Proprietary Software And AI Will Forge New Partnerships

Key Takeaways

• Strategic investments in AI and proprietary solutions are expected to enhance market share and impact higher-margin segments positively.
  
• Diversified approach across key sectors and successful acquisitions bolster revenue growth and earnings stability.
  
• Macroeconomic headwinds, reliance on large deals, and integration impacts could hinder revenue growth and pressure net margins over time.

Catalysts

Operates as an engineering research and development services company in India, the United States, Europe, and internationally.

• L&T Technology Services has achieved record high Total Contract Value (TCV) bookings, including several large deal wins, indicating strong revenue growth potential moving forward as these deals begin to ramp up.
  
• The company is strategically investing in proprietary software solutions and niche engineering work on an investment basis with select customers, which is expected to strengthen partnerships and lead to larger deals in the future, potentially enhancing revenue and market share.
  
• LTTS has been focusing on advanced technologies like AI and Gen AI, evidenced by over 1,500 patents filed, including significant filings in these domains. This focus can drive growth in higher-margin tech segments, therefore positively impacting net margins.
  
• The acquisition and integration of Intelliswift has expanded LTTS's portfolio, particularly in high-growth sectors such as fintech and healthcare. This is expected to contribute to revenue growth as these sectors are targeted for significant expansion.
  
• The company has a diversified segmental approach across Mobility, Sustainability, and Tech, which provides a balanced revenue stream and reduces dependency on any single segment. This diversification strategy is expected to support consistent revenue growth and earnings stability.

L&T Technology Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming L&T Technology Services's revenue will grow by 12.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.9% today to 12.6% in 3 years time.
• Analysts expect earnings to reach ₹19.1 billion (and earnings per share of ₹178.64) by about May 2028, up from ₹12.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.9x on those 2028 earnings, up from 35.6x today. This future PE is greater than the current PE for the IN Professional Services industry at 27.0x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.87%, as per the Simply Wall St company report.

L&T Technology Services Future Earnings Per Share Growth

Risks

• Delays in ramp-ups and signing of large deals due to macroeconomic headwinds can affect revenue growth, which might not align with expectations.
  
• The need to offer proprietary software solutions and niche engineering work on an investment basis for strategic customers could reduce net margins and dilute profit over time.
  
• Intelliswift integration impact resulted in about a 150 basis point margin dilution, potentially impacting overall earnings and clear margins in subsequent quarters.
  
• Macro-related uncertainties and the impact of tariffs can lead to disruptions and demand tightening in the short term, subsequently affecting revenue predictability.
  
• The dependency on large deals and competitive pricing to win business against competition could impact long-term price realization and net margins.

Valuation

• The analysts have a consensus price target of ₹4620.586 for L&T Technology Services based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹6530.0, and the most bearish reporting a price target of just ₹3400.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹151.8 billion, earnings will come to ₹19.1 billion, and it would be trading on a PE ratio of 36.9x, assuming you use a discount rate of 12.9%.
  
• Given the current share price of ₹4257.1, the analyst price target of ₹4620.59 is 7.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.