Update on the Indian Equity market:
On Tuesday, Nifty 50 ended 0.2% higher at 11,897. The gainers were led by HCLTECH (+4.3%), TECHM (+3.2%), and ASIANPAINT (+2.9%), while BRITANNIA (-5.8%), ONGC (-2.6%), and GAIL (-2.3%) led the losers. Among the sectoral indices, REALTY (+3.9%), MEDIA (+2.0%), and IT (+1.4%) led the gainers. PSU BANK (-1.4%), FMCG (-0.4%), and METAL (-0.2%) were the only losers.
LTTS recently released its earnings for 2QFY21. Mr. Keshab Panda, MD, and CEO of L&T Technology Services (LTTS) discussed the result and outlook for FY21 with CNBC TV-18 on 20th October 2020:
• At the beginning of the outbreak of Covid-19, the company took some measures: investment required in new technology, the business model required for each segment, and different geography. These have helped achieve sequential growth in each segment.
• All 5 segments will grow sequentially going forward. The company will offer the new technology demanded by customers quickly in the post-Covid era.
• There are two reasons for ~160 bps improvement in margins sequentially. First, revenue increased 4.1% QoQ and there has been a 4.5% increase in utilization in Q2. There is some room for improvement in the coming quarters as well.
• LTTS has learned that solution selling. To give an example, their medical devices segment which is doing well, they are thinking of taking it to the pharmaceutical and provider space.
• There are multiple levels- operational lever, solution offering lever, and business mix for margin growth going ahead.
• Margin growth depends on the business mix. Some of the segments they have are highly profitable and some segments are not as profitable. Telecom, industrial, and plant engineering have higher segmental margins compared to hi-tech, and part of the transportation subsegment.
• Another parameter is the offsite-onshore ratio. LTTS did well in Q2 and moving forward if customers believe the work can be done from home, the work will be done from India. Higher engineering offshoring will also add to margin improvement going ahead.
• Revenue and margins are expected to be better in Q3 and Q4. The management has guided for a revenue decline of ~7-8% for FY21.
• They intend is to come back to growth as soon as possible. Q1 suffered a drop in revenue and cash flow issue and realigning will take some time.
• Goal is that the 4QFY21 revenue run rate should be the same as 4QFY20.
• The impact of furlough coming in 3Q for LTTS is not clear yet. The positive side is the pipeline and orders in hand and how soon the proposals are accepted by customers.
• Sizeable deals got pushed to Q3 as the decision-making circle is a little longer today than in pre-Covid. Some analysis which was not done by customers in pre-covid is been done today. Cost-saving, analysis of cash flow, business model, credentials -all these are analyzed extensively post Covid.
Consensus Estimate: (Source: market screener website)
• The closing price of LTTS was ₹ 1748/- as of 20-October-2020. It traded at 27.7x/ 21.9x/ 18.8x the consensus earnings estimate of ₹ 63.2/ 79.7/ 93.0 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 1537 implies a PE multiple of 16x on FY23E EPS of ₹ 93.0/-.
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