotech is trading at a price-to-earnings of 47 which looks expensive but growth momentum is justifying expensive valuations where L&T infotech has leading revenue growth. Management is confident about future growth where they are eyeing a 14-15 percent profit margin. The company’s hiring policies are also showing confidence about future growth,” said Santosh Meena.

Sharekhan feels the company is expected to witness sustainable growth leadership in FY2022 on account of strong client relationships, recovery in impacted verticals, strong spending in top accounts in resilient verticals, prudent hiring and talent policies, and superior digital competency position.

“Further, management eyes net profit margin of 14-15 percent going ahead despite investments in capability building and bolstering of sales team, aided by strong revenue growth, higher offshoring, productivity enhancement, cost-optimisation measures, and hedging strategy,” said the brokerage in its report dated August 24.

L&T Infotech, the sixth largest company by market capitalisation, reported a 9 percent sequential and 19.3 percent year-on-year growth in Q1FY22 profit at Rs 496.8 crore. Revenue at Rs 3,462.5 crore grew by 5.9 percent QoQ and 17.4 percent YoY, in the quarter ended June 2021.

Its dollar revenue increased 5.1 percent sequentially (up 20.4 percent YoY) to $470.2 million, while constant currency revenue growth stood at 4.8 percent QoQ and 17.8 percent YoY.

“Q1FY22 also marks the five-year anniversary of LTI’s IPO. Over these past five years, we have delivered USD revenue CAGR of 13.5 percent and more than doubled our net profit,” said Sanjay Jalona, Chief Executive Officer & Managing Director, in company’s BSE filing on July 15.

What Should Investors Do?

Experts largely feel the stock can give double-digit returns in the short term and advised investors to hold the stock.

“Technically, it is continuing its bullish momentum following a breakout of bullish flag formation on a monthly chart. Although momentum indicators are showing overbought territory, it may test an immediate target of Rs 5,800,” said Santosh Meena.

He feels on the downside, 20-DMA of Rs 5,200 is the immediate support level while Rs 4,900-4,800 will be the next demand zone.

Investors are advised to stay invested in this counter as the stock can see 25-30 percent more upside from here while traders can continue with buy on dip strategy with a stop loss of Rs 4,800, he advised.

Jay Thakkar, Vice President and Head of Equity Research at Marwadi Shares and Finance said LTI has been in an uptrend post its breakout from the sideways consolidating range. “It has formed a rectangular pattern on the daily charts and post that it has been smoothly moving in an upward direction.”

He feels the weekly and monthly momentum indicators are well into buy mode whereas the daily momentum is still in the sell mode which indicates that positional/medium-term trend is positive for the stocks and in the short term it may see some profit booking.

“The target on the upside is Rs 5,850 levels whereas the support or reversal is pegged at Rs 5,320 levels, so the risk to reward is approximately 1:1 hence not much favourable for the bulls or for initiating fresh buy however those holding it from lower levels can continue to do so with a trailing stop loss of Rs 5,320 an target of Rs 5,850,” Thakkar said.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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