Q3FY24 Review: L&T Tech Services: Muted quarter; Q4 outlook to ensure strong exit

17 Jan 2024 , 12:20 PM

L&T Technology Services (LTTS) reported Q3 revenue growth of 0.9% cc QoQ — a tad below IIFLe of 1.9%. Growth was led by Medical Devices (+2.4% QoQ), while other verticals were impacted by seasonal furloughs. At 17.2% (+10bps QoQ), Ebit margin was in line with IIFLe, as LTTS focused on productivity improvement. Deal wins were healthy with six USD10mn+ deals in the quarter, including one USD20mn/40mn deal each. Management indicated that the initial conversations with clients highlight that CY24 budgets could be flat to increase slightly. LTTS maintained its FY24 revenue growth guidance to 17.5%- 18.5% cc YoY, which implies a strong exit for 4-7% cc QoQ for Q4. Ebit margin guidance of 17% for FY24 was also maintained. Analysts of IIFL Capital Services increase their FY24-26 EPS estimates by 1-2%, on the back of improved demand commentary; their 12-month TP increases to Rs5,250 (was Rs5,200) on 32x 2YF EPS. Maintain ADD. 

Modest sequential growth across verticals: 

While all the five verticals reported sequential growth for the second straight quarter, growth across the board was modest, due to higher-than-expected seasonal furloughs. Deal wins in Q3 remained healthy, and management indicated that the pipeline has expanded QoQ and YoY. Overall, LTTS is confident of delivering a strong Q4, in terms of growth as well as deal wins; and believes that the spending winter may be behind. Within verticals, Transportation, Plant Engineering and Telecom & Hi-tech are likely to lead near-term growth. 

Margins steady, despite muted growth: At 17.2% (+10bps QoQ), Ebit margin was in line with IIFLe, as LTTS improved utilisation and rationalised support functions. Headcount declined by ~600 QoQ; mgmt expects headcount to increase Q4 onwards. Ebit margins guidance of ~17% in FY24 and 18%+ by 1HFY26 was maintained. 

Risk-reward balanced, maintain ADD: LTTS is currently trading at 39x FY25 P/E, at a ~12% premium to mid-cap IT peers. Analysts of IIFL Capital Services see limited room for re-rating from the current levels in the present macro environment. Key risks: M&A integration.