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Upward revisions likely on the guidance front

Improving demand outlook and long growth trajectory are key drivers

* LTTS reported 3.8% QoQ CC growth in 4QFY21, missing our estimate by 150bp. While segments like Plant Engineering (+9.9% QoQ, large deal ramp up) and Transportation (+6.6% QoQ) did well, Telecom and Hi-Tech and Medical Devices were flat QoQ. EBIT margin improved 140bp QoQ, benefiting from better utilization and offshore mix.

* The company continues to do well on the deal front, adding six large deals (over USD10m), with two deals with a TCV of over USD25m. The management expressed its confidence on the deal pipeline, which has a good mix of smaller and larger deals, helped by a return to normal decision making cycle in the US and Europe.

* LTTS provided an initial FY22 USD revenue growth guidance of 13-15%. The management attributing the modest guidance to their increased caution due to the recent COVID-19 cases in India. While we are disappointed by the guidance (our initial estimate was of mid-to-high teens), we see meaningful scope for an upward revision as we progress through the fiscal.

* With strong demand commentary across industries and key regions, and capability to deliver services during the lockdown, LTTS should not see meaningful disruption in the business. We bake in 17.5% revenue growth for FY22E, partially on account of a favorable base.

* We expect margin to remain rangebound from current levels in FY22 as the wage hike and investments should offset a gradual improvement in operating metrics. Given the low base of FY21, we factor in a 310bp 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 50% of revenue, it should also benefit from 18% growth in Digital ER&D spends over this period. We have built in 17%/29% revenue/EBIT CAGR over FY21-23E. We value the stock at 30x FY23E EPS. Maintain BUY.

Revenue miss but margin in line; FY22 initial guidance below our estimate

* In USD terms, revenue grew 1% YoY (v/s our estimate of 2.7%), operating profit grew 9.3% (v/s our expectation of 10.6%), and PAT fell 5% (v/s our expectation of being flat) in 4QFY21. The same declined 6.2%/15%/19% YoY in FY21.

* Revenue rose 3.9% QoQ (v/s our estimate of 5.6%) to USD197.5m in 4QFY21. In constant currency, the same was up 3.8% QoQ, but flat YoY.

* During 4QFY21, LTTS won six deals with a TCV of over USD10m, which includes two deals of over USD25m.

* Revenue from Digital and leading-edge technologies stood at 52% in 4QFY21.

* The management guided at USD revenue growth of 13-15% in FY22.

* EBIT margin improved 140bp QoQ to 16.6% (in line) in 4QFY21 despite an 80bp increase in SGA expenses.

* Increase in margin was aided by a 140bp improvement in utilization, which stood at 78.9%, and an 80bp improvement in offshore mix.

* PAT stood at INR1.9b, up 4.5% QoQ, but down 5% YoY.

* Transportation/Plant Engineering spearheaded the sequential growth, growing 6.5%/9.9% (due to scaling up of large O&M deals in 4QFY21). Growth in Telecom and Hi-tech and Medical Devices remained flat during 4QFY21.

* Total employee strength stood at 16,452, a net addition of 383 employees. Attrition rose 150bp sequentially.

* FCF rose 157% YoY to INR12.5b in FY21. The FCF/PAT ratio stood at 189%.

* Dividend payout in FY21 stood at 35%.

Key highlights from the management commentary

* LTTS won six deals in 4QFY21, of which two are over USD25m and the balance range between USD10m and USD15m. Going forward, the pipeline remains strong. However, closures are uncertain.

* Within Transportation, there is an increased traction in Auto, Trucks, and OffHighway. Electric Technologies and Autonomous Driving are key growth areas. Spends are also coming from traditional segments, and the company is pursuing multiple large deals.

* Quoting Zinnov, the management said the ER&D industry is set to touch USD1.8- 2t in the next three years, which is a key positive for the industry. It guided at revenue growth of 13-15% in FY22 and said the impact on the delivery side is a key monitorable.

* Impact of wage hikes is expected in 1QFY22. However, the management will try to offset it by improving operational metrics. It is confident of sustaining margin and stated that one can expect improvement in certain segmental margins.

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 (17% CAGR over FY21-23E).

* After a sharp 200bp dip in margin in FY21, due to the COVID-led impact, LTTS should be more than able to recover margin over the next two years on favorable operating leverage, leading to 29% earnings CAGR over FY21-23E.

* Our TP of INR3,130 per share implies 30x FY23E EPS, a premium to our target multiple for LTI on better industry and company growth. We anticipate improved industry spends compared to the previous five years. Maintain BUY.

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