L&T Technology Services Limited (LTTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '27 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. Sandesh Naik, Head of Investor Relations. Thank you, and over to you, sir.

Thank you, [indiscernible]. Good evening. I'm Sandesh, and welcome you all to the earnings call of L&T Technology Services for the first quarter of FY '27. Our financial results, investor release and press release have been filed on the stock exchanges and are also available on our website, www.ltts.com. I hope you had a chance to go through them. This call for 50 minutes will try to wrap up the management [indiscernible] in 20 minutes and then open up for Q&A. The audio recording of this call will be available on our website approximately 1 hour after the call ends. With that, let me introduce the leadership team present on this call. We have with us Amit Chadha, CEO and MD; Alind Saxena, Executive Director and President; Rajeev Gupta, Executive Director and CFO; and Munjay Singh, Chief Operating Officer. We will have Amex providing an overview of the company's performance and outlook with Amit sharing perspectives across our business segments. Rajeev will then walk you through the financial performance. With that, I now invite Amit to start his opening remarks.

Thank you, Sandesh. I hope I'm audible.

Yes.

[Foreign Language]. Thank you all for joining us on the call today. For strategic actions initiated under our Lakshya 31 plan and continued investments across our 6 technology bets are now delivering tangible business outcomes reflected in the healthy quarterly growth and continued margin improvement. Now for the key highlights for our Q1 performance. Revenue came in at $310 million, growing 1.5% sequentially and 1.9% year-on-year on a constant currency basis. Mobility segment showed encouraging signs of recovery in a dynamic macro environment, recording a 2.3% sequential growth. Our most profitable segment, sustainability continue the growth journey at 4.3% quarter-on-quarter and 11.3% year-on-year, continuing with its double-digit growth driven by continued deal wins and ramp-ups. North America, our major market continue to grow sequentially along with ROW in India while Europe demonstrated slight moderation during the quarter. The enhanced growth profile, coupled with operational discipline and actions taken contributed to a continued EBIT margin expansion to 15.7%, up 50 bps quarter-on-quarter and 200 bps year-on-year. Our engineering intelligence solutions, which I'm personally very proud of our opening up more strategic client conversations and translating into a healthy pipeline of large opportunities. In Q1, we recorded large deal TCE wins of nearly $100 million with a few large deal wins that were supposed to close in Q1 having moved to early part of Q2. Right now, we are confident of closing even larger engagements in the coming quarters. Further strengthening our engineering intelligence portfolio, we just announced a strategic partnership with [ Anthropic ] to integrate flawed models across engineering processes and TTS AI-powered platforms like AgenticIQ, Flex AI and others. In Q1, we achieved several milestones across our technology and innovation charter. One, we inaugurated Europe's outside of India, Europe post Engineering Intelligence Center in Munich, strengthening our ability to support AI led engineering and manufacturing transformation globally. Two, through our consultative engagements, we are helping clients assess their AI maturity and shape future AI road map, supported by an AI readiness index developed by MIT Media ups. Third, AI in [ Phonics ], our latest engineering intelligence platform was launched to help the process industry clients unlock insights from engineering data. Finally, our innovation momentum remains strong. AI patents now stand at 244, taking the total patent count to 1,757. With that said, I would request Alind to provide a detailed segment performance outlook and review. Alind, over to you.

Thank you, Amit. Am I audible?

Sir, you are audible.

Okay. Perfect. All right. First of all, good morning, good afternoon and good evening to whatever you are I appreciate all of you joining us today. I will now walk you through the segment-wise performance and outlook. Mobility. Mobility delivered 2.3% sequential growth. This was broad-based led by Aero and rail and truck on of highway. In North America, the business is seeing good traction and growth. with increase in new vehicle launch plants by OEMs, we are participating in their next [indiscernible] retail architecture program. We also continue to expand into newer areas such as autonomous mobility and advanced transportation platform. While Europe remains challenging, we believe that LTTS is well positioned to benefit from vendor consolidation and engineering outsourcing opportunities in that area. In Japan, OEMs are increasingly looking to leverage India for engineering, product localization and supply chain optimization, where we continue to expand our present. Across the industry, customers remain focused on reducing retail development time lines and costs with improvement in our client engagement, substantial investments in FCB platform and leadership in EV solutions, our engine and intelligence capabilities are helping improve engineering productivity and speed to market for all our subsegments in mobility, a leading aerospace technology provider selected LTTS to establish engineering capabilities for next-generation air bond connectivity platforms and aviation communication solutions. We also expanded our engagement with a leading vehicle -- electric retail manufacturer to support vehicle development across exterior systems, lighting technologies and future mobility solutions. Overall, Mobility remains a key contributor to a large deal win, and our pipeline remains healthy, giving us confidence in gradual improvement in revenue and margins through the rest of the fiscal year. Sustainability. Sustainability remains a strong growth driver, delivering 11.3% year-on-year and 4.3% sequential growth driven by a strong execution of [ CMT1 ] programs. both plant engineering and industrial products ensured strong growth towards this quarter's performance. In Plant Engineering, we continue to see strong demand across upstream oil and gas, LNG and chemical supported by investments in capacity expansion, digitalization, engineering information management and operational optimization. Our newly launched [ CI InformX ] platform is gaining strong client adoption and is expected to improve project productivity, quality and cost efficiency. The steadily partnership announced last quarter with a leading global energy company continues to ramp up as planned. LTTS secured a project to lead the design and site construction supervision program for a major industrial development company. Industrial products continues to see healthy demand across data centers, electrical equipment, promotion in robotics and automation. These are supported by investments in digital infrastructure, energy transition and smart manufacturing. These trends are helping us expand our engagements with leading global clients across the industrial, energy and technology sectors. [indiscernible] selected LTTS as a global system integrator and technology development partner, supporting the design, deployment and life cycle enablement of advanced systems engineering platforms across industries. Overall, we continue to see healthy growth with a strong pipeline, driven by demand for digital transformation, plant modernization, power electronics and data center investments. Tech or tech portfolio. In the tech segment, we are doubling down on strategic partnerships across technology ecosystem for the collaborations with anthropic, Databricks and other leading AI innovators. By combining their technology with our engineering domain expertise were advancing engineering intelligence solutions for clients in the product, services and manufacturing. This is being leveraged across all other segments. The segment operated in a measured demand environment during the quarter. We expect the headwinds to ease over the next few quarters and a significant deal in telecom to close in early Q2. The media and tech business continues to see healthy demand driven by investments in semiconductors, power networks and digital systems. We are expanding our engagement with semiconductors and telecom customers with wider consolidation of share engineering and transformation program. Software and Platform subsegment is scaling PI-led solutions across software testing, AI and analytics optimization, helping clients improve productivity and accelerate enterprise AR adoption. We are also seeing increasing election in fintech, including addition of our first customer in the private equity segment. Our pipeline continues to strengthen, supported by improved sales execution and growing demand for AI led engineering and platform solutions. In [indiscernible] subsegments, one of our programs reached its planned conclusion while the start of the other program has been tensely delayed. [indiscernible] remains digital health, diagnostics, imaging, surgical robots and connected medical devices. LTTS has won a deal from a global medical technology leader in ophthalmology and microsurgery solutions to establish an offshore engineering center to innovate, support new product development, product refresh and life cycle engineering. We are also expanding our pharma business by bringing together engineering, manufacturing and health care abilities to deliver end-to-end solutions for life cycle clients. Building on innovation from our software and platform business, pharma-isolution is getting good traction in the marketplace, which is an end-to-end AI platform accelerating pharmaceutical R&D by transforming data into actionable inside with regulatory compliance. Overall, the tech segment has several large opportunities at advanced stage of discussion, and we remain optimistic about converting them over the coming months. We expect the segment to return to growth from Q2 onwards. With that, I hand the call back to Amit to share the outlook. Amit, over to you.

Sure. Thank you so much, Alind. Before I conclude, let me briefly touch upon why we remain confident about the road ahead. It comes down to engineering intelligence. We believe that AI is a 6-layer kit. It's real, and LTTS is uniquely positioned with capabilities spanning the entire textile from energy to chips to infrastructure to data engineering, AI models and real-life world applications. Second, our Lakshya 31 strategy continues to gain momentum, providing a clear road map to help clients transform products, processes and manufacturing while positioning LTTS is the next phase of sustainable growth. Third, I would like to confirm and reconfirm that your company will continue to grow sequentially in revenues and margins in the quarters ahead. Finally, looking ahead, we remain committed to our aspiration of delivering 13% to 15% CAGR over the next 5 years, while maintaining EBIT margins of 16% to 17%. With that said, I'd like to thank you for all your support. I would like to hand over the call to Rajeev to provide his commentary.

Thank you, Amit, and greetings to everyone joining us on the call. Let me start by sharing key highlights themes for the quarter. First, we made good progress on our journey from an engineering services company to an engineering intelligence solutions company. Engineering intelligence is becoming integral to both how we engage with customers and how we deliver them, enabling smarter, faster and more scalable outcomes. As part of our Engineering Intelligence live event, we brought together nearly 40 industry analysts who experience are engineering intelligent solutions through live demonstrations across engineering EI, agenticAI, manufacturing AI and physical AI. Second, our focus on building scalable business and improving operational efficiency maintaining disciplined SG&A management helped us deliver constant currency revenue growth of 1.5% sequentially and 1.9% year-on-year. Our EBIT margin improved by 50 bps sequentially and 200 bps year-on-year and strong free cash flow at 153% of net income. With that, I will move to Q1 FY '27 financials, starting with the P&L. Revenue for the quarter came in at INR 2,950 crores, representing growth of 2.9% sequentially and 11.5% year-on-year. EBIT margin for the quarter stood at 15.7%, an improvement of 50 bps sequentially and 200 bps year-on-year. Effective tax rate for the quarter was 26%, improving by 60 basis points over the previous quarter. We expect ETR to remain in the range of 26.2% to 26.7%. Net income for the quarter was INR 352 crores, up 1.5% sequentially and 17.4% year-on-year representing 12% of [indiscernible]. Our earnings per share from continuing operations was INR 33.17 for the quarter, translating to an annualized EPS of INR 132.6 compared with reported FY '26 EPS of INR 15.89, which is improvement of nearly 15%. This reflects the benefits of our portfolio mix, prudent capital allocation, alongside investments in engineering intelligence and 6 technology bets aligned with Lakshya strategy. Other income net was INR 14.7 crores for the quarter, lower compared to previous quarter, primarily due to ForEx losses. Now turning to balance sheet. Let me highlight key line items. Our combined DSO moved to 77 days from 83 days in Q4, an improvement of 6 days, bill DSO improved to 57 days from 68 days in Q4. Going forward, we expect combined DSO to remain in the range of 80 to 85 days. Free cash flow for Q1 FY '27 was 540 [indiscernible] [ INR 339 ] crores at the end of quarter 1 FY '27 compared to INR 3,575 crores at the end of Q4 FY '26. The revenue metrics in dollar terms revenue was USD 309.9 million compared with USD 305.9 million in Q4 FY '26. This represents a currency sequential growth of 1.5% and year-on-year growth of 1.9%. On segment margin performance, Mobility margins for Q1 came in at 15.6%. There was a slight decline primarily due to on-site ramp-up of new programs. As these engagements mature, we expect both revenue and margins to improve sequentially. Sustainability continued to perform well with margins improving to 29.1%, up 40 bps sequentially. A healthy pipeline and good quality of revenue continue to support both growth and profitability. Tech segment margins came in at 11.5%, reflecting softer revenue performance in the quarter. As recently on deals move into execution, we expect both growth and margins to improve over the coming quarters. On operational metrics, offshore mix was 53.9% broadly in line with Q4. We continue to work on opportunities to improve this mix going forward. E&M revenue mix was 64.9% in Q1, lower compared to Q4 as we focus on favorable shift towards fixed price and outcome-based engagements. Client profile improved with an increase in $20 million-plus accounts, $10 million-plus accounts compared with previous quarter, client contribution to revenue remained broadly similar with Q4 across categories. Headcount remained steady at INR 23,845 in Q1 compared with 23,814 attrition as well remained range-bound at 14.7%. The realized rupee for Q1 was around 94.86% to the dollar, representing depreciation of 1.5% versus Q2. Margin outlook before concluding. Let me talk about our margin outlook. We continue to expect sequential improvement in EBIT margins throughout the year, resulting from 3 factors: continued growth in higher margin sustainability and mobility business along with improving margin outlook for tech. Second, greater productivity through engineering intelligence-led delivery model and continued focus on operational excellence and disciplined SG&A management. With that, we remain on track towards our aspiration of achieving a mid-16% EBIT margin on or before Q4 FY '27. To summarize, Q1 FY '27 reflects steady execution, sequential revenue growth, margin expansion, disciplined working capital management and strong cash conversion. We'll also continue to invest in engineering intelligence and our 6 strategic technology bets, which we believe will strengthen our differentiation and support long-term value creation. With a strong foundation in place, we remain focused on executing our Lakshya 31 strategy and achieving an aspiration of 13% to 15% CAGR for revenue over the next 5 years while maintaining EBIT margins between 16% to 17%. Thank you, everyone, for your support. I will now hand the call back to the moderator for questions.

[Operator Instructions] Our first question comes from the line of Ravi Menon with Axis Capital.

I would congrats on really strong growth in mobility sustainability, both mobility, especially in auto, some of the peers have been [indiscernible]. So I want to talk a bit about what looks for you here and how you -- I know that you said there is a good pipeline. But what's really differentiating you in this market? And then in fact, I know we have to have a Q1 seasonality with cover [indiscernible], but it sort of surprise so have declined. So we talk about why that declined.

So I'm going to start. I'm going to hand over to Alind to talk about differentiators at it. So one, if you look at, Ravi, we've invested in advance, like Rajeev talked, Alind talked about in engineering intelligence. That allows us to continue to have new deal wins and ramp-ups for the deal wins that were done throughout last year in sustainability. And I had said this during quarter 4 as well, and I expect sustainability to grow double digits in the current financial year, FY '27. And we're seeing that play out. So these differentiators are there based on I based on the work that we're doing with our debt will continue. Now in mobility, we have invested in unique. We've invested in hybrid. We've invested in SDV, and all 3 are playing out positively for us. Alind will share a few more details in this separately. On the tech part, like Alind mentioned, there was a particular medical program that actually stop and per plan, the new one did start, and that's why we said a couple of our wins have moved into Q2. And that's why you saw that slight decline that was there. But as I look forward, I do believe mobility and tech as 2 segments will also grow in this financial year. Alind, would you like to share a few details on differentiators of mobility and sustainability, too.

Sure. So if you fundamentally look at it, you look at mobility and you think about it as different sectors within that. So you've got [indiscernible], got truck and off-highway and we've got aero there. So that's our mobility as a world and that diversification and the strategy really helps as we are seeing now as well. So we have been very closely being very intimate with our clients in what we have been doing with them. And that I do believe that above all, technology that remains a key differentiator for us to be able to leverage the part of the journey that they are undertaking. So that's one. Two, to come said look, we had advanced invested in the whole EV strategy, which didn't play out as a way. But market is doing is the hybridization, which is now becoming very popular. This remains a very key aspect of that. The fact that we had invested in a large initial solutions is playing out well fees because that hybrid strategy is very clearly laid out not just for automotive, but for some of the off-highway vehicles and [indiscernible] engines as well. So that's helping us go through. The third thing is you were one of the earlier adopters to not just look at SPV, but STB with an angle of -- and which means that you look at software designed vehicles through the Anglo autonomous and intelligence. And those are the solutions that we have built I think we showcased that in one of our investor roadshow, we have to do that again, which is key and crucial to continuing differentiation. Now if I were to talk about on sustainability. See, on sustainability side, we know that there is an upside, which is there due to data centers. But the forward investments that we have done in a solution like AI and Phonics, which is helping transform our plant engineering customers and having them with clients later that they are already generating to be able to create differentiation. That is very unique and sort of unparalleled in the outcomes that we are able to deliver. And similarly, on Industrial Products, we have had a very strong relationship with the OEMs and their whole development process as well. and embedding the solutions in the -- in helping and creating not just as catch the momentum, but cash again unfavorably on the base of technology and solutions that we have developed. I'll take a pause.

And the rest of the world, not in due the [indiscernible] business segment that people are expecting not to do very well, but perhaps on pretty well here. Could you talk about that?

So we operate largely in Japan are the new pain a little bit of Australia, a little bit of Middle East. So I think it's done okay for us. It's Europe that has moderated this quarter for us, but that should come back next quarter for the season.

Our next question comes from the line of Vibhor Singhal with Nuvama Equities.

Congrats [indiscernible]. Just one question from me for you and Alind [indiscernible] and then just one for Rajeev. So talking in terms of the broadband context of how deals are shaping up if you look at the peers at the IT service industry. So all the large companies have now started reporting some large deals in the AI space, which is basically helping times a complete end-to-end transformation using AI do you believe a similar kind of kind of deal transition might also happen in R&D at some point of time, maybe with a lag or maybe it is already happening, but the deal sizes might actually start increasing with the clients using AI to, let's say, do more, let's say, garment of work from one into the other and which could eventually lead to some sort of a consolidation also? Or do you think it's too early to call anything on that part in the space pay [indiscernible].

Sure. And your second question was for Rajeev, do you want to give us that question as well?

Yes, sure. No, I think very solid cash flow relation in this quarter. So net -- our free cash flow net income and I mean, is that going to -- you mentioned that the DSO range has to be between [ 80, 25% ] is what we're expecting. Does the net -- does the free cash flow to radicals remained as high as -- or was it an aberration in this quarter and we would probably settle more at [indiscernible] range, which generally is the case Yes. That goes on 2 questions.

Rajeev, you want to answer that, and then I will bring -- I'll answer the AI part of that.

Sure. Thank you, Vibhor. You are, as always, supportive of LTTS team, so I appreciate that. See, as far as the cash flow, I think I've always guided that we will deliver free cash flows in the range of 90% plus, right? This has been a stellar butter in terms of working capital management. While we will attempt to do as well as we did in this quarter. But you try to keep it between 90% to 95%, that is for certain that we can deliver for the year, right? So that's what I will say. But yes, you'll see our best if we can deliver as well as we delivered in this quarter.

Now on the [indiscernible] strategic initiatives and large deals that. Alind, you want to take a stab at that?

So today, if I look at any large deal, and we talked about this earlier, there are 2 fundamental shifts which are happening One is that most of these large deals are on a fixed price or an outcome-based model where there is clarity on what's the outcome that needs to be delivered. The second equally important point is that they are asking if our customers are asking us on how are we going to transform the current processes which they are running. And unless the transformation happens along with that deal, it is not going to really be a viable opportunity. And where we play in and we think about AI, right? So AI is a central part of the transformation team, which is there. And to say that you take any process -- and if you're not putting that thought process in there and the solutions that we have built around engineering intelligence in there, it's not going to come to fruition. So AI is clearly embedded. How do you talk about it, how we announce is different and that the fundamental returns there.

Okay, right. So I'd just add a couple of things. Number one, goof you look at. So we have -- because we once lab. So we've gotten into now consulting and being the consultation partner to our clients on which engineering processes, which manufacturing processes to take and roll out EI or AI and which ones to leave because is not there. So we are starting at that level. So there's a lot of those projects that we are executing for our customers trade assignments. From there, you are then getting into the ones which we agreed to roll out manufacturing lights out factory or if I take engineering, you take [indiscernible], you have developed a tool now even for the finance function that we have rolled out through our segment on LinkedIn, I just like did yesterday, we just launched it yesterday, we are also in there. So that is the second part where you are actually implementing it for various parts. So the second piece. The third part then something like Alind is talking about, where their existing work is there and you are figuring out whether you are going to implement AI and do productivity improvement, cost asset on, et cetera. The last thing, which I want to mention is this cloud partnership that we have signed. And this is very important because this will help us in taking the cloud module as well as the various workflow to our size. [indiscernible] is a small example. We were in Midwest recently. And one of our clients is moving from complete EV to a hybrid set of vehicles. And he was sharing that look, it takes us about 36 months to 40 months to do a complete design, is it possible for you to come in and do it in 18? Is it possible if you redo 15? Now part of the engineering design will be owned by us for sure, but part of it will be done by their own engineers. So now what you're doing is with this flat partnership with other tools that you are developing, you are starting to become the owner engineer which is a very different positioning than just going asking for work. So that's what's helping us knock on wood as you look at us today. And that's the EI part that we have talked about. And I'm sure you've seen a new logo as well. You love the [indiscernible] Samir and his team for that.

Yes. Got it. Got it. That's really helpful, Amit. Just one last follow-up question on that. Do you believe this kind of a positioning that you mentioned that we will be able to own that basically IP or that process or that existing domain that you're talking about? And that also eventually, if not immediately lead to some basically pricing benefit for us in the medium to long term? Or do you think it's difficult to follow on that?

So we will see, we'll continue to -- again, we've been -- at has been very kind to us other than specific cases with even I had called out last year. Nobody has ever come back and say reduce your rates to us because you see the value and we are not a commodity player, right? We are a differentiated engineering player. We are a higher-end engineering per year. So we will continue to see expansion. We'll see a lot to be done. I think [ Munjay ] had also spent a lot of time with you during the EI event in as well. So we're leaving all this, we'll see where it goes. I got to be done. Product excitement not to be covered. Like I said, 6-layer AI kit. You decide which one is properly and which one is [indiscernible] in the year.

Our next question comes from the line of Sandeep Shah with Equirus Securities.

Congrats on a good start despite the difficult macro-led challenges. Sir, just wanted to understand the word from engineering services to EI. Do we believe the productivity gain demand can take a lead versus a higher wallet share or both pools in a hand-to-hand and the impact of the growth may not be material.

So when I look at EI right, and I've actually divided it up. And so see the I part that I talked about the 6 layers, which is energy and the chips, there's infrastructure, there's data and data engineering, there's models and then there is application. These are 6 layers, right? If I take gold and I then map it to our bets, our [indiscernible] software platform in AI, number one, software-defined mobility. Third is plant buildout and modernization that is to do EI and route EI as well as energy automation with digital manufacturing, medical technologies and next-gen compute and AI infrastructure. Those are our best step you got. Now Sandeep, as you move forward and on the past few quarters, the wins that we have been having we are having to use our own tools. And I'll require [indiscernible] to chicken here and talk about the tools we have got. But the tools are being used as part of our bids to our customers. And we are having to pass on some productivity improvement. Absolutely. Otherwise, we will not win it. It's a very competitive environment. When the clients are able to see the value and allow us to keep some of that as well. So as you look forward, there will be 2 parts. One, you will continue to see LTTS gain market share over competition because we do believe that we are still between 6 to 9 months ahead of competition in this area, number one. And number two, you will continue to see some of these benefits being passed and we have to continue to reinvent ourselves and build new offerings as we take it forward. Alind, would you take a minute and talk about 2 kits that we have established in EI, please.

Sure, Amit. Good evening, everyone. So we have tool switches like I'll put you in 3 buckets. One is to tools which we use to work faster, which is basically they can lead to people to do their jobs better. And second is to make sure we are able to generate to which can automate work, so that the systems can become autonomous as autonomous as possible. The third is to actually embed this in the product itself. So these are 3 sets. There are specific tools built for each one of them. I have [indiscernible] are aiding people to do the job faster. In agentic IT platform for creating agent, which can make systems autonomous. And then I have physical AI that we embed, like AI, et cetera, that we're embedding products, which will take this AI application to real world. Now the broad question that you asked is, and I'll try one second to explain that. see the use of AI is to do things faster, right? And when you do things faster, it will produce more, not less, because the customers will have an opportunity to create not more variety of [indiscernible]. So eventually, it will lead to explosion of the work that we are seeing today. If you look at 4 basis, for example, we will see a number of core getting generated. And eventually, these core somebody will have to run mainly new point lines. it's a broader shift that is being in the industry, and we believe the way we have approached it, which is ensuring that the intelligence is being engineered using the tools in the products and the processes we believe that it will lead to a lot more expansion of the work that we do in the market.