Moderate guidance takes the sheen off L&T Tech stock
A below-expectation Q4 showing, premium valuation other concerns
The L&T Technology Services stock shed about 8 per cent in trade after reporting a lower-than-expected performance in the March quarter and weak revenue growth guidance for FY22. Given these factors, its premium valuation too led to some selling pressure in trade on Tuesday.
Barring two verticals of five (plant and engineering and transport), revenue growth was either flat or showed a marginal uptick. Sales growth of 3.8 per cent on a constant currency basis was less than the 4.5 per cent estimated by the Street and lagged smaller peers in the engineering research and development or ER&D space.
The earnings before interest and taxes or Ebit margin improved 138 basis points on a sequential basis to 16.6 per cent and was supported by increased utilisation, a higher share of offshore operations, operational efficiency, and lower amortisation. Analysts at ICICI Securities note that adjusted for lower amortisation, the margin has expanded just 70 basis points as compared to the 150 basis points of Cyient and thus missed their estimates. The Street was also not too enthused by the 13-15 per cent revenue growth guidance for FY22. The dollar revenue guidance — which came on the back of a 6.3 per cent fall in the revenue in FY21 — was short of expectations as brokerages had pegged the same at high teens growth. HDFC Securities says the guidance implies a modest
The stock is trading at a 25% premium to sector leaders, such as TCS, and more than twice that premium when compared to smaller peers. Analysts at Phillip Capital believe that the 63% run-up in the stock over the last six months has taken valuation to 29x its FY23 earnings
2.1-2.8 per cent compound quarterly growth rate despite the phase two rampup of the $100 million-plus oil and gas deal.
The growth outlook mismatch brought the premium valuation into focus; the stock is trading at a 25 per cent premium to sector leaders, such as TCS, and more than twice that premium when compared to smaller peers. Analysts at Phillip Capital believe that the 63 per cent run-up of the stock over the last six months has taken valuation to 29x its FY23 earnings. This is expensive given the 13 per cent growth guidance in a discretionary spend dependent ER&D business.