L&T Technology: Important IT business of L&T Group

L&T Technology Services Limited (LTTS) is into Engineering and R&D (ER&D) services. It offers design and development solutions throughout the entire product development chain across various industries such as Industrial Products, Medical Devices, Transportation, Telecom and Hi-tech and Process Industry. The company also offers solutions in the areas of Mechanical engineering Services, Embedded Systems Services, Product Lifecycle Management (PLM), Engineering Analytics and Power Electronics and M2M and the Internet of Things (IoT).


It holds multi-domain engineering expertise, from manufacturing to healthcare and telecommunications, and its bluechip clientele comprising 69 Fortune 500 companies.

 LTTS is a publicly listed subsidiary of Larsen & Toubro Ltd., the $21 billion Indian conglomerate operating in over 30 countries.

The Clients of the company currently include 69 of the global fortune-500 companies and 51 of the top 100 R&D spenders.

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About Parent Company

Larsen & Toubro is a USD 14.3 billion technology, engineering, construction, manufacturing and financial services conglomerate, with global operations. Its products and systems are marketed in over 30 countries worldwide. Also, L&T is one of the largest and most respected companies in India’s private sector.

1. Shareholding Pattern of L&T Technology Services

L&T technology services stock analysis with details of shareholding pattern
L&T technology services stock analysis with details of shareholding pattern

2. Executive members of the Board

(i) Mr. A.M. Naik - Chairman and Founder

Graduated in Mechanical Engineering Mr. Anil Manibhai Naik has over 50 years of experience. He is also the Chairman of the L&T Group of Companies – the Group that he has served for over five decades and led for the last two.

Mr. Naik became Member of board of L&T Limited on 23 November 1989. Further in 1999, he took over as the Chief Executive Officer and Managing Director. Further In 2003, he became the Chairman of Larsen & Toubro, the first employee in the Company's history to be elevated to this post. In 2017, he stepped aside from executive responsibilities, and took over as Group Chairman.

(ii) Mr. S.N. Subrahmanyan - Vice Chairman

Mr. S.N. Subrahmanyan is Vice Chairman, LTTS, as well as the Chief Executive Officer and Managing Director of Larsen & Toubro. In addition, he is Vice Chairman on the Board of L&T Infotech Limited (LTI) and Non-Executive Chairman of L&T Metro Rail (Hyderabad) Limited.

With a degree in civil engineering and post-graduation in business management, SNS commenced his professional journey with L&T in 1984 as a project planning engineer. He took over the reins in July 2017 having previously, as Deputy Managing Director and President, L&T, headed the construction business of the group.

(iii) Mr. Amit Chadha - CEO & Managing Director

Amit is an electrical & electronics engineer who has done his Global Business Leadership Executive Program with Harvard Business School Publishing. He has also done an Advanced Management Program in Business Leadership from INSEAD, France. Amit is currently based in Washington DC.

He joined LTTS in 2009, as its Business Head of Americas. Amit was previously Deputy CEO & Whole Time Director, running the gamut of business operations, delivery and sales & marketing at LTTS.

(iv) Mr. Abhishek Sinha - COO & Whole Time Director

Mr. Abhishek Sinha is the Chief Operating Officer (COO) & Whole Time Director at LTTS. After graduating in engineering from Banaras Hindu University (now IIT-BHU), Abhishek joined Infosys in 1993 and worked till 2013. 

Prior to joining LTTS, Abhishek was the Chief Operations & Personnel Officer and Executive Board Member at KPIT, where he was responsible for laying out the operational framework and operational governance of all businesses within KPIT to help in achieving profitable growth. Also, Abhishek was the Vice President and Global Head for Product Engineering Services (PES) at KPIT. 

3. Group Structure

LTTS stock analysis with detail of group structure
  • During FY20, the company incorporated a wholly owned subsidiary in China named L&T Technology Services (Shanghai) Co. Limited.
  • The Company also formed an overseas company named L&T Technology Services (Canada) Limited through its wholly owned subsidiary, L&T Technology Services LLC, which holds 100% shares in the said Canadian entity.
  • During the year, the Company also acquired the shares of Esencia Technologies India Private Limited (India) from Esencia Technologies Inc. and the business of Graphene Solutions PTE. Ltd (Singapore), Graphene Solution SDN. BHD (Malaysia), Graphene Solutions Taiwan limited (Taiwan) and Seastar Labs Private Limited (India) from Graphene Semiconductor Services Private Limited.

4. Sectors served by L&T Technology Services

(i) Transportation

LTTS offers the complete gamut of engineering services and solutions for its global customers in the transportation industry, including OEMs and Tier 1 suppliers in Automotive, Trucks and Off-highway Vehicles, and Aerospace.

(ii) Industrial Products

In Industrial Products Sector, LTTS provides services for:

  1. Industrial Machinery
  2. Building Solutions
  3. Power Equipment
  4. Lightning Engineering
  5. Electronics
  6. Renewable Energy

(iii) Telecom and Hi-Tech

LTTS’ Telecom and Hi-Tech vertical provides engineering services and solutions that cater to five key sectors: Telecom, Consumer Electronics, Semiconductor, ISV, and Media & Entertainment.

(iv) Medical Devices

LTTS helps medical device OEMs address various industry challenges including, acceleration of the development cycle for new products thereby reducing the time-to-market in developing new products, value engineering, and enabling customers to launch their product in various geographies by following country-specific regulatory requirements.

(v) Plant Engineering

As an engineering, procurement, and construction management (EPCM) specialist, LTTS certainly supports every phase of a plant’s lifecycle from concept to commissioning.

  1. Consumer Packed Goods
  2. Specialty Chemicals
  3. Energy & Utility

5. Offering Portfolio of LTTS & Revenue Segmentation

Core Engineering Services

LTTS offers design and development solutions to clients across the entire value chain of product development and also caters to all major industries including transportation, industrial products, telecom & hi-tech, medical devices and process industries.

LTTS provides engennering services in the areas of :

  1. Product Engineering
  2. Manufacturing Engineering
  3. Operations Engineering

Digital Engineering

Digital Advisory Practice

The four areas of Digital Advisory Practice includes:

  1. Digital Road-mapping
  2. Innovation Labs as-a-service
  3. Virtualization and Simulation Services
  4. Platforms and Solutions

Innovation Engine

(a) L&T Technology Services Revenue by verticals

L&T technology services stock analysis with detail of revenue segments

(b) Geographical Distribution of Revenue

L&T technology services stock analysis with detail of revenue segments in various geographies

LTTS dependence on the US market is high, with around 61% of the revenue coming from the US every year. Although geographical diversity mitigates business risk, the skew in revenue is unavoidable given that the US is the largest IT spender in the world, with US contributing over 60% of the industry's revenues.

6. Key Operational Parameters

(i) L&T Technology services - Nature of contracts

L&T technology services stock analysis with detail of project categories

LTTS has lower % of fixed price contracts as compared to other major industry players. Fixed price contracts have high profitability but are riskier as compared to time and material contracts. On the other hand, time and material contracts are less risky but have low profitability as compared to fixed price contracts. Refer our previous blog - IT Stocks Analysis

(iv) Location of Employees

L&T technology services stock analysis with detail of onsite & offshore revenue mix

(iii) Employee Statistics of LTTS

L&T technology services stock analysis with detail of employee metrics

As employees are the most important asset of the company. Certainly LTTS has maintained a very good employee utilization ratio which is very good sign. However the attrition rate is increased this is basically due to furloughs because of lockdowns. High employee attrition rate is not a good sign for IT companies. In respect of L&T Technology Services, the attrition rate of its closest peer "Tata Elxsi" is even lower. It is 10.6% in FY20 and 6.6% for FY21.

LTTS stock analysis with employee expenses analysis, expected to rise in FY22

7. Key Competitors of L&T Technology Services Ltd

Tata Elxsi

Image result for tata elxsi logo

Tata Elxsi is amongst the world’s leading providers of design and technology services across industries including Automotive, Media, Communications and Healthcare. It provides technology consulting, new product design, development, and testing services. Tata Elxsi also provides solutions and services for emerging technologies such as IoT (Internet of Things), Big Data Analytics, Cloud, Mobility, Virtual Reality and Artificial Intelligence.

Cyient Ltd.

Cyient Logo

Cyient is a global engineering and technology solutions company. Engaged with customers across their value chain helping to design, build, operate, and maintain the products and services. The company servers in various industries for instance aerospace, defence, automotive, communication and many more. Moreover the company's customers includes 29 Fortune 500 companies, across multiple industries.

8. Financial Parameters & key ratios

(i) Net Sales

CAGR = 13% for 6 years

L&T technology services stock analysis with detail of sales growth

(ii) Operating Profit

CAGR = 14% for 6 years

L&T technology services stock analysis with detail of operating profit growth in 6 years

(iii) Profit After Tax

CAGR = 14% of 6 years

L&T technology services stock analysis with detail of PAT growth over last 6 years

(iv) Free Cash Flow

L&T technology services stock analysis with detail of free cash flow analysis
  • The company's revenue for the first nine months of fiscal 2020 grew by 11.1% over the corresponding period of the previous fiscal. This is because of higher revenues from medical devices segment and transportation segment. Operating margin has also remained healthy at 20.6% in the first nine months of fiscal 2020.
  • Overall LTTS delivered largely flat growth over FY19-21 (1% revenue CAGR) due to COVID-19 and ramp down at key clients (partly due to external issues) but management expects the performance to grow in future .

(v) EBIT Margin

L&T technology services stock analysis with detail of EBIT margin

(vii) PAT Margin

L&T technology services stock analysis with detail of PAT margin

(viii) ROE

LTTS stock analysis with ROE analysis

The ROE ratio of the company was more than 100% during the initial years of listing. Subsequently it decreased after FY16. However the company maintained ROE ratio more than 20%.

(ix) ROCE

LTTS stock analysis with ROCE analysis

(x) Segment Results

L&T technology service ltd stock analysis with year wise growth of segments

Segment wise revenue of LTTS grew at a CAGR of:

  • Industrial Products: 6%
  • Medical Devices: 29%
  • Plant engineering: 7%
  • Telecom & Hitech: 15%
  • Transportation: 13%

9. Management Discussion & Concall Highlights March 2021

(i) Key Deal Wins

LTTS won 6 deals in the quarter 4 FY21, of which 2 are USD25m+ and the balance range
between USD10-15m. Going forward, the deals pipeline remain strong. But the closures remain uncertain.

  • Under a multi-year EV program, the Electronic Powertrain unit of a European automotive components manufacturer selected LTTS to build a real-time technology framework to simulate the controller design of the e-Powertrain systems.
  • Secondly, LTTS will set up a dedicated engineering analytics lab at Bangalore for one of the world’s leading technology companies to provide software engineering and system validation for the next generation server platforms.
  • Moreover, a global telecommunications company selected LTTS as its engineering services partner to provide end to end systems integration, 5G and engineering services.
  • LTTS also won an Infotainment Systems deal from a multinational electronics company. LTTS will support multiple OEM programs in a managed services engagement model.
  • A leading European OEM selected LTTS for its next generation telematics program. Thus, LTTS will set up a Telematics Lab for the customer in Germany.

(ii) Acquisition of Orchestra Technology

Orchestra is based in Texas, USA. Management also expects that the acquisition of Orchestra will enhance offerings in the areas of Network Engineering & Enterprise Mobility. Moreover, it will provide strategic access to Telecom service providers who invest in next generation digital systems for 5G and IoT networks.

(iii) Competitive advantage of winning $100m Deal in O&G

During FY21 LTTS has won $100mn deal with Oil & Gas major by displacing existing supplier of client who was operating the plant for 20 years. LTTS won this deal because it has niche skills in terms of understanding oil & gas plant operations, considering L&T parentage (hydrocarbon business). Another big advantage is capability to scale up in offshore and bring new digital technologies such as predictive maintenance, remote operations, simulation of plant operations & data analytics. Also prior to this LTTS had successfully managed two smaller sites for thhis client.

(iv) Growth in Electronic Vehicles

Management is expecting significant investments in both by traditional and new age car manufacturers. LTTS sees opportunities in both EV side and legacy side, although legacy spend will be at slower space. Prior to new developments of EV, connected cars and autonomous, these spends were held by OEMs and now there is lot more opening up of spends for ER&D players. Moreover management started working with new age auto companies.

(v) Remarks on Segmental margins

Plant engineering, medical devices and Industrial Products have higher EBITDA margins than company average because there is very less competition in these segments with almost all pro-active deals. Whereas telecom and high-tech are low margin segments as they are highly competitive segments. This is because customers are open to outsourcing and multiple vendors are available. In addition LTTS is making efforts to move up the value chain to improve margins.

(vi) Other Key Highlights

  • Management believes that there is slow decision making due to which the company has not finalized some projects.
  • Management stated that it expects growth traction to jump in Medical from 2QFY22. This is largely on the back of expected deal closures in the coming quarters.
  • There is an improvement in $1m and $10m client category. Moreover CAPEX in Oil & Gas sector is also slowly picking up.
  • The company opened an EV design lab in Bangalore last month, with this the company seeing good opportunities to partner with customers in areas of power electronics, inverters & other electric vehicle sub segments.
  • Impact of wage hikes is expected in 1QFY22 however company will try to offset it by improving operational metrics. Management is confident of sustaining margins and also stated that one can expect improvement in certain segmental margins.

10. Opportunities and Strengths

(i) Large diversified clientele

L&T technology services stock analysis

*LTM = Last Twelve Months

LTTS client concentration risk is low as per FY21 and also reduced as compared from FY16. The dependency on Top 10 clients for the FY16 stood at 36 % which reduced to 27%. Moreover the company is not dependent upon one major client like closest peer Tata Elxsi which is greatly dependent upon JLR. Thus the performance of one major client does not affect the performance of company.

The company has a presence in engineering and research and development (R&D) services. Which are certainly new segments. Consequently there is growing interest in the past few years from clients across sectors. For instance, global telecom, automotive, aerospace, industrial products, heavy machinery, construction, and consumer appliances source their engineering and R&D requirements from India.

Certainly this enabled the company to withstand the slowdown pressures as exposure is not restricted to a particular end-user industry.

(ii) Strong financial risk profile

The company's financial profile continues to be strongly supported by healthy cash accruals, almost debt free balance sheet as well as robust liquidity.

(iv) Growth in FMCG and O&G sector (Oil & Gas)

As CAPEX is increasing in O&G sector certainly management is seeing some good opportunities in that sector. Moreover the FMCG segment has done reasonably well. Some of the learning the company had in FMCG segment, have taken into oil and gas segment also. The large deals we won, that is because of that

11. Risks

(i) Currency risk

The exchange rates impact the revenues of the company directly. As a result there should be efficient currency risk management policy to mitigate the risk.

(ii) Geographies or Cyclical downturns

Economic slowdown in key geographies or cyclical downturns in key segments materially affect revenue growth and profitability. Thus there should be broad-based revenue mix that is diversified across geographies and industry segments.

(iii) Increasing competition in the engineering services business

LTTS is an engineering services provider focused on offering innovative design and development solutions across the product development value chain, for industries such as industrial products, transportation, aerospace, telecom and the process industry. Given the healthy growth prospects in this segment, many IT firms forayed into the engineering services business in the last few years resulting in increased competitive intensity.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry's Publications.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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