INSUBCONTINENT EXCLUSIVE:
NEW DELHI: At the beginning of 2018, this subsidiary of India’s largest capital goods firm Larsen Toubro unveiled what it called Vision
20:20:20 – a drive to ensure 20 per cent sustainable annual top line growth, complemented by a healthy 20 per cent Ebitda margins and 20
new technology patents annually.
For FY18, LT Technology Services did report 20 per cent year-on-year profit growth at Rs 506.60 crore
against Rs 425 crore a year ago.
The aim is to give the company necessary momentum to drive revenue to $1 billion by FY21, Keshab Panda, CEO
MD, LT Technology Services told ETMarkets.com.
Investors are already buying this vision
The company, which went public in September 2016, has already seen its stock double investor wealth, rallying 100 per cent from Rs 865.10 on
September 23, 2016 to Rs 1,737 as of September 5, 2018
Market capitalisation has grown even faster to over Rs 18,000 crore from nearly Rs 8,800 at the time of listing.
The stock’s valuation
appears optically rich at 23 times FY20F EPS
But strong earnings momentum (20 per cent FY18-20 CAGR) and a superior business portfolio should sustain that, says JM Financial.
LT
Technology Services is one of the three listed subsidiaries of LT
The company provides design and development solutions to clients across the entire value chain of product development
These include solutions in areas of mechanical and manufacturing engineering, embedded systems, software engineering and process
engineering.
It provides services to 51 of the world’s largest RD spenders and counts 52 Fortune 500 companies among its customers
Around 90 per cent of the company’s revenues come from repeat business, which the CEO claims is a validation of customer confidence.
The
company’s growth targets for FY21 (20 per cent overall; 15 per cent organic) appear achievable given growth momentum and differentiation,
global brokerage CLSA said in a report
However, it will be tough to meet the margin target at 20 per cent Ebitda, and that may need a combination of utilisation, rate increases,
an offshore shift and IP success, it said.
CLSA has a ‘buy’ rating on LT Technology with a target price of Rs 1,750.
Panda says LT
Technology Services is looking at investment in newer areas such as NB-IoT, machine learning and embedded technologies complemented by
creation of new labs to spur research and innovation.
“We would focus on four transformative technology areas, which are expected to
disrupt traditional ways of doing business and define our offerings and growth in the years to come,” he said.
The engineering RD space is
witnessing good demand and the LT seeks to tap this opportunity as a pureplay engineering services provider.
Padna sees a large customer
base across the globe, as the business world begins to accelerate investments in digital engineering.
An artificial intelligence-based
proprietary offering called AiKno is expected to bring in a lot of business for the company over the next five years
It is also exploring a few strategic MA opportunities, specifically focusing on niche technology companies which provide end-to-end new age
digital services.
Three other key areas which can bring in large business are 5G, internet of things, autonomous and electric
vehicles.
“We are focused on improving margins by using technology and automation tools to obtain higher productivity
We are also exploring newer ways of customer engagement and to monetize IP-led solutions,” Panda told ETMarkets.com.
The company aims to
sustain FY18’s return on equity (RoE) at 30 per cent
In FY17, the RoE stood at 40 per cent.
Elara Capital on August 31 came out with an ‘accumulate’ rating to the stock with a target price
On Friday, the stock traded at Rs 1,756.
“While the management’s aspiration is to have an Ebitda margin of 20 per cent by FY21, we
expect only 19 per cent in FY21 at a USD-INR rate of 69.9
Upside to our estimate can come from a higher IP revenue proportion,” said the Elara analysis.
Elara’s revenue estimate is 2.6 per cent
higher than the management’s organic revenue aspiration of $900 million
The brokerage has assigned a target multiple of 26 times for the company, which is higher than 25 times given to India’s IT behemoth TCS,
thanks mainly to LT Technology Services’ broad revenue momentum, depth of the management team and a positive industry outlook.
“We
expect a very long runway of growth beyond the $1 billion targeted for FY21,” the brokerage said.
Anand Rathi Financial Services recently
initiated coverage of LT Technology Services with a ‘buy’ rating and a price target of Rs 1,940 a share.
