L&T Tech Services: Healthy large-deal momentum

22 Aug 2023 , 11:20 AM

Recommendation: Add; Target Price: Rs 4000

Analysts of IIFL Capital Services met with CEO & MD Amit Chadha, and CFO Rajeev Gupta to better understand the demand environment and progress on Smart World and Communication’s (SWC) integration. LTTS has seen an improvement in the overall decision-making environment from June, particularly in large deals that provides visibility for the nearterm outlook. LTTS has set up dedicated SWC sales teams and leadership across US, Canada, Europe, Singapore and the Middle East; where it has started to see initial traction. Management is confident of delivering its 20%+ cc YoY FY24 revenue growth guidance (implies 4%+ Cqgr over Q2-Q4FY24) with Ebit margins of ~17%; continues to aspire hitting the USD1.5bn revenue run rate by FY25, with 18%+ Ebit margins by H1FY26. Analysts of IIFL Capital Services forecast USD Revenue/EPS Cagr of 16%/15% over FY23-26. Given the improving demand environment and receding risks from SWC integration, they increase their target multiple to 26x (was 25x) and roll forward leading to their 12-month TP of Rs4,000 (was Rs3,700). Maintain ADD. 

Investments underway to drive client mining: 

Investments from setting up large-deal teams and focusing on six strategic bets have paid off. Incrementally, LTTS is focused on driving client mining from key accounts, including measures like setting up a client advisory council with key accounts. Overall, the size and quantum of large deals in the pipeline are at an all-time high; deal conversions have also improved since June. SWC has already helped LTTS win deals on cybersecurity and they are in talks for Next Gen communication deals with global clients. 

Multiple levers to drive margins higher: 

LTTS’s 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 consolidation of SWC and Q2 is likely to be impacted by wage hikes, management has multiple levers to take margins back above 18% by H1FY26. Margin levers include change in business mix of SWC, offshore pyramid rationalisation and operating leverage. 

Risk-reward balanced; maintain ADD: 

LTTS is currently trading at 30.7x FY25 P/E, at a ~20% premium to mid-cap IT peers — slightly above its historical average. Analysts of IIFL Capital Services believe further re-rating would require SWC synergies to play out and LTTS to successfully mine key clients.