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L&T Technology Services - ER&D leadership shines through - HDFC Securities

Posted On: 2021-10-21 09:15:09 (Time Zone: IST)

Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities and Mr. Vinesh Vala, Institutional Research Analyst, HDFC Securities

We upgrade L&T Technology Services (LTTS) to ADD, based on robust performance in Q2 and improving growth outlook due to deal wins. The management has increased the growth guidance for FY22E to 19-20% (vs. 15- 17% earlier), citing a strong demand environment. We believe LTTS' growth will be driven by (1) robust deal wins - five wins of TCV >USD 10mn, including two of TCV >USD 25mn; (2) impressive client base and mining capability - 57 of the top-100 ER&D spenders are LTTS clients and the deal pipeline remains strong, especially in EACV (electric), med-tech, and digital ER&D (manufacturing); and (3) leadership in industrial products and plant engineering, supported by recovery in telecom and hi-tech verticals. The margin performance will be supported by offshoring, operating leverage, and improving segmental mix; however, the ongoing hiring of freshers (to counter attrition) and the expected increase in travel and operational expenses could impact margins. The target EBIT margin range is ~18%. We acknowledge LTTS' prowess/diversity in digital ER&D and have increased our EPS estimate by ~10% and multiple to 40x (vs 35x earlier). Our target price of INR 5,350 is based on 40x Dec-23E EPS.

Q2FY22 highlights: (1) LTTS' revenue stood at USD 217mn (vs. estimate of USD 214mn), +5.7/+22.1% QoQ/YoY (+6/+22.3% QoQ/YoY CC); (2) growth was largely led by process industry (+10.2% QoQ), followed by industrial products (+8.4% QoQ) and transportation (+6.2% QoQ); (3) nine large deals were won in Q2, of which five were >USD 10mn TCV and two of >USD 25mn TCV (in transportation & telecom vertical); (4) EBIT margin improved 116bps QoQ to 18.4% (higher than the estimated 16.6%), supported by operational efficiencies, which offset the negative impact of wage hikes given to mid to senior employees; (5) digital engineering contributed 55% to revenue (+7.6% QoQ).

Outlook: We have factored in USD revenue growth of +22.4/+19.7/+16.2% and EBIT margin at 18.1/18.3/18.4% for FY22/23/24E respectively. LTTS is currently trading at 45x FY23E with the FY21-24E EPS CAGR at 33%.

Shares of L&T Technology Services Limited was last trading in BSE at Rs. 5123.40 as compared to the previous close of Rs. 4854.85. The total number of shares traded during the day was 97772 in over 19477 trades.

The stock hit an intraday high of Rs. 5469.20 and intraday low of 4990.40. The net turnover during the day was Rs. 511903602.00.

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