Shares of L&T Technology Services Ltd gained 3 percent on the back of the company’s strong earnings and revenue guidance. Analysts, however, remained cautious and maintained the ‘sell’ rating while reducing the target price for the stock. The stock was trading at Rs 3546 on the BSE, up 2.9 percent from its previous close.
The engineering services company reported a 22 percent increase in net profit, reaching Rs 1,174.1 crore by the end of FY23. In Q4 of FY23, LTTS recorded a net profit of about Rs310.9 crore, posting an 18 percent rise over the same period last year. The company experienced a 19.4 percent on-year growth in revenue from operations at Rs 2,096.2 crore, primarily driven by the transportation, plant engineering, and industrial products verticals.
Sequentially, revenue from North America, which contributes 60.2 percent to the company’s total revenue, declined 1.4 percent. In full FY23, LTTS achieved $990 million in CC revenue.
In FY2023, LTTS secured 18 large deals worth $10 million or more, which is lower than the 20 large deals it had bagged a year before. The management has, however, indicated that the total contract value (TCV) of the deals, including those below $10 million, is slightly higher than the levels achieved in FY2022.
“We believe this trend indicates client view of macro uncertainty. Pressure in relatively smaller sub-segments of semi-conductor and hyperscaler projects further reflect dynamic macro pressures,” said Dolat Analysis & Research in its report. The brokerage house maintained its ‘sell’ rating and kept the target price at Rs 3,240 a share.
Despite some weakness in the semiconductor and hyperscaler sectors, the overall commentary from the management remains strong, with great traction across other sectors. Based on the broad-based deal pipeline and growth momentum, the management has guided the FY24 revenue growth to be 10 percent or more in organic CC terms, implying a 2.8 percent compounded quarterly growth rate (CQGR). Additionally, they expect a 20 percent or more revenue growth, including acquisition.
According to a Kotak report, L&T Tech had a good quarter, and their organic growth guidance is in line with expectations. However, the report notes that risks exist due to the discretionary nature of the ERD business and a slowdown in developed markets. While the report broadly maintains EPS estimates and a target multiple of 21X FY2025 EPS, leading to an FV of Rs 3,000, it considers the stock to be expensive and maintains its ‘sell’ rating on the stock.
“Given the margin-dilutive and working-capital-intensive nature of SWC’s business, it is expected that the FY2024 EBIT margin will decline to approximately 17 percent, down from 18.5 percent in FY2023. Additionally, receivables days are anticipated to increase to 115-125 days, as compared to 95 days in FY2023. It should be noted that the ERD business is discretionary in nature, which may not be the best attribute during a deteriorating environment,” the Kotak report said.
Dolat Analysis & Research believes that their existing USD revenue estimates already reflect the Q4 results and the management guidance for FY24. As a result, they will keep their growth estimates for FY24/FY25 unchanged. The integration of SWC was factored into their previous estimates, but they will moderately increase their margin estimates by 57bps/34bps for FY24/FY25 to reflect the guidance for a 17 percent margin for FY24. Overall, they have raised their earnings estimates by 3.3 percent/1.8 percent, respectively for FY24/FY25, based on the reported results.
Motilal Oswal anticipates that the increased spending on engineering, research, and development (ER&D) due to digitisation will benefit LTTS, as the company has strong capabilities, a multi-vertical presence, and a solid wallet share. The company is expected to achieve robust revenue growth in the upcoming years.
Motilal also expects industry spends to improve compared to the preceding five years, which should further benefit LTTS given its strong position and capabilities in the engineering and R&D space. The brokerage firm has maintained the ‘buy’ rating and kept the target price at Rs 4,040 a share.
According to the brokerage house, the valuations of LTTS have significantly decreased over the last year, and they are now at 22x FY25 EPS. This is seen as an attractive valuation because the outlook for the ER&D services industry is better than the broader IT services universe.
