Increased revenue guidance due to robust demand environment – Larsen & Toubro Technology services

Update on the Indian Equity Market: 

On Thursday, NIFTY closed lower at 18,178 (-0.5%) led by IT (-2.5%), CONSUMER DURABLES (-1.8%), and METAL (-1.8%). PSU BANK (+2.7%), BANK (+1.3%), and FINANCIAL SERVICES (+1.2%)  were the gaining sectors. Top gainers in NIFTY50 were KOTAKBANK(+6.9%), TATAMOTORS (+4.5%), and GRASIM (+3.5%). The top losers were ASIAN PAINTS (-4.9%), HINDALCO (-3.8%), and INFOSYS(-2.5%). 

Edited excerpts of an interview with Amit Chadha, MD, and CEO of L&T Tech Services  with CNBCTV18 on 20th October 2021: 

• The company has increased its FY22 revenue guidance for the second consecutive quarter to 19-20 percent from the previous 15-17 percent owing to the strong demand and robust supply chain. 
• Earlier the company had anticipated a USD 1 bn runrate between Q2FY23E and Q3FY23E, which could be met sooner than expected. 
• The company took on board about 1,200 freshers in the last six months and plans to hire about 2,000 in 3QFY22E and 4QFY22E. 
• On the margin front, the company has delivered EBITDA margins in the 18% range despite the wage hikes and the overhead costs in FY21, going forward the company expects them to stay in the 18 percent range. 
• With the robust market environment and the company’s order pipeline improvement to about 18% over 1QFY22, the company’s overall aim is to reach a USD 1.5 billion run rate by FY25.
• The company expects the demand for CY22 and CY23 to remain at the current level.
• The average deal size in the engineering business is between USD 10 million and USD 25 million. The firm has landed a number of transactions ranging from USD 10 to USD 25 million. They are also looking for agreements worth more than USD 50 million.
• The offshoring revenue has increased by 100 bps. The company expects the offshoring revenue percentages to stabilize and improve further on account of the optimistic demand environment from its clients in the United States and Europe, in CY22.
• On the acquisition front, the company is looking for a US or European-based company in the ISV segment or transportation segment, or in the medical technologies segment. The company is currently assessing different companies for the purpose and is in various stages of conversation with different companies.  The company has an appetite for acquiring a company with a revenue of 50 million dollars as well, given the company’s strong balance sheet and cash flow.

 Asset Multiplier Comments 

• The management commentary of continued strength in end demand aided by significant deal wins, and healthy deal pipelines suggest growth could significantly exceed the upper end of the revised guidance.
• The aggressive recruiting and re-skilling initiatives, will assist the business to overcome supply-side limitations.

Consensus Estimate (Source: market screener websites) 

• The closing price of Larsen & Toubro Technology services was ₹ 4726/- as of 21-Oct-21. It traded at 54x/46x/39x the consensus EPS estimate of ₹ 88/102/121 for FY22E/ FY23E/FY24E respectively. 
• The consensus target price of ₹ 3,965/- implies a PE multiple of 32x on FY24E EPS of ₹ 125/-. 

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