LTTS has identified six investments areas for further growth: Amit Chadha, CEO & MD

Amit Chadha, Chief Executive Officer & Managing Director, L&T Technology Services Limited (LTTS), talks about the June quarter numbers, expected deal pipeline for FY22, margins, price hikes and M&A opportunities among others during a candid chat with Swati Khandelwal, Zee Business. Edited Excerpts:

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Q: This is the fourth consecutive quarter of improvement in operating margin and there is a continuation of the broad-based growth. How will you summarize the numbers of the quarter and is it sustainable growth for the future?

 A: As you said, $Revenue is up 4.2%, Rupee revenue is up 5.3% and EBIT margins is 17.3% and net profit at Rs 216 crore, broadly this has been our best results as compared to the past. In fact, this is the first time, when we have crossed the annualized run rate of Rs 800 million after many quarters. A lot of this has happened because of our team, our customers and the way they have worked and performed. Growth has been broad-based and going ahead, we have increased our revenue guidance and have increased our revenue guidance for FY22 to 15-17%. And, we are seeing that there are three or four things that are helping us in this area and they are

(i) The markets of the US and Europe have opened and do we expect that going ahead there will be an improvement in terms of decision making etc. But broadly normalized towards pre-COVID levels.

(ii) We are seeing that spends on digital manufacturing, digital engineering and digital products in the IT vertical have grown. Also, the emphasis on electric vehicles, connected vehicles is increasing and we are getting engineering related works for it.

(iii) Hi-tech semiconductor, an area of consumer electronics, is also improving and has also improved for us as we are seeing it.

(iv) In plant engineering, we have seen that in the oil and gas segment, the price of oil is back and it has helped us in terms of projects etc as we are getting the Brownfield projects. At the same time, the food and beverage industry is also improving.

So, all-in-all, we have seen an improvement. In medical, there is spending. A project ended for us and the second project took some time in starting but going forward from quarter two onwards, we see this going up. Digital engineering, which used to be at a 40% level a few quarters back has reached 54% of revenues today and see this growing and continuing as we move forward. So, we are fairly confident about the future as we move forward.

Q: How the deal pipeline is looking for FY22 and the segment where the highest traction is visible?

A: Our deal pipeline is better than what it was one year ago. In fact it is better than it was in the last quarter as well. Our TCV wins/intake net new more than 1 million deals is about 15-17% higher than the last quarter itself, sequentially. Also, two deals were of more than 25 million and four deals were between 10 million and 25 million. In total, there were 11 big deals which helped us in quarter one. We do see quarter two also equally promising as we move forward. We did an ideation exercise in the company on some vectors and that helped us in conversion in terms of sustaining our growth as we stand. In addition, there are six investments areas that we have identified for ourselves given the market today and we think that it will help us for the next three to five years. The areas are, Electric autonomous connected vehicles, 5G, med-tech, digital manufacturing, AI for products and sustainability and we feel that these six investment areas will help us as we move forward in growing further. 

Q: In terms of margins, you have beaten the street estimates. Going forward, what is going to be your strategy to continue to grow and be better at profitability in your margins and what are the levels where it will be sustainable at travel expenses is increasing as vaccination ramps up? SO, what is the margin guidance that you would like to provide?

A: We do not provide margin guidance and we stay away from it. But in the last quarter, we, me and our CFO, said that we want to stay at 17% corridor and that is where we want to be, so, we delivered 17.3% this quarter. Our core attempt will be to stay in this range in this FY for the short term. And, this will not happen just by cutting costs anywhere but there will be three factors and they have been there for it because we gave a wave hike from April 1, 2021, and the second set of the wave hike that should be provided to the remaining the rest of the employees will be provided from July 1, 2021. So, I will say that the portfolio will shift more towards digital engineering, which is 54% of the company. Secondly, operational efficiency measures, hiring, cross series skilling that our CEOs along with their team have taken an initiative and doing it since past one year, fresher hiring in which we have hired more than 300 fresher in the last quarter alone and the number stood at the same level in Q4FY21 also. In fact, going forward, we expect that we will be hiring 400 plus fresher in the second quarter and this scheme of 400 plus fresher will continue for next two to three quarters at least. So, all these put together, we are fairly confident that we will be able to maintain the band that we are in, right now.

Q: Digital contracts transformation is looking strong. So, is there a possibility that price hikes will be there?

A: There is hope and we also make efforts. Clients also look and consider it. Alone in this quarter, we, our employees, have filed 46 patents for our clients. We have also filed 23 patients for ourselves. All these technologies on which we work is high-end technology and we hope that we can get better pricing as well as a better realization from our clients. And, hope is that we continue to work on this as an ongoing exercise across the company.

Q: Update us about your strategy on M&A. Are there some interesting areas where you wish to strengthen yourself more, especially in the market where technology and disruption is the flavour? Also, update us about the fund situation and is there any need to increase it? 

A: As far as funds are concerned, we do not have a challenge. We do believe that if it is the right acquisition, we have the money and will find money to acquire. So far four acquisitions have been completed. The first acquisition was done many years ago in transport in the US. After this, we made two close to each other acquisitions in the semiconductor segment. Last year, we acquired 5G. We continue to look at acquisition as an area to augment our capabilities maybe it is the US or Europe and that will be an area where you will see more action in the following quarters. We continue to look actively at various opportunities, we can engage with.

Q: But is there something in radar that we can expect specific verticals and areas that seems more important at present and will the ticket size will be mid-sized?

A: The investment area that can be for the acquisition will be in some among the six strategic areas that I have said earlier. And, we have a process, a team that continuously evaluates M&A and it is unfair for me to say anything at the stage and we are looking forward to what we are doing. As far as ticket size of acquisition is concerned, then the size of the acquisitions that have been done till date has been in the range of, I guess, 20 million revenue range but it is not necessary that we will be in the same range. We can go slightly higher; we can be slightly lower, depending upon what we get and at what price we get it.