L&T Technology Shares Drop As Nomura Initiates Coverage With 'Reduce' Rating
Nomura expects L&T Technology to clock a U.S. dollar revenue CAGR of 14% over fiscal 2022-2025.
Shares of L&T Technology Services Ltd. dropped on Thursday after Nomura flagged a challenging industry outlook, the integration of margin-dilutive SWC businesses, and rich valuations.
It initiated coverage on the company with a 'reduce' rating and a target price of Rs 3,050 per share, implying a potential downside of about 17%.
"Near term, we are watchful about Smart World and Communication's (SWC's) integration and slowdown in the engineering research and development industry," the brokerage said in its investor note.
L&T Technology had announced in January that it would acquire parent L&T's Smart World & Communication business.
SWC reported revenue of Rs 1,098 crore, an 8-10% Ebitda margin, and 100% India revenue concentration in fiscal 2022, the note added.
The scrip was trading 1.40% lower at Rs 3,696.25 per share, compared with a 0.19% decline in the benchmark Nifty 50 as of 9:21 a.m.
The relative strength index stood at 57.
Of the 30 analysts tracking the stock, 11 maintained 'buy,' eight suggested 'hold,' and 11 recommended 'sell,' according to Bloomberg data. The average 12-month price target implies a potential downside of 9.1%.
Slowing ER&D Industry
According to Nomura, L&T Technology, which is one of the leading "pure-play" engineering research and development services companies in India, could face the brunt of a slowdown in the ER&D industry.
It compiled a database with 200 global companies with the highest ER&D spend in transportation, industrial products, telecom, high technology, and medical devices verticals. The brokerage found a strong correlation between L&T Technology's segmental and overall revenue growth and the databased companies ER&D spending growth over the calendar years 2018 to 2021.
Citing Bloomberg estimates, Nomura said that these 200 companies should record a revenue CAGR of 4.7% over calendar years 2021 through 2024, compared with 5.7% in calendar years 2016 to 2021.
"Revenue growth consensus estimates for these companies indicate weak 3.4% and 3.3% year-on-year growth in calendar years 2022 and 2023, respectively, versus 14.5% year-on-year growth seen in calendar year 2021."
Revenue And Margin Forecast
Nomura expects L&T Technology to clock a U.S. dollar revenue CAGR of 14% over fiscal 2022-2025. This is compared with the 12.7% dollar revenue CAGR it posted during fiscal 2017–2022.
"Our revenue growth assumptions are in line with our T200 database, which shows signs of moderation in the ER&D clients’ revenue growth projections," the brokerage said.
Meanwhile, the company's EBIT margins in fiscal 2024 could be under pressure given the margin-dilutive SWC acquisition, Nomura said. However, it expects a gradual recovery in fiscal 2025 with a 17.3% EBIT margin.
Over fiscal 2022 to 2025, Nomura expects U.S. dollar revenue CAGR of 14% with a margin contraction of about 100 basis points, which will lead to lower-than-consensus earnings per share CAGR of 15.2% over the same period.
The brokerage noted that L&T Technology is currently trading at 26.4 times the estimated earnings per share for fiscal 2025, which, according to it, is expensive.
