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L&T Technology Shares Fall Even As Firm Raises Growth Guidance After Q2 Earnings

Here's what analysts made of L&T Technology Services' Q2 earnings.

<div class="paragraphs"><p>L&amp;T Technology Services Ltd.'s signboard sits on a stone plaque outside the company's office. (Source: Company website)</p></div>
L&T Technology Services Ltd.'s signboard sits on a stone plaque outside the company's office. (Source: Company website)

Shares of L&T Technology Services Ltd. dropped the most since Dec. 21 even as the company raised its revenue growth guidance after its earnings for the second quarter ended September met estimates.

The company now sees its revenue rising 19–20% in the fiscal 2021-22. The engineering services company had raised the full-year dollar revenue growth guidance to 15%-17% from 13%-15% after the first quarter ended June.

Key Q2 Earnings Highlights (Consolidated, QoQ)

  • Revenue up 5.9% at Rs 1,607.7 crore.

  • Dollar revenue up 5.7% at $217.4 million.

  • Net profit up 6.3% at Rs 230 crore.

  • Ebitda up 9.9% at Rs 349.3 crore.

  • Margin at 18.4% vs 17.3%.

  • Declared a special dividend of Rs 10 per equity share.

The company won five deals with a total contract value of over $10 million each, including two $25 million+ deals.

“We had a strong quarter with 6% sequential growth in constant currency driven by healthy traction in digital engineering across all our five segments," Amit Chadha, chief executive and managing director at L&T Technology Services, said in the earnings statement. "The rising digital adoption across our customer base has led to our revenue from digital & leading-edge technologies increasing to 55% in Q2."

The broad-based growth drove the company's margin rose to 18.4%, the highest ever, he said.

Shares of L&T Technology Services fell 9.9% to Rs 4,623.2 apiece in morning trading on Wednesday. The stock surged 15% on Tuesday, buoyed by group peer L&T Infotech Ltd.'s gains.

Of the 26 analysts tracking L&T Technology Services, 11 have a ‘buy’ rating, seven suggest a ‘hold’ and eight recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies a downside of 10.6%.

Here's what analysts made of L&T Technology Services' Q2:

Motilal Oswal

  • Maintains 'buy' rating, raises target price to Rs 5,670, implying a potential upside of 11%.

  • Operating leverage led to EBIT margin improvement to 18.4% above Motilal Oswal's estimate of 16.8%, despite strong employee additions and lower utilisation. It reported better-than-expected attrition of 16.5%.

  • The 350-basis-point increase in the FY22 dollar revenue growth guidance to 19–20% (vs 15–17% in Q1) came as a welcome surprise.

  • It has surpassed the brokerage's estimate of 19% and indicates a robust demand environment for engineering, research and development services.

  • Continues to see L&T Technology Services as a beneficiary of the growing penetration of engineering, research and development services and the best tier 2 IT services play within our coverage.

  • Bakes in 21.2% revenue growth for FY22 and expect the company to continue to revise its guidance upwards over the second half of the fiscal.

  • Digitisation is driving accelerated spends in R&D, and L&T Tech should benefit from this owing to its strong capabilities, multi-vertical presence, and solid wallet share.

  • Expects it to deliver strong revenue growth over the coming years, and retains it as top pick in the mid-cap IT services space.

Kotak Institutional Equities

  • Maintains 'add' rating, raises fair value to Rs 5,300 from Rs 4,250 earlier, implying an upside of 3.2%.

  • Reported a good quarter with sequential revenue growth of 6% in constant-currency terms, Ebitda margin expansion and strong net profit growth.

  • The company is well on track to achieve medium-term revenue growth aspiration at good profitability.

  • L&T Technology Services is a strong play on multi-year engineering, R&D growth opportunity.

  • Raises FY2022-24E EPS by 2-4%.

  • The company is the best play on relatively faster growing engineering, R&D courtesy its multi-vertical expertise, full spectrum of offerings and high quality client base.

Prabhudas Lilladher

  • Maintains 'buy' rating, raises target price to Rs 5,621 from Rs 4,880 apiece, implying a potential upside of 9.5%.

  • Well positioned to benefit from strong growth in digital engineering.

  • Consistent improvement in EBIT margin for five consecutive quarters led to highest ever margin of 18.4% despite high supply-side cost pressures, driven by productivity gains and revenue growth leverage.

  • Believes that margins may not sustain at these levels and will come back to around 17.3% in the second half given headwinds from rising attrition, probable wage hike and come-back of travel and facility costs.