IGI Logo

Good execution, pain ahead?

LTTS reported beat on revenue with growth of 3.2% QoQ USD (I-Sec: 2.1%), 4.7% QoQ CC (I-Sec: 3%). Revenue growth was led by Plant Engineering (7.5% QoQ USD), Industrial Products (4.4% QoQ USD), Transportation (2.9% QoQ USD) and Medical devices (2.6% QoQ USD). Telecom & Hi-Tech was soft at 0.1% QoQ USD.

LTTS reported strong deal wins – one $50mn deal, four $25 mn and two $10 mn deals. This is in-line with record high TCV they had reported in Q4FY22. They mentioned that the R&D spends continue to be strong in Plant engineering, Industrial and Transportation verticals, but they see tightening of budgets by some clients in medical and pauses in sub-verticals of HiTech & telecom (platform companies, companies with new products/business lines where there are no paying end consumers) because of inflationary pressures. Management is confident of strong demand in near term but is cautiously optimistic about medium term.

Company has retained 13.5-15.5% YoY USD (14.5-16.5% YoY CC) revenue growth guidance. Unlike in FY22, we do not expect management to upgrade guidance over course of the year. In our view, ER&D spends are project based and done for future growth agendas and therefore more discretionary in nature compared to IT services. These spends are likely to get delayed in case of slowdown/ recession. We model 13%/11% revenue growth for FY23/24.

EBIT margins came at 18.3%, -30 bps QoQ slightly above our estimates. (ISEC: 18.6%). Employee costs increased by 300bps QoQ led by lower utilization due to aggressive fresher hiring done in FY22 and upfront talent investments required for couple of large deals won in previous quarter. These were offset by lower SG&A expenses. Q2FY23 margin will be impacted by headwinds from wage hike which are expected to be partially offset by growth and operational efficiency. Offshore revenue increased to 56.2%, +160 bps QoQ and has scope to further improve by 200bps to ~57-58% over medium term. Net-headcount addition was moderate this quarter at 572 employees, +2.7% QoQ (vs average net-addition of 1.1K per quarter in FY22) due to only lateral hiring (freshers are not generally on-boarded in Q1). Company has target to add ~3K freshers in FY23 (similar to that in FY22).

Our EPS estimates remains intact for FY23/FY24. LTTS trades at valuation of 30x/27x for FY23E/24E. We continue value LTTS at 24x on FY24E EPS of Rs 116 to arrive at a TP of Rs 2,742 (prior: Rs 2,758). While LTTS is well poised to play the ER&D theme and grow at premium rates we do not find risk reward favourable. Maintain REDUCE.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

SEBI Registration Number INZ000183631

Above views are of the author and not of the website kindly read disclaimer