| L&T Technology Services Limited | ||||||
| Rating outlook revised to 'Positive'; ratings reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||||
| Detailed Rationale |
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CRISIL has revised its rating outlook on the long-term bank facility of L&T Technology Services Limited (LTTS) to 'Positive' from 'Stable', and reaffirmed the rating at 'CRISIL AA+'; the rating on the short-term facility has been reaffirmed at 'CRISIL A1+'. |
| Analytical Approach |
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* CRISIL has amortised the goodwill arising from the acquisition of the product engineering services (PES) vertical over 10 years. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Support from the parent and increased strategic importance of the IT business for the group 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. Over the years, the contribution of the services business to the group, both in terms of revenue and profitability, has been improving. Additionally, L&T has been leveraging its services capabilities to grow its core infrastructure business. Its new strategic initiative, L&T Nxt, also bodes well for the services business. The company is eyeing more than USD 1 billion revenue from this newly launched new-age technology platform in the next 5-7 years and LTTS is set to play a major role in this. L&T's intent of acquiring Mindtree signifies L&T's serious intent to become larger and more credible player in the IT services business. 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 two companies also have common board members. Increasing thrust on the services business and continued operational and managerial support will augur well for LTTS over the medium term. * Large diversified clientele The company has a presence in engineering and research and development (R&D) services, which are relatively new segments. There has been growing interest in the past few years from clients across sectors (including telecom, automotive, aerospace, industrial products, heavy machinery, construction, and consumer appliances) in sourcing their engineering and R&D requirements from India. Clients currently include 117 of the global fortune-500 companies and 52 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. The growth in revenue is due to increased R&D spending as a result of higher capex globally, normalising oil prices from the lows of the past, and launch of newer technologies in telecom and chipsets. 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 (27.4% revenue from the top five in the third quarter of fiscal 2019 against 25.5% in the corresponding period of the previous fiscal) and maintain steady acquisition of clients. Similar growth and profitability is expected to be maintained over the medium term, thereby supporting the overall business risk profile. * Strong managerial, operational, and financial support from L&T There is commonality in the board of directors and entire operational teams have moved as part of the strategic business unit (SBU) to LTTS. 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. LTTS benefits from L&T's established position as an engineering specialist, given that the target market of the former is engineering design. Operational support is available from L&T in the form of shared resources, largely infrastructure such as office space and talent. Even though the financial risk profile of LTTS is sound, support from the parent exists for any exigency. * Strong financial risk profile Higher cash accrual and prudent capex funding should keep the financial risk profile healthy over the medium term. There are no major capex plans over this period and capex of about Rs 53 crore in the first nine months of 2019 was funded through internal cash accrual. Debt protection metrics may also remain strong due to nil debt and increasing profitability. Weakness * Geographical concentration in revenue The US contributed 60% to revenue in fiscal 2018, similar to many players in the IT industry. Any regulatory changes in the region could have a significant impact on operations. Protectionist measures adopted by the US may also pose business challenges. |
| Liquidity |
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Cash accrual is expected at Rs 600-800 crore, sufficient to fund capex of Rs 80-100 crore, per fiscal over the medium term. Additional working capital requirement to support expected growth will also be funded through internal cash accrual. Average utilisation of the fund-based bank limit was around 8% during the 12 months through Dec 2018, with an average unutilised limits of Rs 184 crore. Cash & cash equivalents alongwith current investments were about Rs 424 crore as on September 30, 2018, and are expected to remain at a similar level over the medium term. Dividend at 25% of the profit after tax (PAT) has been paid for fiscal 2018, and is expected to be the same over the medium term. There was no long term debt as on December 31, 2018. |
| Outlook: Positive |
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CRISIL believes the business risk profile will improve over the medium term, supported by steady revenue growth and sound operating efficiency, and the strength of the L&T brand. The financial risk profile is also expected to remain strong over this period due to healthy cash accrual and absence of any debt-funded capex or acquisition plans. The company will also benefit from the increased focus by the L&T group to consolidate its position in the IT sector. |
| About the Company |
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LTTS is an engineering services provider incorporated in 2012, focused on offering innovative design and development solutions across the product development value chain. It caters to industries such as industrial products, transportation, aerospace, telecom, and processes. As on March 31, 2019, L&T held 78.88% shares of LTTS, a reduction from 100% at the time of the initial public offering in September 2016. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||
**Non Fund Based ' Letter of Credit / Bank Guarantee |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||
**Non Fund Based ' Letter of Credit / Bank Guarantee | ||||||||||||||||||||||||||||||||||||
| For further information contact: | ||||||
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