Maintain REDUCE on L&T Technology Services - Trajectory improving, but priced in - HDFC Securities

Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities

We maintain REDUCE on L&T Technology Services (LTTS) as valuations more than adequately factor in the recovery curve despite a strong (in-line) 3Q and accelerating growth/margin profile in the near term. We acknowledge LTTS' prowess in digital ER&D across verticals and addressability, yet the business cyclicality feeds into the volatile profile over the medium term. Deal momentum has evidently picked up in ER&D (USD 100mn-5yr Oil & Gas deal and seven deals >USD 10mn a validation). Margin recovery is supported by increasing utilisation/offshore (now a familiar trend), better mix and operating leverage, which should support the strong earnings momentum for FY22. The company is targeting 17%+ EBIT margins and raised its FY21 revenue growth guidance to -6.5% (-7 to -8% earlier). Our target price is Rs 2,175, at 22x Dec-22E EPS (20x earlier).

3QFY21 highlights: (1) Revenue stood at USD 190mn, +6.8 QoQ (USD 189mn est.) and -4.6% YoY (-5.2% CC). (2) Growth was broad-based across verticals, with a recovery in Telecom & Hi-Tech vertical (+14.3% QoQ in USD terms) helped by Orchestra acquisition (~2/3 of the increase). (3) Seven large deal wins in 3Q, including one deal >USD 100mn TCV, two deals >USD 15mn TCV and seven deals >USD 10mn TCV. (4) EBIT margin improved 151bps QoQ (in-line) at 15.2%, supported by higher utilisation, better offshore-mix, and operational efficiency, partially offset by variable pay and sub-contracting cost. (5) LTTS to roll out wage in 1QFY22 (junior staff) and 2QFY22 (senior staff). (6) LTTS revised USD revenue guidance to - 6.5% in USD terms for FY21.

Outlook: We have factored in USD revenue growth of -6.2/+16.8/+12.6% and EBIT margin at 14.4/16.7/17.4% over FY21/22/23E respectively. 4QFY21 revenue growth is estimated at +4.4% QoQ, and FY22/23 revenue growth implies 3.6% CQGR each, translating into FY21-23E EPS CAGR at 32%. LTTS currently trades at 30.8/26.0x FY22/23E (3Y average at 21x).

Shares of L&T Technology Services Ltd was last trading in BSE at Rs.2527.9 as compared to the previous close of Rs. 2662.55. The total number of shares traded during the day was 66501 in over 7583 trades.

The stock hit an intraday high of Rs. 2660 and intraday low of 2416.6. The net turnover during the day was Rs. 170846193.

Source : Equity Bulls

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