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 Limited Q4

Sure.

Thank you very much.

We will now begin the question and answer session.

We take the first question from the line of Laxmi Narayanan from ICICI Mutual Fund.

Please go ahead.

Lakshmi Narayanan

I have three questions.

The first question is, what is your effort mix onsite-offshore this year and how it was last year full year?

Second question is, what have been your revenues from new clients for this year?

And the third question is, do you get any synergy from Mindtree, in case if there are some clients of Mindtree which you can actually mine?

These are my three questions?

Keshab Panda

The first part I think I would request PR to answer that, and the second part let me answer, the new customer.

If you look at it, we always focus on Top 80 customers, top 30, next 20 and next 30.

And consistently FY18, FY19 and FY20, the similar trend - Top 30 customer contributes anywhere between 58% to 61%, and Top 80 customers contribute 83% to 84%, that trend remains the same.

Then when we look at the numbers, we always look at what happens to our top customers and how they are doing it, and then other customers.

So I think we always focus on these 80 customers without fail we must continue to maintain the percentage what we do and grow.

And absolute number also is growing.

So about the synergy from Mindtree, yes, of course, we are looking at if there is a possibility of working together, specifically when we see some of the areas where they do IT and there is an opportunity for us to do engineering, of course, we look at that.

As we speak, there are few areas we are bidding together.

But only thing is, you need to remember we need to have an arms-length distance, we need to have a different MSA, we need to have clarity at the beginning itself.

And that governance is in place and that seems to be working fine.

On onsite-offshore, we have improved, our offshore component increased compared to FY19 to FY20. I think it is in a healthy condition right now.

PR, can you give the numbers, last year for FY19 - FY20 onsite-offshore.

P. Ramakrishnan

Sorry, Lakshmi, I am sorry, whereas we have been always giving the onsite-offshore revenue mix perspective, we don't have a practice of disclosing the efforts part of it.

So we only disclose the revenue side.

Moderator · Conference Operator

Thank you.

We take the next question from the line of Pankaj Kapoor from CLSA.

Please go ahead.

Pankaj Kapoor

Dr. Panda, my first question is to you.

If you look at your business portfolio, how much of it would be called discretionary?

I mean, for example, relate to say a new product development etc., whether disruption in supply chains can have an impact for an extended period?

And conversely, how much of it would be more that you can recover relatively quickly once things start normalizing?

Keshab Panda

You know if look at it, 40% of the business is consulting and design work, and 60% is what's called skill-based engineering which is annuity business, that's how it works.

Now, when you go up, the product engineering, the discretionary business - it changes from industry to industry.

What is discretionary in Automotive and Off Highway segment is different from what we do for Hi-Tech segment.

So today if you see what is discretionary and if discretionary is impacted, there are some segments which have not been impacted at all.

But there are some segments Q4 FY20 Earnings Call May 15, 2020 because of supply chain - the Auto industry for example has taken a hit.

But at the same time, because of supply chain issue we also won few orders, the orders we talked about the recent wins what we have.

So, in my view, overall when you look at it, it's a minimum percentage with impacts on the discretionary part.

It depends on…like in medical areas, the product which we are working earlier, customers come with new ideas… “can you the project on hold and this project can restart and complete by this date”.

So I think it keeps changing from segment to segment.

That is where I think his current situation is.

Pankaj Kapoor

Understood.

And Amit, your comment seems to suggest that there appears to be some normalization in the decision making on these deals in the recent weeks.

So just wanted to understand, has there been any release in deals, or have you seen any higher expectation from the clients on price of these deals?

If you can clarify please.

Thank you.

Amit Chadha

If I heard your question correct, the question was, if there has been any level is the same, video was cutting off.

Repeat the question please.

Pankaj Kapoor

So what my question was that, your comments were suggesting that the deal decision making is now getting normalized to some extent, especially in the last few weeks.

So just wanted to understand if you have seen any rescoping in these deals?

And has there been any higher aggression from clients on pricing in such deals?

Amit Chadha

So number one, so where we were in early March and onwards from there in early April, where people were bothered about survival and life.

We do have clients talking to us and say, 75% of a meeting would basically be focused on COVID.

We have clients talking about their supply chain disruption, how it's going to change, they are talking about their plans in the new environment, and they are positively receiving proactive proposals that we are making.

So that's for sure happening.

Now, is the speed of decision making back to pre-COVID levels?

The answer is no, they are taking longer to make those decisions.

Third, do we see price point pressures?

The answer to that is that, again, it's a mixed bag, because there are areas that we are getting engaged in, like the ones that we have won where we have won them at pre-COVID levels, we have not had to make any room there.

But there are conversations that we are doing in consolidation, etc., which requires a little bit of aggression.

But again a mixed bag, it's not one sign that you are getting to give up rates etc.

Keshab Panda

And Pankaj, segment-wise when you look at it, Telecom Hi-Tech and Medical, which even though people were in panic condition earlier, and that will have impact in quarter one.

But what we see is, in end of quarter one some of the deal wins will come back.

So Telecom, Hi-Tech and Medical segment, I think will come back faster than other segments.

Now, coming to Plant Engineering segment, if you see Plant Engineering - CPG, food beverage industry and chemical industry that is going to grow faster than the Oil and Gas segment.

Oil and Gas we don't know, it might go to quarter three, quarter four as well.

So it is not going to come back in quarter two.

In Transportation, in the Auto segment in particular we won a deal recently, when crises was going on and customers are sitting at home, still a decision was made, and a sizable deal we won.

Because that is a priority for them, the supply chain - the way they were managing earlier, they Q4 FY20 Earnings Call May 15, 2020 want to change that today.

They are saying companies like us, we can play a bigger role than what we have been doing.

But at the same time, in the Automotive segment there are instances of furloughs.

So it's a combination based on segments.

What we are saying is, at least communication - when we were in March, early April, customers were not available to have a dialogue.

Now the proactive proposals and the business model we are proposing to them, the response that is coming back from them is “let us have a dialogue and let us talk about it”.

At least that gives us a hope and the recent wins, like yesterday, we won a deal in Germany.

That's a very high level of design work, which we do, chip design work on semiconductor segment.

This was something we thought we will close in March end.

But it happened only yesterday.

So from the second half of March till first half of April, the communication was one-sided only, As Amit said, we were talking about COVID-19 only, we were talking about how they are doing, how their employees are doing, how their family is doing.

Business discussion has started happening from second half of April onwards which gives us a comfort that some segments are going to come back sooner.

And those segments we are prioritizing so that we can bring back our revenue growth.

Moderator · Conference Operator

Thank you.

The next question is from the line of Abhishek from Elara.

Please go ahead.

Abhishek Shindadkar

Just a question on the deal activity, your commentary sounds little optimistic in terms of the deal wins in the quarter as well as the pipeline and what you are seeing on the ground.

Could you elaborate as to what, why, or how are you winning this?

Is it the activity is progressing faster than you anticipated?

Or some clients are kind of aggressively closing the deals?

Keshab Panda

Listen, Abhishek, the reality is 4.5 million people are impacted, 300,000 people died and 190 million people globally are unemployed, and America has 37 million people unemployed.

So we have issues like there are furloughs and SOW’s getting cancelled.

I think when you see overall, at this particular time when you go through, you hear negative news, you hear positive news, but it gives us comfort that what we intended to do as a company, as a leadership team, some of the proactive proposals, some of the new ideas we are telling, customers are listening to that.

There is one customer we had a videoconference in last few days, and he was telling, "let's not wait for it, this COVID will continue, but I have a problem in supply chain, I believe we want to do something different in India.

Can we do a center for me there?" So, those issues also supply chain also can create a positive impact for us.

So, the way we are saying is, there are negatives happening, we talked about that, and positives happening at today's time, in April May when you win a $15 million engineering deal, $30 million engineering deal, it is definitely a positive thing.

And we have to be optimistic, otherwise every morning you wake up and see 2,000 people died in America, and then oil price going to negative which never happened in a decade, it happened now.

So keeping in mind what the business opportunity is for us, we believe the technology and domain knowledge what we built over years, the innovation what we have done, it is time for us to stay strong .And that seems to be working.

That's all I would say.

Q4 FY20 Earnings Call May 15, 2020

Abhishek Shindadkar

That’s helpful.

And just a short data question.

My apologies if it's a repeat, but could you quantify the drop in Q4 to demand challenges and the execution challenges?

And second part is to PR, PR the realized rate for the quarters is substantially higher.

Anything you would like to highlight?

Thanks.

Keshab Panda

See, demand and supply part I will answer first one, PR will take second one.

See what happens is, we did work from home, when we started working, I did communicate in March 26, work from home which we did.

But when you work from home, the productivity for work from home, even though there are some cases customer approval came, some cases where the fixed bid projects which we thought are going to be completed, customer approvals got delayed.

For us to perfect this delivery from home and being as productive as in office what we visualize, that has not happened.

So that had an impact in quarter four.

That's number one.

Number two, there are some cases we thought we are going to close.

Usually, in engineering, the last part of it, we will have 10% to 15% of business we close later...so that got delayed.

And second part, I would ask PR to answer.

P. Ramakrishnan

So thank you.

Abhishek, I did tell while I was explaining the numbers that there was an increase of almost Rs.

2.50 in realized exchange rate in Q4 as compared to Q3 and that obviously added to top-line and profitability.

But also you have seen that in Q4 there is a drop of almost $4 million in top-line.

And plus the other aspect is that our onsite-offshore revenue mix also went into more into onsite centric in Q4. That's one of the reasons that we were just able to manage the margins as what we were aiming to.

Moderator · Conference Operator

Thank you.

The next question is from the line of Ashish Agarwal from Principal Asset Management.

Please go ahead.

Ashish Agarwal

I just wanted to understand couple of things.

There was a sharp increase in onsite revenues, any specific reason for that?

And secondly, how should we look at your margins going forward into FY21?

Keshab Panda

PR, can you take that please?

P. Ramakrishnan

So the onsite-offshore revenue mix, historically we have been always saying that onsite-offshore revenue mix will range from 45:55 to 55:45.

It depends on the type of project we get during the quarter and which goes into maximum amount of execution.

For a large part of the last four, five quarters we have been seeing onsite-offshore revenue mix hovering between 45:55.

This is one quarter where the number has undergone a slight change, tilting in terms of going into more of onsite side, almost 3%, from 44% to 47%.

But I expect this is not something which is going to change also in the near future, we will operate in that 48:52 or 52:48 band in terms of revenue mix.

And secondly, when it comes to margin, we don't give a specific margin guidance.

But all of you are aware of the fact, and that is also demonstrated in the segment result part of it, margin is, I would say, more of a function of where the business comes from.

And if the business seems to be coming from three segments, there the margin profile is slightly higher.

And when it comes Q4 FY20 Earnings Call May 15, 2020 from Transportation and Telecom and Hi-Tech, the two segments where the margin clip is lower and around 15% to 17% at constant currency rate that we see today.

So, I guess we are not here to talk about in a sense that we will take only margin dilutive revenue growth or margin accretive value growth.

I think it's a question of what kind of growth which will come, and we will take that.

And that will obviously have the related margin consequence.

Having said this, yes, there are margin levers in terms of utilization and all, which we continue to work upon.

And hopefully I guess we should be in a position to maintain in a sense that based on constant currency and constant growth as the way we have talked about, otherwise there will be an impact.

Moderator · Conference Operator

Thank you.

The next question is from the line of Shashi Bhushan from Axis Capital.

Please go ahead.

Shashi Bhushan

In verticals wherein we are seeing weaker environment, like oil and gas and plant engineering, is it pricing that is under pressure or that aggressive stance may help gaining wallet share?

Or is it that there is complete freeze on decision making with cancellation of projects?

Keshab Panda

See, Oil and Gas is a part of Plant engineering, okay.

And some part of the industry, if you see oilfield services, we service that in the Industrial Product segment.

If oil price goes down, the customers who were willing to invest in new project in upstream areas, that is getting delayed.

The pricing pressure doesn't come here.

Opportunity goes away or opportunity is deferred because the project you are doing today, this investment required, that they stopped.

They said let's stop this, we will discuss this after a few quarters.

There is no pricing pressure there.

In plant engineering, again, there are three segments, right.

One is Oil and Gas; then other one is CPG and food beverage industry.

And the third one is Chemical industry.

So Chemical and CPG is not impacted.

So we see this is an area where again, there is no pricing pressure or not impacted as high as what we see there in Oil and Gas.

It could have deferrals, but I think this is going to comeback faster than the Oil & Gas segment within in plant engineering.

Shashi Bhushan

And how do we see Q1 evolving as we are already six weeks into the quarter, would the decline this similar to this quarter or steeper than this?

Keshab Panda

Every day is new, and I wish I had the answer to give you today.

In the current scenario, some cities are open, some plants are open, and some plants are not open.

Even if it’s open, it’s going to start at 25% or 30%.

And sales people, all the communication goes through video.

And in the current scenario the people who completed their projects - they can't fly back to India, as commercial flights are not there.

So I think a lot of questions need to be answered.

I think overall point of view, is there going to be a dip?

I think we said that, Q1 is going to be a dip.

We are making assessments and we are trying to win new deals, so it depends on how fast it is going to recover and how many deals we are going to win quickly, so that we minimize that dip.

So that's where we are at this time.

Moderator · Conference Operator

Thank you.

The next question is from the line of Madhu Babu from Centrum Broking.

Pa.

Q4 FY20 Earnings Call May 15, 2020

Madhu Babu

Sir, captives have been impacted substantially in this lockdown in terms of logistics etc. So how do we see the market share moving within captives?

Because engineering anyways has a large amount of captives.

So are we seeing a market share gains in the captives?

Second, are there any captives which will be on the block and we would look for acquisitions?

Keshab Panda

Listen, I think we are looking at it right now.

One thing we did well compared to, I don't have the data to say for sure, the work from home and moving the lab or the engineering center to home, I think we did very effectively.

Some of the BCP plan when we send to our customer who have captive in India, they say “you guys have been able to do what we couldn't do”.

So, I think as we speak, we are looking at the captives in India and where we have the possibility of doing more than what we do today.

Some of them are our customers as well globally, including captives.

But one thing you have to be careful about, what are we going to acquire a captive for?

Do I get technology or do I get people, or do I get revenue?

So, I think it is important for us, is a captive working on a particular segment only, and if that segment is going to be impacted long term we may not be interested in doing that.

So, I think, as we speak now, absolutely we are looking at few opportunities in captive area, which has potential and synergy for us for future growth and taking these people is going to be helpful.

We did a small scale, one or two we did not on a bigger scale, last few months.

Are we going to look at the bigger ones?

And if we do bigger ones, what is the value I get for the long term?

We always debate on that.

Yes, there is an opportunity on that.

Moderator · Conference Operator

Thank you.

The next question is from the line of Mukul Garg from Haitong Securities.

Please go ahead.

Mukul Garg

Dr. Panda, based on your previous comments, it seems like you are seeing a fair number of clients coming back to discussion table in last few weeks.

Now, if you look at overall global macroeconomic environment that continues to remain quite weak.

And usually despite people's desire to maintain R&D, that is an area which seems to be sort of amount of cost reduction.

So why is this time the kind of decisions with client a bit different versus what we have seen in the past?

Why are they willing to continue spending on R&D instead of cutting costs?

Keshab Panda

Mukul if you go through what is R&D, R&D is not research and development in true sense when you go to a customer, right?

When you go to a customer, he has a product already there.

He has to take out the cost, he has to do more than what he was doing before.

He has less money now, still he has to do it.

He has a product now where the people are there right now working on it and then there is a cost pressure.

He doesn't want to do capital investment.

Whereas we already have a lab, we already have people.

So any crisis brings opportunity, whether that's 2001, or 2007-2008 we believe.

At the end of March, April when we were trying to look at when you get furlough or you get sort of a cancellation, and we analyze why the cancellation is happening...so customers were looking at that time saying that we are not sure what is going to happen to our liquidity position, so which are the projects we can stop.

And I still believe an Industrial company or Telecom Hi-tech company or a company like a Plant engineering company, FMCG Company, the core thing is, they manufacture their product, and their manufacturing shop floor has to run.

Q4 FY20 Earnings Call May 15, 2020 So, if I am thinking about new ideas which are going to hit the market, I am going to roll it out two years from today, I am doing innovative projects.

Then I look at my bank balance, do I have money to invest for two years.

Those projects are put on hold, they are not going to do it.

Now, there are projects we have heard from customers saying, this project was supposed to be delivered in two quarters, can you do in one quarter, then I go and hit that in the market quickly.

Same is the case of product development, the product development project which I am doing, which is supposed to have a plan for working for long-term, that has been put on hold.

So, I think multiple things are happening but it’s not a question of research and development, this is a survival issue.

If a customer has to survive, then he has to do product, if a customer has to survive then manufacturing shop-floor has to run, it has to be more efficient and it has to be a smart product.

And if a customer wants to go to a new geography – do they go now or delay by three months, six months, look at how market is going on, the liquidity condition, debt condition, all that they look at.

So that’s how it was, nothing has changed.

So, temporary impact of course is going to happen …this is something nobody has seen in a lifetime, but it's not going to remain long term.

At the same time, I still believe if we do this right with the technology and the vertical segment what we have, it is an opportunity.

If you play it well, you can have a temporary dip, but you will be able to come back.

Moderator · Conference Operator

Thank you.

The next question is from the line of Sandeep Shah from CGS CIMB.

Please go ahead.

Sandeep Shah

Just the experience in terms of the deal wins which has happened in January, February, and March and also in the last few weeks which you have said in April, May.

Are they ramping up as per your expectations?

And your expectation of 2Q bouncing back in terms of the growth, is it on an assumption that there could be some normalization of COVID?

Or is it largely in terms of the deal wins, which has happened?

The third question is, just in terms of what you said in April and May, one large deal of $30 million and second was $50 million, and that is largely a new business?

And PR, are using in the coming years the margins could be flattish in a constant currency, is it what you are trying to say in a previous reply?

P. Ramakrishnan

Dr. Panda, I will take the last questions.

So what I talked about was that I told that we don't give specific margin guidance.

I also told that margin for us is dependent largely on the fact as to how the revenue growth comes across the five segments.

So if you see revenue growth coming from the higher profitable segments, obviously margins would be higher.

And I also told that if at constant currency and constant revenue whatever we had; I don't see why margins cannot be maintained.

But, obviously, it's a mathematical equation which you are trying to talk about.

So, for us, the margin profile primarily depends on which segment the growth is coming from and that will determine our margin profile in a normal scenario.

Keshab Panda

There's one correction though, I think you said $50 million, that's not correct. $15 million, that's what we talked about.

What Amit spoke and I spoke, $30 million and $15 million, April, May.

Amit, can you answer the other one, what gives comfort on Q2, that first question, can you answer that please?

Q4 FY20 Earnings Call May 15, 2020

Amit Chadha

Sure.

So the way we look at this, and I have given commentary vertical by vertical the reason we think that our quarter two onwards we will be able to start our trajectory is because, one, in the Medical segment, though it is small for us, we are seeing continued demand.

We see that Telecom & Hi-Tech also will continue to have positive conversations.

Though Transportation, Industrial Products and Plant Engineering were hit, Transportation - again people are coming back, people are starting to buy cars, and there is positivity in terms of discussion going on there.

And so is Industrial Products.

Plant Engineering like Dr. Panda talked about, will take some more time.

So we already covered that.

But I am happy to take any specific item that you may have in this area.

Sandeep Shah

Yes, can you throw some light in terms of aerospace as a whole?

And is there any systematic risk in any of your top 20, 30 clients as a whole?

Amit Chadha

So from an aerospace standpoint, we work in the avionics space, we do not work with airlines, right?

I mean, that's not our business, we are more with the aerospace companies, avionics, etc. And Dr. Panda had also shared with you, I think last time we had the earnings call that we had set up this center in the U.S. focused on ITAR and defense.

So, though there is a hit on these areas, we do expect these to bounce back sooner, there are conversations going on in this area.

So we do expect avionics - the work that we do is very specialized, and we do see that that will come back sooner.

So that was one.

You had another part of the question?

Moderator · Conference Operator

Thank you.

We will take that as the last question.

I would now like to turn the conference back to Mr. Pinku Pappan for closing comments.

Pinku Pappan

Thank you for joining us on the call today.

We hope we were able to answer most of your questions.

If you have any follow-up queries, please reach out to me on email.

Wishing you very safe times.

Goodbye and have a great day.

Moderator · Conference Operator

Thank you very much.

With that we conclude today's conference.

Thank you.

Thank you for joining us, ladies and gentlemen.

You may now disconnect your lines.

Note

This transcript has been lightly edited for clarity and accuracy.