L&T Technology Services: Too bold to handle?

Winter for the general engineering R&D (ER&D) space is over and spring may be around the corner, said the management of L&T Technology Services (LTTS) in its Q3FY24 earnings call. This optimistic outlook, the company believes, is not limited to LTTS but extends to the broader industry. A bold statement, despite prevailing global economic uncertainties and a cautious stance from top tier IT companies regarding near term demand.

In the third quarter, LTTS, a tier 2 IT firm and a specialist in ER&D, reported a revenue growth of 0.9% in constant currency (CC), missing analysts' estimates. However, the company remains upbeat, confident of achieving 17.5 18.5% year on year (YoY) revenue increase in CC for FY24. It's worth noting that ER&D, involving development and enhancement of products and services, is quite susceptible to economic fluctuations.

LTTS provides a range of services, including consultancy, design, development, and testing, covering the entire product and process development lifecycle. Contrasting LTTS’s stance, Infosys recently adjusted its FY24 CC revenue growth forecast, tightening it from 1 2.5% to 1.5 2% year on year. Similarly, HCL revised its forecast from 5 6% to 5 5.5%, and Wipro projected a 1.5% to 0.5% quarter on quarter CC revenue growth for Q4 in IT Services, which is lower than some analysts’ estimates.

But the LTTS management seems fairly certain of achieving the lower end of revenue growth guidance. This would be aided by factors such as lower furloughs, higher working days in Q4 and an immediate ramp up of deals won in Q3. According to the management, the deal pipeline continues to be robust with multiple large deal opportunities.

In Q3, its deal wins were decent, with six deals of more than $10 million total contract value, including a $40 million plus and a $20 million plus deals. However, meeting the implied quarterly growth rate of 4 7% for Q4FY24 might be challenging given the macroeconomic conditions. "For the top end of 7% q q growth, it would need more deals to be closed.

While the stronger seasonality of the SWC business would aid growth in Q4, LTTS expects growth to remain broad based across verticals. We expect LTTS to achieve the lower end of its guided band by clocking a 4% q q cc growth in Q4 FY24F," said Nomura Financial Advisory and Securities (India). LTTS has also maintained its earnings before interest and tax (Ebit) margin guidance of 17% for FY24.

Levers such as revenue growth, cost optimization and productivity measures would aid margin outlook. It aims to get back to the 18% level by 1HFY26. In Q3, Ebit margin at 17.2% was lower than some analysts’ estimates. Meanwhile, in response to the company's Q3 earnings, the stock rose 3% on the NSE in early deals on Wednesday.

While it remains to be seen whether this confidence translates into higher revenue growth, for now, valuations are expensive. The stock trades at FY25 price to earnings multiple of around 30 times, according to analysts' estimates, a premium to some tier 1 IT stocks..