LTTS - Not another IT company!

@abhymurarka @AvadhMaheshwar2 @hjyadav @caniravkaria
LTTS is a leading global ER&D services company with a client base comprising 69 Fortune 500 companies and 51 of the world’s top R&D spenders. The Company offers design and development solutions to clients across the entire value chain of product development.
What is ER&D?
ER&D industry works on basis of the domain expertise of the service provider as the service provider will work as an engineering expert for that particular contract and the client relies on the expertise and execution capabilities of the service provider
How is it different from the IT industry?
Constant involvement is required during the service of contract due to technical nature of work, maintenance requirement which requires domain expertise
Company needs to have a strong relationship with clients. Entry barriers are very..
..high in this business because the client requires track record of proven expertise as they can’t rely on new players due to technical nature of work and loss of revenue due to incapability of service provider
Need to have core technological strength which means the company..
..has to bring new-age technology eg, digitalization of existing technology, predictive maintenance (fixing it up before breakdown)
Customer will not outsource its entire development of a project in one shot to a player, it will be developed gradually while working on the project
ER&D services was the fastest-growing segment among tech spend with increasing spending in digital led services. Currently, global outsourcing in ER&D is only 5% unlike IT services which is at more than 50%
The global spend of Digital Engineering is expected to grow at a CAGR..
..of 19% from USD 403 billion in 2019 to reach USD 1153 billion by 2025
India will account for 41% of the global digital engineering services market by 2025 (Report by Zinnov)
By 2025 around 53% of customer spending will be on digital engineering development, by 2019 it was 30% of overall customer spend. Digital – making technology more intelligent, more connected, and transform the user experience
Financial highlights:
The company has increased revenue from INR 30,665 Mn in FY16 to INR 56,191 Mn in FY20 at CAGR of 16.3%
The company has increased EBITDA from INR 5,378 Mn in FY16 to INR 11,913 Mn in FY20 at CAGR of 22% by expanding margins from 17.5% in FY16 to 21.2% in FY20
The company has reduced its onsite presence (low margin) from 53% in FY16 to 45% in FY20 and increased its high margin offshore presence from 47% in FY16 to 55% in FY20
Revenue from India has grown at a substantial rate
LTTS caters to all major industries including transportation, industrial products, telecom & hi-tech, medical devices, and process industries
Following is the segment performance over the years
Medical devices and transportation segment have grown substantially
LTTS is strong in the segment in which L&T had a presence in the engineering space such as plant engineering, industrial products & medical devices
The company doesn’t face any major competition in this plant engineering space from India due to strong capabilities coming frm L&T
Moat is present in Industrial products segment where company has a strong presence as L&T used to be a mftr of industrial products in electrical, medical space, cement, etc which over the years have been divested but the engineering expertise of those products stayed with company
The company is ahead of industry in terms of digital engineering revenue which forms 49% of the company’s revenue whereas for the industry it is around 30%
The company has strong track record of execution and good relationship with client which has led to continuous contract flow
The high-margin segments do not face intensive competition as there are very few vendors in this space having domain expertise. The EBITDA margins in this space are not going to change a lot due to domain expertise, early mover advantage, and strong client relationships
The company is currently trading at PE of 43.8x for FY21e which is at a high premium as compared to its peers
The premium valuation is justified due to the dominant presence in a niche segment with stable and improving EBITDA margins.
The company has a proven track record of sustainable growth with expanding margins and being a pure-play ER&D player will benefit from the sustainable industry growth. The company has been growing at a faster rate than the industry average.
LTTS's business growth depends on the global ER&D spending by corporates, the quantum of ER&D outsourced to third-party vendors, and the ability of LTTS to develop competencies to address the ER&D needs of its customers
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