Price: Rs. 1422.10
L&T Technology Services Limited (“LTTS” or the “Company”) is an India-based engineering research and development services company. The Company is engaged in providing a range of engineering services and related technologies in the areas of embedded systems, mechanical and others. As on June 30, 2018, L&T holds 87.10% shares of LTTS.
Its segments include Transportation, Process Engineering, Industrial Products, Medical devices and Telecom. The Company also acts as a service provider to companies in India and abroad. It offers services, including embedded system and applications; engineering process services; mechanical engineering; product lifecycle management (PLM), and consulting services. It also offers solutions, including engineering analytics; Internet of Things and machine to machine; power electronics, and semiconductor Internet protocol (IP) solutions.
The Company exports engineering and design services to North America, Europe, the Middle East, Japan, Korea and other Asia-Pacific (APAC) countries. The Company is a subsidiary of Larsen & Toubro Limited.
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Strong Managerial, Operational, and Financial Support from L&T
L&T Technology is a subsidiary of L&T from which it derives strong managerial, operational, and financial support. There is commonality in the board of directors and entire operational teams for these units have moved as part of the strategic business unit (SBU) to LTTS. L&T had invested Rs 750 Cr. in the form of preference shares in LTTS in addition to Rs 300 Cr. of equity share capital for the buyout of these SBUs. The 10% preference shares (redeemable at par) subscribed by L&T were converted into equity in May 2016, and the company was listed in September 2016.
L&T Technology benefits from L&T’s established position as an engineering specialist, given that LTTS target market is engineering design. Operational support is available to LTTS from L&T in the form of shared resources, largely infrastructure such as office space and talent.
Presence in Niche Service Lines And Industries With Healthy Growth Prospects
LTTS has presence in engineering and R&D services, which are relatively new segments, holding significant opportunity for the Indian IT and IT-enabled services (ITES) sectors. The past few years have witnessed growing interest from clients across sectors (including telecommunications, automotive, aerospace, industrial products, and heavy machinery, construction, and consumer appliances) in sourcing their engineering and R&D requirements from India.
Strong Financial Risk Profile
Financial risk profile is expected to remain comfortable, backed by healthy gearing and debt protection metrics, strong net cash accrual, and absence of debt obligation or debt-funded capital expenditure (capex) over the medium term. L&T Technology has no long-term debt. Since the 10% preference shares (redeemable at par) subscribed by L&T were converted into equity in May 2016, the company has no redemption obligation against the same in future.
Gearing is likely to be below 0.02 time over the medium term because of healthy accretion to reserve and absence of large acquisitions or capex. Debt protection metrics may also remain strong despite a dividend payout (inclusive of dividend distribution tax) of over 50% profit after tax (PAT) to L&T, given the strong accrual expected over the medium term.
Geographical Concentration in Revenue Profile
Dependence on the US market is high, with around 60% of the revenue coming from the US. Although geographical diversity mitigates business risk, skew in revenue is unavoidable given that US is the largest IT spender in the world and accounts for over 60% of the industry’s total revenue.
1. North America
4. Rest of the World
High Dependence on Foreign Exchange Rate
Though the reporting currency is in Rupees, L&T transact a significant portion of their business in several other currencies. Although they partly benefit from a natural hedge for their foreign currency revenues against their foreign currency expenses, they also have an exposure to foreign exchange rate risk in respect of revenues or expenses entered in a currency where corresponding expenses or revenues are denominated in different currencies. Such transactions are denominated in currencies such as US Dollar, Euro, etc. In addition, the overall competitiveness of the Indian ER&D industry in the global market is also significantly dependent on favourable exchange rates.
Modest Scale of Operations
LTTS is a medium-sized Tier-II player in the Indian software industry with operating income of Rs 3747crores in financial year 2018. The company has a size disadvantage vis-a -vis larger players in the industry (where scale of operations largely determines ability to bid for large orders successfully).
About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities