Sell L and T Technology Services Ltd For Target Rs.2,000 - ICICI Securities
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Questionable multiples!
LTTS continued to lag behind most of its IT / ER&D peers – earlier on resilience, now on recovery. Reported revenue growth (3.8% QoQ, vs 4.7% of Cyient, CC) was behind our estimates. Adjusted 1for lower amortisation, EBIT margin expanded just 70 bps QoQ (vs ~150bps of Cyient) missing our estimates. Revenue growth guidance (13-15%, US$), despite very weak base (-6.8% YoY in FY21, CC), was a disappointment, implying a meagre 3% CAGR (CC) over FY20- 22. (1) Potential delivery impact due to covid second wave in India (~64% of revenue from T&M) and (2) history of downward revisions in guidance makes us sceptical of the potential future upgrades. Disruption in chip ecosystem can pose additional risk, in our view. EBIT margin outlook sounded more defensive (vs previous quarters).
LTTS is currently trading at 37x FY22E EPS, at a significant premium to TCS (29x), Infosys (26x) and even ER&D peers like Cyient (16x) despite its growth / margin trajectory being either inferior or similar. We currently build in 14.3%/16.5%/13.4% revenue growth (US$) in FY22 for TCS / Infosys / Cyient, respectively vs 11% for LTTS. Notably, consensus visibility on growth / profitability / return rations over the medium term is more constrained in case of ER&D (vs IT). In that context, the lofty multiples of LTTS should correct. Maintain SELL rating valuing the stock at 23x FY23E EPS.
* Miss on both revenue and margins.
Revenue growth (+3.8% QoQ, CC) was behind our estimates. Quality of growth was weak with just two verticals firing – Transportation (+6.5% QoQ, US$) and Plant Engineering (+9.9% QoQ, US$). Sequentially, revenue in other verticals (Telecom & Hi-Tech, Industrial Products) remained more or less stable. Adjusted for lower amortisation, EBIT margin expanded just 70bps QoQ. This was led by better utilisation (+140bps QoQ to 78.9%), higher offshore effort (+80bps QoQ to 57.9%) and stronger operational efficiencies. On LTM revenue basis, the company lost its only US$ 30mn+ client account.
* Disappointing outlook; Questionable multiples.
Revenue growth guidance (13%-15%, US$), despite very weak base (-6.8% YoY in FY21, CC), was a disappointment, implying a meagre 3% CAGR (CC) over FY20-22. We see further downside risks to this guidance due to – (1) potential delivery impact due to covid second wave in India (~64% of revenue from T&M) and (2) disruption in chip ecosystem.
LTTS is currently trading at 37x FY22E EPS, at a significant premium to TCS (29x), Infosys (26x) and Cyient (16x) despite its growth / margin trajectory being either inferior or similar. We currently build in 14.3%/16.5%/13.4% revenue growth (US$) in FY22 for TCS / Infosys / Cyient, respectively vs 11% for LTTS. Notably, consensus visibility on growth / profitability / return rations over the medium term is more constrained in case of ER&D companies like LTTS (vs IT firms like TCS). In that context, the lofty multiples of LTTS should correct. Maintain SELL rating valuing the stock at 23x FY23E EPS.
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