L&T Technology becomes the latest beneficiary of froth in markets
For now, L&T Technology’s growth rates and near-term prospects are decent, although the quibble for analysts is that all this and more is priced into the stock
L&T Technology Services Ltd (LTTS) shares jumped as high as 19% on NSE on Thursday, after it announced June quarter results. The move was so fierce that even shares of parent company Larsen & Toubro Ltd rose by over 4%.
But while the move in these stocks was impressive, it has left analysts scratching their heads. “LTTS’s Q1FY22 earnings were ahead of our estimates, primarily led by its higher profit margins. But this does nothing to our FY23 earnings estimates for the firm, 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 now trading at 30 times FY23 price-to-earnings (PE) – making it one of the most expensive stocks in the sector – and that too, for a discretionary spend dependent 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.
For now, the firm’s growth rates and near-term prospects are decent, although the quibble for analysts is that all this and more is priced into the stock. The stock now trades at over 35 times FY23 earnings, based on PhillipCapital estimates.
A key highlight of the June quarter earnings was that in spite of wage hikes, its operating profit margin improved by 70 basis point (bps) on a sequential basis to 17.3%. One basis point is one hundredth of a percentage point. According to the company’s management, wage hike impact of around 150bps and higher subcontractor costs were absorbed by tailwinds from operational efficiencies, cost optimisation and growth in higher margin business.
The sequential constant currency revenue growth of 4.3% was largely in-line with Street’s estimates, aided by improvement in client metrics. Growth was healthy across verticals, except medical devices and geography-wise growth was led by North America and Europe, the management said. The company also won six large deals of over USD10 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," says the analyst mentioned above.
It appears that some investors are viewing LTTS with a news lens, where it is no longer merely an ERD (engineering and R&D) services firm, but a digital ERD firm.
Other stocks in the ER&D space such as Tata Elxsi Ltd, KPIT Technologies Ltd and Cyient Ltd have also rallied sharply in the past year, rising 400%, 272% and 257% respectively.
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