Q2FY24 Review: L&T Tech Services: Healthy quarter, but H2 outlook soft

18 Oct 2023 , 12:22 PM

L&T Technology Services (LTTS) reported Q2 revenue growth of 3.2% cc QoQ — tad above IIFLe at 2.8%. Growth was led by Transportation (+4.4% QoQ) and Plant Engineering (+3.8%). Ebit margin at 17.1% (-10bps QoQ) were above IIFLe of 16.6%, despite the full impact of wage hike and investments in capability building. Deal wins were healthy with 7 USD10mn+ deals in the quarter, including the first USD10mn+ deal leveraging SWC capabilities. Management also indicated strong deal closures in H1 of Oct (3 USD10mn+ deals). However, LTTS cut its FY24 revenue growth guidance to 17.5%-18.5% cc YoY (from 20%+ cc YoY), due to incremental macro headwinds and cautious spending environment. Ebit margin guidance of 17% for FY24 was maintained. Analysts of IIFL Capital Services lower their FY24-26 EPS estimates by up to 2%, on the back of softer H2 outlook and their 12-month TP reduces to Rs 4,450 on 28x 2YF EPS. Maintain ADD. 

Broad-based growth across verticals: 

LTTS’ Q2 revenue growth of 3.2% cc QoQ was broad-based, with each of its verticals growing sequentially. Deal wins in Q2 were strong, but management indicated incremental macro headwinds towards the end of the quarter that is leading to longer decision-making cycles. This is likely to lead to a muted 3Q and hence, LTTS cut its FY24 revenue growth guidance by ~200bps to 17.5%-18.5% cc YoY. However, management is confident of growth rebounding Q4 onwards and is investing in training 2,000 employees on Software Defined Vehicles, Cybersecurity and AI. 

Margins surprise positively: 

Ebit margins at 17.1% (-10bps QoQ) were above IIFLe of 16.6%, despite the impact of wage hikes, capability building investments and headcount increase of ~500. Segment margins for three of its five segments improved sequentially. LTTS maintained guidance of Ebit margins of ~17% in FY24 and 18%+ by H1FY26. 

Maintain ADD: 

LTTS is currently trading at 33x 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.