L&T's tech twins show contrasting fortunes; LTTS falls 10%, LTI gains 7%

Larsen & Toubro Infotech
The September quarter (Q2) results and outlook for L&T’s IT twins — L&T Infotech (LTI) and L&T Technology Services (LTTS) — were in contrast, and so was the market reaction. While LTI indicated that the second half would be strong, LTTS cut its growth guidance for the current financial year. 

The cut in guidance did not go down well with the Street, which led to the LTTS stock shedding 10.45 per cent on Tuesday. On the other hand, LTI has gained about 7.5 per cent over the last couple of sessions. 

After muted performance over the last few quarters, LTI put up a better show in Q2FY20. It indicated that it won large deals in the quarter, ramped up existing deals, and had lower client-specific issues. All these are expected to help the company report a better second half. 

The most important aspect was that the firm reversed the flat revenue trend of its top clients. LTI improved revenue contribution from the top five clients, which had dropped 670 basis points (bps) over the last two years to 31.3 per cent. This increased by 40 bps to 31.7 per cent in Q2.

Large deal wins has been another significant factor, with the company announcing $100 million from services, energy and utility verticals. This should help ramp up revenues in the second half of the financial year. 

For LTTS, while the Q2 results were broadly in line with estimates, the company reported that the telecom and hi-tech verticals remained weak. This was attributed to delays in decision-making amid global trade tensions. 

Transportation, its largest vertical by revenue, posted sequential growth of 2.4 per cent after an average growth rate in excess of 5 per cent for eight quarters. The Street worries that the weakness could spread to other segments.

The management cut its FY20 revenue growth guidance to 10 per cent from 12-14 per cent. This is the second time this year that the firm has scaled down its guidance. It expects a softer December quarter, with growth picking up only in the last quarter. Most brokerages have cut their earnings estimate for the company by up to 5 per cent after the guidance. 

Despite the near-term worries, analysts at HDFC Securities continue to be positive on the prospects of LTTS, given its technical capabilities, diversified vertical mix, and niche position in process industry and industrial products.

Large deal wins, client mining strategies, and superior execution, on the other hand, are the reasons for the Street’s bullish view on LTI. 

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