Sharekhan has reaffirmed its "Buy" rating for L&T Technology Services Ltd (LTTS), maintaining a price target of Rs 6,500, which reflects a 21% upside from its current market price of Rs 5,351. LTTS reported healthy revenue growth in Q2 FY25, driven by strength in its Sustainability and Mobility verticals. However, the company’s EBIT margin fell short of expectations due to investments in sales and technology. With an anticipated revenue growth of 8-10% in constant currency for FY25 and improvements in margins expected in the second half of the fiscal year, LTTS remains well-positioned for future growth.

Strong Revenue Growth Driven by Key Verticals

In Q2 FY25, LTTS posted $307 million in revenue, representing a 3.4% quarter-over-quarter (QoQ) growth and 6.3% year-over-year (YoY) growth in constant currency. This performance was in line with expectations, with significant contributions from the Sustainability vertical, which grew by 6.5%, and the Mobility vertical, which expanded by 4.8% QoQ. In rupee terms, the company reported Rs 2,573 crore in revenue, marking a 4.5% increase QoQ and a 7.8% rise YoY.

Despite challenges in the Hi-tech vertical, which saw muted growth of 0.8% QoQ, the company has sustained broad-based growth across its major verticals, highlighting its resilience in the face of sectoral slowdowns.

EBIT Margin Pressured by Sales and Technology Investments

LTTS' EBIT margin for Q2 FY25 stood at 15.1%, a decline of 50 basis points (bps) QoQ and 200 bps YoY. The decline in margin is primarily attributed to increased investments in sales and technology as part of the company's growth strategy. While this missed the analyst estimate of 16.2%, management remains optimistic, reaffirming its guidance of 16% EBIT margin for FY25. The company expects margin improvements in the second half of the fiscal year, driven by operational efficiencies and stronger revenue from key verticals.

Steady Deal Wins and Expanding Pipeline

Deal wins for LTTS remained robust, with the company securing two $20 million and four $10 million Total Contract Value (TCV) deals in Q2 FY25. Additionally, the company inked two major empanelment agreements in the Sustainability vertical, which are expected to provide a steady revenue stream in the coming quarters. The deal pipeline is growing, with multiple large contracts in the $25 million to $100 million range, and management expects several of these deals to close in Q3 and early Q4 FY25.

Key Project Milestones: Cyber-Security and Sustainability

LTTS achieved a significant milestone with the Maharashtra Cyber-Security Project, which is now partially live. The full project is expected to be completed within the next three to six months, followed by an operations and maintenance phase over five years. Revenue recognition from this project is tied to the achievement of specific milestones, and management has expressed confidence that the project will meet all targets on schedule.

The Sustainability vertical also continues to be a key driver for LTTS. The company’s growing expertise and project wins in this area are aligned with the global shift towards green energy and sustainable solutions, positioning LTTS favorably to capture future opportunities.

Client Profile and Attrition

LTTS saw improvements in its client profile across higher value contracts. The number of clients contributing $30 million+ in revenue increased by one, while $20 million+ and $10 million+ clients grew by one and two, respectively. However, the total number of active clients decreased from 378 in Q1 FY25 to 373 in Q2 FY25. Despite this minor decline, the company continues to build deeper relationships with its top customers.

On the workforce front, LTTS reported a net addition of 121 employees in Q2 FY25, bringing its total headcount to 23,698. Importantly, attrition fell by 50 bps QoQ, reaching a low of 14.3%, reflecting improved employee retention efforts.

Financial Highlights and Valuation

Key financial metrics for LTTS in Q2 FY25 include:

Revenue: Rs 2,573 crore, up 4.5% QoQ and 7.8% YoY.
EBITDA: Rs 466 crore, marking a modest 2.1% QoQ growth, though down 2.0% YoY.
Net Profit: Rs 319.6 crore, a 1.9% QoQ increase, but slightly below the expected Rs 341 crore.
Despite the slight miss in margins, Sharekhan remains bullish on LTTS' future prospects, reiterating a price target of Rs 6,500. At its current price of Rs 5,351, the stock trades at 41.2x FY25 estimated earnings, with valuations expected to decline to 35.1x FY26 and 29.3x FY27 earnings. The stock offers compelling growth potential, supported by a healthy deal pipeline, sectoral tailwinds, and margin improvement initiatives.

Growth Outlook for FY25 and Beyond

Management is confident of achieving 8-10% revenue growth in constant currency for FY25, supported by strong performance in key verticals such as Sustainability and Mobility, as well as the continued ramp-up of large deals. The ask rate of 4.5-7.5% CQGR over the next two quarters is challenging, but achievable given the company's robust deal pipeline, project milestones, and seasonality in the Software and Cyber-security verticals.

Over the long term, LTTS aims to reach $2 billion in revenue with an EBIT margin of 17-18%, reflecting the company's commitment to expanding its leadership in the Engineering Research and Development (ERD) space. With a broad portfolio across multiple verticals and a growing client base, LTTS is well-positioned to deliver sustainable growth in the years ahead.

Risks to Outlook

Despite LTTS’ strong fundamentals, there are risks to its growth outlook. These include:

Rupee appreciation or adverse cross-currency movements, which could impact profitability.
Global macroeconomic headwinds, including a potential recession in the US, which may reduce technology spending and delay large projects.

Conclusion: Strong Buy on LTTS with 21% Upside Potential

L&T Technology Services continues to show resilience and growth, with strong performance in key verticals and a growing deal pipeline. While short-term challenges around EBIT margins persist, the company's long-term prospects remain intact, supported by broad-based growth across verticals and operational improvements. Sharekhan’s “Buy” rating with a target price of Rs 6,500 highlights the stock’s strong potential for upside in the near term. Investors seeking exposure to a leader in the ERD space with a diversified portfolio and strong financial outlook should consider LTTS as a compelling investment.