Sharekhan maintains Buy rating with a price target of Rs 3100

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L&T Technology Services’ management is confident of delivering strong revenue growth going ahead, given rising spends on digital engineering, prudent client mining strategy, broader vertical mix, internal change in portfolio mix, aggressive strategy to participate in customers’ cost take-out initiatives, and increased outsourcing activities. L&T Technology Services has been strengthening its capabilities in digital technologies across all its verticals to capture the opportunities. Sharekhan maintains Buy rating on L&T Technology Services with a price target of Rs 3100. L&T Technology share price closed at Rs 2548, up Rs 56 or 2.25% in last session.

L&T Technology Services Management witnesses strong demand trends such as:

(1)    electric vehicle/connected vehicle – software development services are expected to post a 9%-10% CAGR, aided by increasing usage of software in vehicles

(2)     5G – Orchestra acquisition has strengthened its capabilities to capture opportunities in network equipment, consumer electronic devices, industrial automation, etc

(3)    artificial intelligence, which is expected to make its way in every application in the engineering space

(4)    medical technology given development of new products using technologies of AI and 5G

(5)     sustainability – enterprises across industries have been started moving towards clean energy

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L&T Technology Services has been doing consulting work in sustainability area and executing projects on small scale as well. L&T Technology Services plans to invest in this space to strengthen its capabilities to capture the opportunities going ahead. With strong digital engineering capabilities across verticals, L&T Technology Services will be considered one of the preferred transformation partners for the world’s leading companies. Management indicated its top-30 customers (which contribute 55% to its total revenue), each spend $1 billion+ on R&D annually, which provides lot of headroom for the company for scalability.

L&T Technology Services has been focusing on scaling its revenue from its existing large customers by:

(1)    expanding its existing engagement from a vanilla project to programme level of engagement

(2)    moving to other areas of same engagement or focusing on adjacencies of same customer

(3)    penetrating into different distant divisions/segments of same customer

(4)    extending the relationship into different regions

L&T Technology Services Management aspires to cross Q4FY2020 revenue and adjusted EBIT margin levels (16.5%, excluding one-time expenses) in Q4FY2021. Despite highly impacted commercial aero sub-vertical, management expects to deliver sequential revenue growth across its five verticals in Q4FY2021.

Sharekhan expects EBIT margin to improve by 40bps qoq to 15.6% in Q4FY2021 (lower to its aspiration level of 16.5%) despite currency headwinds and initial expenses relating to ramp-up of large deals, led by:

(1)    continued lower travel and admin expenses

(2)    better revenue mix

(3)    improvement of utilisation

(4)    operational efficiencies

Sharekhan also expects L&T Technology Services to report margin improvement in FY2022E despite near-term headwinds such as

(1)    initial expenses relating to ramp-up of large deals

(2)    possible negative impact from new wage code

(3)    increased local hires in the US


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