Upbeat FY25 aspiration led by strong demand outlook: We attended LTTS’ Analyst Day, where the management spelt out its aspiration of achieving FY25 revenue of $1.5billion, along with 18% EBIT margin. The management indicated that digitisation is driving accelerated spends in ER&D and should benefit it due to: 1) strong capabilities, 2) multi-vertical presence, and 3) solid wallet share. We expect LTTS to deliver strong revenue growth over the coming years and retain it as our top pick in the mid-cap IT Services space.
LTTS well placed to capture the demand momentum: LTTS is well placed to capture the overall demand momentum as it is one of the top pure play ER&D services companies globally. It works with 57 of top 100 global ER&D spenders. It also enjoys solid wallet share as it is among the top two vendors with most of its top 30 accounts, including being the top vendor for four out of the top five clients. LTTS’ multi-vertical presence (v/s a single or few verticals presence for its peers) allows it to leverage its cross vertical capabilities to build its solutions offerings. Given the strong demand and improved visibility, the management has guided at an $1-billion/$1.5-billion revenue run-rate by 2Q-3QFY23/FY25, with ~18% EBIT margin.
Its FY25 guidance implies a FY21-25 USD revenue CAGR of ~20%, and indicates high management confidence in both the demand environment as well as its ability to gain share in all key verticals. The management has increased its focus on scaling up large accounts along with large deals, which will drive growth. It sees scope for margin improvement, led by a further offshore shift.
Valuation and view – industry-leading growth to defend rich multiples: The management has provided a strong outlook, which implies a growth momentum of ~20% over FY21-25E. Moreover, it reiterated its focus of keeping its guidance achievable, despite client and attrition related risks. We see this as an indication that there can also be potential upside risk to its aspiration of $1.5-billion revenue by FY25. The management is confident of maintaining segmental margin, despite then near-term headwind from a tight supply environment. Moreover, its medium term margin outlook of ~18% EBIT implies a margin expansion. Our TP of Rs 4,530 per share implies 39x FY23E EPS (v/s 31x earlier), given its strong medium term guidance and increased earnings visibility. We maintain our ‘buy’ rating.