| L&T Technology Services Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities of L&T Technology Services Limited (LTTS).
On January 12, 2023, LTTS announced acquisition Smart World & Communication (SWC) business of Larsen and Toubro Ltd (L&T; rated ‘CRISIL AAA/Stable/CRISIL A1+’) for Rs 800 crore, subject to shareholders and regulatory approvals which is expected to complete by March-2023. SWC is a leading connected intelligence solution provider with Rs 1,098 crore in revenue at 8-10% EBITDA margin in fiscal 2022 through 3 segments – Communications (74% revenue share), Safe & Smart Solutions (25%), and Cybersecurity (1%). The acquisition will enhance LTTS’ end-to-end offerings in these segments albeit will be working capital intensive and margin-dilutive in the near-term which is expected to improve over the medium term driven by synergies and cost-optimisation efforts; which remain the key monitorables. The acquisition will be funded by internal accruals and liquid funds which stood at Rs 2,305 crore as of September 30, 2022. LTTS financial risk profile is expected to remain strong even after the acquisition with strong liquid surplus and continuing healthy cash accruals.
The ratings continue to reflect LTTS’s strong business risk profile supported by its established market position and diversified product offerings across various end-user industries. Company’s large client base in key markets has helped it in continued deal wins over the years. In the first six months of fiscal 2023, consolidated revenue grew by 35% year-on-year to Rs 3,869 crore with EBITDA margin moderating to 21.3% as compared to 22.1% in fiscal 2022. Revenue growth was broad-based across segments including transportation, industrial products and engineering verticals while continuing with healthy fixed costs absorption. LTTS continued to remain financial debt free with cash surplus growing to Rs 2,305 crore as of September-2022 from Rs 2,179 crore as of March-2022. Finance lease liabilities as of September-2022 stood at Rs 461 crore (Rs 477 crore as of March 31, 2022)
The niche presence in value-added segments and focus on emerging areas such as automotive (mainly Electric Vehicles), medical devices, telecom and 5G, process engineering, and industrial automation will aid sustained annual healthy organic growth in revenue of 12-15% further aided by inorganic expansions and operating profitability of 19-20% over the medium term. The company continues to maintain a healthy financial risk profile, and robust liquidity, which too are expected to continue over the medium term.
The ratings continue to factor in benefit from the strong managerial and operational support from its parent, Larsen & Toubro Ltd, and the overall strength of the L&T brand. These strengths are partially offset by its geographical concentration in its revenue profile and increasing competition in the business.
The ratings also reflect the strategic focus of the parent, L&T, towards service-based businesses such as information technology (IT), and financial services with the objective of reducing the dependence on capital intensive and low margin businesses. L&T has taken significant steps to consolidate and strengthen its services business including amalgamation of Mindtree Ltd (Mindtree) with Larsen and Toubro Infotech Limited (LTI, ‘CRISIL AAA/Stable/CRISIL A1+’). Over the years, the contribution of service based business towards group’s overall business, both in terms of revenue and profitability has also been improving. |
Analytical Approach For arriving at the ratings of LTTS, CRISIL Ratings has factored in support expected from its parent, L&T. CRISIL Ratings believes that LTTS will in case of exigencies receive active support from its parent considering strategic importance of L&T Limited as LTTS relies heavily on engineering and the technical knowhow of the parent due to its reputation in the engineering and construction industry. Moreover, the parent has also assisted LTTS for acquisition of the two divisions (PES & IES) in the past.
CRISIL Ratings has combined the business and financial risk profile of LTTS, and its 12 subsidiaries, including the recently acquired Smart World & Communication (SWC) business of L&T which will reside at standalone LTTS.
With adoption of Ind AS 116 with effect from April 01, 2019, lease liabilities are treated as debt along-side adjustments are also made in depreciation and amortization and interest cost components.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
The company has a large and diversified client base given its strong presence over the years across various verticals including telecom, automotive, aerospace, medical devices, industrial products, heavy machinery, construction, and consumer appliances. There has been growing interest in the past few years from clients across sectors in sourcing their engineering and Research and Development (R&D) requirements from India. Clients currently include 69 of the global fortune-500 companies and 57 of the top 100 R&D spenders. This has enabled the company to withstand the slowdown pressures as exposure is not restricted to a particular end-user industry.
On account of continuous focus on R&D and building new platforms solutions, the company has been able to expand the revenue share from existing clients and maintain steady acquisition of new clients. Similar growth and profitability is expected to be maintained over the medium term, thereby supporting the overall business risk profile.
The company’s financial profile continues to be strongly supported by healthy cash accruals, debt free balance sheet and robust liquidity (cash surpluses of ~Rs. 2,305 crore as on September 30, 2022). Finance lease liabilities as of September-2022 stood at Rs 461 crore (Rs 477 crore as of March 31, 2022). Capital spending, except for acquisitions, is expected to remain moderate; this and incremental working capital needs are likely to be funded through cash accruals.
LTTS benefits from L&T's established position as an engineering specialist, given that the target market of the former is engineering design. Managerial and Operational support is available from L&T in the form of shared resources both managerial and infrastructure.
There is commonality in the board of directors and entire operational teams have moved as part of the strategic business unit (SBU) to LTTS. Even though the financial risk profile of LTTS is sound, support from the parent exists for any exigency. L&T had invested Rs 750 crore in the form of preference shares in the company in addition to Rs 300 crore of equity share capital for the buyout of these SBUs. The 10% preference shares (redeemable at par) subscribed by L&T were converted to equity in May 2016, and the company was listed in September 2016.
Further, being an L&T group company, LTTS also benefits from the strong brand and domain expertise available within the group, resulting in better penetration and acceptability in the market. Treasury operations are supported by L&T Treasury, and critical treasury decisions are taken by the Treasury Committee, which consists of members from L&T and LTTS.
The IT and technology services business has been becoming more critical to the L&T group in recent years. The group is presently focusing more on the services business, which includes financial, and IT and technology services, which are asset light, have healthy growth potential, and offer high return on capital employed. L&T has taken significant steps to consolidate and strengthen its services business including recently announced amalgamation of Mindtree Ltd (Mindtree) with Larsen and Toubro Infotech Limited (LTI, ‘CRISIL AAA/Stable/CRISIL A1+’). Over the years, the contribution of service-based business towards group’s overall business, both in terms of revenue and profitability has also been improving.
Weaknesses:
Dependence on the US market is high, with over 62% of the revenue coming from the US in fiscal 2022, having increased from ~60% in fiscal 2018. Although geographical diversity mitigates business risk, the skew in revenue is unavoidable given that the US is the largest IT spender in the world, with the US contributing over 60% of the industry’s revenues. SWC acquisition will, however, improve the diversification given its India focused existing business which is expected to be ramped-up across geographies going-forward.
LTTS is an engineering services provider focused on offering innovative design and development solutions across the product development value chain, for industries such as industrial products, transportation, aerospace, telecom and the process industry. Given the healthy growth prospects in this segment many IT firms have forayed into the engineering services business in the last few years resulting in increased competitive intensity.
Given the increasing competition and the resultant pricing pressures, the ability to introduce new innovative products/platforms will remain extremely critical to maintain competitive advantage. Further, players will have to maintain an efficient cost structure, ensuring effective resource retention and utilization while remaining responsive to the dynamic nature of the industry. |
Liquidity: Superior The company is expected to generate cash accrual of about Rs 1,000 crore over the medium term, which will be sufficient to annual capex and incremental working capital needs. The Rs. 103 crore fund-based bank limits have witnessed negligible utilization during last twelve months ended December 31, 2022. Moreover, cash and liquid surplus were about Rs 2,305 crore as on September 30, 2022 and is expected to reduce in the near term post SWC acquisition funding but remain healthy over the medium term at similar or higher levels. There is no long-term financial debt, except for financial lease liabilities of Rs 477 crore on LTTS’ balance sheet as on March 31, 2022 |
Outlook: Stable CRISIL Ratings believes LTTS’s business risk profile will be supported by healthy growth in engineering and research & development (R&D)-related information technology (IT) services, and its financial risk profile will remain comfortable in the absence of debt-funded capital expenditure (capex). CRISIL Ratings also believes LTTS will continue to receive managerial and technical support in case of any exigencies from L&T. |
Rating Sensitivity factors Downward factors
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About the Company LTTS is an engineering services provider incorporated in 2012, focused on offering innovative design and development solutions across the product development value chain, for industries such as industrial products, transportation, aerospace, telecommunications (telecom) and the process industry. As on March 31, 2022, L&T held 73.9% shares of LTTS.
The company was created by combining two strategic business units: Product Engineering Service (PES) from L&T Infotech Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) and integrated engineering services (IES) from L&T, which were transferred to it on January 1, 2014, and April 1, 2014, respectively. |
Key Financial Indicators - CRISIL Ratings Consolidated Adjusted figures
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Fund Based – Cash Credit / Packing Credit (does not include term loan) **Non Fund Based – Letter of Credit / Bank Guarantee |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 19-Jan-23 in line with the lender-wise facility details as on 16-Nov-22 received from the rated entity.
*Fund Based – Cash Credit / Packing Credit (does not include term loan)
**Non Fund Based – Letter of Credit / Bank Guarantee
Criteria Details
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