L&T Technology Services (LTTS) is a leading global pure-play Engineering Research and Development (ER&D) services provider. It provide ER&D services, which is defined as the set of services provided to manufacturing, technology and process engineering companies, to help them develop and build products, processes and infrastructure required to deliver products and services to their end customers. The company mainly deals in product engineering and plant engineering services.
Prior to January 2014, LTTSL was a part of L&T Infotech (LTIL), subsidiary of Larsen & Toubro (L&T). On January 1, 2014, as a part of restructuring exercise and in order to bring the entire IT outsourcing engineering services under one umbrella, LTIL sold and transferred the assets and liabilities of its product engineering services (PES) and Integrated Engineering Services (IES) business to LTTSL by way of slump sale. LTTSL brought together engineers with domain expertise in product and process industry from IES and PES to create a specialized talent pool in ER&D services to deliver higher value to their customers.
In FY 2015, LTTSL acquired the engineering services division of Dell U.S.A., and also acquired its operations in India from Dell India. LTTSL also acquired a majority of the equity share capital of TSIPL, a company engaged in the business of, among others, software development, IT consulting, software evaluation, design, implementation, research and training in relation to computer software.
The company is present across five business verticals: Transportation (30% of total revenue), Industrial Products (25% of total revenue), Telecom and Hi-Tech (20%), Process Industries (19%) and Medical Devices (6%).
The company derives around 60% of its revenue from North America, around 20% from EU (largely from Germany and Nordic Regions), 8% from Japan and rest 12% from ROW.
LTTSL has filed 35 proprietary patents and 134 co-patents with customers that can be monetized through business stickiness inherent in the industry. They also have 1 published trademark and 9 pending trademark applications.
LTTSL focuses on innovation driven technology leadership and have set up Research and Test Laboratories that are specific to particular industry verticals and that seek to replicate their customers work environment, enabling them to work very closely with the customers research and development teams on product innovation through leveraging their technology. LTTSL has made investments in innovation labs since their establishment, and they currently have 31 labs, located in Bengaluru, Mumbai, Mysore, Vadodara and Chennai.
LTTSL has 12 Global Delivery Centers in India and Overseas, 26 sales offices in India, North America, Europe, the Middle East and Asia and 31 Labs in India. As of March 31, 2016, LTTSL has more than 8,000 Engineers from 9 nationalities serving over 200 customers, including more than 50 Fortune 500 customers. The company has 3 customers generating revenues of more than US $20 million and 8 customers generating revenues in US$ 10-20 million as on March 2016. The current utilization rate is around 76%.
LTTSL has invested in Internet of things (IoT), Digital Technologies (smart products, smart services, smart manufacturing and smart operations) and Lab Infrastructure to strengthen their position in these areas. Their ER&D services help customers reduce time-to-market for their end products and services, innovate to create new products and solutions, reduce cost of development and meet increasing regulatory requirements more effectively.
The Offer and the Objects
The promoter, L&T, currently holds 10.17 crore equity shares (including 6 equity shares held jointly with 6 individuals as nominees of the promoter), equivalent to 100% of the pre-offer issued, subscribed and paid-up equity share capital of the company.
The entire issue of 1.04 crore of equity shares of face value of Rs 2 each is an offer for sale being offered by L&T. At lower price band of Rs 850 per share, the issue size works out to Rs 884 crore and at higher price band of Rs 860 per share, the issue size works out to Rs 894.40 crore. The minimum bid lot is 16 equity shares and in multiples of 16 Equity Shares thereafter. The issue is made through a book building process and will open on 12th September and will close on 15th September with anchor investor bidding date of 9th September 2016.
The object of the issue is to achieve the benefits of listing the equity shares on stock exchanges, enhance the visibility and brand image among existing and potential customers and provide liquidity to the existing shareholders.
The company has three year window that available for minimum public shareholding to reach 25% level from post-issue level of around 90%.
Strengths
Strong parent and brand equity of the Promoter. LTTSL has benefitted from the engineering expertise of L&T, which was recognized as the 8th most valuable brand in India in 2015 and is a brand associated with strong global engineering capabilities, quality of service and reliability. The end-to-end engineering expertise backed by their parents engineering heritage of over 75 years provides LTTSL a competitive edge over other ER&D players.
The companys track record of delivering an extensive range of solutions using global delivery model, demonstrable industry and technology expertise, and sensitivity to its clients feedback, has helped it to forge strong relationships with major clients and helps in deriving repeat orders. The company generated around 94.6% of its revenues from repeat business and 5.4% of revenues from new client addition in FY16.
There is huge market potential. Total corporate ER&D spend is around US$ 1.01 trillion of which around US$ 365 billion is the outsourcing portion. Currently only US$ 67 million is being addressed.
In FY 2016, the company derived around 50.3% of revenues from the 3 segments of Industrial Products, Process Industry and Medical Devices. These 3 segments represent US $ 205 billion of ER&D spend and have low penetration by India based third-party ER&D service providers, which gives the company a competitive advantage.
LTTSL acts as a one-stop shop for their customers and cover phases from conceptualization to implementation within the product and manufacturing engineering life cycles, including consulting, design, development, testing, maintenance, go-to-market and after-market services. LTTSL possess multi-vertical industry expertise and target a broad spectrum of services in all the segments of their business.
LTTSL has long-standing relationships with their customers, which include more than 50 leading Fortune 500 companies and technology leaders in their industry including P&G, UTC, Danaher, Eaton, Rockwell Automation and Calsonic Kansei. LTTSL focuses on customers with large ER&D budgets; 43 of their customers are amongst the top 100 global ER&D spenders, representing 66.3% of the ER&D corporate spending budgets.
Weaknesses
The company has only two years financial track record to report, which is too short to make proper judgment about its past growth record.
The ER&D industry is characterized by rapid technological changes, evolving industry standards, changing customer preferences and new product and services introduction. The future success of LTTS will depend on its ability to enhance the existing offerings and develop new services and solutions to meet its customers needs and most importantly, in a timely manner.
Attrition of skilled engineering professionals, which are critical to the business of the company, is a continuous challenge that the company has to face. The attrition rate as on March 2016 stood at 12%.
Any regulatory changes relating to ER&D industry can affect the companys prospects significantly. Any change in outsourcing strategy globally through regulation or national or geographical decision or change in strategy on using more of captive ER&D services can also affect the companys future earnings.
Challenges in relation to immigration may affect LTTS ability to compete for, and provide services globally, partly because it may be required to hire locals instead of using its existing work force, which could result in lower profit margins, delays in, or losses of, client engagements and otherwise adversely affect its ability to meet its growth, revenue and profit projections.
Like any other exporter, the company is also exposed to foreign exchange volatility and uncertain global economic environment.
Valuation
For the quarter ended June 2016, consolidated net sales (as per old accounting standards) stood at Rs 802.88 crore. The OPM stood at 19.3% and OP at Rs 155 crore. After providing total tax of Rs 43.49 crore, consolidated PAT for the June 2016 quarter stood at Rs 123.68 crore. As per new accounting standards (Ind AS), consolidated sales are higher by 13% to Rs 802.88 crore and net profit is higher by 23% to Rs 108.31 crore. Notably consolidated net profit as per the new accounting standards, is 12% lower than net profit as per old accounting standards.
For FY 2016, consolidated net sales (as per old accounting standards) stood at Rs 3066.51 crore, up by 17% YoY. The OPM went up 180 basis points to 17%, resulting in a 31% increase in OP to Rs 520.43 crore. Higher foreign exchange gain resulted in other income being up by 202% to Rs 76.22 crore. PBT stood at Rs 535.24 crore, up by 44%. After providing total tax of Rs 118.59 crore, up by 94%, consolidated PAT for the year ended FY 2016 stood at Rs 416.65 crore, up by 34%. On equity share capital of the company of Rs 20.34 crore of face value of Rs 2 each, the EPS for FY 2016 works out to Rs 41.
At higher price band of Rs 860, LTTS is being offered at a P/E of 21 times its FY 2016 earnings.
Tata Elxsi and Cyient are its listed comparable peers. For FY 2016, Tata Elxsi reported consolidated sales of Rs 1075.21 crore (up 27%) and PAT of Rs 154.81 crore (up 52%), with an EPS of Rs 49.7. At the current market price of around Rs 1530, the scrip is trading at P/E of around 30.7 times its FY 2016 consolidated earnings. Cyient, based on its consolidated FY 2016 EPS of Rs 29.7 (net profit down 8% over FY 2015) and the current market price of around Rs 466, is trading at P/E of around 15.8 times.
| L&T Technology Services: Issue highlights |
| For Offer for Sale Offer size (in Rs crore) | |
| - On lower price band | 884.00 |
| - On upper price band | 894.40 |
| Offer size (in number of shares in crore ) | 1.04 |
| Price band (Rs) | 850-860 |
| Post issue capital (Rs crore) | 20.34 |
| Post-issue promoter & Group shareholding (%) | 89.9 |
| Issue open date | 12-09-2016 |
| Issue closed date | 15-09-2016 |
| Listing | BSE,NSE |
| Rating | 49/100 |
| L&T Technology Services: Consolidated Financials |
| 1503(12) | 1603(12) | 1606(03) |
| Net Sales | 2618.63 | 3066.51 | 802.88 |
| OPM (%) | 15.2% | 17.0% | 19.3% |
| OP | 398.74 | 520.43 | 155.00 |
| Other in. | 25.26 | 76.22 | 30.52 |
| PBDIT | 424.00 | 596.65 | 185.52 |
| Interest | 3.38 | 2.49 | 0.50 |
| PBDT | 420.60 | 594.16 | 185.02 |
| Dep. | 48.46 | 58.92 | 17.85 |
| PBT | 372.14 | 535.24 | 167.17 |
| EO (net of tax) | 0.00 | 0.00 | 0.00 |
| PBT after EO | 372.14 | 535.24 | 167.17 |
| Tax (including Deferred Tax) | 61.04 | 118.59 | 43.49 |
| PAT | 311.10 | 416.65 | 123.68 |
| MI | 0.20 | 0.00 | 0.00 |
| PAT | 310.90 | 416.65 | 123.68 |
| EPS* | 30.6 | 41.0 | # |
*EPS is on post issue equity capital of Rs 20.34 crore of face value of Rs 2 each
EPS is calculated after excluding EO and relevant tax
#EPS cannot be annualized due to seasonality of business
Figures in crore
Source: Capitaline Database |
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