Prabhudas Lilladher has given Accumulate recommendation for Larsen and Toubro Technology Services with a target price of Rs. 4549 in its research report issued on Apr 22, 2022

Prabhudas Lilladher’s research report on Larsen and Toubro Technology Services

We cut LTTS’s rating to Accumulate from Buy as we cut DCF based target price to Rs. 4549 (earlier: Rs.5428) given expensive valuations on backdrop of possible moderation in ER&D spends (more discretionary in nature) given high inflationary environment, supply chain issues and global macro uncertainties and little scope for further margin expansion over FY23-24 due to higher manpower costs, return of travel costs and investments for future growth. Our EPS estimates cut by 3.3%/4.2% in FY23/24 led by cut in revenue estimates. We assume ~18% margins in FY23 & FY24. FY23 USD revenue growth guidance of 13.5-15.5% YoY USD appears to be conservative given pickup in large deal wins especially in EACV segment in FY22 and all-time large deal pipeline. However, given possibility of moderation in ER&D spends due to macro uncertainties, guidance may not be upgraded by same level as it was done in FY22 (upgraded from 13-15% to 19-20%). Management targets to maintain 18%+ EBIT margin factoring in headwinds from intermittent wage hikes, travel costs, high admin expenses partially offset by tailwinds of growth leverage, better quality of revenues, pyramid optimization and operational efficiencies.

Outlook

We arrive at DCF based TP of Rs. 4549 with implied target multiple of 36x P/E on FY24 EPS (earlier 41x). LTTS is currently trading at 38x/33x on FY23/24 earnings of INR 111/126 respectively with Revenue/EPS CAGR of 16%/17% over FY22-24E.

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