Mid-cap IT company L&T Technology Services Ltd (LTTS) shocked its investors with a mixed performance in the December quarter. In constant currency terms, its revenue rose 4.2% sequentially, below the 5% estimate by many analysts for the company. A combination of unfavorable factors such as seasonality, weak performance of its industrial products and medical devices verticals and a high T2FY22 basis, weighed on LTTS’s revenues.
Now considering that Tier 2 IT companies have seen tremendous growth in recent quarters, earnings expectations for the third quarter were high. Additionally, although the third quarter was a seasonally weak quarter for the IT industry, large-cap companies Tata Consultancy Services Ltd, Infosys Ltd and HCL Technologies Ltd saw their constant currency revenues increase more than Street estimates. . In this context, it is hardly surprising that in reaction to its third quarter results, LTTS shares fell more than 7% on the NSE in Wednesday’s opening session.
In a post-earnings conference call, management said the demand environment remains robust and the deal pipeline is healthy. For FY22, the company maintained its revenue growth forecast of 19-20% in USD terms and expects revenue growth to be at the upper end of this range. During the quarter, LTTS won one contract worth $45 million and a total of three contracts with a total value of over $10 million.
On a sequential basis, Ebit margins improved by 20 basis points (bps) to 18.6% in Q3. Ebit is short for Earnings Before Interest and Taxes. Management maintained its long-term margin guidance of 18%. While the current margin is over 18%, management warned of some headwinds from gradually rising travel costs, salary hikes and inorganic investments.
While there are some bright spots in LTTS’ third-quarter earnings and outlook, the valuation the stock is trading at didn’t leave much room for disappointment. Over the past year, LTTS stock has risen approximately 95% relative to the benchmark Nifty IT index, which has generated returns of 44% over the same period. In fact, on January 4, 2022, the stock hit a new 52-week high of ₹5955 on the NSE. According to analysts, after this strong recovery of the title, most of the positive points are taken into account.
“LTTS is well positioned to play the ERD theme and grow at premium rates. However, stocks are trading at premium valuations which already embed high growth characteristics in our view. valuing the stock at 38x unchanged EPS for fiscal year 2024E,” analysts at Kotak Institutional Equities said in a report.
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