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Demand stays robust

L&T Tech Services (LTTS) posted Q3FY22 revenue growth of 3.6% QoQ to USD225.1mn, lower than our/Street’s estimate of USD227mn/USD229.5mn. Operating margin rose 20bp QoQ to 18.6%, in line with our estimate but above Street’s estimate of 18.3%. PAT grew 8.2% QoQ to INR2.5bn, in line with our and Street’s estimates. LTTS declared an interim dividend of INR10/share.

LTTS is witnessing improvement in its pipeline. That it hired 2,000-plus during Q3FY22, more than last four quarters’ combined addition, corroborates the strong momentum. Hence, we are raising the TP to INR5,868 (from INR5,675) on the back of strong EPS growth expectations while rolling over the valuation to Q1FY24E.

Strong demand across segments

Deal conversions and pipeline in six growth areas continue to see healthy improvement. Revenue growth was led by Transportation, which grew 5.1% QoQ, followed by Telecom and Hi-Tech/Plant Engineering/Medical Devices/Industrial products growing 4.7%/4.4%/1.5%/0.7%. By geography, LTTS reported steady growth of 2.8%/2.3%/9.3%/3% QoQ for North America/Europe/India/Rest of World. LTTS hired 2,135 employee in Q3FY22, which is its highest-ever addition in a single quarter. Strong hiring impacted utilisation, decreasing to 75.9% from 78.1% in Q2FY22. The company plans to continue to hire freshers at the same pace in FY23 as it is looking to broaden its employee pyramid.

Guidance maintained

LTTS maintained revenue guidance of 19–20% for FY22. EBIT margin improved by 20bp to 18.6%, driven by operational efficiency measures, pyramid restructuring and currency movement, which were offset by lower utilisation and higher travel costs. Management aims to maintain 18%+ margin and would manage headwinds through cost levers. LTTS has won deals worth USD45mn, three deals with TCV of USD10mn+. Additionally, it won two empanelments, which have potential to touch USD50mn each in coming years. Revenue from digital & leading-edge technologies rose to 56%

Outlook and valuation: Healthy demand environment; retain ‘BUY’

We believe the ER&D industry in India is witnessing a long-term structural upcycle, which will drive LTTS’s long-term revenue growth. We are increasing the TP to INR5,868 (from INR5,675) on robust multiyear demand outlook along with a valuation rollover to Q1FY24E (at 40x). Maintain ‘BUY/SO’.

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