Buy Larsen and Toubro Technology Services; target of Rs 5280: Motilal Oswal

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

LTTS reported a 3.6% QoQ CC growth in 4QFY22, 90bp below our estimate due to softer growth in Industrial Products (-0.5% QoQ), Medical Devices (flat QoQ), and Telecom and Hi-Tech (+1.1% QoQ), while Transportation grew a robust 7.8% QoQ. Despite the large 400bp shift in its on-site revenue mix and lower utilization (-80bp QoQ), operating margin was flat QoQ. Attrition spiked to 20.4% (+290bp QoQ) in 4QFY22, indicating continued supply pressures. The company bagged its second over USD100m deal (after winning a historical first in Dec’21) from Jaunt Air Mobility in the Aerospace vertical. USD CC revenue/INR EBIT/INR PAT grew 20%/52%/44% YoY in FY22. While the management’s initial FY23 revenue growth guidance of 13.5-15.5% was disappointing, their vertical commentary and deal momentum (six deals of over USD10m in 4QFY22) suggest that its guidance trajectory should mirror that of FY22 where there was a gap of almost 500bp between its initial guidance and final growth. With the scaling up of new deal wins from 2QFY22 onwards, we remain confident of LTTS delivering a revenue growth of 17.5% in FY23. With continued additions to its workforce (LTTS grew its staff count by 27% in FY22, despite elevated attrition) and an improving deal pipeline, we continue to view the company as a beneficiary of structural demand tailwinds.

Outlook

We lower our FY23-24 EPS estimate by 4-5% due to the 4QFY22 miss and weaker guidance. We maintain our Buy rating and marginally tweak our TP to INR5,280 per share (40x FY24E EPS).

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