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Buy L&T Tech Services, target price Rs 1,290: ICICI Securities

The brokerage has upgraded L&T Technology Services from “add” to “buy” with a revised target price of Rs 1,290 based on 15 times March 22E EPS (earlier 18 times December21E EPS).

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Last Updated: Mar 30, 2020, 10.01 AM IST
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ICICI Securities has upgraded L&T Technology Services to buy from add with a target price of Rs 1,290. According to the brokerage, short-term interruption enables an attractive entry point in the stock.
Though margins would take a hit in the near-term on expected weakness in revenues, the brokerage sees no reason for structural margins to be any different than before. It has upgraded the stock to a buy as valuation of 12.8 times FY22E EPS is adequately pricing in the near-term risks.

The company’s share price moved down by -2.19per cent from its previous close of Rs 1174.90. The last traded price is Rs 1149.20. Incorporated in 2012, L&T Technology Services is a midcap company with a market cap of Rs 12331.32 crore.

Investment Rationale

LTTS is seeing business impacts on both the demand side (spending cuts, temporary furloughs etc as well as the supply side (inability to fulfill all demand through work from home given data sensitivity and other reasons). The demand impacts are restricted to the automotive, O&G and industrial product segments as of now. Hi-tech, aerospace, medical devices, FMCG, specialty chemical and media segments are more resilient. From a supply side standpoint, the company has the ability to fulfill at least 90per cent of demand.

EBIT margins may get impacted in Q4FY20/Q1FY21 despite the benefit from the rupee depreciation and lower travel costs given revenue weakness and lower utilisation (exacerbated in the near-term as attrition trends down meaningfully). Though there is no reason for structural margins to be any different than before Covid-19, the brokerage has still revised the FY22 EBIT margin lower to 16.5 per cent (vs an expected 16.8per cent in FY20).

The brokerage expects revenues to decline by nearly 5 per cent QoQ in Q1FY21 and increase by just 1.5 per cent in FY21 while lowering EBIT margin to 16per cent in FY21 from 16.8per cent in FY20 even as rupee depreciates by 4-5 per cent. The estimates are seen as presenting limited downside if the impacts of Covid-19 don't linger beyond Q1FY21.

The brokerage has upgraded L&T Technology Services from “add”to “buy” with a revised target price of Rs 1,290 (earlier Rs1,740) based on 15 times March 22E EPS (earlier 18 times December21E EPS).

Key risks: Persistent macro weakness in the key US and European market. Weaker than expected margin execution and slower than expected scaleup in IP revenues, andan appreciation in the INR/USD exchange rate relative to expectations.

Financials
For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 1422.90 crore, up 1.48 per cent from last quarter sales of Rs 1402.10 crore and up 8.05 per cent from last year's same quarter sales of Rs 1316.90 crore. The company reported net profit after tax of Rs 205.80 crore in the latest quarter.
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