Infosys, HCL Tech, LTM, Persistent Systems: CLSA picks these 2 stocks; here's why

CLSA in its latest note has reiterated its high conviction 'Outperform' rating on Persistent Systems Ltd, while also picking LTM Ltd, saying SaaS is gaining market share in the AI world, over system integrators (SIs).

CLSA said the majority of SaaS (Software as a Service) companies have increased their guidance with more stable earnings growth year-to-date, while the majority of IT service companies have cut guidance.

"We note an improving margin trajectory and sharp increase in revenue per employee (RPE) for most SaaS companies, while RPE for SIs is increasing but gradually. Both product engineering and implementation work around these SaaS platforms for SIs is vulnerable to automation, where SIs need to show more aggression by passing productivity and gaining more volumes," CLSA said.

CLSA said Services-as-Software (SaS) opportunity for IT services is still very small and will take time to ramp up. Globant is the only SI globally that discloses this, with 2.5 per cent of its revenue coming from the SaS opportunity currently, and it expects this to constitute 5 per cent of its revenues by the end of the fiscal year.

"In the hi-tech vertical, many companies including LTM and Persistent have flagged significant deflation in the past due to automation in coding. Both companies have tried to offset that by an increase in deal volume reflected in recent strong growth in the vertical for LTM and a recent $650 million deal win announced by PSYS," CLSA said.

CLSA said a majority of Indian IT companies reported strong YoY order book growth as cost takeout and vendor consolidation deals remained a key focus of clients that are trying to save costs during these uncertain times. It said a lot of deals getting renegotiated by clients to build-in AI related productivity could also be a factor for healthy deal wins for most of the Indian IT companies.

It noted that HCL Tech, Persistent Systems, Infosys Ltd and Mphasis Ltd led IT firms in terms of revenue per employee. All of the mid-caps under CLSA's coverage performed well on the metric.

"While greater use of AI tools, both internally and externally, is leading to
improvement for the industry as a whole, mid-tier players seem to be better able to capture the opportunity by virtue of being smaller and more nimble than their larger peers," it said.

LTM share price target: Rs 5,534 | Upside: 21.5% 
For LTM, CLSA said upside catalysts include large deal wins similar to the recent deals with Paramount Global ($585 million), the Indian government ($330 million), a retail client ($200 million) and an agri-business client ($450 million), margin expansion, and a revival in discretionary spending, particularly in the BFSI and retail verticals. A revival in growth in top accounts across both the BFSI and hi-tech verticals.

"We value LTM at 25 times 5Q-8Q EPS. Our target multiple is at a 65 per cent premium to our target multiple for TCS of 15 times (based on 2.5 times PEG) on account of its superior revenue and earnings growth profile," CLSA said.

Persistent Systems share price target: Rs 5,643 Upside: 10.7% 
CLSA said about 50 per cent of Persistent's revenue is derived from product and platform engineering work, a $105 billion market that is growing in the mid-teens. It said consistent industry-leading revenue growth of 3-5 per cent QoQ in dollar terms; strong performance around the order book, which has a pretty high relationship with revenue growth, and deal wins in the areas of platform/product engineering may ensure the company is not getting into easy run-of-the-mill managed services programmes.