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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 of Rs 1,840.
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.
