L&T TECHNOLOGY SERVICES

L&T Technology Services is well-positioned to capitalise on the growing engineering services provider (ESP) market, driven by technological shifts across key verticals. The company’s strong deal wins, management confidence, and expansion into high-growth segments like AI, sustainability, and digital engineering indicate long-term growth potential. However, there are certain challenges that may investors do well to take note of [EasyDNNnews:PaidContentStart]

In the first fortnight of January 2025, the broader market experienced a selloff. However, some stocks outperformed due to strong Q3FY25 earnings and robust revenue visibility. One such stock was L&T Technology Services Ltd. (LTTS). Following its Q3 results announcement on January 16, LTTS surged 10 per cent, hitting an intraday high of ₹5,336.45 on the BSE. Despite the bearish sentiment, the stock maintained its uptrend, reaching a monthly high of ₹5,502.50 on January 23.

As of January 30, LTTS’ shares have gained 12.69 per cent month-to-date, though they remain 2.29 per cent lower over the past year and below their 52-week high of ₹6,000, recorded in August 2024. The IT sector outlook remains optimistic, supported by strong Q3 earnings and positive management commentary indicating improving prospects. LTTS expects organic growth of 8 per cent for FY25 and reported record-high deal bookings in Q3, including eight large deals.

Over the last three years, revenue and profit have grown at a CAGR of 20 per cent and 22 per cent, respectively, while return on equity stood at 26 per cent. However, stock performance remained muted with the share price growing at a CAGR of just 5 per cent over the past three years. Renewed investor interest is emerging due to LTTS’ recent quarterly performance. Let’s dive deeper into LTTS to arrive at an informed opinion.

About the Company
L&T Technology Services Ltd (LTTS), backed by Larsen and Toubro Limited (L&T), is a leading engineering services provider incorporated in 2012. The company specialises in engineering, research and development (ERD) and digitalisation solutions across key industries, including transportation, industrial products, telecom and hi-tech, medical devices, and plant engineering. LTTS boasts a strong customer base, including 69 Fortune 500 companies and 53 of the world’s top ERD firms. The company also offers digital engineering advisory services.

LTTS went public on September 23, 2016, and currently serves 296 global clients across 25+ countries. LTTS focuses on disruptive technologies such as 5G, AI, collaborative robots, digital factories and autonomous transport, with multiple innovation and research and development design centres worldwide. With over 1,300 patents and 24,000+ employees, LTTS continues to expand its capabilities and service offerings.

Business Segments
LTTS operates in three key business segments:
1. Mobility: Focuses on automotive, aerospace and rail sectors. The key areas include software-defined mobility, electrification, and vehicle engineering.
2. Sustainability: It works with process and industrial clients on greenfield and brownfield engineering, plant modernisation, and sustainable manufacturing.
3. Technology: It serves medical, smart world, communications, media and technology companies. It specialises in platform engineering, system integration, and device and silicon engineering.

Corporate Structure
L&T Technology Services Ltd. (LTTS) operates as a subsidiary of Larsen and Toubro Ltd, which held a 73.66 per cent stake as of December 31, 2024. The corporate structure includes multiple wholly-owned subsidiaries, such as:
• L&T Technology Services LLC (material subsidiary)
• L&T Thales Technology Services Private Limited
• L&T Technology Services PTE Ltd. (formerly Graphene Solutions PTE Ltd.)
• Graphene Solution SDN. BHD, Taiwan Limited
• L&T Technology Services (Shanghai) Co. Ltd.
• L&T Technology Services (Canada) Limited
• L&T Technology Services Poland (incorporated in October 2023)
• Notably, Orchestra Technology Inc. merged with L&T Technology Services LLC on February 1, 2024.

About the Sector
The global ERD sector is experiencing rapid growth, fuelled by technological advancements, macroeconomic trends, and increasing digital transformation across industries. According to Boston Consulting Group (BCG), the ERD market is projected to expand from USD 1.5-1.8 trillion in 2023 to USD 2.5-3.3 trillion by 2030, growing at a CAGR of 8-9 per cent. The key drivers of ERD growth include:

1. Macro-Economic Factors: Increasing global GDP and consumer spending are boosting demand for new product development and engineering services.
2. Technological Advancements: Innovations in AI, IoT, automation, and digital transformation are driving ERD investments across industries.
3. Global Trends: Energy transition, supply chain localisation, geopolitical uncertainties, and population shifts are further accelerating ERD demand.
4. India’s Growing Role: India remains a key ERD outsourcing hub, with spending expected to grow from USD 44-45 billion in 2023 to USD 130-170 billion by 2030.

The major ERD growth areas include:
• Mobility: The aerospace, automotive and rail sectors are embracing software-defined mobility, electrification, and autonomous technologies. The market is expected to grow from USD 460 billion in 2023 to USD 820 billion by 2030.

• Sustainability: The industrial machinery, smart buildings, and renewable energy segments are investing heavily in digital twin technology and green solutions, with the global machinery market reaching USD 300 billion by 2030.

• Hi-Tech: Medical technology, semiconductors, consumer electronics, and AI-driven solutions are experiencing double-digit growth. The medical technology industry alone is projected to reach USD 559 billion by 2027.

• Plant Engineering: This sector is integrating digital engineering and innovation for industries such as chemicals, energy, and consumer-packaged goods, with spending expected to exceed USD 90 billion by 2030.

LTTS is aligning its business model to capitalise on these trends, with a strategic focus on mobility, sustainability, and hi-tech segments.

Recent Developments
L&T Technology Services (LTTS) has made significant strides with strategic acquisitions, new sub-segments, and major deal wins:

1. Acquisition of Intelliswift: LTTS acquired Silicon Valley-based Intelliswift for USD 110 million to enhance its capabilities in software product development, platform engineering, digital integration, data, and AI. This acquisition brings 1,500 employees and USD 96 million in revenue, strengthening LTTS’ presence in the U.S., Costa Rica and India.

2. New Sub-Segment - Software and Platforms: PostIntelliswift acquisition, LTTS launched a software and platforms sub-segment to target hyperscalers and service-led markets such as retail, fintech and healthcare.

3. Large Deal Wins: Notable deals include an USD 80 million digital engineering transformation contract in sustainability, a USD 50 million agreement with a global network provider, and a multi-million-dollar contract in mobility for engineering design services.

4. NVIDIA AI Experience Zone: LTTS launched this initiative in Bengaluru to bolster AI solutions in mobility and technology.

5. Innovation and Patents: The company’s patent portfolio stands at 1,448, with 903 co-authored with clients. LTTS has filed 174 patents in AI | Gen AI applications.

FY24 Financial Performance
LTTS reported a 9.44 per cent rise in net sales to ₹9,647.3 crore and a 7.39 per cent increase in PAT to ₹1,306.3 crore in FY24. PBIDT rose 8.5 per cent to ₹2,126.3 crore with a PBIDT margin of 22.04 per cent. The company had healthy return on equity ratio of (ROE) 27 per cent for FY24.

Q3FY25 Financial Performance
In Q3FY25 LTTS’ revenue from operations rose 9.55 per cent YoY to ₹2,653 crore. PBIDT excluding other income grew by 1.44 per cent YoY to ₹494.70 crore, with a margin of 18.65 per cent, expanding by 54 basis points while PAT declined by 5.14 per cent YoY to ₹319.50 crore.

In Q3, the company recorded its highest ever deal booking with the total contract value (TCV) aided by eight large deals across segments – one USD 50 million, two USD 35 million, two USD 25 million, and three USD 10 million deals. The large deal pipeline has seen robust addition on the back of engagements with customers on both new-age product and platform development and business transformation. LTTS provided a guidance for about 10 per cent revenue growth in constant currency for FY25, including the contribution from Intelliswift.

Growth Triggers
• Revenue Growth Outlook: The management expects nearly 10 per cent revenue growth in constant currency for FY25, including Intelliswift’s contribution.
• Strong Deal Wins: Record deal bookings in Q3FY25, including one USD 50 million, two USD 35 million, two USD 25 million, and three USD 10 million deals. Similar momentum is expected in Q4.
• Client Expansion: Active clients increased to 378 from 373 in Q2FY25.
• Segmental Growth: The technology segment rebounded 11.1 per cent QoQ, led by communications, media and medical technology. Sustainability grew 4 per cent, driven by process and industrial sectors.
• Intelliswift Acquisition: The acquisition of Intelliswift is expected to enhance LTTS’ capabilities in AI, digital, and software product engineering, expanding the addressable market. It is also expected to open up opportunities in the service-led sector, namely retail, fintech and healthcare.
• 'Go Deeper to Scale’ Strategy: Investments made in the first half of the fiscal year under this strategy are yielding results, visible in deal bookings, growth, and margins.
• New Technology Investments: LTTS is investing in cutting-edge solutions such as LTTSiDRIVE for SDV implementation and agentic AI for autonomous operations. The company has also inaugurated a NVIDIA AI Experience Zone to boost AI capabilities.
• Geographic Expansion: The company is capitalising on growth opportunities in the Middle East for smart city solutions.

Key Focus Areas
• Strategic Growth Segments: Focus on mobility, sustainability and technology, aiming for billion-dollar verticals.
• Technology and Innovation: Heavy investments in AI, Gen AI, and software-defined solutions.
• Digital Transformation: Expansion in digital twin, smart manufacturing, and industrial automation.
• Large Deals and Client Mining: Targeting more USD 100 million+ accounts and deeper client relationships.
• Geographic Expansion: Strengthening presence in Europe and North America.
• Strategic Mergers and Acquisitions: Acquisitions like Intelliswift to enhance AI and software capabilities.

Key Business Concerns
1. Mobility Segment Weakness: Declined 5.2 per cent QoQ, impacted by OEM slowdowns and spending pauses.
2. Furloughs and Project Delays: Automotive and industrial segments faced delays in spending and project ramp-ups.
3. EBIT Margin Pressure: Intelliswift integration to reduce EBIT by 150 bps, near-term margins at 15 per cent.
4. Attrition and Talent Management: Headcount fell by 233, signalling possible hiring challenges.
5. Integration Challenges: Intelliswift’s integration may create short-term operational inefficiencies

Valuation
L&T Technology Services trades at a PE ratio of 44x on a trailing 12-month basis, significantly above the industry average of 32.1x. The PEG ratio of 4x suggests that valuations appear stretched. Additionally, the price-to-sales ratio stands at 6.1x compared to its last three years’ median of 6x, indicating that the stock is fully priced. The company’s strong return on equity (ROE) of 26.4 per cent and robust revenue guidance, supported by large deal wins, help justify current valuations. However, the double-digit earnings growth on a forward basis could support these valuations while the expected 150-basispoint impact on EBIT margins due to the Intelliswift consolidation could significantly affect its earnings in the near term.

Conclusion
L&T Technology Services is well-positioned to capitalise on the growing engineering services provider (ESP) market, driven by technological shifts across key verticals. The company’s strong deal wins, management confidence, and expansion into high-growth segments like AI, sustainability, and digital engineering indicate long-term growth potential. Additionally, the Intelliswift acquisition enhances LTTS’ capabilities in software product engineering and digital transformation, further expanding its addressable market. However, near-term challenges persist.

The automotive segment remains under pressure, and the management has highlighted weak demand in the agriculture and construction sectors due to uncertainty around potential tariff changes, creating revenue uncertainties. Furthermore, the integration of Intelliswift is expected to impact EBIT margins by 150 bps in Q4FY25, limiting earnings growth. While LTTS aims to restore margins to mid-16 per cent levels by FY27, any shortfall in execution could pose risks. In terms of valuation, the stock appears fully priced at current levels. Despite strong revenue visibility, near-term margin pressures, and weakness in the certain segments limit upside potential. Given these factors, we recommend AVOIDING LTTS at this time while monitoring margin recovery and future growth execution.

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