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You are here : IndiaNotes >> Market Action >> Fundamental

L&T Technology Services 2QFY18 Results: Margin recovery could do wonders; retain ADD

Equirus Securities | 14 Nov, 2017  | Follow Author | Add to my Favourites 
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L&T Technology Services (LTTS) 2QFY18 earnings were good on revenue but „not so‟ on margins. 2Q US$ revenue growth of 9.2% was led by organic growth (~7.2%, large deal conversion & traction in top 30 customers) and Esencia contribution (~$ 4.5mn). Healthy bookings (11 logos, ~6 multi-million deals) and 1H performance implies extraordinary growth in FY18e. However EBITDAM performance was „Ok‟ as onsite ramp-up in large verticals ate into margins. Tepid 1H leads to trimming of FY18e margin assumption but earnings revision is contained by f/x gains. Finally, extraordinary growth supported by margin recovery could make the franchise very attractive. Retain ADD with TP of Rs. 864 at 17x Dec‟18 TTM EPS of Rs. 50.8 (vs. Rs. 808 set at 16x Sept‟18 TTM EPS of Rs. 50.5 earlier). Industry leading growth leads to increase in target multiple by a turn.


Reiterates growth guidance on solid beat:
LTTS reiterated double digit growth guidance for FY18e led by 2Q beat and backed by healthy bookings, large deal wins. Order backlog was at $ 220mn, executable over next 2 quarters and waited pipeline stood at $ 90mn. We are raising our estimates to accommodate 2Q beat and now expect organic revenue growth of 11.3% yoy (~8.7% earlier) and overall revenue growth estimate of 14.5% (12.2%) for FY18E. We assume Esencia revenue contribution of ~$ 16mn for FY18e.


Large verticals led quarterly growth: Growth during the quarter was led by large verticals such as transportation (32.3% of revenues, grew 5.4% qoq in rupee terms), and telecom (24.3%, 32.3%, Esencia), helped by smaller vertical such as medical (7.0%, 10.5%). Industrial products (23.6%, 1.6%) and Process were soft (12.8%, 0.3%).  Geographically, growth was led by India (23.6% qoq), RoW (39.1%) aided by Europe (8.8%) and North America (3.2%).


EBITDAM performance could have been better:
EBITDAM were „Ok‟ (15.3%, 34bps lower than EE) and were impacted by onsite ramp-ups in large verticals partially offset by operational efficiency. Hi-tech and Process margins declined 432 bps/155 bps qoq led by onsite ramp-ups (increased 160bps qoq) and dragged company average. Hi-tech margins are now in single digits (8.3%) vs. 23.2% in 2QFY17. Though LTTS is striving to balance growth and margins through SG&A leverage, pyramid correction, utilisation improvement, and platform led revenues; soft 1H performance coupled with wage hike impact in 3Q leads to trimming of our margin assumption to 15.6% vs. 16.3% earlier.


Retain ADD driven by earnings cut:
Differentiation in 50% of its business, large market opportunity, healthy bookings, b/s metrics, & return ratios support our 17x target PE (lower than 19.7x average for Indian ER&D peers (FY18e) and at 35.6% discount to Tata Elxsi‟s multiple). Slower than anticipated ramp-ups in large deal and recovery in Process, ramp-downs in large customers and uneven execution are key risks to our estimates.
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About Equirus Securities

Equirus has built impeccable credential and market standing across domains & has created a niche for itself in its ability to structure and deliver transactions in-line with client’s requirement. It takes pride in being a one stop Investment bank for all financial needs of growth oriented mid market companies. Led by seasoned bankers, they work with the largest and the most reputed investors in the industry. Equirus Securities can be accessed at www.equirus.com


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.

 




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