Motilal Oswal has given Buy recommendation for Larsen and Toubro Technology Services recommended buy rating on the stock with a target price of Rs 6130 in its research re with a target price of Rs. 6130 in its research report issued on Jan 19, 2022

Motilal Oswal’s research report on Larsen and Toubro Technology Services

LTTS reported a 4.2% QoQ CC growth in 3Q, 100bp below our estimate due to softer Industrial Products (+0.7% QoQ) and Medical Devices (+1.5% QoQ) on a high base of 2QFY22. Operating leverage aided the 20bp QoQ improvement in EBIT margin to 18.6% (In line), despite adding a record 2,135 net employees (+12%), lower utilization (-220bp) and on-site mix (+50bp). It reported an attrition of 17.5% (+100bp QoQ). USD revenue/INR EBIT/INR PAT grew 20%/59%/48% YoY in 9MFY22. The management maintained its 19-20% USD revenue growth guidance. It indicated that it is likely to be tilted towards the upper end. Moreover, this guidance includes a planned scale back in part of the company’s Media sub-vertical, where it will exit a few low margin accounts in 4QFY22. The management said the demand environment remains encouraging and the deal pipeline is healthy. Strong hiring with a record 2,135 net additions (+12% QoQ) provides further visibility on demand. LTTS can surprise on the upside (FY23 EBIT margin guidance of over 18%), given that it will gain from: a) a favorable pyramid, due to higher fresher addition (1,900 in 3QFY22); b) better than industry attrition, which is stabilizing ahead of our expectation; and c) pickup in margin in the Telecom vertical (~9pp gap v/s group margin). We expect LTTS to deliver a further 50bp margin improvement over the next two years from our FY22 estimate of 18.4%.

Outlook

We lower our FY22-24E EPS estimate by 1-2% due to the 3QFY22 miss. We maintain our Buy rating and marginally tweak our TP to INR6,130 per share (43x FY24E EPS).

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