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Strong deal wins and commentary indicate good FY25

In-line 3Q performance

* L&T Technology (LTTS) posted revenue of USD291m in 3QFY24, up 0.9% QoQ CC and slightly below our estimate. Revenue performance was broad based, led by Medical Devices (+2.4% QoQ). Despite 3Q seasonality, dealsigning was strong, as LTTS signed six large deals with USD10m+ TCV. The management maintained its FY24 revenue growth guidance at 17.5-18.5%, which implies a strong exit to FY24 (+4.0-7.0% QoQ CC), aided by SWC seasonality.

* EBIT margin wasflat at 17.2% (up 10bp QoQ), missing our estimate of a 60bp QoQ improvement. Despite the net headcount reduction of ~600, the margin improvement was muted in 3Q as utilization was low due to furloughs and higher SG&A costs.

* While the 3Q delivery was modest and in line, management commentary on the demand environment was relatively more positive in the recent quarters as LTTS is seeing a good business environment across sectors. With deal activity and deal pipeline continuing to improve, the company is likely to gain incremental business from the scale-up in new accounts. Moreover, while 4Q will benefit from seasonal tailwinds in the recently acquired SWC business, the upper end of the guidance indicates an improving near-term outlook, a rampup in recent empanelment, and potential large deal wins.

* We factor in a gradual margin expansion over the next two years, with LTTS reaching its 18%+ EBIT margin target by 4QFY25. With good revenue growth over the next two years, we expect the company to post a CAGR of 16%/17% in USD revenue/INR PAT over FY23-26. ? We keep our FY24/FY25 EPS estimates broadly unchanged after the 3QFY24 results. We retain our BUY rating on LTTS with a TP of INR6,220 (based on 35x FY26E EPS), considering 1) a better outlook for the ER&D services industry compared to the broader IT services universe, and 2) the growing penetration of outsourced ER&D services.

In-line 3Q, revenue guidance maintained

* LTTS reported 3QFY24 USD revenues of USD291m, up 0.9% CC QoQ and marginally below our estimate (40bp). ? The growth was balanced across verticals, with 0.9% QoQ growth each for Trans/Telecom/Plant. Medical was up 1.9% QoQ.

* EBIT margin at 17.2% (up 10bp QoQ) was below our estimate of 17.7% on account of higher SG&A % rev (up 100bp QoQ).

* PAT came in at INR3.4b, up 6.6% QoQ and in line with our estimate. ? Net employee reductions stood at ~600 QoQ. Attrition further declined to 15.8% (down 90bp QoQ).

* Deal-signing activity remained robust, with LTTS signing six deals worth more than USD10m, including one USD40m+ deal and one USD20m+.

* For 9MFY24, revenue (inc. SWC) came in at USD858.8m (+7.2% YoY), operating margin stood at 17.1% (flat YoY), and net profit was INR9,627m (+10.4% YoY).

Key highlights from the management commentary

* In CY24, the spending outlook from customers should either improve slightly or remain unchanged. However, given its engineering and designing capabilities, LTTS is confident of sustaining growth from potential accounts as it has a major play on contractual work vs. project-based work.

* The deal velocity remains as strong as it was in 2Q, and even the pipeline remains healthy. The management expects revenue growth to rebound in 4Q and is confident of achieving its FY24 guidance

* The momentum continues within transportation segment, and the clients continue to engage in new technologies. LTTS is partnering with AWS, auto OEMs, and Tier-1 suppliers for SDV and embedded engineering, while also helping them with integration and software architecture.

? The headcount reduction in 3Q was done to drive productivity and bring efficiency; otherwise, the company has a strong recruitment program for fresh hiring. The company has already rolled out offers to 1,200 freshers and is actively evaluating further resources as it pursues large deals

Valuation and view

* Digitization is driving the accelerated 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 INR6,220 implies 35x FY26E EPS. We expect industry spending to improve vs. the preceding five years. We retain our BUY rating on the stock.

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