L&T Technology Services Ltd. share price target

Maintain BUY with TP of Rs 1,500, 22x FY20E EPS. L&T; Technology (LTT) posted strong growth with revenue at USD 162mn, 7.5% QoQ (5.5% QoQ excluding the one-time revenue from Esencia IP sale). Growth was broad-based with Transportation vertical (30.8% of rev) leading the growth at 7.2% QoQ. EBITDA% came in-line at 15.5%, +22bps QoQ (16.1% adjusted for Rs 55mn one-off). Margin improvement was supported by better offshore-mix and higher utilisation (80.7% in 4Q).

L&T; Technology Services (LTTS) surprised again with a 7.5% QoQ USD revenue growth in 4QFY18. It expects revenues to grow at least 16% in FY19 and at 15% CAGR to USD1bn in FY21 (including USD c.120mn from future acquisitions) given strong deal wins/pipeline. It also expects concurrent margin expansion that could be amplified by the INR depreciation. We raise our recurring FY19/FY20 EPS estimates by c.4% each. While the stock's valuation appears optically rich at 19x FY20F EPS, we believe the strong earnings momentum (17% FY18-20 CAGR) and a superior business portfolio should sustain that. Maintain BUY with a...

LTTS reported strong Q3 revenue growth, ahead of estimates, up 8.4% QoQ led by strong show in Telecom-Hitech vertical (28% of revenue; up 24.8% QoQ). Despite wage impact, EBITDA margin (at 15.3%) was flat QoQ led by strong cost control (employee cost down 280 bps QoQ).

LTTS reported strong Q2 revenue growth (up 9.2% QoQ in USD terms/8.7% in cc terms) led by strong show in Top 30 clients (up ~12% QoQ). EBITDA margin (at 15.3%) was flat QoQ.

Maintain NEUTRAL with a TP of Rs 805, 15x Sep-19E EPS. L&T; Technology (LTT) posted strong revenue numbers (large accounts-led), while operating performance was in-line with estimates. Revenue came in at USD 139mn, 9.1% QoQ (5.6% organic), supported by strong growth in the Top-5 accounts (60% of incremental sequential growth in 2Q). EBITDA% came in at 15.3%, -2bps QoQ (15.5% est.), supported by lower SG&A;, which offset the negative impact of high onsite growth. APAT came in at Rs 1.1bn, 12.3% QoQ.

We return positive from LTTS' analyst meet. With a well-articulated growth strategy (esp. multi-vertical leadership, T30:A3 for client mining), marquee clients (48+ of Top 100 R&D;) and an impressive differentiated solutions portfolio (iBEMS, UBIQWeise etc.)

Valuations at 14x FY19E (MidCap-IT at 12.2x) may limit the upside. Maintain NEUTRAL with a TP of Rs. 800, 15x FY19E EPS. We attended L&T; Technologys (LTT) Analyst Meet, where the company showcased its IPs and multiple solutions (transportation value-engg. services, connected worker IoT etc). Going ahead, LTTs growth will be led by (1) Large client mining (geo-expansion strategy), with 48 clients from the global Top-100 R&D; spenders, (2) Diversified vertical mix (recovery in the Process Industry vertical), (3) Business de-risked from client concentration (lowest Top-10 revenue share vs peers at 37%), (4) Acquisition synergies (Esencia) in the Telecom and Hi-tech vertical, and (5) Margin levers of utilisation, fixed-price and IP revenue.

Huge addressable market of USD 365 bn with just ~7% penetration. We expect domain specialists like LTTS to showcase higher growth, deeper mining. While Global Engineering Research and Development (ER&D;) is USD 1 trn with G500 ER&D; spend at USD 614 bn, market addressed by India is ~USD 20 bn. India-b..

L&T; Technology Services Ltd's (L&T; Tech) provides a pure play in the Engineering and R&D; services (ER&D;) space which is expected to grow at CAGR of 14% over 2015-2020. Further, L&T; Tech's target of 15% growth in FY17 and doubling of revenue in ~4 years would enable it to outperform the industry. While PER of 21x FY16 is at a premium to the large-caps and is expensive in the current IT services business environment, we believe that it provides good investment opportunity...

Incorporated in 2012, L&T Technology Services (LTS) is a leading global pure-play in the growing ER&D services company. The company leverages the strengths and heritage of Larsen & Toubro, a leading Indian conglomerate with strong global engineering capabilities providing it deep domain expertise in product and process engineering. LTS operates in five diverse industry segments viz. transportation, industrial products, telecom and hi-tech, process industry and medical devices. In FY16, the company derived ~50% of revenues from the three segments of industrial products, process industry and medical devices. The company aims to raise ~| 894 crore through an offer for sale of shares (at a price band of | 850-860 per share).

Valuation : LTS is one of the leading players in the growing ER&D space. However, the stock is available at 15.5x FY18E EPS, which is at a premium to other IT players who has presence in ER&D space such as HCL Tech (12.3x FY18E EPS) and Cyient Technologies (11.9x FY18E EPS). Hence, we believe current valuations leaves limited upside. We recommend that investors AVOID the issue.