Reduce L&T Technology Services Ltd For Target Rs.3,908 - ICICI Securities
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Unfavourable risk-reward, expensive valuations
LTTS reported a miss on revenue growth by 130bps at 3.1% QoQ USD (Isec:4.4%). In CC terms, revenues grew 3.6% QoQ. In terms of verticals, Transportation reported strong growth of 7.8% QoQ, followed by Plant Engineering (+3% QoQ). Telecom & Hi-tech grew 1.1% QoQ, while Industrial Products / Medical Devices remained largely flat sequentially. Management guided for organic growth of 13.5-15.5% YoY USD for FY23 which is way below our/consensus revenue growth estimate of ~19%. We believe the guidance is a bit conservative against the backdrop of the robust vertical and deal pipeline commentary. We forecast 14.5%/14% revenue growth for LTTS for FY23/24.
EBIT margin for the quarter stood at 18.6% (vs Isec: 18%), flat QoQ. We expect margins to remain range-bound in the near term (>18%) given supply side pressures and reinvestment back in the business for growth, and forecast margins of 18% for FY23/24. Headwinds from the return of travel and discretionary costs and wage inflation can be offset by a better margin profile in low-margin verticals, productivity gains and cost efficiencies.
In Q4, LTTS won a $100 million plus deal in the EACV space – being chosen as the strategic engineering partner for a new-age electric VTOL (Vertical Takeoff and Landing) aircraft program. Deal bookings continue to be strong with a total of six deals worth more than $10 million won in Q4, including a $100 million plus deal in EACV and another $25 million plus deal.
Our EPS estimates are reduced by 3.2%/6% for FY23/24 on account lower revenue growth guidance for FY23. Margin estimates remain intact at 18% for FY23/24. LTTS currently trades at 35x FY24E P/E for FY22-FY24E EPS CAGR of 16%, PEG of 2.1x.
While LTTS is well positioned to play the ERD theme and grow at premium rates, we do not find the risk-reward favourable. We value the stock at 32x (earlier 34x) FY24E EPS. Maintain REDUCE rating with a revised target price of Rs3,908 (prior: Rs4,413).
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