LTTSNSEQ2 FY23October 25, 2022

L&T Technology Services Limited

8,543words
76turns
15analyst exchanges
4executives
Management on call
Amit Chadha
CEO,
Abhishek Sinha
COO,
Rajeev Gupta
CFO,
Pinku Pappan
HEAD, INVESTOR RELATIONS
Key numbers — 39 extracted
4.5%
s the vision and having the confidence in us. Our momentum continued into the second quarter with 4.5% constant currency growth led by Transportation and Plant Engineering segments. The growth was acc
18%
rowth was accompanied by sound operational execution with Q2 being the 5th consecutive quarter of 18% plus EBIT margin. Total © L&T Technology Services deal TCV remains healthy, and o
9.4%
egmental performance and outlook. Starting with Transportation: We had a stellar performance with 9.4% QoQ growth in Constant Currency that was broad-based across sub-segments of Auto, Trucks and Off
150%
o Semi-conductor shortage in Auto are starting to ease, o Global air travel has increased by 150% versus July 2021 levels leading to more aircraft orders and a rising backlog at manufacturers and
rs,
and Off Highway and Aerospace. We continue to invest in EACV. To highlight one, in Connected Cars, we have invested in a next generation digital cockpit domain controller solution that is currently
6%
confidence about our growth prospects. In Plant Engineering, we had a strong quarter with nearly 6% QoQ growth in constant currency that was broad-based across FMCG, O&G and Chemicals. Clients in a
3.5%
© L&T Technology Services Moving on to Industrial Products, we had a healthy growth of 3.5% QoQ in constant currency which was led by Electrical, Machinery and Power and Utilities. There is
16.5%
owns; however, growth should rebound in Q4. Our FY23 USD revenue guidance is now narrowed to 15.5-16.5% in constant currency. With that, let me end by wishing you all very good health, a very Happy D
₹1,995 crore
Let me take you through Q2 FY23 financials starting with the P&L: Our revenue for the quarter was ₹1,995 crores, a growth of 6.5% on sequential basis. Our double- digit YoY growth trajectory continues with Q2
6.5%
FY23 financials starting with the P&L: Our revenue for the quarter was ₹1,995 crores, a growth of 6.5% on sequential basis. Our double- digit YoY growth trajectory continues with Q2 revenue of 24.1% on
24.1%
of 6.5% on sequential basis. Our double- digit YoY growth trajectory continues with Q2 revenue of 24.1% on YoY basis. © L&T Technology Services Glad to share that despite the headwinds, w
18.2%
y Services Glad to share that despite the headwinds, we have been able to maintain EBIT margin at 18.2% in line with our aspirations and this has been the 5th consecutive quarter of 18% plus EBIT level
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Guidance — 20 items
Pinku Pappan
opening
“The audio recording of this call will be available on our website approximately 1 hour after the call ends.”
Amit Chadha
opening
“This is for one of their sites and we expect the program to be expanded to multiple sites of the customer.”
Amit Chadha
opening
“Overall, we expect the pace in telecom either to pick up as the 5G and Media deals in the pipeline close.”
Amit Chadha
opening
“Our play in this segment is very broad which gives us the ability to target different areas of growth.”
Amit Chadha
opening
“We expect Q3 to have the seasonal furloughs and plant shutdowns; however, growth should rebound in Q4.”
Amit Chadha
opening
“Our FY23 USD revenue guidance is now narrowed to 15.5-16.5% in constant currency.”
Rajeev Gupta
opening
“Effective tax rate for Q2 was 27.2%, close to our target range of 26.5-27%.”
Rajeev Gupta
opening
“Q2 Unbilled days improved to 18 days versus 22 days as compared to Q1 resulting in combined DSO including Unbilled of 96 days which is an improvement of 6 days compared to Q1 and just shy of our target range of less than 95 days.”
Rajeev Gupta
opening
“We expect this to gradually improve to 57% range going forward as large deal ramp-ups stabilize.”
Rajeev Gupta
opening
“Let me give some visibility on the EBIT margin trajectory going forward - We are watchful of the headwinds from the current economic environment and like in the past few quarters, we will continue to balance headwinds with opportunities on revenue growth, quality of revenues and operational efficiencies.”
Risks & concerns — 12 flagged
As I highlighted last quarter, there is softness in the Hitech space with companies being cautious on spends.
— Amit Chadha
Client contribution to revenue – All three categories, Top 5, Top 10, Top 20 have shown a slight decline compared to Q1.
— Rajeev Gupta
Though attrition moved up to 24.1%, we believe attrition will likely soften in the coming quarters due to various employee engagement measures to manage it.
— Rajeev Gupta
Third, I do want to call out that Europe for us has had a significant amount of wins this quarter as they go through 3 items - 1) Cost challenge; 2) An energy challenge and 3) To stay ahead in technology.
— Amit Chadha
And second if it is correct, it shows a slowdown, so it largely factors furloughs or some client specific issues because of the deteriorating macro as well because the first half the QoQ growth has been in the range of 4.5-4.7% QoQ in CC terms?
— Sandeep Shah
Second, people are looking at, so last year same time, cost was not such a big consideration & technology advancement was, but now, cost along with technology advancement that would either help the topline or bottom-line, like I said ROI – is a concern.
— Amit Chadha
So, I do believe that we are in a fairly volatile world and these offer us opportunities as long as we can be agile and we can continue to marshal our resources, to retrain people, to move people around and adapt to latest technology trends.
— Amit Chadha
What led to changing the currency dynamics from USD to constant currency because currency was equally volatile in Q1 also?
— Vikas Ahuja
Both were in constant currency and as you would appreciate and also trying to clarify to most of the other participants, dollar has been extremely volatile and it is an environment which has really had us to think through that guidance can be © L&T Technology Services really managed on constant currency basis as supposed to on reported currency basis because of the volatility, so that is one part of the response.
— Rajeev Gupta
And, secondly to Rajeev, how should we look at the margin trajectory for the second half given the fact that the biggest headwind of wage hikes is behind you now, so what are the incremental headwinds and tailwinds you see for the second half of FY23?
— Bhavik Mehta
Just a few questions, the Plant Engineering segment shows a 200 bps decline in margin despite a strong growth of 5%+, so what really went behind the margin in this segment?
— Shradha
Net ads, I think Amit and even Rajeev mentioned that earlier, this was a tight quarter for us given that this was the quarter when we gave increments, so we had to be very cautious on how we ran operations this quarter.
— Abhishek Sinha
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Q&A — 15 exchanges
Q
Amit, just wanted to get some sense on the deal flow, have you seen any moderation in the TCV numbers, the large deals TCV count has come down this quarter and while you mentioned that there are number of deals in the pipeline, is this something to do with increased caution at the client end or is this just a timing issue? The other question was on the guidance, just want to clarify whether should we see this guidance in the context of last quarter's 14.5-16.5% which was as of Q4 end or if this FY23 over constant currency FY22, just wanted to assume clarity given the volatility in the currency
Amit Chadha
Number one, on the deal flow, I do want to confirm to you that our pipeline as it stands today is slightly better than what it was last quarter and that was slightly better than it was previous quarter. YoY – there is a double digit increase in pipeline. Now, in terms of deal closures, we have been closing 3-digit deal wins for the last few quarters in a row now. So if you remember, Q4 was a USD 100M win, Q1 was a USD 50M win and this quarter there is a USD 60M+ win. So, deal wins continue.. I would not read too much into the USD 10M+ because there are deals that are in USD 9M range that close
Q
Just to achieve the guidance of 15.5-16.5% in constant currency terms, just wanted to clarify the ask rate which I am getting is 0.6-1.7% QoQ in the next 2 quarters in constant currency to achieve the revised guidance. So the question is whether this calculation is correct? And second if it is correct, it shows a slowdown, so it largely factors furloughs or some client specific issues because of the deteriorating macro as well because the first half the QoQ growth has been in the range of 4.5-4.7% QoQ in CC terms?
Amit Chadha
So, the way I would look at it, right is not count Q3, Q4. See Q3 generally is a soft quarter because of furloughs and the vacations. This time as you are aware, Diwali and Dussehra, both along with the entire Thanksgiving and Christmas and New Year, everything is coming in quarter 3. Generally, Dussehra normally comes in the Q2 and the other comes in Q3. This time, © L&T Technology Services everything is in Q3, it is a festive season, so this will be a little muted. While we expect Q4 to be back at our standard growth rates, so we have factored in all that, but having said that, we want to be
Q
So, my question is sir, in the aftermath of Ukraine-Russia war as well as the geopolitical condition in China, so how has the business strategy changed prior to the war and post? As well as I also wanted to add about the Europe recession part, so what would be the changes in strategies?
Amit Chadha
See, we are seeing three or four broad areas with the Ukraine war, that we have seen emerge in the US as well as Europe. Number one, not just countries, but states in larger countries are starting to think of localized supply chains and that does offer opportunity for people like us. Second, people are looking at, so last year same time, cost was not such a big consideration & technology advancement was, but now, cost along with technology advancement that would either help the topline or bottom-line, like I said ROI – is a concern. Third, there is a transition in energy sources happening, it
Q
Sir, I just wanted to understand on, it is pretty much clear about this particular FY23, but just wanted to get a sense, how are you seeing the next year, any conversations with clients, specifically to client budgets, I need some color over 2- year period in your sense, how are you seeing the 2-year period now versus what you are seeing last quarter, that will be really helpful? © L&T Technology Services
Amit Chadha
Number one, we do believe, see, we had given you guidance that we will hit the USD 1B run rate, last year September is when we had told you, so we did achieve it in this quarter. We are reiterating our guidance of getting to a USD 1.5B run rate by FY25. That has not changed and that is our goal from here on as we move forward. Any conversations with clients around next year's budget? Yes, we continue to talk to clients, Mihir. In fact, this is the time when we sit down and we do workshops with some of our larger clients and strategic clients, we sit and do workshops on next year projects and w
Q
Just one clarification which is regarding the guidance, we have changed the guidance because last quarter we reported in USD terms, now it is constant currency and we did allude to the constant currency in the call last time. What led to changing the currency dynamics from USD to constant currency because currency was equally volatile in Q1 also? And secondly, when I look at the peers, the cross-currency impact is closer to between 250 to 350 basis points, is that similar for us?
Rajeev Gupta
Vikas, this is Rajeev, let me answer to that. So, when you talk about the guidance that we have provided, we have narrowed the guidance to 15.5-16.5% and this is comparative to 14.5-16.5% that we provided in the previous quarter. Both were in constant currency and as you would appreciate and also trying to clarify to most of the other participants, dollar has been extremely volatile and it is an environment which has really had us to think through that guidance can be © L&T Technology Services really managed on constant currency basis as supposed to on reported currency basis because of the vo
Q
I just had a question around the Transportation segment in particular. As we see in the Transportation segment, particularly in the Auto space, a lot of the strategic programs are with the next few years kept in mind, when it comes to programs around connected mobility, autonomous, shared mobility, so as you said with the quick ROI demand coming through some clients, so is there any possible change in the multi-year deals and the deal sizes going ahead, how would the strength actually play out in this sector which is supposed to be showing strong tailwinds, just had the questions around that?
Amit Chadha
So, one, we do see Transportation segment looking at clearly moving to energy efficient vehicles, be it Auto, be it Trucks, be it Off-Highway, be it skid steer loaders, backhoe loaders, etc., so much so that even floor cleaners - people are trying to get a hybrid or an electric version out. So, there is a massive shift that is happening in that direction. Deals again can't be, it is not a magic wand that can happen in a 6-month period, these are versions of programs that run for anything between 18 months to about 3 years and they address family of vehicles. So, say, somebody would look at sma
Q
Sir, I have two questions, firstly to Amit. Amit you talked about the client cautiousness on spends, so is this broad based across your verticals or some verticals better placed than other when it comes to decision making? And, secondly to Rajeev, how should we look at the margin trajectory for the second half given the fact that the biggest headwind of wage hikes is behind you now, so what are the incremental headwinds and tailwinds you see for the second half of FY23?
Amit Chadha
Bhavik, one, Every time there is a negative commentary you think, are you headed in the right direction, that is the reality, but having said that, see Transportation, the tailwind in Electrification and the tailwind in Autonomous & Connected is something that is a measurable tailwind, one. Second, for Industrial and the Process industry – digital manufacturing and energy conversion or alternative energy, etc., are valid themes that are again tailwinds that are required - that are going forward. They again go back to basic laws of human nature - number of workers are less, they need stuff to b
Q
Amit, so I wanted to check on the guidance which you shared of achieving the USD 1.5B run rate by FY25, so we are at USD 1B run rate currently and the difference to achieve that is about 50% over a two year period and when the demand environment or to say there is some caution in the environment from client side, what gives you this visibility over the next 2-2.5 years still maintaining that aspiration of achieving that number? That was part one and the part two is that, how should we think about the organic and inorganic component within this 2.5 years journey?
Amit Chadha
So, here is how I would see it. Our USD 1.5B includes three things that we have factored in this. A is, we expect at some points, right now like I admitted to you that about three-and-a-half bets out of the 6 bets are firing, we expect the remaining two-and-a-half to fire as well and for a period of time, we expect that all 6 bets will fire. We have done a modulation based on that and then of course may be one of them will fall off, etc., but there will be a period of time between now and the next, by FY25 that all 6 bets will fire. B, we are considering some amount of large deals that we will
Q
Just a few questions, the Plant Engineering segment shows a 200 bps decline in margin despite a strong growth of 5%+, so what really went behind the margin in this segment?
Rajeev Gupta
Shradha, this is Rajeev. I will take that. Two parts to that - one of course, there have been quite a few new deals that have started in this segment which of course, when you start any new deals, you tend to see margins coming down in the initial period and then you sort of catch up on that. The second is also that when you have these new deals starting, you may invest in subcontractors, so those are the two key reasons why we have seen margins slightly come down in Plant Engineering, but we believe that we should be able to improve as quarters go by. And second question Rajeev is, you did me
Q
Couple of questions from my side. One to begin with Amit, just wanted to compare the macro comments related to the last quarter, so would you say that the dynamics have been similar to what we saw last quarter or has there been a change because the two verticals we have mentioned remained same, but just wanted to understand the intensity of cautions around that?
Amit Chadha
Sulabh, what we saw last quarter is what we are seeing now. There is no deterioration, there is no improvement, it is basically the same. © L&T Technology Services And second is to Rajeev, Rajeev, you mentioned the puts and takes to the margin in this quarter, so would it be possible for you to quantify those percentages, the margin walk for the quarter? We would not be able to do that, but if you want to pick an offline conversation to get any clarity, feel free to touch base with Pinku, so that you can have a more elaborate conversation on this.
Q
Congrats on good execution. Just one question from a demand perspective, what are you seeing on the ground from captives, given the challenges in the Europe, what are they doing, are they also relocating or looking to ramp up capacities in India and is that changing the competitive intensity in the market?
Amit Chadha
Abhishek, thank you so much. Abhishek, if you would have asked me this question 10 years ago, I would have said captives are competition, but honestly Abhishek, it is a co-opetition model, so you work with them and there is a core contextual that the client defines; core done by them, contextual done by us. What they define as core changes, what they define as context changes, so that is how this flux happens. We have seen a little bit of a pause as far as Hitech is concerned and as far as Medical is concerned, we are seeing a slight pause from own employees being hired by captives. So that we
Q
This is more on the headcount on the sales and support side, so while our aspiration for FY25 is about USD 1.5B run rate which essentially makes 4-4.5% compounded growth from now, with that aspiration and near-term expectation of large deal engine firing, our sale support has gone down by about 5% on a QoQ basis, so is that more of an aberration or is it more indicative of near-term trend?
Amit Chadha
Look at enabling functions, sales support as a slab structure. You need a certain set to make a certain number and then you have a range and then you again, you continue to do that. So, I would not be worried…USD 1.5B in FY25 is, we are right now in FY23, so there are 2 years to go. So, we will see that. We are mindful of it is all I would say at this stage. I would not worry about it and I would not take it as a lead indicator or anything like that. © L&T Technology Services So, just a follow-up on that, how do we look at this number going forward? We don’t give guidance on sales support numb
Q
Amit, two questions from my side, so in the Auto segment, within EV, ADAS, Connected, and Infotainment, which of these sub-segments are having the maximum contribution to your deal wins and is the demand equally strong with European OEMs and US OEMs and how is the pipeline looking? And second question, just a follow-up on the hiring part, net addition has been soft in Q2, so what is the outlook for FY23?
Amit Chadha
I would request Abhishek, our Chief Operating Officer to answer the first question on how do we see Auto, which sub-segment and which region. Abhi? So, if you look at these three segments clearly, at least at this point, Electric is where we are seeing the highest traction followed by Connected and then Autonomous and as far as the region is concerned, both US, Europe traction was equally strong for us at this point and also both Automotive and Tier-1s, I mean OEMs and Tier-1s in the Automotive space, but also of course we are seeing traction interestingly on EV Connected side on the Trucks an
Q
I just wanted to understand how has the utilization moved in last 2 or 3 quarters and this is also in the context of headcount addition, do we have enough room for increasing of the utilization from that at this point of time or we will have to hire more? © L&T Technology Services
Rajeev Gupta
This is Rajeev. I will take part of the question and I will also request my colleague, Abhi to add to it. Like we have said in the previous quarters, we have stopped reporting utilization because of course, there are areas of revenue that are not directly linked with utilization, but I can certainly give you directionally, the utilization has been improving and that is part of what Abhi mentioned earlier that we have looked at Q2 revenue and we have tried to optimize on parameters that could eventually help us in terms of delivering the quarter. I will also request Abhi to add on to this, plea
Q
Thank you everyone for joining us on this call today. It was a pleasure interacting with you and we look forward to more such interactions during the course of the quarter. From all of us at LTTS it is a good-bye and wish you a very Happy Festive Season for the coming days. Thank you. Bye-bye.
Management
Speaking time
Amit Chadha
20
Moderator
17
Rajeev Gupta
9
Mihir Manohar
3
Shradha
3
Abhishek Sinha
3
Pinku Pappan
2
Mukul Garg
2
Sandeep Shah
2
Pratap Maliwal
2
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Opening remarks
Pinku Pappan
Thank you, Faizan. Hello everyone, and welcome to the Earnings Call of LTTS for the Second Quarter of FY23. I am Pinku, Head of Investor Relations. Our financial results, press release and investor release have been filed on the Stock Exchanges and are also available on our website www.LTTS.com. I hope you have had a chance to go through them. This call is for 60 minutes. We will try to wrap up the management remarks in 20 minutes and then open up for Q&A. The audio recording of this call will be available on our website approximately 1 hour after the call ends. Let me introduce the leadership team present on this call. We have Amit Chadha - CEO; Abhishek - COO and Rajeev - CFO. We will begin with Amit talking about company performance and giving an overview on the outlook, followed by Rajeev who will walk you through the financial performance. I now hand over to Amit.
Amit Chadha
Thank you Pinku and thank you all for joining us on the call today. I hope all of you are keeping healthy and safe. With that, let me start with the key highlights for our Q2 performance - I would first like to share that we at LTTS are very proud to have achieved the USD 1B annualized revenue run rate on a constant currency basis this quarter. This is a milestone that we had set for ourselves last year to reach by Q2/Q3 of this fiscal and we are happy that we have crossed USD 250M in constant currency in Q2. I would like to take a moment to thank all our employees that have come together on this journey as well as our Chairman, Vice Chair of the Board, the entire Board and our first CEO – Dr. Keshab Panda for having shown us the vision and having the confidence in us. Our momentum continued into the second quarter with 4.5% constant currency growth led by Transportation and Plant Engineering segments. The growth was accompanied by sound operational execution with Q2 being the 5th cons
Rajeev Gupta
Thanks Amit. Greetings to all of you. I am pleased to share our Q2 FY23 performance – It has been another quarter of good results with revenue growth and operational execution. Let me take you through Q2 FY23 financials starting with the P&L: Our revenue for the quarter was ₹1,995 crores, a growth of 6.5% on sequential basis. Our double- digit YoY growth trajectory continues with Q2 revenue of 24.1% on YoY basis. © L&T Technology Services Glad to share that despite the headwinds, we have been able to maintain EBIT margin at 18.2% in line with our aspirations and this has been the 5th consecutive quarter of 18% plus EBIT levels. During the quarter, we had higher employee benefit cost on account of wage hikes which were largely absorbed by better employee productivity, SGA leverage, cost optimization measures and rupee depreciation. Moving to below EBIT: Other income came at ₹26 crores, slightly lower on sequential basis due to relatively lower foreign exchange gains compared to previous
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