Results Daily: Cyient, L&T Infotech & L&T Technology Services Q1FY21 Results Review - HDFC Securities

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

HDFC Securities Institutional Research Desk Results Daily - Cyient, L&T Infotech & L&T Technology Services Q1FY21 Results Review

Cyient: We maintain REDUCE on Cyient, based on weak 1Q performance and uncertain growth outlook. The services (~86% of revenue) segment is severely impacted (-18.6% YoY) by structural problem in Aerospace & Defence vertical (-28% YoY). Cyient's higher mix of mechanical services and elevated exposure to stressed verticals (aerospace, travel and ENU) have magnified the COVID-19 impact vs. its peers. The company is struggling with issues such as (1) stress in services portfolio (-18.6% in FY21E), (2) issues in top accounts (A&D), (3) focus on lower margin DLM business and (4) deteriorating margin profile due to investments. While some recovery is expected in 2H, concerns related to slowdown in decision making, COVID-19 related uncertainty, and higher mix of legacy services remain. Based on margin recovery in 2H, we increase EPS estimate by 7.6/7.0% for FY21/22E. Our target price stands at Rs 285, based on 9x Jun-22E EPS, which is at ~25% discount to 5Y average 1Y-fwd P/E multiple.

L&T Infotech: We maintain ADD on L&T Infotech (LTI), based on its growth leadership within the sector (10% CAGR over FY20-22E) and superior/stable operating profile (highest in mid-tier). LTI's multi-pronged growth is supported by the following: (1) large deals (USD 20mn NN UK-BFS win in 1Q and to accelerate in 2Q); (2) 'minecraft'/top accounts growth (T1 account posted growth); (3) new growth initiatives (LTI canvas in partnership with Microsoft) and new logo additions (16 added in 1Q including 1 F-500 logo in manufacturing vertical); (4) vendor consolidation opportunities (LTI a challenger to tier-1s); (5) resilient operations with remote transition of large deals. LTI's valuation premium to peers reflects its growth/margin/return metrics outperformance vs. mid-tier peers. Our target price of Rs 2,375, 19x Jun-22E EPS (18x earlier and 3-year average of 18x), follows ~3% EPS estimate increase for FY22E.

L&T Technology Services: We maintain REDUCE on L&T Technology (LTTS) on broad-based portfolio dent and protracted operational recovery. 1Q revenue decline was steep at -12.5% QoQ (mirroring Cyient in decline), and the dent to margin was steeper, impacted by lower utilisation and volume cuts. Recovery will be slower (vs. pre-COVID moderating growth rate) and will be supported by (1) continued traction in telecom-hi-tech vertical (inorganic in 3Q) and medical devices vertical; and (2) gradual recovery in the transportation vertical (airline sub-sector hit in 2Q) and plant engineering vertical (O&G drag). Higher portfolio susceptibility to the global economic crisis and low-annuity/high-discretionary elements are likely to result in a slower recovery of LTTS, even as medium-term opportunities open up. Our target price of Rs 1,240, 16x Jun-22E EPS, follows ~3% EPS estimate cut for FY22E.

Source : Equity Bulls

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