Hold Larsen and Toubro Technology Services; target of Rs 4250: Prabhudas Lilladher

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

The revenue growth (-4.2% QoQ CC) was below our estimates (-2.5% QoQ CC), attributed to the SWC seasonality, however ex-India USD revenue grew by 1.5% QoQ. The mobility business (ex-Auto) has stabilized and picked up pace in the off-highway and trucks segments, while Automotive sees incremental pauses and deferrals on executions. The weakness in the Automotive is fairly balanced against the momentum within Sustainability, validated through securing $50m deal within the space. The deal ramp up would support the growth in H2, and even beyond the sizable win ($200m+ LD TCV) the deal pipeline seems to be robust. Given the revenue miss in Q1, the ask-rare translates to ~2.8% CQGR for the rest of the year to achieve low double-digit CC growth. We believe the large deal ramp up and positive SWC seasonality would support growth in H2 to achieve directional milestone. Margins were largely stable despite the notable revenue decline, partly aided by low-margin SWC seasonality and continued momentum in high-margin Sustainability business. We are adjusting our revenue growth against Q1 miss, while keeping our margin estimates largely unchanged. We are building in 9.8%/9.2% CC revenue growth, while keeping EBIT margins unchanged at 13.9%/14.7% for FY26E/FY27E.

Outlook

We are assigning 29x PE to FY27E EPS, translating a TP of 4,250. Valuations capped with no potential upside, maintain our HOLD rating.