Reduce Larsen and Toubro Technology; target of Rs 3865: HDFC Securities

HDFC Securities' research report on Larsen and Toubro Technology

L&T Technology Services (LTTS) delivered lower Q1 revenue performance, impacted by SWC seasonality. Strong demand continued in the transportation vertical (33% of revenue), led by continued traction in off-highway, EV, and software-defined vehicles while other verticals were impacted by delayed decision-making. Telecom & Hi-tech witnessed organic decline impacted by weakness in the semi-conductor sub-segment which is expected to prevail further in Q2. SWC revenue performance is expected to improve in H2FY24; it has historically contributed ~60% of annual revenue. We have built low-teen organic revenue CAGR over FY23-26E, which is in line with its historical growth, supported by a strong and diversified engineering services pedigree. LTTS maintained its medium-term growth outlook of USD 1.5bn revenue rate by FY25E. Wage increase in Q2 will be offset by medium-term levers of lower sub-contracting and better performance of SWC in H2FY24E.

Outlook

The risk-reward is unfavourable at 33x FY24E and we maintain REDUCE, with a TP of INR 3,865, based on 25x Jun-25E EPS and a 16% EPS CAGR over FY23-26E.