LTTS — earnings call
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Prepared remarks
Moderator · Conference Operator
Ladies and Gentlemen, Good Day and Welcome to the L&T Technology Services Q3 FY ’20
Thank you very much.
We will now begin the question and answer session.
The first question is from the line of Sandeep Agarwal from Edelweiss Securities.
Please go ahead.
Sandeep Agarwal
Happy New Year to the management team, Dr. Panda you although explained a little bit on the weakness which we saw and you called out clearly that the worst is behind in the telecom and hi-tech space, what gives you the confidence to make this statement because is it based on your deal pipeline or is it based on your interaction with the clients number one?
Number two, do you think that the worst of the trade war if at all they would have impacted this space is behind, and finally, I understand that there is a sharp drop in revenues in telecom would have impacted your margins, but still I would say is the correlation so sharp that we have not been able to achieve what we anticipated because we knew this is coming, so that is part one on the telecom and hi- tech space, and I would also like to know a little bit on that IOT growth.
If I understood correctly you mentioned 29% growth and now it forms 43% of the revenue, is it also little lower and impacted by some kind of indirect influence of the telecom and hi-tech space?
Dr. Keshab Panda
I think you asked two questions, number one is on the telecom hi-tech, on what basis you are saying Quarter-4 is going to be flat?
If the Quarter-4 has to be flat, we have to win orders and the customer downside which could have happened there that is stabilized, so order we already won few of them, already on hand and we always calculate about how much we are going to contribute in Quarter-4 and beyond.
We have few orders, if you recall last quarter I talked about few deals we were working on and Amit spoke about.
There were some deals we already won and some deals are in pipeline and we expect to close that soon, so based on those pipelines and order we already won taking that into account we believe that Quarter-4 is going to be a good quarter for us.
I would say at least there will not be degrowth and there will be growth on the telecom hi-tech.
On Digital and Leading Technologies front - there is one correction though - it contributed 41% of the revenue in Quarter-3 and had a growth of 29% year-on-year.
If you see last quarter, it was 39% of revenues, what happens is when you say digital and leading-edge technologies, this is not for one segment alone.
It is from all the five business segments where we use that extensively, so telecom degrowth has nothing to do with impacting this that is for sure and we believe the impact and the investment we did in creating this will continue to help in coming quarters too.
On the margin front, we have been flat.
Last quarter and this quarter it remained almost flat and I think there is no margin impact because of this only thing is you can see that Telecom Hi-tech there has been a degrowth from Q2 to Q3, it has a marginal impact on that.
Beyond that I do not think any concern on the margin side at all.
L&T Technology Services Q3 FY20 Earnings Call January 17, 2020
Moderator · Conference Operator
Thank you.
The next question is from the line of Sudheer Guntupalli from Motilal Oswal Securities.
Please go ahead.
Sudheer Guntupalli
If I look at your $ 50 million plus engagement on a year-on-year basis, it was two in Q3 of FY ’19, it has come to zero now so one loss we understand in the semiconductor space earlier, so can the second loss be also be attributed to the telecom and hi-tech vertical, is there an engagement loss or is there a client loss here?
Dr. Keshab Panda
I think you are right, the two were in telecom hi-tech but there is no client loss, they have dropped to 30 plus million accounts but we never lost that account so I think both are in telecom and hi- tech segment, yes you are right.
Sudheer Guntupalli
In the semiconductor space, so is this expected to be a transient thing because earlier also we were expecting this issue largely driven by disruption in the mobile supply chain so on and so forth, so is this expected to be a transient issue or is it because of more let us say structural reasons like the shift towards open sourcing which is happening in the chipset ecosystem?
Amit Chadha
As you rightly said, we did see two accounts that were 50 plus drop-down and in one case which we had talked about earlier in the year that this was because that there was ownership change and they had in-sourced a part of the activity.
In the second case, it has been a situation where the client has gone ahead and shutdown that particular business unit that has dealt us this loss.
Having said that, we continue to see opportunity in the segment, we do see it in the ISV space, in the Media space as well as in the Semcon space, so this is broad based.
There has been some delay in decision-making where some of these deals take a little bit more time, but that is where I would put it.
I do not see this weakness going forward into next quarter or beyond.
Sudheer Guntupalli
Okay Sir, so we can expect stability in this segment going forward unlike it happened in the case of FY ’20?
Amit Chadha
We do see growth in Q4.
Moderator · Conference Operator
Thank you.
The next question is from the line of Madhu Babu from Centrum Broking.
Please go ahead.
Madhu Babu
Sir, we are talking about market share expansion in aerospace I mean in terms of wins and we opened a new Centre in Illinois, so could you talk more about what are the areas we are targeting and what are the cross sell we are trying to do in the aerospace side?
Dr. Keshab Panda
A lot of data when we say customer specific data cannot be taken out of country, it is mostly aerospace and part of it on the defense side, so it is critical to the customer and has to remain close to the customer.
The Rockford Centre what we built can seat 130 employees.
On the aerospace side, multiple things we do.
As you know air traffic management is one of the areas we work, in-flight entertainment we are working on it.
The customers are very, very receptive to the idea about having a centre close to them and then that centre connects to our centre in India, so I think that model is working out reasonably well.
When you are doing a mission critical L&T Technology Services Q3 FY20 Earnings Call January 17, 2020 project for the aerospace area, it is always important that we connect with the customer.
As Amit talked about, the digital areas of aerospace and we talked about the in-flight entertainment and all these are focus areas.
Again, some of the system design we do for the customers in aerospace areas - that we partly will deliver from there and partly we will deliver from our centre as well in India.
Madhu Babu
Second one on the exit rate, this is going to be again weak, so this year we are going to be doing 10% kind of growth, so for us to move back to 13%-14% kind of momentum for next year, so what should work well, is it some new deal wins or the semiconductor stabilization or what is the key trigger for us to move back to the 14%-15% kind of growth?
Dr. Keshab Panda
I think some of the deals we already won, I think if you see nine deals we won and two of them 30 plus million TCV we announced that and there are few in the pipeline what we have.
It gives us comfort about; I think we will talk more about in Quarter-4 some of the deals we are going to close.
The only thing is decision-making getting delayed that may impact to some extent.
Other than that, I think I am not worried about FY ’21 going by the deal size pipeline I have seen in multiple segments.
You could imagine if Telecom segment would have remained flat, three of our segments has grown in excess of 20%, Plant Engineering, Medical as well as Transportation.
If there was no de-growth in telecom and hi-tech we would have had a better number, so I think that is the only problem - as long as it remains flat and the pipeline what we have on hand and as Amit said, we are seeing Quarter-4 onwards not only remaining flat, we see a growth trend happening in that segment with all these deals has to we have the confidence that FY ’21 should be a better year.
Moderator · Conference Operator
Thank you.
The next question is from the line of Mukul from Haitong Securities.
Please go ahead.
Mukul
The first one was again on the telecom and hi-tech decline this quarter, this seems to be coming from your top client right now which was a 50 million plus and you mentioned that this has been because one of the units kind of shut down, so was there also an element of the Q3 seasonality…furloughs which played a part in this and you expect this account ex of this unit to kind of improve going forward or is the growth pickup going to come from other deal wins which you have acquired in this space this quarter?
Dr. Keshab Panda
The seasonal issue as you know, I think Quarter-3 is always the case and that has impacted, small impact I would say and let me correct one thing, this is not shutdown or anything.
If the customer decides to sell the part of the business and that is one part of the weakness.
Second part is customer decided not to do that business and sold it to somebody else.
Both the situations divesting the business to the new party - that had some impact and as we see that there is one company where the part that was divested and the company who acquired them, they are keen to continue to work with us.
It will take some time; I would say it is a temporary impact and I think whatever value we created is supposed to come back again.
L&T Technology Services Q3 FY20 Earnings Call January 17, 2020
Mukul
The second question was on your qualitative view on FY ’21, earlier you have stated that you see a lot of opportunity in the space and you would like to kind of grow at high teens to 20% type of a growth rate, because of the disruption which you have seen recently FY ’20 was a bit weak, do you expect to kind of revert back to your growth rate in FY ’21 especially in light of decision-making I think is still kind of bit dodgy?
Dr. Keshab Panda
I think our intent is always to do better than what we do now, I think it is always the case.
As we stand today, we are always looking at it, and when we have been able to deliver two years consistently that number, and then in telecom hi-tech had this issue not been there, we may have been in a different place altogether, but there are somethings we control and somethings we do not control and we have been able to deliver those numbers earlier and our intent is how quickly we do that.
The intent is always there, we are working towards that.
We will have more visibility at the end of Quarter-4, we are working on how FY ’21 looks like.
And as the clarity comes and we will share with you.
Moderator · Conference Operator
Thank you.
The next question is from the line of Pritesh Vora from Mission Holdings.
Please go ahead.
Pritesh Vora
Sir, I had a general question on the employee headcount, which is decreased YOY by 12% and utilization rate has gone up, so if you adjust utilization rate then also there is a 10% decrease in the headcount vis-a-vis the constant currency growth has happened at 7.5%, so has the net billing rate has increased or is it due to mix change, if you can give some color on it that will be much better?
Dr. Keshab Panda
One correction though there is an increase in year-on employee, only thing what happened is quarter-on-quarter remained flat, only two employees is less than Q2 to Q3 and today the business we are in, the technology which we are using it now, the equation earlier depending on number of employees the revenue that equation does not hold entirely, so I think it is difficult to calculate that how many employees I should add to get this revenue, no, that is not true.
Can you do more with less number of employees and deliver more value to your customer and more value to your investor, that is how we look at the model right now.
Pritesh Vora
You are saying better productivity and higher count per employee has happened?
Dr. Keshab Panda
Yeah, the only point what I was telling you is year-on-year there is an increase in number of headcount - it has increased.
And last quarter to this quarter only two employees left but revenue growth has happened and so we want to continue to do that.
As and when required, we always plan, resource planning we do in a way because you can imagine the way technology is changing now what was their last year this is different and the quality of employees we need and the types of employees we need, we always work out and then we will have fourth-quarter, maybe we will have more employees joining there, so additional employees is going to happen, absolutely going to happen but numbers how many numbers we are going to hire that is a question I think we are always working on, I am always challenging the team saying that can you deliver more with less number of employees, are you using robotics, are you doing 3D printing, are you this AI as a L&T Technology Services Q3 FY20 Earnings Call January 17, 2020 platform can you use it, do it more, so I think there is various options we have and we debate that and what is used for medical may not be true for industrial may not be true for semiconductor, so every segment we look at it and different answer for different segment, that is something we do.
Moderator · Conference Operator
Thank you.
The next question is from the line of Ritesh Rathod from Alchemy Capital.
Please go ahead.
Ritesh Rathod
Sir, my question was on the Agri side what is the outlook now given the deal which has been signed by China/US to import the Agri commodities from US?
Amit Chadha
At this stage, it is too early to say where we are going to go with that.
We are hopeful that it will actually mean good things to the industry and therefore for us.
Ritesh Rathod
Second on deal pipeline, how would that grown from last year basis this year like in terms of whether it would be 1.5x or 30% up or 2x of what was the number in your pipeline last year at the same time too?
Amit Chadha
We have seen two things here, number one our pipeline as it stands today is bigger than where it was year-on-year as well as quarter-on-quarter.
Secondly, our TCV of deal closure has also increased from Q1 to Q2 to Q3 and as Dr. Panda said, we continue to be very focused on this to see how we can continue to grow this and continue the growth momentum.
Ritesh Rathod
My intention was asking like how the pipeline has improved or expanded is more to get a sense on what are the adjacent areas which you are addressing in your client wallet, which would get in a way reflected in your pipeline so if it has gone up by 50% or 70% which means in a way your capability addition which you have done, you are able to go and target those deals in client’s wallet?
Dr. Keshab Panda
The answer to this is every vertical there is a different answer, we always look at when we get a new customer, it could be Industrial, it could be Transportation and which are the areas I am going to focus, or where I am going to be relevant long-term and grow, and what technology do I have?
Customers are today asking - engineering design we know you can do it and you successfully done that for last few years and what else you can do, what technology you can bring to me from adjacent industry which is going to help me or make me more competitive.
What you can do so that my customer experience increases, so those aspects of it for every segment we look at it.
We have created a new group called Digital Advisory Group, so Digital Advisory Group goes to customers, some of the customers are still struggling today about which direction they are going to take, so our advisory group goes and talks to them about I think we understand your industry well, we have been doing design for you and we have been doing manufacturing for you and this is what you should be taking first step, this is what you should be doing this quarter or this year and beyond.
L&T Technology Services Q3 FY20 Earnings Call January 17, 2020 I think that is helping in a big way and I think when you start doing in digital or new age technology you start with a pilot.
You do for one plant, you do for few numbers of assets then try to expand that, so as long as you are in at the right time because we have been working with them for some time it is going to grow, and some of the customers could be in traditional engineering.
When you look at a customer of 40 billion or 20 billion, we are servicing them only for 7 billion or 8 billion but opportunities are there in other areas.
In the other areas, the technology we have, the knowledge what we have can I take it and deliver, I think that makes lot of difference so I think that the answer is this is what is our job every day.
We look at it every week, we review this and see what changes we are going to do in terms of strategy and investment so that is going to continue to grow.
Ritesh Rathod
Okay, my intention was is there any quantitative way we can measure that how you are expanding like reaching to that addressable market?
Dr. Keshab Panda
We do look every time at the customer satisfaction index, the win ratio what we have…I would be more worried about if I lose an order to somebody else, so that is not happening, number one.
Number two, measurement when you say customer, customer is spending X billion in their ER&D, then what percentage of that I get today.
I can talk about technology, I can talk about lab, and what percentage is that, am I missing out something where I should have done that, that is the analysis our ADM and ARM, leadership team together - that is the exercise we always do it, so market share from that customer what I got and how do I improve on that, that is the matrix we always measure.
Ritesh Rathod
Two quick questions, your margins given will recover growth in telecom, margins will have a business mix headwind because telecom is relatively low margin but at the same time we have utilization which is down year-on-year by 200 bps so how is the margin guidance outlook from here onwards?
P. Ramakrishnan
We do not specifically give a margin guidance, but as I have indicated as always that margins are a function of the kind of revenue mix which we get and also the exchange rate.
Obviously, a bump in telecom high-tech growth segment obviously will probably improve the margins from what we have reported for that segment in Q3, but yes we are working on all levers possible which is essential to at least ensure that the overall company margins is protected in and around these levels at constant currency.
Ritesh Rathod
Quickly, the L&T Treasury which we had given ICD that has been redeemed I think last time, is that the right way to picture?
P. Ramakrishnan
In fact, thanks for taking that point, as I have indicated that whatever we had advanced as a loan or an inter-corporate deposit - it was not a loan, but it was an inter-corporate deposit of short- term to a group company, and it has been completely paid back and we have no exposure in terms of any assistance to the parent or to any of the group companies.
L&T Technology Services Q3 FY20 Earnings Call January 17, 2020
Moderator · Conference Operator
Thank you.
The next question is from the line of Shraddha Agarwal from AMSEC.
Please go ahead.
Shraddha Agarwal
Sir, between Telecom and Hi-tech how big would semiconductor be for us?
Amit Chadha
We do not give out specific sum percentages, but it is a significant part of our hi-tech sector to the tune of about 40% plus in what we do today in the hi-tech area.
Shraddha Agarwal
Sir, given the fact that Gartner has talked about 12%-13% decline in worldwide semiconductor revenues, how do you see that space playing out from a medium to longer term perspective for us and also given the fact that we had close to $200 million revenue coming from semiconductor last year which has now come down to $ 150-$ 160 million, so how long will it take to get back to that original number of close to $200 million in that space?
Dr. Keshab Panda
What Gartner talks about semiconductor segment and what we talk about the segment is different.
We are talking about designing a chip that can be used for medical, it could be a chip which can be end-to-end, VLSI chip design like the one we won - I think I spoke in my remarks earlier and this chip design could be for an automotive application, so I think when they talk about semiconductor you cannot correlate one to one.
Again, customers are now taking ownership of designing their own chip, you are aware of that.
Of course I think if you see the semiconductor segment in US, they are all coming back again which is not as bad as two quarters ago, it is much better today but I think if we look at this way - there are very few companies that can do chip design end-to-end and has the domain knowledge in multiple business areas, there are few companies in the world who can do that and we are positioned in that area that we believe that is going to be the growth area for us.
One more point, I think Amit talked about it - we designed a security solution which we are doing in Israel and we are creating a chip design taking security into account, this design center plus our Bangalore center plus our California center all three working together to create one, that is a unique proposition what we have.
P. Ramakrishnan
And this customer was not a semiconductor client although it is driven from our semiconductor VLSI practice, so when we talk about telecom hi-tech and when we say semiconductor, it is not that our clients are the classic semiconductor companies only - it is also the practice which we do, which largely emanates from the semiconductor companies but for also non-Semcon companies as well.
Shraddha Agarwal
Sir, secondly on the margin bit, last quarter we had talked about a 4Q margin seeing a dip because of transition cost in certain large deals, so do we stick with that statement that 4Q margins would see a further dip from the current levels?
P. Ramakrishnan
So it depends on whatever deal intakes happen, so till Q3 whatever deal intakes have happened are largely deals which are normal steady state, but as we going to any sort of a transition deal, hopefully at that point of time, we will communicate it.
L&T Technology Services Q3 FY20 Earnings Call January 17, 2020
Moderator · Conference Operator
Thank you.
The next question is from the line of Bharat Sheth from Quest Investment.
Please go ahead.
Bharat Sheth
Sir, just understanding on the margin front, earlier we were looking for 1% improvement EBIT margin YOY in FY ’21, so where do we stand?
P. Ramakrishnan
As we talked about the margin guidance which we gave as what our objective was from the fact that we will have a growth trajectory which is across all the verticals which we cater to, so this year in fact despite the drop in the telecom hi-tech over last 12 month basis, despite that drop it is not necessary that we have consequently removed people because we believe the skill sets are very much required and because of our opportunity pipeline and what we understand that is going to continue, so despite that part still continuing, I guess we have been able to maintain the margins and it is also evident from the overall utilization we have been improving quarter-on- quarter, so I would say that our margin guidance or our margin trajectory depends on how the mix of revenues come across the various segments and based on constant currency and other parameters, I say that we are trying our level best to ensure that given the revenue mix coming in, we should be in a position to at least protect from where we are today.
Bharat Sheth
Sir, can you share nine months’ TCV wins?
P. Ramakrishnan
We do not disclose that particular number, whatever was told by Amit and Dr. Panda is what we can at this stage tell you.
Dr. Keshab Panda
One point I want to tell you that Amit talked about, the order we won in Q1, Q2, and Q3, Q3 is higher than Q2 and Q2 is higher than Q1, that is a very important point Amit made, I think that is something you should make a note of.
Moderator · Conference Operator
Thank you.
The next question is from the line of Srinivas Seshadri from Mirabilis.
Please go ahead.
Srinivas Seshadri
Sir, just one question for PR, just on the SG&A line item if you see in 3Q or in nine-month, there has been a substantial increase even if you adjust for the Ind-AS part so what are these attributable to and how do we see this going ahead?
P. Ramakrishnan
We are talking of the number what we show under SG&A at Q2 at 169 crores and 181 crores, these are elements which will have some sort of a quarterly impacts here and there - largely this quarter we have had a slightly higher amount spent on CSR and also for stock options which were granted in Q2 a larger part of that transaction has happened.
So on the SG&A side I think the way we evaluate and see is trailing four quarters whether are we seeing any substantial changes here and there, if there are some specific line items as one-off items be it as an expense or as an income, we will definitely tell that while we announce the results and for this quarter I do not see any specific one-off items in either of the expense side which we merits an attention.
So specific to your question I would say the one or two element that is specific cost for the quarter was the higher CSR spend and ESOP allocation for three months pursuant to the stock L&T Technology Services Q3 FY20 Earnings Call January 17, 2020 grant which was provided in Q2, but over 12 months I guess it is as per what we believe should be.
Moderator · Conference Operator
Thank you.
The next question is from the line of Ashish Anand from Allegro.
Please go ahead.
Ashish Anand
Just wanted to know, you mentioned that our top two clients as in the two which were in the 50 million plus bucket were from the telecom and the hi-tech vertical, just wanted to check, can you share for the seven clients in the 20 million plus bucket, what is the kind of vertical split there and additionally just also wanted to understand in terms of these clients what is going to be the potential to reach 50 million, which verticals do you see the next bucket of 50 million coming from?
Amit Chadha
One, we do not provide a vertical split on accounts, but having said that if you have been attending our quarter calls, you will recall that Dr. Panda in one of the calls talked about the account management program that we run for our T-30 accounts and our Next 20 accounts and this is done as a regular process in the company - it starts with ideation to help the client grow, so it is to see what we can help the client with and then it comes down to proposals, it comes down to areas in different subdivisions, and geographies which we can work with the client, so that mining exercise of our client is key to our strategy and will continue to play out as we move along.
If you look at it from Q2 to Q3 you will see that our $ 10 million clients have also gone up, so we see that as an indication of that and if you look at it from Quarter-3 of last year also, you will see a difference there and that is an ongoing process that we will continue to have in the company.
Ashish Anand
Without getting into specific verticals at the client level, I just wanted to understand are certain of the verticals more predisposed towards larger engagement than others or is that not really true?
Amit Chadha
The larger deals that we are seeing today or what we have been closing are largely in Transportation and Telecom and Hi-tech and followed by Plant Engineering and IP, it is very broad-based, we see it across all the segments but some of them are slightly better than others in a given quarter.
P. Ramakrishnan
I think the priority would be first should be Transportation followed by Hi-tech and third would be Plant Engineering.
Ashish Anand
Just lastly, you mentioned a couple of times in terms of the margin drivers and you mentioned business mix, just wanted to understand if you could share a bit more in terms of which are the higher parts of the business or higher margin parts of the business and which are the slightly low margins parts of the business?
P. Ramakrishnan
Just to reiterate if you see three segments Industrial products, Plant engineering, and Medical Devices, their EBITDA margins are almost 3 to 4 percentage points higher than what we have for Transportation and Telecom & Hi-tech, so that is why I keep insisting that the revenue mix L&T Technology Services Q3 FY20 Earnings Call January 17, 2020 is a very important margin driver.
At the same time, it is not that we are only trying to pursue high margin opportunities just because we want only margins because growth is important so we are competitively positioned from a competency perspective across all the five segments, but opportunities depend on the underlying growth opportunities in each of the segments to which our customers cater to, so I would tend to say that there are three segments always structurally we have seen that when you talk at EBITDA level they are above 20 odd percent and the other two segments are probably in the mid-teens - that is the way we position this and we are there to take the opportunity depending on wherever the activity is there.
Moderator · Conference Operator
Thank you very much.
That was the last question in the queue, I would now like to hand the conference back to Mr. Pinku Pappan for closing comments.
Pinku Pappan
Thank you all for joining us on the call today.
I hope we were clear in the way we communicated our performance.
If you have any questions, please feel free to write to me.
Let me wish you all a Good Evening.
Thank you.
Moderator · Conference Operator
Thank you very much.
On behalf of L&T Technology Services, that concludes the conference.
Thank you for joining us, Ladies and Gentlemen, you may now disconnect your lines.
Note
This transcript has been edited for clarity and accuracy.