L&T Technology Services Ltd

NSE:LTTS

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Q1 FY '21 Earnings Conference Call of L&T Technology Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pinku Pappan, Head of Investor Relations. Thank you, and over to you, sir.

[Pinku Pappan, Head of Investor Relations]

Hello, everyone, and welcome to the earnings call of LTTS for the first quarter of FY '21. I am Pinku heading Investor Relations. Like last quarter, I will start with an apology for having the call at 8 p.m. Let us hope the pandemic will be behind us soon, and we can all revert to our earlier norms. Our financial results, investor release and press release have been uploaded on our website, www.ltts.com. I hope you have had a chance to go through them. This call is for 60 minutes. We will try to wrap the management remarks in 25 minutes and then open up for Q&A. The audio of the call will be available for replay on our website approximately 1 hour after the call ends.Let me introduce the leadership team present on this call. We have Keshab Panda, CEO; Amit Chadha, Deputy CEO; Abhishek Sinha, COO; P. Ramakrishnan, CFO. We will begin with Dr. Panda providing an overview of the company performance and a commentary on the business outlook. Amit will then talk about the large deal wins and the deal pipeline. And finally, PR will walk you through the financial statements.Let me now turn the call over to Dr. Panda.

[Keshab Panda, CEO, MD & Whole Time Director]

Thank you, Pinku, and thank you all for joining us on the call today. I hope you are all keeping safe and well. I am happy to say that our employees continue to be safe across the geographies. We are taking every precaution to ensure we continue it, especially as we start to resuming work from office. Our India offices resumed from the first week of May, strictly following the guidelines of the respective state administrations. Today, around 25% of our India-based employees have resumed working from office.Let me talk about our Q1 performance. We had indicated via the exchange filing of 20th of June that we will see a low double-digit percentage dip in revenue in Q1. The slowdown in the global economy and our exposure to some of the heavily impacted industries, like aerospace and oil and gas, in addition to auto and industrial, which were also impacted in a significant way, led to our revenue dipping by around 12.5% quarter-on-quarter. The operating margin was down by 300 bps, again impacted majorly by the dip in utilization.On the bright side, free cash flow generation was robust as we improve on collections. The balance sheet position is also very strong with net cash of around INR 1,000 crore plus. Our large deals engine continue to fire well. We had a strong bill booking, higher than what we booked in quarter 4. And we won 2 deals of $15 million each and 1 deal $30 million plus in the quarter.Let me provide a brief summary of our performance in each vertical before providing the overall outlook, starting with transportation. We had a sequential dip of around 23% in Q1, and the decline was sharper in aero compared to automotive segment. Let me cover auto first. Many of our customers resorted to furlough and spending cuts as car sales fell globally in the last 4 months or so. But we are seeing things are picking up slowly. More importantly, spend will continue in area of electric car and autonomous technology where we are strong. Our competency continued to be top notch. We won 2 large deals, one $30 million, another $15 million in auto, both in design and development of new-age platforms. In aero, as you are aware, the number of flights globally are much lower than normal. And airlines are cutting down fleet sizes, which is leading to the pain both the OEMs and Tier 1 aerospace are going through. We'll see a decline in 1 more quarter in aerospace segment.However, we are seeing good opportunities on the defense side, where spending continues and continue to increase. We already have 2 ITAR certified facilities in U.S., and we are in the process of adding 1 more to service them. Overall for transportation, we are optimistic on growth coming back. And we will grow sequentially in Q2 and should pick up, improving in Q3 onwards.In Plant Engineering, the quarter-on-quarter dip was 24%, led primarily by oil and gas. As we indicated in the previous quarter, the sharp fall in oil prices led to the immediate cut in budget and ongoing spending is mostly in upstream areas. We are seeing some sign of stability in O&G. There are a few large proposals in the pipeline. We've established a good track record in setting up what is called the engineering value center model for providing sustenance engineering for some of the oil and gas majors.In CPG, we are seeing increased traction in digital, and we are having conversations to help customers improve operating efficiency and quickly turn around from the product to another. This is something that we are -- again, I'm happy to say we had some -- a few wins in these areas as well. In Plant Engineering, we will see a sequential growth from Q2 onwards led by CPG and chemical.In Industrial Products, we had a decline of 12% quarter-on-quarter and was on account of machinery subsegments where there was a sharp reduction in demand from the end customers in oil and gas upstream players. Again, I want to highlight our competency edge. We won a $15 million plus deal in O&G machinery side where we will help to create the data analytics platform, again, for example, on how we are viewing digital and new age areas in this segment. In the other subsegments, like building optimization and electricals, there was a pause in decision-making, but we see growth picking up as customers are ready to spend on new product development and value engineering. We see growth in Industrial Products from Q2 onwards.In telecom & hi-tech, after a few quarters of pain, we turned around in Q1, with 5% quarter-on-quarter growth made by ramp-up in both media entertainment and semiconductors. We expect the growth path to continue with good deals in the pipeline. I must, however, add that the pickup in momentum will gradually lead to longer sale cycles and some bit of caution in the budgets. The outlook remains positive with the momentum in 5G pickup and fixed rate in entertainment consumption to derive in the media entertainment segment. Telecom & hi-tech is a sector where technology disruption is a norm. And to strengthen our capability in telecom OEM side today, we announced the acquisition of a company called Orchestra Technology based in Texas. We are excited about this acquisition as this will help us capture the opportunity in 5G with telecom service providers and network OEMs as they ramp up 5G rollout and look for solutions to manage and optimize network performance.Lastly in Medical, we continue the momentum from Q4, with 9% quarter-on-quarter growth on the back of deals wrapped up. In fact, growth would have been better if not for a fall in the number of elective surgeries that has affected hospitals and the device industry. We continue to be positive on the outlook with a good pipeline in the new product development and sustenance engineering and new age technology for diagnostic devices and newer areas like telemedicine, teleconsultation and remote monitoring, we are very bullish about the segment.Let me now discuss the outlook. Q1 was a tougher quarter and we took a hard knock on 3 of our verticals. Broadly, there was a freeze in decision-making and many of our customers resorted to pausing some of the ongoing development work, given the uncertainty. However, spend are going to continue. For example, even in aero or oil and gas, we are confident that we will grow either -- over the next few quarters. We may have to look at different areas of growth like aero, given how the industry has been hit and that alignment has already started. This is a unique advantage for being broad-based, both in domain as well as in technology. It gives us the ability to pivot based on customer needs and where the spending is happening post-COVID. The pandemic has given out an opportunity to take multiple proactive proposals to our customers in very strategic areas, which addresses their key business priorities, like manufacturing, line expansions, agile sourcing, remote operations and asset care, lab consolidation, et cetera.We've also aligned our offerings to the market, like frugal manufacturing, telehealth solutions and i-BEMS Shield, which are seeing good traction. So overall, we are confident of our ability to keep growing and expect we could -- expect a sequential recovery in revenue as well as margin from Q2 onwards. Our guidance for FY '21 revenue based on our current visibility is for a decline of 9% to 10% in USD terms for FY '21. I want to end by assuring that we are taking action to increase sustainability of our business. Our focus on training and competency building, investment into lab and technology and these things provides us with lasting competitive differentiation, and we will continue that journey.Before I end, I would like to comment on the change in CFO. As you would have seen from the exchange filing, P. Ramakrishnan is resigning as CFO, and he is going back to the parent company, L&T, on a new assignment. PR has been -- we fondly call him PR. PR has been with L&T since 1992. He came on sabbatical. He moved from L&T to LTTS in January 2009 -- 2016, sorry, 2016. And before the IPO, he has gone with us on IPO roadshow. And he is a quick learner. If you [ need anything on ] our technology -- there are very few CFOs you will find who have more insight to our technology. We are very proud of him -- associating with him for the last 4 years, but PR is not going to go away. We'll miss him in LTTS, but he's going to be with us in our parent company, Larsen & Toubro. He did a great job. I think we always remember him.I would also like to welcome our new CFO, Rajeev Gupta, who joins us from Birlasoft where he was the CFO. Rajeev brings a lot of experience with him, especially in the IT and ITeS industry. He worked in Capgemini for a long, long time. He joined us in April and had a good transition period from April to today. Last few months, he has been working closely with PR, and he has a good transition period. We look forward to working with him to achieve our milestones.Ladies and gentlemen, thank you. And I now hand it over to Amit.

[Amit Pal Singh Chadha, Deputy CEO & Whole Time Director]

Good evening, and thank you, Dr. Panda. Pinku, I am assuming I'm audible.

[Pinku Pappan, Head of Investor Relations]

Yes.

[Amit Pal Singh Chadha, Deputy CEO & Whole Time Director]

I trust all of you and your families are keeping healthy and doing well. When we spoke to you in May, we shared that we have created growth and resilience action streams amongst the leadership team, right from March onwards, focused on growth actions and cost actions. I would like to provide an update on the growth actions we have taken. The entire company across delivery, sales, operations enablement has come together to generate proactive proposals focused on our top 50 accounts that are aligned to their revised vectors of value definition. The theme of these proactive proposals has been very targeted with broad themes centering around consolidation of spend, repurposing manufacturing, rewiring of the supply chain, cloudification of products and services, enhanced security and data analytics. And we are finding that majority of our customers are wanting to work with us on their newer priorities or change the business plans, which gives us an opportunity to target more of their ER&D wallet share. Backed by several of such proactive proposals, our pipeline today is higher than pre-COVID levels and gives us the confidence that the worst is behind us. Also from May to now, we have seen an improvement in deal closures, although client decision-making cycles have to still improve to pre-COVID levels.Let me give you a segment-wise update. For transportation, we won a large deal in auto in the area of software integration for autonomous driving. We've additionally won 2 of the 4 deals we were pursuing, 1 in automotive, where we will be setting up an ODC for our client to support their digital initiatives globally for drive performance; and the second one in aero to build on a software factory for the customers' defense business in the U.S.We are working on an additional conversion at this stage across 4 more deals in the areas of powertrain, connectivity in 2 of them, and expanding an ODC relationship in the other 2 with our clients. In Plant Engineering, we closed 3 deals in this segment, 1 in oil and gas and 2 in CPG. In one of the wins in CPG, we are executing our digital paperless factory project for the customer. And in the second, we are working on asset and reliability management. Last week, we closed a new engineering value center deal with our U.S. client, where we will support this client with site engineering tasks across multiple sites. We are pursuing 2 more engineering value center deals in this segment.Moving on to Industrial Products sector. We have closed 3 deals in this segment in the last quarter. We are in the process of discussing proposals in the digital and touchless operations domain and supply chain realignment, and hope to make some headway in this segment though quarter growth will be muted in the near term.In the Medical segment, we closed 3 of 4 deals being pursued in Q1. We are currently in the race of closing 3 deals additionally in Q2. The pipeline here is robust, and we expect this segment to continue the momentum. In the hi-tech segment, Q1 saw us win 2 new clients in the telecom operator space, expand some existing relationships in the telecom infraspace, and win a new chip design project with a client leveraging our VLSI acquisition. We are currently working on some opportunities in the Semcon and telecom infraspace in the areas of full chip design in 1 case and product support and vendor consolidation in the second case. We continue to see headroom for growth in this sector.Summing up, we saw furloughs and deal decisions being delayed in quarter 1, but have been able to grow back our pipeline as well as close deals higher than the previous quarter sequentially and year-on-year. For FY '21 and beyond, we expect to see positive momentum in Medical and Telecom to continue, Industrial Products slightly muted for Q2 and see a path for sequential growth quarterly for Transportation and Plant Engineering from Q2 onwards. Like Dr. Panda mentioned, we are working with customers to address their key business priorities that is giving us visibility for growth for the coming quarters.I will now like to hand over to PR. Thank you so much. Stay safe. Stay healthy.

[Parameswaran Ramakrishnan;Chief Financial Officer]

Thank you, Amit, and good evening to all of you. Am I audible? I hope. Yes. So I'll just take you through the financial statements. I hope all of you must have received the SEBI advertisement along with the earnings fact sheet.As you may have seen, the revenue for the quarter ended June 30, 2020, was reported at INR 1,295 crores, showing a decline of 10.5% on a Q-on-Q basis and 4% on a Y-on-Y basis. In dollar terms, we reported revenue at $171 million as compared to $195.3 million, demonstrating roughly 12.5% degrowth. This is on the back of the maximum, I would say, the degrowth happened was most visible in some of our major segments; transportation, almost around 23% degrowth from previous quarter; Telecom and Plant Engineering at 24%; and Industrial Products at 12%. The degrowth in these 3 segments was partly offset by a growth of 5% in telecom & hi-tech and a growth of 9.2% in medical devices. As you may be aware that last year, we had a muted performance in telecom & hi-tech. I guess we have turned tide now, and we expect the growth rebound happen in telecom & hi-tech segment from this year onwards.Coming to margins. Our reported margins for the quarter was at 12.1% as compared to 15.2% for the previous quarter. 15.2% adjusted for the one-off PM CARES contribution of roughly INR 20 crores, which happened, the previous quarter margin was actually around 16.5%. So a drop has been visible from 16.5% to 12.1%. And if you see from the overall -- the revenue and the cost stack, the savings which we have managed to accrue in the current quarter has been almost -- have been able to absorb around 7% of the revenue in terms of overall revenue share of the cost. But otherwise, there has been almost a 5% cost savings, which we have been able to accrue in Q1. But the balance 12.5% drop in revenue, out of that 7% we could offset in terms of cost savings. The rest had a rough impact of almost 5 point -- I would say, 450 basis points drop, which has contributed to a drop of EBIT -- drop of margins of EBIT to 12.1%.As far as the other income element is concerned, our other income for the current quarter was reported at 474 -- sorry, net of others, including of interest charges, it is around $30 million, but the drop has been partially because of the exchange loss, which we have accrued because of a weaker rupee. And we also had, in the previous quarter, the licenses income, which we accrued for the year FY '19. In this quarter, it is only realizations of those licenses, which happened to accrue to only around INR 51 million. So that has one of the reasons that the other income has also partially dropped. The overall tax provision from a tax provision perspective is around 25% to 26%, no major change which we see in the current year as well.Coming to the balance sheet. One important thing is the balance sheet is roughly unchanged, barring for the fact is that there has been a drop in accounts receivable and unbilled revenues and led by an increase in investments and cash and cash equivalents. As you may know that when we closed Q4 last year, we had a shortfall in collections of almost $25 million, which we have recouped in the current quarter and that is one of the reasons that despite a lower profitability, our free cash flow is almost in the range of INR 318 crores. But kindly note that this includes, I would say, roughly around $25 million to $30 million of shortfall of collections, which we could not do in the month of March, that has slipped over to the current quarter. But with that, we are reasonably sure that at least the working capital in terms of DSO and unbilled revenue, we have brought it down from previous quarter levels of 109 to current quarter's of around 95 to 96.Coming from a perspective of geography, constitution of revenues, no major change. North America still continues at 60% plus, led by North America 60%, and we have Europe and India roughly at 16% and 13%, respectively.The other metrics, no major change. Our onsite/offshore revenue metrics comes to roughly around, I would say, 48% to 51%, onsite is 48% and offshore revenue mix is around 52%. Fixed-price contracts, time and material, again 39% to 61%, that combination remains the same. One of the reasons for the drop in revenue and margins -- one of the reasons for the drop in margins can also be witnessed by the drop in utilization. Q4 utilization was around 78% and Q1 is reporting at around 71%.The headcount, marginal drop in headcount, the total headcount is at -- as of 30th July -- 30th June was 16,640 as compared to 16,800 for the previous quarter.With this, I have tried to summarize the overall financial performance. And I would also like to take on -- put on record that it was a pleasure working with the stint of 4 years with LTTS and also with all of -- interaction with all of you. And I am moving forward -- I am moving back to parent on a different assignment. And myself and Rajeev, we have worked together for the last 3 months, and Rajeev Gupta has -- comes with a rich experience, especially in the IT and the engineering services sector. And I am sure that he will take LTTS to new heights. Welcome, Rajeev, a formal welcome to you. And that's all from my side. We can probably go back to the question and answers. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Mukul Garg from Haitong Securities.

[Mukul Garg, Research Analyst]

Dr. Panda, if I refer to your commentary from the Q4 call, while Q1 was expected to be weak, but the degrowth this quarter seems to be a bit sharper than what we initially expected. It would be great if you can just help us with the areas where you saw further deterioration as we progressed during Q1? And are these areas now coming back?

[Keshab Panda, CEO, MD & Whole Time Director]

I think the impact was, as you said, plant engineering and the other one is transport, right? Transportation, I did not expect the aerospace to go down the level. The areas, if you recall, quarter 4 I talked about, areas like in-flight entertainment or the air traffic management, the software area which we work, and that is going to be in demand. That is #1. #2, Japan MRJ, there's a customer who decided to scrap the project as a whole, it has impacted in a big way to some of the OEMs and Tier 1s, where they were our customers. So Japanese aerospace customer deciding to scrap the project we never visualized in quarter 4 that's going to be the case. So aerospace has an impact, which impacted our transportation segment. 23% drop quarter-on-quarter, I did not expect that to happen, right? So this is suddenly it came there. And second point was on the 2 segments, Plant Engineering and Transportation, right, these 2 segments were hit big way, 23%, 24%. Plant engineering, it is -- oil and gas has taken a beating. But oil and gas, the way it has gone down to where we expected to, part of it to remain, part of it to go away. The CapEx spending sudden decision, which came now, and we thought this is going to take 2 quarters to come bottom, then we'll pick up in quarter 2 and so on; quarter 1, it's not going to go to that level. So this together, I never expected them -- before we gave to the stock exchange that is going to be low double digit, and we never expected to go there. And suddenly these 2 factors impact in a big way to this drop in Q1.

[Mukul Garg, Research Analyst]

Got it. So given that backdrop and the uncertain macroenvironment, what puts and takes you currently have to stay within the current 9% to 10% degrowth guidance that -- have you incorporated any scenario in this, where you might encounter greater restrictions on either supply or demand?

[Keshab Panda, CEO, MD & Whole Time Director]

See, what I see today that all this segment, worst is behind us because this segment has already hit the bottom of it, right? And we believe transportation and industrial, for example, is going to take some time. But aerospace is going to take 1 more quarter to hit the bottom. It has not hit the bottom yet. Q2, aerospace is going to hit the bottom. And -- but automotive have seen already growth. The number of deals we won and all the action started now, Q2, there's a growth in automotive. That is going to be muted to partially by the aerospace. So that I see quarter 2 will be bottom for the transportation segment. Then coming to Plant Engineering, Plant Engineering, anyway, this whatever had to go, it has gone already. There's nothing else I have where it's going to go whatever may the oil price. So -- and FMCG and the chemicals segment, some of the orders we won, Amit talked about, so those segments is going to have a positive impact quarter 2 onwards. So Q2, there is going to be an increase in that segment, which has hit 24% down in Plant Engineering, that is already behind us. Then our Medical segment, which grew 40% -- 42% year-on-year for the Q1, that segment, the pipeline we have, the order we won will continue to grow quarter -- sequential growth, we'll have that. Industrial is going to be -- there will be growth. There won't be degrowth. The 12% degrowth happened in Q4 to Q1, that is not going to happen now. So we have hit the bottom of it. And with the orders we won now, there will be a marginal growth in Q2 and start going Q3 onwards. So -- and telecom & hi-tech, as you know, I think we did last year, we have gone through very difficult times in telecom & hi-tech, degrowth, whatever happened, and we -- the percentage growth impacted. Now telecom & hi-tech first time, after so many quarters, we have grown 5% growth here. So that, I think we believe that is quarter 2 onwards, to start growing, and then okay, that we are in a big step. So all these segments, when I look at it overall, what would be the worst case scenario and that, looking at that, we have given the guidance that you see right now.

[Mukul Garg, Research Analyst]

Got it. Just clarification. Is the acquisition baked into your guidance number? Or is that on top of it?

[Keshab Panda, CEO, MD & Whole Time Director]

This is -- we have not taken that into account. Guidance number, this is not part of the guidance number.

[Operator]

The next question is from the line of Sandeep Shah from CGS-CIMB.

[Sandeep Shah, Vice President]

Just wanted to understand, first question, in terms of the gross margin. So it has declined by almost 675 basis point on a Q-on-Q basis. So wanted to understand, is there any elements which can be understood as a permanent loss to the margin where we might have given some billing rate discounts to the client? So out of that 675, what could be one which you can recoup with the growth?

[Keshab Panda, CEO, MD & Whole Time Director]

Yes. I think I will ask -- let PR answer that. The first point is revenue itself. If the revenue $195 million going to $171 million, if you do the math on that, that itself is a big part. And then #2, as you can see that people were coming out of the project in U.S. and outside India. And also in India, we were not able to make a decision to reduce. We have taken a conscious decision that the people, fully bottom performers, we are going to downsize, but all the employees, we'll retain them. And #1 is they couldn't fly back to India. The assignment over, they were all sitting in the U.S., a cost on us and that's now going through. So all these together, I think I would say major part is on the revenue drop itself. Once revenue starts coming back and the margin will come back, there is no other major issue on the -- any customer issue or any onetime payment issue, no, that's not the issue. The issue was on the -- suddenly, this came in Q1, that has impacted the margin. PR, do you want to add anything to that point?

[Parameswaran Ramakrishnan;Chief Financial Officer]

So thank you, Dr. Panda. Sandeep, just to add to what Dr. Panda just now told, the drop in margins is led by drop in revenue, which I say from a volume basis, not necessarily from a value basis. There has been some reduction in billing rates, but that is not materially to impact these margins what we have shown. Essentially, the 12.5% dollar terms drop in revenue, which has led to the margin drop. But for the fact that we managed to have normal cost savings, which any company would have witnessed, like travel costs and other stuff, that has anyway happened, plus we have been able to optimize some part of our employee overall cost stack without disturbing the overall employee headcount. There are further actions like Dr. Panda talked about more, I would say, clinical separation of bottom performers, which will lead to some amount of cost savings maybe from Q3 onwards.

[Sandeep Shah, Vice President]

Q3 onwards, you are saying?

[Parameswaran Ramakrishnan;Chief Financial Officer]

Yes. Because separations would have happened some in June, July. So I think we have to see from Q3 onwards.

[Keshab Panda, CEO, MD & Whole Time Director]

See, there is an important parameter again there. C&B cost, when I look at it, the bottom -- one thing I want to be clear that the number of the employees downsizing we are going to do only bottom performers, rater 1 and 2, nothing beyond that. We'll take some pain for 1, 2 quarters. This -- we have invested a lot on these engineers for last few years. Because project came down, I don't want to reduce the cost for improvement of margin. I'm training them. There are a few hundred people, now close to 1,000, 1,200 people are going through training on new technology because getting a combination of engineering and technology combination, getting people in the market is difficult. So that investment we are doing it. But I think once revenues start improving it, and then all this pain is going to go away, that is #1. #2, the reduction of billing rate is less than 1%. Not that in many places we have got requests from customers to reduce billing rate, it's a small percentage of business.

[Sandeep Shah, Vice President]

Okay. Fair enough. Just in terms of guidance indicates 2.3% to 3% Q-on-Q growth from 2Q to 4Q at the higher end and the lower end of the guidance. So will it be back-ended more in 3Q, 4Q? Or you believe even 2Q may see almost a similar guided range of growth?

[Keshab Panda, CEO, MD & Whole Time Director]

Quarter 2, as you know, I think every day is a different day, every day we are going through. As I see right now, the growth -- I also talked about every segmental growth quarter 2 onwards, right? And what is the percentage, I am not going to comment at this time, but I can only tell you that every segment, all the 5 segments I talked about, which is going to have growth and which is going to have a very positive growth, which is going to have a flat growth and so on. So I did talk about it. It's difficult to say. I will not be able to comment on this; quarter 2, what is the percentage of growth. But growth is going to happen from quarter 2 onwards. That is for sure.

[Operator]

I would request Mr. Shah to rejoin the queue for follow-up questions. The next question is from the line of Pankaj Kapoor from CLSA.

[Pankaj Kapoor, Research Analyst]

Dr. Panda, 2 questions to you. How much of the revenue fall in the quarter you will attribute to projects that may have been altogether scrapped or canceled by the client and probably will not get revived instead of just being deferred? That's my first question.

[Keshab Panda, CEO, MD & Whole Time Director]

Yes. I think the percentage -- see, Pankaj, the majority of this what happened deferred, I would say 60% to 65% of the project we deferred because customer is saying, "Let me review am I going to have this product roll out now or I will do that later. Is that going to be my priority?" So quarter 1, most of the impact happened. The customers were also not going to office, coming together, thinking about how is the product engineering going to -- how are they going to change their strategy. They wanted to design a product, go to different market. Is that market is right time today or they will wait for 3 more months? But at the same time, they also came back, which was not priority. Some of the areas, new areas, they came back and said, "Can you stop this and work on the other areas?' So I would say it's a combination of both together. So more and more, if you see -- and again, segment-wise, there are customers where -- the capital investment in oil and gas, who were doing very interesting project going through and said, "We see the value in doing that, but I think let's delay by a few quarters. We'll come back in quarter 3, quarter 4, year time, maybe December -- October-December time frame, we will come back and reopen this and make sure that our core team remains." So I think all combination happened during this quarter, last 4 months.

[Pankaj Kapoor, Research Analyst]

Okay. And in scenarios where the customers decide to scrap or cancel the project, how did we account for the cost? Was there any cost element taken up in this quarter, which was a onetime initiative due to those contracts?

[Keshab Panda, CEO, MD & Whole Time Director]

Only cost is like customer cancel the project. For example, onsite. If we offshored, to some extent, it can be managed. Onsite, they were not able to fly to India, right? And they were all -- somebody -- there are a few, let's say, 50 engineers came out of the project and they were sitting in the U.S., and we had a choice to terminate their service in U.S. itself. They were allowed an H1 visa, they were allowed an L1 visa. It is allowed legally, but we made a decision, conscious decision that getting our employee from India to U.S. or Europe, we are not going to terminate their service. If they have come on visa, we should retain them. And there is a cost came along with that. We paid for it, and we hold the people and some of them have gone back to India, and some of them are reengaged into new assignment with other customers, so that all happened, if they have the right skill set. So I think this is -- and other areas when we look at the employees who are here, the defense area, we believe is going to grow. Some of these citizens what we had in similar area, we put them in our development center in the U.S., and they are going through training program, that is giving us more opportunities. Recently, we won a deal where -- because these employees, we hold them, even though the cost came to us, and that is helping us to win new orders. So I think there are multiple situations.

[Parameswaran Ramakrishnan;Chief Financial Officer]

Pankaj, to -- apart from what Dr. Panda just now stated, I guess, to answer to your question, we did have in one of the projects in Plant Engineering in terms of project closures, one time, I think costs have come down. One of the reasons for Plant Engineering to come down in margins is attributable to that. I guess with that project being done, I think from next quarter onwards, at least, to that extent, there will be a rebound in margins.

[Pankaj Kapoor, Research Analyst]

And PR, just 1 bookkeeping question on the SCS income. What -- you have any figure, which you are expecting to come through in this year? And you think this will be more in the later half of the year?

[Parameswaran Ramakrishnan;Chief Financial Officer]

See, Pankaj, normally, you are aware that the way we do is we file for the licenses usually in the second quarter, okay? When we file, we do take a percentage of the licenses, which we have filed for as one percentage. And usually, we get the licenses in the fourth quarter, correct? Another percentage we accrue based on what be the probability. So as it stands now, the government has not opened the portal. Usually, they open the portal for filing sometime in Q2, most probably, I think, July or August. But as it is COVID and there is foreign trade policy that is still not announced, but I believe that the policy will continue for FY '20 in terms of our ability to file, but we don't know when we will be filing because the portal is not yet open. Our understanding is that if it's open, we will file it in Q2. So we will have some number accruing in Q2 and if you look at the licenses in that quarter, usually Q4. And what you see in the other quarters is nothing but how much we have taken as a mark-to-market and the realization of that what accrues as a number. So whatever number we had in Q4 -- sorry, Q1 is nothing but realization of the licenses what we already had.

[Pankaj Kapoor, Research Analyst]

Got it. Wish you all the best PR in your new role back in L&T.

[Parameswaran Ramakrishnan;Chief Financial Officer]

Thank you, Pankaj.

[Operator]

[Operator Instructions] The next question is from the line of Vibhor Singhal from PhillipCapital.

[Vibhor Singhal]

So just 2 questions from my side. One, I think, maybe Amit sir, can answer this. Sir, basically, just wanted to get an idea as to what exactly is your outlook in terms of the, let's say, the deal flow that could play out, not just in the next couple of quarters, but let's say, over a larger period of time. Do you see this pandemic actually impacting the companies so significantly that at this point of time, while at one time -- one hand, we have seen these project cancellations and companies putting their spend on hold. Even if, let's say, we are past this pandemic, there's going to be a lag with which the companies actually resume their R&D spending. I mean, initially, they might want to just focus on their other activities to boost sales and rationalize their costs. So do you see that -- even when we are past this pandemic, do you see a lag in which the entire discretionary R&D spend comes back, this could take us back on the growth path? And secondly -- my second question is on basically the growth outlook that we are looking at in the manufacturing space -- sorry, in the transport space, in the transport space, the auto manufacturing is probably one of the largest part, aerospace has been to -- downturn. Where in the year, not just necessarily for us, but for -- as an industry as a whole, when do we see the auto industry and the overall transport industry to maybe start reviving back in some sort of number?

[Keshab Panda, CEO, MD & Whole Time Director]

Yes. I think overall, which industry is going to be -- I don't look at it next -- if you look at 3 years' term, right? Pre-COVID and post-COVID is going to be different. We have recognized that in the last 4 months what we were selling in pre-COVID is 100% is not going to be the same way. The business model has changed. New technology has come in. Priority -- customer priority has changed. So we have realigned ourselves. When you've gone to customer and submit a proposal for not only quarter 2 and quarter 3, but beyond for the next year as well so the proposals have gone to the customer, we have video conference, we are talking to them regularly. And that process is on. The team is working. Amit and the whole team is working on this, whole delivery team as well working on this, number one.Number two, for example, some of the platform area, which we work on. i-BEMS Shield, if you see in our press release, we had a smart campus management platform. We said in post-COVID, what is going to be important with sales transform that we call post-COVID. And then if you look at the process industries, what they would be needing it now, when you say top place operations, when you have to run it, or remotely you have to track your plant, what are the technologies used there? The number of people going to plant is not going to be the same. And what technologies we have today, we can immediately realign to that so the customer is going to buy. So those we have already been doing it. And I would think, as a whole, we are making every effort to see this is not for quarter 2 or quarter 3, beyond. How do you do? This year, FY '21 and beyond, what are the technology and engineering, what we need to build, what is important today? And how much software and electronic engineering, embedded engineering is more important, how much mechanically we don't have to have. So those balancing is what in last 4 months we have been doing it.As far as transportation is concerned, I think if you see transportation is a segment. Before transportation, I will talk manufacturing. We did talk about frugal manufacturing, right? We realized that what is the customer, auto industries or when we go to -- we're already working with some auto industries. I will request Amit to give some -- a few examples. See, I think auto industry, what are they going to buy? And if you go to auto and aerospace now, we are doing it. Now aerospace, even though there is a downturn, there is -- customers who are talking about with digital way of design to manufacturing, how do we compress the time? And what are the new technology we can borrow from adjacent industry to aerospace industry, that process is going on.Auto industry, again, auto industry is buying from -- customers are going to buy different type of things. There are electric vehicles, are they going to autonomous car? Is that going to go away? No, it's not going to go away. That is much more technology-driven is going to come. And if you see us, some of the deals we won recently are in these areas. So we believe there are some priority changes happen to what we were doing pre-COVID to post-COVID. But I think some of the technology areas, if you are in technology, you understand the segment domain, it is going to continue. It is not going to be, I think, maybe pain for few quarters, 1 or 2 quarters we go through, then we'll come back slowly, both top line and bottom line improvement we can do. There are areas in oil and gas. We are going through difficulty oil and gas. As you know, oil price is going down, but we had a gain in oil and gas segment in upstream area in the oilfield services area where entirely software. We are building a platform using analytics, our domain knowledge, we are building platform there. So I think more and more your priority changes, business model changes, but I think nothing changes as a whole. That is our experience last 4 months dealing with the customers in audio, video and emails, communicating what we have, that's our experience. Amit, do you want to add anything?

[Amit Pal Singh Chadha, Deputy CEO & Whole Time Director]

Sure, sir. So one, like Dr. Panda talked about, he already talked about frugal, so I will not touch on that. See what we are seeing definitely is that there is cost pressures that our clients are facing, #1. #2 is this remote operations, from idling factories, they have been shutdown because of infection, et cetera, as well as shutdowns in local counties and areas and precinct is creating more digital opportunity. Third, there is repurposing of the manufacturing as well as supply chain that's happening. So the wins we have had are broadly in these 3 areas. If I look at the technology tailwinds that we have got, these are around Industry 4.0 smart manufacturing, product redesign, cloudification, AR/VR and analytics and then system and network security. We have invested in these areas in the last few years, quarters. Dr. Panda has alluded to it by saying we invested in technology, that is helping us at this stage, right? If you see the report that came out today morning in the U.S., we have seen this on the ground, retail is back up, cars are selling again. Europe has opened up. So we do see that coming in as a positive. And so that's 1 and 2. Third, just one thing, in your data metrics, we have gone to the e-business platforms. We've conducted more than 30 webinars just in the last quarter, which was attended by about 1,300 people. And this would not have happened had there not been interest in engineering services in our technology area. So we still are fairly upbeat about our prospects in this sector.

[Operator]

The next question is from the line of Abhishek Shindadkar from Elara Capital.

[Abhishek Shindadkar, Research Analyst]

Let me first wish PR. Thank you for the support and best wishes. My question is regarding the December quarter more. So generally, it's a seasonally soft quarter with furloughs. But this time, because of the COVID, people have had furloughs in the June quarter itself, and there is a possibility that we could resume back and continuing the holiday season as well. So my question is, when you're talking to clients and when they are budgeting for the ramp-ups or the transitions, what is the kind of feedback you're getting? Are they kind of budgeting the ramp-up to continue in the Q3 as well? Or it could be the usual year?

[Keshab Panda, CEO, MD & Whole Time Director]

It's a picture of both. There are customers who are coming back and saying that we are going to relook at it, as I said before, saying, this project, we are not going to do it. Now look at the elevator, right, touchless elevator, can we do that? How do you do this? There is some technology coming in there. And looking at the other areas, you know automotive, for example, the customer has come back and said, "Can you do this now and which we need more than before, can we do that?" Data analytics getting auto -- from auto from lot of chips out there. And then we sold recently an end-to-end TTQ design for a camera. So I think it is a multiple things happening right now. It is not that customers are saying, "Am I going to reduce my spend?" Yes, we are always careful about the customer, big customers who are $10 billion, $20 billion customers, they are thinking differently than the customer Tier 1, small companies, less than $1 billion. They're worried about, are they going to keep their employees outsourced or they're going to keep the employee -- or they're going to reduce their employee cost and use us more? So there are multiple things going on. And more and more we hear from them saying that, "Can I reduce my cost? Can you take this particular product, which -- can you take complete control over this, starting from design modification to my customer support, can you take completely? And the other point is, a new product, I'm coming back. Now I won't use less employees, I'll use more employees, your employees, because you have a lab, you have multiple labs, you have -- your employees have domain knowledge, can I use that?" And there are cases customers are also saying -- on the negative side, customers are saying, "I think I will not talk about next 2, 3 quarters on the growth. And let me look at it how this goes, then I'll come back to you." So I think it's about both, that's how we look at it.

[Abhishek Shindadkar, Research Analyst]

Sir, second one, on the acquisition. So as per the press release, the revenue contribution you have highlighted for '19 and '18, there has been a sharp jump in the revenues of the company. So what is a sustainable revenue run rate for this company? If you can just provide a color, that would be helpful.

[Keshab Panda, CEO, MD & Whole Time Director]

No, I didn't understand your question. '18, '19. '18, '19. See, I think, one, on M&A, we believe in one thing. We always believe in that we are not going to acquire a company for the top line. We are going to acquire a company for technology, we are going to get from there, wherever the gap, whether we can build or buy? And is that going to give us access to which market and what technology, how we are going to do that? So all the M&A we did -- we did a small one, we do always, $10 million, $20 million M&A, we do always. And that -- not too many companies are available in technology segment where we can acquire to engineering application. So the M&A which we did now also, we believe, that's a gap in competency we can fill. And that's a segment we think we should go -- it will add us to our portfolio what we have. That is how we go and do that.

[Amit Pal Singh Chadha, Deputy CEO & Whole Time Director]

If I may add Dr. Panda?

[Keshab Panda, CEO, MD & Whole Time Director]

Sorry, I missed, '18/'19, PR or Amit, can you explain that?

[Parameswaran Ramakrishnan;Chief Financial Officer]

Amit, you explain.

[Amit Pal Singh Chadha, Deputy CEO & Whole Time Director]

Yes. So before we go to numbers here, see, the reason we have done this is that, like Dr. Panda said, 5G is an area for us. 5G, we believe, is an area where there will be investment, right? And we are seeing that already. We have been working with some telecom infra providers. We also talked about it in our investor release that we've actually started business with operators also. So this company does high-end value engineering work for the telecom industry in the areas of network engineering operations and enterprise mobility. So they just don't provide services, they also have a patented product that helps with the network as well as devices on the product, okay? Clients, they've got multiple clients. In fact, they work with 3 of top 4 communications service providers in the U.S. They work with the telecom operators headquartered in U.S. and Europe. So that's why it's strategic to us in terms of competency tool as well as client fit. From a revenue standpoint, how much would it add? I will request PR to answer that directly. PR?

[Parameswaran Ramakrishnan;Chief Financial Officer]

So last year, revenues were in the range of $15 million, okay? And the way we have structured the transaction regarding to earn-outs, we will have a normal -- better than revenue growth rate. I mean, quite an aggressive growth rate over the next 3 years. And also, equally, I think, I would say, good EBITDA track because we believe that this company is in the current, I would say, scheme of things into telecom-related work, which is going to really be well. And with their association with LTTS, the company should be giving us good flexibility to increase that part of -- in that particular space. So last year, revenues were $15 million, and we expected to grow better.

[Operator]

[Operator Instructions] The next question is from the line of Sandip Agarwal from Edelweiss.

[Sandip Kumar Agarwal, Vice President]

So Dr. Panda, I have 1 specific question on the growth front and then I will have a small question on the margin front also. First of all, I [ will wish good health ] to everyone. So just wanted to know, sir, while we knew that this quarter will be weak because we are a lot more dependent on physical activities or physical interface because we have plant engineering and there it is very hard to grow in this kind of situation or defend the revenue. But when you are guiding for a 9%, 10% decline, why that 9%, 10% decline number implies a very, very small quarter-on-quarter growth, particularly in a scenario where we have seen such a sharp decline in this quarter. And as one of the early participants mentioned that the manufacturing industry may not go through the furloughs, which they generally go through this time. Sir, I believe that the recovery could have been much stronger. So what is holding you back to give such a deep cut for the full year, barring the quarter 1 number? Is there something else which -- or you are just simply conservative, #1? #2, on the margin front, the utilization, there is a dip of 70%. I understand that you have taken few steps, which are -- which will be helpful for the company in the long term, in the sense that we are not asking anyone to go and all those things. But with such a low utilization, I believe that the comeback or the turnaround will be also extremely sharp. So while you have mentioned there will be a recovery in margin, can you give something -- some ballpark on what could have been the loss of this last fall of utilization in the overall thing?

[Keshab Panda, CEO, MD & Whole Time Director]

See, Abhishek, I think there are a couple of things happening. Now in the U.S., as you know, I think there are states which opened and closed after 2 weeks, it's still going on. And the offices open, office closes. Capacity is not at 100%, 50% itself is a big number. So I think we have to look at it overall point of view, what could be the challenges could be in the future, looking at that. And the aerospace segment, as you said, quarter 4, I did explain earlier quarter 4, I did not see the Japanese aerospace company completely scrapping this -- the project itself, a few billion dollars they invested. They decided not to go ahead and said few quarters, they are not going to do it, so possibly this year itself. So I think that taking that into account and then what is happening in their overall point of view. And engineering is one thing for sure that the market size is big enough for us to dream big. There's no question about that. If anybody can do engineering, we can do engineering. I've no doubt about that, the technology and engineering put together. So only point is we have to be careful about, is that a number of order or pipeline we have today is better than Q4. We did that.And then decision-making, if decision-making is going to be delayed, some of the customers are going to delay the decision-making. The decision-making would have happened now because, let's say, Texas close or Florida close or California close or Arizona close, in that, some cities close. If it happens to be there, if that's going to be delayed by 2 months, that's going to impact your business. So I think overall, keeping in mind what is going on in the world today. See, I think the factory or oil and gas, the drop in plant engineering is more related to oil price than going to factory or office. See, we were doing much more technology work in upstream area, and the CapEx investment and companies going through -- oil and gas companies, OEMs going through difficulties, they said, that investment, we are going to put a stop to that right now till we come back. When we came down to $20, $22, they made a decision that we'll come back to that investment later. There is no doubt about our contribution to this, no doubt about our technology use, they need it. But at this time, affordability was issue or looking at strategy was issue. Can I look at investment more in downstream, upstream area, can I put a stop for some time? So those changes, which happened. Are we going to -- the quarter 2, if I see things are going to be better, I think we have to be very, very careful about what we say and what we really see that we communicate.As I see, what we see today, that is what we communicated. Is that going to -- see, today, this COVID-19 is not over yet. If the vaccination is going to come, is medicine going to be there by end of December or January, and some city opens and closes. So I think keeping that all these factors into account, we have come with the best case scenario, this is what we see today. And we'll keep updating you next quarter, again, what we see this quarter to next quarter. This is something we'll continue to do that.On the margin front, you asked about, our intent is, it so happened that suddenly it came in Q1. There, I think, keeping in mind, the employees, conscious decision we have made that employees, we'll keep it, but cost came now. And once the revenue business starts growing, revenue keeps adding, these employees, we kept them. The employees who are relevant in terms of technology and domain knowledge they have, we kept them, we are training them. And that we don't have to go to market, hire those people to increase our revenue in Q2 and Q3 in a bigger way. And those employees with entry level engineers we get from good engineer school, I think that solve our purpose moving forward. And again, our investment in technology, whatever we did, the platform out -- 525 patents we have filed now. So we are not going to stop that to improve margin right now because that investment, if you don't do engineering technology, you may not be -- you're not going to be relevant in the long run. So keeping that in mind, balancing out customer buying, we are balancing out on the post-COVID scenario and employees, what asset we have, and that's what we have worked out.

[Operator]

The next question is from the line of Prakash Chellam from Marathon Edge.

[Prakash Chellam;Marathon Edge;Partner]

Just a quick one. Your SG&A has dropped dramatically by almost 33%. Could you give me some color on how much of it has dropped because of S&M, how much of it has dropped because of G&A? What sort of cuts have happened on that front?

[Keshab Panda, CEO, MD & Whole Time Director]

PR, please, take that question, please.

[Parameswaran Ramakrishnan;Chief Financial Officer]

So Prakash, the SG&A drop is -- one of the reasons would be the savings from the travel costs, okay? And then we also had -- we also focused upon how much we can optimize on the sales cost also. So there has been some amount of savings, okay? And also, the other aspect is we have had some separations in that particular area, thereby enabling functions earlier itself. And that also we managed to cut on the cost aspect. So the major things are, I would say, savings in travel. And also a lot of separations, which we managed to do prior, the cost of that also has -- savings on that account also has come back.

[Prakash Chellam;Marathon Edge;Partner]

And these separations are in sales and marketing or in G&A.?

[Parameswaran Ramakrishnan;Chief Financial Officer]

It is a combination of both.

[Keshab Panda, CEO, MD & Whole Time Director]

Prakash, what we did is we formed different teams now internally, and we said this is a very difficult time, we get new ideas. We said, are we efficient enough in sales organization? If more demand is going to be on telecom than in medical, can we reassign our sales people if they have the right technology knowledge, can we do that? And there are people who are selling the technology, which we don't think are relevant, then go to can you reduce back number of head count. So we have taken a target for this. What -- both sales and administration side, both the HR, then the finance, the administration plus sales altogether, we said we are going to do that, look at this parameter, where are the room for us improvement, that we have -- very, very aggressively, we have done that. There is room to -- I still believe that we need to work, some more work we need to do, depending on what we learn in quarter 1 and what difference is going to be quarter 2 and beyond. That's work in progress, and we'll continue to do that.

[Operator]

Thank you. Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Mr. Pinku Pappan for closing comments.

[Pinku Pappan, Head of Investor Relations]

Thank you for joining us on the call today. We hope we were able to answer most of your questions. In case you have any follow-up queries, please reach out to me on email. Wishing you safe time. Goodbye, and have a great day.

[Operator]

Thank you. On behalf of L&T Technology Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.