L&T Technology Services: Digitally engineered

Presence across key verticals and addition in large-sized clients are positives

In the mid-tier IT space, very few players operate in differentiated and niche areas and deliver industry-leading growth rates.

L&T Technology Services (LTTS) is one such player that is favourably placed to be a reasonably attractive option for investors.

The company is an engineering research and development services (ER&D) provider and caters to segments such as transportation, telecom, industrial products and the process industry.

Robust traction across key verticals and markets, steady addition in large-sized clients and focus on digital engagements across segments are positives for the company.

 

 

 

There have also been improvements in operational indicators such as utilisation and attrition.

Investors with a two-year horizon can buy the shares of LTTS, given the company’s broad-based growth and reasonable valuation.

At ₹1,215, the stock trades at 18 times its likely per share earnings for FY-20, which is cheaper compared to the valuation multiples enjoyed by mid-tier software players such as Hexaware Technologies and Mindtree that trade at 20-21 times.

In FY-18, LTTS’ revenues grew by 15.4 per cent over 2016-17 to ₹3,747 crore, while net profits increased by 19.1 per cent to ₹506 crore.

This growth rate in revenues was among the highest in the industry.

The company expects its topline to continue growing at an annual rate of 15 per cent for the next few years, which would be nearly twice the industry’s rate (7-9 per cent expected by trade body Nasscom for FY-19).

 

 

 

Broad-based growth

All of LTTS’ verticals expanded in FY-18. Revenues from three segments — transportation (31.8 per cent of revenues), telecom (25.7 per cent) and medical devices (6.8 per cent) — grew at 15-65 per cent in 2017-18.

Growth from another large vertical — industrial products — was tepid last fiscal, but the company hopes to get back to double-digit growth in the segment in FY-19.

Within transportation, automotive would be a key driver for LTTS, on the back of growth across the US, Europe and Japan as clients increase spends on emerging areas such as autonomous driving and passenger assistance systems.

In most verticals that it operates in, the company is focused on new-age areas such as analytics, product engineering, cloud, 5G and IoT (internet of things).

In terms of geographic mix too, the company is well-placed, with North America (60 per cent of revenues), Europe (17.3 per cent), India (10.8 per cent) and the rest of the world (11.7 per cent), all witnessing healthy traction.

Since North America (mainly the US) is the largest spender in ER&D services, the company’s significant presence in the geography would help it tap into clients there.

LTTS has also been able to ride the digital wave quite well. In FY-18, the company derived 26 per cent of its revenues from digital engineering services, more than double the level it recorded in FY-17.

The growth in digital revenues is much faster than the overall rate. Clearly, LTTS has been able to drive digital engagements well among its existing and new clients with a fair degree of success.

Operational positives

In the last one year, the company added two clients each in the $40-million and $30-million categories, one in the $20-million bucket and three in the $10-million band. LTTS has also been able to mine its exiting top clients significantly and derive a larger share of revenues from them in FY-18 compared to the previous fiscal.

By increasing its repeat business with existing clients, the company has managed to reasonably rein in selling and marketing expenses last fiscal.

Fixed-price contracts, which ensure better realisations compared to time and material projects, account for 37 per cent of revenues as of FY-18, up from 30.2 per cent in 2016-17.

Utilisation has improved over the past year and is now at a reasonable 77.8 per cent. Though there is scope for improvement here, given LTTS’ growth rate, the figure is fairly healthy.

Attrition, a key operational risk, has decreased over FY-17 and was at 13.5 per cent as of March 2018.

The proportion of onsite revenues has increased for LTTS, suggesting significant client traction. But employee costs could go up as a result of this increase, hurting margins, though projects can later be moved offshore after they reach a mature stage.

c:set var="prUrl" value="https://premium.thehindubusinessline.com" />

Read further by subscribing to

The Hindu Businessline

What You'll Get

  • Web + Mobile

    Access exclusive content of the Hindu Businessline across desktops, tablet and mobile device.


  • Exclusive portfolio stories and investment advice

    Gain exclusive market insights from the Hindu Businessline's research desk.


  • Ad free experience

    Experience cleaner site with zero ads and faster load times.


  • Personalised dashboard

    Customize your preference and get a personalized recommendation of stories based on your intrest.

This article is closed for comments.
Please Email the Editor