Results Review for L&T Technology Services and Federal Bank

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L&T Technology Services (NS: LTEH ): L&T Technology Services (LTTS) maintained its FY24E outlook implying a strong exit in Q4FY24E, even as Q3 performance was lower than expected. Revenue growth was impacted by softness in the Telecom & Hi-Tech vertical (adj. for SWC seasonality). Guidance reiterated at 17.5% to 18.5% CC for FY24E implies 4-7% QoQ CC for Q4FY24E, which will be supported by (1) sequential improvement in furloughs/billing days/SWC seasonality, (2) six deals of USD 10mn+ TCV booked in Q3FY24, and (3) strategic partnership with bp (medium-term driver) and targeted mining program for top clients. While LTTS’ prowess as a leading pureplay ER&D service provider with a diversified vertical base and strong credentials across domains persists, growth print is impacted by a longer deal conversion cycle and business cyclicality despite strong industrial tailwinds. Risk-reward is unfavorable for LTTS as current valuations imply >16% USD revenue CAGR over FY23-33E. Maintain REDUCE on LTTS with a TP of INR 4,915, based on 27x FY26E EPS.

Federal Bank (NS: FED ): Federal Bank (FB) reported its highest-ever quarterly earnings, despite a miss on NII, on the back of healthy loan growth (+18% YoY), profit from stake sale in its NBFC subsidiary and lower credit costs (31bps annualized). Given the competitive intensity for low-cost deposits, FB too saw a decline in CASA ratio of 54bps QoQ taking its CASA ratio to 30.6%. Differentiated FinTech ecosystem partnerships to gain market share in relatively high-yield segments are key to driving further business productivity on both sides of the balance sheet. FB appears on track to deliver its targeted RoA of 1.4% over FY24-25; however, we see challenges to growth with the credit-deposit ratio likely to be capped, going forward. Following the RBI advisory on CEO succession, the Board of Directors has commissioned an agency to suggest internal/external candidates within 2-3 months. We tweak our estimates to factor in lower provisions offset by higher opex; and maintain BUY, with a TP of INR190 (1.4x Sep-25 ABVPS).

L&T Technology Services

Unchanged Guidance Implies a Strong Q4

L&T Technology Services (LTTS) maintained its FY24E outlook implying a strong exit in Q4FY24E, even as Q3 performance was lower than expected. Revenue growth was impacted by softness in the Telecom & Hi-Tech vertical (adj. for SWC seasonality). Guidance reiterated at 17.5% to 18.5% CC for FY24E implies 4-7% QoQ CC for Q4FY24E, which will be supported by (1) sequential improvement in furloughs/billing days/SWC seasonality, (2) six deals of USD 10mn+ TCV booked in Q3FY24, and (3) strategic partnership with bp (medium- term driver) and targeted mining program for top clients. While LTTS’ prowess as a leading pureplay ER&D service provider with a diversified vertical base and strong credentials across domains persists, growth print is impacted by a longer deal conversion cycle and business cyclicality despite strong industrial tailwinds. Risk-reward is unfavorable for LTTS as current valuations imply >16% USD revenue CAGR over FY23-33E. Maintain REDUCE on LTTS with a TP of INR 4,915, based on 27x FY26E EPS.

Q3FY24 highlights: (1) LTTS reported revenue growth of +0.9% QoQ CC at USD 291mn (HSIE est. USD 299mn), driven by medical devices in Q3 and lower-than-anticipated performance in telecom & hi-tech vertical. (2) LTTS’ growth was broad-based across verticals; however, softness in industrial products (+0.3% QoQ) continued due to delayed decision-making and softness in the building automation sub-segment. Medical devices reported +1.9% QoQ growth driven by digital experience and supply chain optimization; however, the company expects softer growth in the near term due to budget constraints of enterprise clients. (3) EBITM improved 11bps QoQ at 17.2% in Q3, supported by improvement in plant engineering and transportation segmental margin. (4) LTTS bagged six deals of TCV USD 10mn+, which included one deal of USD 40mn+ and one deal of USD 20mn. Commentary on the deal pipeline was positive with multiple large deal opportunities, which provides revenue visibility for Q4. (5) The management maintained its revenue growth outlook of 17.5-18.5% for FY24E, EBITM of 17% for FY24E & 18% for H1FY26E, and DSO target of 115-125 days for FY24E.

Outlook: We have factored in USD revenue growth of +17.6/14.9/16.2% and EBITM of 17.3/18.0/18.5% for FY24/25/26E respectively translating into 20% EPS CAGR over FY24-26E. LTTS is currently trading at 36x FY25E and 29x FY26E, with FY24-26E EPS CAGR at 20%.

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