Rating Rationale
June 16, 2022 | Mumbai
L&T Technology Services Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.250 Crore
Long Term RatingCRISIL AAA/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
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).

 

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 fiscal 2022, revenue grew by 18% year-on-year to Rs 5,874 crore with EBITDA growing by 40% to Rs 1,319 crore as margins improved by about 370 bps to 22.5%. This was led by pickup in demand across profitable segments including transportation, industrial products and engineering verticals compared to lower base last year and improved fixed costs absorption. LTTS continued to remain debt free with cash surplus growing to Rs 1,970 crore as of Mar-2022 from Rs 1,383 crore last year.

 

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 growth in revenue of 12-15% 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 (L&T; rated ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’), 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 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.

Analytical Approach

The ratings of LTTS factor in support expected from 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.

Key Rating Drivers & Detailed Description

Strengths

Large diversified clientele

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.

 

Strong financial 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. 1970 crore as on March 31, 2022).  Capital spending is expected to remain moderate (Rs 80-100 crore); this and incremental working capital needs are likely to be funded through cash accruals.

 

Strong managerial, operational, and financial support from L&T; increased strategic importance of the IT business for the group

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

Geographical concentration in revenue profile

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.

 

Increasing competition in the engineering services business

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 600-700 crore over the medium term, which will be sufficient to annual capex of Rs 80-100 crore and incremental working capital needs. The Rs. 103 crore fund-based bank limits have witnessed almost nil utilization during last twelve months ended May 31, 2022. Moreover, cash and liquid surplus were about Rs 1970 crore as on March 31, 2022 and is expected to be healthy over the medium term at similar or higher levels. Currently, there is no long-term debt 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

  • Significant decline in revenues by over 10% and deterioration of operating margin to below 12%, adversely impacting cash flows
  • Sizeable debt-funded acquisition, leading to weakening of debt protection metrics or liquidity
  • Change in the strategic focus of parent L&T towards service-based businesses and/or deterioration in credit risk profile of the parent.

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 Adjusted figures

As on/for the period ended March 31,

Units

2022 (Provisional)

2021 (Actual)

Operating income

Rs.Crore

5,874

5,038

Profit After Tax (PAT)

Rs.Crore

919

673

PAT Margin

%

15.64

13.36

Adjusted debt/adjusted networth

Times

-

-

Interest coverage

Times

37.38

-

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the ‘Annexure – Details of Instrument’ in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities – including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisil.com/complexity-levels. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon Rate (%)

Maturity Date

Issue size (Rs.Cr)

Complexity level

Rating assigned with outlook

NA

Fund-Based Facilities*

NA

NA

NA

103

NA

CRISIL AAA/Stable

NA

Non-Fund Based Limit**

NA

NA

NA

50

NA

CRISIL A1+

NA

Proposed Working

Capital Facility

NA

NA

NA

97

NA

CRISIL AAA/Stable

*Fund Based – Cash Credit / Packing Credit (does not include term loan)

**Non Fund Based – Letter of Credit / Bank Guarantee

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 200.0 CRISIL AAA/Stable   -- 29-04-21 CRISIL AAA/Stable 21-01-20 CRISIL AAA/Stable 26-04-19 CRISIL AA+/Positive CRISIL AA+/Stable
Non-Fund Based Facilities ST 50.0 CRISIL A1+   -- 29-04-21 CRISIL A1+ 21-01-20 CRISIL A1+ 26-04-19 CRISIL A1+ CRISIL A1+
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Fund-Based Facilities* 10 Citibank N. A. CRISIL AAA/Stable
Fund-Based Facilities* 10 The Hongkong and Shanghai Banking Corporation Limited CRISIL AAA/Stable
Proposed Working Capital Facility 97 Not Applicable CRISIL AAA/Stable
Fund-Based Facilities* 53 Bank of America N.A. CRISIL AAA/Stable
Non-Fund Based Limit** 10 Citibank N. A. CRISIL A1+
Non-Fund Based Limit** 25 The Hongkong and Shanghai Banking Corporation Limited CRISIL A1+
Fund-Based Facilities* 10 ICICI Bank Limited CRISIL AAA/Stable
Fund-Based Facilities* 20 JP Morgan Chase Bank N.A. CRISIL AAA/Stable
Non-Fund Based Limit** 15 ICICI Bank Limited CRISIL A1+

This Annexure has been updated on 17-Nov-22 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
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Software Industry
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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