Calculated Innovation And Tech Investments Propel Growth And Elevate Margins

Key Takeaways

• Strategic investments in mobility, sustainability, and tech aim for billion-dollar units, driving revenue growth with strong deal pipelines.
  
• Proprietary solutions and technology investments boost client adoption and margins, enhancing competitive edge and high-value account growth.
  
• Investments in AI and SDV are pressuring margins, with challenges in mobility and macro uncertainties affecting revenue, impacting overall earnings and growth visibility.

Catalysts

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

• The company is investing heavily in strategic segments like mobility, sustainability, and tech, aiming to build each into a billion-dollar unit. These investments are expected to drive revenue growth in these segments.
  
• There is a strong pipeline of deals, especially in the $25 million to $100 million range, expected to close in the upcoming quarters. These will likely contribute significantly to revenue and earnings.
  
• The introduction of proprietary frameworks and solutions such as LTTS iDrive and factory next is expected to accelerate client adoption and improve margins through high-value offerings.
  
• Improved client mining is resulting in an increase in high-value accounts, which is expected to enhance revenue and potentially improve net margins due to better pricing and efficiencies.
  
• Continued investment in technology and innovation, as shown by an increase in patent filings and new AI offerings, is likely to enhance the company's competitive edge, supporting revenue growth and potentially improving gross margins.

L&T Technology Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming L&T Technology Services's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.1% today to 14.1% in 3 years time.
• Analysts expect earnings to reach ₹19.1 billion (and earnings per share of ₹180.09) by about December 2027, up from ₹13.1 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 40.4x on those 2027 earnings, down from 42.7x today. This future PE is greater than the current PE for the IN Professional Services industry at 25.6x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.76%, as per the Simply Wall St company report.

L&T Technology Services Future Earnings Per Share Growth

Risks

• The company's EBIT margin has been impacted due to investments in sales and technology, particularly in AI and SDV, which could pressure net margins further if such investments do not yield expected returns in the near term.
  
• There is a concern about achieving the 16% EBIT margin target for FY '25, given the planned wage hikes in the second half of the year and potential lower margins from seasonally strong but low-margin businesses like SmartWorld, potentially impacting overall earnings.
  
• The company is experiencing a slowdown in the mobility segment due to furloughs, particularly in the automotive sector in Europe and the U.S., which could adversely affect revenue growth momentum.
  
• Hi-tech margins remain under pressure, partially due to the inclusion of lower-margin businesses like SmartWorld, meaning that any large unexpected delays or challenges in scaling these offerings could negatively impact overall profit margins.
  
• Revenue growth is closely tied to large deal closures that were delayed in Q2 due to macroeconomic uncertainties, such as elections, which introduces risk to the timing and finalization of these deals, potentially affecting revenue and earnings visibility.

Valuation

• The analysts have a consensus price target of ₹5092.43 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 ₹6500.0, and the most bearish reporting a price target of just ₹3460.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹135.7 billion, earnings will come to ₹19.1 billion, and it would be trading on a PE ratio of 40.4x, assuming you use a discount rate of 12.8%.
  
• Given the current share price of ₹5285.2, the analyst's price target of ₹5092.43 is 3.8% lower. 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.