(TP Rs 1,950, CMP Rs 1,455, MCap Rs 151bn)

L&T  Technology Services (LTTS) posted strong rev performance (in-line) and better operating performance (offshore, FP-contract), led by transportation/process industry verticals and strong client adds. Revenue guidance  increased  to  >21% YoY for FY19E (>16% earlier). Revenue came at USD  177mn,  5.5/29.5%  QoQ/YoY  in CC. EBITDA% stood at 18.1%, +105bps QoQ supported  by INR depreciation (+150bps QoQ), absence of visa cost (+50bps) and  efficiency  gains  (+55bps) offsetting wage increase impact (-150bps).

We  maintain  our  positive  view  on  LTTS based on (1) Broad-based growth across  verticals (led by Process Industry/ Transportation) and recovery in Industrial  Product  (20.6%  of  rev), (2) Continuity in large deal wins (6 large  wins in 2Q) and strong pipeline (conversion of projects to MSA), (3) Improving  business-mix  (Process  industry,  Industrial  Product,  Medical device)  leading  to  better  margin  profile,  (4)  Large  account  mining opportunity  in  top-30  accounts  (~65% of rev) and limited competition in multiple  verticals, (5) Solution/ platform strategy driving cross-vertical opportunities (Hi-tech-Automotive).

Expect  rev/EPS  at  20/28% CAGR over FY18-21E, factoring USD rev growth at 24/18/19%  and EBITDA% at 18.2/18.5/18.8% for FY19/20/21E. Growth estimates imply  4.3/4.0/4.3%  rev  CQGR over FY19/20/21E. Maintain BUY with TP of Rs 1,950, at 22x Sep-20E EPS.

Highlights of the quarter

  1. Industrial  product  vertical  has turned around following muted performance   earlier   and  growth  (double-digit  guidance)  to  be supplemented  by  large  wins
  2. Hi-tech vertical was impacted by 2 projects  entering  steady state with offshore shift
  3. Momentum in medical  device  vertical  is  expected  to  continue
  4. Growth in Automotive vertical is led by spend on EV/Hybrid vehicle, Autonomous, Battery management and Infotainment security

Near-term  outlook:

Ramp-up  of deals in Industrial product, Process industry and Transportation verticals to drive growth Financial Summary

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