Following strong sequential growth in the third quarter ended December 31, 2021, L&T Technology Services (LTTS), a pure-play engineering services firm, is looking to sustain the momentum with more deals across all five segments of its business -- transportation, plant engineering, industrial products, medical devices, and telecom and hi-tech.
In a post earnings interview with TechCircle, Keshab Panda, CEO and managing director, spoke about the factors that led to a sharp decline in the first quarter and those attributed to the recovery since then.
For the third quarter, LTTS reported Rs 1,400 crore in revenues and Rs 186.1 crore in net profits, which is significantly better than its Q2 results, but 1.6% and 8.8% lower than what was reported during the same period a year ago.
Panda also spoke about a major deal signed with an oil and gas giant during the third quarter, the services witnessing demand across segments, and the imminent shift to digital and leading edge technologies moving ahead.
After a major hit in Q1, during the pandemic, the revenue appears to be coming back strongly. Do you expect the momentum to continue?
We were doing very well, but in Q1 we went down. What happened is if I'm a product manager launching a product in a new area and the pandemic hits then I'm looking at the buying behaviour of the customer, their affordability, and the technology required -- what I planned pre-Covid and what's going to happen during Covid or post-Covid. So, some of the decisions got delayed. The customers wanted to relocate their planned spending. That's one of the reasons Q1 took a big hit.
However, during Q1, they discussed how they are going to take this forward, the priorities. We used to make customer-specific plans and tell them about new ideas, how we can help them to reduce costs, increase profitability, and make sure that the business comes back.
Taking this into account, in Q2, four of our five verticals came back, sequential growth, and Q3, all five grew. We mastered technology borrowing from one segment to another and focused on what the customers are going to buy during the pandemic -- and whether we can improve on that or reduce cost.
So, all this connecting one to the other, it helps us and we believe now the worst is behind us and sequential growth for all five segments will continue for the coming quarters as well.
Which engineering services/products were more in demand during the quarter, across segments?
In automotive, connectivity and telematics technologies for electric vehicles. In aerospace, every 20 years they come with a new product because it requires a huge investment. When a new product doesn't come, the huge business you don't get... So we have got into what is in demand -- some of the system design we do in aircraft, for example. We did the motors, which runs your lighting system, the air condition system, and everything else that goes inside, we design that.
In the plant engineering, if you see what is required, we say, digital twin, sustenance engineering -- we won a $100 million deal there -- remote plant maintenance, improving its performance.
Even in medical, we have done very innovative work. We developed an AI application for radiology, won an award for that too. We recognized that, in medical devices, designing is something you can do, but how do I use AI for patient radiology. So we did that. We also did product design for a company called Agappe Diagnostics in India, and there are many such projects that we do. There are very few companies who can do end-to-end product design, starting from concept to prototyping.
All these I think are going to be much more in demand, but one thing is sure though -- tomorrow some new technologies would be coming in. It will be all about how quickly, 360-degree you think about it and capture that. We understand applications well and have customers in Japan, Korea, the Middle East, Europe, India, US, so I think we have the domain knowledge, customer in different geography knowledge with technology integration. Dynamically, we have been able to do that and we will continue to maintain that. The future looks pretty good.
Can you give us some insight into that $100 million deal?
We are going to do sustenance engineering for two refineries, the biggest refineries in the world in the US. We’re going to do sustenance engineering in terms of plant maintenance and we are also going to do productive improvement, predictive maintenance, and all those things using new technology. We have signed these two plants for five years.
But, sustenance engineering is nothing new, we have been doing this for FMCG customers.
So when the investment on the greenfield project got delayed, we came with a plan -- if oil and gas upstream investment is not happening because the oil price is down that time, they still have to run the refinery efficiently with the new technology. So, can we do that, go to the downstream area and do business? During the pandemic, we worked on that. We went and said, this is where you are spending $200 million or so but you know what we can do multiple things for you. The customer was convinced. This does not happen in a week or two days, it was a few months we have been discussing with them. Finally, we did the deal. And now, we will have a creative centre very close to the refinery, with 90% of the people working in India and 10% going there. So, both put together, it is a great win.
Are there more large deals on the cards for Q4?
If you’re in engineering services, of course. We always pray how many times we can hit such deals but you know, it's like this, that hundred million deal if you do well -- I'm sure we will -- and there's a lot more that can be done there itself extending. If one customer came and said we are convinced this is going to work, we are going to be in the front line and get it done. So, if we are working on taking this to customer B and customer C and so on in the same area itself, that's a great opportunity. We are working on large deals across segments at any particular time.
Telecom and hi-tech witnessed a sequential growth of 22% as a segment, higher than all others. What exactly led to this uptick?
The organic growth in this segment is only 3.5%. The rest 14+% you see is from an acquisition. We acquired a company called Orchestra Technology in Q2 (for Rs 187 crore). They are a part of LTTS now. The revenue we got there that has shown very high growth in the segment, but the organic growth is 3.5-4%, which is reasonable to expect moving forward.
How do you see the contribution of digital and leading edge technologies growing in the business?
I call it legacy engineering and the new age engineering or digital engineering, which takes into account AI, AR, VR, and all that new technology. From today till 2025, if I see the CAGR for digital engineering around 20%, but legacy engineering at only 2%, that means a time would come, maybe by 2028-2030, when old engineering is going to die down.
Anything you do it has to be the digital way of doing it. One thing you need to remember is if the market CAGR for digital engineering is 20%, is my CAGR 20% or not? If I am able to maintain 20% then I am leading the pack. For us, it is always around 45-49%. As we go to continue to do that, you will find that one day nobody will talk about old age technology. Everything will be digital or new-age technology.
This is something we track very closely and also we look at what are the new business models possible there. Plus, the customer is also getting educated, they also know about how things work. For instance, we have a sensor lab which simulates what sensors a customer should use in their plant, which are more cost-effective, and commercially available. So, I think these are all new things coming up.
Finally, how do you see the aspect of cybersecurity evolving in the new normal and amid changing customer demands?
We have a group of people working on our own cybersecurity for the products, for the plants and we are doing multiple things there. If you look back, we signed an MOU with IIT Kanpur this year for research in cybersecurity programs.
We have our own security layer built into the platform solutions we have on offer. We are building security on those platforms. We are also extending that to network security. We have a team of people working on that, and in collaboration with IIT Kanpur, there is a lot of cutting edge technology, we have been using it. We have been able to use that for multiple customers as well. Anything we do in the future, this is an important component of any business we do.