L&T Technology Services Ltd

L&T Technology Services Limited

For the Earnings Call held on January 16, 2024, 19:00hrs IST

MR. AMIT CHADHA – CEO & MD, MR. ABHISHEK SINHA –COO & EXECUTIVE DIRECTOR, MR. ALIND SAXENA – PRESIDENT, SALES & EXECUTIVE DIRECTOR, MR. RAJEEV GUPTA – CFO, MR. PINKU PAPPAN – HEAD, INVESTOR RELATIONS

• Our deal wins were healthy – 6 deal wins of $10M+ TCV, which includes one $40M, one $20M deal and a third one was a $10M+ deal in Cyber. Additionally, we had 2 significant empanelment wins. • Our operational performance continues to be strong – We improved our EBIT margins to 17.2% • Last quarter, we had talked about how we were investing in SDV or software Defined Vehicles, AI and cybersecurity. • We made notable progress in each of these areas, and I shall provide details of the same in my segment commentary. • In December, we held our second client advisory council meeting, consisting of 16 members with a combined market cap of $2 Tn, and revenue of $400 Bn. We also hosted the second Digital Engineering Awards along with ISG and CNBC. We gained a lot of perspective and insights from these meetings which is baked in our growth strategy. Let me now start with Transportation, We see a continued build-up of deal discussions around new technology across all 3 sub- segments - Auto, Commercial Vehicles and Aero. • SDV is where the next big wave of spending will happen. Last quarter, I talked about how we had started engaging with multiple customers across OEMs and Tier 1s to help them in their SDV journey. You would have also seen our announcement of partnering with AWS to accelerate the development of SDV. • I am happy to share we won an empanelment with a US Auto OEM to define their SDV architecture. In this multi-year partnership, we will help them in the development of the system, software architecture and integration. This is a milestone win for us and will help us in our ongoing SDV discussions with multiple OEMs and Tier1’s in US and Europe. • I also want to highlight that SDV is becoming relevant in Commercial Vehicle segment too - which follows the same trend as Auto - by investing first in EV and now SDV. With a US construction and mining giant, we have been working on their EV platform, and now we are helping them on SDV architecture too. • We continue to see EV related spending moving from new products to our product optimization, benchmarking and performance improvement.

• On the Aero side, we won a large deal in avionics. We are also having deal discussions with a few new logos in new-age aerospace like electric/hybrid aircraft, building on our earlier wins. Overall, 3 large deal wins and the SDV win in Q3 give us a lot of comfort of strong growth continuing in Transportation. In Plant Engineering, • We had broad-based growth across FMCG, O&G and Chemicals. • The key highlight of Q3 was the start of a significant relationship with bp - as part of which, we will help them in operational excellence and low-carbon initiatives. • This marquee client win reflects our 2 decades plus Plant engineering design expertise combined with digital transformation capabilities, that we've been investing in. • The broad demand trends across all 3 sub-segments are similar - as customers invest in new capex due to more regionally self-sufficient supply chains, embark on plant modernization to increase efficiency and look at sustainability investments - like reducing energy consumption and moving towards greener fuels. We are excited about the pipeline and strong customer spending outlook that gives us confidence of Plant Engineering growth continuing. At Industrial Products, • We are seeing good growth within Machinery and Power sub-segments although Building Automation remains challenged. • Demand is driven by customer investments in digital platforms, need for higher product efficiency, factory optimization and sustainability. • Lifecycle assessment is an emerging area of demand - we are working on AI driven automated solutions that will reduce time to market for our customers. • Cybersecurity continues to be of interest as legacy systems and products are getting connected and modernized. We are optimistic on growing in IP, which will be driven by digital products and supply chain resilience. In Telecom & Hitech, • We are seeing signs of a turnaround in Semcon with the spending freeze in the past few quarters being lifted slowly.

• In Q3, we won a large deal with a Semcon major to consolidate their labs. • Demand is strong in the VLSI chip design space for 5G and AI related chipsets. • In addition to the alliance with Palo Alto, we have now signed a $12M deal in cybersecurity with a Telecom Network OEM. We are seeing a very good acceleration in our Cybersecurity practice post the addition of SWC talent. This deal is our second large deal leveraging SWC in the global market. • We are seeing good opportunities in network automation and digital infrastructure management as Telcos look at cost take-outs and performance improvement. • We are partnering with Telcos to help enterprise customers leverage next generation communication networks for industrial automation, security, and material handling. • In Media and ISV, we are seeing more cost takeouts and vendor consolidation opportunities as focus turns towards higher productivity and efficiency. Overall, we see a good pipeline in Telecom & Hitech and expect growth to continue gradually improve as the deals get closed. Lastly, in Medical, We had a good performance in Medical, led by the ramp-up of a large deal win that we won in Q2. • Demand is driven by 3 key areas: o Digital platforms to enhance patient experience and diagnostics o Complaints handling and remediation o Digital manufacturing and supply chain optimization. • We see a great potential in leveraging AI in Healthcare - For e.g., we have developed an AI solution for Complaints Handling that is finding good traction with customers. This differentiated solution combines AI with domain specific context like regulation to improve process efficiency. • You would have also seen our press release of our collaboration with NVIDIA to develop Gen AI and Advanced Software-Defined Architectures for Medical Devices. Overall, we believe budgets will be constrained in Medical in the short term, but we see consolidation and AI driven opportunities to help drive growth forward.

The segmental margin performance was better in 3 out of 5 segments on a sequential basis, with improvements in Transportation, Telecom & Hitech and Plant Engineering segment. Now let me comment on operational metrics. The Onsite:Offshore mix has moved slightly towards Onsite as compared to Q2. Offshore percentage now stands at 58.7%. We continue to work on measures to gradually improve this metric for our aspiration of 60%. The Fixed Price revenue mix was 38.5% in Q3, higher compared to Q2 on account of movement in milestone-based contracts. Client profile – which indicates number of million dollar plus accounts, has shown a sequential improvement of 2 customers in the $20M+ category. The client profile will continue to improve in the coming quarters. Client contribution to revenue – Has shown a slight improvement in the Top 5 & Top 10 Categories as compared to Q2. We expect revenue from top customers to improve going forward as we are running targeted programs on client mining. Headcount decreased sequentially by 582 employees on account of initiatives to improve productivity, while Attrition dropped by 90 bps to 15.8% as a result of both internal employee engagement measures and reflecting the industry wide trends. Realized rupee for Q3 was around 83.3 to the US dollar, a depreciation of around 1% versus Q2. Before I conclude, let me give some visibility on EBIT margin trajectory going forward. Despite a challenging year, we have delivered consistent margin so far and continue to remain focused on maintaining FY24 EBIT margins at 17%. This will continue to happen through a combination of revenue growth, operational rigor, productivity improvements and cost optimization measures. Amit has already highlighted that; we are seeing all 5 segments grow and have a good pipeline of opportunities across segments. With technology shifts towards SDV, AI, Next Gen Communication and Cybersecurity, we will continue to make necessary investments to support capability building and future growth. Having said that, we maintain our medium-term aspiration of 18% EBIT levels by H1 FY26. With that, I now hand it over to the Moderator for questions. Thank you. Moderator: Thank you very much. We will now begin the Q&A session. The first question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.

make sure that we are as much in the marketplace with our clients as possible, and that gives us a little bit of confidence as we stand today. Vibhor Singhal: Got it. Very helpful, thanks for that detailed expansion. My second question, if you could take that please, in terms of the maths for Q4, which appears to be quite high in around 5% - 8%. So, is that going to be a seasonality thing driven by SWC? Is that going to be a recurring feature of the business now that we have this, when you had mentioned H2 to be better than H1? Amit Chadha: So, thank you so much Vibhor, to ask that. So let me state this. My math in constant currency is approximately between 4% - 7% sequential growth. And I can confirm to you that as we stand today, I am fairly comfortable between that 17.5% - 18%, and we are working towards the upper half of the range. There is a number of deals in play. We are anticipating some large deals that will add revenue in Q4. In addition, there is a ramp-up anyway committed for Q3 deals – that have started. So, I hope that gives you a complete answer. Vibhor Singhal: So just to extend on that. So, you got that math. So that 4% to 7% growth you're seeing is going to be a broad-based growth, and this is not necessarily driven by some seasonality in SWC? Amit Chadha: I am confirming that the 4% to 7% growth will be secular across verticals, barring Medical, which I said will be muted in the immediate term. Vibhor Singhal: Got it. Thank you so much, Amit. Thanks for taking my questions and wish you all the best. Amit Chadha: Yes. Moderator: Thank you. Next question is from the line of Dipesh from Emkay Global. Please go ahead. Dipesh: Yes. Thanks for the opportunity. Two questions. First, just want to understand about the two empanelment agreement which we highlighted. Can you just provide more detail, whether the deal which we announced, that is part of that deal or these are two separate things? And this quantification may be separate. So, if you can provide some sense about the quantification or maybe potential size of this engagement. And whether it is different in the way we earlier used to have deal signings. So, if you can provide some context to it. Second question is about the medium-term aspiration, $1.5 Bn, which we indicated. Can you provide some sense? Because it still requires significant growth trajectory to continue. So, like Q4, we expect 5-odd percentage kind of thing for next four quarters. So, if you can provide some colour around it. Thanks. Amit Chadha: Thank you so much. So let me address the $1.5 Bn first, and then I'll go to the others. Our aspiration to be $1.5 Bn remains. It did bake in some amount of inorganic part, and therefore, we are evaluating it. So please allow us, when we come back in April – at the end of the March quarter, to come back and give that clarification to you. We have an active M&A pipeline as well. So please allow us till March to come back and give that clarification completely to you. But the aspiration is there. It still remains, that’s number one.

Now on empanelment, etc, I'll answer it two ways. So, there are six $10M + deals, okay? And of that six $10M, one is a $40M deal, the second one is a $20M deal. The third one, which I want to call out is a cyber $10M +deal. And then there are three other $10M + deals. In addition to this, there is an empanelment with bp. We are calling it an empanelment. It's the beginning of a relationship which we will work together on and build up in the areas of green energy as well as digital transformation. We will work with them. And we are going to work very hard to see how we can get this to a top 10 client for ourselves. We're working very hard with our customer, developing that relationship. There's a team already working, and it will contribute positively to the revenues of the company for FY24. The second one, I would request my President Markets to talk about a little bit, and that is an empanelment for Software Defined Vehicles with an Auto OEM. Alind, over to you, if you want to give a little colour on that. Alind Saxena: Right. Thank you, Amit. So, as you are aware, we have made broad investment in SDV over the years. We have created some solutions. This is one of the fulfilment that has come through. There is an increased traction that we have on SDV. There is a lot of work which is going to be done by the OEMs as they take control of the complete vehicle history and future. So, we are one of the selected parties. The ramp-up has actually already started in different geographies. We expect it to continue over the next few quarters, with the majority of that happening between this quarter and next quarter, and then it will stabilize, or it will grow as we see the demand come back. But we're excited about this. We also can confirm to you that there is another one that we are working on with a major Tier- 1, which we should see in the next few weeks come through as well. Both of them add to the SDV story that we are developing, and this is to be played out over the next year. Dipesh: Thank you. Moderator: Thank you. Our next question is from the line of Ravi Menon from Macquarie. Please go ahead with your question, sir. Ravi Menon: Hi. Thank you for the opportunity. I just wanted to ask about Automotive. Do you think that if the European Union dilutes 2035 sunset for ICE engines, that could be potential headwinds in the traction we've seen in Automotive? Amit Chadha: Thank you so much for that. Look, I would look at the Automotive spends coming out actually in multiple areas. So, it's not just electric. The Transportation spends are coming out in Software and Connectivity. They're coming out in Electrification, of course, Hybridization. They're coming out in Connected Mobility, in the area of additive manufacturing and in interiors. So, there've multiple parts. In fact, think about a car as an experience zone, a transmission zone and connected zone. I mean, that's broadly how you look at a car. So, there are various kinds of spends that are happening. And we believe that that should continue. Also please realize that the kind of work that we get

is generally about, on a model year, that's about four years out. So, these short-term blips here or there don't impact the design cycles. If anything, they're a lot more planned, etc. So, at this stage, for Q4, for next year, we do think Transportation will continue to grow across Automotive and Commercial vehicles. Ravi Menon: Great. Thank you for that detailed answer. And on Aerospace, you had been empanelled by Airbus, if I recall right, as one of the strategic vendors. So, I know that unlike say, one of our competitors, we don't have any manufacturing facility as such. So, do you think this is a disadvantage for you in Aerospace compared to peers who have that capability? Amit Chadha: No. Because look, Manufacturing is a very different ball game. We are not a manufacturing entity. We are an Engineering & Technology Entity. We are in fact seeing, in the Aerospace and Rail & one of our wins, $40M+ win has been in comms in the rail network area, we believe that there's a lot to be done on connectivity around & there's a lot of stuff to be done in avionics, and we'll see how things progress. Ravi Menon: Thank you so much and best of luck. Moderator: Thank you. Our next question is from the line of Bhavik Mehta from JPMorgan. Please go ahead with your question, sir. Bhavik Mehta: Thank you and Happy New Year to the management. So, three questions. Firstly, just on the quarter itself like what surprised you positively and negatively in terms of the demand in the different verticals. Secondly, last time, you had spoken about pressures in Telecom & Hitech, Plant Engineering and Medical. Now you highlighted that Medical still remain under pressure but is the worse over in terms of demand for Telecom & Hitech and Plant Engineering and will we start to see growth accelerate from here on? And lastly, on the guidance, 4% to 7% for the fourth quarter. How much of this confidence is coming from the deals which have already been won and you started ramping up vs the deals you are aiming to close in this quarter? Basically, trying to understand what is the risk that you miss the guidance when you report in April? Thank you. Amit Chadha: So let me address it this way. The positives that we saw in the current quarter was 1) All five segments grew & that is important for us. 2) Positive sign for us was the lowering of our attrition rate because our attrition rate came down further. 3) 53 patents that we have filed in AI & then there's a lot of others in terms of the deal wins, etc, that we have had. The negatives, very honestly, if I look at it, was that I would have potentially hoped the number of vacations and the number of furloughs could have been slightly lower and would have helped us a little bit in this quarter. But no harm done, because I do see that work life balance is becoming very important for our colleagues across the world and people are taking serious vacations or seriously taking vacations. So, we are seeing that impact coming in the last 2 years on us, and it's a trend. I'm seeing that & on a different conversation, I'm happy to dwell more

into details. But we've seen that, post-COVID, people taking a lot more vacations than they normally do. So that was & not strictly a negative, but was one of the things that we had hoped for differently. Now let's go to guidance and our confidence. So, if I look at it, it's a 4% -7% growth sequential that we are looking at constant currency. So, if I take 4% -7%, I think 4%-5.5% – do the translation – We talked to you already about the fact that the lower end of the guidance – I'm fairly confident about. It's the upper end zone of the guidance that I'm working towards. So, if you translate that to the quarter, that's what I'm working towards. And we'll see how it goes, and we'll keep you appraised as we move forward. So, the lower end of the guidance includes already the stuff that is ramping up and the upper end will include stuff that we'll win as we take forward. Bhavik Mehta: Okay. Just on the vertical, so Telecom & Hitech and Plant Engineering going to grow from here on? Or do we see some pressure out like in Medical? Amit Chadha: I'm sorry, can you repeat that, Bhavik? It was a little unclear. Bhavik Mehta: I was asking, the Telecom & Hitech and Plant Engineering verticals, have we reached the bottom over there and can we start to see growth accelerate from here on? Or do you think it's going to be gradual recovery which might take another three to six months. Amit Chadha: Thank you. So, Plant Engineering, we are hiring very actively. And I do believe that you will see growth from here on & don't see a problem in Plant Engineering. Hitech as well, you will see growth will be there. It will be a slightly more gradual than Plant Engineering. Plant Engineering will pick up faster and prior to Hitech in terms of % growth. Bhavik Mehta: Okay, that's helpful. Thank you. Moderator: Thank you. Our next question is from the line of Akshay Ramnani from Axis Capital. Please go ahead. Akshay Ramnani: Hi, thanks for taking my question. So, first question is on the geography side. So, Europe has been doing very well for us for the past 4 – 5 quarters & US at the same time has been flattish. So, can you explain this dichotomy and help us understand which verticals in Europe are doing well and which verticals in US are pulling the growth down? Amit Chadha: Okay. So, I'll give this thematically. So, if I look at Europe today, Europe is growing on the back of three or four things. Number one is Transportation, number two is there is growth in partly Industrial Products and partly Plant Engineering. There is not a lot of Medical in Europe, it's very small. So that's where you're seeing the growth areas coming from. Digital Manufacturing, which plays into Industrial Products & Plant Engineering as verticals and even in Transportation. So, we're seeing that growth in these four areas. So, Transportation, Industrial Product, Plant Engineering, and Digital Manufacturing – which is a horizontal, is where we see growth in Europe. And you are right. The team has done very well. We are proud of the team. I'm thankful to our delivery and sales leaders that have together made this happen. If you remember, some

quarters ago, there was a question with Europe strategy & I had promised you that we will come around, and I'm happy that, that growth is very visible. Now let's go to the US. The US has got all five verticals & we've been constantly challenged in Telecom & Hitech area. And at one time, there was a weak Semcon, there was a weak ISV, and that had been the problem. In the current quarter, currency wise it has shown a degrowth. But I want to confirm to you that from a geography standpoint, which includes some India currency billings or rupee currency billings, US has grown but not on the same pace as Europe, but it has grown. Leading the growth in US today is by Plant Engineering, Transportation, IP and Medical, while Hitech has been pulling it down. I do have confidence that as we move forward into the subsequent quarters, there are some deals that are being talked about within the US & in Europe and as they fructify, you will start to see this balance getting better. Last, ROW. I do want to confirm that Japan in constant currency grew for us yet again in this quarter, and you will continue to see growth in Japan. Japan is largely focused on Automotive, IP and a little bit of Hitech. And all 3 of those have done well for us. We are trying to build Medical in Europe & Japan, we are trying very hard. It takes a little bit more time because this is a conservative sector. Work continues to be done in this area. But I assure you, same time next year, I should be able to give you more in Medical & in both these areas. Akshay Ramnani: Thanks for that detailed answer, Amit. So, another dichotomy which I wanted to tie in was your comment on the winter being over, and the headcount metrics which we saw are reducing this quarter. So, I guess last quarter also, we fell short of our initial target of getting 750 net adds. In H2, we were supposed to onboard 1,000 additional freshers, but it looks like it didn't happen in Q3. So, can you help us reconcile this dichotomy of a good demand visibility but a reducing headcount in Q3? Amit Chadha: So, winter and spring also comes with wearing sweaters and taking them off and wearing jackets and taking them off. So, part of de-layering happened as winter got over. So, we have de-layered the organization. On a serious note, we have reduced some areas, we have consolidated certain areas and functions, and you have seen that impact in headcount reduction in support staff between last quarter and this quarter. That is over. What we had to take as actions is complete. So, you will see positive headcount going forward, but we are improving our utilization in billable headcount – though we don't announce the exact utilization numbers anymore, but we've actually improved utilization by more than 100 basis points, and that has helped us in being able to bill more as we move forward. You will see positive headcount as we go forward. And that's part of our balancing act as we move forward to take it forward. I also want to confirm to you that we have made whatever offers we had made to campuses, we will honour all of that and conclude getting everybody on board with the time we end March. And we have made close to about 1,200 offers for next year to freshers already, and we are actively looking at how many more we need as we move forward.

Okay. Thanks for the detail answered. Just one observation. If I look at the 4QFY23, my comments – including SWC, we have grown at 10.4% sequentially. And within that, almost 74% of the incremental growth has been driven through SWC. But I think this year, we are saying fourth quarter growth may not be skewed towards SWC seasonality, it would be evenly spread out. Is it the right way of looking at it? Amit Chadha: So SWC does have a seasonality in Q4, and that will be there. But I'm confirming to you that the other three verticals other than Hitech will also grow. And this is a quarter in play, so we'll see what percentage they grow at. Sandeep Shah: Okay. Thanks, and all the best. Congrats on a good execution. Moderator: Thank you. Our next question is from the line of Girish Pai from Nirmal Bang Equities Private Limited. Please go ahead. Girish Pai: Thanks for the opportunity. Amit, when you said the winter is over, is that applicable only to you or for the broader ER&D players in the market? Amit Chadha: Look, I do believe and somebody quoted our peers, the larger peer as well about green shoots. You heard us talk about – somebody talks green shoot, somebody says winter and spring. So broadly, I think that I do see that & I'm not being biased because I'm responsible for L&T Technology Services or an engineering company, I'd say in general for the industry. Look, I do believe that ER&D has a different cycle than IT. ER&D is being leveraged by customers far and wide to create new revenue streams, to be able to fortify their market positioning with more, better products; at times, shoring up their bottom line by being able to improve the supply chain path. So, there is a direct correlation to top line and bottom line by ER&D. So, I have seen, in my more than a decade in this sector, that this sector actually helps clients pull out of a bad year. It helps clients in improving and changing their services to their customers, and therefore it's a tool. So, I would say that the green shoots or winter done spring around the corners, seems to be an industry phenomenon that you should look at. Again, to be seen as you move forward. And step by step as we move forward. I assure you, as we come back to you in April, we have conversations with you between now and then, we'll continue to keep you appraised and as we move forward. But one reality is that the pipeline is bigger than we had same time last year. We continue to ideate. We continue to reconfirm, etc, and continue to create proposals and take it to our customers, and value propositions. Girish Pai: Okay. My second question, there have been a lot of media reports around slowdown on the EV side. There's some discussion around inventory buildup and all that. So, is that having any impact on the Auto ER&D services side? Amit Chadha: So, look EV, there's no I mean, and I'm sure you guys read a lot more on the subject, that EV component suppliers are in a problem because a lot of those components are being provided from China at different price points to what European and US Tier 1s are able to provide at. That is creating a kind of a shift where a lot of US and European Tier 1s are trying to get to lower

price points on the equipment, on the components that they are supplying by doing value engineering, etc. So, there is that spend that is there. But there is bigger spend in Software Defined Vehicles that is coming out by the OEMs and a lot more work happening on the SOC side for Automotive that is there. And I believe that overall, the spend may remain the same, the colour of it may change from one pocket to another. Girish Pai: And lastly, you mentioned about 4% to 7% as a range for growth for 4Q. Does the 7% depend on some of the deals that you're going to win in the quarter and 4% is broadly in the bag because it's based on your deals won by 3Q? Amit Chadha: My dear friend, I should say it like this. I do feel very comfortable with the lower end of that 4% to 7% range that we have talked about. But I can't say it's in the bag because I have not invoiced it yet, the quarter is not over. But I'm reconfirming to you that the lower part of that 4% to 7% is I'm comfortable with. The upper part of the 4% to 7%, we are working towards, and there are deals in the quarter that have to be closed and there is an immediate ramp-up to those, and we know what those are, etc. Moderator: Thank you. Mr. Girish Pai may we request you to return to the question queue for follow-up questions. Our next question is from the line of Surendra Goyal from Citi Group. Please go ahead. Surendra Goyal: Amit, Happy new year. The billable headcount reduction of 2% is not usual ahead of a sharp recovery, 4% to 7% kind of growth, at least based on what we have seen in the sector in the past. I'm just trying to understand, what are we missing here? Is the nature of deals changing significantly? Are there more system integration driven business or anything that we should be kind of aware of when we are thinking about this dynamic? Amit Chadha: Sure. Thank you. So here are the following – the things between Q3 and Q4 that you should think about. Number one, the number of working days in Q4 are higher than Q3 and the number of leaves and furloughs in Q4 are much lower as compared to Q3, So that's one reality. The second one is that we have optimized headcount and we have been able to improve utilization and we will continue to do that as we move forward. Third, we have had people join us earlier in the quarter now rather than later in the quarter, and that will again give us that. So there will be an element of system integration that will come in as well. So, it's all those four playing out together. Surendra Goel: Understood. Thank you. Moderator: Thank you. Ladies and gentlemen, that was the last question of our Q&A session. I would now like to hand the conference over to Mr. Pinku Pappan for closing comments. Pinku Pappan: Thank you, everyone, for joining us on the call today. We hope we were able to answer most of your queries. We look forward to interacting with you down the quarter and helping you

understand more about our journey. With that, moderator, we can close the call. I wish everyone a very good day, and goodbye from all of us here in the management team. Thank you. Moderator: Thank you. On behalf of L&T Technology Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Note: This transcript has been lightly edited for clarity and accuracy.