Home / Markets / Mark To Market /  Why L&T Tech’s valuation is a worry after weak Q3

For a mid-cap stock trading at a steep valuation premium to its larger peers, subdued earnings growth could be punished more severely by investors. Case in point is information technology firm L&T Technology Services Ltd (LTTS).

The tier-II company’s December quarter (Q3FY22) results didn’t excite the Street as its sequential constant currency revenue growth at 4.2%, was below the 5-5.2% estimates of many analysts. Seasonality, weak performance of its industrial products and medical devices verticals and a high base of Q2FY22 affected LTTS’ revenues.

Mixed bag
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Mixed bag

Moreover, given that tier-II IT companies reported stellar growth in the past few quarters, Q3 earnings expectations from LTTS were high. Also, despite Q3 being a seasonally weak quarter for the IT industry, large-caps Tata Consultancy Services Ltd (TCS), Infosys Ltd, and HCL Technologies Ltd saw constant currency revenue grow ahead of the Street’s estimates. So, it is not surprising that shares of LTTS ended trading session on Wednesday down 6%.

The demand environment remains robust and the deal pipeline is healthy, the management said in a post earnings conference call. For FY22, the company has retained its 19-20% dollar revenue growth guidance. During the quarter, LTTS won a $45 million deal and three other deals with a total contract value of more than $10 million.

Sequentially, Ebit (earnings before interest and taxes) margins improved by 20 basis points (bps) to 18.6% in Q3. One basis point is 0.01%. The management has maintained its long-term margin guidance of 18% (currently above 18%), but foresees headwinds from wage hikes, inorganic investments, and a rise in travel cost.

Indeed, there are some bright spots in the Q3 earnings of LTTS and the demand outlook is strong. But the stock’s steep valuations do not leave much room for disappointment. Bloomberg data shows LTTS shares trade at 45.82 times FY23 estimated earnings. TCS, Infosys, and Wipro are trading at 32.50, 29.44, and 24.75 times, respectively.

The LTTS stock has risen by about 97% over the past year, surpassing the 43% gain in the Nifty IT index. Analysts say that post this steep rally, most positives are already factored in. “LTTS is well positioned to play the engineering and research and development theme and grow at premium rates. However, the stock trades at premium valuations already pricing in high growth characteristics in our view," analysts at Kotak Institutional Equities said in a report on 19 January.

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