On Monday, Ambit Capital initiated coverage on L&T Technology Services Ltd. (LTTS:IN) with a sell rating and a price target of INR4,990.00. The firm provided a cautious medium-term outlook for the company, citing several areas of concern.
L&T Technology Services, recognized as the largest pure-play Engineering Research and Development (ER&D) service provider in India, is facing challenges according to Ambit Capital. The firm pointed out LTTS's significant involvement in lower growth and margin sectors such as vehicle engineering, which constitutes 51% of the company's transportation revenue, as well as telecom, particularly after the Smart World & Communication (SWC) acquisition.
The analysis also highlighted the company's sluggish growth with its top-5 clients, which showed a compound annual growth rate (CAGR) of only 0.6% from the fiscal year 2020 to 2024. In addition, Ambit Capital expressed concerns over LTTS's continuous investments in capability-building, which may affect both growth and profit margins.
Ambit Capital's forecast for LTTS includes a 10% U.S. dollar revenue CAGR from the fiscal year 2024 to 2027, which is a slight decrease from the 12% CAGR observed from the fiscal year 2015 to 2024. The expected average EBIT margin is projected at 16.4%, slightly lower than the 16.5% average from the previous period.
The current market price (CMP) of LTTS is built on the expectation of a 10.6% U.S. dollar revenue CAGR from the fiscal year 2024 to 2041. However, Ambit Capital's discounted cash flow (DCF)-based target price of INR4,990 is based on what it considers more reasonable assumptions: a 9% U.S. dollar revenue growth over the same period with an average EBIT margin of 17.9%.
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