L&T Technology Services Ltd (LTTS), a tier-2 IT company, is grappling with the challenge of balancing revenue growth and margins. In the September quarter (Q2FY25), its constant currency (CC) revenue grew by a decent 3.4% sequentially, marking a recovery from a seasonally weak Q1. All three key verticals—mobility, sustainability, and hi-tech—returned to growth.
Growth was board-based across geographies. But Ebit margin slipped 50 basis points (bps) sequentially to 15.1%, hurt by higher selling, general, and administrative expenses, along with sustained investments in technology.
The management of LTTS is hopeful of a relatively better performance in H2FY25 and has maintained FY25 CC revenue growth guidance of 8-10% and Ebit target of 16%.
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Ramp-up of deal wins and milestone payments to be received from the government of Maharashtra for the cybersecurity project could help boost revenue. During the September-ended quarter, LTTS won two $20 million deals and four $10 million TCV (total contract value) deals. Plus, increased thrust on productivity enhancements measures, such as offshoring are seen as margin levers in H2FY25, the management said.
Still, meeting these targets may be a tall task. Order conversions, a seasonally strong Q4 exit, and the ramp-up of deals in hi-tech and sustainability offer support, but meeting guidance remains contingent on everything falling into place over the next few quarters, said Motilal Oswal Financial Services.
The ask rate to achieve the lower end of the revenue guidance now requires a compound quarterly growth rate (CQGR) of approximately 4.5% and Motilal’s base case assumes that LTTS could miss its revenue guidance by around 50bps.
Wage hikes effective from November and usual furloughs in Q3 are potential margin headwinds. While its SWC (Smart World & Communication) business has favourable seasonality in second half, it is margin dilutive. “LTTS has underperformed in the last two quarters, struggling with either growth or margins. We believe the engineering research and development industry is still not out of the woods, with headwinds in the mobility vertical on the horizon,” said a Nuvama Research report on 16 October.
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Little wonder then, LTTS stock has gained only 2% so far in 2024, trailing the Nifty IT index’s 20% rise. Bloomberg data shows the stock is trading at 36 times its FY26 price-to-earnings ratio, higher than several large-cap peers, leaving little room for missteps. While the company benefits from a diversified revenue mix, recurring earnings cuts over the past few quarters have eroded its investment appeal, Nuvama noted.
