L&T Tech to see revenue, margin pressures in FY21 as clients defer spends

Recovery in segments such as transportation could be pushed to FY22

L&T Technology Services, which operates in the engineering, research and development (ER&D) segment of the information technology sector is expected to witness revenue and margin pressures in FY21. Given the discretionary nature of spends in the ER&D segment, the impact of Covid-19 has been felt more in this segment.
 

Some of the demand worries have been reflected in the June quarter results and the muted outlook for the current financial year.

The company reported a 12.5 per cent fall in revenues on a sequential basis in the quarter, higher than mid-cap IT peers. About two thirds of the revenue decline has been on account of deferral of projects and product rollouts by customers.
 

The overall revenue decline was led by the 23-25 per cent sales dip in transportation and plant & engineering verticals.

Transportation is the largest vertical for LTTS and accounts for 32 per cent of its revenues. Within transportation, auto and aerospace underperformed while oil and gas segment was responsible for the weak performance of the plant and engineering vertical.
 

The poor revenue performance and falling utilisation levels led to a sharp drop in operating profit margins. The 720 basis points drop in utilisation led to a 310 basis points fall q-o-q in margins to 12.1 per cent.
 

The management expects to end FY21 with a revenue decline of 9-10 per cent. Analysts at Phillip Capital say that ERD segment which is dependent on the discretionary segment will underperform other segments and might also see a delayed revival in FY22.

The positive for the company however has been the deal pipeline has been strong with nine deal wins across all the key verticals.

Given the slow recovery in key verticals and better growth opportunity in IT services space, LTTS could underperform its software peers in the near term. Though the stock is up 38 per cent from its March lows, it is trailing peer index, the BSE Information Technology which is up 56 per cent over the same period. Investors should avoid stocks in the ER&D space such as LTTS and Cyient.