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Guidance demands flawless execution in 2H

Revenue largely in line, but margins miss the mark

* L&T Technology (LTTS)’s 2QFY25 revenue was up 3.9% QoQ /6.5% YoY in USD terms vs. our estimate of ~4.1% QoQ growth. In CC terms, revenue was up 3.4% QoQ/6.3% YoY). Growth was led by the Sustainability vertical (up 6.5% QoQ), followed by the Mobility vertical with 4.8% QoQ growth. EBIT was up 1.1% QoQ but down 4.9% YoY at INR3.8b (est. INR4.2b). PAT stood at INR3.1b (est. INR3.5b), up 1.9% QoQ/1.3% YoY. For 1HFY25, revenue/EBIT/PAT grew 7.4%/-3.9%/1.1% compared to 1HFY24. In 2QFY25, the company signed two USD20m deals and four USD10m deals.

Our view: 2H to be better but could fall short of guidance

* All three of the company's verticals returned to positive growth after a seasonally weak first quarter, driven primarily by Sustainability (up 6.5% QoQ in USD terms) and Mobility (up 4.5% QoQ, following a 6.4% rise in 1Q).

* The company has retained its FY25 guidance; however, the ask rate to achieve the lower end of the guidance now requires a CQGR of ~4.5%, which may prove to be challenging.

* While order conversions, a seasonally strong 4Q exit, and the ramp-up of deals in Hi-tech and Sustainability offer support, we believe that meeting guidance remains contingent on everything falling into place over the next few quarters, leaving little room for errors. Our base case now assumes that LTTS could miss its revenue guidance by ~50bp.

* Guidance: LTTS maintained its FY25 guidance of 8-10% CC growth and the medium-term outlook of USD2b revenue, with EBIT margin of 17-18%.

* Margins: The company's investments in Sales, SG&A, and Labs have weighed on margins in 1H. Looking ahead, 2H may face additional challenges, such as furloughs and wage hikes (~80 bp impact in 3Q). We believe the company has sufficient levers to pull to improve margins in H2; however, we expect that deal ramp-ups and other headwinds could lead to a slight miss on the 16% EBIT margin target for FY26.

Needs flawless execution in 2H: In summary, while we expect LTTS to have a much stronger 2H, meeting the guidance is contingent on both external factors and internal execution falling into place. That being said, LTTS remains in pole position to benefit from client spending in digital engineering over the medium term due to its strong capabilities, multivertical presence, and recently re-aligned vertical.

Valuation and changes in estimates

* We expect USD revenue CAGR of 10.7% over FY24-FY27, with EBIT margins of 15.7%/16.8%/17.0% in FY25/26/27. We have reduced our FY25/FY26/FY27 EPS estimates by 2.3%/2.0%/2.4% due to lower margins and the increased likelihood of missing revenue and margin guidance.

* We believe, however, that the new GTM strategy will unfold new avenues for growth in the medium term, especially in hitherto weak areas such as mobility, which is growing fast across its peers. We reiterate our BUY rating on the stock with a revised TP of INR6,400 (INR6,600 earlier; premised on 40x Sep’26E EPS).

Revenues in line, margins miss estimates

* USD revenue grew 3.9% QoQ vs. our estimated growth of 4.0% QoQ. Revenue stood at USD307m, up 3.9% QoQ.

* Growth was led by Sustainability (up 6.5% QoQ), followed by Mobility and HiTech with 4.8% and 0.8% QoQ growth, respectively.

* EBIT margin stood at 15.1%, down 50bp QoQ/200bp YoY vs. our estimate of 16.5%. PAT was up 1.9% QoQ to INR3.2b but below our estimate of INR3.5b.

* The employee count grew 0.5% QoQ to 23,698, attrition was down 50bp to 14.3%.

* Deal signings: Two USD20m deals and four USD10m deals.

* Management has maintained the guidance of 8-10% CC revenue growth for FY25 and a medium-term outlook of USD2b revenue, with an EBIT margin of 17- 18%.

* YTD cash conversion was at 52% FCF/PAT.

* Management declared a dividend of INR17 per share.

Key highlights from the management commentary

* The company experienced sequential broad-based growth across verticals. The company expects to close USD50m, a couple of USD100m, and many USD25m deals in upcoming quarters. There can be a slight impact on deal closures due to the US elections.

* The company has launched a cybersecurity project with the Government of Maharashtra, which is expected to be executed in 3-6 months. It is a fixed-price project, with revenue to be realized upon milestone completion. The OEM maintenance phase will be executed over five years.

* The Sustainability vertical is showing a promising outlook with a turnaround in industrials. The demand for setting up CoEs and plant modernization is strong. The China +1 strategy is helping drive demand.

* Guidance of 8-10% organic CC growth for FY25 was maintained. The company expects tailwinds such as a robust pipeline, large deals, and milestone payments to be received from the Government of Maharashtra for the cybersecurity deal, which will aid in achieving its target guidance.

Valuation and view

* Digitization is boosting spending in ER&D, and LTTS is expected to 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 INR6,400 (INR6,600 earlier) implies 40x Sep’26E EPS. We reiterate our BUY rating on the stock.

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