Bajaj Finance, ICICI Prudential, L&T Technology, Tata Elxsi, Zensar Tech Q2 Results Review: HDFC Securities

HDFC Securities Institutional Equities

Bajaj Finance - Operating leverage to offset net interest margin compression

Bajaj Finance Ltd. delivered a strong set of numbers on the back of higher than-expected growth in assets under management (+33% YoY), customer additions (+37% YoY) and new loans booked (+26% YoY). NIMs were sequentially softer by 14 basis points on account of a spike in funding costs, which is likely to further sustain into Q3 FY24, reflecting in incremental NIM compression to the tune of 25-30 bps.

While our FY24 AUM growth forecast (+28%) is moderately behind management guidance, we believe that NIM compression is likely to be offset by improving operating leverage (Q2 FY24: 34%).

We believe that the increasing scale of operations, concomitant with rising competitive intensity, is likely to translate into a slower pace of AUM growth (sub-25%) over the medium term.

We introduce our FY26E forecasts and maintain 'Add' with a revised residual income-based target price of Rs 8,870 as we roll forward to September-25 (implied price/book of six times Sep-25 adjusted book value per share).

ICICI Prudential Life - Sluggish growth; proprietary banca channel drags

ICICI Prudential Life Insurance Company Ltd. clocked muted annual premium equivalent growth (+3% YoY) coupled with a further sequential softening in value of new business margin to 28.8% (-310 bps), translating into a 7% YoY VNB de-growth.

The company’s investments in channel diversification reflected in modest growth in the excluding ICICI Bank Ltd. channel (+6% YoY), which helped offset sustained de-growth in the proprietary banca channel (-15% YoY).

While ICICI Prudential’s re-engineered business model, focused on offering customers a diversified product and channel mix, is gradually reflecting in industry-leading share in sum assured (FY23: 15%), the drag on growth continues to disappoint.

We trim our FY24E/FY25E APE growth forecasts and moderate our VNB margin assumptions to adjust for the potential drag from the ICICI Bank channel and expect VNB to clock a 4% compound annual growth rate over FY23-25E (weaker than earlier forecasts). We retain 'Add' with a revised target price of Rs 575 (1.8 times March-25E embedded value).

L&T Technology - Guidance lowered, reflects H2 uncertainty

L&T Technology Services Ltd. posted decent growth and margin performance in Q2 but lowered its FY24E growth guidance from more than 20% constant currency earlier to 17.5-18.5% CC.

While L&T Technology’s deal wins have improved, complemented by better margin defence, risks of business cyclicality and weaker working capital cycle (post-Smart World and Communication) persist.

Strong demand continued in the transportation vertical (33% of revenue), although recent macro developments can impact the near-term profile. L&T Technology's differentiation as a pure-play engineering research and development services company lies in its domain capabilities across a diversified vertical base, supplemented by strong industry drivers (medium term), but the growth print may be impacted by a longer deal conversion cycle.

L&T Technology maintained its Ebitm outlook of 17% for FY24E and improved it to 18% by H1 FY26E, supported by cost optimisation and better operational efficiencies.

We believe that risk-reward is unfavorable at 31 times FY25E and we maintain 'Reduce', with a target price of Rs 4,100, based on 25 times Sep-25E earnings per share and a 17% EPS CAGR over FY23- 26E.

Tata Elxsi - Good show but growth skew continues

Tata Elxsi Ltd.’s Q2 performance was better than estimated (both on revenue and margin), but the growth divergence within verticals is expected to continue. Tata Elxsi’s client concentration has increased (T10 concentration highest in five years) which is also indicative of pipeline/vendor consolidation.

Growth was led by the transportation vertical (supported by deals in software-defined vehicles), but the media and communication vertical remained muted (impacted by revenue/cost pressure on enterprise clients).

The scalability of the transportation vertical supported by strong industry tailwinds and Tata Elxsi’s design-led differentiation is expected to drive the bulk of the growth ahead.

Following 34% and 24% growth in FY22/23, Tata Elxsi’s revenue growth has decelerated to 10%. While its revenue trajectory will improve to above mid-teens growth, margins are at the top-end (as compared to augmented trajectory over FY20-23), reflected in the earnings trajectory ahead.

Maintain 'Sell' on Tata Elxsi with a target price of Rs 6,560, based on 38 times Sep-25E EPS; Tata Elxsi is trading at 48 times/ 39 times FY25/26E.

Zensar Technologies - Growth challenged; margin discipline

Zensar Technologies Ltd. delivered another quarter of muted revenue growth but the margin performance was in line. The revenue was impacted by weak hi-tech (top client), offset by strong manufacturing and banking financial services and insurance.

The company reported a strong total contract value number of $194.8 million but there was a bunching up of deals from Q1 due to slower decision-making; normalised TCV is flat.

The company has registered a sharp margin improvement over the last three quarters on account of selling, general and administrative rationalisation, higher utilisation, better productivity and business mix (lower pass-through).

In Q2, the margin was flat despite a full quarter impact of a wage hike offset by a one-time benefit of ~160 bps. There is limited scope for margin improvement from the current level of ~17%, and the management target is mid-teens level.

The incremental benefits will be invested in the business to accelerate FY25E growth. The management indicated continued challenges in consumer and hi-tech verticals and cited uncertainty in the current demand environment with delays in decision-making.

We expect FY24E growth to be muted with acceleration in FY25E and have marginally changed our earnings per share estimate by ~1%.

We maintain our 'Add' rating with a target price of Rs 540, based on 18 times December-25E EPS.

The stock is trading at a price/earning of 19.5/19 times FY24/25E EPS, higher than its five-year average price/earning multiple.

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