Q4FY23 Review: L&T Tech Services: Steady quarter; outlook cautiously optimistic

27 Apr 2023 , 12:53 PM

L&T Technology Services (LTTS) reported Q4FY23 revenue growth 2.2% cc QoQ (+12.1% cc YoY), tad above IIFLe of 1.3% cc QoQ, led by Medical Devices and Plant Engineering. Ebit margins were flat QoQ at 18.7%, tad above IIFL/consensus expectations of 18.3/18.6%. Deal wins were healthy, with four USD10mn+ deals in the quarter, including one USD40mn+ deal, which provides visibility for near-term growth. LTTS has guided for FY24 revenue growth of 20%+ (organic revenue growth of 10%+) with Ebit margins of ~17% (-150bps YoY), due to consolidation of Smart World Communication (SWC). Management reiterated their guidance of achieving USD1.5bn revenue run rate in FY25 and 18%+ Ebit margin by 1HFY26.

Analysts of IIFL Capital Services lower their FY24/25 EPS estimates by 4-5%, due to lower inorganic contribution from SWC. Their 12-month TP reduces to Rs3,400 (was Rs3,550) on 24x 2YF EPS. Maintain ADD. 

Medical Devices and Plant Engineering drive growth: 

LTTS’ 4Q revenues grew 2.2% cc QoQ, led by Medical Devices (+7.5% QoQ), Plant Engineering (+5.9%), Industrial Products (4.3%) and Telecom & Hi-tech (+4%). Transportation vertical declined 1.1% QoQ, off a high base. Management is cautiously optimistic about broad-based growth across verticals in FY24, leading to its guidance of 20%+ YoY revenue growth (10%+ organic). Initial signs of potential synergies from SWC acquisition were visible, with LTTS signing 3 deals with international customers leveraging joint capabilities.

Margins steady: 

At 18.7% (flat QoQ), Ebit margins were tad above IIFLe of 18.3%, driven by continued operational improvements and easing supply side. Segment margins in 3 of its 5 segments improved sequentially. Management expects Ebit margins to decline to ~17% in FY24 and inch back to 18%+ by H1FY26.

Maintain ADD: 

LTTS is currently trading at 24x FY25 P/E, at a ~20% premium to mid-cap IT peers. The premium is above its historic avg. of ~15% and hence, we see limited room for further expansion in the current macro environment. Key risks: M&A integration.