Hold Larsen and Toubro Technology Services; target of Rs 4070: Prabhudas Lilladher

hold

Prabhudas Lilladher's research report on Larsen and Toubro Technology Services

The revenue performance (-2.8% QoQ CC) was below our estimates, although it is not comparable on QoQ basis, as the company has re-calibrated some of its business units in Q3 that are operationally low-margin and non-strategic. The carved-out units were majorly a part of Hi-Tech segment, ex-Hi-Tech growth stood at ~1.1% QoQ in USD. The management has laid out 5-year strategy (“Lakshya”) to doubling down on high growth areas and focus on quality revenues, while eliminating commoditized play. We believe the strategy is margin accretive from the quarter itself, but plugging the topline gaps would be challenging in the near-term, where Sustainability remains the only growth engine.

Outlook

Despite the strategic move, the milestone to achieve ~16% margin remains intact. We are building in 5.0%/3.5/9.0% CC revenue growth, while estimating margins at 13.9%/15.2%/15.7% for FY26E/FY27E/FY28E. With this strategic exercise, our EPS revised downward by ~7% each in FY27E/FY28E. We assign 25x to FY28E EPS that translates a TP of 4,070. Retain HOLD.

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LT Technology Services - 1601026 - prabhu