L&T Technology Services Ltd
NSE:LTTS
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Ladies and gentlemen, good day, and welcome to the L&T Technology Services Q3 FY '19 Earnings Conference Call. [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.
Thank you, Reo. Hello, everyone, and welcome to the third quarter earnings conference call of LTTS. I am Pinku from the Investor Relations team. I hope you have had a chance to go through our investor release and financial statements. If not, you can download them from our website, www.lnttechservices.com. On today's call, you will hear from Keshab Panda, CEO; Amit Chadha, President, Sales and Business Development; Bhupendra Bhate, COO; and 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 provide an update on the large deal wins and the deal pipeline. PR will walk you through the financial statements, and we will then open the line for questions. Let me now turn the call over to Dr. Panda.
Thank you, Pinku, and thank you all for joining us on this call today. I wish you all a very happy new year. First, let me walk you through the highlights of the quarter 3. We delivered a strong Q3 with 4.8% quarter-on-quarter revenue growth. We sustained the double-digit growth trajectory across all the industry segments. Our revenue from digital and leading-edge technologies has gone up from 33% to 34% this quarter.The last is momentum across verticals and geos continue to gain strength. In Q3, we owned 8 multimillion dollar deals across all our industry segments from various geographies as well. Operationally, we executed well, with EBITDA margin improving to 18.4% in Q3, despite the partial wage hike impact that was there in Q3. Let me now talk -- take you through the 5 industry verticals what we have. Number one is transportation. We had a strong growth of 4% quarter-on-quarter in transportation led by auto, truck and off-highway and aerospace. In auto, we are seeing demand from customer in areas of autonomous driving platform, active safety deployment and supply chain optimization. We own a few large deals in auto in Q3, and Amit will talk to you about in greater details. Based on the pipeline, we are building competency in digital cockpit and autonomous architectural design as well. In truck and off-highway, we are seeing demand in both value engineering and new product design. For example, we redesigned the seating and steering control to enhance riding comfort for a truck manufacturer. We see more and more demand in truck and off-highway in electronics embedded in software. We are into that as well. In aero, we continued the momentum that we gained in quarter 2. We are working on areas like actuation system where we have gained good expertise during last 2 years. Industry 4.0 for the subfloor of auto manufacturer, power drives and battery management system for a U.S.-based customer. In the military space for each, we are leveraging our U.S. workforce, the U.S. citizens as well. The pipeline in transportation is good, with the discussion happening on setting up ODC for OEMs and Tier 1s for multiple geographies. Next 2 -- number two, industrial system -- industrial products. In industrial products, we're able to sustain the growth momentum with 2.8% quarter-on-quarter growth in Q3. We are finding good traction with customer in 3 areas. Firstly, inclusion building, smart city-related work, our IDM platform solutions, and our knowledge and skill set in this domain is getting acknowledged around the world. We are leveraging our IDM solution in the deal we own with a U.S. customer financing user experience in a smart campus, where a lot of cutting-edge technology like artificial intelligence, virtual reality all that is being used, AR, VR. On the energy side, we started working with renewable energy companies in defining their digital roadmap and strategies for product life cycle management. Lastly, in electrical products and automation, we have expanded our work for low-voltage products, making them smart and system design leveraging our experience in this segment. In the pipeline, in addition to the above areas, we are seeing a lot of opportunity in the digital space as customers look to improve manufacturing operations and implement digital [ machine ] diagnostic using artificial intelligence. Overall, we feel confident that we can sustain the growth trajectory. Telecom & Hi-tech. Coming to Telecom & Hi-tech, performance rebounded with 6% quarter-on-quarter growth in Q3. Growth was led by our telecom, semiconductor and consumer electronics segment. With the network equipment OEM, we are assisting in the 5G rollout operations, for which we are designing tools for automated radio access network configuration. With Silicon Valley company -- with a Silicon Valley company, we have started working on the security testing of a cloud platform. We started the engagement with a leading setup box manufacturer where we are waiting an order receipt of support and announcement. We have a few large deals in pipeline in semiconductor area in advanced chip design space, which provides us good growth visibility for the future. Process industry. Plant engineering had a good quarter with -- again one more good quarter with 6.1% quarter-on-quarter growth, driven by the ramp-up of deals over the previous quarters and good demand across chemicals, O&G and CPG.In Q3, we [owned] a deal with a U.S.-based O&G EPC major, providing unique support from offshore. The first phase of this project has started, and we are using high-end 3D plant design and modeling to support their engineering teams. Cybersecurity, for a plant data protection, is a new area where we recently executed project at one location, for U.S.-based food and beverage industry. This project is to be rolled out across the globe with 300-plus plants worldwide. We're seeing a good pipeline for plant engineering in the U.S. and Europe, especially in chemical and O&G area, and we expect growth to continue for coming quarters as well. Medical devices had a strong growth with 8% quarter-on-quarter growth in Q3. Growth was driven by ramp-up of some of the recent engagements we owned. These are 2 major trends that are helping us drive demand in medical side. Firstly, staying in regulation in Europe that medical devices companies need to comply with, starting 2020. And this requires a significant redesign of product features and materials. Secondly, healthcare is moving to self-care, home care and remote care. This means lot more device, miniaturization easy usage and connectivity. Some of the deals we own include new product development for a U.S. healthcare company to develop the high-tech patient wearable devices. With a growth of demand in this, we believe that's a growth area again. Device changes to comply the regulation for a large U.S. device manufacturer. Overall, we are seeing a good pipeline of opportunity, digital health monitoring, high-end patient care equipment announcement and benchmarking and regulatory certification. Our platform and solution update. On the platform and solution side in Q3, we had license sales of about USD 0.5 million. We sold out condition-based maintenance solution called Integrated MCare to an O&G customer. The solution will monitor the behavior of critical equipment like boiler and generator and use machine learning algorithm to assess remaining useful life and reduce downtime of a plant. Let me conclude by providing the outlook on the basis going forward. We have a well-oiled sales and delivery engine that is executing very well, both in sourcing bill and computing them and executing them. This execution has led us to winning deals consistently over past 6 to 8 quarters and giving stability to our revenue growth, which has been averaging around 5% per quarter. The deal pipeline for FY '20 looks promising, and we expect our conversion rate to be better than earlier quarters. We don't see a headwind in our -- in any of our verticals or geographies barring one account where the ownership has changed hands. The new owner is rethinking their outsourcing strategy and wants to take over one of our client engagement. We are still working out the details with the new owner, but we feel it is important to give you a heads up that the changes to the engagement -- change to the engagement is likely to take up effective March 2019. As things stand today, we see the change in having impact of around 4% on our growth rate for the next fiscal year of FY '20. When we report in Q4, we'll provide a more granular update on the FY '20 guidelines. We are confident that excluding this account, the business in gearing to grow -- geared to grow in the high teens for the next year. As I mentioned earlier, we feel good about the large deal pipeline and some of the large deals are in the final stage of discussion, which can help us mitigate the impact from this one particular account. Amit will cover the large deal pipeline in more details. We are reaching our FY '19 USD revenue growth guidance to 24% from 21%, talked about last quarter. This guidance factors a 1-month impact from the account, I talked about, that we discussed in or Q4 implied guidance. I now hand over to Amit. Amit?
Thank you, Dr. Panda. Good evening all. I will be covering 3 areas. Large deal wins, deal pipeline and the geo outlook. From a large deal standpoint, we have continued our journey and continue to win deals across geos and segments. Let me briefly highlight 6 of the large deal wins this quarter to bring out the differentiated work that we do. One, for an automotive Tier 1, we've been awarded an incremental $20 million deal and exclusive partner status to work on their entire active safety product line, developing new products that are set to launch in the next 18 to 24 months. Our team will be largely based offshore and the work will start ramping up in Q4 of this year. Two, for a European OEM, we won an incremental $15 million deal to support their autonomous driving program. With this deal, we will be the sole supplier to support the client globally as they work to improve autonomous driving features, patterns and recognition. The team is ramping up as we speak and will be fully operational in the next 2 months. Third, for a semcon chip manufacturer, a new client this time around for us, we have been engaged to ramp up to deliver a gaming chip providing end-to-end functionality and user experience improvement with our work. This $12 million deal has been won given our physical design expertise from the Graphene acquisition. Four, for an all-terrain vehicle manufacturer, with the U.S. China tariff discussions as a backdrop, we will work with them to redefine the entire supply chain. This $10 million incremental win will see us helping the client with engineering design, manufacturing optimization for their new ATV product lines. Next, for an industrial conglomerate headquartered in the U.S., we have been chosen as IoT platform development and deployment partner, our UBIQWeise platform will also feature in this work. We've started the work in the new year, calendar year, and we'll ramp up in this and next quarter. We expect this deal to give us an incremental $10 million value. Finally, the medical sector has given us 3 digital deals in the last quarter with cumulative value in excess of $10 million, coming from 1 existing and 2 new clients. In these wins, in one case, we will develop a mobile platform for diabetes therapy, which will facilitate data collection and sharing between patients and doctors. In the second case, we are helping a surgical equipment major to connect their equipment in the operation theater. In summary, these 6 deals alone will give us a TCV value of nearly $18 million of incremental revenue over the next 2 to 3 years. Moving on to deal pipeline. As Dr. Panda spoke about, and you already discussed, a part of our pipeline is always proactively built. We have just concluded account planning for most -- for our most promising top 18 accounts and we are now working on the rest. The concluded plan give us confidence that there is sizable opportunity for us in our existing client base across regions and verticals. Some of the large incremental deals we are working on are: One, there are 4 deals in the automotive area across OEMs and Tier 1s regarding autonomous driving, electric vehicle and the infotainment space; there are 2 ODC proposals awaiting decision with a diversified semcon major; there is one ODC being discussed with an electronics and mobile company; there is a digitalization deal for an O&G major in line with what we won last year. A couple of engineering value center discussions are in various stages with 2 petrochemical companies.Having said that, let me quickly give a geo outlook. We see a robust demand across the U.S., continental Europe, Japan and MNCs in India for our services and solutions. Our customers continue to spend on key initiatives and we are an integral part in a number of these conversations. We continue to also see upward movement in our client pyramid. Sequentially you would have seen, we've added 2 clients in the $20-plus million category, 2 additions in the $10 million plus category, 5 in the $5-plus million category, and 4 in the $1-plus million category. To sum up, we continue to win large deals across verticals and geos, a large deal engine that works directly with me continues to make progress, both in pipeline value and conversions. We remain upbeat about the next quarter and next financial year. With this, I'll hand over to PR now.
Thank you, Amit, and good evening to all. I will -- you must have all seen the fact sheets and the -- on the performance of the company for the quarter ended December 2018. I'll give you an overall summary of the financial performance. The revenue for the quarter was reported at INR 13,169 million and showing a growth of 4% quarter-on-quarter over that of the previous quarter. In dollar terms, our revenue numbers was around $185.7 million, posting a growth of 4.8% sequentially. Using constant currency methodology, our revenue growth for the quarter has been reported at 4.6%. Coming to margins, our EBITDA margins for the quarter is reported at 18.4%, a growth of around 30 basis points as compared to the previous quarter, where we reported 18.1%. If you see from the fact sheet, you'll see that the gross margins for the quarter ended December 31, 2018, is at 29.6%, whereas for the previous quarter, it was 31%, a marginal drop of 40 basis points. This is primarily due to the fact of 2 major reasons. We had a partial wage impact during this quarter and this was communicated when we did the earnings call for the September quarter earnings release. And also expenses on computer software and miscellaneous other expenses have gone up. But we were able to demonstrate a saving. The EBITDA margin was largely on account of SG&A leverage, given by larger revenue. Coming to segment numbers. Our segment as you see, transportation continues a robust growth. That has the highest share in the overall revenue side, almost around 32%, followed by Telecom Hi-tech at 27%, industrial products at 20%, process industry at 14%, and the residual 7% comprises of medical devices. Coming to the EBITDA margin performance of the 5 segments. There has been an EBITDA increase in transportation, in Telecom Hi-tech and in medical devices, whereas the EBITDA [ flat ] compared to Q2. The margin in industrial products has been constant in Q3 as compared to Q2. There has been around 2% dip in the EBITDA margin for process industry. This is in line with our internal expectations for the quarter as the revenue composition tilted towards higher on-site, and a little amount of higher subcontracting cost, which related to some pass-through revenue engagements. Coming to -- in terms of revenue share by geography, we don't see a major difference as we have seen in LTTS in earlier quarters as well. North America continues to take the major share at 58%, Europe at 16%. There has been an increase of around 100% in the revenue share from India, which is largely account because of some of the engagements which converted to rupee billing and also addition of revenue numbers arising from the acquisition of Graphene.Coming to other income. You might have seen in the fact sheet we have given the overall breakup of other income. The previous quarter, Q2 FY '19, we reported other income of almost INR 65 crore and as against that the current quarter is INR 35 crore. The drop is primarily on account of we had accrued -- the export licenses accruals during Q2 when we had filed the claim. This quarter, we don't have any increase on this account. And other breakup of exchange difference has been put in the fact sheet. Coming to the last point. In terms of the overall, our cash conversion ratio in this quarter has been fairly good. So for the 9 months for FY '19, our total free cash flow, operational free cash flow, that is EBITDA adjusted for working capital and CapEx is around INR 430 crores, out of which, in Q3, INR 216 crores was the free cash flow. And that is primarily because of better account working capital management, we were able to improve the DSO almost by 3 to 4 days from that of the previous quarter. In terms of balance sheet, we are having currently overall investments around INR 450-odd crores. That contributes to the liquid investments plus cash and bank balances. And just before I conclude the call, wish to tell you that when we talked about the revenue number at $185.6 million, that includes the recent acquisition of Graphene, which contributed to almost $2 million to the top line. While we talked about this acquisition, I also wish to tell you that we are having some active acquisition opportunities in the pipeline, largely comprising of areas like in the transportation and automotive sector, medical devices and also some plant engineering opportunities. With this, I have tried to give you overall flavor of the financial performance, and we are now free to answer any questions that you may have.
[Operator Instructions] The first question is from the line of Shyamal Dhruve from PhillipCapital.
So my first question is on the European geography front. So it's been 3 to 4 quarters wherein we are seeing the U.S. -- the European revenue at almost similar level of $30 million to $31 million. So partly that would be due to the currency, but are there any other headwinds, which we are seeing on the European side?
It is -- I think you can't take the number -- Europe as a number because the way we accounted their customer, global customers, stayed across the geography. So the customer was sometimes redundant. So there is no drop in revenue or there is a increase in revenue. We see -- FY '18 to FY '19, we see a good growth in Europe itself. So there is no problem in Europe as a geography. Only thing the way we account it for a global customer that could be a difference. There is no -- there is nothing to worry about it.
And my second question is on the -- or the business on specialty chemicals, FMCG and oil and gas. So in recent past, we have seen quite a bit of fluctuation on the crude oil prices. So -- though it takes around 2 to 3 quarters of lag effect on the client spending part. But are we seeing any early signs of client holding their -- oil and gas clients holding their CapEx on the IT front or the business is going as usual?
No, I think we have not seen that yet. You will see oil and gas segment now. Oil prices fluctuation happening $50, $60, now $60 -- around $60 or so. We don't see any problem there. I think the reason some of the oil and gas companies started outsourcing engineering and technology because they don't have too much money. So I think that [compute] process will continue. Oil price going down, investment not having oil and gas as more investment comes in specialty chemical area. So it is the -- we are not seeing the Europe or U.S. anywhere. We do specialty chemical area. We don't see any drop in customer demand at least till today.
And just last one question, bookkeeping question. So in this quarter, we have seen the GBP and the euro depreciation against USD. So this would be some negative cross-currency impact, but we have reported 20 basis point positive impact. So is there any change in currency mix or...
Yes, okay. Just to tell you our realization rate has been fairly better. So there has been no material impact because of the cross-currency headwinds because whatever depreciation with euro and the other currencies have had against the dollar has been partly compensated by way of the dollar/rupee in terms of higher realization rate.
Okay, but my question is more related on the USD revenue. So we have reported USD revenue growth of 4.8 percentage and CC growth of 4.6 percentage so plus 20 basis points positive impact. But compared to date, all of our peers have reported negative CC impact. So just wanted to have some idea like why we have positive impact despite GBP and Euro depreciating against USD?
Okay. Actually, if you see during this quarter, when we saw September, the dollar/rupee, October, it went up to -- right up to INR 74. Then it came back to INR 69 before finally closing at INR 69.5. So what has happened is, in terms of our billings, which has happened across these quarters, that is one of the reasons that I'm talking about that the realized rate in rupee is better than what it was in the previous quarter. And that is one of the reasons where, in constant currency, we have at 4.6% as against reported billing at 4.8%. It's more to do with the volatility of the USD/INR during this quarter that has added to this particular, I would say, dichotomy.
The next question is from the line of Sandip Agarwal with Edelweiss.
So, Dr. Panda, I have couple of questions. First, on the industrial products side. So what are you seeing there? What is your view for next one year on that segment? I am not asking for a guidance, but I am just trying to understand what is driving growth there, and how is our pipeline and what is your sense on that segment? And second, on the transportation vertical as well, similar question, what is your sense what is driving growth there? How will -- with upcoming time, except -- so and other than these 2 questions, I just wanted to know how is the IoT theme playing out for us? Is it in line with what we expected better than that?
Absolutely. I think the IoT is doing very well. You can see that our new technology and digital portfolio, it has grown our contribution to 34% from 33% last year -- last quarter. So that growth trajectory will continue. There is lot more demand coming on Industry 4.0, more on the smart product, more on the connected device web system and so on. What makes a difference is our investment in creating those platform what we did. This is applicable for every industry. For example, IBM platform is firing everywhere, every geography now, starting from Australia to America to Europe to India. So I think that's a great move I would say. Similarly, when you look at it, our industry -- transportation quarter-on-quarter has grown 4%. And Amit talked about some of the opportunity in these areas, which we -- at the last deals we own. This is going to give us again the growth in the coming quarters. You would remember the type of opportunity in the market in transportation now, autonomous vehicle, safety system, infotainment. So it is important to have your own -- the electric vehicle. If you ask are there going to be -- number of gas stations going to be there 25 years from today. It's not going to be there. Those gas stations, I don't know what business they're going to do. So the fact that the world's changing and the -- our investment in battery management system for electrical vehicle, our investment in autonomous vehicle, safety system, infotainment and transportation that is making a difference. Industrial products, again, I think, we have grown this quarter with Q2 to Q3. IP has grown 2.8% quarter-on-quarter, and we believe some of the areas we're focusing on of smart campus management, energy management, and the areas like designing products and making the smart products, these areas is again going to grow. So we don't see any problem so far in industrial products. But I think in transportation, it has grown 4% quarter-on-quarter and industrial this quarter 2.8% grown, and we believe that is going to continue. See, the areas we need to focus, industrial, again, what we are doing is conditional-based monitoring. The MCare platform we have that is helping us. Go Green is one area -- different area on the industrial side that is again our portfolio is helping for growth. So I think multiple areas, electrical system, then building management, campus management, and Go Green all put together, we see a great opportunity moving forward. Did I answer your question?
Yes, there seems to be no response from the line of Mr. Sandip Agarwal. We move to the next question. The next question is from the line of Pratik Lambe from ARM Research.
I had just one question regarding our Indian business. I see that for the past 2 quarters, we have delivered Y-O-Y growth of more than 50%. Just wanted to know from you, even it could be -- I would appreciate if you just throw some granular view on what sectors or what are the verticals driving this India growth?
See I think India growth, we are not selling to Indian customers. That's not the strategy we have. Whoever customer when do project for them that is one, and the second thing is, when you see the revenue growth, we acquired a company in India that's rupee building, right? Graphene is rupee building that also added up in to these numbers. So the growth point of view, our strategy has not changed. We continue to support our global customer in India. So that will continue to be there. Do I see, again in '19 to '20 same to continue, absolutely not. That's not going to be the case.
The next question is from the line of Pankaj Kapoor from JM Financial.
Mr. Panda just a clarification on the client specific issue that you mentioned. So if you can give some sense of which geography, which vertical would that be in? And if I understand you right, you mentioned that this will have an impact of 4% on FY '20 growth, which we expect to be in high teens. So just to clarify that number?
Pankaj, I think discussion is on, still we have not concluded. This is going to not only one geography, it's going to be multiple geographies. So it's just -- it would be across multiple geographies that will have an impact. And is that going to be -- we have given a number -- rough number, in maximum, we'll have 4% impact. That's what we see now. But we still will not conclude it. We thought it's safe to communicate this, when we started the -- one piece of business, the customer -- existing customer now, he's sold it to a different party. And that new owner, he believes that, that staff is going to be -- he is going to own them, outsourcing to us. So there are multiple things we are discussing with him. What he's going to own, what we are going to continue to service them? So this part is still not clear. A lot of work is still being done. Maybe part of it he is going to own or a part of we are going to, how we are going to do it? So we have analyzed that maximum impact is going to be 4%, that's what we have communicated.
Got it. So this is a more conservative outlook, which is factoring in probably a worst case scenario. Okay. And the other thing, may be, you or -- the whole point about the, which I wanted to understand is the impact of the recent trade conflict or some of the macro concerns, which are coming in. So any sense if that is having any impact on the conversations that you're having on the client? So it may not yet have an impact on the business slow. But any -- is this something which is coming up in client conversation? And how do you see the outlook of the ER&D spend of the clients are planning as they get into the new year budget cycle?
Of course, I think we have not heard about this yet from any customer. What is it a trade issue going on with China and U.S. Is that going to have spend on our ER&D budget? No, that's -- I think we've not heard that. But what we're watching very carefully is that most of the global customers, we service them around the world, that we do in U.S., we do for example, for China, the subcenters they have, engineering R&D is done out of India. That will continue there. So I think -- so we -- any of the industry, any geography have not heard about the impact of the tariff. It is not clear yet. It is not clear yet. At least, I see FY '20, is that going to have an impact? We don't know at this time.
Sure. And so, I mean, of course, this year we had a very strong growth momentum. So if I want to just understand as you get into, probably the next year planning cycles and all. Do you think that you probably would like the growth to be a bit more moderate, so that you think you can use that to may be make the -- increasing robustness overall the organization, so make some investment that you're planning? Or you think that the momentum is very strong and you would rather participate in that momentum?
Pankaj, we always look at the business we run, it has to grow. Top line has to grow, bottom line has to, obviously do well. Our innovation engineering, what we started, we had 99 patents we had filed, now we own 99 patents. The platform business we have, we are now working very aggressively, having a setup team working on that investment we did. There are a few hundred people working full-time on how to realign this platform to take it to the next level, so that we can compete, not only getting contract, but selling those licenses aggressively. So I think there are multiple things going on. Investment is a nonissue provided, we know the ROI, proper ROI is there. So this is not an issue at all. On the guidance for FY '20, when you talk about, Pankaj, I think you've seen in the last 8 quarters. 7 quarters, we have been able to grow. We are very careful about it, we want to make sure, that we know before we tell you what is that going to be. We've given high teens, now, what we are going to see. And at the same time, we are also working on the impact of the one customer issue, which is there -- is this, how do you nullify that with the some of the large deals you are working? How quickly we can close and how we take this forward? That's something we're working on.
Got it. And just lastly, PR, one question on the incentive income. Do you see that flowing into next year based on the filings that you may have done for the previous year? Or whatever we have is -- will get exhausted this year itself?
Pankaj, when we had filed the applications in Q2, we had taken based on what we take it as the estimate of how much of licenses we will get. So that licenses have not been granted yet in Q3, we believe in this quarter we should be getting those. So you may expect some amount of credits accruals coming in, in Q4. And as far as the current year licenses is concerned, we believe that we may accrue some part of it, but at this stage, I would not like to give any comments on.
Sure. And just on the hedge book that you're running with, what's the current quarter rate, what kind of hedge gain or loss do you expect next year?
At this stage, Pankaj, our total hedge book would be in the range of, we workout probably around $600 million dollar-rupee over the next -- as we have talked that we have this rolling 36 months. And average, I think hedge rate would be in the 73% -- 72% to 73% over the next 3 years. So probably, I think, we will be able to communicate that when we close the books as to how much of this -- it also depends, as I told you earlier into response to one of the other queries, which have come. That the dollar-rupee is having a lot of volatility over the last 6 months, I would say. And most volatile in the quarter, we just don't win, passed by. So as far as the years, as far as the hedge book is concerned, we are reasonably covered into 2019, '20 in terms of overall hedges. And I would say it would be in the range of 72% as the forward rate.
The next question is from the line of Priyankar Sarkar from Motilal Oswal Asset Management.
Just wanted to figure out that some of our IT peers are talking about building an on-site pyramid because of the regulation change in terms of visas. Do we also see any need of building a pyramid structure on-site base? That's one. And the second one I had another question related to the global macro. So what I understand is that one, there's a global slowdown in case that happens, the first to cut is the ER&D spend before even the IT services are cut in terms of budget. So if that's yet to happen, because there's some noise on that front, which of the industries or which of the verticals will be effected the most, is it the transportation, industrial? Both if you can give us some color in that hypothetical situation that I'm talking about?
I think today, when you look at the ER&D spend, it is not right to -- number one question is about the workforce globally. Last time, I talked about we hired 15 engineers in U.S. from engineering colleges and trust me, the cost management when you -- if you do it right, the -- some of the Indian workforce going from here to doing the job, the work can be done by engineers with 1 year experience is going to much cheaper than having engineers from India going there and doing that. So that portfolio analysis in the U.S., we have done that. And one thing positive for us, is as a company -- engineering company, the company we acquired earlier, we have few hundred people already there who are American citizens. So they are already in U.S. And they are acting as the program managers, and that they are acting as the SMEs and so on. So I think -- so overall point of view, the pyramid what IT company's talking about, that pyramid is a nonissue of -- for all the engineering company. On the global slowdown, yes, we see that. At least, we see the news what is going on. The U.S. economy, the GDP growth, what happened in '18 may not happen at '19 -- not happen in '19. And so calendar year '19 is globally -- the U.S. economy goes down from 3% to 2.3% or 2.4%. What is the impact on that and which industry is going to do? We analyze that. So you cannot generalize this. What happens is, the investment now happening in plant engineering, in specialty chemical, oil and gas, they are building it, their money flowing to U.S. U.S. economy, as a whole, is doing reasonably well. I don't -- at least, we have not seen employment is going down in every aspect. So we have, at least, in industry, the customer base we have, we are going around the customer and talk to them. We are not going about any slowdown because of global economy. However, if you see lately, there is still is news about the guidance -- profit guidance for a lot more companies, that is a much more a retail segment, that is much more in other segment, not in engineering side yet. And if the economy doesn't do well, not necessarily the ER&D budget will be first to go, because ER&D, you'd look at differently. Like for examples, there -- ER&D, there are 2 components. They do not come with a new product, but they do the product take out then making the product smart, making the -- their product are reliable and going to new geographies. So I think that area, once you are with the customer unlike IT, engineering, they don't have too many suppliers. They have either one supplier if you have a maximum of 2 depending on the size of the company. And dependency, you're like an external one for them and they would -- when the economy goes down, they would hire less number of their own employees than working with company like us. That we know their processes, we know their stance, we know their product and we know the technology what they use. So I think it is not going to be the issue as we see today. We have more data. The next quarter maybe when you come back, we'll give you more update that time.
The next question is from the line of Sudheer Guntupalli from AMBIT Capital.
My first question is, I think, growth in the top 5 and top 10 accounts and even top 20 as well, it looks slightly softer than company average. So if you can give some more color on that, that would be really helpful?
All the numbers, if you see top 5. Our top 5 customers, when you say it, that has grown '18 to '19, if I look at it overall, it's grown 46.8%. So there is no slowing down there, top 5 customers. If I take top 15 customers, the growth from '18 to '19 almost grown by 45% plus. So I think every segment the percentage point that -- we always look at 3 parts: top 30, next 20 and next 30. So total 80 customers, where the ER&D spend is close to INR 1 trillion plus, $1.6 trillion to -- or so. So we always track it down. How we top 30 doing, next how in 20 doing and next 30 doing it. All 80 customers, if I look at it '18 to '19, close to 20-plus percent is growth pivotal. So I don't see top 5 customers going down.
No sir, I'm not saying it is going down. I'm just asking the reason for softer than a company average performance in this quarter as of compared to the previous quarter?
If you ask as the numbers point of view, if you want to ask PR. If you can look at that [Audio Gap] numbers. Please go ahead.
Okay, just to answer this, please note the way we have computed the growth is on last 12-months basis, okay. And the data is being put through in our fact sheet as well. So for example, just to give you a perspective, our top client has on quarter-on-quarter, has almost grown 7% and a year-on-year the same client is almost 21%, okay. So it's a question of -- and if you see the top 5 clients, if you see just as a number, maybe there is a drop of 1% or so, but there is structurally, as far as the top 30 accounts are concerned, I wish to tell you they still in aggregate contribute to 65% of our revenues, which has been our almost, I would say, a steady state kind of a share, over the past, I would say, 8 to 10 quarters. So sometimes, it could be possible that quarter-on-quarter, there can be a change -- minor change here and there, but it is important and we have been talking this consistently that what we aim is, what is the share of our top 30 accounts in terms of our overall growth strategy? So as we have grown and as Dr. Panda talked about that we will close the year with almost 24% growth as that of previous year. Our belief is that these top 30 accounts will continue to have the 64% to 66% share. And I think that would be a more important metric that we would like to concentrate upon.
It's a fair thing to see, in top accounts we need to see annual basis than quarterly basis. I think that is how we'd say, it is always. So we track it down our top 30 accounts very closely. As PR was saying, what percentage of this contribute to annual basis and that is something we are very close to these numbers.
Sure sir, thanks. And my second question is in terms of your FY '20 commentary. We're talking about the client specific issues, which can potentially impact our revenue growth by around 4 percentage points. And despite that, you are talking about high teens kind of revenue growth for FY '20 over FY '19. The commentary sounds pretty strong compared to any other, let's say, ER&D company, or IT company out there in the market. So I'm just trying to understand, apart from, I mean, you've already spoken about the deal pipeline and all. Apart from that, what are the factors which are giving you this confidence? And just if I -- as there's a downside scenario here or a bear-case scenario here, how would that high-teens number look like? Let us assume that everything doesn't go as per our expectations in terms of macro. So what would be the bear-case scenario look like? Maybe that high-teens number, will it be low teens or high single-digits, how would that look like?
I think we have been very careful about last 7, 8 quarters. If you see we've given the guidance for FY '19. We started 15, then we said, we've gone to 21. Now we said, we have -- we're dealing with 24. At this time, what we see, the question you're asking about FY '20, economy what happens with the economy and all, there are a lot of questions to be answered. As of today, what we see, this is what we see, okay. The pipeline we have, the order on hand we have, with that, we believe this is what we're going to tell you about, right? And we'll update you more in the next quarter when you come back, we'll have more details and we're going to update you more.
Sure, sir. And just one clarification. So this high-teens number you're talking about, obviously includes the incremental revenue that's going to come from Graphene over the next year, right? Or just that organic number?
So just want to clarify this point, that look, we have -- one, we talked about our deal pipeline, we talked about our wins, et cetera. So with that, if this one client blip was not there, we are -- we were very confident of high-teens growth, okay? Now we have this blip that has appeared. We still are negotiating our way through it. We don't know where it'll end up. But we -- the worst case scenario at this stage is, if you take the high teens, you'll shave off 4% from that. So you end up logically in mid-teens, is where you end up. This is where we see the market, everything else holding at this stage, and we're fairly confident with what we're seeing here. Like Dr. Panda talked about, we don't want to go overtly optimistic, we do not want to -- we want to be clear on what we see right now, we're sharing with you.
Okay, sir. So essentially, you mean to say, without factoring in that 4% impact, it is high teens. And then if you factor that in, obviously, it will be in mid-teens. And it is including your inorganic component coming in from Graphene?
Yes.
The next question is from the line of Ashish Agarwal from Principal Mutual Fund.
Sir, just wanted to understand, what are -- what will be our levers for margins going forward? And looking at that, our margins are already 18% plus, how more margin increase can we have going into FY '20?
Okay, first and foremost, I wish to state here, whenever we talk about margin increase or drop they are subject to the fact that we are talking at constant dollar-rupee. Assuming that dollar-rupee is wherever it is at INR 71. In terms of margin levers, as we have seen our utilization as just around 80-odd percent, so we believe that this part of the thing, you don't expect any further better utilization in terms of the overall thing. Secondly is -- the fact is the more important thing which I would like to convey is, over the last 1 or 2 quarters, we have seen margin improvements in our traditionally slightly margin-dilutive segments like transportation. So we expect better productivity and a better mix up of on-site offshore. There's some amount of margin expansion is likely. Secondly is industrial products, the growth segment, the industrial -- the growth segment, we expect to be something which the segment grows, that will obviously result into a better margin trajectory for the company. And last but not the least, as we are demonstrating a growth, we believe that we have seen the leverage to ensure that this particular margin expansion, we can demonstrate some, which we have shown in the current quarter. And in terms of this -- our Chief Operating Officer also talked about in the last quarter, we do believe that there is still some more margin, I would say, expansion in the form of revisiting our employee pyramid, that exercise is ongoing. And we do expect some more improvements happening on this set out. Last but not the least, we have also, and I still maintain that we are talking to clients, wherever low-margin clients in terms of traction, getting higher bill rates in terms of our -- ensuring that the margins are protected or if not improved.
One of the important -- if you will look at the portfolio we have, how do we manage the portfolio well. The industrial, plant engineering, medical, that is one part, operation is second part and third part is the investment we did in new technology, when we do the project with the customer the levers available there. So all the levers we are firing.
We seem to have lost the line for Ashish. We'll move to the next question. The next question is from the line of Ravi Menon from Elara Securities.
Just wanted to understand a little bit more on how the ramp down in that 1 specific client, that you've talked about, either should we expect to see this ramp down all at once, starting with Q4 and then going into Q1? Because that would imply probably 8%, 9% negative growth Q-o-Q for first quarter FY '20?
It's not true. So what's going to happen is starting from March, it will take some time to complete that. The reason we wanted to be at 4% maximum is going to impact that we have given there. Because the contract is not concluded yet. So if you look at the total revenue impact, it's going to be -- if you take 4%, not 9%. 4% if you take, you take the revenue, what you see 4% down. That's what -- that is how we should take it. So I don't think there's an impact of 9%. It is going to be over -- let us say we conclude by February -- January end of February we conclude, March we start, it can flow for some time in quarter 1 itself.
And with the wins that we've talked about as well, the wins that we've talked about and the ramp up that we're talking about, we don't expect a decline quarter-on-quarter.
And listen, I think -- I also made a statement there, because the last deal's pipeline we are working on, and the -- we are also negotiating the same new owner, the part we are losing or going to lose. And we're also negotiating new owners that which components we are going to keep, which part is going to -- he is going to be owning it. So we'll have more clarity in this quarter. Maximum which is the impact going to be in FY '20, that's what we said.
All right sir. And any color on how much of the margin impact do you expect from that?
Not really, there is not enough margin impact there. Not going to be impacted.
The next question is from the line of Madhu Babu from Centrum Broking.
Sir, firstly, I mean, will the employees will be coming off, it depends on this large -- I mean, this ramp down and they'll be immediately be able to deploy in to other service? And second is, if I'm understanding this right, it's almost $28 million of annual revenue in wages. So is it in the top line where this entry is coming?
Today, employees coming off being down below, that's not an issue. I do have requirement in every vertical -- number of engineers requirement right now. The pipeline is very strong. So I don't think employees coming out, and I would will not give you more details about how many numbers come? What is really going to happen? That's the reason I've said this is not going to have any impact on the margin, this deal losing.
Sir, the revenue impact is almost $28 million annual that you [catch] and you said 4%.
I would think so, yes. Roughly, that's correct. You are right.
Okay. And just on the acquisition strategy, I think last year, we have got about [indiscernible] based on acquisition strategy [indiscernible]. So anything on the automotive side, where you are looking [indiscernible]?
I thought PR talked about that, one is, he talked about automotive, we also talked of medical. There are few candidates right now we are looking at very seriously. And those, I think, if it goes well, maybe, I think we'll give you news next quarter. So we are very seriously looking at these area. Automotive is one and the medical side is the other one. So there are 2 areas we are very aggressively looking at it.
Due to time constraints we'll be able to take one last question. Last question is from the line of Mihir Manohar from CapGrow Capital.
Just wanted to get some more granular details on what has led to this 10% decline in the SG&A cost? As to what has exactly led to this decline? If you can give some color on this, that will be really, really helpful.
Okay, as I talked about, when we talked about SG&A, it's a combination of 4 major elements, which is sales, marketing and general establishment expenses, and other corporate expenses comprising on enabling functions. The major saving, which has happened, is because of the higher decrease in run rate, the sales and marketing cost has seen a substantial saving, and we expect that this with the run rate revenue uptick happening this is something, which we expect, and as I talked about this, one thing which we feel that there is something more we can do provided the revenue run rate, the uptick continues.
We'll be able to take one last question. We take the last question from the line of Apurva Prasad from HDFC Securities.
If you can elaborate on what size of acquisition, that you are looking at that you're talking, we're nearing the medical devices and transportation? Would it be similar scale to our previous acquisitions?
Apurva, if you'll look at around the globe, there's not too many companies out there, are $100 million, $50 million companies, it's not available even if you want to acquire, right? Always the technology company, if you are not looking at the top line -- getting top line, we are very selective that way. So we want to acquire a company which is getting that technology. We're just going to access this last customer or access -- grow our last customer or the technology used for multi-vertical segment. So I think that is strategy. So you will never see a big earning day which you are going to do. I think it is fair to assume the similar size, the one we think Esencia similar size, I would think that is a right essence there.
Right. And just one more if I can add. On the -- how would you see the residual part of the business? You talked about the 4% impact from the large account, how is the visibility on the residual business from that account?
I think that is what we said high teen and impact of that, right? But we talked about that. So today, as we see -- I think, we have not concluded the contract yet, right? The part of business sold by our customer today to a new owner and new owner believes that some part of the business, he should own it than outsourcing it. That happened only with 1 customer, and that customer we are still negotiating. We thought it is safe for us, we already know that's going to happen, it has not happened yet. We thought it is safe for us to inform you immediately to what is going out there. So I think -- that's what we see.
I just wanted to check on that account, the residual business from that particular account and not the overall residual?
Yes. So the residual business from that account is still being worked out. There will be a part of business that will continue with us for that client and a part of that they will take back and do it themselves. And like, Dr. Panda talked about the exact mechanics and which one what, how long, et cetera, is being worked out. They have confirmed to us at all levels that they see us as a strategic partner going forward and actually the sole strategic partner going forward, and will be working with us. So please wait for that announcement. We will be making a formal announcement on that, joint announcement if possible in the next few months or weeks.
Thank you very much. We'll take that as the last question. I would now like to hand the conference back to the management team for any closing comments.
Thank you all for joining us on the call today. I hope we were able to answer most of your questions. We look forward to meeting you during the course of this quarter, and let me wish you all a very good evening. Thank you. Bye.
Thank you.
Thank you.
Thank you very much. On behalf of L&T Technology Services Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.