L&T Technology Services Limited analyst Q&A

Our first question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.

Congrats on a very solid performance. Amit, so my question was on the overall growth environment and the growth target that we have set for FY25. Now last quarter you mentioned that the winter is over, and the spring is around the corner. So, do you believe this guidance is a reflection of that and or do you believe the macro has changed a bit since then which led us to maybe a slightly lower guidan ce than what we were expecting o r maybe on the other hand, maybe slightly better than what we were expecting?

Sure. So, I think spring looks like 5.1% sequential growth if you ask me.

Absolutely. But we knew this was driven by the SWC seasonality?

No, no, it's not just SWC seasonality. We also grew Semiconductors in this quarter , we also grew Hyperscalers in this quarter and that's how we've been able to get to this. So let me give you a little bit of colour. So, Vibhor, as we look at it today. Internal targets that we've got are higher, but we have baked in the kind of political uncertainty, etc., going on right now in the world. See, we are seeing very clearly, and I'm going to talk in terms of my new Segments here, if you don't mind. If I look at Mobility, we will see spends coming out in the software defined vehicle space continue to happen. We've now got I think about 8 empanelment s with OEMs and some TCV signed, and that gives us a lot of confidence in the spend there. In the sustainability segment, we are seeing new spends emerge and come in the Oil & Gas as well as Chemicals and the CPG area, therefore the verticals that we've got will grow in that area definitely into next year. In Hi-Tech segment, I do see in the MedTech area there will be expansion for QARA and others. In the areas of CMT which is the other part of Tech, (Communications, Media, Telecom and Technology) – I do believe that Semiconductor as well as Hyperscalers will provide us that growth. And there are some opportunities with Operators and Infra companies to try and help them with lab-as-a-service, etc. So those are the positives that we are seeing. The kind of caution that we have still got is in Sustainability, the Industrial area is sort of soft right now. So, we are looking to see how we can leverage Digital Manufacturing Solutions, AI and SDx solutions in that area. Second, we are still not clear on 5G spends and how Operators will behave in the medium near term. And that again, is something that we are looking to see how we can leverage AI to try and do some more stuff in. So, we took all that into account when we have given you this guidance. So, this is not a target this is a guidance. And like I said our aspiration remains, and we'll continue to update you as we move along.

Got it. Got it. Just a bit on the trajectory of this number that we are looking at, given that we've ended the year on a very strong footing in terms of exit rate both QoQ and YoY. This 8% to 10% guidance, do you expect this to be more spread throughout the year? Or do you think it could be more backended given the geopolitical uncertainties that you mentioned, which might maybe get addressed in the later half of the year?

So see the way we have done the trajectory right now, we do see a muted Q1. But we are still working through the numbers, we are only on 25th April today. And there are deals in play right now. And as we move forward, we will see where we get to, but we are very comfortable in the 8% to 10% range at this stage. And with these new Segments coming along, we actually hosted a 2 day workshop on Monday and Tuesday in our Development Centre in Lonavala. We flew in our leaders. We had 40 people together. And there's a lot of positivity in the organization at this stage. We've elevated roles of leaders, etc. So I do believe that this will give us the push forward and push up as we move forward.

Got it. That’s very useful. Thank you so much Amit. Thanks for taking my questions and wish you all the best.

Thank you. T he next question is from the line of Bhavik Mehta from JP Morgan. Please go ahead.

My question is to Rajeev on margins. Can you elaborate on what kind of inve stments and costs we are going to bring, which is driving this 100bps drop in margin for FY25? And when can we see margins start coming back to that 17% level? That would be helpful.

Sure, Bhavik. So, see like I said that one, we are unveiling our new structure. Amit talked about the fact that we are elevating leadership within the organization to drive growth within this new organization that we are talking about, that will entail investments in people and technology. We are also pivoting in three segments, which is Mobility, Sustainability and Hi-Tech. So that's going to be one area that we will invest. The second is, like Amit talked about, the geopolitical factor, the macro environment. And we've seen a very recent phenomena that somewhere has led to what we have aspired to be a higher growth in terms of this year to sort of lower the aspiration and the growth. At the back of growth we see, of course, the margins to be relatively lower than where we aspired, which has been originally at 17%. While we will continue to look at improving margins, we believe the factors which is leading to investments, a new reorganization and of course, the geopolitical and macro factors, the margins may likely come to about 16% levels, while we'll continue to endeavour to be higher as the year goes by.

How should we see these investments spread out between Gross Margins vs Sales and Marketing costs?

So, we will continue to invest in Sales. Like we have said earlier, our scale has been at industry level. On the G&A side, we believe we've optimized quite a bit. So largely the investment will be at the Gross Margin level because this is essentially where you want to build solutions and capability. So that is where it is going to be. I will also request Abhi to add specific investment that we will have at the Gross Margin level.

So, on the solutions front where we are investing. One on the Digital Manufacturing side clearly, we are looking at investments, some we have done and some we are enhancing on the Asset Healthcare Solutions for predictive-prescriptive analytics for plants and manufacturing shops. We're also looking at investing in developing product and process integrated digital solutions. Then of course, there's this big thing on GenAI. We cannot keep away from that. So, the GenAI enabled pluggable modules for automated generation of unit test scripts frameworks, scripts and so forth. Also looking at how to create smart PIDs especially in the manufacturing set up to reduce the cycle time for legacy plant optimization, modernization of plants, there is work being done on the hardware virtualization. Digital Twin areas, again, what's happening on cloud-based virtual digital cockpit development. So multiple areas, but all of these are, of course, something that came out of the workshops we have been doing around the segments that we have carved out. Each of the segment leaders have come up with this very specific investment asks and I think this is the right time for us to invest in as we dive deeper into the segments and get more technology focused than we already are, for us to be able to be dominant experts in the areas.

Okay. That's helpful. And just lastly, how should we look at the margin trajector y from a quarterly perspective? Does the 17% go down to 16% immediately in Q1 or will it be gradual over the quarters of FY25?

So, the way we see it, Bhavik, I think Amit talked about Q1 to be muted and largely coming out from the seasonality of the SWC business. So look, when it is about Q1 and Q2, we are going to likely see the margins to be relatively lower than what we have seen all of FY24. But as we progress between Q3 and Q4 the margin trajectory will come back . So, when I look at 16% levels take that to be an average across the year, with Q1, Q2 to be lower and Q3, Q4 to be higher.

Okay. Thank you.

Thank you. Our next question is from the line of Ravi Menon from Macquarie. Please go ahead.

Thank you for the opportunity. W ith the cybersecurity win in the state of Maharashtra these kinds of deals are what SWC was doing I think pre-integration and we've never looked upon the India-centric deals as something that can generate even company average profitability. Is that different here?

Yes. This is different this time for the simple reason that this is not a win only on cybersecurity to buy some components and put them forward. In fact, this whole deal is about trying to buy and integrate and actually, first of all, to architect a solution around AI-enabled solution, which then works with various kind of product areas and will protect critical infrastructure from cyber- attacks. This is a master software deal rather than being only an SI deal. Second, there are home grown solutions that we're going to be implementing with this that we take forward. We have leveraged global know -how of relationship with Palo Alto, IBM, Cisco and others a nd we are putting this together, including threat intelligence, et c. So, this is very different from what we have normally done. We won it because of the home -grown solutions and widgets, et c, we have built. And we believe this will help us scale up the cybersecurity business globally, internationally much further faster.

And these sorts of deals, I guess, there are a lot of them that enterprises give out as a standalone or separate from infrastructure services?

Yes. This is outside of infrastructure management services. This is not infrastructure management, and this is software related. And we've, in fact, even engaged in two banks in India, one bank in the U S which is supporting them on cybersecurity as well. So that's how we are growing that. I can confidently tell you that cybersecurity will be $100M business with us in the next few years annually.

And in t ransportation, you were talking about how you delivered 12% and the outlook is still good, any things that you could add about the slowness in EV sales and any uncertainty around that, any changes in client behaviour?

So, I would actually request my colleague, Alind to give you colour on Mobility because he's going to be leading that segment.

Amit already talked about this, we are now engaging with 8 major OEMs in that space. And if you look at the spend over the last, I will say few quarters, it has very naturally shifted from working with the Tier 1s to the OEMs , and what we are seeing is an excessive amount of interaction with them and areas around SDV, Vehicle Architecture, Hybrid and EVs. So, a little bit colour on software defined vehicles, we are looking at two major areas within that. One is called the experience zone, and the other is the ADAS piece of it, both of which are coming up very fairly well. And if I would talk about the Tier 1s, we are seeing that in the Tier 1s, Hybrid is another area that we are investing today along with fuel cells, in addition to electrification where we have already done, that is picking up traction as well. So, both these areas, whether we talk about OEMs or we talk about Tier 1s, they are looking at alternate ways to conduct business , and our investment in both these areas are positioning us well to be able to cater to these needs for both short term and long term.

Thank you everyone.

Thank you. O ur next question is from the line of Manik Taneja from Axis Capital. Please go ahead.

Just wanted a broad view with regards to the guidance for FY25 and the $1.5 Bn revenue run rate aspiration that you had and which you are still sustaining. So, are we essentially planning to do an acquisition through the course of this year to simply get to that milestone? That's question number one. The second question was with regards to Transportation verticals. While you mentioned that you've won some deal in the current quarter, but some of our peers are and given what one has been picking up on the industry, are we seeing some slowdown, some sort of a pause in this vertical in terms of customers reassessing their priorities?

Thank you. So, number one, M&A, yes. There are various candidates we're looking at in ISV and MedTech in North America, Auto in Europe, and we will work towards it and see what we can get to. I do want to say very clearly, and we've already always said this, we will not take pressured stances of doing an acquisition just because we have to. So please rest assured, it will be a considered decision like all other decisions that we have made, a deliberative one that will add value to the company a nd the organization and the larger stakeholders. So , 8% to 10% organic CC locked, we will work to come back as we go forward and provide better picture as we move forward . M&A is in progress, we'll keep you updated. But we will not take hasty decisions and steps. I just want to be very clear on that. Number two on Mobility, look the colour of spend is changing like my colleague Alind told you, he's based in Chicago, he actually has spent his life in this area. So SDV is an area that we've invested in. We have won empanelment, we have won OEM contracts. We started working, ramping up area definitely. EV, the colour is changing to Value Engineering. So, from new product development, a lot more area work happening there. And third, Vehicle Engineering in terms of crash analysis, simulation, body-in-white, etc. And so, we're getting work in that area with new age OEMs as well. So, we do believe that Mobility in FY25 is a double-digit growth for us. And a lot of that work is starting in Q1. And we actually see more offshoring happening in our favour in this area. And Mobility is not just Auto, it's CVs, and we are starting to see early signs of potentially work coming out in Aero as well to us. See, finally, it depends on what solution differentiators you create , and are you able to gain market share? I'm happy to share with you that your company is gaining market share over others in this space. And like Rajeev talked about, the investments we are trying to make, like we made during COVID, if you will recall, that we opened an EV lab while COVID was going on, and a number of people asked us at that point, are you really serious why are you investing, and it paid off for us. Similarly, we believe this is the right time to invest before the curve turns around and grows and therefore, provide a differentiated offering. So, we don't need to take pressure on margins. Structurally, we continue to operate at those levels that we've operated in earlier, but claw back, invest, and then grow.

One more question for Rajeev. Just wanted to understand, like you mentioned that our growth in the current quarter was a combination of the SWC seasonality and some growth in other parts of the portfolio , if you could help break that up between the two contributors. That's question number one. The second thing is with regards to the margin outlook that we are sharing for FY25 and the investments that you're talking about, if you could help us understand which areas are these going into given the fact that talent market essentially is in a far be tter shape as well as you're talking about further offshoring in certain portfolio segments. So, it would be great to get a detailed perspective on that?

Sure. So, you talked about the breakup in terms of the growth between SWC and the other revenues. We've talked about this earlier as well. We do not report the financials separately, but I can tell you this, that it is a mix of growth which is in the telecom sector between our telecom business and of course, the SWC business. When you talk about the investments, I think Abhi did talk about several of the areas that we're investing in. Maybe I'll also again request Abhi to share the investments once again because we did talk about the specific areas where we're making these investments. Abhi, you want to add up to that?

I think the key point here is that like I said earlier based on the new reorganisation we are doing, we asked each of the segment head how would they like to run their business? And instantly the segment heads, of course, went strong with the teams and came back with very specific areas where they wanted to make investments in. Manufacturing solutions definitely is one key area which touches Process Industry and Industrial Products areas on the Digital Twin side and the other areas to of course, including predictive analytics and so and so forth. GenAI was another hot topic that came up from multiple segments, saying we'd like to invest because conversations are going with the customer multiple segments again, more on the, I would say on the V&V side and on smart PID creation on the Process Industry side for plant modernization. There was a lot of demand on creating solutions around virtualization, cloud-native frameworks. So, I think what we are seeing is a lot of this is stemming from the segment heads taking a fresh look at how they'd like to bootstrap their respective organizations and go from there. And I think it's only fair for us to give them the platform which helps them grow faster as we move forward.

Maybe I'll just add to what Abhi said, I think Amit alluded to it. What you need to be comfortable with this as an organization, I think we reiterate our aspiration of becoming a $1.5 Bn organization exiting FY25. Of course, there are areas that we're going to invest in like Abhi said, and we feel it's the right time for us to make the investment and we embark on with this new reorganization to see benefits over the course of next 3 years.

Hi, Sir. Thank you for the opportunity. Two questions from my side. Just want to understand, In 4Q revenue increased by ₹ 115 crores on a sequential basis while your othe r expense also increased by ₹ 135 crores on a sequential basis. And the second thing is I just want to understand on the cybersecurity deal. Has the deal started ramping up in 4Q or if not, then what is the timeline for the ramp up for cybersecurity deal?

So, I'll take the first part, and I'll request Abhi to add to the second part of your question which is the ramp-up on the cybersecurity deal. So, on the first part of your question in terms of the increase in revenue and tied to the increase in other expenses. So of course, like we said, the increase in revenue is a mix of increase in our SWC business and as well as in our organic business on the telecom segment side. When you look at the other expenses, a large part of that increase is coming from subcontracting and software related costs, right? And that's how we've seen the increase to come in. I will request Abhi to add in terms of the ramp-up on the cybersecurity.

On the cyber deal, yes, the ramp -up has definitely started. We are in the detailed requirements stage right now. And like Amit very clearly said that this deal is unlike the usual infrastructure deal that someone has, it is more of a system integration, if I may, whereas, I would say, only 50% software integration more unlike the usual infrastructure deals that we get. And that makes it very exciting because it gives us tremendous opportunity to use the software assets we have and also create new assets which can be relevant for other similar deals. In fact, we have put a separate cell. And that’s another investment, that is a pretty parallel track working with this program whose only job is to identify the common assets and IP that can be created for similar deals, which we believe is going to be the way forward in this space, not just in India, but outside India as well.

Thank you.

Thank you. The next question is from the line of Karan Uppal from Phillip Capital India. Please go ahead.

Two questions from my side. Firstly, on margins. So, Rajeev we had our medium-term aspiration of reaching 18% margins by H1 of FY26. So, given that now we are targeting 16% for FY25, so are we pushing that 18% margin target? That's first. And second, on SDV. So, we are hearing multiple ER&D players getting empanelled on SDV initiatives by OEMs. So, is the outsourcing very high around the SDV area o r OEMs want to recreate the new architectures really fast and are spending aggressively within in-house as well as outsourced vendors like us?

Sure. See SDV basis is that car used to get customized, and car used t o get delivered with different features. Now with SDV what's going to happen is that the same car will be delivered to you, but with features that may be different and that too all leveraging software, correct? So, the software-related spend of SDV is definitely increasing, right? Now while we are looking at various options while investing, we are making sure that we are going for higher margin deals. So, the offshore content is higher , our differentiation is higher, etc. And we've also got empanelled with a number of these players like I talked about. And we are happy to share that given the fact that we continue to make these widgets, etc, the quality of revenue that we are getting in Transportation or Mobility is better than we use d to have some years ago. And I think that there is a play for a differentiated player like us plus going down to becoming Mobility, Sustainability and Hi-Tech, you will see Mobility being able to compete on a one-on- one basis head-to-head with people in that space and with the higher margin profile that we have got, we believe that with differentiated assets, we will do better. Rajeev, you want to take the first question.

Sure. So first, on the FY25 margins, see the softness that we've indicated as always, I mean this is the worst-case scenario. We aspire to do better, and we will let you know as the quarter goes by because there are still opportunities that we are seeing can allow us to offset the investments. So, aspiration of doing better margin continues but we definitely indicate wherever the softness is. So, this certainly is the worst -case scenario that we are letting you know. In terms of the aspiration of coming back to 18% levels by H1 FY26, we'll take a few quarters and we'll come back to clarify. There are certainly aspirations during the year, one, of course, to get to that $1.5 Bn exit rate by FY25 which includes certain investments, certain other areas that we're looking at. So, we will take a few quarters and come back and clarify on the aspiration for 18% margin going forward.

Okay thanks and all the best.

Thank you. The next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.

Just want to get sense about the investment. Typically, any business investment requirement over the course of the business cycle. So, most of the investment in businesses is all kind of investment. The investment which you are referring to is any specific intervention which we are making, which can have a medium- to long-term growth trajectory difference. If you can provide some clarity on those investment plans? Second question is about the salary hike cycle related thing. Now last year, we gave somewhere in July, the salary hike, any changes we plan to make this year? And third related question is about Q1, Q2 trajectory. You said Q1, Q2 margin will be lower, and we will recover in Q3, Q4. Anyway, it implies considering 100 bps kind of margin lower than expected for the full year. Q1, Q2 maybe below 16% kind of margins. So if you can provide some clarity?

Yes. So let me just take the first question with regards to other investments, short term, medium term, long-term as a company policy and strategy and then the approval framework that we have we always look at long-term investments. To give investment, one of the things I can speak about earlier was software defined everything while there is a lot of talk of SDV from an Automotive or Transportation or Mobility perspective. But we do realize t hat software defined everything when it comes to products especially the Industrial and Medical segments. So, we are investing in integrated digital platforms, which will enable connected intelligent products in some of the segments to create software defined everything requirements that the industry has. Likewise, the legacy plant modernization is a need now and will remain for a very long time because plants do get old. They need to be modernized and it is a great solution to invest in as we go forward. Digital twin technologies again, Asset Healthcare solutions again these are all investments which are medium to long term. Amit, Rajeev, you can probably take it forward.

I'll talk about the second one. Salary a t this stage appraisals have started, and we've just ended the year. So, we celebrated the beautiful quarter that we closed and the year that we had in spite of difficult time we celebrated that with our employees. You would have seen on LinkedIn various images of Estrella’s that was done on 4th of April for all our employees. So, we continue to be motivated to make sure that employees march with us as we move forward. So currently, the view is to do the increments in the July cycle as planned, as we always do. And if there's any changes, we'll let you know, but that's where it is.

Yes. So let me respond to the margin question. Look, we have guided for an aspiration of 16% for the year. And like we've done in the past; we tend to provide a view on margins for the year. I wouldn't want you to read that, look, there is a QoQ view. I think we continue to work. And there are opportunities. When you look at growth, quality of revenues. Amit talked about it in terms of Mobility and other segments that we've now organized into. There are also productivity improvements, right, in terms of operational efficiencies. We've talked about SWC, the opportunity on internationalizing that business continues to be. So, there are these opportunities, and I would want you to read that, look, there is a QoQ view on the margins. I say that the aspiration is 16%, but we will endeavour to do better as the year goes by.

Thank you everyone for joining us on this call today evening. We hope we were able to answer most of your questions and I would be happy to address them if you have follow -up. With that, we're signing off today and look forward to interacting with you through the course of the quarter. Wish you all a very good evening and this is bye-bye from all of LTTS here. Thank you.

Thank you. On behalf of L&T Technology Services Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.

This transcript has been lightly edited for clarity and accuracy.