Motilal Oswal's research report on Larsen and Toubro Technology Services
L&T Technology (LTTS) posted a 4.5% QoQ growth in constant currency (CC) in 2QFY23, 20bp below our estimate. This was led by strong growth in Transportation (+7.4% QoQ) and Plant Engineering (+4.6% QoQ), while Telecom & Hi-Tech (-1.3%) was subdued. EBIT margin contracted slightly by 10bp QoQ despite the full-quarter impact of wage hikes, beating our estimates by 70bp. The deal wins were remained healthy after record bookings in 1QFY23 and the pipeline remained strong and was up v/s the previous quarter. LTTS narrowed FY23E CC revenue growth guidance upwards to 15.5-16.5% v/s 14.5-16.5% earlier, which is positive given the challenging macro environment. While the management highlighted some pain in Hi-Tech and Medical devices (due to inflation), longer term outlook remained positive. Though 3QFY23 is expected to remain soft due to furloughs, we expect growth to rebound in 4Q. Despite factoring in demand moderation in 2HFY23, we see the guidance as achievable with strong 1H. This should help LTTS deliver growth near the upper-end of its guidance in FY23E. Though management is highlighting pick up in telecom, media and media devices, large deal wins and inorganic initiatives to help achieve its FY25 aspiration of USD1.5b revenue run-rate, we are building in USD revenue CAGR of 12.9% over FY22-24E, below the run rate required to meet its FY25E revenue aspiration (implying FY22-25E CAGR of 19%). This is because we are not factoring in any inorganic contribution in our estimates. LTTS should see a flattish margin performance in FY23E, with good topline delivery offsetting supply-side pressures. EBIT margin should improve in FY24 to 18.6%, in line with the management guidance of 18%+ profitability. Favorable pyramid, cost optimization and better revenue mix should more than offset the continued pressure on employee cost and travel resumption.
Outlook
We continue to view LTTS as a beneficiary of the growing penetration of ER&D Services and the best Tier II IT Services play within our coverage universe. We have not revised our estimates materially. We retain our BUY rating and value LTTS at INR4,230 (based on 32x FY24E EPS).
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