Maintain REDUCE on L&T Technology Services - Recovery priced in - HDFC Securities

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

We maintain REDUCE on L&T Tech (LTTS), as valuations more than adequately factor in the recovery curve. 2Q print was slightly ahead of estimates, and the growth rebound (despite 3Q furlough uncertainty) is supported by a pick-up in deal activity (deal pipeline and wins higher by ~16% over the previous quarter). While LTTS has a strong pedigree in ER&D with a well-diversified service portfolio, factors such as business cyclicality, higher discretionary nature, and slower pace of large deal conversion result in sequential volatility. The revised USD revenue guidance of -7% to -8% (-9% to -10% organic earlier) in FY21 implies +3.4 to 4.9% QoQ over 3Q-4Q and includes consolidation of Orchestra Tech (~2% QoQ in 3Q). Improvement in cash generation with a reduction in DSO (including unbilled) is positive. Our target price of Rs 1,585, is based on 18x Sep-22E EPS (DCF-implied at 18x and historical average at 19x).

2QFY21 highlights: Revenue stood at USD 178mn, +4.1 QoQ (+2.9% CC) and -10.0% YoY (-10.6% CC). Growth was broad-based ex-telecom & hi-tech vertical, which was impacted by delayed deal closure. Eight large deal wins in 2Q, including 3 deals >USD 15mn TCV and 3 deals >USD 10mn TCV. EBIT margin recovered to 13.7%, +161/-332bps QoQ/YoY and RPAT was supplemented by Rs 0.40bn SEIS. Vendor consolidation and acceleration in deals moving from pilot stage to production support recovery ahead.

Outlook: We have factored in USD revenue growth of -7.4/+14.1/+12.4% and EBIT margin at 14.6%, 16.5%, 16.5% over FY21/22/23E respectively. 3Q-4QFY21 revenue growth estimated at 4.5% QoQ and 4.0% QoQ respectively and FY22/23 revenue growth imply 2.9% CQGR each, translating into FY20-23E EPS CAGR at 9% (26% CAGR over FY21-23E). LTTS currently trades at 21.6/18.9x FY22/23E.

Shares of L&T Technology Services Ltd was last trading in BSE at Rs.1750.55 as compared to the previous close of Rs. 1728.8. The total number of shares traded during the day was 13622 in over 1871 trades.

The stock hit an intraday high of Rs. 1779.8 and intraday low of 1693.95. The net turnover during the day was Rs. 23602849.

Source : Equity Bulls

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