LTTSNSEQ2 FY24October 23, 2023

L&T Technology Services Limited

8,744words
58turns
10analyst exchanges
5executives
Management on call
Amit Chadha
CEO & MD,
Abhishek Sinha
COO & EXECUTIVE DIRECTOR,
Alind Saxena
PRESIDENT SALES & EXECUTIVE DIRECTOR,
Rajeev Gupta
CFO,
Pinku Pappan
HEAD, INVESTOR RELATIONS
Key numbers — 36 extracted
3.2%
call today. With that, let me start with the key highlights of our Q2 performance: • We grew at 3.2% sequentially in constant currency. The growth was broad based after 4 quarters with all segments
4%
all segments growing sequentially. • Transport and Plant Engineering led the growth with around 4% growth in each. • Our deal wins were strong – 7 deals of $10M plus of which six were above $15M
17.1%
• Our operational performance continues to be healthy with EBIT margins of 17.1% - nearly flat on a sequential basis even as we absorb the wage hikes of our employees and inves
4.4%
detailed segmental view and outlook: Starting with Transportation, • We had a good quarter with 4.4% QoQ with all 3 sub-segments – Auto, Trucks & Off Highway and Aero growing. • Similar to our i
rs,
mber of large deals in the pipeline and new technology conversation we are having with our customers, which should continue to drive growth in Transportation. In Plant Engineering, • We had a stro
2%
will be driven by digital products and digital manufacturing. In Telecom & Hitech, • We grew by 2% sequentially despite challenges in the Semcon and Consumer Electronics portfolios. • In Semic
17.5%
Q3 and Q4 could play out for us. • We are therefore revising our FY24 revenue growth guidance to 17.5% to 18.5% in CC. Summing up, we had a good quarter, and the deal wins and customer traction make
18.5%
4 could play out for us. • We are therefore revising our FY24 revenue growth guidance to 17.5% to 18.5% in CC. Summing up, we had a good quarter, and the deal wins and customer traction make us confi
₹ 2,387 crore
et me take you through Q2 FY24 financials, starting with the P&L. Our revenue for the quarter was ₹ 2,387 crores, a growth of 3.7% on a sequential basis. Our YoY growth for Q2 came in at 4.6%. We have been a
3.7%
24 financials, starting with the P&L. Our revenue for the quarter was ₹ 2,387 crores, a growth of 3.7% on a sequential basis. Our YoY growth for Q2 came in at 4.6%. We have been able to maintain EBI
4.6%
rter was ₹ 2,387 crores, a growth of 3.7% on a sequential basis. Our YoY growth for Q2 came in at 4.6%. We have been able to maintain EBIT at 17.1% after absorbing wage hikes and investments in tech
17%
er SGA leverage and cost optimization measures. The EBIT margin is in line with our aspiration of 17% for FY24. Now moving to below EBIT. Let me talk about Other Income. Other Income was ₹ 29 cro
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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 this call ends.”
Amit Chadha
opening
“• We plan to have around 1,800 resources trained in SDV over the next few quarters in line with the demand.”
Amit Chadha
opening
“We continue to see growth in IP, which will be driven by digital products and digital manufacturing.”
Amit Chadha
opening
“o In one, we will be developing a next-generation platform to bring out products faster into the market.”
Amit Chadha
opening
“Q3 will be a soft quarter for us in line with seasonality, although we expect growth to bounce back Q4 onwards.”
Amit Chadha
opening
“• We are therefore revising our FY24 revenue growth guidance to 17.5% to 18.5% in CC.”
Rajeev Gupta
opening
“The combined DSO, including Unbilled stood at 118 days compared to 117 days in Q1, which is within our target range of 115-125 days for the year.”
Rajeev Gupta
opening
“We expect this to continue at the same level going forward.”
Rajeev Gupta
opening
“Client contribution to revenue all three categories, Top 5, Top 10 and Top 20 have shown a slight improvement as compared to Q1, and we expect this trend to continue going forward.”
Rajeev Gupta
opening
“Before I conclude, let me give some visibility on EBIT margin trajectory going forward.”
Risks & concerns — 12 flagged
While growth momentum has continued, the pace has been slow on account of decision-making delays and some stress in the sub-billion customer set.
— Amit Chadha
Headcount increased sequentially by 488 employees, while Attrition dropped by 220 basis points to 16.7% as we see an impact of various employee engagement measures as well as the industry- wide trend coming down.
— Rajeev Gupta
Now the reason that we've been prudent and cautious slightly in terms of the guidance to saying 17.5% – 18.5%, though our internal targets are to reach the original numbers that we had told you, is that the market in the last 3 weeks/5 weeks has changed slightly.
— Amit Chadha
Then with respect to margins, Rajeev, the sharp decline in SG&A expenses that we've seen this quarter, and this is especially with the number of sales employees increasing.
— Sulabh Govila
So just trying to understand what has led to this sharp decline?
— Sulabh Govila
So is the slowdown in between cycles across verticals for you or some verticals are more stressed than others at this point of time.
— Karan Uppal
Now number two, do we see a slowdown happening across.
— Amit Chadha
See more than a slowdown, I would call it caution.
— Amit Chadha
So, we are seeing decision-making cautious.
— Amit Chadha
And that is exactly the reason why we are in five verticals, and I do believe that this will be a shock absorber for others in case there's a slowdown in one area.
— Amit Chadha
And what is your view on the Consumer Electronics, which we were expecting some amount of slowdown in the 1Q outlook?
— Sandeep Shah
So, you said and I think, you also said earlier that last month or so or last few weeks that trends have shown a little bit of a slowdown, but on the other side, you also said that furlough, you expect them to be better than last year.
— Surendra Goyal
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Q&A — 10 exchanges
Q
Great to see a mix of very broad-based growth across all the segments, so congrats on that broad- based growth. I just have a couple of questions. In the industry at this point of time, we are seeing two phenomena. One is the new deals are taking time to get closed or start execution. The second is the existing deals, the discretionary part of those deals is being put on hold or being delayed. What in your case has led to that small discrepancy in the revenue, which led us to downgrade our guidance? And what do you see -- how do you see those things playing out over the next 2 to 3 quarters.
Amit Chadha
So Vibhor, thank you so much. Vibhor, so let me say a couple of things. One, if I look at the last quarter, when I had come to this call and before that as well, I've been talking about the fact that the number of deals that we have got in our pipeline – $10M+, $20M+, right -- and $50M+, even three-digit deals – is higher than where it was last year. And the deal velocity is slightly slower. The average deal size is slightly longer. I talked about this last time. So, the results have been that we've been able to sign the 7 deals that were $10M+ in Q2, right, out of which 6 of them are $15M+. A
Q
Congrats on good execution on margins. So, my first question was on SWC seasonality. So, during last quarter's earnings call, you mentioned that SWC has a seasonally stronger H2. Now when I try to look at the numbers where you have given revenues for including SWC and excluding SWC for FY23 and take the difference out there, it appears that in Q2 of FY23, SWC is having strong sequential growth & it also appears that H1 was stronger than H2 in FY23. So, can you please clarify on the SWC seasonality? And also maybe comment on how did SWC is performing Q2 of the current quarter, if you may add di
Amit Chadha
Sure. So, thank you so much, Akshay. In fact, if I take away the SWC revenue from the quarter, same quarter last year, the growth is approximately 16% for us as a company, right? But having said that, if I look at the SWC business now, see, the whole goal of integrating SWC, buying SWC and integrating it together as one team, one company, one division was that we would like to take this business internationally, investing in a full-scale sales team in Middle East, investing in a full-scale sales team in the US as well as parts of Europe. The whole idea was – 1) take the business international,
Q
So, first is with respect to the guidance that we've revised, I just wanted to understand what's the split of this guidance ex of SWC? I mean, on an organic basis, what's the number that you're looking at for FY24?
Amit Chadha
So Sulabh, thank you so much for asking. Actually, we had mentioned this in the last call that we look at this now as an integrated business. And we don't look at it as two businesses anymore because now the international deals are being one, that means some of the Smart World resources are being used, NGC resources are being leveraged for that. There is work that is happening in India where we are leveraging some of the LTTS heritage resources as well; So, it's now become one team. So, we are guiding at this stage, 17.5% to 18.5% and comfortable with the upper part of the spectrum. Understood
Q
Yes. Thanks for the opportunity. So, Amit, one question on the longer decision cycles you have mentioned in the press release. So is the slowdown in between cycles across verticals for you or some verticals are more stressed than others at this point of time. And how confident are you to achieve the guidance because it still requires 2% to 3% CQGR you're in H2?
Amit Chadha
Karan, thank you. I'll answer your second question first and the first question second. So, I would like to confirm to you that internal targets are higher than the guidance, and we will continue to strive to see that we meet those and do well, right? So unequivocally, I want you to think about this. And we have baked in some amount of happenings in the last few weeks, like I said in one of the earlier answers. Now number two, do we see a slowdown happening across. See more than a slowdown, I would call it caution. There is caution in terms of conversations, there are clients that are having w
Q
Thank you. Amit, if I heard you right, the only area that you really called out softness, it was semiconductors. And Q3, historically, it hasn't been really bad for LTT, if you want to look at it. Is anything different this time?
Amit Chadha
So one, we do expect there to be a softness in Medical, right? I'm calling that out. Number two, Semcon and ISV, my belief is that the pain will be over by Q3 and in Q4, things should turn around in Semicon and ISV. So there's another quarter of pain left in that particular area. Outside of that, regular furloughs, Ravi, the only thing that we don't know is that because of the UAW strike since mid-September, some of our projects were put on hold. And we are not sure whether we'll be able to leverage the working days in this quarter to work on it or will it slip to next quarter. So some of that
Q
Thank you. Couple of questions. Amit, the decision-making delays, what you mentioned, is it just on the deal closures or also in terms of project ramp-up because it seems like the deal closures have been strong for you. And then assuming that, it's more on the conversion side where there's is an issue, is that a fair understanding? And secondly, if I look at the geography, it seems like a lot of the growth was driven by Europe and India, while US was soft. So any colour on the US geography in terms of what verticals are taking in headwinds over there? Thank you.
Amit Chadha
Sure. So Bhavik, thank you. So Bhavik, number one, when I say decision-making delays, I'm referring to a couple of things here. Number one is that the deal tenure that we were winning has increased; if we were winning deals that were 2.5 years long, now those deals that we are winning now are on an average about 3.2 years long, right, is what's happened. So therefore, there is a longer ramp-up and then get to a stable phase and then potentially closure. Second, what is happening is that in July, when we came in and talked to you & then we did roadshows in August, right? At that point of time,
Q
Hi, sir. Thanks for the opportunity and congrats on good execution. And just a clarification on the data point that you mentioned that the revenues could be $800K to $1M higher before the UAW strike. Should we also assume a similar number baked into your guidance in terms of why the reduction happened from – especially from this project?
Amit Chadha
So Abhishek, thank you. Abhishek, I was giving an example on quantifying a certain situation when I gave that number, right? The point is that there are – I mean you are aware of the macros that are developing right now with the kind of uncertainty that's there. So, there is a general caution Abhishek that we are baking into the guidance that we are providing, Abhishek. Got it, sir. Thank you for taking my question and best wishes for the year.
Q
Yes, thanks. Thanks for the opportunity and congrats on a good execution, especially on the margins. Amit, the first question is, if I look at the ask rate to achieve the next guidance at the upper end, which you are confident is roughly around 3.4%. And in our previous calls, we have said for SWC, the H2, which be heavier versus H1. So, is it fair to assume that the organic growth could be lower than 3.4% on a QoQ basis, that is what you are assuming in the guidance, excluding SWC?
Amit Chadha
Sandeep, thank you. Sandeep, everything is organic now, that's the way we look at it. So, we are baking in some pluses and some minuses. While international, meaning the U.S., like the colleague prior to you saw very rightly, the U.S. was a little light, while Europe, India did better. So, this is to be played out. There are deals in the pipeline right now that we have to sell and deliver to achieve this guidance. I mean let me be very clear in that. And there are deals in the U.S., there are deals in Europe, there are India deals, there are Middle East deals that we are working on. So, to be
Q
Yes, hi. Good evening. Amit, just trying to understand some of your comments better. So, you said and I think, you also said earlier that last month or so or last few weeks that trends have shown a little bit of a slowdown, but on the other side, you also said that furlough, you expect them to be better than last year. And last year, we were in a fairly robust demand environment. So, I was just trying to understand what is your thoughts process there.
Amit Chadha
So Surendra, what I'm saying is that, look, do we expect -- because this conversation was, I think I had with some of you that said do we think it will be a Christmas quarter, right? And at this stage, looking at what we've been seeing in the later part of September, we don't think it's going to be a Christmas quarter, right? Having said that, it has to be played out because the cues that we are getting from different customers is different, right? So, to be played out, like I said, and that we have taken into account when we have given the revised guidance. I'm sorry if I sounded contradictor
Q
Thank you, everybody, for joining us on the call today. We hope we've been able to answer your questions, and if you if you have any follow-up, please reach out to me. With that, we are signing off, and we look forward to interacting with you coming days in the quarter. Have a good day, and goodbye from all of us. Thank you.
Management
Speaking time
Amit Chadha
19
Moderator
12
Rajeev Gupta
3
Akshay Ramnani
3
Sulabh Govila
3
Sandeep Shah
3
Pinku Pappan
2
Vibhor Singhal
2
Karan Uppal
2
Ravi Menon
2
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Opening remarks
Pinku Pappan
Thank you. Hello, everyone, and welcome to the earnings call at L&T Technology Services for the Second Quarter FY24. I am Pinku, Head of 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've had a chance to go through them. This call is for 60 minutes. We will try to wrap 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 this call ends. With that, let me introduce the leadership team present on the call We have Amit Chadha – CEO and MD; Abhishek – COO and Executive Director; Alind Saxena – President Sales and Executive Director; Rajeev Gupta – CFO. We will begin with Amit providing an overview of the company 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
Sure. Thank you, Pinku. Happy Navratri to one and all. Thank you so much for joining us on the call today. With that, let me start with the key highlights of our Q2 performance: • We grew at 3.2% sequentially in constant currency. The growth was broad based after 4 quarters with all segments growing sequentially. • Transport and Plant Engineering led the growth with around 4% growth in each. • Our deal wins were strong – 7 deals of $10M plus of which six were above $15M each. We also had two significant empanelment deals. Like our growth, the deal wins were also broad-based in nature. • Our operational performance continues to be healthy with EBIT margins of 17.1% - nearly flat on a sequential basis even as we absorb the wage hikes of our employees and investments into capability building. Let me now start and provide a more detailed segmental view and outlook: Starting with Transportation, • We had a good quarter with 4.4% QoQ with all 3 sub-segments – Auto, Trucks & Off Highway and A
Rajeev Gupta
Thank you, Amit. Greetings to all of you. I am pleased to share that our Q2 FY24 performance – it has been another quarter of good results with healthy addition of deals and consistent operational performance. Happy to note that after fully integrating SWC within LTTS, we have seen our first large deal win in the global markets leveraging the joint capabilities. With that, let me take you through Q2 FY24 financials, starting with the P&L. Our revenue for the quarter was ₹ 2,387 crores, a growth of 3.7% on a sequential basis. Our YoY growth for Q2 came in at 4.6%. We have been able to maintain EBIT at 17.1% after absorbing wage hikes and investments in technology that Amit highlighted. These headwinds were offset through operational efficiencies, better SGA leverage and cost optimization measures. The EBIT margin is in line with our aspiration of 17% for FY24. Now moving to below EBIT. Let me talk about Other Income. Other Income was ₹ 29 crores, lower on a sequential basis due to lower
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