Slow recovery ahead
We maintain REDUCE on L&T Technology (LTTS) on broad-based portfolio dent and protracted operational recovery. 1Q revenue decline was steep at - 12.5% QoQ (mirroring Cyient in decline), and the dent to margin was steeper, impacted by lower utilisation and volume cuts. Recovery will be slower (vs. pre-COVID moderating growth rate) and will be supported by (1) continued traction in telecom-hi-tech vertical (inorganic in 3Q) and medical devices vertical; and (2) gradual recovery in the transportation vertical (airline subsector hit in 2Q) and plant engineering vertical (O&G drag). Higher portfolio susceptibility to the global economic crisis and low-annuity/highdiscretionary elements are likely to result in a slower recovery of LTTS, even as medium-term opportunities open up. Our target price of Rs 1,240, 16x Jun22E EPS, follows ~3% EPS estimate cut for FY22E.
* 1QFY21 highlights: (1) Revenue declined 12.5% QoQ (in-line) and EBIT margin came at 12.1%, -309bps QoQ (lowest since 4QFY18). (2) Transportation and plant engineering verticals led the decline at >20% QoQ, offset by growth in telecom & hi-tech and medical devices verticals. (3) Revenue guidance of 9-10% decline organic in FY21E implies +2.3-3% CQGR. (4) Nine multi-million dollar wins in 1Q, including a USD 30mn+ win (automotive OEM) and a USD 15mn+ win.
* Outlook: We have factored in a revenue decline of 9.6% and margin decline of ~300bps in FY21 leading to 22% EPS decline, factoring in the recovery to 4QFY20 margin level in four quarters based on employee ‘right-sizing’, increase in offshore, and improvement in utilisation.
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