L&T Technology may trail peers in near term despite improved FY21 guidance

While deal pipeline remains strong, Q3 growth, valuations could impact stock

The L&T Technology Services stock has been trading flat since its results announcement last week. This is despite the improved guidance for the financial year, and sequential improvement in the September quarter.

The company has guided for a revenue decline of 7-8 per cent for FY21, which is a 200-basis-point (bps) improvement compared to the earlier guidance of a 9-10 per cent decline. 

The management commentary suggests that the worst is over for the company, and growth should improve hereon. Following a 12.7 per cent revenue contraction in the June quarter led by a decline in most verticals, growth has improved by 2.9 per cent in the September quarter. 

Strong deal wins and a pipeline that is 40 per cent higher than pre-Covid levels, is favourable for the company. 

However, Vibhor Singhal and Karan Uppal of PhillipCapital say the 200-bp upward revision in revenue guidance is technically not an upgrade, given that it incorporates the 1 per cent impact of the Orchestra acquisition, and 0.5-1.0 per cent from constant currency impact.

The major uncertainty, however, is the client mix — tilted towards discretionary sectors and spends of clients. This, Singhal and Uppal believe, will remain weak in the current uncertain environment. 

Near-term growth could be hit by furloughs in the December quarter and any delay in deal closure. Large deals in the telecom and hi-tech segments were delayed in the quarter. In addition to furloughs, what could add to uncertainty is the US presidential election on November 3. 

The other factor that could weigh on the stock in the near term is valuation. From its lows in March, the stock has gained 76 per cent and is trading at 21x its FY22 earnings estimates. 

Analysts at HDFC Securities, who have a ‘reduce’ rating, believe the valuation has more than adequately factored in the near-term recovery curve of the company. 

While most brokerages are positive on the long-term growth story, they expect it to underperform its software services peers on the growth front.