Published on 22/07/2021 9:59:22 AM | Source: Motilal Oswal Financial Services

Buy L&T Technology Ltd For Target Rs. 3,380 - Motilal Oswal

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Remain positive on improving demand outlook

Upward revisions to its guidance to continue

* LTTS reported a 4.3% QoQ CC growth in 1QFY22, above our estimate of 2.8%. Industrial Products/Transportation (+7.8%/+4.3% QoQ) spearheaded this growth. EBIT margin improved by 70bp QoQ, despite a wage hike during 1QFY22, aided by efficiency improvement, better utilization, and ongoing rightsizing of the workforce.

* The company continues to do well on the deal front, adding six large deals (over USD10m), with two having a TCV of over USD25m. The management remains extremely positive on the deal pipeline, which has seen a rise over the last two quarters, as client spends recover across both US and Europe.

* LTTS increased its FY22 USD revenue growth guidance to 15-17% (a 200bp increase) as it sees a significant reduction in COVID-related supply uncertainty. While we were expecting the guidance to increase, its strong 1QFY22 performance and commentary indicates that growth can significantly exceed the upper end of its revised guidance.

* With a strong demand commentary across industries and key regions, and capability to deliver services during the lockdown, LTTS should not see a meaningful disruption in the business. We bake in 18.6% revenue growth for FY22E, partially on account of a favorable base.

* We expect margin to remain rangebound from current levels in FY22 as the partial wage hike (senior employees) and investments should offset a gradual boost in operating metrics and an improvement in Telecom and HiTech margin. Given the low base of FY21, we factor in a 280bp EBIT margin improvement over FY21-23E.

* We see LTTS as a key beneficiary of growing tech adoption in ER&D, which should grow by ~2x that of IT Services over FY18-23E. Moreover, with Digital at 53% of revenue, it should also benefit from 18% growth in Digital ER&D spends over this period. We have built in 18%/33% revenue/EBIT CAGR over FY21-23E. We value the stock at 31x FY23E EPS and maintain our BUY rating.


Strong 1Q performance, FY22 guidance up by 200bp

* Revenue (USD)/operating profit/PAT grew by 20%/67.4%/84% YoY (est. 19%/52%/71%) in 1QFY22.

* Revenue rose 4.2% QoQ (est. 2.8%) to USD205.7m in 1QFY22. In constant currency, revenue grew 4.3% QoQ, but was flat YoY

* LTTS won six deals with a TCV of over USD10m. This includes two over USD25m deals in 1QFY22.

* Revenue from Digital and leading-edge technologies stood at 54% in 1QFY22.

* Growth was driven by the top 10 clients, which grew 4.7% QoQ.

* Industrial Products/Transportation spearheaded the sequential growth, up 7.8%/4.3%. The same in Medical Devices declined by 1%.

* The management has revised its USD revenue growth guidance to 15-17% (from 13-15%) in FY22.

* EBIT margin improved by 70bp QoQ to 17.3% (140bp above our estimate) in 1QFY22.

* Margin improvement, despite a wage hike in 1QFY22, was due to a marginal increase in both utilization (+30bp QoQ) and offshore (+20bp QoQ).

* PAT rose 11% QoQ to INR2.2b, 8% ahead of our estimate, on strong operational performance.

* Total employee strength stood at 16,972, a net addition of 520 employees. Attrition spiked by 230bp sequentially to 14.5%.

* FCF stood at INR 687m in 1QFY22, implying an FCF/PAT ratio of 32%.


Key highlights from the management commentary

* LTTS has returned to double-digit YoY growth and crossed the USD800m runrate. It won 11 deals, of which six/two were over USD10m/USD25m.

* Going forward, the management has identified six strategic investment areas and expects to make these into a sustainable growth engine.

* On the back of strong performance in the US/Europe and a recovery in India/Japan, the management expects growth to be broad-based and has raised its FY22 revenue guidance to 15-17% YoY.

* It said margin in 2QFY22 would be impacted on account of a residual wage hike impact. However, efforts are being made to absorb the same through employee pyramid rationalization and improved productivity.

* Rising attrition may put pressure on margin though. The management said it is taking various measures to control the same. It is making efforts to sustain margin at current levels.


Valuation and view – industry-leading growth to defend rich multiples

* While LTTS has delivered largely flat growth over FY19-21 (1% revenue CAGR), due to COVID-19 and ramp down at key clients (partly due to external issues), we expect a strong growth rebound (18% CAGR over FY21-23E).

* After a sharp (200bp) dip in margin in FY21, due to the COVID-led impact, it should more than be able to recoup margin over the next two years on a favorable operating leverage, leading to 32% earnings CAGR over FY21-23E.

* Our TP of INR3,380 per share implies a FY23E EPS of 31x, a premium to our target multiple for LTI on better industry and company growth. We anticipate improved industry spends compared to the preceding five years. We maintain our BUY rating.


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