01-01-1970 12:00 AM | Source: Motilal Oswal Financial Services Ltd
Buy L&T Technology Services Ltd For Target Rs. 4,230 - Motilal Oswal
News By Tags | #872 #4185 #4315 #1302 #409

Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel

https://t.me/InvestmentGuruIndiacom

Download Telegram App before Joining the Channel

Growth momentum continues; reiterate BUY

* L&T Technology (LTTS) posted a 4.5% QoQ growth in constant currency (CC) in 2QFY23, 20bp below our estimate. This was led by strong growth in Transportation (+7.4% QoQ) and Plant Engineering (+4.6% QoQ), while Telecom & Hi-Tech (-1.3%) was subdued. EBIT margin contracted slightly by 10bp QoQ despite the full-quarter impact of wage hikes, beating our estimates by 70bp.

* The deal wins were remained healthy after record bookings in 1QFY23 and the pipeline remained strong and was up v/s the previous quarter. LTTS narrowed FY23E CC revenue growth guidance upwards to 15.5-16.5% v/s 14.5-16.5% earlier, which is positive given the challenging macro environment. While the management highlighted some pain in Hi-Tech and Medical devices (due to inflation), longer term outlook remained positive. Though 3QFY23 is expected to remain soft due to furloughs, we expect growth to rebound in 4Q.

* Despite factoring in demand moderation in 2HFY23, we see the guidance as achievable with strong 1H. This should help LTTS deliver growth near the upper-end of its guidance in FY23E. Though management is highlighting pick up in telecom, media and media devices, large deal wins and inorganic initiatives to help achieve its FY25 aspiration of USD1.5b revenue run-rate, we are building in USD revenue CAGR of 12.9% over FY22-24E, below the run rate required to meet its FY25E revenue aspiration (implying FY22-25E CAGR of 19%). This is because we are not factoring in any inorganic contribution in our estimates.

* LTTS should see a flattish margin performance in FY23E, with good topline delivery offsetting supply-side pressures. EBIT margin should improve in FY24 to 18.6%, in line with the management guidance of 18%+ profitability. Favorable pyramid, cost optimization and better revenue mix should more than offset the continued pressure on employee cost and travel resumption.

* We continue to view LTTS as a beneficiary of the growing penetration of ER&D Services and the best Tier II IT Services play within our coverage universe. We have not revised our estimates materially. We retain our BUY rating and value LTTS at INR4,230 (based on 32x FY24E EPS).

Good operational performance

* In CC terms, LTTS’ 1QFY23 revenue grew 18.1% YoY, INR EBIT rose 22% YoY, and INR PAT grew 23% YoY.

* Revenue rose 4.5% QoQ CC to USD247.1m in 2QFY23.

* Transportation (+7.4% QoQ) and Plant Engineering (+4.6% QoQ) grew strongly, while Telecom & Hi-Tech (-1.3% QoQ) remained weak.

* EBIT margin at 18.2% (down 10bp QoQ), beat our estimates by 70bp despite the full impact of wage hikes in 2QFY23. Attrition rose 90bp QoQ to 24.1%.

* The company announced dividend of INR15/share.

Key highlights from the management commentary

* The deal pipeline has grown in double digits and is stronger than 1QFY23.

* Europe is expected to do well aided by: 1) its initiative to reduce cost challenge, 2) its initiative to lower energy challenge, and 3) its strategy to stay ahead of the curve in technology.

* Demand to remain strong as: 1) countries/states are looking to localize the supply chain (due to global macro volatility), 2) cost optimization measures are coming into prominence, and 3) energy transition to alternate sources is taking place gradually (which is a five-to-seven year opportunity).

* Outlook: Though macro environment remains challenging, LTTS has not seen any cancellations yet. The customers are cautious on the projects where ROIs look stretched. Though 3QFY23 will be soft on furloughs, 4Q is expected to see good rebound.

* Medium-term margin guidance continues to be 18%+.

Valuation and view

* Digitization is driving the accelerated spends in ER&D and LTTS should benefit due to: 1) its strong capabilities, 2) multi-vertical presence, and 3) solid wallet share. We expect the company to deliver strong revenue growth over the coming years. We retain LTTS as our top pick in the Tier II IT Services space.

* The management expects strong growth during the medium term, which implies a growth momentum of ~20% over FY21-25E.

* Our TP of INR4,230 implies 32x FY24E EPS. We expect industry spends to improve than the preceding five years. We retain our BUY rating on the stock.

 

To Read Complete Report & Disclaimer Click Here

 

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

 

Above views are of the author and not of the website kindly read disclaimer