Midcap IT Stock That Can Outperform Larger Peers, Buy For Good Returns

Markets have become increasingly volatile, thanks to fears of rising interest rates in the country. There are worries that rising interest rate would slow down economic growth across the globe. Sharekhan has recommended buying the stock of midcap IT Company L&T Technology Services for good returns.

Revenue growth moderated

L&T Technology Services reported below-than-expected revenue growth due to weak growth in medical devices and industrial products verticals, while EBIT margin remained flat sequentially despite higher onsite mix, decline in utilisation and supply-side crunch.

"Q4FY22 witnessed a strong deal intake, client mining, net hiring and client addition. Revenue growth moderated to 3.6% q-o-q and 19.4% y-o-y on CC. The growth was primarily led by 7.8% q-o-q growth in the transportation vertical, " broking firm Sharekhan has said.

Margins remain flat

EBIT margin remained flat sequentially at 18.6%, exceeding Sharekhan's estimates. Sequential headwinds including higher attrition, lower utilisation and higher onsite mix, were offset by 70 bps benefit from operating leverage and currency tailwind.

"The company guided revenue growth of 13.5%-15.5% in USD terms for FY2023, broadly on the expected line, which implies a USD CQGR of 3.0-3.7%. LTTS initially began FY2022 with revenue growth guidance of 13-15% and finally reported 19.5% y-o-y growth for FY2022. We forecast strong revenue growth of 18.2% for FY2023 given rising spend on digital engineering space, though we understand the industry is facing higher macro-economic challenges (including inflationary environment and geopolitical tensions) as compared to the start of FY2022," the brokerage has said.

Premium valuations justified

According to Sharekhan, the stock trades at 37x/31x its FY2023E/FY2024E earnings estimates, which justifies premium valuations, given strong deal wins in emerging technology space, accelerated spends in ERD segment, and a quality client base.

"Hence, we retain a Buy on L&T Technology Services with a revised price target of Rs. 5,350," the brokerage has said.

"We tweaked our earnings estimates for FY23E/FY24E factoring in Q4FY2022 results and higher attrition, while strong deal wins and higher spend in ERD segment likely to sustain its growth momentum in next 2-3 years," it has added.

Key risks

According to the brokerage the key risks would be Macroeconomic uncertainties could affect earnings. Further, loss of key customers and/or lower ERD spends/R&D budgets may affect growth trajectory. We also wish to emphasize to our readers that markets are extremely volatile at this juncture and hence it is better to remain cautious. Invest only small quantities and on declines. While we remain convinced on the structural upward trajectory, we believe that investors should moderate returns expectations in the coming year. Markets are unlikely to give robust returns, given that interest rates are headed higher in the coming quarters. This could make Fds attractive once again.

Disclaimer

The above stock is picked from the brokerage reports of Sharekhan. Investing in equities poses a risk of financial losses and investors should understand the nature of the risk. Investors must therefore exercise due caution. 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.