L&T Technology Services28Aug18 -...

Multi-vertical focus to aid growth momentum

Madhu Babu [email protected] | 91-22-66322300

Rajat Gandhi [email protected] | 91-22-66322246

Rating: ACCUMULATE | CMP: Rs1,608 | TP: Rs1,780

L&T Technology Services (LTTS IN)

L&T Technology Services

August 28, 2018 2

Contents Page No.

Multi-vertical focus to aid growth momentum ........................................................ 3

Industry Structure: Large addressable market puts LT Technologies in a sweet spot ................................................................................................... 4

Major sub-segments in Engineering Design Services .................................... 4

Engineering Design Services remains dominated by European firms ............ 5

LT Technologies is well positioned to tap the large market opportunity .......... 6

Key verticals and focus areas ............................................................................ 9

Transportation: Technology Refresh in Automotive to drive momentum ........ 9

Telecom and Hi-tech: Internet of Things (IoT) to aid strong momentum in Semiconductor segment. .............................................................................. 11

Case Study: Ruggedized Tablet ................................................................... 12

Industrial Products: Tepid growth could continue in medium term................ 14

Process Industry: Uptick in Oil &Gas Sector could aid growth...................... 16

Medical vertical: Poised for strong momentum ............................................ 18

Case Study: Customized Knee Implant Design ............................................ 19

LTTS set to enter the bigger league ................................................................. 21

a) LTTS enjoys marquee client base across segments ................................ 21

b) Ability to drive complex engagements drive client stickiness ................... 23

c) Lower cost structure compared to legacy vendors ................................... 23

d) Acquisitions can ramp up European operations ....................................... 24

e) Strong Revenue per employee owing to high end service offerings ......... 24

Financial Analysis ............................................................................................ 26

Strong revenue growth to continue over FY18-FY21E ................................. 26

Expect gradual margin expansion led by scale and G&A leverage .............. 27

Steady dividend payout ratios keep ROEs strong ........................................ 29

Steady free cash flow trajectory: ................................................................... 29

Valuation and View .......................................................................................... 30

Comparative Valuation Table ........................................................................... 31

Business Overview ........................................................................................... 32

Operating Metrics: ............................................................................................ 33

August 28, 2018 3

Rating: ACCUMULATE | CMP: Rs1,608 | TP: Rs1,780

Multi-vertical focus to aid growth momentum

We initiate coverage on LT Technologies (LTTS) with ‘Accumulate’ rating and

target price of Rs1780. LTTS appears to be in a sweet spot led by immense

potential for scale-up in Engineering Design Services which is touted to be

the next growth driver. The company has annual revenues of US$621mn

(LTM) with headcount of 13,100 employees and is among the very few pure

play engineering services company with footprint in multiple verticals

(Transport, Industrial Products, Process Engineering, Medical). Global

Engineering Services has an addressable market of US$400bn, which offers

huge potential for scalability. With marquee relationship with most of the

large R&D spenders, we believe that LTTS is well-poised to ride the multi-year

growth opportunity. We expect the company’s USD revenues to grow by 18%

CAGR over FY18-FY21E. Operating leverage and INR depreciation will enable

margin expansion over Fy18-20E (We model EBIDTA margin at 17/17.9% for

FY19/FY20E v/s 15.5% in FY18). We expect valuation premium to sustain

given niche positioning in high growth segments. We estimate PAT CAGR of

18% over FY18-21E and value the stock at 24xSep 20E EPS which yields a TP

of Rs1780/sh.

Multi-vertical expertise to enable scalability: LTTS has a larger scale with

strength across multiple verticals (Transport, Industrial Products, Process Industry,

Telecom and Hi-tech, Medical Equipment). As spends in Engineering design tend

to be cyclical, we believe that a broader vertical mix reduces vulnerability to vertical

specific cyclicality and drives more sustainable consolidated revenue growth

momentum. Peers like Cyient, Tata Elxsi, and KPIT Tech have strong engineering

practice albeit have strength in limited verticals such as Cyient (Aerospace, Rail

transport), Tata Elxsi (Automotive, Media), KPIT Tech (Automotive). This makes

LTTS a broader based play in EDS segment.

Technology Refresh driving strong growth opportunities: Technology refresh

in select verticals are driving multiple growth opportunities. Automotive industry is

undergoing technology refresh with traction in ADAS (Advanced Driver Assistance

Systems), Electric Vehicles, Telematics etc. Semiconductor industry is also

witnessing a strong technology refresh owing to Internet of Things (IoT). We believe

these technology shifts will drive upswing in engineering spends and hence, aid

LTTS revenue growth trajectory.

Acquisition can help scale European region: We believe LTTS could scout for

boutique acquisition in Europe to scale up presence in the region and expand client

relationships (LTTS annual revenue from Europe is at US$110mn(LTM) and

accounts to 18% of total revenues). As large European engineering service players

(Altran (US$3bn sales and 45000 employees), Akka Technologies and ALTEN)

have a close relationship with marquee clients in the region (Airbus, Daimler,

BMW), we believe LTTS could scout for acquisitions to scale up in that region.

Valuation premium to sustain: LTTS remains the costliest midcap IT stock in the

sector trading at 23.5x FY20E EPS (which is at par with TCS). Company’s revenues

are likely to grow 23% in FY19 which is more than 2x the growth rate of TCS. We

believe LTTS is on the path of multi-year growth cycle owing to strong potential for

scalability. Initiate with Accumulate and a TP of Rs1780/sh.

L&T Technology Services (LTTS IN)

August 28, 2018

Company Initiation

Change in Estimates | Target | Reco

Change in Estimates

Current Previous

FY19E FY20E FY19E FY20E

Rating ACCUMULATE -

Target Price 1,780 -

Sales (Rs. m) 48,770 56,084 - -

% Chng. - -

EBITDA (Rs. m) 8,359 10,026 - -

% Chng. - -

EPS (Rs.) 62.7 68.3 - -

% Chng. - -

Key Financials(Consolidated)

FY17 FY18 FY19E FY20E

Sales (Rs. m) 32,483 37,471 48,770 56,084

EBITDA (Rs. m) 5,856 5,811 8,359 10,026

Margin (%) 18.0 15.5 17.1 17.9

PAT (Rs. m) 4,251 5,072 6,620 7,206

Diluted EPS (Rs.) 39.6 48.1 62.7 68.3

Gr. (%) 23.5 21.5 30.3 8.9

DPS (Rs.) 7.0 16.0 21.3 23.2

Yield (%) 0.4 1.0 1.3 1.4

RoE (%) 33.7 29.6 31.0 28.2

RoCE (%) 29.3 28.2 30.1 27.5

EV/Sales (x) 5.0 4.3 3.3 2.8

EV/EBITDA (x) 27.6 27.8 19.0 15.5

PE (x) 40.4 33.5 25.5 23.4

P/BV (x) 11.0 8.5 7.1 5.9

Key Data LTEH.BO | LTTS IN

52-W High / Low Rs. 1,637 / Rs. 734

Sensex / Nifty 38,694 / 11,692

Market Cap Rs. 166 / $ 2,369

Shares Outstanding 104m

3M Avg. Daily Value Rs. 326.37m

Shareholding Pattern (%)

Promoter’s 80.70

Foreign 3.8

Domestic Institution 7.4

Public & Others 8.1

Promoter Pledge (Rs bn) -

Stock Performance (%)

1M 6M 12M

Absolute 4.4 15.2 111.4

Relative 0.8 2.3 72.7

Madhu Babu

[email protected] | 91-22-66322300

Rajat Gandhi

[email protected] | 91-22-66322246


August 28, 2018 4

Industry Structure: Large addressable market puts LT Technologies in a sweet spot

The Global Engineering and R&D Services is pegged at US$1097bn, of which, the

global addressable market is ~US$440bn. Of this, the addressed market stands at

US$100bn and share of India stands at US$27bn. The US$27bn Engineering

Design services market from India is well split between third-party providers (HCL

Tech, TCS, Wipro, LTTS) as well as global in-house centers (all the major

Engineering players in the Industry have captives). As per a leading Consulting firm,

ERD Services’ exports from India stood at US$24bn as in FY17 and have grown at

13% CAGR over the past five years.

Addressable market for Engineering Design Services Business

Source: Company, PL

Major sub-segments in Engineering Design Services

Within Engineering Design services, the sub-segments include Mechanical

Engineering, Embedded Engineering, Software Product Engineering and Product

Life Cycle Management (PLM) Services.

Key categories within Engineering Design

Source: Company, PL

A large portion of offshore Engineering

Design services from India is

addressed by captives. Most of the

large engineering conglomerates like

Intel, Texas Instruments, Boeing,

Bosch have large captives in India.


August 28, 2018 5

Mechanical Engineering: This includes outsourcing of engineering services

related to the design and development of physical products, such as cars, aircraft,

industrial equipment, medical devices, consumer electronics, etc.

Embedded Engineering: This includes outsourcing of engineering services

related to the design and development of embedded systems. Embedded systems

are the electronic control devices that reside inside physical products.

Software Product Engineering: Outsourcing of engineering-related activities in

the software product development lifecycle, such as design, development and

maintenance, architecture, performance, migration, product management, etc. The

customers for software product engineering outsourcing are independent software

vendors (ISVs).

PLM Services: Consulting and systems integration services for enterprises for

leading product lifecycle management (PLM) applications. This segment includes

key CAD and manufacturing applications, as well as plant automation applications.

Engineering Design Services remains dominated by European firms

The engineering services provider market is fragmented with select large firms and

multiple midsized and boutique vendors.

Major Engineering Service Providers

Source: Company, PL

The Scale players: These service providers have engineering services annual

revenue exceeding US$1bn. There are eight such service providers: Akka

Technologies, ALTEN, Altran, AVL, Bertrandt, HCL, TCS and Wipro.

Established players: These service providers have engineering services revenue

between USD100mn and USD1bn. These service providers are all established and

are strengthening their positions in key services, verticals, and geographies. Some

of the service providers in this category include L&T Technology Services, Cyient,

QuEST Global, Pactera, EPAM, KPIT Technologies, Semcon, Tata Elxsi and Tieto.

Altran, the largest player in

Engineering design has acquired

Aricent in November 2017 in a bid to

boost its offshore presence.


August 28, 2018 6

Emerging Companies: These service providers have engineering services

revenue that is currently between US10mn and USD100mn. Some of the

companies include Auriga, AXISCADES, Belatrix, Mindtree, Neilsoft, Nexient and

Sasken.

Revenues of major engineering vendors

Fig in USD bn Revenues (USD bn) FY2016 FY18E

Altran 2.35 3.3

Alten 1.94 2.5

AVL 1.55 NA

Akka 1.24 1.7

HCL Tech 1.23 2.7

Bertrandt 1.11 1.2

TCS 1.1 NA

Wipro 1.05 NA

Accenture 0.85 NA

AF 0.82 NA

IAV 0.81 NA

EDAG 0.81 NA

Source: Company, PL * We present the estimated CY18 revenues for Altran and

Alten, Akka, Bertrandt

LT Technologies is well positioned to tap the large market

opportunity

Profile of LTTS: LTTS is a pure play Engineering Design Services with presence

across multiple verticals and hence has a much diverse positioning in comparison

to other vendors like Cyient and Tata Elxsi. LTTS offers ER&D services and

solutions to all major industries which include Transportation, Industrial Products,

Telecom & Hi-Tech, Medical Devices and Process Industry.

LTTS presence across verticals

Source: Company, PL


August 28, 2018 7

Key Statistics of LT Technologies

Source: Company, PL

LTTS has annual revenues of US$620mn for LTM (Last twelve months) with

headcount of ~13,080 employees as on 1QFY19. The company has over 235

clients as on FY18 and the top 10 clients contribute to 40.5% of total revenues.

Presence across the Engineering value chain: LTTS offers design and

development solutions throughout the product development value chain and

provides solutions in the areas of mechanical and manufacturing engineering,

embedded systems, software engineering and process engineering.

Engineering Design Life Cycle

Source: Company, PL


August 28, 2018 8

Apart from Engineering Design Services to clients, LTTS also has IP and Platforms

which it independently sells to clients. Company believes that share of IP-led

offerings can increase over coming years and aid in non-linearity.

Focus on IP and Platforms aims to drive non-linearity

Source: Company, PL


August 28, 2018 9

Key verticals and focus areas

Transportation: Technology Refresh in Automotive to drive momentum

Transportation segment is the largest segment by revenue and contributed to

31.8% of the total revenue in FY18. The segment USD revenues grew by 15.2%

YoY in FY18.

LTTS offers engineering services and solutions over the complete spectrum of the

transportation industry that includes OEM and Tier 1 suppliers in Automotive,

Trucks & Off-Highway Vehicles, Aerospace and Rail industries. The segment

delivers end-to-end services from concept to detailed design, testing, aftermarket

and sourcing support helping OEMs and Tier1s develop products in a cost-effective

manner. LTTS also helps its clients develop cutting-edge Transportation

technologies such as Autonomous driving, Electric Vehicle and Drones.

LTTS focus verticals in Transportation vertical.

Source: Company, PL

LTTS offerings in Transportation vertical

Source: Company, PL


August 28, 2018 10

LTTS caters to critical projects for clients which include

Developing an engine, chassis, alternator and cab harness to be installed in a

specialty vehicle. Optimized clamping strategy, standardized and diminished

the bill of materials count by 5% and reduced design time by three weeks.

Designed and tested a powertrain Electronic Control Unit (ECU) for a Tier 1

automotive supplier. Integrated features such as speed shift switch, vehicle

speed sensor and various solenoid valve drives.

“We opened a dedicated Offshore Development Center (ODC) with a

Japanese major in the off-highway segment in our Chennai office. Ours is the

only design center outside of Japan for this customer and we will work on the

design, validation, benchmarking of products for emerging market as well as

the smart product design” LTTS CEO in Q1FY19 Concall.

LTTS areas of investment in transport vertical include new areas like Digital

Cockpit, Additive Manufacturing, Autonomous Car Middleware, Active Safety,

EV/ Hybrid, V2X. Marquee clients in transportation include Daimler, UTAS,

John Deere, Caterpillar etc.

Revenues from this SBU grew at 5.2% CQGR over the past five quarters.

Revenues from Transportation Vertical (USD mn)

34.2 34.8

37.638.7

40.5 40.9 40.4

43.045.0

46.7

49.9

52.2

30.0

35.0

40.0

45.0

50.0

55.0

Q2F

Y16

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

US

D M

n

Source: Company, PL

We expect LTTS to deliver strong traction across all the three sub segments in

Transportation with potentially higher growth in Automotive vertical. Strong

technology refresh in Automotive led by ADAS, Electric Vehicles, Telematics etc is

likely to remain the growth driver for this vertical. We model revenues from this SBU

to grow at 18.7% CAGR over FY18-FY21E.

Revenues from Transportation vertical

Fig in USD mn FY17 FY18 FY19E FY20 FY21E

Transportation 160.5 184.6 221.6 262 309

Growth (%) NA 15% 20% 18% 18%

As a % of total revenues 33% 32% 31.1% 31.7% 32.4%

Source: Company, PL

Automotive Industry is seeing a strong

technology refresh led by ADAS,

Electric Vehicles etc which is driving

growth for this vertical.


August 28, 2018 11

Telecom and Hi-tech: Internet of Things (IoT) to aid strong

momentum in Semiconductor segment.

Telecom and Hitech vertical has contributed 25.8% of the company’s total revenue

in FY18. This segment has shown the strongest growth with USD revenues growing

by 66% YoY in FY18 led by a large deal win from Intel as well as Escentia

acquisition.

LTTS operates within three sub-verticals in Telecom and Hitech vertical which

includes

Telecom & Hi-Tech - This business unit offers ER&D services for Android

Products, Network Management Systems, Smart Homes, Wireless & Wireline

Infrastructure design and LTE Testing, Media & Entertainment and

Semiconductor industries.

Consumer electronics – LTTS works with mobile device and tablet

manufacturers, set-top box and gateway manufacturers and smart home and

wearable device manufacturers.

Semiconductor industry – This vertical focuses on application-specific

integrated circuit (ASIC) design and verification, embedded software for chip

and related validation services, reference board design and radio-frequency

(RF) design.

Sub-segments in Telecom and Hitech vertical

Source: Company, PL


August 28, 2018 12

Areas of work in Telecom and Hi-tech vertical

Source: Company, PL

Case Study: Ruggedized Tablet

Application Scenario: The government and law enforcement agencies which

operate in harsh and extreme conditions require ruggedized products for daily

operations. LTTS developed a ruggedized android device with smart features and

high battery life for such agencies.

LTTS contribution: LTTS has a complete end-to-end product ownership from

design to manufacturing to after-sales support. The company contributed in

complete design including Hardware Board Design, PCB Design, RF Design,

Platform Software Design & Development, Mechanical design and System

Verification and Validation. LTTS also designed ruggedized cradle, on which the

tablet is mounted.

Benefits to client: Customized product development for low volume,30% saving

on the unit cost, compared to existing market price of similar products


August 28, 2018 13

Revenues from this vertical have grown at 16% CQGR over the past five quarters.

This strong growth was aided by a large deal won from Intel as well as Escentia

acquisition.

Revenues from Telecom and Hi-tech

24.6 24.021.4 22.4

24.1

20.723.0

25.7

33.8

42.1

47.8 48.5

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Q2F

Y16

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

US

D m

n

Telecom and Hitech

Source: Company, PL * A large deal win from Intel and Escentia acquisition aided

higher growth in Telecom and Hitech vertical in FY18

Telecom and Hitech vertical revenues have seen strong traction in FY18 led by

large deal wins. However, this SBU has lower segmental margin and hence,

impacting the overall margin trajectory for the company in FY18. With strong

traction for Internet of Things (IoT) led technology refresh, we expect this vertical to

show steady growth and model 25% CAGR over FY18-FY21E.

Revenues from Telecom and Hitech vertical


Telecom & Hi-tech 90.1 149.5 202.8 245 294

Growth (%) NA 65.9% 35.7% 21% 20%

As a % of total revenues 18.6% 25.8% 28.5% 29.7% 31.0%

Source: Company, PL

LTTS has won a large deal from Intel

which helped boost the growth in

Telecom vertical in FY18. This deal

involves knowledge Transfer and

hence LTTS has rebadged Intel

employees from multiple locations


August 28, 2018 14

Industrial Products: Tepid growth could continue in medium term

Industrial Products segment is the third largest segment and contributed to 22.8%

of the revenue in FY18. The segment has shown a muted USD revenue growth of

4% YoY in FY18. Marquee clients in this segment are UTC group (OTIS elevators),

Rockwell Automation, EATON, DANAHER.

LTTS’ Industrial Products practice helps OEM customers across building

automation, home and office products, process control and machinery. This

Industrial Products segment offers end-to-end product development leveraging

expertise spanning software, electronics, connectivity, mechanical engineering,

industrial networking protocols, user interface/user experience (UI/UX), test

frameworks and enterprise control solutions.

LTTS sub-segments in Industrial Products vertical

Source: Company, PL


August 28, 2018 15

Industrial Products

Source: Company, PL

Case Study: Packaging Machine Cost Optimization

Project: LTTS was selected as the engineering partner by the client to achieve

significant cost reduction for the packaging machine. The optimization process saw

integration of parts, replacement with low cost alternate components in the air

cushion winder assembly and also simplification of the manufacturing process.

Client Profile: The client is a leading manufacturer of innovative, protective

packaging products and packaging systems.

Business Perspective: Client required: a) Cost reduction b) Weight reduction c)

Improved production yield d) Estimated cost savings.

Scope of Engagement: The scope of engagement was to optimize the machine

design modifications and leaner manufacturing process included:

- Redesign or integration of assembly parts for part count reduction

- Weight optimization to sustain required strength and stiffness of assembly & to

reduce overall manufacturing cost

- Alternate low cost part selection for electrical & electronics components

- Engineering Analysis (Finite Element Analysis)

– Prototyping - Verification

LTTS approach: LTTS worked on electrical Bill of Material (BOM) cost reduction,

3-D part models, drawings and existing component cost to execute the project as

per standard. This specialized requirement saw LTTS team justifying assembly

weight, scrutinize manufacturing process to reduce material wastage and

assimilate the number of parts used. The objective of cost reduction with process

and part optimization was achieved in the expected time frame.


August 28, 2018 16

Revenues from Industrial Products vertical (USD mn)

29.5

30.3

31.4 31.1 31.432.0

32.5 32.6 32.9 32.9

33.934.5

25.0

26.0

27.0

28.0

29.0

30.0

31.0

32.0

33.0

34.0

35.0

Q2F

Y16

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

US

D m

n

Source: Company, PL

We expect the Industrial segment to show a relatively moderate growth within the

peer’s verticals. We model revenues from this vertical to grow at 6.3% CAGR over

FY18-FY21E.

Revenues from Industrial Products vertical and growth (%)


Industrial products 127.0 132.3 144.1 151 159

Growth (%) NA 4.1% 9.0% 5% 5%


Source: Company, PL

Process Industry: Uptick in Oil &Gas Sector could aid growth

Process Industry contributed to 12.9% of the company’s total revenue in FY18. This

segment USD revenue have grown by 1.1% YoY in FY18. Major clients in this

segment are P&G, Unilever, Chevron etc.

The Process Industry practice provides end-to-end engineering services for leading

plant operators across the globe. LTTS provides services in E/EPCM, Engineering

Reapplication and Global Rollouts, Plant Sustenance and Management, Regulatory

Compliance Engineering along with chemical, consumer packaged goods (FMCG)

and energy and utility sector clients. LTTS specializes in traditional Engineering,

Procurement, Construction and Management (EPCM) and operational

maintenance projects, as well as contemporary digital engineering enterprises.

The company is advancing its engineering footprint to encompass the digital sphere

and working with customers on ‘Smart Manufacturing’ technologies such as

automation, IoT, analytics, and augmented reality (AR).


August 28, 2018 17

Sub segments in Process Industry

Source: Company, PL

Some of the deal wins in Process Industry include:

LTTS won a deal with ExxonMobil Exploration Company to enable rapid

conversion of historical Geoscience content into the digital domain by

leveraging sophisticated automation utilities. This will provide geoscientists

with improved data availability, enhancing the speed and efficiency of analysis

and evaluation. This deal is worth US$20mn.

Germany’s Covestro, a world-leading manufacturer of high-tech polymer

materials, has chosen LTTS, as engineering services partners to implement

digitalization-based Engineering Programs across Covestro’s global locations.

Revenues from the Process Engineering vertical have grown at 6% CQGR over the

past five quarters.

Revenues from Process Engineering vertical

22.7

21.9

21.0

19.6

18.7 18.6

17.117.8 17.8

19.219.9

22.8

15.0

16.0

17.0

18.0

19.0

20.0

21.0

22.0

23.0

24.0

25.0

Q2F

Y16

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

US

D m

n

Source: Company, PL

Management cited that recovery in oil

and gas vertical will drive growth in

Process Industry


August 28, 2018 18

We expect revenues from this segment to grow at 15.5% CAGR over FY18-FY21E.

Recovery in Oil and Gas vertical is driving capex spends and leading to higher deal

wins for LTTS.

Revenues from Process Industry and growth (%)


Process Industry 74.0 74.7 94.2 106 115

Growth (%) NA 1.0% 26.1% 12% 9%


Source: Company, PL

Medical vertical: Poised for strong momentum

Medical Devices segment is the smallest segment and contributed 6.8% of the total

revenue in FY18. The segment revenues have grown 20.0% YoY in USD in FY18.

LTTS’ domain expertise helps medical device OEMs address industry challenges,

accelerate time to market and optimize costs. LTTS focuses on delivering solutions

in Diagnostics, Patient Mobility Services, Musculoskeletal Services, Life Sciences,

Surgical Services, Cardiovascular, Home Healthcare and General Medical.

Sub segments in Medical vertical

Source: Company, PL


August 28, 2018 19

Case Study: Customized Knee Implant Design

Application Scenario

In traditional knee replacement surgery, the surgeon opts for an “off-the-shelf”

implant from a range of available standard sizes. In general, off-the-shelf knee

replacements are not designed for a patient’s anatomy. Therefore, the implant fix

and fitment is not always 100%, resulting in implant overhang, underhang and

improper alignment. All of this might lead to post-surgical residual pain.

LTTS’ Contribution

LTTS created and developed customized knee implants and cut guides, which

perfectly fit the patient’s knees, suiting the anatomy. This method involves end-to-

end design, process verification, pre-op planning along with planning documents

for doctors. All of this ensures optimal bone preservation for the patient along with

anatomy based values, needed for surgical technique.

Benefits to Customers

Optimal and long-term surgery benefits owing to customized design, reduced

turnaround time from design to manufacture and shipping and higher operational

efficiency of the implant at optimal cost.

Areas of work in Medical Devices

Source: Company, PL

“in medical, we do lot of innovative work for customers especially in Japan, in the

futuristic technology areas. In medical, we are seeing a lot of demand from medical

equipment manufacturers in the area of kidney, lung and ophthalmic. Hardware

support, certification and compliance testing is an area where clients are

increasingly outsourcing and that is where we play and that is also our strength” Dr

Keshab Panda in 3QFY18 concall


August 28, 2018 20

Revenues from Medical vertical have grown at 6.6% CQGR over the past five

quarters.

Revenues from Medical devices vertical

7.737.22

7.49

8.41 8.24 8.09 7.99

8.83

9.759.44

10.5310.98

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

Q2F

Y16

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

US

D m

n

Source: Company, PL

We expect Medical vertical revenues to grow from US$39mn in FY18 to US$76mn

in FY21E which represents a 24.5% CAGR. The strong growth would be aided by

smaller revenue base and strong traction across its key clients.

Revenues from Medical Vertical

Fig in USD mn FY17 FY18 FY19E FY20E FY21E

Medical Devices 32.7 38.6 48.7 60.9 76.2

Growth (%) NA 17.8% 26.4% 25% 25%


Source: Company, PL


August 28, 2018 21

LTTS set to enter the bigger league

a) LTTS enjoys marquee client base across segments

LTTS works with most of the top vendors within its focus verticals. Some of the

marquee clients include Intel, DANAHAR, P&G, UTAS, Boeing, Caterpillar.

Focus remains on mining top 30 accounts

Source: Company, PL

Each of LTTS’ clients have large R&D budgets and hence the company has ample

room for scalability. The company currently has only two accounts with annual

billing of over US$50mn per year. We note mining remains strong across client

buckets.

“As I have said earlier, our bigger asset is our top customers - the top 50 customers

that each spend more than US$1bn plus annually. We believe a lot more

opportunity exists to mine these customers, and we continue to focus on our top

customers to grow our revenue” Dr Keshab Panda in Q1FY19 concall.

R&D budget of key companies per year

Fig in USD bn R&D spend per year

Intel 13

Qualcomm 3.4

Samsung 3.4

Airbus 2.5

Boeing 3.1

UTC 2.4

Source: Company, PL

LTTS already has two accounts with

annual billing of USD50mn per year


August 28, 2018 22

Client Buckets of LTTS

Client profile Q4FY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Number of active clients 223 224 233 233 235 235

40m+ 2 2

30m+ 1 2 2 1 3 2

20m+ 2 3 4 3 4 3

10m+ 6 8 12 12 12 12

5m+ 21 16 28 30 31 33

1m+ 49 53 79 79 84 89

Source: Company, PL

The company also has a moderate client concentration with top 10 clients

contributing to 40% of total revenues and top 20 clients contributing to 55% of total

revenues.

Client Concentration of LTTS

54.3

%

54.1

%

53.8

%

53.8

%

52.1

%

51.7

%

51.5

%

52.6

%

54.9

%

56.4

%

56.7

%

55.6

%

35.7

%

36.4

%

36.2

%

37.8

%

36.3

%

35.5

%

35.6

%

37.0

%

39.8

%

41.2

%

41.4

%

40.5

%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Q2F

Y16

Q3F

Y16

Q4F

Y16

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

Top 5 clients Top 10 clients Top 20 clients

Source: Company, PL

Major Clients of LT Technologies across verticals

Source: Company, PL

LTTS has shown strong momentum

in client mining across the bands


August 28, 2018 23

b) Ability to drive complex engagements drive client

stickiness

LTTS has delivered strong track record in executing multiple enjoyments. We

present some of the key areas of work done by the company. LTTS service offers

span multiple industries and hence enjoy a strong client referral. Some of the

projects executed by LTTS include concept to Design of Gyro Screw driver,

enablement of LTE chipset.

Some of key projects executed by LTTS

Source: Company, PL

c) Lower cost structure compared to legacy vendors

European players are a large, formidable competition in the Engineering Services.

Continental Europe has large engineering conglomerates like Airbus, BMW,

Daimler, etc. Hence, both France and Germany have large boutique firms focusing

on Engineering Design Services. All the three largest players in Engineering

Services are from Continental Europe. The legacy engineering Service providers

have higher revenue per employee owing to on-site execution. However, they have

lower margins v/s Indian peers owing to bloated cost structures. Most of the

European vendors are focusing on expanding offshore presence to improve margin

structure. Altran acquisition of Aricent was aimed at boosting the offshore

headcount.

Revenue per employee and margin of key vendors

Source: Company, PL

Though European players like Altran,

Akka have high revenue per

employee, there margin profile is low

owing to higher onsite execution


August 28, 2018 24

d) Acquisitions can ramp up European operations

LTTS has been relatively slow on acquisitions. The major acquisition done by the

company was Escentia which was acquired in May 2017. LTTS spent US$27mn for

this acquisition (US$15mn is fixed and rest is earnout). Escentia had revenues of

US$20mn with over 100 employees. We believe that LTTS should scout for

acquisitions in Europe as the region has a large presence of boutique companies

operating in the ER&D space. LTTS derives 18.5% of total revenues from Europe

and the annual trailing 12 months’ revenues of US$110mn from this region. Hence,

LTTS is still subscale in the region.

We believe acquisitions form an important element in scaling the Engineering

Design Services Business. Major acquisitions done by global players are shown

below: Altran has been most aggressive on the acquisition front with an aim to scale

up its offshore presence.

Acquisition done by global firms

Company Acquired Entity Amount paid Revenues of Target company Headcount of Target company

Altran Aricent USD2 bn USD687mn 10500

Altran Global Edge USD50mn NA 1000

Altran SiConTech NA NA NA

Altan IRM NA NA NA

Akka PDS NA USD260mn 2600

Akka Gigatronics NA USD200 1000

HCL Tech Geometric USD200mn USD150mn 2600

Source: Company, PL

e) Strong Revenue per employee owing to high end

service offerings

LTTS has a headcount of ~13,081 employees as on Q1FY19. The mix of hires is

changing in favor of embedded owing to the increasing component of electronics

within devices.

“See, percentage is changing now, mechanical I think is reducing and embedded

and software is increasing now. We have 60:40, 40% mechanical and 60% in

embedded and software, electronics side. Now, the engineers we hired in multiple

areas, when you talk about working on IoT, algorithm development and

engineering, we need good engineers with good software skills. So those

engineers, like recently we hired engineers from IIT a few of them, and they will be

working on futuristic technology under CTO organization full time on some of the

platform development, new technology development they will be working full time”.

LTTS CEO in Q1FY19 concall.


August 28, 2018 25

LTTS revenue per employee per year

51,740

48,979

47,213 48,147

49,890

51,463

53,448 53,222

44,000

46,000

48,000

50,000

52,000

54,000

Q2F

Y17

Q3F

Y17

Q4F

Y17

1Q

FY

18

2Q

FY

18

3Q

FY

18

4Q

FY

18

1Q

FY

19

US

D

Revenue per employee per year (USD)

Source: Company, PL

Focus on high-end offerings has enabled LTTS to enjoy revenue per employee at

par with Tier 1 IT vendors (Infosys/TCS revenue per reported employee stood at

US$54,090/ US$48,808 per year for FY18).


August 28, 2018 26

Financial Analysis

Strong revenue growth to continue over FY18-FY21E

LTTS has delivered softer growth in FY17 led by pruning of tail accounts and

rationalization of portfolio. The company has seen sharp acceleration in revenue

growth in FY18 led by traction in Telecom and Hitech vertical led by large deal wins

as well as traction in transportation vertical. We expect strong growth in FY19 as

well and expect LTTS USD revenues to grow by 23% in FY19.

Management has guided for an ambitious target for revenues to reach US$1bn by

FY21E. This target includes an inorganic component of ~US$120mn. Hence, we

believe that LTTS would require 15% organic CAGR over FY18-FY21E to reach its

revenue target by FY21E. This would put the company at the fastest growing pace

among peers in the sector. For FY18, LTTS’ organic revenue growth is 16.5%,

which is almost 3x the organic growth of industry leader Altran (Altran organic

growth is 5.6% for CY17). Even HCL Tech’s organic revenue growth in Engineering

design services is only 6% for FY18. Hence, LTTS superior growth could help

company sustain premium P/E multiples.

Consolidated USD revenues and Growth YoY (%)

467 484

580

713

825

951

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

200

400

600

800

1000

FY16 FY17 FY18 FY19E FY20E FY21E

US

D m

n

USD Mn Revenue YoY Growth (%)

Source: Company, PL

We expect LTTS USD revenues to

grow by 23% in FY19 (entirely

organic growth)


August 28, 2018 27

Vertical Mix of revenues of LTTS


Transportation 160.5 184.6 221.6 262 309

Growth (%) NA 15% 20% 18% 18%


Industrial products 127.0 132.3 144.1 151 159

Growth (%) NA 4.1% 9.0% 5% 5%


Telecom & Hi-tech 90.1 149.5 202.8 245 294

Growth (%) NA 65.9% 35.7% 21% 20%


Process Industry 74.0 74.7 94.2 106 115

Growth (%) NA 1.0% 26.1% 12% 9%


Medical Devices 32.7 38.6 49.5 61.9 74.2

Growth (%) NA 17.8% 28.4% 25% 20%


Total 484.3 580.3 712.3 825.6 951.2

Growth (%) NA 19.8% 22.7% 15.9% 15.2%

Source: Company, PL

Expect gradual margin expansion led by scale and G&A

leverage

LTTS has shown volatile margin trajectory over the past few years. Margins have

fallen by 310bps YoY in FY18 led by higher growth in Telecom and Hitech and

Transportation verticals both of which have which have lower margins. Company

has also taken some onsite heavy deals which weighed on margins in FY18. We

believe scale would drive G&A leverage and help margin trajectory. We model

gradual margin expansion over FY19-FY21E. INR depreciation would also aid in

margin expansion over FY18-FY21E.

EBITDA Margin v/s Average Exchange Rate

15.2%

17.0%

18.0%

15.5%

17.1%

17.9%18.3%

56.0

58.0

60.0

62.0

64.0

66.0

68.0

70.0

14.0%

16.0%

18.0%

20.0%

FY15 FY16 FY17 FY18 FY19E FY20E FY21E

EBITDA Margin (%) Average Exchange Rate (USD vs INR)

Source: Company, PL

Transport and Telecom, Hitech

verticals are likely to continue deliver

strong growth among verticals


August 28, 2018 28

“Some of the engagements that we signed in FY18, especially in the transportation

and telecom sector, have been onsite-heavy, but we have done this with a very

clear intention to expand our technology foot print.

In transportation, we have taken up some engagements which initially are onsite-

heavy, but that has led us entry into autonomous driving and it has helped us

building up the competency in this crucial area.” LTTS COO in Q4FY18 concall.

EBITDA Margin and EBIT Margin (%)

15.2%

17.0%

18.0%

15.5%

17.0%17.9%

18.3%

13.4%

15.1%

16.1%

13.1%

14.8%

16.0%16.6%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

FY15 FY16 FY17 FY18 FY19E FY20E FY21E

EBITDA Margin (%) EBIT Margin (%)

Source: Company, PL

Segmental EBITA margins for FY18

13.5%

19.4%

24.4%

22.4%

17.2%

12.0%

19.5%

21.7%

20.2%

12.6%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

Transportation ProcessEngineering

IndustrialProducts

Medical Telecom

FY17 FY18

Source: Company, PL

Transport, Telecom and Hitech verticals have lower segmental margins among the

SBUs, while Process Engineering, Industrial Products and Medical equipment

enjoy higher margins. We believe taking over deals which involve onsite re-badging

have also weighed on LTTS’ margin trajectory. For example, LTTS has won a large

deal with Intel in FY18 and this involved re-badging of onsite employees across

India, Israel and Europe.

Higher growth in Transport and

Telecom & Hitech vertical, deals which

involved onsite knowledge transfer

weighed on LTTS margins in FY18


August 28, 2018 29

Steady dividend payout ratios keep ROEs strong

LTTS has maintained a steady dividend payout ratio over the past few years.

Hence, ROE trajectory has remained steady over the past few years. Net cash on

balance sheet stands at Rs3bn as on FY18. We expect ROE trajectory to remain

strong in FY19/FY20E as well.

Dividend Payout Ratio (ex –dividend tax) and ROE (%)

50.4%54.5%

17.0%

32.0% 33.0% 33.0%

22.9%

30.4%33.7%

29.6% 30.7%28.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

FY15 FY16 FY17 FY18 FY19E FY20E

Dividend Payout Ratio (Ex -Dividend tax) ROE(%)

Source: Company, PL

Steady free cash flow trajectory:

LTTS continues to enjoy steady operating and free cash flow trajectory. The

company spent Rs970mn in FY18 for Escentia acquisition (Fixed payment). We

expect LTTS to continue to generate steady free cash flow in FY19/FY20E as well.

LTTS Operating and free cash flow

Fig in Rs mn FY16 FY17 FY18 FY19E FY20E

Cash flow from Operations 5337 3879 4136 4465 5605

Capex (1,284) (465) (866) (1,000) (1,000)

Acquisition Spend (970) - -

Free Cash Flow 4053 3414 2300 3465 4605

FCF/EBIDTA 77.9% 58.3% 39.6% 43.0% 47.4%

Source: Company, PL

LTTS has maintained a lean balance

sheet through maintaining steady

payout ratios. Hence, ROE trajectory

has remained superior at upwards of

28%


August 28, 2018 30

Valuation and View

LTTS stock has seen a strong rally since its initial IPO led by steady P/E re-rating.

Stock is up 123% over the past one year. Stock trades at 25x one year forward

earnings compared to 14x traded one year ago. LTTS trades at 23.5x FY20E EPS

and remains among the costliest stock in the sector. We value the stock at 24x

Sep20E EPS which yields a TP of Rs 1,780sh.

LTTS one year forward P/E chart

Source: Company, PL

LTTS currently trades at par with TCS on one year forward P/E. Strong growth

profile is aiding LTTS trade almost at par with TCS.

LTTS discount wrt TCS (One year forward P/E chart)

Source: Company, PL

10

12

14

16

18

20

22

24

26

28

Sep

-16

Oct-

16

No

v-1

6

Dec-1

6

Jan

-17

Feb-1

7

Mar-

17

Ap

r-17

May-1

7

Jun

-17

Jul-

17

Aug

-17

Sep

-17

Oct-

17

No

v-1

7

Dec-1

7

Jan

-18

Feb-1

8

Mar-

18

Ap

r-18

May-1

8

Jun

-18

Jul-

18

Aug

-18

P/E Mean Mean + Std Dev Mean - Std Dev

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Jan-0

0O

ct-16

Nov-

16N

ov-

16D

ec-

16Ja

n-1

7F

eb-1

7M

ar-

17

Mar-

17

Apr-

17

May-

17

Jun-1

7Ju

n-1

7Ju

l-17

Aug-1

7S

ep-1

7S

ep-1

7O

ct-17

Nov-

17D

ec-

17D

ec-

17Ja

n-1

8F

eb-1

8M

ar-

18

Mar-

18

Apr-

18

May-

18

Jun-1

8Ju

n-1

8Ju

l-18

Aug-1

8


August 28, 2018 31

Comparative Valuation Table

Global peer Alten trades at 17x CY19E EPS. However, we note Alten organic

revenue growth is at 6% with EBITDA margin at ~10.8% for CY19E. Hence, LTTS

trades at substantial premium (vs global peer Alten).

Valuation Profile of Global peers

MCAP (USD bn) Revenue (USD mn) EBITDA (USD mn) EBITDA Margin (%) PAT (USD mn)

CY17 CY18E CY19E CY17 CY18E CY19E CY17 CY18E CY19E CY17 CY18E CY19E

ALTRAN TECHNOLOGIES SA 2.8 2,578 3,361 3,717 285 458 544 11.0 13.6 14.6 187 226 296

ALTEN SA 3.4 2,232 2,563 2,755 234 273 298 10.5 10.6 10.8 175 180 199

AKKA TECHNOLOGIES 1.5 1,508 1,712 1,916 104 155 183 6.9 9.0 9.6 43 68 91

MCAP (USD bn) P/E EV/EBITDA ROE (%)

CY17 CY18E CY19E CY17 CY18E CY19E CY17 CY18E CY19E

ALTRAN TECHNOLOGIES SA 2.8 17.2 12.4 9.6 12.7 6.6 5.5 14.7 11.9 13.0

ALTEN SA 3.4 15.7 19.0 17.2 11.7 12.4 11.4 18.7 16.9 16.3

AKKA TECHNOLOGIES 1.5 23.1 22.7 17.2 12.4 11.7 9.9 18.2 23.0 25.4

Source: Company, PL

Valuation Profile of Indian Peers

MCAP (USD

bn)

Revenue (USD mn) EBITDA (USD mn) EBITDA Margin (%) PAT (USD mn)

FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E

TCS 114 19,089 20,952 23,070 5,146 5,490 6,119 27.0 26.2 26.5 3,744 4,432 4,722

HCL TECH 21 7,838 8,469 9,316 1,773 1,945 2,125 22.6 23.0 22.8 1,360 1,404 1,522

Cyient 1.2 607 684 773 85 95 109 14.0 13.8 14.1 59 66 78

Tata Elxsi 1.3 215 246 292 50 68 79 24.9 28.0 28.0 35 44 52

LTTS 2.4 580 713 825 90 121 147 15.5 17.0 17.9 73 95 104

MCAP (USD bn) P/E EV/EBITDA ROE (%)

FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E

TCS 114 30.5 25.7 24.2 22.8 18.9 17.4 29.4 31.9 28.8

HCL Tech 21 16.5 14.8 13.5 11.8 10.3 9.5 25.4 24.5 23.5

Cyient 1.2 19.9 17.8 15.3 13.4 11.3 9.8 18.3 18.5 19.5

Tata Elxsi 1.3 37.0 29.5 25.2 25.4 20.3 17.8 37.0 35.8 31.7

LTTS 2.4 33.6 26.1 23.4 27.2 18.8 15.2 33.6 32.6 29.6

Source: Company, PL * For Indian companies, we have converted INR financials to USD at average rate of 69. Tata elxsi is in soft

coverage


August 28, 2018 32

Business Overview

LTTS is a leading global ER&D services company, backed by the rich Engineering

expertise and experience of parent company, Larsen & Toubro. The company has

broad-based vertical mix offering Engineering Services across Transport, Industrial

Products, Medical, Process Engineering and Telecom and Hi-tech verticals. As on

Q1FY19, the company has headcount of ~13,000 employees.

Business Profile of the Company

Source: Company, PL

Management Profile

Managing Director and CEO

Dr. Keshab Panda is the CEO and MD of LTTS. He has over 31 years of global industry experience in research, conceptualizing, creating, operationalizing and turning around complex technology and engineering services businesses. His past leadership roles include President – Americas, Mahindra Satyam & Head of Europe Operations, Satyam Computer Services. He obtained his Doctor of Philosophy from the IIT, Bombay and an advanced management degree from the Aresty Institute of Executive Education, The Wharton School, University of Pennsylvania.

Chief Financial Officer

Mr. P Ramakrishna has been CFO of LTTS from January 2016. He had been with the L&T Group for last 24 years, having worked in different areas of finance and accounts covering Treasury, corporate accounts, and corporate finance. He has graduated degree in Commerce (Honors) from University of Calcutta.

Chief Operating Officer

Mr Bhupendra Bhate is a technologist with a blend of business acumen with over 30 years of experience in the field of engineering, product development and software. He joined L&T group in 2003 and has had a steady growth in the organization moving up the ladder holding various positions, most recently being Chief Digital Officer. Prior to joining L&T, he worked with AtoS Origin and with Godrej & Boyce. He holds a Bachelor’s degree in electrical engineering, with executive business management program from Harvard Business School and senior executive program at London Business School.

President Sales & Business Development

Mr Amit Chadha is President, Sales and Business Development, Whole-time Director of LTTS. In his current role as President, Sales and Business Development, Amit is responsible for helping global R&D customers and Fortune 500 companies leverage LTTS digital engineering offerings for their strategic differentiation and product development. He is certified under the Global Business Leadership Executive Program with Harvard Business School Publishing and holds a Degree in Electrical and Electronics Engineering from BIT Mesra.

Source: Company, PL

Revenues

Vertical Mix (%)

Transportation: 30.9

Industrial Products: 20.4

Telecom & Hit-Tech: 28.7

Process industry: 13.5

Medical Devices: 6.5

Geography Mix (%)

North America: 56.3

Europe: 18.5

India: 12.4

RoW: 12.8

Key Competitors:

Cyient, TCS, HCL Tech, Quest

Headcount

13,081

Client concentration as on Q1FY19

Top 5 - 28.3

Top 10 - 40.5

Top 20 - 55.6


August 28, 2018 33

Operating Metrics:

Revenue by verticals

Contribution by Verticals Q1FY17 Q2FY17 Q3FY17 Q4FY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Transportation 32.2% 32.9 34.0 33.4 33.6 32.3 30.9 30.8 30.9

Industrial products 25.9 25.5 26.6 26.9 25.5 23.6 21.8 20.9 20.4

Telecom & Hi-tech 18.6 19.6 17.2 19.0 20.1 24.3 27.9 29.5 28.7

Process Industry 16.3 15.2 15.5 14.1 13.9 12.8 12.7 12.3 13.5

Medical Devices 7.0 6.7 6.7 6.6 6.9 7.0 6.3 6.5 6.5

Source: Company, PL

Revenue by Geography (%)

Contribution by geographies Q1FY17 Q2FY17 Q3FY17 Q4FY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

North America 63.5 62.3 62.5 63.3 64.5 60.8 58.7 57.6 56.3

Europe 20.2 19.5 19.2 17.3 16.6 16.5 17.2 18.6 18.5

India 6.8 7.5 8.1 9.2 9.3 10.5 11.5 11.7 12.4

RoW 9.5 10.7 10.2 10.2 9.6 12.2 12.6 12.1 12.8

Revenue by Delivery Centre and Contract type

Q1FY17 Q2FY17 Q3FY17 Q4FY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Revenues by delivery (%)

Onsite 51.1 48.0 47.5 49.2 49.2 50.8 50.7 50.0 49.4

Offshore 48.9 52.0 52.5 50.8 50.8 49.2 49.3 50.0 50.6

Revenues by project type (%)

Fixed price 28.6 30.6 31.0 30.4 30.2 33.2 38.2 37.0 40.9

Time and material 71.4 69.4 69.0 69.6 69.8 66.8 61.8 63.0 59.1

Source: Company, PL

Headcount of LTTS

Headcount Q1FY17 Q2FY17 Q3FY17 Q4FY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19

Total headcount 9,419 9,599 10,040 10,463 10,805 11,532 11,941 12,307 13,081

Billable 8,587 8,739 9,160 9,537 9,886 10,573 11,009 11,360 12,147

Sales & Support 832 860 880 926 919 959 932 947 934

Voluntary attrition 13.2% 14.6% 14.0% 14.0% 13.4% 13.4% 13.2% 13.5% 15.4%

Source: Company, PL


August 28, 2018 34

Consolidated Model Sheet of LTTS

Fig in R mn FY15 FY16 FY17 FY18 FY19E FY20E FY21E

USD revenues 428 467 484 580 713 825 951

Growth (%) NA 9.1% 3.8% 19.8% 22.8% 15.7% 15.3%

Organic growth (%) 9.1% 3.8% 16.5% 22.50% 15.7% 15.3%

Average Exchange Rate (USD vs INR) 61 66 66 65 68 68 67

Consolidated Revenues (INR mn) 26,186 30,665 32,483 37,471 48,768 56,084 63,739

Growth (%) NA 17.1% 5.9% 15.4% 30.1% 15.0% 13.6%

EBIDTA 3987 5204 5856 5811 8298 10028 11652

EBIT 3503 4615 5231 4923 7231 8964 10569

PAT 3109 4167 4250 5121 6539 7199 8386

EBIDTA margin (%) 15.2% 17.0% 18.0% 15.5% 17.0% 17.9% 18.3%

EBIT margin (%) 13.4% 15.1% 16.1% 13.1% 14.8% 16.0% 16.6%

PAT margin (%) 11.9% 13.6% 13.1% 13.7% 13.4% 12.8% 13.2%

Diluted EPS 46.81 32.10 39.64 47.58 61.42 68.30 79.57

EPS Growth (%) NA -31.4% 23.5% 20.0% 29.1% 11.2% 16.5%

P/E 67.5 49.8 40.5 33.2 25.5 23.4 20.1

P/S 6.3 5.3 5.0 4.4 3.4 2.8 2.6

EV/EBIDTA 41 32 28 28 19 15 13

Dividend Payout ratio (Ex - dividend tax) 50.4% 54.5% 17.0% 32.0% 33.0% 33.0% 33.0%

DPS 15 22 7 16 21 23 27

ROE(%) 22.9% 30.4% 33.7% 29.6% 30.7% 28.3% 27.8%

ROCE (%) 23.0% 28.1% 29.3% 28.2% 30.1% 27.5% 27.2%

ROIC(%) 25.3% 31.2% 29.0% 24.9% 31.7% 36.6% 39.1%

Consolidated Balance sheet FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Networth (R mn) 10,521 10925 14,852 19,367 23,308 27,647 32,701

Net cash on Balance sheet (R mn) -1083.9 -595.0 1599 3046 5665 8517 10957

Net cash per share (21.06) (5.85) 14.92 28.61 53.20 80.80 103.96

Net cash as a % of stock price -1.4% -0.4% 1.0% 1.9% 3.5% 5.3% 6.8%

Consolidated Cash flow

Cash flow from Operations 2889 5337 3879 4136 4522 5948 7092

Capex 541 1,284 465 866 1,000 1,000 1,000

Acquisition Spent 6,096 - - 970 - - -

Free Cash Flow -3748 4053 3414 2300 3522 4948 6092

FCF/EBIDTA -94.0% 77.9% 58.3% 39.6% 42.4% 49.3% 52.3%

Source: Company, PL


August 28, 2018 35

Financials Income Statement (Rs m)

Y/e Mar FY17 FY18 FY19E FY20E

Net Revenues 32,483 37,471 48,770 56,084

YoY gr. (%) 5.9 15.4 30.2 15.0

Employee Cost 20,958 24,600 31,715 36,597

Gross Profit 11,525 12,871 17,055 19,487

Margin (%) 35.5 34.3 35.0 34.7

SG&A Expenses 5,669 7,060 8,696 9,461

Other Expenses - - - -

EBITDA 5,856 5,811 8,359 10,026

YoY gr. (%) 12.5 (0.8) 43.8 19.9

Margin (%) 18.0 15.5 17.1 17.9

Depreciation and Amortization 625 888 1,035 1,064

EBIT 5,231 4,923 7,324 8,962

Margin (%) 16.1 13.1 15.0 16.0

Net Interest 21 24 22 24

Other Income 582 1,934 1,732 800

Profit Before Tax 5,792 6,833 9,034 9,738

Margin (%) 17.8 18.2 18.5 17.4

Total Tax 1,542 1,712 2,414 2,532

Effective tax rate (%) 26.6 25.1 26.7 26.0

Profit after tax 4,250 5,121 6,620 7,206

Minority interest (1) (6) - -

Share Profit from Associate - - - -

Adjusted PAT 4,251 5,072 6,620 7,206

YoY gr. (%) 2.0 19.3 30.5 8.9

Margin (%) 13.1 13.5 13.6 12.8

Extra Ord. Income / (Exp) - - - -

Reported PAT 4,251 5,072 6,620 7,206

YoY gr. (%) 2.0 19.3 30.5 8.9

Margin (%) 13.1 13.5 13.6 12.8

Other Comprehensive Income - - - -

Total Comprehensive Income 4,251 5,072 6,620 7,206

Equity Shares O/s (m) 102 103 103 103

Diluted EPS (Rs) 39.6 48.1 62.7 68.3

Source: Company Data, PL Research

Balance Sheet Abstract (Rs m)


Non-Current Assets

Gross Block 3,402 4,404 5,204 6,004

Tangibles 1,757 2,020 2,420 2,820

Intangibles 1,645 2,384 2,784 3,184

Acc: Dep / Amortization 1,479 2,231 3,266 4,331

Tangibles 567 770 1,345 1,936

Intangibles 912 1,461 1,922 2,395

Net fixed assets 1,923 2,173 1,938 1,673

Tangibles 1,190 1,250 1,075 884

Intangibles 733 923 862 789

Capital Work In Progress 23 1 1 1

Goodwill 4,215 4,921 4,921 4,921

Non-Current Investments 1,054 590 590 590

Net Deferred tax assets 323 243 243 243

Other Non-Current Assets 380 487 487 487

Current Assets

Investments 1,946 2,207 2,307 2,407

Inventories - - - -

Trade receivables 7,106 9,623 11,357 13,061

Cash & Bank Balance 672 1,542 4,278 7,234

Other Current Assets 3,399 3,805 4,005 4,205

Total Assets 22,329 27,051 31,786 36,681

Equity

Equity Share Capital 203 205 205 205

Other Equity 14,653 19,159 23,149 27,492

Total Networth 14,856 19,364 23,354 27,697

Non-Current Liabilities

Long Term borrowings - - - -

Provisions - - - -

Other noncurrent liabilities - - - -

Current Liabilities

ST Debt / Current of LT Debt 1,019 702 702 702

Trade payables 1,489 1,807 2,352 2,705

Other current liabilities 4,957 5,128 5,328 5,528

Total Equity & Liabilities 22,329 27,051 31,786 36,681



August 28, 2018 36

Cash Flow (Rs m)

Y/e Mar FY17 FY18 FY19E FY20E Year

PBT 5,792 6,778 9,034 9,738

Add. Depreciation 625 888 1,035 1,064

Add. Interest 20 23 (1,710) (776)

Less Financial Other Income 582 1,934 1,732 800

Add. Other 365 (131) - -

Op. profit before WC changes 6,802 7,558 8,359 10,026

Net Changes-WC (1,342) (1,701) (1,390) (1,550)

Direct tax (1,581) (1,721) (2,414) (2,532)

Net cash from Op. activities 3,879 4,136 4,556 5,944

Capex+ acquisitions (447) (1,821) (800) (800)

Interest / Dividend Income 57 78 1,732 800

Others (1,391) (261) (100) (100)

Net Cash from Invt. activities (1,781) (2,004) 832 (100)

Issue of share cap. / premium - 2 - -

Debt changes (937) (317) - -

Dividend paid (1,264) (983) (2,630) (2,863)

Interest paid (21) (25) (22) (24)

Others - - - -

Net cash from Fin. activities (2,222) (1,323) (2,652) (2,887)

Net change in cash (124) 809 2,736 2,957

Free Cash Flow 3,414 2,300 3,756 5,144


Quarterly Financials (Rs m)

Y/e Mar Q3FY18 Q4FY18 Q1FY19

Net Revenue 9,691 10,548 11,522

YoY gr. (%) 19.6 29.9 40.1

Employee Expenses 6,320 6,818 7,381

Gross Profit 3,371 3,730 4,141

Margin (%) 34.8 35.4 35.9

SG&A expenses 1886 2035 2180

SG&A as a % of Sales 19.5 19.3 18.9

EBITDA 1,485 1,695 1,961

YoY gr. (%) 8.1 14.1 15.7

Margin (%) 15.3 16.1 17.0

Depreciation / Depletion 145 452 260

EBIT 1,340 1,243 1,701

Margin (%) 13.8 11.8 14.8

Net Interest 9 8 4

Other Income 435 755 982

Profit before Tax 1,766 1,990 2,679

Margin (%) 18.2 18.9 23.3

Total Tax 501 344 698

Effective tax rate (%) 28.4 17.3 26.1

Profit after Tax 1,265 1,646 1,981

Minority interest - - -

Share Profit from Associates - - -

Adjusted PAT 1,265 1,591 1,981

YoY gr. (%) 16.5 64.9 102.1

Margin (%) 13.1 15.1 17.2

Extra Ord. Income / (Exp) - - -

Reported PAT 1,265 1,591 1,981

YoY gr. (%) 16.5 64.9 102.1

Margin (%) 13.1 15.1 17.2

Avg. Shares O/s (m) 105 105 105

EPS (Rs) 12.0 15.1 18.8


Key Financial Metrics


Per Share(Rs)

Diluted EPS 39.5

48.2

62.8

68.3

CEPS 48.0 58.1 74.7 80.7

BVPS 146.4 188.9 227.8 270.2

FCF 33.6 22.4 36.6 50.2

DPS 7.1 15.8 21.3 23.2

Return Ratio(%)

RoCE 29.3 28.2 30.1 27.5

ROIC 29.0 24.9 31.7 36.6

RoE 33.7 29.6 31.0 28.2

Balance Sheet

Net Debt : Equity (x) (0.1) (0.2) (0.3) (0.3)

Debtor (Days) 80 94 85 85

Valuation(x)

PER 40.4 33.5 25.5 23.4

P/B 11.0 8.5 7.1 5.9

P/CEPS 33.4 27.6 21.5 19.9

EV/EBITDA 27.6 27.8 19.0 15.5

EV/Sales 5.0 4.3 3.3 2.8

Dividend Yield (%) 0.4 1.0 1.3 1.4



August 28, 2018 37

Analyst Coverage Universe

Sr. No. CompanyName Rating TP (Rs) Share Price (Rs)

1 Cyient BUY 860 742

2 HCL Technologies BUY 1,100 963

3 Hexaware Technologies BUY 460 496

4 Infosys BUY 1,430 1,317

5 Mphasis Accumulate 1,250 1,150

6 NIIT Technologies BUY 1,300 1,120

7 Redington (India) BUY 175 113

8 Sonata Software BUY 390 365

9 Tata Consultancy Services Accumulate 2,080 1,875

10 TeamLease Services Hold 2,740 2,672

11 Tech Mahindra BUY 760 655

12 Wipro Hold 300 283

13 Zensar Technologies BUY 1,410 1,240

PL’s Recommendation Nomenclature

Buy : Over 10% Outperformance to Sensex over 12-months

Hold : -5% to 10% Outperformance to Sensex over 12-months

Sell : > -5% Underperformance to Sensex over 12-months

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly


August 28, 2018 38

ANALYST CERTIFICATION

(Indian Clients)

We/I, Mr. Madhu Babu- BTech & PG MBA, Mr. Rajat Gandhi- MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

(US Clients)

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report.

DISCLAIMER

Indian Clients

Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com.

This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.

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