Why L&T Tech’s valuation is concerning after a weak third quarter
For a mid-cap stock that trades at a steep valuation premium over its larger counterparts, subdued earnings growth could be punished more harshly by investors. A good example is the information technology company L&T Technology Services Ltd (LTTS).
The Tier II company’s December quarter results (Q3FY22) did not thrill the street as its sequential constant-currency revenue growth of 4.2% was below many analysts’ estimates of 5-5.2%. . Seasonality, weak performance in its industrial products and medical devices verticals and a high Q2FY22 base affected LTTS’s revenue.
Additionally, given that Tier II IT companies have seen tremendous growth in recent quarters, LTTS third quarter earnings expectations were high. Additionally, although the third quarter was a seasonally weak quarter for the IT industry, large-cap companies Tata Consultancy Services Ltd (TCS), Infosys Ltd and HCL Technologies Ltd saw their constant currency revenues increase more than Street estimates. So it’s no surprise that shares of LTTS ended Wednesday’s trading session down 6%.
The demand environment remains robust and the deal pipeline is healthy, management said on a post-earnings conference call. For FY22, the company stuck to its revenue growth forecast of 19-20% in dollar terms. During the quarter, LTTS won a $45 million contract and three other contracts with a total value of over $10 million.
Sequentially, Ebit (earnings before interest and tax) margins improved by 20 basis points (bps) to 18.6% in Q3. One basis point equals 0.01%. Management maintained its long-term margin forecast of 18% (currently above 18%) but expects headwinds from wage increases, inorganic investments and increased travel costs.
Indeed, there are positives in LTTS third quarter earnings and the outlook for demand is solid. But the stock’s lofty valuations don’t leave much room for disappointment. Bloomberg data shows that LTTS shares are trading at 45.82 times estimated earnings for FY23. TCS, Infosys and Wipro are trading at 32.50, 29.44 and 24.75 times, respectively.
LTTS stock is up about 97% over the past year, outpacing the 43% gain of the Nifty IT Index. Analysts say that after this strong rally, most of the positives are already priced in. “LTTS is well positioned to play the engineering and R&D theme and grow at premium rates. However, stocks are trading at premium valuations which we believe already embed high growth characteristics,” Kotak Institutional Equities analysts said in a Jan. 19 report.
Never miss a story! Stay connected and informed with Mint. Download our app now!!