What‘s making CLSA initiate coverage on L&T Tech with buy call?

Moneycontrol NewsCiting good client base, diversification of its verticals along with a strong suite of offerings, CLSA has initiated a buy coverage on L&T Technology Services (LTTS). It has kept a target price of Rs 150 and expects the scrip to double over the next four years. The brokerage house believes that the revenues for the firm could reach USD 1 billion in five years, while the growth should accelerate to 16 percent over FY18-21. The company, in FY16, had revenues of USD 468 million and is now on the cusp of accelerating growth with improving economics, the research firm’s report added. On key business areas, CLSA cited the unique positioning in engineering services. “LTTS operates in the mechanical and embedded services part of the Engineering and R&D services (ERS market) that contributes two-thirds of a USD 60 billion market that remains under-penetrated,” the report stated. Its strong client relationships and niche focus can help it to scale up the business at 15 percent CAGR over the next five years, it said. Simultaneously, it stated that the company was the only pure-play firm with a strong presence across all key verticals, which reduces vertical-specific challenges. Among key financial metrics for the firm is its sector-leading revenues and profit per employee, the brokerage house said. It expects margins to expand by 140 basis points (bps) over the next three years on the back of differential positioning. On risks, it sees the company’s revenue growth to be slower due to cleaning up of tail accounts, deferrals by customers due to political factors as well as slow capex. The company also uses H1-B visas in the US, which means exposure to higher wage costs if legislative action is taken, it added. Despite this, the brokerage house cites strong order book to boost growth in the first quarter of next fiscal. Its earnings and revenue growth statistics supports the one-year target price of Rs 950 of CLSA.