L&T Tech's Q3 excites, but don’t ignore the near-term headwinds

The demand outlook is steadily improving and all verticals are slated to grow in Q4, LLTS management said (L&T Technology Services )
The demand outlook is steadily improving and all verticals are slated to grow in Q4, LLTS management said (L&T Technology Services )

Summary

  • L&T Technology Services has surprised investors with significant deal wins and margin expansion in Q3FY25. But its shares have declined 4.35% in FY25 so far, lagging the Nifty IT index’s returns. Here's why

Midcap IT firm L&T Technology Services Ltd (LTTS) surprised the Street with solid deal wins and margin expansion in the December quarter (Q3FY25). Investors cheered, taking the shares up about 8% on Thursday.

Sequential constant currency (CC) revenue grew 3.1%, broadly in line with estimates, and led by the tech and sustainability verticals. The mobility segment remained at a sore point, hurt by furloughs and a pause in spending by some clients.

Nonetheless, the demand outlook is steadily improving, and all verticals are slated to grow in Q4, LLTS management said, adding that FY26 would be better than FY25. Its FY25 year-on-year CC revenue growth guidance still stands at 10%. This includes a contribution from the recent Intelliswift acquisition, with which LTTS forays into the high-growth software ER&D (engineering research and development) segment. Q4 performance is expected to be strong, aided by the ramp-up of Q3 deal wins and a favourable seasonality in SWC business.

Deal wins were at an all-time high in Q3 with eight large deals won above $10 million, spread across all three key verticals having an average deal tenure of about three years. LTTS expects similar booking levels in Q4 and sees no significant impact on large deal ramp-ups. “Go deeper scale" strategy implemented in H1FY25 is yielding results as reflected in deal bookings, the management said.

Earnings before interest and tax (Ebit) margin improved by 80 basis points (bps) sequentially to 15.9%. This was led by offshoring and lower selling, general, and administrative expenses partly offset by wage hikes impact and one-time M&A expenses. However, LTTS expects Intelliswift acquisition, which has a weak margin profile, to impact overall margins by 150 bps in Q4. It aims to achieve 16.5% overall margins by Q4FY27/Q1FY28.

Also Read: Indian IT services companies shed reliance on H-1B visas

Further, LTTS has revised organic year-on-year revenue growth guidance to 8%, which is at the lower end of earlier guidance of 8-10%. This reflects ongoing weakness in the auto portfolio of its mobility vertical. HDFC Securities notes that the downward revision in organic revenue growth guidance was on expected lines and headwinds in the automotive subsegment of mobility (32% of revenue) are likely to disrupt near-term growth keeping earnings growth volatile. For FY25, the Ebit margin target for the organic business is at 16%.

Meanwhile, despite Thursday's jump, LTTS’s shares have declined 4.35% in FY25 so far, lagging the Nifty IT index’s 24% returns. That’s because LTTS is struggling with either growth or margin. Notwithstanding Q3 deal wins, a weakening margin profile due to recent acquisitions is a concern. Sure, LLTS enjoys positives such as a strong ER&D franchise, but a sustained improvement in earnings is crucial for rich valuation to justify.

Also Read: LTTS investors see a ray of hope but valuations can be a bother

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