by Suhani Adilabadkar
LTTS had made its debut, listing at 7% premium in September 2016. Growing at a CAGR of 25%, the stock has almost doubled investor wealth over the past four years. The company looked resilient amidst general slowdown and US China trade war issues though weakness in the Hi-tech segment continued.
Quick Takes:
· LTTS reported revenue at Rs. 1400 cr compared to Rs. 1266 cr same period previous year, the 11% YoY.
· Operating profit jumped 24% YoY reported at Rs. 283 cr in september quarter Q2FY20.
· Telecom & Hi-tech constituting 21% revenues dragged growth with a 14% YoY revenue decline.
· Industrial products reported slower growth due to deal closure delays.
· Sales cycle is getting longer. Global macro uncertainty and US China trade war has led to delayed decision- making and slower deal conversions.
Company Profile
Based out of Vadodara, Gujarat, L&T Technology Services Limited (LTTS) is a subsidiary of Larsen & Toubro (L&T). The company is a leading global pure-play Engineering Research & Development (ER&D) services conglomerate. LTTS offers design and development solutions throughout the product development chain providing services in the areas of mechanical and manufacturing engineering, embedded systems, engineering analytics and plant engineering.
With over 16,000 personnel spread across 17 global delivery centres, 28 global sales offices and 49 innovation labs, the company has created a portfolio of 416 patents, of which 300 have been co-authored with its customers and the rest by LTTS. Its strong customer base includes over 69 Fortune 500 companies spanning across five industry segments, industrial products, transportation, telecom & hi-tech, medical devices and process industry.
A decent Q2 despite global weakness
LTTS reported double digit revenue growth though at a slower pace in Q2FY20. Revenue witnessed an upsurge at Rs. 1,400 cr compared to Rs. 1,266 cr same period previous year, rising 11% YoY. In spite of wage hike in Q2FY20, operating profit moved in double digit lane rising 24% YoY reported at Rs. 283 cr in Q2FY20 compared to Rs. 229 cr corresponding quarter previous year. Operating profit margin stood at 20.2% against 18.1% in Q2FY19, expanding 213 bps YoY. PAT jumped 8% YoY from Rs. 192 cr in Q2FY19 to Rs. 206 cr with margin of 14.71% in Q2FY20.
North America led with 19% YoY growth followed by India at 17% YoY constituting 62% and 13% of revenues respectively. The European market and ROW declined 6% and 5% and contributed 14% and 11% respectively to the revenue basket in Q2FY20. Digital or new technologies accounted for 39% of total revenues rising 32% YoY in Q2FY20. LTTS won 8 multi-mn dollar deals across all major industry segments and increased its USD 20mn+ clients by 4 and its USD10mn+ clients by 3 on a YoY basis.
Is the worst over? Management says yes
Though the numbers were stable with revenue and operating profit growing in double digits and operating margin well expanded, Telcom & Hi-tech degrowth impacted overall revenue mix which contributed roughly 21% in Q2FY20. Telecom & Hi-tech revenue had dipped $7 mn sequentially in Q1FY20 as its semiconductor sub-segment witnessed reprioritization of spends among clients, disruptions in the mobile supply chain and slowing demand from China. The weakness continued with revenues declining 14% YoY and 6% sequentially in Q2FY20.
As per the management, although the deal pipeline is growing, the sales cycle is getting longer and Dr. Keshab Panda, CEO, LTTS further added, “We see a flat trend in Q3 and initialization Q4 onwards”. Apart from telecom & hi-tech degrowth, the company also had to contend with slower pace of growth in industrial products segment coming out at 5% YoY and a meagre 1% QoQ. Though the segment is witnessing strong opportunities in IOT, power distribution products and electrical automation, business in the current scenario has been severely impacted by global slowdown.
Dr Panda said, “We are seeing a slowdown in spending at few of our large accounts and deal closure delays”. Though management in its June quarterly call had indicated that telecom sector weakness would be carried forward in the September quarter, industrial products vertical growing in double digits till Q1FY20 has further accentuated growth concerns due to slowing growth in developed countries and US-China trade war issues.
Despite these headwinds, LTTS has maintained its double-digit momentum with its remaining three verticals, transportation, plant engineering and medical devices growing in excess of 20% YoY in Q2FY20 contributing 35%, 9% and 16% respectively to the revenue basket in Q2FY20. Transportation business that encompasses engineering services to aerospace, railway transportation, automotive, truck & off highway vehicles has been impacted by delays in decision making and late deal closures. Management expects neutral growth in Q3 and better pick up from Q4FY20 for the vertical.
Nevertheless, YoY growth has been strong and resilient at 22% and 2.3% sequentially. The leader in the medical devices business, LTTS has witnessed strong deal wins and robust demand driven by remediation work, IOT, regulatory compliance, connectivity services and process validation for manufacturing solutions. Though on a small base, the vertical has been growing consistently in strong double digits in early twenties in FY19 and has been galloping since Q1FY20 with growth coming out at 42% YoY and a 51% YoY and 13% QoQ in Q2 FY20. LTTS is a strong niche player in plant engineering business as the company witnessed robust outlook in CPG, oil & gas and specialty chemicals reporting growth of 27% YoY and 8% sequentially.
Top 20 customer revenues have declined YoY with contribution declining from 55% in Q2FY19 to 51.3% in Q2FY20. Though the major dent is caused by telecom & hi-tech, slower growth pace of industrial products vertical along with neutral growth expected in transportation business is giving weak growth visibility for near term.
The company has been communicating headwinds faced by its respective verticals specially telecom & hi-tech, which was impacted by specific client issues due to exposure to China, which is non segmental. In this respect, Dr Panda reiterated, “The worst is behind us. Telecom & Hitech has sizeable revenue contribution, thus Q3 will be muted and growth will be better in Q4”. The company has revised its USD revenue growth guidance to 10% for the year.
As per the management, clients have become more cautious on spending, taking more time on due diligence, adopting a ‘wait & watch policy’, leading to slower deal conversions. This has taken a toll on the company’s near-term growth visibility.
LTTS has been outperforming its competitors and stands resilient in the current scenario with strong capabilities in transportation and hi-tech, enjoying niche space in industrial and plant engineering business and diversified revenue stream across verticals. The December quarter would give a better view of future growth outlook and hopefully something positive on US China trade front, if both sides stop posturing politically.