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Deal wins to drive growth; keeps near-term caution In-line performance; SWC drives gradual recovery to Telecom

* L&T Technology (LTTS) posted in-line revenue of USD288m in 2QFY24, up 3.2% QoQ CC (incl. SWC). Growth was driven by Transportation and Plant Engineering verticals, with 4.4% and 3.8% QoQ growth, respectively. Despite in-line revenue, LTTS management has cut its FY24 revenue growth guidance to 17.5-18.5% vs. 20% YoY earlier. The guidance revision was due to an elongated United Workers Strike (UWS) in the US, which is leading to a pause in multiple projects and causing deferrals in ramping up new projects.

* EBIT margin wasflat (down 10bp QoQ), beating our estimate of a 90bp drop as it completely absorbed the Q2 wage hike impact. The margin improvement was attributed to a better business mix. Transpiration/Plant Engineering reported margin improvement of 120bp/110bp QoQ. The management has maintained its FY24 margin guidance (17%+) despite a cut in itsrevenue growth guidance.

 *Although the management has maintained caution in the near term, the overall deal funnel is higher than last year and it continues to chase multiple large deals (7 large deals signed in 2Q). However, the slower deal velocity and increasing deal tenure (3.5 vs. 2.5 year earlier) create a near-term revenue leakage. The integration of SWC is driving an incremental opportunity to chase large deals (USD10m+) with comprehensive offerings in the Telecom Infra and Semicon areas while keeping proximity to Telecom OEMs and tier-1 suppliers. Clients are maintaining caution with small investments in new projects and expect gradual ramp-ups as the macro trend recovers.

* Considering in-line revenue growth and a margin beat in 2Q, our EPS estimates broadly remain unchanged. We expect USD revenue CAGR of 16% (FY23-FY25E) with EBIT margins of 17%/17.7% in FY24E/FY25E.

* We continue to see LTTS as attractive due to a better outlook for the ER&D services industry compared to the broader IT services universe and the growing penetration of outsourced ER&D services. We lower our FY24 EPS estimate by 1.3% to factor in revised revenue guidance, but we keep our FY25 EPS estimate intact. We retain our BUY rating on the stock with a TP of INR5,210 (premised on 35x FY25E EPS).

in-line revenue, margin beat on lower SG&A

* CC revenue growth stood at 3.2% QoQ, in line with our estimate. Revenue at USD288m was up 2.9% QoQ.

* Growth was led by Transportation (+4.4%) and Plant Engineering (+3.8%), while Industrial/Telecom reported muted growth of 1.1%/0.9% QoQ.

* EBIT margin at 17.1% (down 10bp QoQ) was 80bp ahead of our estimate, aided by lower SG&A expenses (down 230bp QoQ).

* PAT was up 1.4% QoQ at INR3.2bn (in line), led by lower other income.

* It added ~500 employees QoQ. Attrition further declined to 16.7%.

* YTD Cash conversion was strong at 69% FCF/PAT.

* The board has declared a dividend of INR17 per share.  

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