LTTS investors see a ray of hope but valuations can be a bother
The stock of L&T Technology Services Ltd (LTTS) hit a new 52-week high of ₹4,408.95 on Wednesday. The company’s management recently met analysts and spoke about the improving near-term demand outlook. According to management, barring a few pockets of weakness such as telecom (semiconductors), deal pipeline is improving. Although pace of deal conversions is still slow, the company has not seen clients significantly cut technology spending. So, management hopes that consistent deal conversions will boost revenue growth ahead.
For FY24, the company has maintained its overall revenue growth guidance of 20%. In Q1FY24, it reported sequential constant currency revenue growth of 9.8%, which, although below analysts’ expectations, was higher than large-cap IT companies.Given the company’s execution capabilities, analysts expect it to meet its FY24 overall revenue growth guidance. However, its organic revenue growth guidance of 10% may disappoint.
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“This is due to the weak start in Q1FY24 and a slower conversion of the pipeline in Q2FY24, given the nascent demand recovery and persisting weakness in a few areas of the company’s portfolio of offerings. We forecast an organic growth rate of 8% in FY2024E,” said a Kotak Institutional Equities report on 22 August. In Q1FY24, the company reported muted sequential constant currency organic revenue growth of 0.6%. Seasonality in Smart World and Communication (SWC) business and slower decision making by clients impacted revenue growth.
The company targets Ebit margin of 17% for FY24. Here, wage hike headwinds need to be watched out for. That said, margins may get some cushion from factors such as employee pyramid and better leverage.
Meanwhile, so far in 2023, the LTTS stock has rallied by nearly 19%, outperforming the Nifty IT index’s single-digit ret-urns. This has translated into pricey valuations. At FY25 price-to-earnings, the stock is trading at a multiple of 30.65 times, a premium to large-cap peers, showed Bloomberg data.
“Even though some improvement is happening in the deal win scenario, near-term challenges on revenue visibility are not out of the company’s way. So, it remains to be seen if demand picks up in H2FY24 as is being widely anticipated,” said Omkar Tanksale, senior research analyst, Axis Securities Ltd. Further, SWC business is likely to remain a near-term overhang for the LTTS stock because revenue synergies will take time to come, he added. To conclude, the stock’s valuations are expensive, thus limiting steep near-term upside potential.
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Updated: 23 Aug 2023, 11:08 PM IST
