JOINDRE CAPITAL SERVICES LTD.

SEBI REGN NO. INH000002061 / INZ000174034

RESEARCH REPORT 15th April 2019

L&T TECHNOLOGY SERVICES LTD
BSE : LTTS Sector: ENGINEERING RESEARCH & DEVELOPMENT SERVICES BSE: 540115

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CMP : Rs. 1649
Target Price: Rs 2200 (In next 12 to 18 mths)

BUSINESS BACKGROUND KEY DATA

FACE VALUE Rs 2.00
L&T Technology Services (LTTS) was established through a group restructuring
exercise by the L&T Group, wherein, integrated engineering services of L&T and
product engineering services business of L&T Infotech were transferred to LTTS. As DIVD YIELD % 0.97
a result, LTTS has emerged as one of the leading global pure-play ER&D services,
providing services to manufacturing, technology and process engineering 52 WK HI/LOW 1852/1150
companies, LTTS has active presence in 10 verticals: consumer electronics,
semiconductor, aerospace, medical devices, telecom, energy, construction & heavy NSE CODE LTTS
machinery, automotive, transport, industrial Products. LTTS captures data from IoT
devices on ER&D products platform, aggregates at the gateway, stores in the cloud
and retrieves by applications with a global presence in over 30 countries.
BSE CODE LTTS

INVESTMENT HIGHLIGHTS MARKET CAP RS 17159 CRS

Strong Financial Performance in Q3 and 9 months of FY19 –

LTTS reported a steady set of FY18 numbers with net sales at Rs 3747 SHAREHOLDING PATTERN
crs as compared to a revenue of Rs 3248 crs last year, with EBIDTA
placed at Rs 575 crs with the PAT placed at Rs 506 crs from Rs 424 PROMOTERS - 80%

crs last year. LTTS has declared a dividend of 800% for FY18. BANKS, MFs & DIIs - 4%

For LTTS in Q3 of FY19 Sales are up by 34% at Rs 1214 crs with FIIs - 5%
EBIDTA up by 62% at Rs 228.7 crs with PAT at Rs 318 crs from a PAT
PUBLIC - 11%
of RS 160 crs last year in Q3.EBIDTA margins in Q3FY19 stood at
18.80% from 15.5% in Q3 last year. KEY FUNDAMENTALS

Pure-play on ER&D services with strong heritage –

vScore: vScore (Value Score) is our proprietary company rating system f
YE FY19 FY20 FY21
L&T Technology Services (LTS) is a focused player in the growing Rev Gr% 27 18 15
ER&D space. Furthermore, LTS have been also recognised by Zinnov in
the “leadership zone”, its highest ranking category in eight industry EBIDTA Gr% 48 19 16
verticals. With the leadership position, the company is likely to be a key
beneficiary of the growing ER&D market. PAT Gr% 38 16 19
Strong capabilities in niche domain – industrial products – EPS Gr% 38 16 19
LTTS is the leader in the industrial products segment (31% of revenue) EPS (Rs) 68.97 80.00 95.00
mainly due to its rich heritage (parent L&T). In this segment, it is
associated with large clients such as Caterpillar, John Deere, Rockwell ROE % 32 30 29
Automation, Danaher, and Eaton. It has technological alliances with Precise Advice
Microsoft, Microchip, Texas Instruments, Renesas, National Instruments,
Assured…
OPC Foundation, Siemens PLM, and Dassault Systems. With its roots in
ROCE % 34 34 32
engineering, LTTS possesses strong capabilities to service larger P/E(x) 21 17
players in the
Long term industrials
Drivers segment
for DHFL look good in view of the follow18
 JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ000174034

LTTS operates across well diversified verticals with focus on growth –

LTTS has diversified very well across five verticals viz. transportation,industrial products, telecom and
hi-tech, process industry and medical devices. Furthermore, the company has long-standing
relationships with customers, including more than 50 leading Fortune 500 companies. Also, 50 of
LTTS’ customers are among the top 100 global ER&D spenders. Top 20 customers contribute 54% to
revenues while 95% business was from repeat customers. Going ahead, the company will focus on
driving growth through its “T30:A3” model, whereby LTTS is looking to prioritise T30 accounts that are
in the range of $5-$30 million and which are scalable to $50 million over the next few years.

LTTS has strong presence across the Transportation, Industrial Products and Process
Oriented sectors where it has a strong competitive advantage –
Transportation is LTTS biggest revenue segment, and generates 31% of its total revenue. Under the
transportation vertical, it provides services to the following sectors/segments

Automotive ERD mechanical, embedded, and software engineering services – including areas of
body control modules, automated driver assistance systems, telematics, and infotainment

Off-highway equipment New product development, value engineering, and M2M connectivity for
excavators, harvesters, combines, and headers, planters, balers, backhoe loaders, and all-terrain
vehicles

Aerospace Structural design, electrical and avionics systems

CV manufacturers Body design and product localisation. It offers its solutions through alliances with
different partners.

LTTS is associated with some marquee clients such as BMW, Calsonic Kansei, Scania, Harley
Davidson, Honda, Boeing, Airbus, Thales, and Daimler
Within the Automotive LTTS works with three of the world’s top-10 auto manufacturers. Key trends
shaping the auto industry include –

Stricter Regulations –

Emission and fuel economy regulations are getting tougher. As per PwC, in the US and Europe, by
2025, cars will need to have a fuel economy of 60 miles/gallon. Meeting these standards would entail
significant improvements in internal combustion engine and powertrain.

Safety First –

The advent of autonomous vehicles has raised questions of safety. Countries in the US, Europe, and
Japan have now made it mandatory for OEMs to deliver safer vehicles – equipped with advanced
driver assistance systems like camera, radar, and Lidar that help keep the driver alert.
 JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ000174034

The LTTS management sees tremendous traction in this segment. The way Tesla has focused on
fuel-efficient energy cars has changed the dynamics of the automotive industry. The core business of
auto electronics, which was earlier handled by OEMs’ in-house, has now become non-core for them
resulting in outsourcing

Aerospace -
LTTS offers comprehensive engineering services (mechanical and avionic) to the aerospace industry,
and defence OEMs and their suppliers. Its service offerings span the entire product life cycle from
concept design to reverse engineering, modelling and analysis, virtual testing, flight-control testing
systems, prototyping, physical testing certification, support, and manufacturing.

As per WSJ, commercial aircraft orders are likely to see a CAGR of 5% over the next 20 years.
However, aerospace being a cyclical business, revenue growth profile remains lumpy, and is
expected to remain the same.

Railways -
LTTS also partners with global rail industry leaders, providing them with a wide range of end-to-end highly
customised engineering solutions to meet requirements for innovations, reduced time-to-market, and cost-
effective product development

Apart from the Transport vertical LTTS also is a big player in the Industrial products business
which is its core domain expertise –

Industrial products is the second biggest revenue segment for LTTS at 22% of its total revenue. LTTS
is the leader in this domain, mainly due to the rich heritage it has gained from its parent L&T. It has a
presence in segments like

Power, electrical, drive, and utilities

Focus areas include conventional and non-conventional power generation, transmission, distribution
equipment, and utilities equipment.

Building automation

Includes Building Energy Management Systems (iBEMS), lighting and accessories, heating,
ventilation, and air conditioning (HVAC), safety, security and access control solutions, and elevators
and escalators.
 JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ000174034

Home and office products

Includes white goods such as kitchen appliances and office equipment.

Machinery

Includes machines and equipment manufacturers in precision, processing, packaging, and power and
tool machines

LTTS is associated with some big clients such as Caterpillar, John Deere, Rockwell Automation,
Danaher, and Eaton. It has technological alliances with Microsoft, Microchip, Texas Instruments,
Renesas, National Instruments, OPC Foundation, Siemens PLM and Dassault Systems.
With its roots in engineering, it possesses capabilities to service larger players in industrials. This
segment has historically performed well and is likely to grow faster than the company average due to
its strong relationships with its existing clients
The other important segment for LTTS is the Process industry generates 13% of its total
revenue. In this segment, LTTS has a presence in the following sectors –

FMCG

LTTS works with the world’s biggest FMCG/CPG companies in process design, basic and detailed
design, development, refurbishment and support services, smart factory solutions, capex cost
engineering, mechanical, civil, electrical engineering services for brownfield and greenfield
manufacturing plants.

Speciality chemicals

LTTS provides services such as process design and development services, and basic and detailed
design services – mainly for brownfield projects.

Oil and gas

LTTS works in asset optimisation, performance management, and sustenance services

Another important business vertical for LTTS is the Telecom vertical –

Telecom generates 28% of the total revenue.to the total revenues. LTTS has a presence in

Telecom

LTTS works with network equipment manufacturers across the product-development lifecycle,
including development of protocol stacks and network management systems along with maintenance
and support.
 JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ000174034

Consumer Electronics

LTTS works with mobile device and tablet manufacturers, set-top box, and gateway manufacturers,
and smart home and wearable-device manufacturers.

Semiconductors

LTTS works areas of application-specific integrated circuit (ASIC) design and verification, embedded
software for chip and related validation services, reference board design, and radio-frequency (RF)
design.

Industry Dynamics look bright for LTTS going ahead –

Given IoT is gaining momentum, regulatory and growing customer demand for innovation to increase
energy efficiency & lower emission, personalised product experience, engineering R&D is witnessing
strong momentum in spending. According to Zinnov, $1007 billion was spent by corporations on
ER&D activities in FY15 According to Nasscom, global ER&D spend grew at a CAGR of over 7%
since 2009.

Out of $1007 billion, the addressable engineering outsourcing market is $365 billion. However, only
$67 billion outsourcing market has been addressed so far. Even out of $67 billion, the ER&D market
addressed by India was only $20 billion indicating huge opportunities to be tapped in future.

According to Zinnov, revenue from the India addressed market may grow at a CAGR of 13.7% to $38
billion in FY15-20E. Out of this, while in-house ER&D centres are expected to grow at a CAGR of
13.3% to $22.9 billion, revenues from third-party ER&D service are anticipated to grow at a CAGR of
14% to $14.9 in FY15-20E. In 2015, in-house & third party ER&D market size was $12.2 billion & $7.8
billion, respectively

ER&D industry poised for healthy growth –

Engineering, research and development (ER&D) services are defined as a set of services provided to
product and process companies to help them develop, test, upgrade, maintain and deliver their
products and services to end-customers.

The ER&D services market comprises product engineering services and process engineering
services which includes –

Product engineering services typically address the product development life cycle for companies that
produce discrete products through services in areas such as mechanical engineering, embedded
systems and software product engineering.

Process engineering services assist process companies in the production of facilities and processes
that produce value-added outputs and components through plant design engineering, manufacturing
engineering, industrial engineering and process control systems
 JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ000174034

Drivers for global ER&D spending and outsourcing ahead –

Changes in technological trends augur well for global ER&D spending –

We expect advancements in technology have lowered the barriers to entry for new companies in
many industries, resulting in increased competition. On the other hand, with advanced technology at
their fingertips and the launch of products/services that are easy to use by born-digital companies,
customers in many industries are becoming more knowledgeable and demanding, in our view.

As such, corporates are asking for more customized products/services for particular customer
segments and/or markets. Hence, enterprises are under pressure to design products, services and
processes that suit particular client segments and/or markets at a faster pace than their competitors.

IoT is another potential trigger for higher global ER&D spending –

After the fourth industrial revolution, most things (products, devices, machines, people, etc.) are
becoming connected through IoT, such as machine to machine, person to person and products with
other products. This is leading to new business models for enterprises (for example, offering products
as a service, with a usage-based pricing model).

For these business models, we believe that enterprises need to strengthen product engineering which
requires investment in design capabilities, either in-house or through global sourcing/outsourcing. We
believe the increased need for improved product engineering can be met by infusing new technology
into existing products as clients do not want to let go of their rich engineering legacy for different
products/services and hope to revitalise it with newer technology.

According to Nasscom, prior to 2010, the India-based ER&D service industry was primarily geared
towards providing services at a lower cost than other countries that provide global outsourcing. Since
then, however, it has moved up the value chain of ER&D outsourcing.

We believe India has the required ingredients to scale up ER&D capabilities, including: i) a sufficient
number of English-speaking engineers, ii) diversification across markets/industries, iii) high customer
satisfaction and iv) proactive investments by vendors. With global outsourcing increasing and India’s
wallet share improving, Nasscom projects robust CAGR of 12% in ER&D export revenues from India
over FY18-26F to reach US$50bn in FY26F

Given that engineering, research and development (ER&D) outsourcing services is a niche segment
and differs from enterprise IT services, a strong parentage for LTTS gives it an added advantage

L&T’s operates in several business segments, including construction, hydrocarbon engineering,

power, metallurgical and material handling, heavy engineering, defence, ship building, electrical and
automation, construction and mining machinery, valves, infrastructure, railways, realty besides parent
company’s business units operating in finance and technology industries. This provides LTTS with a
strong engineering and design heritage,
 JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ000174034

Given the increasing demand for digital technologies and digital engineering, LTTS has also
developed various solutions within these realms. LTTS offers solutions in many segments which
should help it to further improve its positioning in cutting-edge technologies,

in our view. IP-based platforms/solutions are likely to form less than 1% of sales currently and LTTS
is targeting to increase this to 1% of sales by FY21F. Here LTTS believes that follow-up sales for IP-
related solutions could be 4-5x pure IP-based sales. LTTS’s digital and cutting-edge technologies
contributed 34% of revenues in 3QFY19 and have grown at a faster pace versus other services.

Strong & Steady Dollar will increase foreign exchange gain –

LTTS earns more than 90% of its revenue from overseas operation. The strong & steady US Dollar
against Indian Rupee will stretch company’s foreign exchange gain.

New Govt. policy may trigger growth –

India contributes only 1.9% of global export while India has 1/5th of the global population. Govt. of
India in its recent policy is emphasizing export promotion with special emphasize to the
manufacturing. Any Govt. stimulus to the manufacturing sector and export would create opportunity in
the ER&D space & will be a trigger for the growth of the company.

Delivering solutions-oriented engineering applicable across verticals –

Digitisation would increasingly become systematically critical in near future, for which LTS plans to
focus on key technology areas as digital engineering, mobile internet, internet-of-things (IoT),
advanced robotics, automation of knowledge, autonomous and near-autonomous vehicles,energy
efficiency and imaging and video.

To bring business process efficiency to clients, company is building cross-domain solutions that can
be applied to the businesses of existing and prospective customers across verticals. Company is also
building and strengthening alliances with technology companies.

Increased investment in emerging technology & innovation labs –

Currently, the company has 31 labs in India. The company will continue to drive growth by focusing
towards digital transformation and have invested significantly in smart manufacturing infrastructure to
align its existing areas of expertise with new business trends
 JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ000174034

Key Deals Wins Post Q3 FY19 Results –

LTTS closed several multimillion dollar projects from global customers across various verticals. The
major wins are listed below

LTTS is the engineering partner for the autonomous vehicle program of an European carmaker with
an objective to improve the accuracy and precision of machine vision and scene recognition
algorithms.

LTTS has secured a deal with a global pharmaceutical company for developing a mobile platform for
Diabetic therapy. This will facilitate better collaboration between patients and doctors though efficient
data collection and sharing.

LTTS has been selected as the ER&D partner for optimising product design and manufacturing
processes of a European aerospace major. The scope of work by LTTS involves 3D digitization,
mesh generation in computational field simulation and manufacturing blueprints.

A leading North American OEM has selected LTTS as a partner to help implement a supply chain
rationalization program to reduce its overall cost.

LTTS will be responsible for engineering, sourcing, testing and process validation.

LTTS is the Technical Design Partner in enabling the Digital Transformation of a major technology
corporate campus to create the most connected, accessible and sustainable campus in the world.

LTTS has secured a multi-year contract to develop the active safety management platform for a US
based Auto OEM major.

LTTS was awarded a network deployment automation project for a leading telecom customer.

A global beverage company has awarded LTTS a cyber security remediation project which entails
design data protection of its plants around the globe.
 JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ000174034

LTTS enjoys a strong balance sheet and both Topline and Bottomline growth is
likely to remain strong going ahead –

LTTS has maintained a strong balance sheet over the years with virtually no debt on
the balance sheet as n March 2018. The company has also enjoyed healthy operating
cashflows. Operating cashflows in the last two years have grown at a average growth
of 12-14%, with the company generating free cash flow of Rs 362 crs in March 2018
and generating Rs 430 crs in free cash flow in first 9 months of FY19.

LTTS has also reported average RoE of 27% during the last 2 years, and looking at the
improvement in both operating and net profitability going ahead we expect that over
the next 2-3 years this is likely to cross 29% by FY21 with Roce expected at around
32% Hence going ahead we expect that LTTS has the capability to sustain the robust
financials performance given its strong business performance and significant cash
generation expected ahead.

We expect that going ahead overall bottomline growth in the next 3 years starting FY19
onwards should increase at a CAGR of 23-25% and going ahead also we believe that
net cash flows generated will remain healthy going ahead.
 JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ000174034

Business Outlook & Stock Valuation –

On a rough cut basis, in FY19, Topline will see a steady rise wherein Topline is
expected to touch Rs 4770 crs in FY19E.

On the bottomline level we expect the company to record a PAT of Rs 700 crs in
FY19E. Thus on a conservative basis, LTTS should record a EPS of Rs 69 for FY19E.
For FY20E and FY21E our expectation is that earnings traction for LTTS would
continue to be strong wherein we expect a EPS of Rs 80 and Rs 95 respectively.

LTTS is a pure play in ER&D space having strong management, large order books
globally with many multi million dollar deals, diversified presence across different
verticals, & strong clientele

The management is confident of growing in double digits in FY18E, and we believe it

will be able to achieve this because of acceleration in top clients, strong growth across
its target verticals – industrial products, automotive and hi-tech.

LTTS has diversified very well across five verticals viz. transportation,industrial
products, telecom and hi-tech, process industry and medical devices. Furthermore, the
company has long-standing relationships with customers, including more than 50
leading Fortune 500 companies. Also, 50 of LTTS’ customers are among the top 100
global ER&D spenders

In conclusion we believe that LTTS is supported by a competent management team

and promoters, wherein LTTS enjoys a strong execution track record and its
positioning in key markets which are all poised to grow fast which will significantly ramp
up the company’s operating profitability and hence we believe that LTTS is well
positioned for long term sustainable growth.

LTTS trades at a PE of 17x on FY21E which looks attractive considering its leadership
in ERD and future growth potential and hence we believe that the LTTS stock should
be purchased at the current price for a price target of around Rs 2200 over the next 18
months.
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SEBI REGN NO. INH000002061 / INZ000174034

FINANCIALS
For the Year Ended March Rs Crs FY17A FY18A FY19E FY20E FY21E
Net Sales 3248.3 3747.1 4770.00 5606 6446.9
EBIDTA 586.3 574.8 850.00 1014.69 1179.783
EBIDTA % 18.05 15.34 17.8 18.1 18.3
Interest 2.8 2.4 1.6 1.5 1.6
Depreciation 62.5 88.8 89.00 90.00 95.00
Non Operational Other Income 58.2 193.4 160.00 165.00 165.00
Profit Before Tax 579.2 677.8 919.40 1088.19 1248.18
Profit After Tax 424.8 506.00 700.00 812.00 964.00
Diluted EPS (Rs) FV Rs 2 41.85 49.85 68.97 80.00 94.98
Equity Capital 20.3 20.3 20.3 20.3 20.3
Reserves 1466.30 1916.00 2377.00 2948.00 3671.00
Borrowings 101.90 70.20 70.20 70.20 70.20
GrossBlock 175.00 205.00 255.00 290.00 330.00
Investments 194.60 220.70 320.70 370.70 400.00
Source Company our Estimates

KEY CONCERNS

Reduction in ER&D spends

Intense competition in ER&D services

Loss of key customers

Adverse exchange rate fluctuations

 JOINDRE CAPITAL SERVICES LTD.
SEBI REGN NO. INH000002061 / INZ000174034

DISCLAIMERS AND DISCLOSURES

This document has been prepared by Joindre Capital Services Limited SEBI REGN NO. INH000002061 / INZ000174034 and is meant for the recipient
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CONTACT DETAILS

Mr. Avinash Gorakshakar (Research Head) Tel.: 4033 4766, Email: avinashg@joindre.com

Mr. Vikas Khandelwal (Research Sr. Executive) Tel.: 4033 4900 Email: vikas@joindre.com

COMPLIANCE TEAM

Mr. A. P. Shukla (President & COF) Tel.: 4033 4723 Email: shuklaap@joindre.com

Mrs. Sujata Poojary (Sr. Executive ) Tel. : 4033 4567 Email: compliance@joindre.com

Mrs. Nikita Shah (Sr. Executive) Tel. : 4033 4567 Email: compliance@joindre.com