Stock pick of the week: Why analysts are bullish on L&T Tech
Sharp revenue and net profit growth, acquisition of high-value clients, strong tech capabilities, improving product mix and steadily rising margin have made L&T Tech analysts’ favourite.
Besides benefiting from the expertise of its parent company, L&T Tech also boasts of high-end capabilities and has the ability to serve a large number of industries, providing its portfolio substantial breadth. This is why this Vadodara-based engineering services company has been able to secure several large orders. It won eight large deals in the third quarter and had bagged six large deals in the second quarter. The company’s weighted average client size has now increased to Rs 50 crore ($7.2 million)—a 6% quarteron-quarter (q-o-q) hike.
It also has a strong and varied deals pipeline that includes systems for electrical vehicles, infotainment and telecom, and engineering services for the oil and gas, chemicals sector, among others. The engineering research and develpment (R&D) industry needs players with deep domain knowledge across industries for cross-domain collaboration—and L&T Tech is just the right candidate. In other words, investors can treat L&T Tech as a strong play on the fast-growing R&D market in the engineering industry.
Due to its improving product mix and relatively stable sales and general administration costs, the EBITDA margin of L&T Tech has been consistently rising. EBITDA stands for earnings before interest, tax, depreciation and amortisation. The company’s third quarter EBITDA margin improved by 30 basis points, q-o-q, and 300 basis points, year-on-year. Margin is expected to continue improving in the coming years as well—analysts expect Ebitda margin to reach 21% by 2020-21 from the 18.4% it reported in the third quarter of 2018-19.
The recent correction in the counter, triggered by the likely loss of one of its large telecom client, is another reason why analysts are getting bullish on L&T Tech. Though its target revenue for 2019-20 may come down by 4%, if the company loses this client, analysts say that this loss will be only because of the change in the ownership of the client and, therefore, should be treated as an isolated incident. In other words, it in does not raise doubts on the capability of L&T Tech or signal a downtrend in the engineering R&D industry.
L&T TECH compared with sensex and et infotech index. stock price and index values normalised to a base of 100. SOURCE: ETIG & BLOOMBERG
Selection Methodology: We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.