Improving deal pipeline and growth factored into L&T Technology stock

Q3 performance was better than estimates led by growth across verticals

Large deals in a quarter, strong deal pipeline and broadbased growth across key verticals for L&T Technology Services highlight that the worst affected IT segment of engineering, research and development (ER&D) is on a firm recovery path. The pure play ER&D player reported a constant currency growth of 6.6 per cent on a sequential basis which was better than the street’s expectation of 4-5 per cent growth. The company has also revised its guidance for FY21. 

Organic growth in the quarter was led by the plant engineering and industrial product segments which were up 5.5-9.2 per cent q-o-q. The highest growth, however, came from the telecom segment which reported a growth of 14.3 per cent; this also includes the acquisition of US-based Orchestra Technology in October. On a y-o-y basis, however, almost all verticals have seen a fall in revenues barring medical devices.

Its largest vertical, transportation which accounts for about 30.1 per cent of revenues was up 3.1 per cent. The company highlighted that the aerospace business has turned the corner and defence led the growth, however, commercial auto segment continues to lag. The share of the transportation segment has declined sharply from nearly 36 per cent in the year ago quarter. The company highlighted that newer areas especially in the digital space are witnessing good traction and about 49 per cent of its revenues come from these areas. 
 

               

After reporting its highest large deal wins led by a $100 million order in a quarter, the company indicated that the deal pipeline across the all segment continues to be strong. This should help growth pick up especially in FY22. The company also improved its guidance for revenue growth in FY21 to -6.5 per cent as compared to the -7 to -8 per cent band that it had guided earlier. The guidance indicates a 3 per cent sequential growth in the March quarter which analysts believe is conservative. What could, however, peg back deal momentum are any further lockdowns in Europe and Japan. 

Strong growth on a sequential basis as well as operational efficiencies led to a 150 basis points sequential uptick in margins to 15.2 per cent. The gains were led by higher utilisation, offshoring and cost savings. While higher variable pay and sub contractor costs did offset some of the gains, the company hopes to reach the 17 per cent pre-Covid margin levels achieved a year ago. 

Despite the improving outlook and guidance, the stock fell 5 per cent. Analysts believe that most of the gains are already factored into the price with valuations at around 30 times its FY22 earnings estimates are expensive. Given the 10-12 per cent medium to long term earnings growth (estimated by brokerages such as Antique Stock Broking), further correction in the stock, which has gained 119 per cent since the start of FY21, could be used to accumulate for the long term.