l&t technology services28aug18€¦ · multi-vertical focus to aid growth momentum madhu babu...
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Multi-vertical focus to aid growth momentum
Madhu Babu [email protected] | 91-22-66322300
Rajat Gandhi [email protected] | 91-22-66322246
Rating: ACCUMULATE | CMP: Rs1,608 | TP: Rs1,780
L&T Technology Services (LTTS IN)
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L&T Technology Services
August 28, 2018 2
Contents Page No.
Multi-vertical focus to aid growth momentum ........................................................ 3
Industry Structure: Large addressable market puts LT Technologies in a sweet spot ................................................................................................... 4
Major sub-segments in Engineering Design Services .................................... 4
Engineering Design Services remains dominated by European firms ............ 5
LT Technologies is well positioned to tap the large market opportunity .......... 6
Key verticals and focus areas ............................................................................ 9
Transportation: Technology Refresh in Automotive to drive momentum ........ 9
Telecom and Hi-tech: Internet of Things (IoT) to aid strong momentum in Semiconductor segment. .............................................................................. 11
Case Study: Ruggedized Tablet ................................................................... 12
Industrial Products: Tepid growth could continue in medium term................ 14
Process Industry: Uptick in Oil &Gas Sector could aid growth...................... 16
Medical vertical: Poised for strong momentum ............................................ 18
Case Study: Customized Knee Implant Design ............................................ 19
LTTS set to enter the bigger league ................................................................. 21
a) LTTS enjoys marquee client base across segments ................................ 21
b) Ability to drive complex engagements drive client stickiness ................... 23
c) Lower cost structure compared to legacy vendors ................................... 23
d) Acquisitions can ramp up European operations ....................................... 24
e) Strong Revenue per employee owing to high end service offerings ......... 24
Financial Analysis ............................................................................................ 26
Strong revenue growth to continue over FY18-FY21E ................................. 26
Expect gradual margin expansion led by scale and G&A leverage .............. 27
Steady dividend payout ratios keep ROEs strong ........................................ 29
Steady free cash flow trajectory: ................................................................... 29
Valuation and View .......................................................................................... 30
Comparative Valuation Table ........................................................................... 31
Business Overview ........................................................................................... 32
Operating Metrics: ............................................................................................ 33
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August 28, 2018 3
Rating: ACCUMULATE | CMP: Rs1,608 | TP: Rs1,780
Multi-vertical focus to aid growth momentum
We initiate coverage on LT Technologies (LTTS) with ‘Accumulate’ rating and
target price of Rs1780. LTTS appears to be in a sweet spot led by immense
potential for scale-up in Engineering Design Services which is touted to be
the next growth driver. The company has annual revenues of US$621mn
(LTM) with headcount of 13,100 employees and is among the very few pure
play engineering services company with footprint in multiple verticals
(Transport, Industrial Products, Process Engineering, Medical). Global
Engineering Services has an addressable market of US$400bn, which offers
huge potential for scalability. With marquee relationship with most of the
large R&D spenders, we believe that LTTS is well-poised to ride the multi-year
growth opportunity. We expect the company’s USD revenues to grow by 18%
CAGR over FY18-FY21E. Operating leverage and INR depreciation will enable
margin expansion over Fy18-20E (We model EBIDTA margin at 17/17.9% for
FY19/FY20E v/s 15.5% in FY18). We expect valuation premium to sustain
given niche positioning in high growth segments. We estimate PAT CAGR of
18% over FY18-21E and value the stock at 24xSep 20E EPS which yields a TP
of Rs1780/sh.
Multi-vertical expertise to enable scalability: LTTS has a larger scale with
strength across multiple verticals (Transport, Industrial Products, Process Industry,
Telecom and Hi-tech, Medical Equipment). As spends in Engineering design tend
to be cyclical, we believe that a broader vertical mix reduces vulnerability to vertical
specific cyclicality and drives more sustainable consolidated revenue growth
momentum. Peers like Cyient, Tata Elxsi, and KPIT Tech have strong engineering
practice albeit have strength in limited verticals such as Cyient (Aerospace, Rail
transport), Tata Elxsi (Automotive, Media), KPIT Tech (Automotive). This makes
LTTS a broader based play in EDS segment.
Technology Refresh driving strong growth opportunities: Technology refresh
in select verticals are driving multiple growth opportunities. Automotive industry is
undergoing technology refresh with traction in ADAS (Advanced Driver Assistance
Systems), Electric Vehicles, Telematics etc. Semiconductor industry is also
witnessing a strong technology refresh owing to Internet of Things (IoT). We believe
these technology shifts will drive upswing in engineering spends and hence, aid
LTTS revenue growth trajectory.
Acquisition can help scale European region: We believe LTTS could scout for
boutique acquisition in Europe to scale up presence in the region and expand client
relationships (LTTS annual revenue from Europe is at US$110mn(LTM) and
accounts to 18% of total revenues). As large European engineering service players
(Altran (US$3bn sales and 45000 employees), Akka Technologies and ALTEN)
have a close relationship with marquee clients in the region (Airbus, Daimler,
BMW), we believe LTTS could scout for acquisitions to scale up in that region.
Valuation premium to sustain: LTTS remains the costliest midcap IT stock in the
sector trading at 23.5x FY20E EPS (which is at par with TCS). Company’s revenues
are likely to grow 23% in FY19 which is more than 2x the growth rate of TCS. We
believe LTTS is on the path of multi-year growth cycle owing to strong potential for
scalability. Initiate with Accumulate and a TP of Rs1780/sh.
L&T Technology Services (LTTS IN)
August 28, 2018
Company Initiation
Change in Estimates | Target | Reco
Change in Estimates
Current Previous
FY19E FY20E FY19E FY20E
Rating ACCUMULATE -
Target Price 1,780 -
Sales (Rs. m) 48,770 56,084 - -
% Chng. - -
EBITDA (Rs. m) 8,359 10,026 - -
% Chng. - -
EPS (Rs.) 62.7 68.3 - -
% Chng. - -
Key Financials(Consolidated)
FY17 FY18 FY19E FY20E
Sales (Rs. m) 32,483 37,471 48,770 56,084
EBITDA (Rs. m) 5,856 5,811 8,359 10,026
Margin (%) 18.0 15.5 17.1 17.9
PAT (Rs. m) 4,251 5,072 6,620 7,206
Diluted EPS (Rs.) 39.6 48.1 62.7 68.3
Gr. (%) 23.5 21.5 30.3 8.9
DPS (Rs.) 7.0 16.0 21.3 23.2
Yield (%) 0.4 1.0 1.3 1.4
RoE (%) 33.7 29.6 31.0 28.2
RoCE (%) 29.3 28.2 30.1 27.5
EV/Sales (x) 5.0 4.3 3.3 2.8
EV/EBITDA (x) 27.6 27.8 19.0 15.5
PE (x) 40.4 33.5 25.5 23.4
P/BV (x) 11.0 8.5 7.1 5.9
Key Data LTEH.BO | LTTS IN
52-W High / Low Rs. 1,637 / Rs. 734
Sensex / Nifty 38,694 / 11,692
Market Cap Rs. 166 / $ 2,369
Shares Outstanding 104m
3M Avg. Daily Value Rs. 326.37m
Shareholding Pattern (%)
Promoter’s 80.70
Foreign 3.8
Domestic Institution 7.4
Public & Others 8.1
Promoter Pledge (Rs bn) -
Stock Performance (%)
1M 6M 12M
Absolute 4.4 15.2 111.4
Relative 0.8 2.3 72.7
Madhu Babu
[email protected] | 91-22-66322300
Rajat Gandhi
[email protected] | 91-22-66322246
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L&T Technology Services
August 28, 2018 4
Industry Structure: Large addressable market puts LT Technologies in a sweet spot
The Global Engineering and R&D Services is pegged at US$1097bn, of which, the
global addressable market is ~US$440bn. Of this, the addressed market stands at
US$100bn and share of India stands at US$27bn. The US$27bn Engineering
Design services market from India is well split between third-party providers (HCL
Tech, TCS, Wipro, LTTS) as well as global in-house centers (all the major
Engineering players in the Industry have captives). As per a leading Consulting firm,
ERD Services’ exports from India stood at US$24bn as in FY17 and have grown at
13% CAGR over the past five years.
Addressable market for Engineering Design Services Business
Source: Company, PL
Major sub-segments in Engineering Design Services
Within Engineering Design services, the sub-segments include Mechanical
Engineering, Embedded Engineering, Software Product Engineering and Product
Life Cycle Management (PLM) Services.
Key categories within Engineering Design
Source: Company, PL
A large portion of offshore Engineering
Design services from India is
addressed by captives. Most of the
large engineering conglomerates like
Intel, Texas Instruments, Boeing,
Bosch have large captives in India.
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L&T Technology Services
August 28, 2018 5
Mechanical Engineering: This includes outsourcing of engineering services
related to the design and development of physical products, such as cars, aircraft,
industrial equipment, medical devices, consumer electronics, etc.
Embedded Engineering: This includes outsourcing of engineering services
related to the design and development of embedded systems. Embedded systems
are the electronic control devices that reside inside physical products.
Software Product Engineering: Outsourcing of engineering-related activities in
the software product development lifecycle, such as design, development and
maintenance, architecture, performance, migration, product management, etc. The
customers for software product engineering outsourcing are independent software
vendors (ISVs).
PLM Services: Consulting and systems integration services for enterprises for
leading product lifecycle management (PLM) applications. This segment includes
key CAD and manufacturing applications, as well as plant automation applications.
Engineering Design Services remains dominated by European firms
The engineering services provider market is fragmented with select large firms and
multiple midsized and boutique vendors.
Major Engineering Service Providers
Source: Company, PL
The Scale players: These service providers have engineering services annual
revenue exceeding US$1bn. There are eight such service providers: Akka
Technologies, ALTEN, Altran, AVL, Bertrandt, HCL, TCS and Wipro.
Established players: These service providers have engineering services revenue
between USD100mn and USD1bn. These service providers are all established and
are strengthening their positions in key services, verticals, and geographies. Some
of the service providers in this category include L&T Technology Services, Cyient,
QuEST Global, Pactera, EPAM, KPIT Technologies, Semcon, Tata Elxsi and Tieto.
Altran, the largest player in
Engineering design has acquired
Aricent in November 2017 in a bid to
boost its offshore presence.
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L&T Technology Services
August 28, 2018 6
Emerging Companies: These service providers have engineering services
revenue that is currently between US10mn and USD100mn. Some of the
companies include Auriga, AXISCADES, Belatrix, Mindtree, Neilsoft, Nexient and
Sasken.
Revenues of major engineering vendors
Fig in USD bn Revenues (USD bn) FY2016 FY18E
Altran 2.35 3.3
Alten 1.94 2.5
AVL 1.55 NA
Akka 1.24 1.7
HCL Tech 1.23 2.7
Bertrandt 1.11 1.2
TCS 1.1 NA
Wipro 1.05 NA
Accenture 0.85 NA
AF 0.82 NA
IAV 0.81 NA
EDAG 0.81 NA
Source: Company, PL * We present the estimated CY18 revenues for Altran and
Alten, Akka, Bertrandt
LT Technologies is well positioned to tap the large market
opportunity
Profile of LTTS: LTTS is a pure play Engineering Design Services with presence
across multiple verticals and hence has a much diverse positioning in comparison
to other vendors like Cyient and Tata Elxsi. LTTS offers ER&D services and
solutions to all major industries which include Transportation, Industrial Products,
Telecom & Hi-Tech, Medical Devices and Process Industry.
LTTS presence across verticals
Source: Company, PL
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L&T Technology Services
August 28, 2018 7
Key Statistics of LT Technologies
Source: Company, PL
LTTS has annual revenues of US$620mn for LTM (Last twelve months) with
headcount of ~13,080 employees as on 1QFY19. The company has over 235
clients as on FY18 and the top 10 clients contribute to 40.5% of total revenues.
Presence across the Engineering value chain: LTTS offers design and
development solutions throughout the product development value chain and
provides solutions in the areas of mechanical and manufacturing engineering,
embedded systems, software engineering and process engineering.
Engineering Design Life Cycle
Source: Company, PL
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L&T Technology Services
August 28, 2018 8
Apart from Engineering Design Services to clients, LTTS also has IP and Platforms
which it independently sells to clients. Company believes that share of IP-led
offerings can increase over coming years and aid in non-linearity.
Focus on IP and Platforms aims to drive non-linearity
Source: Company, PL
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L&T Technology Services
August 28, 2018 9
Key verticals and focus areas
Transportation: Technology Refresh in Automotive to drive momentum
Transportation segment is the largest segment by revenue and contributed to
31.8% of the total revenue in FY18. The segment USD revenues grew by 15.2%
YoY in FY18.
LTTS offers engineering services and solutions over the complete spectrum of the
transportation industry that includes OEM and Tier 1 suppliers in Automotive,
Trucks & Off-Highway Vehicles, Aerospace and Rail industries. The segment
delivers end-to-end services from concept to detailed design, testing, aftermarket
and sourcing support helping OEMs and Tier1s develop products in a cost-effective
manner. LTTS also helps its clients develop cutting-edge Transportation
technologies such as Autonomous driving, Electric Vehicle and Drones.
LTTS focus verticals in Transportation vertical.
Source: Company, PL
LTTS offerings in Transportation vertical
Source: Company, PL
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L&T Technology Services
August 28, 2018 10
LTTS caters to critical projects for clients which include
Developing an engine, chassis, alternator and cab harness to be installed in a specialty vehicle. Optimized clamping strategy, standardized and diminished
the bill of materials count by 5% and reduced design time by three weeks.
Designed and tested a powertrain Electronic Control Unit (ECU) for a Tier 1 automotive supplier. Integrated features such as speed shift switch, vehicle
speed sensor and various solenoid valve drives.
“We opened a dedicated Offshore Development Center (ODC) with a
Japanese major in the off-highway segment in our Chennai office. Ours is the
only design center outside of Japan for this customer and we will work on the
design, validation, benchmarking of products for emerging market as well as
the smart product design” LTTS CEO in Q1FY19 Concall.
LTTS areas of investment in transport vertical include new areas like Digital
Cockpit, Additive Manufacturing, Autonomous Car Middleware, Active Safety,
EV/ Hybrid, V2X. Marquee clients in transportation include Daimler, UTAS,
John Deere, Caterpillar etc.
Revenues from this SBU grew at 5.2% CQGR over the past five quarters.
Revenues from Transportation Vertical (USD mn)
34.2 34.8
37.638.7
40.5 40.9 40.4
43.045.0
46.7
49.9
52.2
30.0
35.0
40.0
45.0
50.0
55.0
Q2F
Y16
Q3F
Y16
Q4F
Y16
Q1F
Y17
Q2F
Y17
Q3F
Y17
Q4F
Y17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
1Q
FY
19
US
D M
n
Source: Company, PL
We expect LTTS to deliver strong traction across all the three sub segments in
Transportation with potentially higher growth in Automotive vertical. Strong
technology refresh in Automotive led by ADAS, Electric Vehicles, Telematics etc is
likely to remain the growth driver for this vertical. We model revenues from this SBU
to grow at 18.7% CAGR over FY18-FY21E.
Revenues from Transportation vertical
Fig in USD mn FY17 FY18 FY19E FY20 FY21E
Transportation 160.5 184.6 221.6 262 309
Growth (%) NA 15% 20% 18% 18%
As a % of total revenues 33% 32% 31.1% 31.7% 32.4%
Source: Company, PL
Automotive Industry is seeing a strong
technology refresh led by ADAS,
Electric Vehicles etc which is driving
growth for this vertical.
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L&T Technology Services
August 28, 2018 11
Telecom and Hi-tech: Internet of Things (IoT) to aid strong
momentum in Semiconductor segment.
Telecom and Hitech vertical has contributed 25.8% of the company’s total revenue
in FY18. This segment has shown the strongest growth with USD revenues growing
by 66% YoY in FY18 led by a large deal win from Intel as well as Escentia
acquisition.
LTTS operates within three sub-verticals in Telecom and Hitech vertical which
includes
Telecom & Hi-Tech - This business unit offers ER&D services for Android
Products, Network Management Systems, Smart Homes, Wireless & Wireline
Infrastructure design and LTE Testing, Media & Entertainment and
Semiconductor industries.
Consumer electronics – LTTS works with mobile device and tablet
manufacturers, set-top box and gateway manufacturers and smart home and
wearable device manufacturers.
Semiconductor industry – This vertical focuses on application-specific
integrated circuit (ASIC) design and verification, embedded software for chip
and related validation services, reference board design and radio-frequency
(RF) design.
Sub-segments in Telecom and Hitech vertical
Source: Company, PL
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L&T Technology Services
August 28, 2018 12
Areas of work in Telecom and Hi-tech vertical
Source: Company, PL
Case Study: Ruggedized Tablet
Application Scenario: The government and law enforcement agencies which
operate in harsh and extreme conditions require ruggedized products for daily
operations. LTTS developed a ruggedized android device with smart features and
high battery life for such agencies.
LTTS contribution: LTTS has a complete end-to-end product ownership from
design to manufacturing to after-sales support. The company contributed in
complete design including Hardware Board Design, PCB Design, RF Design,
Platform Software Design & Development, Mechanical design and System
Verification and Validation. LTTS also designed ruggedized cradle, on which the
tablet is mounted.
Benefits to client: Customized product development for low volume,30% saving
on the unit cost, compared to existing market price of similar products
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L&T Technology Services
August 28, 2018 13
Revenues from this vertical have grown at 16% CQGR over the past five quarters.
This strong growth was aided by a large deal won from Intel as well as Escentia
acquisition.
Revenues from Telecom and Hi-tech
24.6 24.021.4 22.4
24.1
20.723.0
25.7
33.8
42.1
47.8 48.5
20.0
25.0
30.0
35.0
40.0
45.0
50.0
Q2F
Y16
Q3F
Y16
Q4F
Y16
Q1F
Y17
Q2F
Y17
Q3F
Y17
Q4F
Y17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
1Q
FY
19
US
D m
n
Telecom and Hitech
Source: Company, PL * A large deal win from Intel and Escentia acquisition aided
higher growth in Telecom and Hitech vertical in FY18
Telecom and Hitech vertical revenues have seen strong traction in FY18 led by
large deal wins. However, this SBU has lower segmental margin and hence,
impacting the overall margin trajectory for the company in FY18. With strong
traction for Internet of Things (IoT) led technology refresh, we expect this vertical to
show steady growth and model 25% CAGR over FY18-FY21E.
Revenues from Telecom and Hitech vertical
Fig in USD mn FY17 FY18 FY19E FY20 FY21E
Telecom & Hi-tech 90.1 149.5 202.8 245 294
Growth (%) NA 65.9% 35.7% 21% 20%
As a % of total revenues 18.6% 25.8% 28.5% 29.7% 31.0%
Source: Company, PL
LTTS has won a large deal from Intel
which helped boost the growth in
Telecom vertical in FY18. This deal
involves knowledge Transfer and
hence LTTS has rebadged Intel
employees from multiple locations
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L&T Technology Services
August 28, 2018 14
Industrial Products: Tepid growth could continue in medium term
Industrial Products segment is the third largest segment and contributed to 22.8%
of the revenue in FY18. The segment has shown a muted USD revenue growth of
4% YoY in FY18. Marquee clients in this segment are UTC group (OTIS elevators),
Rockwell Automation, EATON, DANAHER.
LTTS’ Industrial Products practice helps OEM customers across building
automation, home and office products, process control and machinery. This
Industrial Products segment offers end-to-end product development leveraging
expertise spanning software, electronics, connectivity, mechanical engineering,
industrial networking protocols, user interface/user experience (UI/UX), test
frameworks and enterprise control solutions.
LTTS sub-segments in Industrial Products vertical
Source: Company, PL
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L&T Technology Services
August 28, 2018 15
Industrial Products
Source: Company, PL
Case Study: Packaging Machine Cost Optimization
Project: LTTS was selected as the engineering partner by the client to achieve
significant cost reduction for the packaging machine. The optimization process saw
integration of parts, replacement with low cost alternate components in the air
cushion winder assembly and also simplification of the manufacturing process.
Client Profile: The client is a leading manufacturer of innovative, protective
packaging products and packaging systems.
Business Perspective: Client required: a) Cost reduction b) Weight reduction c)
Improved production yield d) Estimated cost savings.
Scope of Engagement: The scope of engagement was to optimize the machine
design modifications and leaner manufacturing process included:
- Redesign or integration of assembly parts for part count reduction
- Weight optimization to sustain required strength and stiffness of assembly & to
reduce overall manufacturing cost
- Alternate low cost part selection for electrical & electronics components
- Engineering Analysis (Finite Element Analysis)
– Prototyping - Verification
LTTS approach: LTTS worked on electrical Bill of Material (BOM) cost reduction,
3-D part models, drawings and existing component cost to execute the project as
per standard. This specialized requirement saw LTTS team justifying assembly
weight, scrutinize manufacturing process to reduce material wastage and
assimilate the number of parts used. The objective of cost reduction with process
and part optimization was achieved in the expected time frame.
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L&T Technology Services
August 28, 2018 16
Revenues from Industrial Products vertical (USD mn)
29.5
30.3
31.4 31.1 31.432.0
32.5 32.632.9 32.9
33.934.5
25.0
26.0
27.0
28.0
29.0
30.0
31.0
32.0
33.0
34.0
35.0
Q2F
Y16
Q3F
Y16
Q4F
Y16
Q1F
Y17
Q2F
Y17
Q3F
Y17
Q4F
Y17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
1Q
FY
19
US
D m
n
Source: Company, PL
We expect the Industrial segment to show a relatively moderate growth within the
peer’s verticals. We model revenues from this vertical to grow at 6.3% CAGR over
FY18-FY21E.
Revenues from Industrial Products vertical and growth (%)
Fig in USD mn FY17 FY18 FY19E FY20 FY21E
Industrial products 127.0 132.3 144.1 151 159
Growth (%) NA 4.1% 9.0% 5% 5%
As a % of total revenues 26.2% 22.8% 20.2% 18.3% 16.7%
Source: Company, PL
Process Industry: Uptick in Oil &Gas Sector could aid growth
Process Industry contributed to 12.9% of the company’s total revenue in FY18. This
segment USD revenue have grown by 1.1% YoY in FY18. Major clients in this
segment are P&G, Unilever, Chevron etc.
The Process Industry practice provides end-to-end engineering services for leading
plant operators across the globe. LTTS provides services in E/EPCM, Engineering
Reapplication and Global Rollouts, Plant Sustenance and Management, Regulatory
Compliance Engineering along with chemical, consumer packaged goods (FMCG)
and energy and utility sector clients. LTTS specializes in traditional Engineering,
Procurement, Construction and Management (EPCM) and operational
maintenance projects, as well as contemporary digital engineering enterprises.
The company is advancing its engineering footprint to encompass the digital sphere
and working with customers on ‘Smart Manufacturing’ technologies such as
automation, IoT, analytics, and augmented reality (AR).
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L&T Technology Services
August 28, 2018 17
Sub segments in Process Industry
Source: Company, PL
Some of the deal wins in Process Industry include:
LTTS won a deal with ExxonMobil Exploration Company to enable rapid conversion of historical Geoscience content into the digital domain by
leveraging sophisticated automation utilities. This will provide geoscientists
with improved data availability, enhancing the speed and efficiency of analysis
and evaluation. This deal is worth US$20mn.
Germany’s Covestro, a world-leading manufacturer of high-tech polymer materials, has chosen LTTS, as engineering services partners to implement
digitalization-based Engineering Programs across Covestro’s global locations.
Revenues from the Process Engineering vertical have grown at 6% CQGR over the
past five quarters.
Revenues from Process Engineering vertical
22.7
21.9
21.0
19.6
18.7 18.6
17.117.8 17.8
19.219.9
22.8
15.0
16.0
17.0
18.0
19.0
20.0
21.0
22.0
23.0
24.0
25.0
Q2F
Y16
Q3F
Y16
Q4F
Y16
Q1F
Y17
Q2F
Y17
Q3F
Y17
Q4F
Y17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
1Q
FY
19
US
D m
n
Source: Company, PL
Management cited that recovery in oil
and gas vertical will drive growth in
Process Industry
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L&T Technology Services
August 28, 2018 18
We expect revenues from this segment to grow at 15.5% CAGR over FY18-FY21E.
Recovery in Oil and Gas vertical is driving capex spends and leading to higher deal
wins for LTTS.
Revenues from Process Industry and growth (%)
Fig in USD mn FY17 FY18 FY19E FY20 FY21E
Process Industry 74.0 74.7 94.2 106 115
Growth (%) NA 1.0% 26.1% 12% 9%
As a % of total revenues 15.3% 12.9% 13.2% 12.8% 12.1%
Source: Company, PL
Medical vertical: Poised for strong momentum
Medical Devices segment is the smallest segment and contributed 6.8% of the total
revenue in FY18. The segment revenues have grown 20.0% YoY in USD in FY18.
LTTS’ domain expertise helps medical device OEMs address industry challenges,
accelerate time to market and optimize costs. LTTS focuses on delivering solutions
in Diagnostics, Patient Mobility Services, Musculoskeletal Services, Life Sciences,
Surgical Services, Cardiovascular, Home Healthcare and General Medical.
Sub segments in Medical vertical
Source: Company, PL
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L&T Technology Services
August 28, 2018 19
Case Study: Customized Knee Implant Design
Application Scenario
In traditional knee replacement surgery, the surgeon opts for an “off-the-shelf”
implant from a range of available standard sizes. In general, off-the-shelf knee
replacements are not designed for a patient’s anatomy. Therefore, the implant fix
and fitment is not always 100%, resulting in implant overhang, underhang and
improper alignment. All of this might lead to post-surgical residual pain.
LTTS’ Contribution
LTTS created and developed customized knee implants and cut guides, which
perfectly fit the patient’s knees, suiting the anatomy. This method involves end-to-
end design, process verification, pre-op planning along with planning documents
for doctors. All of this ensures optimal bone preservation for the patient along with
anatomy based values, needed for surgical technique.
Benefits to Customers
Optimal and long-term surgery benefits owing to customized design, reduced
turnaround time from design to manufacture and shipping and higher operational
efficiency of the implant at optimal cost.
Areas of work in Medical Devices
Source: Company, PL
“in medical, we do lot of innovative work for customers especially in Japan, in the
futuristic technology areas. In medical, we are seeing a lot of demand from medical
equipment manufacturers in the area of kidney, lung and ophthalmic. Hardware
support, certification and compliance testing is an area where clients are
increasingly outsourcing and that is where we play and that is also our strength” Dr
Keshab Panda in 3QFY18 concall
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L&T Technology Services
August 28, 2018 20
Revenues from Medical vertical have grown at 6.6% CQGR over the past five
quarters.
Revenues from Medical devices vertical
7.737.22
7.49
8.41 8.24 8.09 7.99
8.83
9.759.44
10.5310.98
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
Q2F
Y16
Q3F
Y16
Q4F
Y16
Q1F
Y17
Q2F
Y17
Q3F
Y17
Q4F
Y17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
1Q
FY
19
US
D m
n
Source: Company, PL
We expect Medical vertical revenues to grow from US$39mn in FY18 to US$76mn
in FY21E which represents a 24.5% CAGR. The strong growth would be aided by
smaller revenue base and strong traction across its key clients.
Revenues from Medical Vertical
Fig in USD mn FY17 FY18 FY19E FY20E FY21E
Medical Devices 32.7 38.6 48.7 60.9 76.2
Growth (%) NA 17.8% 26.4% 25% 25%
As a % of total revenues 6.8% 6.6% 6.9% 7.5% 7.8%
Source: Company, PL
-
L&T Technology Services
August 28, 2018 21
LTTS set to enter the bigger league
a) LTTS enjoys marquee client base across segments
LTTS works with most of the top vendors within its focus verticals. Some of the
marquee clients include Intel, DANAHAR, P&G, UTAS, Boeing, Caterpillar.
Focus remains on mining top 30 accounts
Source: Company, PL
Each of LTTS’ clients have large R&D budgets and hence the company has ample
room for scalability. The company currently has only two accounts with annual
billing of over US$50mn per year. We note mining remains strong across client
buckets.
“As I have said earlier, our bigger asset is our top customers - the top 50 customers
that each spend more than US$1bn plus annually. We believe a lot more
opportunity exists to mine these customers, and we continue to focus on our top
customers to grow our revenue” Dr Keshab Panda in Q1FY19 concall.
R&D budget of key companies per year
Fig in USD bn R&D spend per year
Intel 13
Qualcomm 3.4
Samsung 3.4
Airbus 2.5
Boeing 3.1
UTC 2.4
Source: Company, PL
LTTS already has two accounts with
annual billing of USD50mn per year
-
L&T Technology Services
August 28, 2018 22
Client Buckets of LTTS
Client profile Q4FY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19
Number of active clients 223 224 233 233 235 235
40m+ 2 2
30m+ 1 2 2 1 3 2
20m+ 2 3 4 3 4 3
10m+ 6 8 12 12 12 12
5m+ 21 16 28 30 31 33
1m+ 49 53 79 79 84 89
Source: Company, PL
The company also has a moderate client concentration with top 10 clients
contributing to 40% of total revenues and top 20 clients contributing to 55% of total
revenues.
Client Concentration of LTTS
54.3
%
54.1
%
53.8
%
53.8
%
52.1
%
51.7
%
51.5
%
52.6
%
54.9
%
56.4
%
56.7
%
55.6
%
35.7
%
36.4
%
36.2
%
37.8
%
36.3
%
35.5
%
35.6
%
37.0
%
39.8
%
41.2
%
41.4
%
40.5
%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Q2F
Y16
Q3F
Y16
Q4F
Y16
Q1F
Y17
Q2F
Y17
Q3F
Y17
Q4F
Y17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
1Q
FY
19
Top 5 clients Top 10 clients Top 20 clients
Source: Company, PL
Major Clients of LT Technologies across verticals
Source: Company, PL
LTTS has shown strong momentum
in client mining across the bands
-
L&T Technology Services
August 28, 2018 23
b) Ability to drive complex engagements drive client
stickiness
LTTS has delivered strong track record in executing multiple enjoyments. We
present some of the key areas of work done by the company. LTTS service offers
span multiple industries and hence enjoy a strong client referral. Some of the
projects executed by LTTS include concept to Design of Gyro Screw driver,
enablement of LTE chipset.
Some of key projects executed by LTTS
Source: Company, PL
c) Lower cost structure compared to legacy vendors
European players are a large, formidable competition in the Engineering Services.
Continental Europe has large engineering conglomerates like Airbus, BMW,
Daimler, etc. Hence, both France and Germany have large boutique firms focusing
on Engineering Design Services. All the three largest players in Engineering
Services are from Continental Europe. The legacy engineering Service providers
have higher revenue per employee owing to on-site execution. However, they have
lower margins v/s Indian peers owing to bloated cost structures. Most of the
European vendors are focusing on expanding offshore presence to improve margin
structure. Altran acquisition of Aricent was aimed at boosting the offshore
headcount.
Revenue per employee and margin of key vendors
Source: Company, PL
Though European players like Altran,
Akka have high revenue per
employee, there margin profile is low
owing to higher onsite execution
-
L&T Technology Services
August 28, 2018 24
d) Acquisitions can ramp up European operations
LTTS has been relatively slow on acquisitions. The major acquisition done by the
company was Escentia which was acquired in May 2017. LTTS spent US$27mn for
this acquisition (US$15mn is fixed and rest is earnout). Escentia had revenues of
US$20mn with over 100 employees. We believe that LTTS should scout for
acquisitions in Europe as the region has a large presence of boutique companies
operating in the ER&D space. LTTS derives 18.5% of total revenues from Europe
and the annual trailing 12 months’ revenues of US$110mn from this region. Hence,
LTTS is still subscale in the region.
We believe acquisitions form an important element in scaling the Engineering
Design Services Business. Major acquisitions done by global players are shown
below: Altran has been most aggressive on the acquisition front with an aim to scale
up its offshore presence.
Acquisition done by global firms
Company Acquired Entity Amount paid Revenues of Target company Headcount of Target company
Altran Aricent USD2 bn USD687mn 10500
Altran Global Edge USD50mn NA 1000
Altran SiConTech NA NA NA
Altan IRM NA NA NA
Akka PDS NA USD260mn 2600
Akka Gigatronics NA USD200 1000
HCL Tech Geometric USD200mn USD150mn 2600
Source: Company, PL
e) Strong Revenue per employee owing to high end
service offerings
LTTS has a headcount of ~13,081 employees as on Q1FY19. The mix of hires is
changing in favor of embedded owing to the increasing component of electronics
within devices.
“See, percentage is changing now, mechanical I think is reducing and embedded
and software is increasing now. We have 60:40, 40% mechanical and 60% in
embedded and software, electronics side. Now, the engineers we hired in multiple
areas, when you talk about working on IoT, algorithm development and
engineering, we need good engineers with good software skills. So those
engineers, like recently we hired engineers from IIT a few of them, and they will be
working on futuristic technology under CTO organization full time on some of the
platform development, new technology development they will be working full time”.
LTTS CEO in Q1FY19 concall.
-
L&T Technology Services
August 28, 2018 25
LTTS revenue per employee per year
51,740
48,979
47,213 48,147
49,890
51,463
53,448 53,222
44,000
46,000
48,000
50,000
52,000
54,000
Q2F
Y17
Q3F
Y17
Q4F
Y17
1Q
FY
18
2Q
FY
18
3Q
FY
18
4Q
FY
18
1Q
FY
19
US
D
Revenue per employee per year (USD)
Source: Company, PL
Focus on high-end offerings has enabled LTTS to enjoy revenue per employee at
par with Tier 1 IT vendors (Infosys/TCS revenue per reported employee stood at
US$54,090/ US$48,808 per year for FY18).
-
L&T Technology Services
August 28, 2018 26
Financial Analysis
Strong revenue growth to continue over FY18-FY21E
LTTS has delivered softer growth in FY17 led by pruning of tail accounts and
rationalization of portfolio. The company has seen sharp acceleration in revenue
growth in FY18 led by traction in Telecom and Hitech vertical led by large deal wins
as well as traction in transportation vertical. We expect strong growth in FY19 as
well and expect LTTS USD revenues to grow by 23% in FY19.
Management has guided for an ambitious target for revenues to reach US$1bn by
FY21E. This target includes an inorganic component of ~US$120mn. Hence, we
believe that LTTS would require 15% organic CAGR over FY18-FY21E to reach its
revenue target by FY21E. This would put the company at the fastest growing pace
among peers in the sector. For FY18, LTTS’ organic revenue growth is 16.5%,
which is almost 3x the organic growth of industry leader Altran (Altran organic
growth is 5.6% for CY17). Even HCL Tech’s organic revenue growth in Engineering
design services is only 6% for FY18. Hence, LTTS superior growth could help
company sustain premium P/E multiples.
Consolidated USD revenues and Growth YoY (%)
467 484
580
713
825
951
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
200
400
600
800
1000
FY16 FY17 FY18 FY19E FY20E FY21E
US
D m
n
USD Mn Revenue YoY Growth (%)
Source: Company, PL
We expect LTTS USD revenues to
grow by 23% in FY19 (entirely
organic growth)
-
L&T Technology Services
August 28, 2018 27
Vertical Mix of revenues of LTTS
Fig in USD mn FY17 FY18 FY19E FY20 FY21E
Transportation 160.5 184.6 221.6 262 309
Growth (%) NA 15% 20% 18% 18%
As a % of total revenues 33.1% 31.8% 31.1% 31.7% 32.4%
Industrial products 127.0 132.3 144.1 151 159
Growth (%) NA 4.1% 9.0% 5% 5%
As a % of total revenues 26.2% 22.8% 20.2% 18.3% 16.7%
Telecom & Hi-tech 90.1 149.5 202.8 245 294
Growth (%) NA 65.9% 35.7% 21% 20%
As a % of total revenues 18.6% 25.8% 28.5% 29.7% 31.0%
Process Industry 74.0 74.7 94.2 106 115
Growth (%) NA 1.0% 26.1% 12% 9%
As a % of total revenues 15.3% 12.9% 13.2% 12.8% 12.1%
Medical Devices 32.7 38.6 49.5 61.9 74.2
Growth (%) NA 17.8% 28.4% 25% 20%
As a % of total revenues 6.8% 6.6% 6.9% 7.5% 7.8%
Total 484.3 580.3 712.3 825.6 951.2
Growth (%) NA 19.8% 22.7% 15.9% 15.2%
Source: Company, PL
Expect gradual margin expansion led by scale and G&A
leverage
LTTS has shown volatile margin trajectory over the past few years. Margins have
fallen by 310bps YoY in FY18 led by higher growth in Telecom and Hitech and
Transportation verticals both of which have which have lower margins. Company
has also taken some onsite heavy deals which weighed on margins in FY18. We
believe scale would drive G&A leverage and help margin trajectory. We model
gradual margin expansion over FY19-FY21E. INR depreciation would also aid in
margin expansion over FY18-FY21E.
EBITDA Margin v/s Average Exchange Rate
15.2%
17.0%
18.0%
15.5%
17.1%
17.9%18.3%
56.0
58.0
60.0
62.0
64.0
66.0
68.0
70.0
14.0%
16.0%
18.0%
20.0%
FY15 FY16 FY17 FY18 FY19E FY20E FY21E
EBITDA Margin (%) Average Exchange Rate (USD vs INR)
Source: Company, PL
Transport and Telecom, Hitech
verticals are likely to continue deliver
strong growth among verticals
-
L&T Technology Services
August 28, 2018 28
“Some of the engagements that we signed in FY18, especially in the transportation
and telecom sector, have been onsite-heavy, but we have done this with a very
clear intention to expand our technology foot print.
In transportation, we have taken up some engagements which initially are onsite-
heavy, but that has led us entry into autonomous driving and it has helped us
building up the competency in this crucial area.” LTTS COO in Q4FY18 concall.
EBITDA Margin and EBIT Margin (%)
15.2%
17.0%
18.0%
15.5%
17.0%17.9%
18.3%
13.4%
15.1%
16.1%
13.1%
14.8%
16.0%16.6%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
FY15 FY16 FY17 FY18 FY19E FY20E FY21E
EBITDA Margin (%) EBIT Margin (%)
Source: Company, PL
Segmental EBITA margins for FY18
13.5%
19.4%
24.4%
22.4%
17.2%
12.0%
19.5%
21.7%
20.2%
12.6%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
26.0%
Transportation ProcessEngineering
IndustrialProducts
Medical Telecom
FY17 FY18
Source: Company, PL
Transport, Telecom and Hitech verticals have lower segmental margins among the
SBUs, while Process Engineering, Industrial Products and Medical equipment
enjoy higher margins. We believe taking over deals which involve onsite re-badging
have also weighed on LTTS’ margin trajectory. For example, LTTS has won a large
deal with Intel in FY18 and this involved re-badging of onsite employees across
India, Israel and Europe.
Higher growth in Transport and
Telecom & Hitech vertical, deals which
involved onsite knowledge transfer
weighed on LTTS margins in FY18
-
L&T Technology Services
August 28, 2018 29
Steady dividend payout ratios keep ROEs strong
LTTS has maintained a steady dividend payout ratio over the past few years.
Hence, ROE trajectory has remained steady over the past few years. Net cash on
balance sheet stands at Rs3bn as on FY18. We expect ROE trajectory to remain
strong in FY19/FY20E as well.
Dividend Payout Ratio (ex –dividend tax) and ROE (%)
50.4%54.5%
17.0%
32.0% 33.0% 33.0%
22.9%
30.4%33.7%
29.6% 30.7% 28.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
FY15 FY16 FY17 FY18 FY19E FY20E
Dividend Payout Ratio (Ex -Dividend tax) ROE(%)
Source: Company, PL
Steady free cash flow trajectory:
LTTS continues to enjoy steady operating and free cash flow trajectory. The
company spent Rs970mn in FY18 for Escentia acquisition (Fixed payment). We
expect LTTS to continue to generate steady free cash flow in FY19/FY20E as well.
LTTS Operating and free cash flow
Fig in Rs mn FY16 FY17 FY18 FY19E FY20E
Cash flow from Operations 5337 3879 4136 4465 5605
Capex (1,284) (465) (866) (1,000) (1,000)
Acquisition Spend (970) - -
Free Cash Flow 4053 3414 2300 3465 4605
FCF/EBIDTA 77.9% 58.3% 39.6% 43.0% 47.4%
Source: Company, PL
LTTS has maintained a lean balance
sheet through maintaining steady
payout ratios. Hence, ROE trajectory
has remained superior at upwards of
28%
-
L&T Technology Services
August 28, 2018 30
Valuation and View
LTTS stock has seen a strong rally since its initial IPO led by steady P/E re-rating.
Stock is up 123% over the past one year. Stock trades at 25x one year forward
earnings compared to 14x traded one year ago. LTTS trades at 23.5x FY20E EPS
and remains among the costliest stock in the sector. We value the stock at 24x
Sep20E EPS which yields a TP of Rs 1,780sh.
LTTS one year forward P/E chart
Source: Company, PL
LTTS currently trades at par with TCS on one year forward P/E. Strong growth
profile is aiding LTTS trade almost at par with TCS.
LTTS discount wrt TCS (One year forward P/E chart)
Source: Company, PL
10
12
14
16
18
20
22
24
26
28
Sep
-16
Oct-
16
No
v-1
6
Dec-1
6
Jan
-17
Feb-1
7
Mar-
17
Ap
r-17
May-1
7
Jun
-17
Jul-
17
Aug
-17
Sep
-17
Oct-
17
No
v-1
7
Dec-1
7
Jan
-18
Feb-1
8
Mar-
18
Ap
r-18
May-1
8
Jun
-18
Jul-
18
Aug
-18
P/E Mean Mean + Std Dev Mean - Std Dev
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Jan-0
0O
ct-16
Nov-
16N
ov-
16D
ec-
16Ja
n-1
7F
eb-1
7M
ar-
17
Mar-
17
Apr-
17
May-
17
Jun-1
7Ju
n-1
7Ju
l-17
Aug-1
7S
ep-1
7S
ep-1
7O
ct-17
Nov-
17D
ec-
17D
ec-
17Ja
n-1
8F
eb-1
8M
ar-
18
Mar-
18
Apr-
18
May-
18
Jun-1
8Ju
n-1
8Ju
l-18
Aug-1
8
-
L&T Technology Services
August 28, 2018 31
Comparative Valuation Table
Global peer Alten trades at 17x CY19E EPS. However, we note Alten organic
revenue growth is at 6% with EBITDA margin at ~10.8% for CY19E. Hence, LTTS
trades at substantial premium (vs global peer Alten).
Valuation Profile of Global peers
MCAP (USD bn) Revenue (USD mn) EBITDA (USD mn) EBITDA Margin (%) PAT (USD mn)
CY17 CY18E CY19E CY17 CY18E CY19E CY17 CY18E CY19E CY17 CY18E CY19E
ALTRAN TECHNOLOGIES SA 2.8 2,578 3,361 3,717 285 458 544 11.0 13.6 14.6 187 226 296
ALTEN SA 3.4 2,232 2,563 2,755 234 273 298 10.5 10.6 10.8 175 180 199
AKKA TECHNOLOGIES 1.5 1,508 1,712 1,916 104 155 183 6.9 9.0 9.6 43 68 91
MCAP (USD bn) P/E EV/EBITDA ROE (%)
CY17 CY18E CY19E CY17 CY18E CY19E CY17 CY18E CY19E
ALTRAN TECHNOLOGIES SA 2.8 17.2 12.4 9.6 12.7 6.6 5.5 14.7 11.9 13.0
ALTEN SA 3.4 15.7 19.0 17.2 11.7 12.4 11.4 18.7 16.9 16.3
AKKA TECHNOLOGIES 1.5 23.1 22.7 17.2 12.4 11.7 9.9 18.2 23.0 25.4
Source: Company, PL
Valuation Profile of Indian Peers
MCAP (USD
bn)
Revenue (USD mn) EBITDA (USD mn) EBITDA Margin (%) PAT (USD mn)
FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E
TCS 114 19,089 20,952 23,070 5,146 5,490 6,119 27.0 26.2 26.5 3,744 4,432 4,722
HCL TECH 21 7,838 8,469 9,316 1,773 1,945 2,125 22.6 23.0 22.8 1,360 1,404 1,522
Cyient 1.2 607 684 773 85 95 109 14.0 13.8 14.1 59 66 78
Tata Elxsi 1.3 215 246 292 50 68 79 24.9 28.0 28.0 35 44 52
LTTS 2.4 580 713 825 90 121 147 15.5 17.0 17.9 73 95 104
MCAP (USD bn) P/E EV/EBITDA ROE (%)
FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E
TCS 114 30.5 25.7 24.2 22.8 18.9 17.4 29.4 31.9 28.8
HCL Tech 21 16.5 14.8 13.5 11.8 10.3 9.5 25.4 24.5 23.5
Cyient 1.2 19.9 17.8 15.3 13.4 11.3 9.8 18.3 18.5 19.5
Tata Elxsi 1.3 37.0 29.5 25.2 25.4 20.3 17.8 37.0 35.8 31.7
LTTS 2.4 33.6 26.1 23.4 27.2 18.8 15.2 33.6 32.6 29.6
Source: Company, PL * For Indian companies, we have converted INR financials to USD at average rate of 69. Tata elxsi is in soft
coverage
-
L&T Technology Services
August 28, 2018 32
Business Overview
LTTS is a leading global ER&D services company, backed by the rich Engineering
expertise and experience of parent company, Larsen & Toubro. The company has
broad-based vertical mix offering Engineering Services across Transport, Industrial
Products, Medical, Process Engineering and Telecom and Hi-tech verticals. As on
Q1FY19, the company has headcount of ~13,000 employees.
Business Profile of the Company
Source: Company, PL
Management Profile
Managing Director and CEO
Dr. Keshab Panda is the CEO and MD of LTTS. He has over 31 years of global industry experience in research, conceptualizing, creating, operationalizing and turning around complex technology and engineering services businesses. His past leadership roles include President – Americas, Mahindra Satyam & Head of Europe Operations, Satyam Computer Services. He obtained his Doctor of Philosophy from the IIT, Bombay and an advanced management degree from the Aresty Institute of Executive Education, The Wharton School, University of Pennsylvania.
Chief Financial Officer
Mr. P Ramakrishna has been CFO of LTTS from January 2016. He had been with the L&T Group for last 24 years, having worked in different areas of finance and accounts covering Treasury, corporate accounts, and corporate finance. He has graduated degree in Commerce (Honors) from University of Calcutta.
Chief Operating Officer
Mr Bhupendra Bhate is a technologist with a blend of business acumen with over 30 years of experience in the field of engineering, product development and software. He joined L&T group in 2003 and has had a steady growth in the organization moving up the ladder holding various positions, most recently being Chief Digital Officer. Prior to joining L&T, he worked with AtoS Origin and with Godrej & Boyce. He holds a Bachelor’s degree in electrical engineering, with executive business management program from Harvard Business School and senior executive program at London Business School.
President Sales & Business Development
Mr Amit Chadha is President, Sales and Business Development, Whole-time Director of LTTS. In his current role as President, Sales and Business Development, Amit is responsible for helping global R&D customers and Fortune 500 companies leverage LTTS digital engineering offerings for their strategic differentiation and product development. He is certified under the Global Business Leadership Executive Program with Harvard Business School Publishing and holds a Degree in Electrical and Electronics Engineering from BIT Mesra.
Source: Company, PL
Revenues
Vertical Mix (%)
Transportation: 30.9
Industrial Products: 20.4
Telecom & Hit-Tech: 28.7
Process industry: 13.5
Medical Devices: 6.5
Geography Mix (%)
North America: 56.3
Europe: 18.5
India: 12.4
RoW: 12.8
Key Competitors:
Cyient, TCS, HCL Tech, Quest
Headcount
13,081
Client concentration as on Q1FY19
Top 5 - 28.3
Top 10 - 40.5
Top 20 - 55.6
-
L&T Technology Services
August 28, 2018 33
Operating Metrics:
Revenue by verticals
Contribution by Verticals Q1FY17 Q2FY17 Q3FY17 Q4FY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19
Transportation 32.2% 32.9 34.0 33.4 33.6 32.3 30.9 30.8 30.9
Industrial products 25.9 25.5 26.6 26.9 25.5 23.6 21.8 20.9 20.4
Telecom & Hi-tech 18.6 19.6 17.2 19.0 20.1 24.3 27.9 29.5 28.7
Process Industry 16.3 15.2 15.5 14.1 13.9 12.8 12.7 12.3 13.5
Medical Devices 7.0 6.7 6.7 6.6 6.9 7.0 6.3 6.5 6.5
Source: Company, PL
Revenue by Geography (%)
Contribution by geographies Q1FY17 Q2FY17 Q3FY17 Q4FY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19
North America 63.5 62.3 62.5 63.3 64.5 60.8 58.7 57.6 56.3
Europe 20.2 19.5 19.2 17.3 16.6 16.5 17.2 18.6 18.5
India 6.8 7.5 8.1 9.2 9.3 10.5 11.5 11.7 12.4
RoW 9.5 10.7 10.2 10.2 9.6 12.2 12.6 12.1 12.8
Revenue by Delivery Centre and Contract type
Q1FY17 Q2FY17 Q3FY17 Q4FY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19
Revenues by delivery (%)
Onsite 51.1 48.0 47.5 49.2 49.2 50.8 50.7 50.0 49.4
Offshore 48.9 52.0 52.5 50.8 50.8 49.2 49.3 50.0 50.6
Revenues by project type (%)
Fixed price 28.6 30.6 31.0 30.4 30.2 33.2 38.2 37.0 40.9
Time and material 71.4 69.4 69.0 69.6 69.8 66.8 61.8 63.0 59.1
Source: Company, PL
Headcount of LTTS
Headcount Q1FY17 Q2FY17 Q3FY17 Q4FY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19
Total headcount 9,419 9,599 10,040 10,463 10,805 11,532 11,941 12,307 13,081
Billable 8,587 8,739 9,160 9,537 9,886 10,573 11,009 11,360 12,147
Sales & Support 832 860 880 926 919 959 932 947 934
Voluntary attrition 13.2% 14.6% 14.0% 14.0% 13.4% 13.4% 13.2% 13.5% 15.4%
Source: Company, PL
-
L&T Technology Services
August 28, 2018 34
Consolidated Model Sheet of LTTS
Fig in R mn FY15 FY16 FY17 FY18 FY19E FY20E FY21E
USD revenues 428 467 484 580 713 825 951
Growth (%) NA 9.1% 3.8% 19.8% 22.8% 15.7% 15.3%
Organic growth (%) 9.1% 3.8% 16.5% 22.50% 15.7% 15.3%
Average Exchange Rate (USD vs INR) 61 66 66 65 68 68 67
Consolidated Revenues (INR mn) 26,186 30,665 32,483 37,471 48,768 56,084 63,739
Growth (%) NA 17.1% 5.9% 15.4% 30.1% 15.0% 13.6%
EBIDTA 3987 5204 5856 5811 8298 10028 11652
EBIT 3503 4615 5231 4923 7231 8964 10569
PAT 3109 4167 4250 5121 6539 7199 8386
EBIDTA margin (%) 15.2% 17.0% 18.0% 15.5% 17.0% 17.9% 18.3%
EBIT margin (%) 13.4% 15.1% 16.1% 13.1% 14.8% 16.0% 16.6%
PAT margin (%) 11.9% 13.6% 13.1% 13.7% 13.4% 12.8% 13.2%
Diluted EPS 46.81 32.10 39.64 47.58 61.42 68.30 79.57
EPS Growth (%) NA -31.4% 23.5% 20.0% 29.1% 11.2% 16.5%
P/E 67.5 49.8 40.5 33.2 25.5 23.4 20.1
P/S 6.3 5.3 5.0 4.4 3.4 2.8 2.6
EV/EBIDTA 41 32 28 28 19 15 13
Dividend Payout ratio (Ex - dividend tax) 50.4% 54.5% 17.0% 32.0% 33.0% 33.0% 33.0%
DPS 15 22 7 16 21 23 27
ROE(%) 22.9% 30.4% 33.7% 29.6% 30.7% 28.3% 27.8%
ROCE (%) 23.0% 28.1% 29.3% 28.2% 30.1% 27.5% 27.2%
ROIC(%) 25.3% 31.2% 29.0% 24.9% 31.7% 36.6% 39.1%
Consolidated Balance sheet FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Networth (R mn) 10,521 10925 14,852 19,367 23,308 27,647 32,701
Net cash on Balance sheet (R mn) -1083.9 -595.0 1599 3046 5665 8517 10957
Net cash per share (21.06) (5.85) 14.92 28.61 53.20 80.80 103.96
Net cash as a % of stock price -1.4% -0.4% 1.0% 1.9% 3.5% 5.3% 6.8%
Consolidated Cash flow
Cash flow from Operations 2889 5337 3879 4136 4522 5948 7092
Capex 541 1,284 465 866 1,000 1,000 1,000
Acquisition Spent 6,096 - - 970 - - -
Free Cash Flow -3748 4053 3414 2300 3522 4948 6092
FCF/EBIDTA -94.0% 77.9% 58.3% 39.6% 42.4% 49.3% 52.3%
Source: Company, PL
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Financials Income Statement (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E
Net Revenues 32,483 37,471 48,770 56,084
YoY gr. (%) 5.9 15.4 30.2 15.0
Employee Cost 20,958 24,600 31,715 36,597
Gross Profit 11,525 12,871 17,055 19,487
Margin (%) 35.5 34.3 35.0 34.7
SG&A Expenses 5,669 7,060 8,696 9,461
Other Expenses - - - -
EBITDA 5,856 5,811 8,359 10,026
YoY gr. (%) 12.5 (0.8) 43.8 19.9
Margin (%) 18.0 15.5 17.1 17.9
Depreciation and Amortization 625 888 1,035 1,064
EBIT 5,231 4,923 7,324 8,962
Margin (%) 16.1 13.1 15.0 16.0
Net Interest 21 24 22 24
Other Income 582 1,934 1,732 800
Profit Before Tax 5,792 6,833 9,034 9,738
Margin (%) 17.8 18.2 18.5 17.4
Total Tax 1,542 1,712 2,414 2,532
Effective tax rate (%) 26.6 25.1 26.7 26.0
Profit after tax 4,250 5,121 6,620 7,206
Minority interest (1) (6) - -
Share Profit from Associate - - - -
Adjusted PAT 4,251 5,072 6,620 7,206
YoY gr. (%) 2.0 19.3 30.5 8.9
Margin (%) 13.1 13.5 13.6 12.8
Extra Ord. Income / (Exp) - - - -
Reported PAT 4,251 5,072 6,620 7,206
YoY gr. (%) 2.0 19.3 30.5 8.9
Margin (%) 13.1 13.5 13.6 12.8
Other Comprehensive Income - - - -
Total Comprehensive Income 4,251 5,072 6,620 7,206
Equity Shares O/s (m) 102 103 103 103
Diluted EPS (Rs) 39.6 48.1 62.7 68.3
Source: Company Data, PL Research
Balance Sheet Abstract (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E
Non-Current Assets
Gross Block 3,402 4,404 5,204 6,004
Tangibles 1,757 2,020 2,420 2,820
Intangibles 1,645 2,384 2,784 3,184
Acc: Dep / Amortization 1,479 2,231 3,266 4,331
Tangibles 567 770 1,345 1,936
Intangibles 912 1,461 1,922 2,395
Net fixed assets 1,923 2,173 1,938 1,673
Tangibles 1,190 1,250 1,075 884
Intangibles 733 923 862 789
Capital Work In Progress 23 1 1 1
Goodwill 4,215 4,921 4,921 4,921
Non-Current Investments 1,054 590 590 590
Net Deferred tax assets 323 243 243 243
Other Non-Current Assets 380 487 487 487
Current Assets
Investments 1,946 2,207 2,307 2,407
Inventories - - - -
Trade receivables 7,106 9,623 11,357 13,061
Cash & Bank Balance 672 1,542 4,278 7,234
Other Current Assets 3,399 3,805 4,005 4,205
Total Assets 22,329 27,051 31,786 36,681
Equity
Equity Share Capital 203 205 205 205
Other Equity 14,653 19,159 23,149 27,492
Total Networth 14,856 19,364 23,354 27,697
Non-Current Liabilities
Long Term borrowings - - - -
Provisions - - - -
Other noncurrent liabilities - - - -
Current Liabilities
ST Debt / Current of LT Debt 1,019 702 702 702
Trade payables 1,489 1,807 2,352 2,705
Other current liabilities 4,957 5,128 5,328 5,528
Total Equity & Liabilities 22,329 27,051 31,786 36,681
Source: Company Data, PL Research
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Cash Flow (Rs m)
Y/e Mar FY17 FY18 FY19E FY20E Year
PBT 5,792 6,778 9,034 9,738
Add. Depreciation 625 888 1,035 1,064
Add. Interest 20 23 (1,710) (776)
Less Financial Other Income 582 1,934 1,732 800
Add. Other 365 (131) - -
Op. profit before WC changes 6,802 7,558 8,359 10,026
Net Changes-WC (1,342) (1,701) (1,390) (1,550)
Direct tax (1,581) (1,721) (2,414) (2,532)
Net cash from Op. activities 3,879 4,136 4,556 5,944
Capex+ acquisitions (447) (1,821) (800) (800)
Interest / Dividend Income 57 78 1,732 800
Others (1,391) (261) (100) (100)
Net Cash from Invt. activities (1,781) (2,004) 832 (100)
Issue of share cap. / premium - 2 - -
Debt changes (937) (317) - -
Dividend paid (1,264) (983) (2,630) (2,863)
Interest paid (21) (25) (22) (24)
Others - - - -
Net cash from Fin. activities (2,222) (1,323) (2,652) (2,887)
Net change in cash (124) 809 2,736 2,957
Free Cash Flow 3,414 2,300 3,756 5,144
Source: Company Data, PL Research
Quarterly Financials (Rs m)
Y/e Mar Q3FY18 Q4FY18 Q1FY19
Net Revenue 9,691 10,548 11,522
YoY gr. (%) 19.6 29.9 40.1
Employee Expenses 6,320 6,818 7,381
Gross Profit 3,371 3,730 4,141
Margin (%) 34.8 35.4 35.9
SG&A expenses 1886 2035 2180
SG&A as a % of Sales 19.5 19.3 18.9
EBITDA 1,485 1,695 1,961
YoY gr. (%) 8.1 14.1 15.7
Margin (%) 15.3 16.1 17.0
Depreciation / Depletion 145 452 260
EBIT 1,340 1,243 1,701
Margin (%) 13.8 11.8 14.8
Net Interest 9 8 4
Other Income 435 755 982
Profit before Tax 1,766 1,990 2,679
Margin (%) 18.2 18.9 23.3
Total Tax 501 344 698
Effective tax rate (%) 28.4 17.3 26.1
Profit after Tax 1,265 1,646 1,981
Minority interest - - -
Share Profit from Associates - - -
Adjusted PAT 1,265 1,591 1,981
YoY gr. (%) 16.5 64.9 102.1
Margin (%) 13.1 15.1 17.2
Extra Ord. Income / (Exp) - - -
Reported PAT 1,265 1,591 1,981
YoY gr. (%) 16.5 64.9 102.1
Margin (%) 13.1 15.1 17.2
Avg. Shares O/s (m) 105 105 105
EPS (Rs) 12.0 15.1 18.8
Source: Company Data, PL Research
Key Financial Metrics
Y/e Mar FY17 FY18 FY19E FY20E
Per Share(Rs)
Diluted EPS 39.5
48.2
62.8
68.3
CEPS 48.0 58.1 74.7 80.7
BVPS 146.4 188.9 227.8 270.2
FCF 33.6 22.4 36.6 50.2
DPS 7.1 15.8 21.3 23.2
Return Ratio(%)
RoCE 29.3 28.2 30.1 27.5
ROIC 29.0 24.9 31.7 36.6
RoE 33.7 29.6 31.0 28.2
Balance Sheet
Net Debt : Equity (x) (0.1) (0.2) (0.3) (0.3)
Debtor (Days) 80 94 85 85
Valuation(x)
PER 40.4 33.5 25.5 23.4
P/B 11.0 8.5 7.1 5.9
P/CEPS 33.4 27.6 21.5 19.9
EV/EBITDA 27.6 27.8 19.0 15.5
EV/Sales 5.0 4.3 3.3 2.8
Dividend Yield (%) 0.4 1.0 1.3 1.4
Source: Company Data, PL Research
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Analyst Coverage Universe
Sr. No. CompanyName Rating TP (Rs) Share Price (Rs)
1 Cyient BUY 860 742
2 HCL Technologies BUY 1,100 963
3 Hexaware Technologies BUY 460 496
4 Infosys BUY 1,430 1,317
5 Mphasis Accumulate 1,250 1,150
6 NIIT Technologies BUY 1,300 1,120
7 Redington (India) BUY 175 113
8 Sonata Software BUY 390 365
9 Tata Consultancy Services Accumulate 2,080 1,875
10 TeamLease Services Hold 2,740 2,672
11 Tech Mahindra BUY 760 655
12 Wipro Hold 300 283
13 Zensar Technologies BUY 1,410 1,240
PL’s Recommendation Nomenclature
Buy : Over 10% Outperformance to Sensex over 12-months
Hold : -5% to 10% Outperformance to Sensex over 12-months
Sell : > -5% Underperformance to Sensex over 12-months
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly
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August 28, 2018 38
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