LTTS

Increased revenue guidance due to robust demand environment – Larsen & Toubro Technology services

Update on the Indian Equity Market: 

On Thursday, NIFTY closed lower at 18,178 (-0.5%) led by IT (-2.5%), CONSUMER DURABLES (-1.8%), and METAL (-1.8%). PSU BANK (+2.7%), BANK (+1.3%), and FINANCIAL SERVICES (+1.2%)  were the gaining sectors. Top gainers in NIFTY50 were KOTAKBANK(+6.9%), TATAMOTORS (+4.5%), and GRASIM (+3.5%). The top losers were ASIAN PAINTS (-4.9%), HINDALCO (-3.8%), and INFOSYS(-2.5%). 

Edited excerpts of an interview with Amit Chadha, MD, and CEO of L&T Tech Services  with CNBCTV18 on 20th October 2021: 

  • The company has increased its FY22 revenue guidance for the second consecutive quarter to 19-20 percent from the previous 15-17 percent owing to the strong demand and robust supply chain. 
  • Earlier the company had anticipated a USD 1 bn runrate between Q2FY23E and Q3FY23E, which could be met sooner than expected. 
  • The company took on board about 1,200 freshers in the last six months and plans to hire about 2,000 in 3QFY22E and 4QFY22E. 
  • On the margin front, the company has delivered EBITDA margins in the 18% range despite the wage hikes and the overhead costs in FY21, going forward the company expects them to stay in the 18 percent range. 
  • With the robust market environment and the company’s order pipeline improvement to about 18% over 1QFY22, the company’s overall aim is to reach a USD 1.5 billion run rate by FY25.
  • The company expects the demand for CY22 and CY23 to remain at the current level.
  • The average deal size in the engineering business is between USD 10 million and USD 25 million. The firm has landed a number of transactions ranging from USD 10 to USD 25 million. They are also looking for agreements worth more than USD 50 million.
  • The offshoring revenue has increased by 100 bps. The company expects the offshoring revenue percentages to stabilize and improve further on account of the optimistic demand environment from its clients in the United States and Europe, in CY22.
  • On the acquisition front, the company is looking for a US or European-based company in the ISV segment or transportation segment, or in the medical technologies segment. The company is currently assessing different companies for the purpose and is in various stages of conversation with different companies.  The company has an appetite for acquiring a company with a revenue of 50 million dollars as well, given the company’s strong balance sheet and cash flow.

 Asset Multiplier Comments 

  • The management commentary of continued strength in end demand aided by significant deal wins, and healthy deal pipelines suggest growth could significantly exceed the upper end of the revised guidance.
  • The aggressive recruiting and re-skilling initiatives, will assist the business to overcome supply-side limitations.

Consensus Estimate (Source: market screener websites) 

  • The closing price of Larsen & Toubro Technology services was ₹ 4726/- as of 21-Oct-21. It traded at 54x/46x/39x the consensus EPS estimate of ₹ 88/102/121 for FY22E/ FY23E/FY24E respectively. 
  • The consensus target price of ₹ 3,965/- implies a PE multiple of 32x on FY24E EPS of ₹ 125/-. 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.” 

 

Technological disruption accelerated in the past quarters – LTTS

Update on the Indian Equity Market:

Indian indices ended in the red for the 3rd consecutive day after profit booking by investors. The Nifty 50 ended at 15,722 (-0.2%), dragged by the MEDIA (-0.8%), BANK (-0.7%), and FINANCIAL SERVICES (-0.6%). IT (+0.6%) was the only sector which ended with gains. Among the Nifty 50 stocks, COALINDIA (+1.3%), RELIANCE (+1.2%), and DIVISLAB (+1.1%) ended with gains while SHREECEM (-1.9%), BAJAJFINSV (-1.8%), and POWERGRID (-1.5%) ended with losses.

Excerpts of an interview with Mr. Amit Chadha, CEO & MD, L&T Technology Services (LTTS) published in the Financial Express on 30th June 2021:

  • LTTS’s domestic market comprises plant engineering and product design related business, both for Indian conglomerates and MNCs. On the product design side, LTTS works with various global engineering centres or captive centres in the transportation, industrial products, medical and telecom segments. In the plant engineering segment, they help FMCG and chemical companies with the engineering support domain.
  • Over the past one year, LTTS has pushed the boundaries of virtual development by securing remote access to its labs and developing a Home Lab environment for select clients where engineers have high computer equipment replicated at their homes.
  • Engineering and the R&D (ER&D) services involve a suite of services- from ideation, conceptualisation, design, product development, testing and after-market launch, to support and enhance existing products.
  • In the current scenario, a lot of the work has evolved from physical to the secured virtual space- through simulation, high-end systems, and servers. This work can be done anywhere and can be accessed from anywhere.
  • Unlike other industries, the ER&D segment necessitates a part of the work to be executed and experienced upon in labs and requires the physical presence of the workforce in design centres.
  • A major trend LTTS is observing is the pace at which change is taking place. The acceleration of technological change and disruption that has been affecting processes, products, robotic automation in business functioning in the past few quarters has been different from that in the last 10 years.
  • The second megatrend observed is that companies are partnering with start-ups who have point solutions and are creating a technology ecosystem along with them. Enterprises are relying on bringing all the specialised capabilities and integrating them from start to finish. With the travel disruptions under the new normal, customers are comfortable with this nature of work being done out of offshore delivery centres.
  • The biggest change in technology trends is seen in the areas of electric autonomous connected vehicles, 5G technology, digital healthcare and digital manufacturing.
  • As an ER&D destination, India has gained prominence as a strategic R&D hub focused on innovation and disruptive technology. Clients seeking technology partners or India captive centres are no longer offshoring just for cost benefits, but to achieve flexibility and availability of talent, time to market, and localised products for developing and developed markets. This is where LTTS’ engineering domain expertise will help it stay ahead of its competition.
  • In the plant engineering segment, there has been a push from the Government with its ‘Invest in India’ initiative and promotion on setting up manufacturing facilities in India.

Asset Multiplier Comments

  • LTTS is a key beneficiary of the increasing tech adoption in ER&D. With 50% of its revenues coming from digital, LTTS will likely witness revenue growth from a growth in ER&D spends by Companies.

Consensus Estimate: (Source: market screener website)

  • The closing price of LTTS was ₹ 2,886/- as of 30-June-2021. It traded at 34x/ 29x/ 26x the consensus earnings estimate of ₹ 85.1/ 101/ 110 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 2,573/- implies a PE multiple of 23x on FY24E EPS of ₹ 110/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Confident‌ ‌of‌ ‌achieving‌ ‌FY22‌ ‌growth‌ ‌guidance-‌ ‌L&T‌ ‌Technology‌

Update on the Indian Equity Market:

On Wednesday, NIFTY closed at 14,618 (+0.8%). Top gainers in NIFTY50 were Sun Pharma (+5.9%), UPL (+4.8%), and IndusInd Bank (+2.5%). The top losers were Adani Ports (-3.6%), Bajaj FInance (-1.8%), and SBI Life (-1.3%). The top sectoral gainers were PHARMA (+4.1%), BANK (+1.6%), and PVT BANK (+1.5%) and the only sectoral loser was REALTY (-1.0%).
Excerpts of an interview with Mr Amit Chadha, MD & CEO, L&T Technology (LTTS) with CNBC -TV18 dated 4th May 2021

  • US & Europe back on track in terms of decision making cycles and budgets.
  • They have been a little worried about the near-term execution challenges in India. Taking that into account and assuming that things will come back sometime in May, they have guided 13-15 percent growth in revenue in FY22. However, they aspire to do more.
  • The company will be able to maintain an EBIT margin of 17 percent. They are back at 16.6 percent EBIT in 4QFY21. As they move forward, the entire focus will be to ensure they continue to grow profitably. 
  • No projects have been cancelled due to the 2nd wave of COVID.
  • There is still some headroom to achieve 80% utilization levels.
  • Attrition at 12 percent is the lowest in the industry. But Mr Chadha is expecting attrition to pick up in 1QFY22 due to seasonality. 
  • The company will be hiring 1,200 freshers in FY22 and has given increments to junior and mid-level employees effective April 1. However, senior employees will be given wage hikes from July 1.
  • Commercial aerospace segment is still weak and will take time to recover. Growth trajectory of transportation is robust; plant engineering grew 10% QoQ.
  • They have been picky on the hi-tech deals given their focus on margin. 

Asset Multiplier comments:

  • As businesses increasingly move their operations to the cloud, the demand for enabling software and services will continue to increase.
  • The ongoing pandemic has pushed many enterprises to implement work-from-home policies for the first time, and this has created a demand for collaborative applications and softwares, which is likely to drive growth for software companies.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of LTTS was ₹ 2,569/- as of 05-May-2021.  It traded at 30x/ 26x the consensus earnings estimate of ₹ 85.5/ 99.9 for FY22E/23E respectively.
  • The consensus price target is ₹ 2,486/- which trades at 25x the earnings estimate for FY23E of ₹ 99.9/-

 Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Goal is to get back to the FY18-19 growth levels– LTTS

Update on the Indian Equity Market:

On Wednesday, Nifty closed 0.9% higher at 13,692. Within NIFTY50, HINDALCO (+2.8%), BHARTIARTL (+2.8%), and HDFC (+2.8%) were the top gainers, while ICICIBANK (-1.1%), INDUSINDBK(-1.0%), and ULTRACEMCO (-0.8%) were the top losing stocks. Among the sectoral indices, REALTY (+5.1%),METAL (+1.8%) and AUTO (+1.0%) were the top gainerswhilePSU BANK (-1.6%) was the only losing sector.

Goal is to get back to the FY18-19 growth levels– LTTS

Excerpts of an interview with Mr. Keshab Panda, CEO, L&T Tech Services, aired on CNBC-TV18 on 15thDecember 2020
● The new normal is presenting new opportunities for engineering and technology companies like L&T Tech Services (LTTS).
● LTTS recently received a USD 100 mn + plant engineering order from a global oil and gas major. The deal is the biggest ever plant engineering deal in India and includes sustenance engineering, control automation, smart manufacturing, and efficiency improvement.
● The revenue contribution of the deal will start coming in FY22E onward.
● The current deal is for 2 plants of the client. The opportunity could be much more than that if extended to other plants. The opportunity in the 2 plants itself could extend by 50-100%.
● For this deal, the model will be 20% onsite and 80% offshore.
● The deal wins pipeline has increased multifold from the pre-covid levels.
● The revenue growth for FY18 and FY19 was 20% and 26% respectively. Growth came down to 8%-9% in FY20 due to customer issue. Now the goal is to get back to the FY18-19 growth levels quickly.
● LTTS is also working on improving margins from the 2QFY21 levels.
● Among sectors that LTTS operates in, plant engineering is doing well, medical is doing best, transportation except aerospace is also coming back.

Consensus Estimate (Source: market screener website)
● The closing price of LTTS was ₹ 1844 as of 16-December-2020. It traded at 30x/ 23 x/ 20x the consensus EPS estimate of ₹ 62.6/80.5/92.4 for FY21E/ FY22E/ FY23E respectively.
● The consensus target price of ₹ 1750/- implies a PE multiple of 19x on FY23E EPS of ₹92.4/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

4QFY21 Revenue run rate to be same as 4QFY20 – LT Technology Services

Update on the Indian Equity market:
On Tuesday, Nifty 50 ended 0.2% higher at 11,897. The gainers were led by HCLTECH (+4.3%), TECHM (+3.2%), and ASIANPAINT (+2.9%), while BRITANNIA (-5.8%), ONGC (-2.6%), and GAIL (-2.3%) led the losers. Among the sectoral indices, REALTY (+3.9%), MEDIA (+2.0%), and IT (+1.4%) led the gainers. PSU BANK (-1.4%), FMCG (-0.4%), and METAL (-0.2%) were the only losers.

LTTS recently released its earnings for 2QFY21. Mr. Keshab Panda, MD, and CEO of L&T Technology Services (LTTS) discussed the result and outlook for FY21 with CNBC TV-18 on 20th October 2020:

• At the beginning of the outbreak of Covid-19, the company took some measures: investment required in new technology, the business model required for each segment, and different geography. These have helped achieve sequential growth in each segment.
• All 5 segments will grow sequentially going forward. The company will offer the new technology demanded by customers quickly in the post-Covid era.
• There are two reasons for ~160 bps improvement in margins sequentially. First, revenue increased 4.1% QoQ and there has been a 4.5% increase in utilization in Q2. There is some room for improvement in the coming quarters as well.
• LTTS has learned that solution selling. To give an example, their medical devices segment which is doing well, they are thinking of taking it to the pharmaceutical and provider space.
• There are multiple levels- operational lever, solution offering lever, and business mix for margin growth going ahead.
• Margin growth depends on the business mix. Some of the segments they have are highly profitable and some segments are not as profitable. Telecom, industrial, and plant engineering have higher segmental margins compared to hi-tech, and part of the transportation subsegment.
• Another parameter is the offsite-onshore ratio. LTTS did well in Q2 and moving forward if customers believe the work can be done from home, the work will be done from India. Higher engineering offshoring will also add to margin improvement going ahead.
• Revenue and margins are expected to be better in Q3 and Q4. The management has guided for a revenue decline of ~7-8% for FY21.
• They intend is to come back to growth as soon as possible. Q1 suffered a drop in revenue and cash flow issue and realigning will take some time.
• Goal is that the 4QFY21 revenue run rate should be the same as 4QFY20.
• The impact of furlough coming in 3Q for LTTS is not clear yet. The positive side is the pipeline and orders in hand and how soon the proposals are accepted by customers.
• Sizeable deals got pushed to Q3 as the decision-making circle is a little longer today than in pre-Covid. Some analysis which was not done by customers in pre-covid is been done today. Cost-saving, analysis of cash flow, business model, credentials -all these are analyzed extensively post Covid.
Consensus Estimate: (Source: market screener website)
• The closing price of LTTS was ₹ 1748/- as of 20-October-2020. It traded at 27.7x/ 21.9x/ 18.8x the consensus earnings estimate of ₹ 63.2/ 79.7/ 93.0 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 1537 implies a PE multiple of 16x on FY23E EPS of ₹ 93.0/-.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”