Maintain REDUCE on L&T Technology Services - Uninspiring - HDFC Securities

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

We maintain REDUCE on L&T Technology Services (LTTS), following a modest 4Q and valuation more than adequately factoring in the recovery. The guidance of 13 to 15% growth (USD terms) for FY22E, following a 6.3% decline in FY21, implies a modest 2.1-2.8% CQGR despite the Phase-2 ramp-up of the USD 100mn+ O&G deal. 4Q performance was led by Transportation and Plant Engineering verticals (early deal ramp-up). Deal wins suggest a skewed performance in the future (Transportation-led growth with protracted recovery in Telecom and Medical devices while Plant Engineering would see a soft 1Q). We acknowledge LTTS' prowess/diversity in digital ER&D and the addressability; yet the business cyclicality feeds into the volatile profile (particularly large accounts) over the medium term. Our Target Price of INR 2,320 is based on 24x Mar-23E EPS.

4QFY21 highlights: (1) LTTS' revenue stood at USD 198mn (USD 200mn est.), +3.9/+1.1% QoQ/YoY (+3.8/-0.6% QoQ/YoY CC). (2) Growth was skewed, largely led by Transportation (+6.6% QoQ) and Process Industry (+9.5% QoQ). (3) Seven large deal wins in 4Q, of which six deals >USD 10mn TCV, which include two deals >USD 25mn TCV. (4) EBIT margin improved 138bps QoQ to 16.6% (higher than estimate 15.9%), supported by higher utilisation, better offshore-mix, operational efficiency, and lower amortisation (+70bps). (5) LTTS to roll out wage hike in 1QFY22 (junior staff) and 2QFY22 (senior staff), which will impact margin, but would be offset by levers like utilisation (scope till 80%), offshoring, and FX. (6) 300 freshers hired in 4Q and the company has planned >1,000 fresher additions in FY22E.

Outlook: We have factored in USD revenue growth of +14.8/+13.4% and EBIT margin at 16.4/17.1% over FY22/23E respectively. FY22/23 revenue growth implies 2.7% and 3.4% CQGR respectively, translating into FY21-23E EPS CAGR of 27%. LTTS is currently trading at 34/29x FY22/23E.

Shares of L&T Technology Services Ltd was last trading in BSE at Rs.2575.7 as compared to the previous close of Rs. 2796.9. The total number of shares traded during the day was 60040 in over 7300 trades.

The stock hit an intraday high of Rs. 2700 and intraday low of 2560. The net turnover during the day was Rs. 155774735.

Source : Equity Bulls

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