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Shares of L&T Technology Services Ltd (LTTS) jumped 19% on the NSE on Thursday after it announced the June-quarter results. The move was so sharp that even shares of parent company Larsen & Toubro Ltd rose by over 4%.

However, the jump has not made much of an impact on analysts. “LTTS’s Q1FY22 earnings were ahead of our estimates, primarily led by its higher profit margins. However, this does nothing to our FY23 earnings estimates, as the already expected margin improvements are flowing in earlier than anticipated. As such, we view the rise in the stock as purely a valuation multiple re-rating, with no great reason to support it," said an analyst at an institutional brokerage, requesting anonymity.

“The stock has run up sharply and is trading at 30 times FY23 price to earnings. This makes it one of the most expensive stocks and that too for a discretionary spend dependent engineering and research and development (ERD) business," said a report by PhillipCapital (India) Pvt. Ltd before the 19% jump in the stock. Discretionary spending tends to be erratic and can cause revenue growth rates to fluctuate.

Ahead of the curve
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Ahead of the curve

For now, the firm’s growth rates and near-term prospects are decent, though all this and more is priced into the stock. The stock now trades at more than 35 times FY23 earnings, based on PhillipCapital estimates.

A key highlight of the Q1 earnings was that despite wage hikes, its operating profit margin improved by 70 basis points (bps) on a sequential basis to 17.3%.

According to the company’s management, the wage hike impact of around 150bps and higher sub-contractor costs were absorbed by tailwinds from operational efficiencies, cost optimization and growth in the higher margin business.

The sequential constant currency revenue growth of 4.3% was largely in line with the Street’s estimates, aided by an improvement in client metrics. Growth was healthy across verticals, except medical devices. Geography-wise growth was led by North America and Europe.

The company also won six large deals of over $10 million during the quarter. It revised its FY22 revenue growth guidance to 15-17% from 13-15% earlier. “Compared to the relatively low base of FY21, we were already estimating a higher growth number for this fiscal," said the analyst cited above.

It appears some investors are viewing LTTS with a new lens, where it is no longer merely an ERD services firm, but a digital ERD firm. Other stocks in the ERD space such as Tata Elxsi Ltd, KPIT Tech Ltd and Cyient Ltd have also rallied sharply in the past year, rising 400%, 272% and 257%, respectively.

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