Accumulate Larsen and Toubro Technology; target of Rs 1860: Prabhudas Lilladher

Prabhudas Lilladher's research report on Larsen and Toubro Technology

LTTS reported Q2 revenue at 178 mn USD, 4.1% QoQ, -9.9% YoY slightly above our estimates at USD 177mn. (3.5% QoQ). Strong revenue growth was on account of broad-based growth across verticals. LTTS is experiencing accelerated deployment of digital engineering with revenues from digital and leading-edge solutions rising to 49% during Q2. Management mentioned that worst is over and deal pipeline has started picking up across all segments. EBIT margin improved by 161bps QoQ at 13.7% in Q2 slightly higher than our estimates of 13.1% by 60bps. Management expects margins to further improve in Q3 & Q4 as growth in high margin verticals (verticals with margin >25% during pre-Covid times) such as Transportation, Industrial Products, Medical devices is expected to improve. Guidance came in line with our estimates of 7-8% revenue decline for FY21E. We were expecting -7.6% revenue decline in FY21E, now slightly changed to -7.2%. After 5 quarters, finally broad based growth & commentary is back for LTTS. Growth will be driven by 3 trends 1) cost optimization initiatives in legacy engineering 2) Digital and leading edge technologies 3) Innovation -platform and solutions such as touch less plant operations. Management has not seen stoppages after July and has seen decision making pickup pace Sept onwards. Our estimates remain unchanged as we were already factoring revenue growth recovery & margin expansion in coming quarters.

Outlook

We assign higher multiple of 22X (earlier 18X) to LTTS as broad based revenue growth is back on track & We believe it will be sustained for consecutive 3-4 quarters ahead. We are estimating 12% revenue CAGR & 23.7% EPS CAGR for FY21-22E. We arrive at a TP of INR 1860 on Sep-22 EPS of INR 84.5 to arrive at a changed TP of INR 1860. LTTS is currently trading at 22.4X/19.4X on FY22/23 earnings of INR 78/90.6 respectively. Upgrade to Accumulate from Hold.

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