L&T Technology Services - Going Deeper To Scale

REDUCE

Information Technology 

Analyst Meet Update   

August 28, 2024

We attended LTTS’s Analyst Day to understand its growth strategy and business outlook. KTAs: 1) Mgmt remains cautiously optimistic on demand. Deal pipeline grew 2x YoY, but decision-making is still slow. Potential start of rate-cut with resilient macros in the US may lead to demand uptick. 2) India ER&D sourcing is expected to grow 17-22% over 2023-30. LTTS aspires to grow at 18-20% over the same period. 3) Mgmt elucidated its growth strategy ‘Go Deeper to Scale’ with focus on 5 growth vectors— scale up Mobility, Sustainability, and Tech to billion-dollar segments; grow client relationships; bag large deals; invest in technologies ahead of the curve; develop talent to drive profitable growth. 4) LTTS aspires to be one of the top-5 ER&D service providers globally and grow revenue to USD2bn over the medium term with EBITM of 17-18%. 5) Mgmt reiterated its 8-10% growth guidance for FY25, and suggested that its exit revenue run-rate aspiration of USD1.5bn hinges on M&A. We roll forward TP to Sep-25E; retain REDUCE; raise TP to Rs5,000/sh at 30x its Sep-26E EPS.

Aspiring to achieve USD2bn revenue over the medium term

LTTS has identified 5 growth vectors: a) create billion-dollar segments—Mobility, Sustainability, and Tech—with separate leadership teams, P&L responsibilities, and a distinguished set of growth strategies; b) grow client relationships – focus on the top-45 accounts and target 2 clients of >USD100mn size, 3 clients with size of USD50-100mn, and 46 clients (35 currently) in the USD10-50mn range; c) co-create value through large deals – it signed 1 deal each in the >USD100mn and USD50-100mn buckets and 2 deals in the USD25-50mn bucket in FY24; it targets scaling this up, to 2, 4, and 8 deals each year in the respective buckets over the medium term; d) invest in technologies ahead of the curve – number of patents have grown to 50 per Quarter for the last 3 years from 50 per year in FY21; e) nurture its ‘Engineer at Heart’ program for inclusive growth. Its USD1bn and 20-22% CAGR revenue aspirations with targeted EBITDA margin band of 20-22% for Mobility will be driven by software-defined mobility (with share increase to 45% from 34% in FY24), followed by Electrification & Hybrid Tech (share increase to 20% from 15%), while Vehicle Engineering will be steady (share expected to decrease to 35% from 51%). In the Sustainability segment, it expects revenue CAGR of 14-16% with EBITDA band of 28-30% to be led by Plant Modernization & Automation, Projects Engineering, Digital Platforms, and Sustainable Manufacturing. For the Tech segment, it aims for 18-20% revenue CAGR with EBITDA margin band of 16-18% to be driven by AI and Next Gen Software, Platform Engineering, Silicon & Device Engineering, Digital, and QARA, to achieve revenue aspirations of USD1bn. It is focusing on 4 geographies—North America, Europe, India, Japan. LTTS aspires to be among the top-5 global ER&D Services providers and grow revenue to USD2bn with 17-18% EBITM over the medium term.

Levers identified for margin improvement

The company aspires to reach 17-18% EBITM over the medium term and has identified margin levers like employee pyramid (to add 2,000-3,000 freshers every year), higher offshoring (potential to improve offshore mix by 300-500bps), optimizing G&A as a % of revenue, higher quality of revenue led by AI, proprietary solutions/accelerators, etc. It aspires to expand Mobility, Sustainability, and Tech segment margins to 20-22%, 28-30%, and 16-18% over the medium term from 19.6%, 28.2%, and 15.5%, resp, in FY24.

Exploring M&A opportunities to boost growth

The company plans to add a) SDV, ADAS, and Connected capabilities in Mobility; b) platform engineering, AI/ML, and data engineering capabilities in ISV; and c) connected healthcare, patient management, and health analytics capabilities in Medtech, through the M&A route. It is targeting entity with revenue run-rate of USD50-150mn in these areas.