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Weak Q1; FY25 growth guidance implies tough ask rate

LTTS reported a weak operating performance in Q1. Revenue fell 3.2% QoQ to US$295.2mn (-3.1% CC), impacted by SWC seasonality, and missing our estimate. EBITM declined by 130bps QoQ to 15.6%, also coming in lower than our estimate. The company won 2 US$30mn and US$15mn deals each, 3 US$10mn deals, and one empanelment. The mgmt expects both, the revenue and margin trajectories, to gradually improve over coming 3 quarters, with H2 being better than H1. Despite the weaker performance, the management retained its FY25 EBITM guidance of 16% and revenue growth guidance of 8- 10% CC, implying ~4-5% CQGR over Q2-Q4FY25 which is a tough ask in our view. This should be aided by a strong deal backlog, SWC seasonality, and healthy pipeline, which is up 2x YoY. LTTS continues to aspire for US$1.5bn revenue run-rate by FY25 which, though, hinges on M&A. We trim FY25-27E EPS to under 1%, factoring in the Q1 performance and guidance. We retain REDUCE on LTTS (rich valuations) and TP of Rs4,750/sh at 30x Jun-26E EPS.

Results summary

LTTS’s revenue declined 3.2% QoQ (down 3.1% cc) to US$295.2mn, coming below our estimate of US$302mn. Sequential revenue growth was hit by decline in Sustainability (-3% QoQ), and Hi-tech (-11.6%) which was partially offset by growth in Mobility (+6.4%). Among geographies, revenue from North America, India, and RoW fell 4.6%, 10.2%, and 0.6% QoQ, respectively, while growing for Europe by 10.6%. Revenue for the top-5 clients declined 5.8% QoQ, while that for the top 6-10 fell 0.6% QoQ. EBITM fell by 130bps QoQ to 15.6%, lower than our estimate of 15.9%. Headcount declined 1.0% QoQ to 23,577. Attrition was stable at 14.8%. What we liked: Strong growth in Mobility (6.4% QoQ) and Europe (10.6% QoQ), healthy deal intake, and strong pipeline. What we did not like: Miss on operating performance, weak cash conversion (OCF/EBITDA at -14%), weakness in top-5 clients (-5.8% QoQ).

Earnings call KTAs

i) The company remains focused on enhancing its solutions for AI in the software-defined and product development lifecycle, test and process automation. It is starting to win AIled deals on the back of Gen AI solutions across asset health, software development, and digital assistants. ii) Mobility grew 6.4% QoQ, driven by Auto, followed by Commercial Vehicles in Europe. LTTS won three large deals in Mobility – one US$30mn, two US$15mn across OEMs and Tier 1 players. Though EV opportunities endure, spends are shifting to SDVs. iii) In CVs, EVs continue to be a strong growth area, while witnessing large deal opportunities in Aero, in avionic equipment development. Given the pipeline, the deals won, and the order backlog, LTTS expects the growth momentum to continue. iv) Within Sustainability, plant engineering is growing well, led by new CapEx projects, spend on plant modernization, offsetting the decline in the industrial sub-segment. v) In the Industrial sub-segment, supply-chain inventory is at an all-time high, leading to a difference in spending and budgets. Further, delays in deal decision-making is leading to large deals getting pushed back. It won a US$30mn deal in digital manufacturing with a North American OEM; this will ramp up in Q2. It believes that the worst is over for the sub-segment, and expects Sustainability to retrace the growth path from Q2. vi) Within Hi-tech, LTTS witnessed good growth in the semi-conductor segment and is seeing strong demand for AI chip design. In the Medical sub-segment, the company has seen customers spend on sustenance engineering, value analysis and value engineering, and digital manufacturing solutions for operation excellence.

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