L&T Technology Services Ltd. share price target

L&T; Technology Services' (LTTS) Q4FY20 earnings were mixed beating our revenue estimates but EBITDA and PAT came below our estimates. Consolidated revenue for Q4FY20 stood at Rs 14,466mn registering +7.7% YoY/+1.7% QoQ, EBITDA increased 7.7% YoY/declined 6.3% QoQ to Rs 2,683mn and PAT increased 7.2% YoY/0.2% QoQ to Rs 2,063mn. Constant currency Revenue (USD) stood at $194 million, up by 1.6% YoY/down 2.5% QoQ, due to COVID-19 outbreak as the company faced supply side constraints and demand side challenges resulting in loss of productivity and work from home for employees. EBIT stood at Rs...

We maintain our conviction on LTTS based on (1) Preferred pick in ER&D on diversified vertical mix (low concentration risk) and niche position in Process Industry and Industrial products, (2) At an inflexion point with stability/recovery expected in Telecom & Hi-tech vertical, (3) Strong account mining engine with T30 program (>USD 10mn client bucket had 3 additions QoQ). Expect USD rev/EPS CAGR at 12.5/15.2% over FY19-22E factoring USD rev growth at 10.1/12.2/15.1% and EBIT% at 17.1/17.0/17.5% for FY20/21/22E, respectively. Key risk continues to be macros, trade war escalation (Industrial products vertical). We maintain our BUY on L&T; Tech (LTTS) based on in-line performance, growth bottoming-out in 3Q on strong wins/pipeline and expectation of stability/recovery in Telecom & Hi-tech vertical. Our TP of Rs 1,790 implies 18x Dec-21E EPS (marginal EPS est change).

LTTS continues to outperform ER&D peers, even as near term growth has slowed. We believe this has more to do with macros, and reckon that LTTS is reasonably resilient with its relatively stronger technical capabilities, diversified vertical mix and niche position in Process Industry and Industrial products. We build USD rev/EPS to post 11.5/14.5% CAGR over FY19-22E. That macros can play a bigger spoilsport than now is the only risk. We maintain BUY on LTTS despite the EPS downgrade (~5%) on weak near-term outlook (2Q nos were in-line). While relative outperformance continues, deceleration in growth trajectory limits our optimism. Our TP is Rs 1,705, based on 18x Sep-21E (20x earlier).

Transportation in US and Singapore, 1 deal in Industrial, 1 deal in Hi-tech and 3 deals in Medical). However, weakness in semiconductor space is likely to dent growth prospects. EBITDA margin at 18.5% (excl. IND AS impact) was ahead of estimates (Ple: 17.2%; consensus: 17.8%)....

Despite emerging challenges in Telecom & Hi-tech vertical, LTTS is the strongest play in ER&D based on (1) Business resilience supported by vertical diversification and low client concentration (vs. peers), (2) Broad-based deal wins & deal pipeline, (3) Growth outperformance in largest vertical (Transportation) vs. peers and (4) Shift in business-mix to support margins. Expect USD rev/EPS growth of 15/17% CAGR over FY19-22E. Key risks include adverse macros (trade war) and INR appreciation. We maintain BUY on LTTS following an in-line 1Q performance. We lower est. by ~3% to factor near-term weakness in Telecom/Hi-tech vertical, however broad-based wins/pipeline provide growth visibility (continues to be industry leading). Our TP is Rs 1,955, at 20x Jun-21E EPS.

LTTS is among our top picks in tier-2 IT based on (1) Leading pure-play ER&D with diversified verticals and least client concentration, (2) High growth visibility supported by broad-based deal pipeline, deal wins and beneficiary of vendor consolidation (Transportation, Process industry), (3) Investments to drive growth in large accounts (program managers, consultant engagements, co-innovation). Expect USD rev/EPS growth at 17% each. Valuations at 18.2x FY21E supported by strong FCF generation (94% FCF/PAT), strong return metrics (35% RoIC) and growth leadership within tier-2 IT/ER&D. Key risk is Brexit/trade war repercussions. We maintain BUY on LTTS after a strong 4Q performance. Industry-leading growth in FY19 and we expect growth leadership to continue. Our TP at Rs 1,860 is based on 20x FY21E EPS.

L&T; Technology Services (LTTS) was established through a group restructuring exercise by the L&T; Group, wherein, integrated engineering services of L&T; and product engineering services business of L&T; Infotech were transferred to LTTS. As a result, LTTS has emerged as one of the leading global pure-play ER&D; services, providing services to manufacturing, technology and process engineering companies, LTTS has active presence in 10 verticals: consumer electronics, semiconductor, aerospace, medical devices, telecom, energy, construction & heavy machinery, automotive, transport, industrial Products. LTTS captures data from IoT...

Despite a significant improvement in its balance sheet, execution pick up and robust order inflows, L&T;'s P/E multiple has not changed over the last three years. We believe that this is due to persistent concerns on at least one out of the four key parameters on which investors evaluate L&T;: 1) execution pick up; 2) balance sheet/ROE; 3) order inflow momentum; and 4) margins. Although L&T; has partially delivered on strengthening its balance sheet over FY16-18, execution improvement in the core domestic infrastructure is also evident over FY18-19. To...

Maintain BUY with TP of Rs 2,030, at 22x Dec-20E. L&T; Technology Services (LTTS) reported strong revenue and operating performance, in-line with expectations and increased its FY19E rev guidance to 24% (21% earlier). A blip emerges with decline expected in a large account in FY20E. However, growth outlook is a robust mid-teens for FY20E with improvement in margins (CC terms), supported by continuity in strong deal momentum and a robust pipeline. Revenue came at USD 185.7mn, 4.8/23.0% QoQ/YoY and EBITDA% stood at 18.4%, +28bps QoQ.

Post strong performance in Q3FY19, we upgrade LTTS USD revenue growth to 24.5% (earlier 24%) for FY19E. However, we downgrade USD revenue growth for FY20E to 17% (earlier 17.8%, client specific issues) and maintain 15.9% for FY21E. Our USD/INR assumptions are at 70/70.5/72 for FY19/FY20/FY21E. We model our EBIDTA margin assumptions at 17.6/17.9/18% for FY19/FY20/21E. Our EPS estimates are at Rs70.5/75/87 for FY19/20/21E, revised by +2%/-1.5%/+0.2% respectively. Stock trades at 22.3x...