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Here are two reasons why this IT stock is down 10% after Q4 results
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
What came as a negative surprise was L&T Technology Services lowering its EBIT margin guidance by more than 100 basis points to 16% in FY25 due to front-loading of investment.
Eight of 10 stocks in the Nifty IT index were in the green on April 26. Of the two in red, one declined as much as 10% to the day’s low after the companies announced results for the January to March 2024 quarter.
L&T Technology Services’ (LTTS) shares traded at ₹4,772.25, almost 8% lower from the previous close on NSE.
The decline in IT stock comes after the company’s fourth-quarter results. While the profit and revenue were in line with CNBC-TV18 poll expectations, the margin and earnings before interest and taxes (EBIT) were amiss.
What also came as a negative surprise was MD & CEO Amit Chadha-led LTTS lowering the EBIT margin guidance by more than 100 basis points to 16% in FY25 due to front-loading of investment. “We would like to change EBIT margin guidance of 18% from H1FY26 to medium term,” the company’s management told CNBC-TV18.
The margin miss along with the stock trading at 32 times the FY26 PE, which means it is expensive, are the two reasons why the L&T Technology Services shares have been declining.
Brokerage firm Morgan Stanley has an underweight call on the stock with a target price of ₹4,200, implying a 19% downside from the closing price on April 25.
The firm said weak revenue growth guidance was baked into buy-side estimates, however, a reset of margin expectations came as a negative surprise.
Given the stock’s year-to-date outperformance and cut to EPS estimate, the analyst said it expects the stock to underperform.
Citi, meanwhile, has given a sell rating on the stock and cut the target price to ₹4,070. It pointed out that the company maintains its aspiration to achieve a $1.5 billion revenue run rate by the end of FY25.
In a post-earnings chat with CNBC-TV18, Chadha pointed out that profit after tax (PAT) went from ₹1,000 crore to ₹1,300 crore in about two years and this will continue to go on and increase.
“We are making investments in our business in a deliberative manner to make sure that we are able to capture the opportunity that’s there because ER&D can benefit. And we can benefit from the ER&D hype cycle if we make the right investments. So, we see margins at 17% levels in the medium term, and then 18% is aspirational from there on.”
In terms of revenue, L&T Tech’s current quarter is probably the best in the industry and definitely better when compared to many of its other quarters.
“We’ve had. 5.1% sequential growth, 17.9% growth in constant currency… The next year, a lot of positive spending is coming to us in the software-defined vehicles area. We now work for eight of the top 10 automotive R&D spenders. We are also seeing a lot more work coming to us in oil and gas, CPG and chemicals because they are spending big time,” he added.
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