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Published on 2/08/2019 9:47:31 AM | Source: Prabhudas Lilladher Ltd

Accumulate L&T Technology Services Ltd For Target Rs.1,693 - Prabhudas Lilladher

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Healthy deal momentum but weakness in HiTech to dent growth

LTTS revenue performance was below our estimates by 2% as there was a client ramp down coupled with slowdown in semi-conductor vertical (to impact Q2FY20 as well) as also led to lower guidance (12-14% for FY20E). While pipeline remains healthy in Hi-tech vertical, momentum will pick up from H2FY20. LTTS continued its deal win momentum with 7 large wins in Q1FY20. Deal wins are broad-based across verticals (2 deals in Transportation in US and Singapore, 1 deal in Industrial, 1 deal in Hi-tech and 3 deals in Medical). However, weakness in semiconductor space is likely to dent growth prospects. EBITDA margin at 18.5% (excl. IND AS impact) was ahead of estimates (Ple: 17.2%; consensus: 17.8%).

We reduce our revenue estimates by 2.6% & 3.4% in FY20E/21E to factor in weakness of Communication, Hi-Tech (~23% of total revs) & lower guidance. Hence, our EPS gets revised downwards by ~2.5%/ ~3.1%. We believe the volatility in management commentary can weigh on the premium multiples. We believe conversion of deal pipeline especially in Hi-tech will be keenly watched. We expect USD revenue & EPS CAGR of 13% & 9% from FY19-FY21E respectively. We value at LTTS at 20X FY21E earnings to arrive at a change target price of Rs.1693(Earlier: Rs.1835). The stock currently trades at 20.6X/18.9X FY20/21E EPS of Rs. 77 & Rs.85. Maintain Accumulate.

* Revenue miss, Inline margins: LTTS’ 1Q revenue was below our estimates at USD 194mn, 1.3/15.2% QoQ/YoY CC. Growth (ex-Telecom & Hi-tech vertical) was at 6.7% QoQ. Telecom & Hi-tech vertical declined (USD 7mn QoQ) impacted by large Hi-tech account. Increased macro concerns in Telecom & Hi-tech vertical (22.3% of rev) led to lowering of FY20 growth guidance to 12 to 14% (14 to 16% earlier). Telecom & Hi-Tech vertical to remain soft in Q2FY20 also and management mentioned growth will happen in 2HFY20, we remain watchful on this recovery. Transportation (34.9% of rev) grew 7.5% QoQ despite challenges witnessed by peers in Auto (Tata Elxsi) and in Aerospace (Cyient). Process Industry has grown higher than company average growth for the past 5 quarters.

* Margins to remain stable: Q1FY20 EBIT margin at 17.1% was up ~60 bps QoQ driven by strong operational efficiencies, SG&A optimization and better revenue mix which more than offset the impact of visa (70 bps) and currency (-30 bps). Q2 will have impact of wage increases (160 bps) but levers exist: (i) operational efficiencies, (ii) better growth revenue mix. Decline in low margin telecom business, also helped in margins beat in this quarter.

* FY20 Guidance lowered: Increased macro concerns in Telecom & Hi-tech vertical (22.3% of rev) led to lowering of FY20 growth guidance to 12 to 14% (14 to 16% earlier). Telecom & Hi-Tech vertical to remain soft in Q2FY20 also and management mentioned growth will happen in 2HFY20, we remain watchful on this recovery. Management remains optimistic on growth prospects driven by momentum on large deals & healthy pipeline.

 

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