Buy This Mid-Cap Software Stock For 14% Gain, Recorded Highest Revenue Growth In 3 Years

Motilal Oswal has recommended investors to buy the stock of L&T Technology Services Ltd (LTTS) as it is showing the potential of 14 gain if investors buy it at the current market price of Rs 3147 apiece with a target price of Rs 3590 apiece.

LTTS reported a 4.7% QoQ growth in constant currency (CC) in 1QFY23, 2pp ahead of our estimate led by strong growth in Plant Engineering (+7.3% QoQ) and Industrial Products (+4.3% QoQ), while Telecom & Hi-Tech (flat QoQ) was subdued. EBIT margin contracted 30bp in 1QFY23 due to elevated lateral additions and upfront investment/ramp-up cost in large deal wins, partially offset by operational efficiency.

L&T Technology Services Stock Outlook

The current market price of the stock is Rs 3147 apiece. Its 52-week high is Rs 5955 apiece and 52-week low is Rs 2924 apiece. The stock has given a return of 314% in the last 5 years and a negative return of 7% in 1 year. It has given 90% return in 3 years.

2. Strong topline and deal flow performance in 1QFY23

In CC terms, LTTS' 1QFY23 revenue grew 19.9% YoY, INR EBIT rose 31% YoY, and INR PAT grew 27% YoY. Revenue rose 4.7% QoQ CC to USD239.5m in 1QFY23. Top five/10 clients grew 0.2%/1.4% QoQ on LTM basis. Top 20 clients registered 2.5% QoQ revenue growth. Management expects this to improve from 2QFY23 onwards.

3. Highest ever booking

The company had its highest ever booking in 1QFY23, including one USD50m deal in the Rail mobility space. LTTS also raised its FY23E revenue growth guidance by 100bp to 14.5-16.5% (based on 4QFY22 currency rate), while maintaining its reported FY23E USD revenue growth guidance at 13.5-15.5%. According to Motilal Oswal, "We were positively surprised by the upward revision in the FY23 guidance given the challenging macroeconomic environment. While the management highlighted some pain in parts of Telecom (5G equipment) and Medical devices (downtrading due to inflation), it expects this to be more than offset by scaling up of large deal wins in Transportation along with continued momentum in Plant and Industrial verticals."

4. Valuation

According to Motilal Oswal, "Digitization is driving the accelerated spends in ER&D and LTTS should benefit due to: 1) its strong capabilities, 2) multi-vertical presence, and 3) solid wallet share. We expect the company to deliver strong revenue growth over the coming years. We retain LTTS as our top pick in the Tier II IT Services space. The management expects strong growth during the medium term, which implies a growth momentum of ~20% over FY21-25E. Our TP of INR3,590 implies 28x FY24E EPS. We expect improved industry spends than the preceding five years. We maintain our BUY rating on the stock. "

5. About L&T Technology Services

L&T Technology Services Limited (LTTS) is a global leader in Engineering and R&D (ER&D) services. With 868 patents filed for 57 of the Global Top 100 ER&D spenders, LTTS lives and breathes engineering. LTTS' expertise in engineering design, product development, smart manufacturing, and digitalization touches every area of human lives - from the moment one wakes up till the time one goes to bed. With 89 Innovation and R&D design centers globally, it specializes in disruptive technology spaces such as 5G, Artificial Intelligence, Collaborative Robots, Digital Factory, and Autonomous Transport. The current market capitalization is Rs 33,286 crore.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal Financial Services. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decisions.