L&T Technology Services Ltd – Unique IT Company but expensive valuations
L& T Technology Services (LTTS) is one of the largest pure-play ESO companies in India. It is a subsidiary of Larsen & Toubro (L&T) Limited,. LTTS was formed through a group restructuring exercise in 2014 to create a specialized talent pool in ER&D services. This involved consolidation of the Integrated Engineering Services (IES) division of the parent L&T and the Product Engineering Services (PES) business of L&T Infotech Limited, a fellow subsidiary of L&T. As of 31 Dec’16, LTTS had 25 sales offices, 12 global delivery centers and 32 innovation labs globally. The company has 10,000+ employees serving 217 clients, including 50+ Fortune 500 clients.
LTTS operates in five broad business segments with each being ranked as a leader on parameters such as the maturity of R&D practice, scale of presence and client spread, and specialization in services portfolio by Zinnov in its 2015 rating of global services providers.
Transportation: This is the largest business segment and primarily covers the following industry verticals: automotive, off highway equipment (OHE), and aerospace and commercial vehicles (CV). Its service portfolio in the automotive segment includes ER&D mechanical, embedded and software engineering services (computer software for machinery or devices), automated driver assistance systems, telematics, and infotainment. For OHE manufacturers, it provides new product development and value engineering services. In the aerospace vertical, LTTS works in the areas of structural design, electrical and avionics systems, including both flight control systems and display systems, in the commercial segment. In India, it works in the defence segment in areas such as avionics and unmanned aerial vehicles. For CV manufacturers, it provides design and development services for body design and product localization. This segment contributed 33% to the overall turnover during first nine months of FY17.
Industrial products: The industrial products segment includes the following sub-verticals: power, electrical, drives and utilities, building automation, home and office products, and machinery. LTTS’ services in this space include product design, development, verification, validation and certification services. Besides, LTTS also provides sustenance, maintenance and value engineering of existing products. This segment contributed 26% to the overall turnover during first nine months of FY17.
Telecom & hi-tech: This is the third-largest segment and includes the semiconductor, consumer electronics and telecom verticals. In the consumer electronics vertical, LTTS works mainly with mobile device and tablet manufacturers, set-top box and gateway manufacturers, and smart home/wearable devices manufacturers. In semiconductor, LTTS works in the areas of ASIC design and verification, embedded software for the chip and related validation services, reference board design, and RF design. In telecom, LTTS works with network equipment manufacturers. This segment contributed 18% to the overall turnover during first nine months of FY17.
Process industry: LTTS is one of the few India-based service providers that operate in the process industry segment, which represents an addressable end market of USD 150bn, according to Zinnov. In this segment, LTTS works with clients in the FMCG, Speciality chemicals, and oil and gas verticals to provide services such as process design, development, and smart factory solutions for brownfield, and to a lesser extent, Greenfield manufacturing plants. This segment contributed 16% to the overall turnover during first nine months of FY17.
Medical devices: LTTS provides end-to-end product development for medical devices deployed in patient mobility, surgical, diagnostics, therapeutics, musculoskeletal and life sciences. Services include certification support and regulatory compliances of medical devices, manufacturing support to transfer engineering design to a commercially manufactured product, product maintenance, and aftermarket support. This segment contributed 7% to the overall turnover during first nine months of FY17.
LTTS expects to grow revenue in line with the industry, as it recovers from the slower-than-expected offtake in large deals + business interruptions in a few large clients that affected the momentum in FY17. Healthy cash conversion (72% OCF/EBITDA) + superior return ratios (39% RoE) are other positives. However, rich valuation (1.4x PEG and 20-40% premium to other leading IT services players) and low liquidity are constraints.