Buy L and T Technology Services Ltd For Target Rs.5,675 - Edelweiss Financial Services
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Healthy demand environment to sustain
L&T Tech Services (LTTS) posted Q2FY22 revenue growth of 5.7% QoQ (USD217.4mn) beating our/Street’s estimate of USD215mn/USD211.8mn. Operating margin rose 110bps QoQ to 18.4%, above our/Street’s estimate of 17.1%/15.6%. PAT grew 6.4% QoQ to INR2.3bn, topping our and Street’s estimates. It declared a special dividend of INR10/share to commemorate five years of listing.
Management has raised revenue growth guidance from 15–17% to 19–20% for FY22. We believe LTTS will continue to report industryleading revenue growth. Hence, we are raising the TP to INR5,675 (from INR5,004) led by strong EPS growth expectations while rolling over the valuation to Q4FY23E.
All segments firing
LTTS is benefitting from strong demand environment and market share gains, which is driving robust growth. Investments in the six strategic growth areas continue to progress well. All verticals grew QoQ. Performance was led by Industrial Products, which grew 8.6% QoQ, followed by Medical Devices/Transportation/Plant Engineering/Telecom and Hi-Tech growing 9.6%/6.2%/4.1%/1.4%; Attrition increased from 14.5% in Q1FY22 to 16.5% in Q2FY22. LTTS is taking various measures to contain attrition and it has added 1K+ employees to manage attrition and drive growth. Management highlighted there would be bump-up in employee addition in H2 due to hiring of freshers.
Robust outlook
LTTS again increased revenue guidance for FY22 to 19–20% from 15–17% earlier. EBIT margin improved by 110bps to 18.4%, driven by operational efficiency measures, including productivity improvement, pyramid balancing and favourable D&A. It will maintain a stable 18% margin by FY25. And they see a good pipeline of opportunitiesin all segments given demand outlook for the US and Europe continues to be strong. LTTS has won five deals with TCV of USD10mn+ each, which include two USD25mn+ deals.
Outlook and valuation: Strong demand; retain ‘BUY’
We believe the ER&D industry in India is witnessing a long-term structural up cycle, which will drive LTTS’s long-term revenue growth. Management highlighted that an overall ER&D spend of USD1.5tn will increase to USD2.6tn by FY26 while digital would grow by 19%. Retain ‘BUY/SO’ with a TP of INR5,675 (40x Q4FY23E).
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