L&T Rating: Buy — A modest showing in the final quarter

FY21/22e EPS down 15% to factor in Covid-19; TP cut to Rs 1,394; ‘Buy’ maintained

L&T Technology Services (LTTS) reported USD revenue decline of 2% q-o-q in Q4FY20. Ebitda margin came in at ~ 19.8% (ex-one-off), in line with our estimate. Revenue contraction is attributable to a 9% q-o-q dip in Plant Engineering (PE), overwhelming the robust 7% q-o-q growth in the medical devices business. Industrial products and Telecom & Hi-Tech were marginally down q-o-q.

Management refrained from guiding for FY21, but mentioned they expect revenue to slide in Q1FY21 and the recovery to take place thereafter. While we remain bullish on the long-term prospects of the fast-growing ER&D and believe LTTS is in a pole position to benefit thereof, the near-term pain from COVID-19 forces our hand to cut LTTS’s EPS by 15% each for FY21e and FY22e.

We are also slashing its target multiple from 20x to 17x, in line with our sectoral adjustment. Maintain Buy with a revised TP of Rs 1,394 (Rs 1,885 earlier) at 17x Q2FY22e EPS.

Covid-19 derails a recovering business: Ebitda margin eroded 160bps q-o-q to 18.5%, largely (~130bps) due to a one-off COVID-19-related CSR allocation. LTTS had just started recovering from its worst phase in Telecom & Hi-Tech, but COVID-19 and the crash in oil prices, respectively, have once again derailed the process, and that is a cause for worry. While management expects most businesses (except PE) to recover sharply in H2FY21 , the overall growth for FY21 at best would be flat, implying no revenue/earnings growth for the year.

Outlook: Temporary pain—Uncertainty continues to mar the outlook for ER&D revenue growth, now further undermined by the COVID-19 crisis. Nevertheless, we believe ER&D demand can bounce back and help LTTS realise its growth potential. The stock is trading at 12.8x FY22EE EPS. Retain ‘BUY/SO’.