Recovery priced in
We maintain REDUCE on L&T Tech (LTTS), as valuations more than adequately factor in the recovery curve. 2Q print was slightly ahead of estimates, and the growth rebound (despite 3Q furlough uncertainty) is supported by a pick-up in deal activity (deal pipeline and wins higher by ~16% over the previous quarter). While LTTS has a strong pedigree in ER&D with a well-diversified service portfolio, factors such as business cyclicality, higher discretionary nature, and slower pace of large deal conversion result in sequential volatility. The revised USD revenue guidance of -7% to -8% (-9% to -10% organic earlier) in FY21 implies +3.4 to 4.9% QoQ over 3Q-4Q and includes consolidation of Orchestra Tech (~2% QoQ in 3Q). Improvement in cash generation with a reduction in DSO (including unbilled) is positive. Our target price of Rs 1,585, is based on 18x Sep-22E EPS (DCF-implied at 18x and historical average at 19x).
* 2QFY21 highlights: Revenue stood at USD 178mn, +4.1 QoQ (+2.9% CC) and -10.0% YoY (-10.6% CC). Growth was broad-based ex-telecom & hi-tech vertical, which was impacted by delayed deal closure. Eight large deal wins in 2Q, including 3 deals >USD 15mn TCV and 3 deals >USD 10mn TCV. EBIT margin recovered to 13.7%, +161/-332bps QoQ/YoY and RPAT was supplemented by Rs 0.40bn SEIS. Vendor consolidation and acceleration in deals moving from pilot stage to production support recovery ahead.
* Outlook: We have factored in USD revenue growth of -7.4/+14.1/+12.4% and EBIT margin at 14.6%, 16.5%, 16.5% over FY21/22/23E respectively. 3Q4QFY21 revenue growth estimated at 4.5% QoQ and 4.0% QoQ respectively and FY22/23 revenue growth imply 2.9% CQGR each, translating into FY20- 23E EPS CAGR at 9% (26% CAGR over FY21-23E). LTTS currently trades at 21.6/18.9x FY22/23E.
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