Maintain ADD on L&T Technology Services - Good show - HDFC Securities

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

L&T Technology Services (LTTS IN) posted revenue ahead of estimates and an in-line operating performance, while maintaining its FY23E revenue guidance (14.5-16.5% CC) and margin (18%+ EBITM). Q1 revenue performance of 4.7% QoQ CC and 19.9% YoY CC was supported by process industry and industrial products verticals. Growth is expected to be driven by (1) strong bookings in the transportation vertical (USD 100mn+ Jaunt Air Mobility deal won in Q4 and USD 50mn+ deal in rail won in Q1) and consistency in USD 10mn+ TCV wins (seven in Q1FY23 as compared to six in Q4FY22 and 20 in FY22); (2) broad-based ER&D spend across sub-segments in plant engineering and digital engineering supplementing growth in industrial products vertical; (3) peak net client quarterly addition and sequential uptick in client bucket; and (4) start of new centers in Europe (France, Poland) and LTTS' customer pedigree (69 F500 companies) and a diversified vertical base. While we are cognizant of the relative risk associated with ER&D services based on variability in Capex/R&D spends, LTTS' ER&D credentials and offshoring proposition mitigate some of those risks reflected in its deal momentum. Maintain ADD, with TP of INR 3,390, valuing LTTS at 28x FY24E EPS (5Y average at 26x) on 16% EPS CAGR over FY22-24E.

Q1FY23 highlights: (1) LTTS' revenue stood at USD 240mn (higher than our estimate of USD 237mn), +3.2/+16.4% QoQ/YoY (+4.7/+19.9% QoQ/YoY CC); (2) growth was largely led by plant engineering (+7.3% QoQ), followed by industrial products (+4.3% QoQ) and transportation (+2.9% QoQ); (3) LTTS won a USD 50mn+ deal from a global rail company and four deals of USD 15mn during the quarter; (4) EBITM declined 32bps QoQ at 18.3% (vs. our estimate of 18.2%), impacted by a wage hike, which was partially offset by operational efficiency; the management maintains its aspiration of 18%+ operating margin; (5) the company added 572 employees in Q1FY23 and plans to add 3,000 freshers in FY23E. Attrition inched up 280bps QoQ to 23.2%, which is expected to taper down.

Outlook: We have factored in USD revenue growth of +13.5/+12.8% and EBITM of 18.2/18.1% for FY23/24E respectively. LTTS is currently trading at 26x FY24E, with FY22-24E EPS CAGR at 16%.

Shares of L&T Technology Services Limited was last trading in BSE at Rs. 3093.70 as compared to the previous close of Rs. 3049.45. The total number of shares traded during the day was 93928 in over 3335 trades.

The stock hit an intraday high of Rs. 3117.85 and intraday low of 3046.20. The net turnover during the day was Rs. 287636988.00.

Source : Equity Bulls

Keywords

LandTTechnologyServices INE010V01017 LTTS HDFCSecurities Q1FY23 ResultUpdate