L&T Tech shares in focus after Q2 results, FY24 guidance cut. Where is the stock headed?

IT major L&T Technology Services Ltd (LTTS) logged a 5.17 per cent rise in its September quarter profit on a similar growth in sales and trimmed its FY24 revenue growth outlook to 17.5-18.5 per cent from 20 per cent earlier, which was largely in line with analyst estimates. The IT firm maintained its EBIT margin guidance of 17 per cent for FY24 and sees 18 per cent margin by H1FY26. Analysts said the quarterly numbers met their expectations but valuations on the counter leaves little upside potential.

Motilal Oswal said LTTS posted in-line revenue of $288 million in 2QFY24, up 3.2 per cent QoQ in constant currency terms, noting that the growth was driven by transportation and plant engineering verticals, with 4.4 per cent and 3.8 per cent sequential growth, respectively.

EBIT margin was flat at 17.1 per cent (down 10 bps QoQ), which beat Motilal's estimate of a 90 bps drop as the IT firm completely absorbed the Q2 wage hike impact.

"Although the management has maintained caution in the near term, the overall deal funnel is higher than last year and it continues to chase multiple large deals (7 large deals signed in 2Q). However, the slower deal velocity and increasing deal tenure (3.5 vs. 2.5 year earlier) create a near-term revenue leakage," Motilal said.

The brokerage has retained its 'Buy' rating on L&T Tech with a target of Rs 5,210 on the stock.

Nomura India has lowered its FY24-25 EPS estimate by 1 per cent and its target by 1 per cent to Rs 3,450 from Rs 3,480 earlier. "Our FY24-26F EPS are 2-6 per cent lower than consensus. Our target is set at an unchanged 24 times 1H FY26F EPS of Rs 144. The stock is currently trading at 34.5 times FY25 and 29.7 times FY26 EPS," it said.

LTTS CEO & Managing Director Amit Chadha said the deal momentum for the quarter was strong with the highlight being a $10 million-plus deal win leveraging SWC capabilities in North America. "This win has been the result of having a superior end-to-end technology stack for wireless and 5G communications which is becoming a key differentiator for us," he said.

Nuvama Institutional Equities said the guidance cut was largely anticipated, as the earlier guidance always appeared a tall ask, given the Q1 performance. Even on the reduced guidance, the brokerage said the required compounded quarterly growth rate CQGR is 3 per cent for next two quarters – which management is confident of achieving.

"The ERD segment has held up well in a weak macro environment despite ERD spends being largely discretionary in nature — which makes us believe that ERD companies would continue to post solid growth. Expensive valuations limit the upside potential," the brokerage said.

The company announced an interim dividend of Rs 17 per share.

"With strong fundamentals, a solid client base, and diverse capabilities across segments, the company remains well-positioned, even though longer decision cycles and macroeconomic challenges are currently affecting the ER&D sector," said Arihant Capital Markets.

This brokerage values LTTS at 25 times its FY26 EPS of Rs 164, which yields a target price of Rs 4,099 per share against an earlier target of Rs 3,915 per share.

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