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

Ladies and gentlemen, good day, and welcome to the Q2 and FY '27 Earnings 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, Mr. Sandesh.

Thank you, Danish. Good evening, wishing you and your family a happy festive season. I am Sandesh, and welcome you all to the earnings call of L&T Technology Services for the second 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've had a chance to go through them. This call is for 60 minutes. We will try to wrap up the management remarks in 20 minutes and then open up for Q&A. The audio recording of this call will be available on the 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 begin with Amit providing an overview of the company performance and outlook followed by Rajeev, who will walk you through the financial performance. I now invite Amit for his opening remarks.

Perfect. Good evening, everyone. I thank you all for joining the call on this last day of Navratri and wish you and your families a very happy Navratri and Dussehra. With our investments in EI and diversified portfolio, we are addressing a broader market with our customers, resulting in accelerated sequential growth across revenue, profitability, large deals and AI revenue. Large deal wins from earlier quarters are converting into revenue, and we are continuing to have a robust pipeline of the same. Let me move to key highlights of quarter 2. Revenue was $317.1 million, up 2.7% sequentially and 4.8% year-on-year in constant currency on a continued operations basis. EBIT margins improved 60 bps quarter-on-quarter to 16.3%, delivering ahead of time line on our aspiration for mid-16% EBIT levels. Large deal TCV was at $203 million across segments with over 50% of them being AI-led wins. Both order backlog and pipeline are up year-on-year. Sustainability continued to grow and delivered its strongest growth in the last 6 quarters. Mobility sustained its growth momentum and tech remains steady, with gross margins improving across all segments. We completed the divestment of our [indiscernible] business on schedule, giving us a sharper and more focused portfolio. We would like to recognize our SWC employees for their amazing work and wish them all the best in their journey. Moving on to EI, which is the center part of our strategy. EI with -- has an annualized revenue of $120 million for us in this quarter. Our deep domain expertise, proprietary AI tool kits and a growing ecosystem of academia and industry partnerships expanding our addressable market and creating new revenue opportunities. LTTS's EI strategy spans across 3 areas: EI for engineering, EI for products and EI for manufacturing and operations. We made progress across all these 3 areas in the last couple of quarters. EI for engineering, as the V model moves to a W model, we are embedding EI across the engineering life cycle through a human plus agent delivery model. In one of our major engagements, we are helping clients accelerate time to market by 50% with 40% of the core being generated by AI. To date, we have upskilled more than 16,000 engineers, about 67% of our workforce in AI. EI for products. EI One is our platform of 100-plus EI solutions is gaining client traction. Our AI patent filing crossed 253 this quarter, taking total patent count across the company to 1808. EI for manufacturing and operations, we launched a new EI lab in partnership with NVIDIA to build and deliver next-gen physical AI native applications across manufacturing, robotics and supply chain. We conducted multiple AI readiness workshops or clients in collaboration with MIT Media Labs and expanded our partnership ecosystem will include Cognite, Anthopic, NVIDIA and Databricks. Innovation remains central to our long-term agenda with a focus on frontier applied research and emerging technologies to address evolving market needs. Looking ahead, our farm program will connect deep tech start-ups with clients to accelerate innovation and bring in new technologies to the market. The LTTS distinguished fellows program recognizes and empowers technical leaders who drive innovation, create business impact and represent LTTS global industry leaders across the forums. Moving on to segmental performance. Mobility. Mobility has delivered a phase of steady growth with revenues up 2.3% sequentially. Growth came from auto North America, Aero and Rail and Trucks and Off-highway, all Europe remained muted, but we believe it should bounce back next year, and we continue to see significant large deals in the pipeline in Europe. We are working on building capabilities in system engineering and diversifying with new wage mobility providers to work on advanced transportation platforms and digital microservices. Aerospace continues to grow strongly as clients continue to expand production and modernize supply chains leveraging digital transformation. Rail as a subsegment is growing for us supported by freight rail rolling stock modernization and digitalization. In Trucks and Off-highway, we added 4 new logos across global OEMs, led by EI with wish panning autonomy, AI, embedded software and digital programs. A strategic deal, a leading automotive technology provider renewed and scaled their engagement with us for AI-powered engineering across product and digital engineering. In summary, Mobility is showing sustained growth, and we expect strong momentum ahead driven by a robust pipeline across geos and ramp-ups of large deals. Moving on to sustainability. Sustainability continues to be a strong growth engine, up 13.4% year-on-year and 4.9% quarter-on-quarter as we execute multiple large deals won over the past 6 quarters. Nearly half of our Q2 large deal wins were in this segment. Industrial Products growth is led by data centers, energy transition, motion and robotics and AI-enabled automation with electrification and smart manufacturing driving a robust pipeline, a leading clean equipment manufacturer selected LTTS design, develop robotic machines. In plant engineering, demand continued steadily across oil and gas and chemicals supported by LNG upstream and nonconventional energy projects. In CPG, we partnered with a leading food and beverage company to scale its industry 4.0 framework enabling IT OT convergence and enterprise-wide AI readiness across its global manufacturing operations. The sustainability track on segment is on track to deliver another double-digit growth year. Finally, on tech. Tech was stable this quarter. The demand was driven by client investments in Agentic AI, AI infrastructure, cloud native, modernization, [ data set ] software, advanced connectivity and semiconductor Tech Infra and Semcon delivered another strong quarter, while Media maintained steady. We have set up a dedicated data center engineering business line, servicing AI infrastructure, servers, storage ecosystem, ODMs and OEMs. We expect it to become an important growth area as customers redesign infrastructure for AI workloads. As filed earlier, we won a large AI led engagement with a global telecom equipment provider to design end-to-end systems spanning AI data centers. This program started ramping up in the current quarter. In MedTech, we are expanding in pharma and life sciences, while demand remains healthy across digital health diagnostics and connected devices. In the current quarter, a specific program ramped down per schedule and the next phase will kick in only in H2. In software and platforms, pipeline quality is improving. Pure-play software world is impacted to the adopted of new wage tools, AI tools. We see demand for the AI led soild development across existing and new logos in retail fintech and platform companies. Providing you 2 more inputs, one on business landscape and then we will summarize on business landscape across our client interactions this quarter, the common theme is that clients are doubling down on growth. This makes us cautiously optimistic about their investment plans. Technology spending is shifting towards AI infrastructure, silicon, cloud platforms, data centers and time to market. We've aligned our portfolio for our Lakshya 31 strategy to these priorities, and our EI capabilities help clients improve productivity in current programs and free up investments for next-gen technologies. To summarize, Q2 was a good quarter. I'd like to thank our clients, our employees, our stakeholders for that with improved growth, margins ahead of plan and our strategic investments gaining traction. With our order backlog and pipeline, both improving year-on-year and several large deals in play, we expect revenue momentum to further strengthen in H2 while sustaining healthy EBIT margins. Growing demand for our EI solutions, diversified portfolio, dedicated large deal engine and improving regional opportunities gives us confidence in our medium- and long-term trajectory. This progress supports our long-term aspiration of 13% to 15% revenue CAGR with EBIT margins in the 16% to 17% range over the next 3 to 5 years. With that said, I'm going to stay back for questions. I would like to request Rajeev to provide his comments.

Thank you, Amit. Greetings to everyone. Wishing you and your family happy Navratri and happy Dussehra in advance. Let me start by sharing key highlights for the quarter. Q2 FY '27 was a strong quarter across all key parameters. Large deal wins of $203 million, sequential revenue growth of 2.7% in constant currency terms. EBIT margins of 16.3% with margin expansion across all segments. Pleased to share that we've been able to achieve our committed mid-16% margin aspiration ahead of term by a couple of quarters. Disciplined capital allocation towards building scalable business and profitable growth is yielding results. Sustainability our most profitable segment, grew double-digit year-on-year basis at 13.4% and now contributes to 30% of our revenues. Our quarter 2 FY '27 annualized EPS came in at INR 143.12 , which is an increase of 23.5% over FY '26 EPS. We successfully concluded this investment of SWC business in this quarter. This resulted in a onetime gain of INR 165 crores in quarter 2 FY '27. With that, I will move to Q2 financials, starting with the P&L. Revenue for the quarter was INR 3,040 crores, representing growth of 3.4% sequentially and 12.1% year-on-year. EBIT margin for the quarter stood at 16.3%, improvement of 30 basis points sequentially and 220 basis points year-on-year. Effective tax rate for the quarter was 26%. Going ahead, we expect ETR to remain in the range of 26% to 26.5%. Net income for the quarter was INR 548 crores, up 53.7% sequentially and 66.8% year-on-year. This represents 18% of revenue. This includes a onetime gain of INR 165 crores from this investment of Smart World business. EPS from continuing operations was INR 35.78 for the quarter, translating into an annualized EPS of INR 143.12 and compared to reported 526 EPS of INR 15.89, an increase of 23.5%. This improvement reflects our disciplined capital allocation towards sustainable profitable growth and investments in new technologies aligned with our long-term strategy. Other income was INR 17 crores for the quarter, higher compared with the previous quarter while absorbing ForEx volatility and [indiscernible] movements. Moving to balance sheet and cash flow. Let me highlight the key line items. Quarter 2 FY '27 overall DSO came in at 78 days. This is filled as billed DSO of 60 days and unbilled DSO of 18 days, which remains stable versus 77 days in quarter 1 FY '27, well below our guided range of 80 to 85 days. With this investment of SmartWorld business now complete, hence forth, we will report overall DSO. Our year-to-date free cash flow was INR 790 crores, a healthly 108% of net income. Our cash and investments stood at INR 4,197 crores end of quarter 2 FY '27 compared with INR 3,394 crores at the end of quarter 1 FY '27. The Board has approved an interim dividend of INR 20 per share, reflecting our focus on creating value for our stakeholders. On revenue metrics, revenue in dollar terms was USD 317.1 million compared with USD 309.9 million in quarter 1 FY '27 which is a constant currency sequential growth of 2.7% and year-on-year growth of 4.8%. On segment margin performance, we saw margin expansion across all the segments. Mobility margins in Q2 improved to 16.9%, up 130 basis points sequentially resulting from quality of growth and operational efficiencies. Sustainability margins saw improvement to 29.5%, up 40 basis points sequentially supported by execution of large deals and strong growth in this segment. Tech segment margins improved to 12%, up 50 basis points sequentially ramp-up of recently on AI-led engagement with a global telecom equipment provider also aided a margin improvement. On the operational metrics, for quarter 2 FY '27, our offshore mix improved to 55.9% in the quarter, reflecting our continued efforts in improving offshore mix. Fixed price mix improved to 35.6% in Q2, progressing towards higher value fixed price and outcome-based engagements. Client profile remains stable on a sequential basis, reflecting the strength of our customer relationships. Client contribution to revenue remained broadly similar compared to Q1 FY '27 across categories. Tech count marginally increased from INR 23,845 in Q1 to 24,035 in Q2. Attrition remained largely range bound at 14.7% during the quarter. Realized rupee for quarter 2 FY '27 was 95.9% to the dollar. Depreciation of 109% compared to Q1 FY '27. Now before concluding, I will share a bit around the margin outlook. We achieved our margin aspiration of mid-16% EBIT levels ahead of time by a few quarters and aspire to maintain this margin range in the near future. Our margin levers mainly will be revenue growth and healthy segment mix. operational efficiency, including AI and productivity gains across delivery and functions and disciplined SG&A management. We remain confident of our growth trajectory supported by a healthy pipeline, deal ramp-ups prudent capital allocation, engineering intelligence-led execution and continued optional discipline. We expect these factors to drive stronger revenue growth for us, while sustaining our margin performance and reiterate our aspiration of 13% to 15% CAGR over the next 5 years with margins in the range of 16% to 17%. I take this opportunity to thank our investors, analysts and stakeholders for their continued trust and support and the entire LTTS team for their dedication and resilience. I will now hand over the call to the moderator for questions. Thank you.

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

Congrats on a good performance. In the past, we have seen that the sustainability segment more volatile. I think you were trying to move towards more annuity deals and where you've now shown very good growth in the last couple of years as we've moved successfully. Can you talk a bit about how much of the revenue or long-term programs and how you managed to bring down the volatility in this?

Ravi. So the question is how do we bring down volatility in sustainability, right?

Correct, sir.

Okay. So over the last 2 years, if I look at it, there are 2 or 3 things that have thematically changed, right? Number one, when we look at sustainability, we have now got that business it up into 4 broad categories, if I may. And the 4 categories we have broken up that business on is oil and gas chemicals is Part 1. FMCG is Part 2. Energy Automation is Part 3 and Industrial Machinery and Building Technologies is Part 4, right? So one, we've basically home in these 4 areas. We've defined -- redefined our offerings and the offerings have broken up into almost like a service industry to MOD 1, MOD 2, MOD 3 or Gen 1, Gen 2, Gen 3, and we have doubled down on it. If I look at the oil and gas chemicals business that we've got, we've been able to win some large-term relationships that trust with our clients. Those are continuous volumes that continue to stay steady, increase over a period of time. And they're almost like you're moving from supporting foundry to do some design to a second one to a third one, but across the landscape of that client type. The second part is that we have invested in creating solutions for digital twin this area and not just that. Now we are leveraging AI. So it's not single variable and single dimension, but multiple dimensions, multiple variable solutions, right? And that is helping reduce downtime for our customers, helping them on planned shutdowns, et cetera. So that's the second part. I will give you one example of the various solutions that we have created. The third point is that as the 6-layer AI cake is unfolded, there is work happening across the 6 players and the liver starts with energy, right? So we are seeing work coming in that area on a continuous basis. Finally, given work that we have done in solutions, this has always been more for the company for the longest period ever. And with the double focus that we've had, we've been able to win large deals in this area. In fact, one of the questions earlier used to be that you have 1 large deal, you're not growing. So a lot of those large deals that we got last year in sustainability have actually moved to revenue and execution right now. And current quarter also more than 50% of the deals are in sustainability. As I look forward in the future, we are actually bringing in a lot more AI content into this part as well. And we believe that this will be the next wave to help us to sustain the growth that we've had.

Thank you for that detailed answer. On the mobility side, the German OEMs are still, I think, in the restructuring mode, do you expect that segment to come back? Or are you more diversified beyond that? What can drive growth in this segment?

There is -- so number one, see, we look at our Mobility, we've got Auto U.S., we've got Auto Europe. We've got E&OH and we've got Aero and Rail, right? Those are the 4 broad components. And you've said in the past that Auto contributes about 50% of our mobility revenues. So we're not overly dependent on Auto Europe, right? So what we have seen happening in the last 2 quarters for us, and we had shared this earlier well that Auto U.S. has a clear strategy and they are in execution mode, and we are seeing that benefit. P&O execution more seeing that benefit. Aero and Rail in execution more seeing that benefit. Auto Europe has been a problem. In fact, current quarter also, we faced some headwinds from Auto Europe. But we do believe that Auto Europe should come back sometime next year, right? In fact, we are working on a lot of solutions on AI defined mobility. We are working on OEM software, sovereignty that we are working on, and we believe that this will along with alternate energy part or EV, BEV part will create the next phase of cycle of growth. Again, early days working through it, you've seen growth in the last 2 quarters in mobility should continue.

One last question, if I may. Aerospace, let us talk about a new single-aisle aircraft program that Airbus might start. Any ideas on when that could be and if that could benefit us?

On a ligher note, I've been waiting to fly [indiscernible] plane for the last 5 years. So on a serious note, I think a little more to be done in that area. So we'll see.

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

Congrats to the LTTA team for a solid performance. Amit sir, a couple of questions from my side. Just digging a bit deep into the verticals. In the sustainability vertical, you have entered the both plant in and still kind of contributed to the growth. So in the oil and gas vertical specifically, are we seeing any challenges due to the Middle East situation at this point of time? And not just in that vertical or the overall business also any challenges which we saw in this quarter or you foresee in the coming quarters? Second question on the mobility vertical. You just mentioned that you expect the European auto part to basically come back next year. So is that comment just for our portfolio in terms of the deals that we are seeing? Or do you believe European auto companies themselves might be able to turn around next year in terms of their CapEx spend and could be positive for the industry as a whole. So just 2 questions and then probably have one more follow-up.

Sure. So we were on oil and gas, I want to say that most of the work that we are doing for oil and gas companies, chemical companies, LNG companies, is largely focused right now on the U.S. and Europe. We have very little business going on in the Middle East, right? We are trying to build that out very little business going on in the Middle East. So the impact is not there. And where we are seeing a lot of these medium sized projects getting kicked off in oil and gas in the U.S., in Europe, we are seeing -- and digital projects and AI projects coming in, we're seeing that as a positive. Middle East overall is a very small part of our portfolio. We are -- our heart goes out for whatever is happening there, but the impact, we don't have any significant business impact from that yet. Having said that, these things drag on, God knows what will happen. Right now, we're not worried about this at this stage. Now when we come to Europe auto. So Europe auto, there are 2 things happening. See, like U.S. auto at they had done last year was that we had gone ahead and done some write-offs clearly from the technology, and they have moved very surefooted towards hybrid vehicles. right? And therefore, they started SDV, they started AI native solutions, all that, and we're seeing the positivity here. Europe Auto at some point, will have to step back and potentially do whatever they have to do in terms of write-offs, et cetera, and rebaseline themselves. I believe that time will happen. A lot of companies are talking about it. Some are doing it. So I do believe that should clear up in the next 6, 9, 12 months, if you look at it. Number two, what's happening is there's a number of local European service providers that still continue to work on old ways working and models. So those are getting replaced by augmented by India Inc. And that's a skin one that we believe will happen. With our investments in Munich with our EI center that we have set up and others, I believe that we do get a fair chance and share were able to win some of that.

Got it. Got it. That was really helpful. Just 1 question for you 1 more, and then I have 1 follow-up for basically on the financials part. So basically, on the iTech vertical. I think the numbers are on the software side. You alluded to that in the opening remarks as well. I think the telecom piece stuff is doing well. It's the media and the remaining business which is probably not firing as the other segments are. So any color on that? And when do you think that vertical should also start supporting the growth of the overall business.

Sure. So I look at -- so there are 4 parts in iTech. There is a medtech piece, right, where we had this 1 program, significant program that ramped down and the follow-on program didn't start, right? So that's been that case. Outside of that, we have been having a fair degree of smaller wins in the med tech space. The second area is Semcon that continues to grow for us and is differentiated for us. Third is our tech infra space where we have won this program, AI-led gram for communication. And the fourth is the media piece, right? A fifth actually is a systems and platform, which we bought with [indiscernible]. So the system-led platform fee has actually improved in margins for us sequentially as well as year-on-year. And we do believe that, that growth trajectory will accelerate sometime in quarter 4 and beyond. Media will be steady. I don't expect anything in different media. Tech Infra will show growth because of the deal that we have won. SEMCO will continue to grow. Medical, I would like to say quarter 3, but I'm going to be careful and say quarter 4 because I want to give a little time to our teams as they regroup, rebuild and take things forward. So overall, tech for you should -- will be muted in quarter 3. But beyond that, we do see growth coming back.

Got it. Got it, sir. So that's [indiscernible] influence. Just one last thing for Rajeev. Rajeev, you mentioned our DSO days now is at around 78, including build and unlit. These are the numbers that we are comfortable with? Or do you think post divestment of see being complete, there could be further scope of maybe improving from these [indiscernible].

Vibhor, so I will say at this point, we are comfortable. The range that I have provided is between 80% to 85%. I think we are operating well under that range. So really comfortable. This is where we likely operate.

Our next question comes from the line of Jyoti Singh with Haitong Securities.

Cogratulations on the good execution. So my question largely on the book tipping side on SWP EBIT parameter. So this discontinued number, we cannot expect in this -- in upcoming quarters and like operational line is around $36 million. So now we expect 0 from next quarter.

So yes, I have -- so Jyoti, thank you for this question. I did highlight this is a onetime gain in quarter 2. The onetime gain is INR 165 crores. And now this is completely a business that has been disinvested. So what you will see going forward quarter 3 will be only the continued part of the business, while we have reported it as part of whatever the accounting principle separately for continued and separately for discontinued. Going forward, we will be -- report continued business.

Okay. And a follow-up question on the Europe side. So like we continue to see downside in Europe and fell around 4% year-on-year. So are we seeing any changes in the ER&budget side or from your top line? Or it's still it's flat [indiscernible].

Actually, Europe grew for us quarter-on-quarter and year-on-year. Maybe there's something to do with the currency billing that we had. But we've got Alind here, who runs the growth markets and large deals. A would you like to talk about the momentum in Europe.

So look, Amit already covered the auto, so I'll not spend time on that. But if you look at the other sectors, so pretty much the AI infrastructure led spend, which is there in Europe, is there. So we are seeing the ex of that and what you see in sustainability growth. Part of that is coming from Europe as well. Plus, we are fairly gang on the plant side of the business as well. So both of them, industrial and plant will continue to grow in Europe. We are opening up a few more areas in tech based on some of the recent wins that we have. Europe will stay cautious, as Amit has said, on automotive. But otherwise, we see a fair amount of growth happening. And I would suggest that if you look at maybe a quarter down the road, the consolidation deals that we have been talking about, they can also contribute to the growth that we see in Europe. And we remain pretty [indiscernible] about what can happen over there.

Sure. And sir, just 2 more questions from me. One is on the furlough side, how we are expecting in Q3. And are we seeing this momentum to hold? And another just '28, how the deal wins we are seeing shaping up?

Okay. So 2 answers here. One, in terms of -- we are not providing quarter-on-quarter on annual guidance. What I'm confirming is that H2 will be better than H1. We expect regular furloughs to happen. So that's the lay there of the land. Now in terms of deal wins, look, this quarter, we run $203 million. I still owe you all $100 million from last quarter. I haven't forgotten that. And I'm looking at my colleague here as I answer this. So we will make sure that we get you the extra $100 million in Q3 and Q4 because we want to keep to that INR 200 million. Lastly, ma'am, your question around next year is also, as you have seen, right, the same thing we had deals last quarter last year. And now this quarter as well, it's coming to revenue. So similar, you would see these coming to revenue. That's the focus that we have out. Our pipeline is up more than 25% year-on-year. Order bookings are up. So knock on wood, let's see where it goes.

Our next question comes from the line of Bhavik Mehta with JPMorgan.

A couple of questions. Firstly, if I look at our daily TCV over the last few quarters, it was a very strong like the question was not converting into revenue, which seems to be playing out right now. So if that is what is playing out in the environment? And can you just help what has changed in the clients and otherwise spending now given the macro site main certain, what has changed from a client perspective trains deal conversion to revenues and adding the growth. And the second question is a margin, good to see you're hitting that mid-16% band at this time. But in the near term, how should we think about festive margins going forward? I mean, will that be a case for a gross margin rate the margins remain around 15% in before you think about expanding margins because just trying to understand with the exit margin by 4 that we set the pace for next year margins.

Bhavik, thank you so much. Bhavik, if I look at what's changed in the last few quarters, see client conversations actually, I'll tell you, have been very positive with the AI CapEx spend across chips across software, across industrial electrical companies across telco, infra, it is powering up a lot of companies and a lot of spend. So that's a positive that we are seeing. Second, when I go talk to our clients or our executive team is going and talking to clients, they are largely focused on growing their businesses in spite of the unstable environment rather than cost cutting. So that's a big second that we are seeing is a shift. Third is everybody wants to get some help on AI and say, how can I make myself more resilient and productive. So our in strategy, et cetera, playing out if you ask me in our favor in that area to take things forward. Also, I believe that we have [indiscernible] 9 to 12 months ahead of competition and peer group in this area. So we're actually gaining market share as opposed to competition. So all those 3 put together, I remain cautiously optimistic in terms of the fact that growth has accelerated actually, of course, the 3 quarters, and let's see where it goes. So that's what that is. You want to talk about...