L&T Tech Q3 Results Review - Strong Deal Wins, Commentary Indicate Good FY25: Motilal Oswal

Motilal Oswal Report

L&T Technology Services Ltd. posted revenue of $291 million in Q3 FY24, up 0.9% QoQ constant currency and slightly below our estimate. Revenue performance was broad based, led by medical devices (+2.4% QoQ).

Despite Q3 seasonality, deal signing was strong, as L&T Tech signed six large deals with $10 million plus total contract value.

The management maintained its FY24 revenue growth guidance at 17.5-18.5%, which implies a strong exit to FY24 (+4.0-7.0% QoQ CC), aided by SWC seasonality.

Ebit margin was flat at 17.2% (up 10bp QoQ), missing our estimate of a 60 basis points QoQ improvement. Despite the net headcount reduction of ~600, the margin improvement was muted in Q3 as utilisation was low due to furloughs and higher selling, general and administrative costs.

While the Q3 delivery was modest and in line, management commentary on the demand environment was relatively more positive in the recent quarters as L&T Tech is seeing a good business environment across sectors.

With deal activity and deal pipeline continuing to improve, the company is likely to gain incremental business from the scale-up in new accounts. Moreover, while Q4 will benefit from seasonal tailwinds in the recently acquired SWC business, the upper end of the guidance indicates an improving near-term outlook, a ramp up in recent empanelment, and potential large deal wins.

We factor in a gradual margin expansion over the next two years, with L&T Tech reaching its 18%+ Ebit margin target by Q4 FY25. With good revenue growth over the next two years, we expect the company to post a compound annual growth rate of 16%/17% in USD revenue/Indian rupee profit after tax over FY23-26.

We keep our FY24/FY25 EPS estimates broadly unchanged after the Q3 FY24 results.

We retain our 'Buy' rating on L&T Tech with a target price of Rs 6,220 (based on 35 times FY26E EPS), considering-

1. a better outlook for the engineering research and development services industry compared to the broader IT services universe, and

2. the growing penetration of outsourced ER&D services.

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