L&T Technology Services Limited (LT.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the business update conference call of L&T Technology Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pinku Pappan. Thank you, and over to you, sir.

Thank you, Faizan. Hello, everyone, and welcome to the LTTS conference call to discuss our acquisition of the Smart World & Communication business of L&T. I am Pinku, Head of Investor Relations and M&A. The press release and investor release relating to this acquisition has been uploaded on our website, www.ltts.com. I hope you have had a chance to go through them. This call is for 60 minutes. We will try to wrap up the management remarks in 15 minutes and then open up the Q&A. The audio recording of this call will be available on our website approximately 1 hour after this call ends. We will be discussing only the acquisition today. Our Q3 results are scheduled on the 19th, and I would request you to hold your questions about the quarter and the demand environment until then. With that, let me introduce the leadership team present on this call. We have Amit Chadha, CEO; Abhishek, COO; Rajeev Gupta, CFO. Amit will provide an overview of SWC and talk about the growth potential we see, and Rajiv will take you through the financial details. Let me now turn the call over to Amit.

Sure. Thank you, Pinku. And I hope I'm loud and clear.

Yes, sir.

Perfect. So thank you all for joining this call today at very short notice. Let me begin by wishing all of you a very happy new year. I'm happy to share that earlier today, we signed an agreement to acquire Smart World & Communication, business unit of L&T. We are excited about joining hands with some SWC and entering a new phase of growth in the areas of Next-Gen Communications, Sustainable Spaces and Cybersecurity. For us, this acquisition is a continuation of our Big Bets driven growth strategy and aligned with our bets in 5G, Digital Products AI and Sustainability. Let me first provide you some background. SWC was started within L&T in 2016 with a mandate to leverage technology and address opportunities arising in India around smart cities and mass connectivity. SWC has surely risen to the challenge with a track record of winning and implementing several large-scale city, state, pan-India projects for cities, utilities, government entities, leveraging disruptive technologies, such as AI, cloud and 5G. It is talent with decades of experience from marquee telecom services and OEM companies and in just 6 years, crossed an annual run rate of INR 1,000 crores. We are also innovation driven by LTTS, having built a software platform called Fusion, which is a state-of-the-art platform for data analytics; gEDGE, a green data center that can be used or the Edge which can deliver significant savings in CapEx and OpEx. The moment we believe is right for this business to be taken to the world to address the growing market across Next-Gen Communications, Sustainable Spaces and Cybersecurity. With LTTS' reach globally, we've got a client base that includes 6 of top 10 telecom infra OEMs and 4 of top 10 telecom operators in North America and Europe. We believe that this base of marquee customers, we can take SWC capabilities globally. On the capability front, the SWC will get -- with SWC, we get a full spectrum technology stack in communications, cybersecurity and a bigger platform at play across Sustainable Spaces. So together, we have the qualifications to participate in large opportunities globally that may involve design, build, rollout and managed services across SOC, NOC and data center rollouts. I would like to now take you through the 3 segments in details. For each segment, I'll cover 3 broad questions. What capabilities does LTTS and Smart World have? How are we better together? What is the market that we now can address? Starting with Next-Gen Communication. Capability-wise, SWC has strong credentials in network design, planning, implementation and management, including network operation centers, OSS work, data center, cloud and private 5G. It has assisted multiple state governments in India with network operating centers and network management systems while establishing end-to-end network connectivity and public safety projects, such as TANFINET and Telangana Fiber Grid. LTTS on the other hand, has been a strategic partner for OEMs for a long time with track record of delivering device R&D for more than 100 product families. We identified 5G as a big bet in 2020 and our 5G offering and services has resulted in the company taking complete ownership of 10-plus Labs-as-a-Service for customers in product R&D, 5G network assurance with over 100 5G use cases for our clients. How are we better together? We now have a full spectrum of offerings in consulting, network planning, managed services, automation, NOC and SOC. We can also address opportunities across segments like Device O-RAN, 5G, Edge Data Center applications and orchestration. What is the market that we can now address. First, we can qualify for large global opportunities across conceptualization network planning, architecture, proof-of-concept, rollouts and managed services. We will expand this in the U.S. and Europe primarily and target operators, OEMs and in partnership with high hyperscalers. In addition, we plan to address a huge private 5G network with ability to architect rollout and cloud-managed networks to enterprise clients. Moving on to sustainable spaces. Capability-wise, SWC brings capabilities around public safety, smart cities and critical infrastructure, smart meeting along with the L&T Fusion platform and the integrated command and control center. We've implemented mega projects -- safety projects in Mumbai, Hyderabad, Nagpur with tens of thousands of devices, including cameras and network equipment have been implemented for city-level surveillance. SWC has also architected, conceptualized and implemented smart metering in states like Uttar Pradesh, Haryana, Delhi in the tune of 6 million meters. LTTS brings the smart building and experience management capability, and through its iBEMS platform that has been deployed in the world's smartest office campus in Israel with over 14,000 centers. Together, LTTS and Smart World gained the ability to offer end-to-end solutions across efficient campuses, cities, utilities, mobility, public safety and environment. We can also leverage a track record of executing mega projects in safety and surveillance, traffic, waste management, water and power with the ability to establish and operate an integrated control and command center, which differentiates us with our scale and to win global opportunities. With over 70% people living in cities by 2050, there is a need to make living sustainable. The ability for cities to govern, survey and act is paramount. The line between smart spaces and sustainability is glaring with more participation in action initiated by countries and was seen during the COP27 Summit. Also, our scope increases from buildings to utilities, hospitals, sports arenas, infrastructure, transportation, amongst others. This was an area that we were present in a very minor number. We plan to take target markets like Middle East, where huge new city infrastructure projects are being undertaken in addition to U.S. and Europe and Canada. LTTS' own enterprise customers, including oil and gas CPG customers with large -- ultra large plants are another opportunity for us to address. Cybersecurity, the third block. SWC brings with it full life cycle that management capabilities with offerings in risk management, threat monitoring, security architecture, design, DevOps and SecOps. LTTS has been offering cybersecurity services to our clients for OT cybersecurity and product cybersecurity globally. Together, the joint team can provide security operating centers of the SOC, full life cycle threat management, OT cybersecurity and product security interventions. Managed services is an opportunity for us as we plan to offer SOCs as a service along with cyber, advisory and consulting. In terms of market, One in 3 companies have experienced cyber attacks since 2019 and the trend is only increasing. With growing digitalization, cybersecurity needs to be embedded in all our solutions. We plan to treat cybersecurity or cybersecure as we call it moving forward, as a horizontal, along with the digital products and AI work that we do leverage existing relationships to expand. Our global partnership and alliances with hyperscalers and product companies will be key to penetrating this market. Finally, let me provide a view on our outlook. We believe this acquisition will enhance and augment LTTS' capability across Next-Gen Communications, Sustainable Spaces and Cybersecurity, allowing us: One, to address the ability -- have the ability to address 5G in a much more meaningful manner and expand addressable market in multiple segments, operators, enterprises and pass into potential of large future spend like sustainable spaces. Second, address the market from a cybersecurity standpoint, and enterprise security in a much more meaningful and bigger manner with the SOC that we get. Third, it will help to take India, which has been a test bed for disruptive technologies at scale to the world and expand our footprint in the Middle East as well as India, APAC, U.S. and Europe as multiple countries are starting to invest in smart and sustainable spaces in our future. While this is early days and we have got 2 months of closure of this acquisition, we have put in place an integration plan that will help us create a joint go-to-market and capture synergies as early as possible. We are excited about the future growth potential and reconfirm our aspiration to get to a $1.5 billion run rate by FY '25. Let me end by wishing all of you great health. Thank you. Have a great day, and I will hand over to Rajeev.

Thank you, Amit. I wish all the participants on the call a very happy New Year and thank you for joining us on this call today. We are happy to start the new year on a high with the announcement of the acquisition of SWC, a unit of L&T. We believe this acquisition will open new avenues of growth in 3 of our Big Bets: 5G; digital products in AI; and sustainability. Amit gave an overview about the business and potential synergies. I would like to give you some color on the financials of the business and the plans to integrate going forward. SWC business is broadly split into 3 segments: Communications, which contributes to around 75% of the revenues; Safe & Smart Solutions, which contributes to 24% of the revenues; and the newest vertical, Cybersecurity, contributes to 1% of the revenues. The EBITDA margin profile of the acquired business is in the 8% to 10% range, relatively lower for 2 broad reasons. One, Currently, SWC operates in the Indian market, executing modernization projects involving design phase, build phase and then operate and maintenance phase. This was the plan to get established in the market. And now they have started positioning themselves to more services-oriented playbook of design, OpEx and managed services that has higher margin profile versus CapEx and build programs. Secondly, higher initial investments in terms of people, labs and product development that will start to yield benefits of scale. Amit already talked about talent and innovation at SWC, evidence by the fusion platform and the gEDGE data center solutions. Going forward, our goal is to improve EBITDA margin profile of SWC business in line with that of LTTS. With the commercial and financial diligence, we've identified levers that will enable us to achieve the margin target. First, take the capabilities of SWC to global markets where there is a good potential to win large transformational projects. A complete end-to-end offering stack, combined with strong customer relationships and track record of large implementations, will help us create differentiation in the market. Secondly, in the Indian market, focused more on the higher-margin services business, which includes managed services, SOC, NOC as a service, design and consultation. Last, we also leverage the solutions and platform player of SWC to drive nonlinearity. Our success in telecom with our own IntelliAgent products gives us confidence of the market potential. To summarize, the combination of leveraging joint capabilities in global markets, a strong differentiation to win larger deals and an improving services share, India in the business, will help drive scale and improve business mix towards higher-margin areas resulting in margin improvements. Now let me talk time lines. We have drawn up initial plans to integrate our offerings and be ready with a joint go-to-market of our services. The leadership teams are ready and excited to take this forward in both LTTS and SWC. The common L&T DNA gives us the confidence of a faster and smoother integration to realize synergies early enough. We are planning for closure of this transaction before March 31, 2023, subject to shareholder approval. We will provide more details as we approach Q4 FY '23 closure. With that, we are reaffirming our aspiration of $1.5 billion run rate by FY '25 and a sustainable 18% EBIT margin trajectory in the medium term. Thank you for all your continued support and wishing you a very happy New Year once again. With that, moderator, we can now take the questions.

[Operator Instructions] First question is from the line of Vibhor Singhal from Nuvama Equities.

So one of my question was basically just a couple of questions on the nature of the transaction. One is I would assume that a large part of this revenue is not 100% of the revenue of SWC would be coming from the Indian markets -- the geography itself. So if that is the case, do you believe having worked with the government entities in India, and as I see that the company was formed in 2016, mainly to cater to the Smart City project. There is definitely a case for -- is there a case for a similar kind of work being done for private entities in our markets outside India? I mean, do you really see -- I mean, is there a real like-for-like mapping that we can do in terms of basically catering those services to the set of clients that we have?

Sure. So Vibhor, thank you so much. I'll address the question this way. But like as you pointed, 70-plus percent of this business is in the communications area. And when you look at communications, the kind of work that they do around conceptualizing an entire network, right, or if you look at the work that they do on -- in terms of the gEDGE data center that they have got, or you look at the work that they have done around private 5G rollout, et cetera, all these 3 put together, this is something that we can immediately take to our OEMs and our telecom customers -- our operator customers. In fact, we work for 6 of top 10 OEMs, and we work for 4 of our top 10 global operators, U.S. and Europe operators. So there is an immediate -- it creates a full stack offering along with the market, right? And therefore, this immediately becomes applicable to our U.S. and European market and Japanese market customers. So that's number one, right? Now in terms of Safe & Smart, we were working with our enterprise customers around iBEMS. We were working in building automation, et cetera. What this gives us is the scale of work done around safety surveillance, traffic management, waste management, smart metering and the Fusion platform allows us to be able to give us an immediate upside in terms of going after utilities as well as going after -- going after markets in the U.S., Europe and Middle East and parts of Asia. Taking this scale advantage is the kind of work that's been done, right, thousands of cameras managed. If you look at it, so many nodes brought together, the Fusion platform which actually allows us to be able to do analytics on top of the field. So it does bring together that particular part. And the third in the cybersecurity, again, was the work that they have done along with the SOC that they bought, security operations center. Taking that to our North American and European clients is an immediate thing that we would play because we will all of a sudden have an end-to-end playbook if I may, rather than having this product OT. So we do see a lot of applicability with that. Not only that, today worldwide, and I say this because I've been talking to a lot of our clients here based in the U.S. and in Europe and Japan, they look up to India. And they look up to Indian technology from a standpoint that the kind of work being done in India and the scale being done in India has not been done in other places. So I'm very confident that this provides an upside.

Right. So -- but if I could just maybe extend the argument a bit. I mean we've been tracking LTTS for quite a while now, and we let speak very highly of the delivery capabilities that the company has. But these -- many of these capabilities exist already with LTTS. I mean, is this a void that they are filling that we didn't have these capabilities, specifically, I think, in the communication space, 5G space? We talked a lot about what we are already offering to our existing clients. I mean are there specific white spaces that this acquisition is filling? And if yes, then my question again is that wouldn't we have -- couldn't we have made an acquisition, let's say, of the outside India with already existing set of clients, which would have probably given us access to new clients maybe, which we didn't have rather than trying to basically cross-sell the capabilities that they have overseas as well as in India into clients outside India in a completely different government to private kind of setup?

So number one, thank you so much. So Vibhor, we did. So if you go back, we did acquire [indiscernible] technology in I guess 2020. And they brought with us with them capabilities of the network operator, assurance -- network assurance for operators, right, they brought that capability. When we did our assessment, what we were missing in the white space was the ability to architect -- conceptualize architect an entire network. And as 5G became a bet area, we tried to organically develop it by creating the Labs-as-a-Service by doing more than 100 5G use cases of clients globally, et cetera. But we did see that the ability to conceptualize architect the network was one thing that we were looking for. And that was what Smart World brought to us that we did not have. We were also looking for a company that had done it to scale. We didn't want somebody that would have done it for one -- for A telecom operator or certain telecom operator, et cetera. We saw what we saw in the market and we did agree that -- we realized that Smart World brought that. Second, we've got key things like the gEDGE data center, right, which is actually a software-defined Edge data center with emergent pooling technology which is, again, a great asset to have to take forward. So second, when we were looking at -- the business state that we're looking at Smart, we've been talking about Sustainability for a long time. We looked at the COP guidelines that came out. We started seeing a lot of utilities starting to spend, right, spend revenues. A lot of people that we were seeing had a product. They were not -- there were very few companies that only do services from a smart sustainability standpoint. That Smart World has got that is not there outside, and we do not want to become a product company. So therefore, it was an excellent fit for us, or it is an excellent fit for us along with the smart metering capabilities they've brought, et cetera, and the Fusion platform. From a cyber standpoint, of course, it provides a soft capability that we do not have. So therefore, it is complementary, if I may, in terms of the white spaces that we had to take it forward.

Got it. If I could just maybe get a couple of data points. What possibility of revenue would be in India and outside India? I'm assuming it is 100% in India. If not, please correct me. What percentage of revenue is government business or private business? And the third is, what would be the -- sorry. Yes, sorry, sir. Please go ahead.

Why don't you finish your question, please?

Yes, the third is, if you could provide a color on what is the receivable days of the entity that we are acquiring?

Sorry, what is the third question?

Receivable days. The DSO days for the company that we are acquiring, SWC?

So number one, from a revenue standpoint, it is 100% India. But there is an active pipeline for APAC and Middle East and parts of -- parts of North America. So I can confirm that. Number two, from a government and private, I don't think we give that data out, and I'll hand over to Rajeev to handle that on the DSO front. Rajeev?

Two points on this. One, these are largely government-driven projects. And second, in terms of receivable days, I mean, given that these are largely government projects, generally, the duration of these projects in terms of receivables is relatively high and would be in the range of 400 days plus. But like we said, there is a good opportunity for us to take this business and offer it to our customers globally. So as we start to change the profile of this business, we see that there is going to be improvement both in terms of receivables and other operating levers as well.

So you mentioned 400 days, right? 400.

Yes.

The next question is from the line of Mihir Manohar from Carmelian Asset Management. .

Congratulation for this [indiscernible].

Mr. Manohar, please use the handset mode, sir.

Sir, I mean, think I wanted to understand the existing business, which is there, I mean, INR 1,100 crores kind of a business, largely government-oriented business. And over there, we are having a 400 days plus kind of receivables. I mean what do you think continuing the existing business after making the acquisition, what is the strategy of the existing business which is there currently at SWC? And my second question was on the GTM strategy. I mean, how are we looking at the overall GTM strategy to take this particular business to maybe APAC or U.S., something earlier you mentioned about you want to take it to other geographies. But largely, I wanted to understand what are the changes that you're making in the organization to have a meaningful GTM strategy. And my third question was on the $1.5 billion aspiration. I mean lastly, when I recollect, the $1.5 billion number, which was there. I mean, that was largely organic kind of a number. So I mean, after addition of this INR 1,100 crores, does that aspiration still hold? Or would there be upside from that?

Okay. So let me address your last question first because your line was not clear for the first question. When we address the second question, and the first we would ask you repeat. So when we had told you we will get to FY -- FY '25, we will be at a $1.5 billion run rate. We did have it as organic plus inorganic. Therefore, this is the inorganic part that has been added. Does that change the goalpost? It's early days. And as we go forward, if aspirations change and goals change, we will keep you informed, but we wanted to reconfirm at this stage, $1.5 billion by FY '25 for sure. So that's number one. On the 3 internal strategy. See, we've been seeing over the last few quarters or months that we've been working on the 6 bets where we had taken -- and we took almost about 21 months ago now. We were focusing, and we were seeing that we did not have certain capabilities. In the communication area, clearly, that was around 5G area. It was clearly in the areas of network architecture SOC, NOC that we did not have. We also saw that we wanted to -- there is a huge market that is coming up for global enterprises to roll out their private 5G. We also see operators spending money. We thought that the capabilities they bring plus our Labs-as-a-Service, et cetera, provide us the ability to go forward. When you are looking at sustainability, often we used to talk about product sustainability. If you remember, some of you would recall, I had talked about water -- waste water management. I've talked about utilities, et cetera. But whenever you would talk to them, we'll only end up going to the OEM, right? We would not be able to go on to the utility itself. We were not able to go to the municipality itself, et cetera. And because we had smaller projects, we were not able to show scale to them. We believe that the scale that Smart World brings in terms of the kind of work that they have done and executed is huge in terms of what we'll be able to handle. And for just one example, the Prayagraj festival in India recently -- that was concluded last year, Smart World managed 250 million people, along with complete coverage, face recognition, including AI, et cetera. If I look at smart metering, I cannot think of another company that's rolled out 6 million meters across 3 states. The Fusion platform brings with it a certain degree of data visualization not seen before. So we believe that, again, that clients in U.S., Europe as well as Middle East are actively looking [indiscernible], and we've done some bit of polling, et cetera, and we believe that is a good market for us. Cybersecurity is, again, I believe that from a strategy standpoint, it fits very well into our digital products as a bet as well as taking it forward, just aligned with that. Could you repeat your first question so that we can answer it?

Yes, yes, sure, sure. Largely, I wanted to understand that given the fact that this business is largely a government business and we are having 400-plus days of receivables making 8% to 10% EBITDA margin. Frankly I believe that they wouldn't be contributing much to the ROE and ROC and would we continue such business in the existing LTTS structure where we have higher margins, [indiscernible] working capital [indiscernible] efficiency. I mean, would we continue the existing business? Or we would like to scrap it out [indiscernible].

So I would request Rajeev to take the question. The key point, keep in mind, Rajeev has already said that our medium term, this is to get -- to do 18% EBIT. You've seen us operate at those levels. Our whole goal is to take this business to international markets and do a higher value services business if we do it in India also. So we are fairly cognizant of that. But Rajeev, could you please answer the ROE, ROC?

So we've already talked about the fact that we can look at improving the profile of this business, which has been more in the nature of CapEx and build programs to more managed services programs. That is one. Second, to also take this business to global customers and newer geographies. To your question, the government projects will conclude over a period of time, right? And that by the very nature, we may not look to review because those are, of course, programs that have come into play in the past few years. So we see over the course of next 18 to 24 months and naturally, some of that business concluding. And as we spoke, changing the profile of the business would start immediately post the integration, and a lot of that thinking has already gone as part of the diligence. And as you see over the next 3 to 4 quarters, the profile of the business will start to improve, so the EBITDA that we've indicated, which is currently at 8% to 10% over the course will start to improve. Our aspiration of $1.5 billion in terms of run rate by FY '25, like Amit said, included in organic strategy. Our aspiration of 18% sustainable EBITDA in the medium term remains to be 18%. And -- sorry, 18% Sustainable EBIT remains to be 18%, and we'll continue to work to improve the profitability of Smart World & Communication.

The next question is from the line of Bhavik Mehta from JPMorgan.

I have a couple of questions. Firstly, if I just do a rough math, based on FY '22 numbers. It looks like the EBITDA margin is going to be like 180 basis points. So if you can just elaborate on how do we plan to maintain 18% EBIT for the combined entity going forward? What are the time lines we're looking at to maintain the rating booking levels. Because my sense was initially, it will take a hit of around 180 basis points. So what are the levers available to make up for that? That's one. And the second question is what is the typical pricing model of this business because it is not a technical R&D business. So how does the pricing work over here? Because this company has like 700 people, but the revenue is like INR 10 million. So if you can just throw some light on the business model in terms, especially of the pricing involved for all the contract perspective?

So let me take this. Yeah, go ahead, Amit.

Rajeev, why don't you cover the EBITDA and then I will cover on pricing model or even starting with [indiscernible].

Yes, let me do that. So I'll cover the big part of it. So Bhavik, like I said in the opening commentary, we've done our due diligence, we've identified certain levers. As we look at over the next 2 months or so, we intend to close the transaction by March 31, '23, subject to shareholders' approval. We will come back with more details in terms of some of those levers and how we will improve. I again maintain that in the medium term, aspiration is to maintain that 18% EBITDA range. But we will come back with more details in quarter 4 of FY '23 once we see more details around this business. Amit, do you want to take the pricing model?

We've mentioned pricing largely model has been fixed price for them, we don't work on T&M. And we are also looking to expand our own fixed price model as we go forward. So it's in line with that. Like Rajeev mentioned, our whole goal of taking over this business is that we have high confidence given our leadership bandwidth, given our ability to be able to improve profit margins in the past as well of our own business. If you remember, we used to get at about 14% EBIT, we've come to 18%, our own ability to manage our business and take it forward. And third, our ability to scale. We believe these 3 internationally, globally, give us the ability to have the confidence to turn this around. So I would not be worried about pricing models at this stage. And I do believe that this is doable and as well as make sure that we are back at that. That's why we wanted to make sure we've made that statement, but medium term, we are backed by 18% EBIT levels that we've always been at.

And lastly, what was the rationale -- L&T to acquiring some of its business for LTTE [indiscernible]?

So the way -- see that question, if you maybe ask L&T, but I will attempt to answer the question in a different manner. L&T has -- and our Chairman has gone on record -- Vice Chairman has gone on record to say that, that L&T looks at LTTS as its expression of engineering and technology to the world. L&T has spent the last 6 years to set up incubate this business, right? Building the Fusion platform, building the gEDGE data center, building out the smart metering capabilities, building a SOC and NOC, and we've invested in this business to take it forward. And I think the time has come for this business to go global. And at that point, we thought that LTTS being an engineering technology company. And this business that we are doing, right, is largely engineering and technology, we thought is the right fit for us to take forward. So that probably is what went on in the mindset.

[Operator Instructions] Next question is from the line of Akshay Ramnani from Axis Capital.

Amit, just one question. How should one think of the growth profile of this business? So you mentioned that some of the government contracts may be ending over the next few quarters, over the next 18 months. And we are also focusing on improving our international presence and managed services presence in India. So there will be a headwind [indiscernible] growth. So some sense on the -- over the past few years, how is the business is growing? And how should we penetrate around the product profitability profile?

Sure. So I understand the question, you're talking about the growth prospects. We will try and answer it, Akshay.

Yes.

So if I look at the growth prospects, we do believe that 5G spend is yet to roll out completely. We haven't completely come out. In fact, there are numbers thrown by public information of about, let me know that by [ 2030 ], 5G is expected to have a global impact of $1.3 trillion, right, on the global economy. And that is not just operator, it's across -- it's from operators. It is from health care providers. It is from -- so overall, so we do believe that that's the kind of revenue that is expected to be rolled out. Now we believe that we are in the right space of this business to be able to take that program. So that's number one from a growth standpoint. So we already got demand. I mean we've been actively recruiting -- Smart World have been actively recruiting to try and take this forward and creating 5G use cases. And we talked to you before about investments we have made already in setting up labs in Bangalore, setting up labs in Mysore on 5G. We announced a partnership with NaviNet, with Qualcomm that we have done. There are others we have not taken names, but we have done work. There is a lot of work that we have done with one of the largest operators in the U.S. actually, to connect 911 calls to rural areas in the U.S., right? So there's a lot of these case studies work that we have done, along with the OT acquisition that we have done. So the uptick that we saw in our OT acquisition and the work that we've been able to generate from there gives us the confidence that this is an area that's up and will see tailwinds from a spend standpoint over the next 2 years at least, right? Now in terms of sustainable spaces, again, various numbers being thrown, but the market size seems to be about -- at about $240 billion of 2025 that we're talking about, across infra buildings, utilities, mobility, public safety, et cetera, which again, I think is the right place to do and take it forward. And that we're not going to be selling directly to them only, but we've got hyperscaler partnerships. I mean you've seen this partnership we have with Microsoft. There are others that we've announced marking the name, which I can't name because we don't have the permission. Now there are these hyperscalers we've got partnerships with that are addressing these spaces and these capabilities we bring in to address it. So if you look at the growth profile, I do believe it's in line with the growth profile that LTTS has shown traditionally without the Covid aberration that we have. So we look at the growth profile in a similar manner.

So just to confirm that despite headwinds from ramp downs from Indian government contracts, we should still expect a growth on the sell rate what they've reported on FY '22?

Yes, absolutely. In fact, you will see -- like Rajeev mentioned and like I said, we are early days, you'll see more of it coming along. We will -- we have confidence that we will turn around. We will take the case study [indiscernible] that we are getting from this business and leverage it globally that allows us to be able to change the profile of some of the business that we are doing and the customers we are dealing with, so that growth continues happen and margins improve.

Got it. And just another clarification that this $1.5 billion, would that include another round of acquisition or have we done -- on what are our thoughts there?

So we have an active pipeline of M&A prospects that we continue to look at. I'm fairly confident when we made a commitment to you, if you remember, last year, 2 years ago in September, we told you 3 things: $1 billion run rate by Q2, Q3; we committed to 18% EBIT in the medium term; we committed to you a $1.5 billion run rate, '25. We have a little bit of acquisition built into that $1.5 billion, the $1 billion did not have acquisition. So we delivered $1 billion to you in constant currency in quarter 2. We delivered 18% actually a quarter after following it up, and we have stayed in that trajectory, right, in spite of wage hikes, et cetera, et cetera, that we had to do. I'm again reconfirming $1.5 billion at this stage is doable. Do we need another tuck in? I don't think so. Will we get another acquisition? We will see. Right price, if we get the right thing, right technology because we don't look at an acquisition only because of revenues. We look at an acquisition, we look at market potential, we look at, of course, top line, bottom line. We look at the tech assets because we are not an IT company. We are an engineering technology company. So we look at the tech assets, we then look at the ability to grow and expand, and across the cauldron, that seems to have steadied. So we take all of that into account. So there's another one. Maybe we'll do it and then maybe we'll come back and give you another number for '25 or '26. But story to be played, we're right here, and that will continue.

The next question is from the line of Mukul Garg from Motilal Oswal Financial Services.

First of all, if you have already answered this, I have joined a bit late. I just wanted to understand from Rajeev, how should we look at the EBIT margin of this acquisition? Because obviously, there is fair bit of capital intensity to this business. And while you have shared 8% to 10% EBITDA margin, is it also possible to share the EBIT and PBT margin for this business?

So Mukul, let me clarify, and like you said, you may have joined a bit late. I did respond to this question earlier. So we continue to look at this business over the next 2 months. We've identified initial levers. The lever has been: One, we would see more projects in the managed services and in the OpEx space, that's one; second, take this business globally to existing customers to new customers, right? And that should be more margin accretive. So if I look at in the medium term, our aspiration remains to see this business in the 18% margin trajectory. We will come back with more details as we see this business over the next 2 months in our quarter 4 FY '23 closure, and we will clarify further on this. So I hope, Mukul, that should address. But we will certainly come back with more details as we look at this business over the course of the next 2 months.

No, Rajeev, I heard this part of your answer, but sorry, I still just -- if it will be possible for you given that you just acquired this entity, historically or maybe most recent period, if you can share what kind of -- below EBITDA, what kind of numbers are because we have seen historically, especially for the large project companies, profitability being very, very low due to higher depreciation, amortization or interest expenses? And also, if you can share the way you have arrived at the valuation, does that also include some assets or IP you are taking over? Or the majority of the valuation is some of the skills and the projects which they already have. Project value obviously will get impacted as you will ramp down the Indian government projects?

So I think interesting questions, Mukul, certainly happy to respond to those. So one, beyond EBITDA, this profile of business is not asset intensive. So from a balance sheet standpoint, we are not taking our assets that will load on to the balance sheet. Second, there is not a high interest cost, right? So that will also not be a burden beyond the EBITDA. So hopefully, that should give you some comfort. The third part question, and maybe can you repeat that, Mukul, because you had quite a few questions. So I just wanted to clarify all of those. The third question was on?

The third question was on the -- when you look at the INR 800 crores which you have paid for this asset, are you also onboarding some physical assets or technology IP in addition to the business as well as the team, which you have valued separately?

I did respond to the fact that this is not a business with high physical assets. But certainly, this is a business that brings in technology. Amit earlier talked about Fusion platform, gEDGE data center solutions. So these are certainly all technologies that have been baked in as part of the valuation. Again, I reiterate, this is not an asset intensive business and certainly does not bring the burden of higher interest cost.

Understood. In terms of -- I think, obviously, you as well probably come back in the next quarter with more details. But in terms of when we look at the areas where the overlap was limited or the skill set which LTTS had was less. If you can just highlight a few points where it was probably something which will accelerate rapidly for you, something -- an opportunity from a global aspect, which you did not have right now?

So from a -- sorry, Rajeev, go ahead?

Go ahead, Amit. Go ahead.

Sure. So, Mukul, one from our telecom operators and infra, especially if you look at high tech, right? You look at high tech of telecom operators, telecom infra, which is the Nokias and Siemens of the world or Nokias and Ericssons of the world, we've got Sencon, we've got consumer electronics, you've got [indiscernible] and then you've got these [indiscernible]. Now if I look at this particular business, this business is largely a telecom operator business and that they've operated in. And we've operated largely in the OEM space. Though with the OT acquisition, we did get the 5G part with some operators. So like I said, we worked for 4 of top 10 across U.S. and Europe in terms of operators. We worked with 6 of 10 OEMs globally. So I believe that this adds our ability to go to current clients in a much wider offering. Second, it allows us to be able to expand into other operators in U.S., Europe and the Middle East. So that is one clear area that we see towards that upside. Second upside that we get is that we've been largely working, if you look at building management, et cetera. So I will not be named here on this call, but we work with a lot of these guys and create those equipment. So refrigeration equipment or metering equipment, et cetera. But we didn't have the ability to stitch a solution and take it to, say, a city or take it to an airport or even take it to our own clients in oil and gas or chemicals that have got huge, large plants. And we want to -- let's say, we want to make the whole thing smart. You want to implement a 5G network and also want to do WiFi 6. We didn't have those [indiscernible]. We may have capabilities in parts but to the whole thing to scale, we didn't have that. So this brings that and it allows us to be able to participate in some of these RFPs, et cetera, that continue to get rolled up. And third, cybersecurity has been an area that we've been keenly doing. In fact, we have talked about digital products and some of you that have been to our centers in Mysore have seen that we've built out, we tried to do a lot of work there. We had some very good talent that we've got there. But that, coupled with the software that we've got, we believe, is a high-powered high-growth story that we think is followed.

The next question is from the line of Mihir Manohar from Carnelian Asset Manager.

Sir, I really wanted to understand, and I understand that it's a difficult at the current juncture to see to what kind of synergies could pop up. But as the background that I'm coming from is that we are paying INR 800 crores for this acquisition that will get added to our net worth. And across the next 18 to 24 months, there are some of the programs which are getting concluded and we will not go for renewal. I know with the revenue ramping down all with the existing business, we are paying INR 800 crores. So just wanted to understand, I mean, the existing INR 200 crores of telecom -- and $200 million of telecom and hi-tech business which is there, I mean what kind of number are we looking at over the next 2 years? So just want to understand as to what sorting of the asset will happen?

Amit, do you want to take this one?

Sure. So where if you look at synergies, like I already explained just now prior, we do see growth expansion opportunities, right? We've always been a top line focused with a sustainable bottom line company. That's been our mantra. So with that said, we do see synergies in -- if I tell you from a technology standpoint, right, we do see the fact that we've done some 5G use cases, more than 100. Smart World has done about 100 use cases in 5G. Together when the labs come together, right, is a great story, right? We don't need to build our own NOC. That NOC now exists in communications, Next-Gen Communication with them. We have our iBEMS platform and UBIQWeise platform. So we will decide technologically with the Fusion platform that Safe & Smart brings is a huge plus for us. We've got OT and product security capabilities. We've got SOC capabilities along with full life cycles with management, again, A plus B -- so we see those synergies. With that said, given that we see synergies, and I already mentioned prior that the profile of growth of this business is similar to our business. We do believe that we will be able to accelerate growth in a profitable manner as we move forward.

Ladies and gentlemen, we'll take one last question from the line of Sameer Dosani from ICICI Prudential AMC.

Amit and Rajeev, just one -- actually two clarifications. I joined a bit late, but what is managed service part of the portion where we are -- we will be trying out this new acquisitions. So we are trying to increase the managed services portion, right? So what is the proportion now? And what is the plan to pick up? What is the plan or a milestone that you would be trying to get it up to?

So we are today, I don't know if Rajeev will give out exact data, we will come back in quarter 4 and give it. But I should say that the business -- and again, as I said for me, if you look at the business, it is clear that last 6 years will be incubated by [indiscernible] and I have done a lot of projects, et cetera. Whatever project you're getting over, actually are converting to managed services. You actually manage whatever you've built, et cetera. We traditionally have been in managed services. So as you go forward, you'll see a lot more content in India, in Middle East, APAC, U.S., Europe in managed services in the business. And that's one of the reasons why we're betting on the fact that we'll be able to turn around the margins a bit. We are fairly confident of what we have done with our recent other acquisitions. So we've done 3 acquisitions in the high-tech space as you are aware. We did OT, we did Esencia, we did [indiscernible] before that. So all these 3 if you look at, I've been over a period of time, allowed us to be able to grow our top line in the sustainable manner. We believe this will do that as well.

But any ballpark number, what will be the percentage 10, 20, 30, just overall, just to understand?

So Sameer, maybe I can add to what Amit was sharing. So Sameer, first, yes, we will come back with more details as we are looking at various aspects of this business. But the part that I would want to add, right, like we said at the opening of this call, this is a business that was started in 2016 as a unit of L&T. The first 6 years really has been at the back of a lot of investments in terms of technology, people, labs. Going forward, the pipeline is more representative of the managed services. So I think in addition to the fact that, of course, like we said, we should be able to take this business even further. We will come back with more details and give clarity in terms of the breakdown and the profile of this business.

Yes. Understood. And second, what is the government part of the business that you would look to ramp down or not renew right now, what is the percentage of that?

So we did respond to this earlier, Sameer. The current business is largely representative of the government business. And these have been projects that commenced over the last few years, and likely will continue over the course of next 18-plus months or so.

Lastly, I think that valuation question was not answered. What is the valuation basis right now? I mean, on which you have arrived at INR 800 crores value.

So the valuation has been arrived using clearly the platforms, the technology, we talked about Fusion, we talked about gEDGE. Of course, the people, also various assets in terms of lab, et cetera, these are some of the things that have been factored in as part of the valuation.

Right. And 18% EBIT margin would be including the amortization hit that would come, because that would also get involved?

So Sameer, to clarify the current business of LTTS is operating at 18% plus EBIT levels.

Correct.

All the aspiration of a sustainable EBIT margin over a medium term. There certainly will be some impact. We will come back with those details. But clearly, there is going to be a curve, and we will bring this business back over a period.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Pinku Pappan for closing comments.

Thank you, everyone, for joining us on the call today. I know it is a long day for you, and I really hope we get to interact in the coming days. And especially on 19th when we report our Q3 results. With that, let me say goodbye and goodbye from all of us here at LTTS. Thank you.

Thank you. Ladies and gentlemen, on behalf of L&T Technology Services, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.