Q1FY24 Review: L&T Tech Services: Muted quarter, FY24 guidance maintained

19 Jul 2023 , 11:17 AM

L&T Technology Services (LTTS) reported Q1FY24 revenue (adjusted for SWC) decline of 2.9% cc QoQ (+10% cc YoY), with organic growth of 0.6% cc QoQ, below IIFLe of 1.6%. Growth was driven by a rebound in Transportation vertical, while Plant Engineering and Telecom & Hi-tech saw sharp declines. Ebit margin at 17.2%, was above IIFLe of 16.8%. Deal wins were strong with 6 USD10mn+ deals in the quarter, including one USD50mn deal, which provides visibility for near-term growth. Management indicated that SWC business has seasonality which will lead to H2 being stronger than H1. LTTS maintained FY24 revenue growth guidance of 20%+ cc YoY with Ebit margins of ~17% (-150bps YoY) and also reiterated their aspiration to achieving USD1.5bn revenue run rate in FY25 and 18%+ Ebit margin by H1FY26. Analysts of IIFL Capital Services tweak their FY24-26 EPS estimates and maintain their 12-mth TP of Rs3,700 on 25x 2YF EPS. ADD.

Transportation vertical drives growth: 

LTTS’ Q1 organic revenue growth of 0.6% cc QoQ was led by Transportation (+3.9% QoQ), while other verticals were impacted by slower decision-making. Management indicated that the pace of decision-making improved towards the end of Q1 which helped them close 6 USD10mn+ TCV deals. The strong deal wins combined with expanded pipeline and H2 seasonality for SWC, gives the management the confidence to maintain FY24 revenue growth guidance of 20% cc YoY. SWC is fully integrated and LTTS has set up dedicated global leadership and sales team to cross-sell its offerings.

Margins above expectations: 

Ebit margins at 17.2% (-150bps QoQ) were above IIFLe of 16.8%, despite investments in large deals and SWC integration. Segment margins 2 of its 5 segments improved sequentially. LTTS has rolled out wage hikes from July and maintained guidance of Ebit margins of ~17% in FY24 and 18%+ by H1FY26.

Maintain ADD: 

LTTS is currently trading at 29x FY25 P/E, at a ~20% premium to mid-cap IT peers. The premium is above its historic avg. of ~15% and hence Analysts of IIFL Capital Services see limited room for further expansion in the current macro environment. Key risks: M&A integration.