Broker’s call: L&T Technologies (Overweight)

Target: ₹5,600

CMP: ₹4,714.85

L&T Technology Services (LTTS) is the second ER&D company after PSYS to do a growth margin tradeoff in order to drive MT to LT growth by making investments currently where demand has moved sideways in order to be ready to tap opportunities when the cycle turns.

Investments will be in building solutions for digital manufacturing, software defined vehicles and GenAI and will impact gross margins by ~100bps, taking down FY25 margins target to 16 per cent (from 17 per cent in FY24). Growth margin trade-offs often exist in IT Services and often get decided in favour of growth.

We expect the stock to react negatively to this, but we would look through the near-term stock weakness and focus on MT revenue/earnings growth that we expect at 13/14 per cent CAGR over FY24-26.

FY25 revenue growth guidance of 8-10 per cent CC was broadly inline with JPMe and bakes in strength in Transport, Plant Engineering, Hitech and semis (about 60 per cent of portfolio) but weakness in Telecom, Industrial Products and Medical (remaining 40 per cent).

We cut revenues by 3-4 per cent and margins by 110-150bps, driving 7-9 per cent EPS cuts. We cut our target PE multiple to 33x (from 34x) and roll forward to Jun’25 and remain OW with new PT of ₹5,600 (from ₹5,900).