L&T Tech Services: Long runway for accelerated growth

21 Sep 2023 , 10:33 AM

Recommendation: Add; Target price: Rs 4000

 

Analysts of IIFL Capital Services hosted Amit Chadha (CEO & MD), Rajeev Gupta (CFO) and Pinku Pappan (Head IR & M&A) for investor meetings in US. In revenues, LTTS has crossed USD1bn and aspires to reach USD1.5bn revenue run rate by FY25. The key moat for the company includes its engineering DNA (helps capture tech trends early), diversified vertical exposure (helps in cross-pollination) and marquee client relationships. LTTS continues to benefit from structural tailwinds in its key verticals – Transportation, Plant Engineering and Industrial Products. Integration of the recently acquired Smart World and Communications (SWC) is progressing as per plan. Large deal pipeline is at an all-time high, though decision-making slower than last year. On margins, LTTS is confident of achieving 18%+ Ebit margins by H1FY26 (vs 17.2% in Q1FY24). Maintain ADD rating on the stock, as analysts of IIFL Capital Services believe the structural tailwinds are partly reflected in the recent re-rating that the stock has seen. 

Structural industry tailwinds intact: 

Structural tailwinds of the lack of availability of talent in the western world, increasing relevance of time to market and expansion of the definition of what’s ‘non-core’ to enterprises — will continue to drive robust growth for India’s ER&D services industry. Additionally, the shortening product life cycles are leading to ER&D spend becoming less discretionary. 

Investments in technology, client and employees to drive growth: 

LTTS is investing in technology (patents, labs, accelerators and reusable assets), clients (mining of strategic accounts and setting up of client advisory council) and employee satisfaction (re-skilling of employees). Management is confident that these investments will lead to a sustainable moat for the company, so as to drive faster growth for longer. Overall, the size and quantum of large deals in the pipeline are at an all-time high; management expects deal velocity to further improve from Jan’24. 

Multiple levers to drive margins higher: 

LTTS’ operational rigour, combined with being selective in picking deals, led to an all-time high Ebit margin of 18.5% in FY23. While Q1 margins were impacted by the consolidation of SWC and Q2 is likely to be impacted by wage hikes, management has multiple levers to take margins back to above 18% by H1FY26. Margin levers include change in SWC’s business mix, offshore pyramid rationalisation and operating leverage.