LTTSNSEQ3 FY23January 27, 2023

L&T Technology Services Limited

8,716words
52turns
11analyst exchanges
4executives
Management on call
Amit Chadha
CEO,
Abhishek Sinha
COO,
Rajeev Gupta
CFO,
Pinku Pappan
HEAD, INVESTOR RELATIONS
Key numbers — 38 extracted
18.7%
mpact from furloughs, especially in Plant Engineering. Inspite of this, we have improved EBIT to 18.7% and crossed the ₹ 300 Cr milestone in Net margins per quarter. From a Technology standpoint, we
₹ 300
especially in Plant Engineering. Inspite of this, we have improved EBIT to 18.7% and crossed the ₹ 300 Cr milestone in Net margins per quarter. From a Technology standpoint, we surpassed the 1,000 Pat
4.4%
gmental performance and outlook. Starting with Transportation, • We had a good performance with 4.4% QoQ growth that was broad-based across the sub-segments - Auto, Trucks & Off-Highway (T&OH) and A
15%
n Q4 with the furloughs behind us. • We are now looking at FY23 USD revenue growth to be around 15% organic, on constant currency, using Q4 FY22 currency rates as baseline. • Finally, as we sta
₹ 2,049 crore
et me take you through Q3 FY23 financials, starting with the P&L. Our revenue for the quarter was ₹ 2,049 crores, a growth of 2.7% on a sequential basis. Our double-digit YoY growth trajectory continues with Q
2.7%
23 financials, starting with the P&L. Our revenue for the quarter was ₹ 2,049 crores, a growth of 2.7% on a sequential basis. Our double-digit YoY growth trajectory continues with Q3 revenue up 21.4%
21.4%
f 2.7% on a sequential basis. Our double-digit YoY growth trajectory continues with Q3 revenue up 21.4% on a YoY basis. EBIT margin at 18.7% increased by 60 bps compared to Q2 FY23. This has been the 6
60 bps
h trajectory continues with Q3 revenue up 21.4% on a YoY basis. EBIT margin at 18.7% increased by 60 bps compared to Q2 FY23. This has been the 6th consecutive quarter of 18% plus EBIT margin. During
18%
in at 18.7% increased by 60 bps compared to Q2 FY23. This has been the 6th consecutive quarter of 18% plus EBIT margin. During the quarter, we had benefits from improved employee productivity, better
₹ 62 crore
exchange gains, offset by a slight increase in SG&A%. Moving to below EBIT Other income came at ₹ 62 crores, higher on a sequential basis due to higher foreign exchange gains compared to previous quarter.
31.5%
ue to higher foreign exchange gains compared to previous quarter. Effective Tax Rate for Q3 was 31.5%, higher due to conclusion of certain past year assessments, we expect this to stabilize in the 27
27%
5%, higher due to conclusion of certain past year assessments, we expect this to stabilize in the 27% range going forward. Net income touched a new milestone of ₹ 304 Cr at 14.8% of revenue and up 8%
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Guidance — 20 items
Pinku Pappan
opening
“The audio recording of this call will be available on our website approximately one hour after this call ends.”
Amit Chadha
opening
“Overall, we expect the pace in Telecom and Hitech to gradually pick up as the environment improves.”
Rajeev Gupta
opening
“Effective Tax Rate for Q3 was 31.5%, higher due to conclusion of certain past year assessments, we expect this to stabilize in the 27% range going forward.”
Rajeev Gupta
opening
“The combined DSO including Unbilled improved to 94 days compared to 96 days in Q2, and in our target range of less than 95 days.”
Now let me comment on operational metrics
opening
“Our aspiration is to improve this ratio to 60% level in the medium term.”
Amit Chadha
opening
“Let me divide the target market into two subparts.”
Amit Chadha
opening
“Both portfolios will grow going forward.”
Amit Chadha
opening
“The joint power of solutioning 5G use cases across a broad spectrum and technical assets like the gEDGE data center, 5G lab-as-a-service gives us the confidence that the combined portfolio will be transformed to be largely Service-led.”
Amit Chadha
opening
“We expect an accelerated growth for the combined portfolio as we target our enterprise customers and new markets that are ready for such solutions at scale and transform from a master system integrator to a master software solutions player in this space.”
Amit Chadha
opening
“With SWC, we will be uniquely positioned to offer full lifecycle threat management, OT, Product, IIoT and enterprise security.”
Risks & concerns — 8 flagged
In respect of client contribution to revenue, all three categories, Top 5, Top 10 & Top 20 have shown a slight decline as compared to Q2, which is due to stronger growth in Top 20-30 accounts.
— Now let me comment on operational metrics
In Q1 of FY24, there could be an immediate impact of 180-200bps on EBIT margin resulting from consolidation of SWC.
— Rajeev Gupta
Are there any signs which have now started becoming visible whether the increased furloughs in Q3 also were a factor of the macro pressure and does this increases the risk to how you are kind of visualizing qualitatively despite FY24 spend from corporates?
— Mukul Garg
Industrial Products is spending in specific areas of digital manufacturing as well as digitization of their products and that continues to happen, we don't see any slowdown.
— Amit Chadha
As we have mentioned that the first quarter of next year, we will see a 180-200bps impact of margins.
— Vibhor Singhal
Would there be any non-recurring impact of that as well?
— Vibhor Singhal
So, Q1 truly is the impact of consolidating the two financials and of course, the impact in terms of acquisition, etc.
— Rajeev Gupta
you mentioned that in ISV, there was some pressure.
— Ravi Menon
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Q&A — 11 exchanges
Q
A couple of questions. Firstly, to Amit. If I look at what happened in 3Q, was it just a function of furloughs or whether also cases where, let's say, a lot of the deals you had won over the last eight to nine months did not ramp up as per your expectations? And how should we look at 4Q then, what are you hearing from clients when it comes to conversion of those deals into revenues so that's one. And secondly, to Rajeev on 3Q performance on margins despite flat growth. So outside of SWC, can we expect 18.5% as a new base of margins going forward? Or do you think that 18% is the normal range to
Amit Chadha
So, number one, I am confirming that Q3, you see normally, if you look at Q3, it has a lesser number of working days, right. I mean that's about, if I may be exact, I am an engineer & that's the problem we want to be exact. So about 3% lesser working days are there. So, we know that and that's how we had said we'll have a muted quarter. We got hit by additional furloughs as we call it, because there were customers that came back and said that they would like to slow down the projects, etc. in Plant Engineering. But the good news is that they've since come back and they confirmed at the time wh
Q
Just a couple of questions. The first is on demand. Amit, you did mention that the demand impact is largely furloughs, but when I look at your guidance, the guidance cut is $5M to $15M in revenues, whereas basis of furlough impact, the impact should not happen more than $2M to $3M So just trying to reconcile some basic numbers behind the guidance cut. Is there more to it rather than just furloughs, which would have led to a change in your guidance that's the first question. The second question is more on relative comparison. That's something which I hate relative comparison but tempted to ask
Amit Chadha
So, the change in guidance, we are saying we'll deliver 15% is basically based on muted Q3. So that's where that is, and that's where that stands. Now in terms of comparison, it was a specific Plant Engineering issue that I believe is since resolved. But of course, finally proof is in the pudding. You will see that at the end of Q4 when we come back and declare that to you. I would, in fact, say that if I look at our market share and our size that we have got going on, I think we are expanding with our clients. In fact, if I look at the total number of clients itself, if I look at it year-on-y
Q
Amit, I just wanted to follow up on the guidance part only. We have seen historically, you tend to be fairly conservative when you provide your revenue growth guidance like generally not like to kind of cut it back as you had to do this quarter. There is obviously this is happening in the backdrop of the macro constraint which you are seeing across the board. Are there any signs which have now started becoming visible whether the increased furloughs in Q3 also were a factor of the macro pressure and does this increases the risk to how you are kind of visualizing qualitatively despite FY24 spen
Amit Chadha
I want to give you a long-ish answer, if you don't mind here. So, let's go segment-wise. When you look at Transportation, right, we have not seen any moderation in spend. In fact, we've seen the growth in that as well in spite of a, shall I say, smaller quarter seasonally. And we do see new programs kicking in, etc. And that's across Auto, Aero and T&OH. Industrial Products is spending in specific areas of digital manufacturing as well as digitization of their products and that continues to happen, we don't see any slowdown. You've seen that in the growth as well as our commentary for Q4. Now
Q
So, two questions from my side. Amit, you mentioned, I mean, we saw a very strong growth in the Transport division in this quarter. And we also had all these deals with the Airbus as well. So just wanted to basically understand the traction that we are seeing in the Aerospace division. We've seen travel rebound significantly across the globe. And is it that kind of leading to more traction in this division? And do you think it can sustain going forward in the next year, I mean, as an industry, do you think there could be more similar kind of deals either for us or for the industry as a whole i
Amit Chadha
One on Airbus, I do want to acknowledge one thing. Dr. Panda, as you're aware, is an Aerospace engineer & this account is very close to his heart. So, we did start trying to pursue this while he was CEO. And I'm happy that after years, we got empaneled first as a provider and then got selected. In fact, he was in our Board meeting today, and he said one thing – “you delivered very nicely done.” It has been a dream, right? So, I do want to say for an aerospace engineer, getting Airbus empanelment for digital manufacturing etc. is a dream. I do think and a lot of people to thank, compliment, etc
Q
Well, two questions. First, within transportation, would you say that at least this year, Automotive is
Management
Q
So within Transportation, would you say that Automotive is the fastest-growing this year, followed primarily by Off-highway with Aerospace a little further behind. Amit from the way you sounded it looks like Aerospace is going to pick up. So how should we think about growth within Transportation overall for CY23?
Amit Chadha
Ravi, can you repeat that, please? I was saying within Transportation over this year, would you say that Automotive was the fastest growing and maybe followed by Off-highway and Aerospace further behind? And how should we think about CY23? Number one, Transportation did grow, right? And let's wait for April to conclude which grew the fastest and slowest. But I will say this to you that for CY23, see, there are a few trends that we definitely see happening. A) One is a lot more electrification of Automotive, so that will continue. Companies, however, have to remain profitable to be able to spen
Q
So a couple of questions from my side. One is on the Auto vertical, particularly, which has been doing well for us as well as industry as a whole. There seems to be no major wins listed this quarter, but so I just wanted to understand, has there been a change incrementally in the way clients are awarding deals? Or is it just a timing issue in this quarter? And the second is on the $30M client bucket, there's a moderation in that number QoQ. So, is that also related to the Plant Engineering related furloughs or that's related to some other client?
Amit Chadha
The number one, Auto, not having a single $10M deal. Again, I said this to some of you once that engineers think like engineers, they don't think like businesspeople, they don't know that $9M is not counted in $10M deals. I would confirm to you that there are deals in Automotive as well. In fact, there are incremental deals. I don't know whether we’ve made it press or not. There were a couple of new ODCs inaugurated in this last quarter. Maybe - they have asked us for names to not be published, so we didn't, but there are a couple of new ODCs that have been published. There were earlier wins t
Q
Largely, I wanted to understand on the North American geography side, I mean, North America hasn't grown for this particular quarter. So any signs of demand moderation across this particular geography? I mean your comments with respect to this geography. That will be helpful. And my second question was on this Airbus notification that we made. Earlier also, we were like a strategic engineering partner, and now we are there for advanced capabilities. So just wanted to understand, given the fact that our penetration and our capabilities are improving on the Aero side. So, what kind of spend coul
Amit Chadha
So Mihir, here are the answers. Number one, you can see that North America, actually, there was a 0.7% de-growth it shows here because of this revenue, the way we count currency, but India shows 6.4%. I can confirm to you that we don't work in India, right? Largely, our India revenue that we report is actually INR billing, but it is done for US and European customers. So, I would like to confirm to you that Europe, North America - both of these and ROW have grown, the India growth that you see, you should actually count it towards the 3 Geos because for India, we do very little, maybe some $1M
Q
So, first question was on offshoring. So, in your opening remarks, you mentioned that we see offshore revenue mix going up to 60%. I wanted to understand what are the drivers of this trend and which are the verticals where we expect this to be play out?
Amit Chadha
So let me start by sharing the verticals, and then I will request Abhi, my colleague, COO to address the drivers for offshoring to increase. From a vertical standpoint, see, as you look at it, we expect it to be, and I want to say this, you'll see this across verticals. It's not a vertical or a second vertical, you'll see this across verticals. I would also say that digital engineering – digital products and services as well as embedded, testing, parts of digital manufacturing. We'll see this a lot more, right? So, it's across. It's not like it's one or the other. Abhi, would you like to give
Q
My question is for Rajeev. Rajeev now when you are doing some back of the envelope calculation on margin guidance. And it seems that the way you have given guidance implies no contribution or a bit from the acquisition, SWC acquisition. Now is this largely because of amortization charge? Or do you expect the core organic margins also to deteriorate from that 18.5% you reported?
Rajeev Gupta
Let me clarify, this does not bake in any deterioration on the organic margin. I did mention it earlier that given we've done 18.7% EBIT in Q3 with all the operational levers and improvement in offshore and many of those things that we've talked about earlier, we do see a fair bit of comfort of sustaining this margin organically as we spoke. As far as the SWC acquisition, there is part of amortization also baked into it. Plus, there may be some investment that we would have to make. And as you would appreciate, the strategy that Amit talked about in terms of Next-gen Communication, Sustainable
Q
Thank you, everyone, for being present on the call today. And we hope we have answered most of your questions. We'll be happy to connect with you during the course of the quarter to clarify any other questions that may remain. With that, I would like to say bye and wish you all a very good day. Thank you.
Management
Speaking time
Moderator
13
Amit Chadha
13
Rajeev Gupta
6
Ravi Menon
4
Kawaljeet Saluja
3
Pinku Pappan
2
Abhishek Sinha
2
Akshay Ramnani
2
Moving to Revenue metrics
1
Now let me comment on operational metrics
1
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Opening remarks
Pinku Pappan
Thank you, Faizan. Hello everyone, and welcome to the earnings call of L&T Technology Services for the Third Quarter of FY23. I am Pinku, heading Investor Relations. Our financial results, investor release and press release have been filed with 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 the management remarks in 25 minutes and then open up for Q&A. The audio recording of this call will be available on our website approximately one hour after this call ends. Let me now introduce the leadership team present on this call. We have Amit Chadha - CEO; Abhishek - COO; and Rajeev Gupta - CFO. We will begin with Amit providing an overview of the company's performance and outlook, followed by Rajeev, who will walk you through the financial performance. Let me now turn the call 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. Let me start with the key highlights on our Q3 performance: • Our deal wins were strong this quarter with 5 deals greater than $10M in TCV and a significant empanelment from Airbus for which we have also issued a press release today • • • From a revenue standpoint, sequential growth was muted this quarter due to seasonality and higher than expected impact from furloughs, especially in Plant Engineering. Inspite of this, we have improved EBIT to 18.7% and crossed the ₹ 300 Cr milestone in Net margins per quarter. From a Technology standpoint, we surpassed the 1,000 Patents filing mark as an acknowledgment of the Tech Prowess of LTTS. Let me now provide the segmental performance and outlook. Starting with Transportation, • We had a good performance with 4.4% QoQ growth that was broad-based across the sub-segments - Auto, Trucks & Off-Highway (T&OH) and Aero. • • • In Auto,
Rajeev Gupta
Thanks, Amit. Good evening to all of you and hope you're doing well. Overall, our Q3 FY23 performance showed another quarter of double-digit revenue growth on a year-on-year basis, good operational execution resulting in improvement of EBIT margin and crossing a new milestone of ₹ 300 Cr in Net profit. Now let me take you through Q3 FY23 financials, starting with the P&L. Our revenue for the quarter was ₹ 2,049 crores, a growth of 2.7% on a sequential basis. Our double-digit YoY growth trajectory continues with Q3 revenue up 21.4% on a YoY basis. EBIT margin at 18.7% increased by 60 bps compared to Q2 FY23. This has been the 6th consecutive quarter of 18% plus EBIT margin. During the quarter, we had benefits from improved employee productivity, better offshore mix and exchange gains, offset by a slight increase in SG&A%. Moving to below EBIT Other income came at ₹ 62 crores, higher on a sequential basis due to higher foreign exchange gains compared to previous quarter. Effective Tax Ra
Moving to Revenue metrics
On a sequential basis, $ revenue was flat on a constant currency basis and up 0.4% in reported terms, mainly led by Transportation and Industrial Products segments. The segmental margin performance was better in all the 5 segments on a sequential basis led by Plant Engineering and Medical Devices.
Now let me comment on operational metrics
The Onsite:Offshore mix has shifted towards offshore and is at 57%. Our aspiration is to improve this ratio to 60% level in the medium term. Client profile – which indicates the number of Million dollar plus accounts – has shown a sequential improvement in the $10M+, $5M+ & $1M+ categories. The client profile numbers have seen an improvement over the past few quarters, and this trend will continue in the coming quarters. In respect of client contribution to revenue, all three categories, Top 5, Top 10 & Top 20 have shown a slight decline as compared to Q2, which is due to stronger growth in Top 20-30 accounts. Headcount improved sequentially by 175 employees, while Attrition moved down to 23.3% and is showing signs of softening. We continue various employee engagement measures to manage attrition. Realized rupee for Q3 was around 82.6 to the dollar, a depreciation of over 2% compared to Q2. I would now like to hand it over to Amit to spend a few minutes on our recent SWC acquisition. O
Amit Chadha
Thanks, Rajeev. I hope it is clear there seems to be some disturbance in the line, so I just pushed on. The SWC acquisition is a significant move, deliberative and thought about and thought through to add capabilities, solutions, technology and most importantly, pre-qualifications that help us getting qualified for large deals in the Communications segment Post our call on the 12th, where we shared initial details and rationale of our acquisition. We received feedback and queries from you. We would like to acknowledge and thank you for the feedback. The queries were in three broad areas: 1) How are we going to achieve the turnaround of shifting the business to services? 2) What are our integration plans and 3) What is the roadmap for revenue/margins for this business and the company? I shall address the first one, and Rajeev will address the subsequent ones. Starting with How will we achieve the turnaround? We go down to basics. SWC business is broadly, three parts, Communications, Sma
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