Moderate growth guidance takes the sheen off L&T Technology stock

Lower than expected Q4 show, premium valuations were other factors

The L&T Technology Services stock shed about 8 per cent in trade after reporting lower than expected performance in the March quarter and weak revenue growth guidance for FY22. Given these factors its premium valuations too led to some selling pressure in trade on Tuesday. 

Barring two verticals out of five (plant and engineering and transport) revenue growth for others were flat or recorded marginal uptick. Sales growth of 3.8 per cent in constant currency basis were lower than the 4.5 per cent estimated by the street and were lagging smaller peers in the engineering research and development or ER&D space. 

Earnings before interest and taxes or EBIT margins improved 138 basis points on a sequential basis to 16.6 per cent and was supported by increased utilisation, higher share of offshore operations, operational efficiency and lower amortisation. Analysts at ICICI Securities note that adjusted for lower amortisation, the margins have expanded just 70 basis points as compared to the 150 basis points of Cyient and thus missed their estimates. 

The street was also not too enthused by the 13-15 per cent revenue growth guidance for FY22. The dollar revenue guidance which came on the back of a 6.3 per cent fall in revenues in FY21 was short of expectations as brokerages had pegged the same at high teens growth. HDFC Securities says that the guidance implies a modest 2.1-2.8 per cent compounded quarterly growth rate despite the phase two ramp up of the $100 million plus oil and gas deal. 

The growth outlook mismatch brought the premium valuations into focus; the stock is trading at 25 per cent premium to sector leaders such as TCS and more than twice that premium when compared to smaller peers. Analysts at Phillip Capital believe that the 63 per cent run up of the stock over the last six months has taken valuation to 29 times its FY23 earnings. This is expensive given the 13 per cent growth guidance in a discretionary spend dependent ER&D business.