L&T Technology Services (LTTS) reported a weak set of numbers for Q2FY21: revenue grew 4.1% q-o-q to $178 m, lesser than Street’s expectations of $181 mn. Operating margin expanded 160bps q-o-q to 13.7%, much below our expectation of 16.8%. PAT shot up 41.1% q-o-q to Rs 1,655 m, but fell way short of Rs 1,982 m we expected.
Despite lower-than-expected growth, LTTS upgraded the guidance for FY21 from between -10% and -9% to between -8% and -7%, and reiterated the worst is now firmly behind them. The stringent lockdown has severely affected ER&D companies and their performance should gradually improve as the economy opens. Retain Buy with unchanged TP of Rs 2,740 (30x FY22e).
Limping back to normal; verticals and geographies robust: All verticals (except Telecom and Hi-Tech) grew q-o-q. Plant Engineering and Medical Devices were the strongest verticals, growing 8.1% and 7.4%, respectively. The slight decline in Telecom and Hi-Tech surprised us. However, mgmt clarified that some of the larger deals in this segment were delayed and those should get completed in Q3.
Elevated costs keep margin subdued: The 160bps q-o-q increase in margin was aided by the combination of utilisation and increase in offshoring mix that was partly offset by rupee appreciation and a rise in other costs. Mgmt has guided that utilisation would further increase to pre-covid-19 levels, thereby aiding margins. On the other side, as growth comes back, it expects some costs to come back.
Outlook: Slow recovery—while the results overall undershot our expectations, the upgrade in guidance reinforces our view that LTTS is now on the path to recovery. The stock is trading at 19.3x FY22e. We maintain ‘BUY/SO’.
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