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In-line Q3; vertical-specific strain stays

Furloughs led to soft growth, in line with our expectations 

L&T Technologies’ (LTTS IN) Q3 results saw revenue largely in line and a mild beat on operating margin. Revenue at USD 290.7mn was as estimated and ~1.4% below consensus estimate of USD 295mn. In CC terms, revenue grew 0.9% QoQ versus our estimate of 1%. EBIT margin at 17.2% was in line with the Street and 30bps ahead of our estimates. Overall softness in Q3 growth was on account of higher furloughs and seasonal weakness. However, expect Q4 to be the quarter to see bounce-back on account of SWC’s (subsidiary company) seasonality strength, minimal furloughs and higher working days. Deals were steady with six large deals in Q3 (seven in Q2), but highly concentrated in Transportation (three out of six), led by SDV growth.

Steep ask rate for Q4 as FY24 growth guidance maintained  

LTTS has maintained its FY24 revenue growth guidance at 17.5-18.5% in CC. This has led to a steep ask rate for Q4 at 4.2-8%. The management is optimistic led by demand in Transportation, Plant Engineering and Medical verticals but strain pertains in Hi-Tech and Industrial Products (barring Oil & Gas clients).       

Macro headwinds sustain uncertainty; maintain Sell, new TP INR 4,240

Structural challenges continue for LTTS (refer “Engineering R&D – Arrived and all agog…” dated 14 October 2023). Industrial Products, Medical and Telecom/Hi-Tech may see strain, offsetting robust growth from Transportation/Process Engineering. Necessary investments in technologies (SDV, AI, next-gen communication and cybersecurity) to harness future growth will keep the margin range-bound (17-18% till FY25E).

Q3 was largely as expected. We up FY25E/26E earnings estimates 1% each to factor in strong rebound in Q4 and better macro demand outlook in FY25. But we continue with ‘below-than-consensus’ estimates. Expect USD revenue/EBIT/EPS CAGRs of 14.3%/~12.7%/ ~12% in FY23-26E. We maintain SELL and raise our TP to INR 4,240 (from earlier 4,050), on 28x (five-year average) Dec-25E EPS of INR 151.