L&T TECH cheated its investors, the stock fell 7% in Q3

New Delhi. Midcap IT company L&T Technology Services Ltd (LTTS) has buoyed its investors with a mixed performance in the December quarter. In constant currency terms, its revenue grew 4.2% sequentially, well below the 5% estimate many analysts were penciling in for the company. LTTS revenue was burdened by a combination of unfavorable factors such as seasonality, the weak performance of its industrial products and medical devices verticals, and a higher Q2FY22 basis.

Now given that Tier-II IT companies have posted stellar growth over the past few quarters, the third quarter earnings expectations were raised. Moreover, despite the third quarter being a seasonally weak quarter for the IT industry, large-cap Tata Consultancy Services Ltd, Infosys Ltd and HCL Technologies Ltd saw constant currency revenue growth ahead of Street estimates. Against this backdrop, it is hardly surprising that LTTS shares fell over 7% on the NSE in early trading on Wednesday, reacting to its Q3 results.

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In the post-earnings conference call, management said the demand environment remains strong and the deal pipeline is healthy. For FY22, the company has retained its USD 19-20% revenue growth guidance and expects revenue growth to be towards the upper end of this range. During the quarter, LTTS won deals worth $45 million and three deals totaling more than $10 million in total contract value.

On a sequential basis, Ebit margin increased 20 basis points (bps) to 18.6% in Q3. Ebit is short for earnings before interest and tax. Management has maintained its long-term margin guidance of 18%. While current margins are above 18%, management warns of some adversity from a gradual increase in travel costs, wage increases and inorganic investments.

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While there are some bright spots in LTTS’ third-quarter earnings and outlook, the valuation at which this stock is trading didn’t leave much room for disappointment. In the past one year, the stock of LTTS has gained almost 95% as compared to the benchmark index Nifty IT Index, which has given a return of 44% in the same period. In fact, on 4 January 2022, the stock hit a 52-week high of ₹5955 on NSE. Analysts say that after this sharp rally in the stock, most of the positive factors-in.

“LTTS is well positioned to drive the ERD theme and grow at premium rates. However, the stock trades at premium valuations already in high growth characteristics in our view. With a revised FV of Rs 5,500 (earlier Rs 5,300) Downgrade to low with. “Valuation of the stock at unchanged value of 38 times FY2024E EPS,” analysts at Kotak Institutional Equities said in a report.

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