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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).

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