Buy Larsen and Toubro Technology Services; target of Rs 3940: Motilal Oswal

Motilal Oswal's research report on Larsen and Toubro Technology Services

L&T Technology (LTTS) posted a flat QoQ topline growth in constant currency (CC) in 3QFY23, missing our estimates of ~2% QoQ growth. This was led by seasonality and higher-than-expected furloughs, especially in Plant Engineering (-4.1% QoQ), Telecom & Hi-Tech (-2.8% QoQ) and Medical devices (-1.1%), while Transportation (+4.4% QoQ) and Industrial Products (+1.1% QoQ) offset the drag. Despite weak growth, EBIT margin improved 60bp QoQ over a low base (wage hike in 2QFY23), beating our estimates of 18.3%. While we were disappointed by the weak topline growth, healthy deal wins (five deals of USD10m+ TCV, total TCV at USD100m+) suggest limited impact on deal momentum due to macro slowdown. However, the weak performance in 3QFY23 led the company to revise its guidance to 15.0% YoY in CC from 15.5- 16.5% YoY given in 2Q. The management indicated some weakness in the Telecom and Medical devices verticals, where the macro impact is the most pronounced and should continue in the near term, while traction in other verticals should aid LTTS deliver a good exit to FY23 (MOFSLe at 3.1% QoQ CC).

Outlook

We continue to view LTTS as a beneficiary of the growing penetration of ER&D Services. We cut our FY23-25 EPS estimates by 1-3%. We retain our BUY rating and value LTTS at INR3,940 (premised on 30x FY24E EPS).