Kolkata (India) correspondent: Considering tier-2 IT companies reported stellar growth in the past few quarters, Q3 earnings expectations were elevated. Also, despite it being a seasonally weak quarter for the IT industry, large-caps saw revenue growth. Midcap IT company L&T Technology Services Ltd (LTTS) has upset its investors with a mixed performance in the December quarter. In constant currency terms, its revenue grew 4.2% sequentially, below the 5% estimate many analysts were penciling in for the company. A combination of unfavourable factors such as seasonality, weak performance of its industrial products and medical devices verticals and a high base of Q2FY22, weighed on LTTS’ revenue.
Now considering that Tier-2 IT companies reported stellar growth in the past few quarters, Q3 earnings expectations were elevated. Also, despite Q3 being a seasonally weak quarter for the IT industry, large-caps Tata Consultancy Services Ltd, Infosys Ltd and HCL Technologies Ltd saw constant currency revenue grow ahead of the Street’s estimates. In this backdrop, it is hardly surprising that reacting to its Q3 results, the LTTS stocks fell more than 7% on the NSE in Wednesday’s opening trade.
In a post-earning conference call, the management said that the demand environment remains robust and the deal pipeline is healthy. For FY22, the company has retained its 19-20% USD revenue growth guidance and expects revenue growth to be towards the upper end of this range. During the quarter, LTTS won a $45 million deal and a total of three deals with a total contract value of more than $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 tax. The management has maintained its long-term margin guidance of 18%. While current margin is above 18%, the management has cautioned of some headwinds from a gradual increase in travel cost, wage hikes and inorganic investments.
While there are some bright spots in LTTS’ Q3 earnings and outlook, the valuation at which this stock is trading, did not leave much room left for disappointment. In the past one year, the LTTS’ stock has risen by around 95% compared to benchmark index Nifty IT index which gave returns of 44% in the same span. In fact, on 4 January 2022, the stock hit a new 52-week high of ₹5955 on the NSE. Analysts say, post this steep rally in the stock, most positives are factored-in.
“LTTS is well positioned to play the ERD theme and grow at premium rates. However, the stock trades at premium valuations already pricing in high growth characteristics in our view. Downgrade to REDUCE with revised FV of Rs5,500 (Rs5,300 earlier) valuing the stock at unchanged 38times multiple FY2024E EPS,” analysts at Kotak Institutional Equities said in a report.
News is being sent by BTC News (Bangladesh) Kolkata (India) correspondent. Subhokar Bose. #
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