L&T Tech Services: Well poised for next leg of growth

3 Aug 2023 , 11:18 AM

Recommendation: Add; target price: Rs 3700

 

Analysts of IIFL Capital Services attended L&T Technology Services’ (LTTS) lab tour at its Baroda campus (among its largest, in terms of employee strength) where they showcased capabilities in Plant Engineering, Product Engineering and Digital Manufacturing. LTTS has set up multiple labs at its campus, including the power electronics lab, tear down lab, smart manufacturing lab, industry 4.0 experience centre and renewable-based EV charging infrastructure, which help replicate real life scenarios and run POCs/prototypes for its clients. A combination of industry growth drivers and LTTS’ engineering DNA are likely to result in accelerated growth for the company over the medium-term, as per management. LTTS’ integration with SWC is progressing well; it has started seeing initial signs of cross-selling its cyber security offerings. Analysts of IIFL Capital Services forecast USD Revenue/EPS Cagr of 16%/15% over FY23-26. However, with the stock trading at 29x their FY25 P/E, they see the risk-reward as balanced. ADD. 

Structural industry growth drivers intact: 

From being a tactical play for enterprises to being longer-term strategic partnerships, ER&D outsourcing services are maturing. This is visible in LTTS’ large deal win success rate and its recent investments in near shore centres. LTTS is confident that these levers will help scale its existing client relationships and achieve the targeted USD1.5bn revenue run rate by FY25. The company continues to see traction on its 6 strategic bets. 

Engineering DNA combined with diverse vertical exposure – a key differentiator: 

LTTS’ Engineering DNA has helped it continuously innovate and adopt newer technologies in both Product Engineering and Plant Engineering. This has led to an increase in the number of patents it files to ~220 in FY23. Additionally, its diverse vertical exposure (>USD100mn LTM revenues from each of its 5 verticals), helps implement its learnings in products, processes and technologies from one vertical into another. 

Risk-reward balanced; maintain ADD: 

LTTS is currently trading at 29x FY25 P/E, at a ~20% premium to mid-cap IT peers. The premium is slightly above its historic avg. of ~15%, hence analysts of IIFL Capital Services believe further re-rating would be subject to synergies with SWC playing out and its ability to scale its key client relationships. Key risks: M&A integration.