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Seasonal headwinds play spoilsport; guidance retained

Revenues and margins miss estimates on seasonal decline in SWC

* L&T Technology’s (LTTS) 1QFY25 revenue was down 3.1% QoQ /up 6.1% YoY in CC vs. our estimate of a 0.5% QoQ drop. In USD terms, revenue came in at USD295m (down 3.3% QoQ/up 5.4% YoY). The revenue decline was due to its restated Hi-tech vertical (down 11.6% QoQ). EBITDA was down 9.3% QoQ but flat YoY at INR4.5b (est. INR4.8b). PAT came in at INR3.1b (est. INR3.3b), down 8.0% QoQ/up 0.8% YoY.

* While 1Q is a seasonally weak quarter for LTTS, the magnitude of decline in its hi-tech vertical (which now also includes its SWC business) was surprising. Mobility had a strong quarter, up 6.4% QoQ in USD terms. That said, the company has retained its guidance, which implies a strong CQGR range of 4.5%-5.5% for the next three quarters. While clients are reconsidering certain EV programs, LTTS’s diversified offerings in the transportation vertical could continue to drive growth for the company over the medium term.

* During the quarter, LTTS won two USD30m deals, two USD15m deals and three deals with TCV of USD10m.

* We expect USD revenue CAGR of 10.2% over FY24-FY26E with EBIT margins of 15.9%/17.3% in FY25E/FY26E.

* We continue to see LTTS as attractive due to a faster growth 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 FY25 EPS estimate by 4% on account of lower margins, but keep our FY26 EPS estimate intact. Digitization is boosting spending in ER&D, and LTTS should benefit due to its strong capabilities, multi-vertical presence, and solid wallet share. We expect the company to deliver strong revenue growth over the coming years. We retain our BUY rating on the stock with a TP of INR5,950 (premised on 38x FY26E EPS).

Miss on both revenue growth and margins

* CC revenue declined 3.1% QoQ vs. our estimated decline of 0.5 QoQ. Revenue stood at USD295.2m, down 3.3% QoQ.

* Growth was led by Mobility (up 6.4% QoQ), while Sustainability and Hi-Tech reported a decline of 3.0% and 11.6% QoQ, respectively.

* EBIT margin at 15.6% (down 130bp QoQ) was 80bp below our estimate on account of higher SG&A expenses (up 170bp QoQ).

* PAT declined 8% QoQ to INR3.1b, below our estimate of INR3.3b. ? The employee count declined 1.0% QoQ, attrition remained stable at 14.8%.

* Deal signing remained robust, with two USD30m deals, two USD15m deals and three deals of USD10m each.

* YTD cash conversion was strong at 96% FCF/PAT.

Key highlights from the management commentary

* Operational performance was affected by revenue seasonality and investments the company is making in each of the three segments to accelerate growth.

* LTTS expects that the revenue and margin trends will go upward from hereon. SWC seasonality led to lower growth in 1Q.

* Guidance of 8-10% organic CC growth for FY25 was maintained. It remains committed to achieving the USD1.5b revenue run rate. LTTS expects 2H to be better than 1H and anticipates growth in the remaining three quarters of FY25.

* The company is seeking inorganic growth opportunities in the automotive sector in Europe (like SDVs), as well as in the ISP (Hyperscalers in North America) and medical sectors in North America. The focus is on acquiring new capabilities and ensuring reasonable valuations in potential acquisitions; it is targeting companies with revenues in the range of USD50-150m.

* The onsite-offshore mix is shifting further toward offshore, with a target to increase the offshore proportion to 60% from its current level. LTTS maintained its EBIT margin target of 16% for FY25.

Valuation and view

* Digitization is boosting spending in ER&D, and LTTS should benefit due to its strong capabilities, multi-vertical presence, and solid wallet share. We expect the company to deliver strong revenue growth over the coming years.

* Our TP of INR5,950 implies 38x FY25E EPS. We expect industry spending to improve vs. the preceding five years. We retain our BUY rating on the stock

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