Buy L&T Technology Services Ltd For Target Rs. 5,500 By Motilal Oswal Financial Services Ltd
Growth steady, but margin reset negative
Strong 4Q exit on the cards; margin expectations reset for FY26/FY27
* L&T Technology’s (LTTS) 3QFY25 revenue was up 1.7% QoQ/7.3% YoY in USD terms vs. our estimate of ~3.7% QoQ growth. In CC terms, revenue was up 3.1% QoQ/8.7% YoY. Growth was led by Hi-tech (up 9.8% QoQ), followed by Sustainability (up 3.1% QoQ). EBIT margin stood at 15.9%, up 80bp QoQ but down 130bp YoY (after adjusting one-time non-operational M&A expense, it was 16.2%). PAT stood at INR3.1b (est. INR3.5b), down 0.9% QoQ/5.8% YoY. For 9MFY25, revenue grew 8.1%, but EBIT/PAT declined 2.1%/1.3% compared to 9MFY24. We expect revenue/EBIT/PAT to grow by 13.6%/5.6%/9.2% in 4QFY25 YoY. We reiterate our BUY rating on the stock with a revised TP of INR5,500 (based on 31x FY27E EPS).
Our view: Growth worries quelled, margin reset slightly worrying
* Broad-based growth, excluding Mobility: 3Q growth was largely in line with our estimates, driven by strong performance in Hi-Tech and Sustainability, while Mobility declined 7.1% QoQ, in line with the industry-wide slowdown. That said, management commentary points to a recovery in mobility ahead.
* Low automotive exposure a silver lining: The company’s limited presence in automotive could work in its favor in FY26E, with demand expected to recover in aerospace, rail, trucks, and off-highway sectors—more than offsetting continued headwinds in the automotive sector.
* Intelliswift acquisition enhances diversification: The Intelliswift acquisition allows LTTS to diversify into software and platform engineering, opening new verticals such as BFSI, retail, and healthcare. Strong relationships with hyperscalers could also pay dividends as technology spending in Hi-tech and platforms recovers in CY26.
* Margin expectations reset a fall from grace: While 3Q margins held up despite wage hikes, LTTS has reset expectations in light of the Intelliswift acquisition. EBIT margins are now guided to be at ~15% in FY26, with only a modest recovery to mid-16% by FY28—a clear fall from grace for a company once proud of its “industry-leading” 17% margins.
* That said, LTTS remains a diversified ER&D play, and with the added platform engineering capabilities from Intelliswift, it could be in pole position to capture the medium-term growth recovery.
Valuation and changes in estimates
* We expect USD revenue CAGR of 13% over FY24-27, with EBIT margins of 15.4%/15.0%/15.5% in FY25/26/27. We have slightly lowered our FY25/FY26 EPS estimates by 1.3%/2.2% due to the recalibration of margin expectations, while maintaining our estimates for FY27.
* The recent correction in the stock price (down ~19% from peak) makes valuations relatively comfortable. We reiterate our BUY rating on the stock with a revised TP of INR5,500 (premised on 31x FY27E EPS).
Revenues miss our estimates (in line with consensus), margins in line
* USD revenue grew 3.1% QoQ CC, below our estimated growth of 4.0% QoQ CC (but in line with consensus). Revenue stood at USD312m.
* FY25 guidance is “near ~10% CC” (8-10% earlier). We estimate 2% contribution from Intelliswift in FY25. This implies 4.5% organic QoQ cc growth.
* Growth was led by Hi-Tech (up 9.8% QoQ) and Sustainability (up 3.1% QoQ), while Mobility declined 7.1% QoQ.
* EBIT margin stood at 15.9% (after adjusting one-time non-operational M&A expense, it was 16.2%), up 80bp QoQ but down 130bp YoY vs. our estimate of 15.9%. PAT was down 0.9% QoQ at INR3.2b but below our estimate of INR3.5b.
* The employee count declined 0.9% QoQ to 23,465. Attrition was up 10bp at 14.4%.
* Deal signings: One USD50m deal, two USD35m deals, two USD25m deals, and three USD10m deals.
* YTD cash conversion was at 101% FCF/PAT.
Key highlights from the management commentary
* The demand outlook is steadily improving. The company expects all verticals to grow in 4Q.
* The "go deeper scale" strategy implemented in 1HFY25 is yielding results, as reflected in deal bookings. No significant impact on large deal ramp-ups is expected in the coming quarter.
* The company has an aspirational organic EBIT margin target of 16% for FY25. Tailwinds include improved revenue quality, a better employee pyramid structure, and operational efficiencies.
* While automotive saw furloughs in 3Q, aero and rail segments were unaffected. Automotive will likely face stress for a couple of quarters, but other subsegments are expected to expand.
* Product engineering and plant modernization activities are ramping up.
* Communication growth is fueled by network performance management, network modernization, and AI-driven initiatives.
* The company has reiterated its guidance of 10% YoY CC growth, with organic contribution to be around 8%. LTTS is confident of achieving its guidance, supported by deal wins in 3Q and seasonality. The inorganic contribution from Intelliswift will further aid in achieving the upper end of the guidance.
Valuation and view
* LTTS remains a diversified ER&D play, and with the added platform engineering capabilities from Intelliswift, it could be in pole position to capture the mediumterm growth recovery. We expect USD revenue CAGR of 13% over FY24-27, with EBIT margins of 15.4%/15.0%/15.5% in FY25/26/27. We have slightly lowered our FY25/FY26 EPS estimates by 1.3%/2.2% due to the recalibration of margin expectations, while maintaining our estimates for FY27.
* LTTS should benefit due to its strong capabilities, multi-vertical presence, and solid wallet share. The recent correction in the stock price (down ~19% from peak) makes valuations relatively comfortable. We reiterate our BUY rating on the stock with a revised TP of INR5,500 (premised on 31x FY27E EPS).
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