(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
- Industrial product vertical has turned around following muted performance earlier and growth (double-digit guidance) to be supplemented by large wins
- Hi-tech vertical was impacted by 2 projects entering steady state with offshore shift
- Momentum in medical device vertical is expected to continue
- Growth in Automotive vertical is led by spend on EV/Hybrid vehicle, Autonomous, Battery management and Infotainment security
Ramp-up of deals in Industrial product, Process industry and Transportation verticals to drive growth Financial Summary