L&T Technology Services Ltd
NSE:LTTS
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Ladies and gentlemen, good day, and welcome to the L&T Technology Services Q4 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. Thank you, and over to you, sir.
Thank you. Hello, everyone, and welcome to the Fourth Quarter and Full Year FY '19 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 statement. These documents are available on our website, ltts.com. Please note that our website address is now ltts.com and all our email IDs to have changed to @ltts.com, LTTS being our abbreviated company name as well as our stock ticker. On today's earnings call, you will hear from Keshab Panda, CEO; Amit Chadha, President, Sales and Business Development; and PR Ramakrishnan, CFO. The call is for approximately 1 hour and an audio replay of this call will be available on our website as -- soon after the call ends. We will begin with Dr. Panda providing an overview of the company performance and a commentary on the business outlook. Amit will then provide an update on the large deal wins and the deal pipeline. PR will walk you through the financial statements. 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 the call today. We had an excellent year again, I'm very pleased to say with you. I will first cover the highlights of Q4 and full year FY '19. We had a strong quarter 4 revenue, up 3% quarter-on-quarter to USD 191.3 million. EBITDA margin was up 10 bps quarter-on-quarter to 18.5%, say, because of operational efficiency improvement. Large deal traction continue to be there like last quarter's. We have 9 multimillion-dollar wins this quarter. For the full year FY '19, we grew revenue to $723.1 million in which is the industry-leading growth of 26.5%. Our growth in FY '19 was more balanced and we're able to achieve double-digit growth across all 5 vertical segments. Both process industry and industrial product [ with a new tailwind ] in FY '18 performed better in FY '19 with double-digit growth both the segment. We are also happy that our top line growth has been accompanied by the EBITDA margin improvement up 250 bps to 18% in FY '19. Digital and leading-edge technologies continue to be our focus, and our investment for last few years is showing us result. The revenue sales is 33% of FY '19, a growth of 58% compared to FY '18. Let me now talk about our 5 industry verticals. In transportation, we grew by 7% quarter-on-quarter in Q4 and 25% in FY '19 on the back of multiple large deals and healthy demand across 3 sub-vertical, auto, aero and off-highway. Today, we have rounded up $258-plus million in transportation on annualized basis. In automotive space, our customers continue to prioritize spending in 3 major areas, which is autonomous vehicle, electrification and connectivity, and security of car, which is important, again. And this is going to be there for coming years as well. What is helping growth is that the auto component systems and architecture are becoming increasingly complex, while at the same time, user experience standards are also moving up in the value chain. We continue to invest in areas like digital cockpit, where we have built solution with innovative features on the display and audio side. And in autonomous driving, where we are working on building our own autonomous architecture, I think that [ is seeing the ] dividend here and we continue to build on that as well. In the truck and off-highway segment, customers are spending on digital initiatives, like connected vehicles, autonomous capability for farm and construction equipment and electrification of highway and access control equipment, which is new. It's happening this year and we believe it's going to continue in the future as well. In aerospace, we continue to be preferred engineering partners for many of our customers in OEMs in Tier 1 segment in the area of software. Two trends which are helping us here: One, clients are using a lot of advanced technology with required data analytics and compliance. And number two, clients are becoming more efficient in program management, which is opening a few vendor consolidation opportunity for us. In addition, we are seeing smaller projects in the digitization space, like connected manufacturing and process automation. So in addition to product development, we are also helping our customers make their [ soft flow ] 4.0 more efficient. Overall, we expect the strength in transportation to continue in FY '20 as well. Moving to telecom & hi-tech. While we had a soft quarter in quarter 4, we had a great year with 31% growth in FY '19. The decline we showed that we discussed -- we disclosed last quarter will lead to a tough Q1, but we'll look to offset it with the growth from other accounts, which we see the visibility as we stand. On the semiconductor side, we are seeing demand in the following areas: advanced chip for autonomous driving, 5G chipset which requires more computing and data processing power; chips for the gaming industry, which is preparing for disruptive model like streaming over 5G. Our successful delivery of a [ ton chipset ] with advanced features will open up multiple deals for this major. We are well positioned to take advantage of the broad-based demand we are seeing at this time, leveraging our spend in VLSI, security, physical design and embedded software. In the media and entertainment space, our expertise in the video domain is helping us win deals both on the front end and back end, at the front end in developing next-gen set-top boxes, platforms [ and libraries and ] OTT and streaming application, which is much more in demand today; at the back end in areas like video distribution platform, video engagement software and so on. That again is the opportunity for us. In FY '19, we're able to broad-base our media revenue to win more business from operators, too. We see more opportunity here in addition to strengthening our engagement with global OEMs. Now let me talk about medical. We had a strong quarter of 7% in quarter 4 growth, and this is the third consecutive quarter we have been growing at 7% sequentially. Our growth in FY '19 in this segment is -- was 23% and the momentum we are seeing put us in a good position in FY '20 as well. Key demand drivers for us are new regulation in European Union, like MDR and IVDR requires most stringent safety and data requirement for devices and will increase completely, and this is a great opportunity for us. Connected health care is a big priority with the devices market shifting from hospital-centric to patient-centric, this is to facilitate preventive health care and remote monitoring of devices. Our experience in end-to-end product design is helping us see a strong pipeline in areas like device integration with the digital health platform, smart product design for advanced diagnostic equipment and home monitoring solutions. So this is again a great opportunity for us. Moving on to process industry. We have been able to continue the growth momentum in process industry. For the last 6 quarters, we have been growing at about 8% sequential on average. And in FY '19, this was the fastest-growing vertical with 37% growth. Focus on large deals and targeting customers' engineering projects, like standardization of data, digitization of plant assets, regulatory and safety projects have pushed our growth higher. Some of the investment we did in the platform, like MCare and so on, engineering platform, that's also helping us in this segment. Its 3 sub-verticals, CPG, oil and gas and specialty chemicals, are participating strongly in this growth. Customers are increasingly looking at vendor consolidation so that -- so a single engineering vendor can take up requests from different sites, which will ensure standards and databases are updated for better cost and lower turnaround time. This opportunity is global for some of our customers. Demand in primary -- demand is primarily in the areas of environment for carbon footprint reduction support, regulatory compliances and safety compliances, digital solution for enhancing productivity, yield and operational flexibility. Strong plant domain knowledge and ability to bring in advanced technology is a key differentiator for us. We have been doing this plant engineering for quite some time so we understand the plant and new technologies. I think that's helping us as well. Moving to industrial products. While Q4 performance was muted on a full year basis, we had a good year as we're able to improve growth to double-digit 10% in FY '19. We are seeing encouraging signs as digital is becoming a priority for our customers in this segment and many more projects are moving from POC stage to full implementation stage in this segment. In Q4, we owned multiple projects on the digital side, specifically in areas like sensor design, gateway design, IoT platform design and development. Our customers are making Industry 4.0 and smart manufacturing a priority, and I don't think we can -- having understood about engineering, product design and manufacturing, that is making a big differential for us. We are winning opportunities in asset management and manufacturing operation management for these customers. We are also engaging in large, strategic initiative to do with our customers in development of their next-generation products, smart products and systems, especially in the areas of motor drive and controllers, test and automation devices, control system and microgrid. We are targeting a double-digit growth in FY '20 as well for this segment, aided by larger base of digital process and continuous amount of strong traction. We have the design and development of products that are smarter and have inbuilt product maintenance capability. Let me talk about our platforms and solutions. We had sales of approximately 2 million platform sales in FY '19. With success in IDM, MCare and NB-IoT, this narrowband IoT platform, we have been able to sell in the market and we have a lot more visibility in this area as well. The number of customers' discussion points and POC that we did in FY '19 has been a marked increase, which is very good for us. We'll engage with an excellent consultant to advise us on the road map of this platform and solutions, the optimal organization structure, investment required to raise the maturity of this product portfolio. We believe this is a great asset for a company like us. We'll be saving our revised strategy on this particular -- in quarter 2. We'll be ready by that time. Finally, let me discuss the outlook for FY '20. Our pipeline remains healthy across geography and verticals. Customers are increasing the digital spend, new technology spend, investing more on disruptive technology and evaluating how to spend more efficiently and effectively. For us, this means our capability building in digital and other new technology -- U.S. technology must keep in pace, and we'll continue to do that. This will open more opportunities for proactive discussion with customers on how to consolidate work and save cost for that. We believe our deep understanding of the engineering domain and co-innovation with customer will help us gain mindset of our customers and participate in larger and more strategy engagement, leading to growth ahead of industry. Over the last 2 years, we have progressively improved the way we provide guidance. So in FY '18, we guided for double digit and closed at 20% growth. In FY '19, we initially guided for at least 16% and later increased it to 24% -- at least 24%. And finally, it closed at 26.5% growth. For FY '20, we are further improving the guidance by providing a range so that we'll get a better picture of this upside possibility. So our guidance for FY '20 is for 14% to 16% USD revenue growth as things stand and we see today. As we discussed last quarter, our FY '20 growth will be impacted by 4% due to the headwind at one of our customers in telecom & hi-tech segment. So the guidance of 14% to 16% is what we see today after factoring this impact. We have reasonable confidence on the lower end that is 14%, what is sitting today. We believe we can achieve the upper end of the guidance if deal wins and ramp-up happen as per our expectations. Of course, we will update the guidance range as our visibility improves every quarter. We have been doing this the last 2 years. We will continue to follow the same system as well. In terms of margin, we are seeing large deal opportunities that could dilute margin initially that I think -- as you can see, one thing this time with our own set of [ issues has phased ] now because the large deals has increased on size and now I think we have been able to operationally improve that. But we are carefully taking up only those opportunities where we have chance to scale up margin over the life of the deal, which is the template we executed in FY '18 as well as in FY '19. We'll also have to do some bit of investment in capability building. We believe that it requires new technology areas as well as existing services line. Overall, we believe growth and continued focus of operational efficiency will help us pursue margin improvement for FY '20 as well. I now hand over to Mr. Amit Chadha. Amit?
Sure. Good evening, and thank you, Dr. Panda. I will discuss 4 broad areas with you: large deal updates, our large deal pipeline, our geography outlook, and finally, how we are trying to change ourselves towards bettering business growth. On the large deal update, we continue to sign large deals across verticals and geographies. Some notable ones in the transportation sector, we have signed 2 deals in autonomous driving, specifically in the active safety domain for a Tier 1 auto company with work being sourced to us from the U.S. and Poland centers to be executed largely from our India center on an ongoing basis. In the second deal, we have been contracted by a U.S. auto OEM client to do verification and validation in [ the full ] domain. These 2 new deals will be executed over the period of 2 years, having started ramp-up in Q4 already. Second, we have been engaged by 2 industrial product clients to enhance their digital platforms for better predictive maintenance, data analytics and for enhancing features that will yield higher plant throughput and equipment uptime. These are new contracts to be executed over the next 12 months. Third, in the petrochemical sector, we've been awarded 2 contracts to provide detailed engineering services towards site upgradation expansion of the client's petrochemical facility in the U.S. in one case and a new LNG terminal in the U.S. in the second case. Both these projects have already started up. One of these is a new client and the other an existing client where we are expanding our relationship. Fourth, we continue to make strides in our digital journey with medical, where we are getting invited and winning new digital projects. In one particular deal, we will engage with a hospital bed and equipment manufacturer to help them create a scalable IoT platform with secured connectivity and analytics for in-room patient devices. In another deal, like Dr. Panda alluded, we are involved in IVDR and MVDR (sic) [ MDR ] work for our QARA service, which is quality assurance and regulatory affairs service, compliance of medical devices of all the manufacturer's products as they get launched in the European markets. Finally, the high-tech vertical has seen us win 2 significant engagements. In one deal, we will help our OEM client develop home protection and alarm systems, leveraging 5G technology for the U.S. market. In the second deal, we've created an ODC with an electronics and mobile company for support enhancement and product launch for their devices being launched in the Asian market. Both these deals have already moved to execution mode in the later part of Q4. Moving on to our large deal pipeline. We continue to see a buildup of large proposals to engage with our clients. We are looking to engage with our chip manufacturer for executing the design and verification of their chips globally. This leverages the 2 semiconductor acquisitions that we had made earlier last year -- in the last 2 years. Second, we in are in conversations with 2 Tier 1s and 1 OEM in the automotive domain to start execution of their autonomous programs in 2 cases and electric vehicle in the case of the OEM. Third, we are in talks for an engineering support contract in the medical area to help an OEM who is expanding their manufacturing lines in the U.S. Fourth, in the O&G petrochemical sector, we are in conversations to set up an engineering value center, in one case an expansion of digital services, in the second case with large U.S., European companies. Finally, in the media and entertainment space, we are in conversations with 2 MSOs and platform providers to provide support and enhancement of their platforms. We expect conclusion of all this in Q1. Now on to our geography outlook. We continue to see traction for our business in the U.S. across all segments from product design, support to verification and validation opportunities, to plant expansion and digitalization work. In Europe, we are seeing traction in 3 segments: transportation, industrial products and oil and gas petrochem in traditional and digital investments. In Japan, we are also seeing traction across most of these segments. The ongoing trade discussions between countries continues to provide us an opportunity to expand our footprint. Finally, an update on the business growth strategy to make our business future-ready. We are investing in local, U.S., Europe-based digital SMEs and consultants that will help us to expand and elevate our discussions to a broader set of stakeholders backed by a strong India-based engine. Two, we see opportunities in digital products and services on one side and digital manufacturing and operations on the other side, and we've created an organization to support this entire spectrum in a deep and focused manner. Third, we have relooked at some of our larger accounts and investor and client partners and program managers to turbocharge these relationships. We expect these people to help us unlock further value for our clients and continue our growth trajectory. To sum up, we are stepping up traction in digital businesses for more work. We continue to see a healthy pipeline in cross geography and verticals. Our large deals engine continues to churn wins continuously. So we remain upbeat about the new fiscal year and beyond. Thank you so much, and I now hand over to PR.
Thanks, Amit, and good evening to all of you who are present in the call. I will summarize the financial performance of L&T Tech Services for the quarter and for the year as well. For the year ended 31st March 2019, our revenues were at INR 50,783 million for the year, a growth of 35.5%. In equivalent dollar terms, we reported revenue of $723.1 million with a constant currency growth at 26.5% as compared to FY '18. Our EBITDA margins for the year was at 18% for the full year. And the net margin, we reported at 15.1% for the full year. Coming to a quarterly basis. Q4, we posted a revenue of INR 13,431 million for the quarter in rupee terms, which is a Q-o-Q growth of roughly 2%. In dollar terms, our revenue numbers were $191.3 million for the quarter, which is, on constant currency, as demonstrated at around 3%. The EBITDA margins of Q4 FY '19 were at 18.5% as compared to previous quarter at 18.4%. And the net income -- that is the PAT, was reported at INR 1,915 million, which is an improvement of 3.2% quarter-on-quarter and the net margin at 14.3%. You must have gone through the fact sheet, which has been uploaded in the website. So I will try to give an overall view as to how the numbers have panned out for the quarter and for the year. If you see the fact sheet, I come to income statement, consolidated. I have explained already -- I have highlighted the revenue part. When it comes to the overall numbers, if you see the cost of sales, which is the line below revenue, has -- for the quarter ended Q4 as compared to Q3, has shown an increase which is corresponding to the increase in revenue but adjusted for revenue mix, which has happened during the quarter in terms of a higher percentage of fixed-price contracts entering into revenue without a corresponding increase in cost. Our selling and general and administration expenses are -- for the quarter is at INR 1,773 million as compared to INR 1,483 million, is higher compared to the previous quarter primarily due to higher provisioning for doubtful debts because of 1 or 2 accounts which we found it as sticky; and secondly, a little amount of higher cost provisions which are taken on a corporate level. Coming to other income. If you see the total other income we have reported for the full year is INR 2,209 million as compared to INR 1,910 million compared to previous year. This quarter -- for the quarter, we have reported a total other income of INR 333 million, which comprises of income from mutual fund or treasury investments at INR 64 million, foreign exchange differences including hedge cash flows attributable to INR 353 million, and there is a negative charge of INR 83 million net. This negative charge is primarily on account of a temporary markdown on our license income because we expected the license to come in the month of March, which since it has not come by the end of financial year, it is expected to come in the first quarter of the current financial year, FY '19-'20. There is a special one-line adjustment on account of change in purchase consideration that is pursuant to the mandated accounting standard disclosure, where we have paid out on account of Graphene as against the earlier recorded liability when we acquired the company. Coming to the balance sheet part. Our overall balance sheet, you would have seen it, but to draw your notice, I would like to say for the free cash flow that is from operations adjusted for capital expenditure has been a record high at INR 7,176 million as compared to INR 3,581 million compared to the previous year. Coming to an overview of the segmental performance. The segmental performance for the year, transportation continued to lead the segmental growth, almost taking 32% of our total revenues, followed by telecom & high-tech at 27%; IP, industrial products, at 20%; process industry at 14% and the residual 7-odd percent in medical devices. On a quarter-on-quarter basis, the percentages largely remain the same but -- however, from a revenue perspective on quarter-on-quarter, we did see a smart growth in transportation and process industry and medical. We did see a little markdown in industrial product that's more to do with normal spending cycles, which was expected. Telecom & high-tech did not exhibit any growth as Dr. Panda talked about one large deal which went into a ramp down from the month of March. Coming to geography. The overall geography in terms of our revenues from North America still continues in the range of 60%. Finally, we have 58% of our revenues for FY '19 in North America, followed by Europe at 17%. India showed revenue percentage share of 13% and the Rest of the World at 12%. In terms of overall revenue mix, one of the important factors of improvement of margins from 15.3% to 18% for FY '19. This margin expansion has been largely attributed to one important element. The dollar-rupee was INR 65 for the previous year and averaged around INR 70 for the year FY '19. This itself contributed to around 190 to 200 basis points. The balance, 50 to 60 basis points improvement, has been increased on volume in terms of the volume of business coupled with a blended mix of higher offshoring percentage of the contracts. So in terms of the revenue by project types, we closed FY '19 with almost 42% coming through fixed-price contracts and the rest through time and material contracts. In terms of client profile, we have around 250-odd active clients, with 2 million -- 2 accounts going into the excess of $50 million bracket. We had 3 accounts at $30 million plus, and this is based on the last 12 months of trailing revenue. In terms of some pointers for the quarter and the year ahead just to part from a [ P&R ] perspective, as has been the case, we will see in Q1 an impact coming on account of Visa and followed by a wage hike we will see in a combination happening in Q2 and Q3 onwards.Our tax rates for the year FY '20 will largely be in the range which have been always maintaining, but to be more specific, around 26% level. We also talked about one more item would be -- we also have reasonably part a whole -- a major part of our cash flows for the year FY '19, '20 hedged. They have been hedged in the average rate of around INR 72 to $1. Then we have the license income. We would probably expect, as I talked about, a major part of the license income for '17-'18 probably will be coming in Q1, and we expect that overall license income, which we will be showing as income in the FY '19-'20 will be in the range of INR 50 crores to INR 60 cross. So that's about it. The Board has declared a final dividend of INR 13.5 per share, which, coupled with the interim dividend of INR 7.5 attributed, added -- aggregates to INR 21 per share. This effectively leads to a 34% dividend payout. And one more important fact we would like to demonstrate is our profitable growth journey along with better working capital management has enabled us to show a return on equity of around 35%. So with this, I -- we have given our overall summary of the financial performance and the other metrics. And Reo, we have -- I'm requesting to -- I'm giving back the call to you for us to take the questions from the investors -- or analysts. Thank you.
[Operator Instructions] The first question is from the line of Ravi Menon from Elara Securities.
Congrats on the pretty good quarter despite the headwind that you had called out. So PR, it would be great if you could actually quantify what was the revenue loss from the 1 month of impact that you've had so far from the headwind. And what is the impact after additional recognition of fixed-price milestones that you spoke of?
Okay. The client account which you talked about roughly could have impacted around $2.5 million to $3 million for the quarter. And on a yearly run rate, it would be 1 month -- sorry, actually, that impacted from March and the yearly run rate would be around $30 million.
And the fixed-price contracts that you recognized this quarter, which you said helped cross-sell a little bit?
Yes. See -- as you see, we have had contracts across all the verticals. So it depends on the contract completions, which happens. So we had had this contract -- fixed-price contracts as some of the segments completing and we were able to probably recognize the margins which were residing in them. If you see in the gross cost of sales, the gross cost of sales has been, I would say, largely muted with -- despite the increase in revenues that is primarily because a lot of revenues got recognized in some of the clients across the segments who -- the fixed-price contracts which achieved the completion. And we were able to achieve client certification. So that is one of the broad-based movement which we have seen. And this is -- and another important aspect is when you talk about margin recognition especially on a cost of sales basis, it depends on how the fixed-price contracts, the completion and the certification happens. So we need to see it more or less at a yearly level and not necessarily at a quarterly level, and that's one of the reasons I had explained about the cost of sales relatively lower to the increase in revenue for Q4.
Definition of T&M and for fixed build is different for engineering services project. Some of the T&M could be -- we have [ scoping. Scoping ] is not clear. We're working with a new product. That could be T&M itself, but that is -- again, in due course of time, it becomes a fixed build and clearer project. So I think defining clearly the fixed build and time and material for an engineering project, I think, will be a little bit different from what are usually used in the industry.
Agreed, sir. And this year it's been pretty good for process industries, but barring the deal to digitize oil well data, is a lot of this revenue project related?
I think usually, one thing to remember, for engineering services company, there are not too many suppliers there. When they select one supplier, any engineering opportunity comes and we continue to work with multiple things. We work on the upstream side, downstream side, midstream side, all 3 areas. So I think it's not of one or the other. So I think it's a combination of all that. And then more and more opportunities are coming on the specialty chemicals. That's a known opportunity, [ open ] for us. So I think some of the deals, I only talked about on the specialty chemical and also on oil and gas side. So I think when -- traditionally, what we are doing before and today, new technology plus [ the certain ] engineering altogether, that is, I think, making a difference. And we believe that's going to be the case for coming years as well.
Right. And one last question on aerospace from me. With all those turmoil that we've seen, what -- would you see any headwinds to that or any major programs coming on hold or anything like that?
Not really. Not really. The -- what we do now on the system design and some of the work on the ATM, air traffic management, and inflight entertainment, these are all long-term process and they -- I know what you're referring to. We have no impact on that at all. So there is no issue there.
The next question is from the line of Pankaj Kapoor from JM Financial.
Dr. Panda, last year, you have been quite conservative when you gave out the guidance and you basically increased -- [ recognized the plan ]. So I'm just wondering that given that the first quarter you've already spoken about being weak, we probably would have an impact of maybe $5 million to $6 million because of this top client. Are you building in some ramp-up happening in the deals, which are already in pipeline or already won? Or you are hoping to convert some of the deals which are currently under discussion? Basically, what is having the confidence of getting this 14% to 16% of growth?
Pankaj, I think when we do the -- give a number, I think we are very careful about what I see today. But you'll remember that PR talked about we have 250 customers. A top 50 customer contributes around 64%, right? And go to next 30, next 20 customer contributes around 30%. Then next, in other words, top 100 customers contribute around 94% of business, okay. And the engineering spend in these 100 customers is as high as close to $200-plus billion. So I think one issue, [ it comes to ] -- but once we see the opportunity in other areas altogether sitting in month of April and May, what we see now is this is the range. In other words, the growth, what we see, quarter-on-quarter growth, sequential growth, we have worked that out. And things might change. Quarter 1, we [ come here ]. You see, last 2 years, the way we are going about, doing it what -- we see visibility every quarter, we keep talking about that so that we are all on the same. So we didn't want to give a number like earlier with that. Maybe our maturity level is more now. We look at how to give guidance and how transparent we could be. So as we see today, this is the number, 14% to 16%. I think we'll talk more when we come back in quarter 1.
Sure. Also, I was just trying to understand that this is something which -- like last year, you had increased every quarter in terms of the guidance. So should we see this as what you think are reasonably confident of getting these 14% to 16%, that's the sense which we should think about?
I think Pankaj, we are very confident about sequential growth quarter-on-quarter. We catch up to 14% or 16%, right. So I think this is something we have worked out. It is not that quarter 1 -- see, I think one thing we did not -- I don't know whether we communicated correctly. Q1 is not a muted quarter. It is not going to be a muted quarter. We did growth anyway with -- you can do the math for the range of sequential growth quarter-on-quarter, and we'll be remaining in that range. So we're pretty sure about the range of what we have given there. And quarter 1, we'll have a few large deals we are working on right now. And those deals, depending on the closing quarter 1, how much revenue is going to come; quarter 2, what revenue is going to come. All put together, I think that's going to give you more visibility in quarter 1.
Got it. This is helpful. And PR, just a question on margins -- in fact, 2. One, you had spoken about aspirational level of 20%, 21% plus by FY '21. So does it mean that given the currency may not be as big a tailwind this year, we probably will be more of a flattish? Or do you still think there's a lot of operational efficiencies which you are working on, which can give you a booster to continue to have a margin expansion in FY '20 as well irrespective of the currency tailwind?
Pankaj, one correction though. We never said 21% any time, right? I think we said 20%. We said our aspirational number is 20% by FY '21. That's what we said. See, our -- we are working on every lead as possible. See, last year, we discussed about EBITDA margin possible. We did not give a number because we worked on this. We continuously work on operational parameter [ is dull ]. See, what we control is operations. What we control is business, offering what we have, technology offering what we have. So we believe all the options are available to us, and we would not comment anything about the number but you will see that in first quarter moving forward. Only thing I can tell you is every option, we are exploring and doing our best. We should make a statement. We stand by that and we continue to work towards that.
Good. And just one clarification, will the ESOP charges come down for us next year given the [ excavated ] amortization schedule that we had?
Okay. So Pankaj, at this stage, we have been consistent in the ESOP charge hitting our P&L almost in the range of INR 22 crores to INR 25 crores. And what we are seeing is that whenever -- the charge obviously, it is front-loaded as far the overall scheme is concerned. But as you may be aware that we still have further options which could be granted during the year as per the discussions, whatever the NRC or the Board decides. So if you assume that there is not going to be any further grants, then the charge to the P&L for the ESOP which have been granted this year will come down. But in case there are fresh issuances will happen, those fresh issuances, in my opinion, will not be as large as it is -- what it was earlier because this would be given to lastly the next level of people other than some senior people joining as and when they join. But -- for having said this, this is subject to the fact that there are no further grants allotted during the year.
The next question is from the line of Abhishek S. from Equirus Securities.
Congrats on a great set of numbers. The question is to Amit in terms of the demand environment pipeline on the ground, why the commentary from the user industry remains challenging. It seems that nothing is getting translated into the deal activity especially for the ER&D peers. So could you help us understand what's actually happening on the ground, which is leading to the strong pipeline and order wins?
Okay. So Abhishek, what we have done is -- see, we looked at -- when you talk about verticals, we looked at sum of parts. So we basically looked at verticals as a micro-vertical focus, okay? So our focus efforts towards our investments, towards the digits we have created, towards the competency we have built, frameworks we have issued out to the market, et cetera, is around. So in transportation, it's autonomous, electric and experience infotainment, right? So those 3. If I take industrial, it's around, again, green, around smart plant manufacturing and also improving productivity. If I take plant engineering, it is like Dr. Panda talked about towards doing projects for the petrochemical value chain as they change, CPG industry and asset management digitization. Medical is around quality, IVDR, et cetera. And telecom & hi-tech is 5G and ASIC, and media, OTT. So we are very clear there are specific areas we're going after. And in these areas, we do not see a slowdown from our market standpoint. There is demand. People are talking to us on a regular basis. I was mentioning to somebody earlier today that it's a good problem to have that we have today that people want to talk to us more and more. So we don't see a problem. From a geo standpoint as well, we are encouraged by the activity we are seeing across Europe Mainland as well as U.K., mostly Mainland because we largely work in Mainland Continental Europe, in the U.S. and Japan. So to answer, we are fairly confident about our future prospects in FY '20 and beyond.
Abhishek, one point to note though. If you take top 30 accounts, '18 to '19, they've grown 22%; next 20 accounts, 35%; and then next 20 accounts, 33%. So I think broad-based growth and for all 5 verticals. That is one point to note. Second point is the new technology that digital and new-age technology has grown 58% from last year to this year. So it is not just one segment going down other segment. The biggest differentiator we have, working on multi-vertical segment and technology -- borrowing technology from one segment to other segment, I think we mastered that reasonably well. And the global presence and -- in some of the areas we talked about, I think that's making a difference. We believe that will provide a lot of opportunity. Again, if you see top 30 accounts, $75 billion ER&D spend; and top 100 accounts, you take close to $200-plus billion market ER&D spend, we are talking about a big-sized market. I think that, that is where it gives us confidence that we'll be able to take this forward in this.
That's very helpful. And just second question to PR. PR, in terms of license revenue, we are talking of a substantial incremental number in '20 versus '19, and that itself should give you around 50, 60 basis points of margin tailwind. So baking that in, are you kind of highlighting that would be invested in the business or that will be led to on the [ bad ] side?
So Abhishek, one correction here. When I talk about the license income, it's featuring as part of our other income. So it doesn't feature in the EBITDA. It only impacts our PAT or the net income margin. So if you see, our numbers for FY '18 was the first year when we had actually taken because the scheme started for '15-'16. So we had taken '15-'16 and '16-'17. Some amount of spillover of '16-'17 licenses happened in '18-'19, and we filed for '18-'19 -- sorry, '17-'18 in the middle of the year. We were expecting the licenses to come by March. That doesn't happen. So it is expected to come in the current year. So as I talked about some part of the previous year which [ is left ] -- which are kind of previous year, meaning '17-'18, whatever we accrue after we receive the licenses. [ Therefore ], we will file for the year '18-'19, which means -- happen sometime during late Q2 or early Q3. Given that -- given the basis of that, we believe that the license income for the year, we will be in the range of INR 50 crores to INR 60-odd crores.
As you point -- you asked about the license. I think there are 2 licenses, right? Licenses from the platform selling is what you asked for. Is that [ a good help ]? This will also -- anyway, we are working on it. I think the...
Abhishek, you -- did you ask for which part of license, Abhishek? Did you ask for the licenses on exports as the government or you want on our IP licenses revenue?
No, the -- I was talking -- PR, I was talking about the IP licenses.
Oh, I'm sorry. Okay. Okay.
Yes. I think I understand that. IP license, what we are talking about, this is also a lever when we talk about what we intend to do for FY '20. This is also a lever we work on. I think this -- absolutely.
The next question is from the line of Shyamal Dhruve from PhillipCapital.
Congrats on a very good set of numbers. So my question -- first question is on the attrition side. So our overall attrition has been at a reasonable level of 14, 15 percentage, but how much would be the on-site attrition? The reason I want to ask you is that one of our [ closest -- very close -- ] PR has indicated that they are feeling supply side issues in U.S. So are we seeing any like similar issues in U.S. or any other geographies? And if so, like what would be the steps we will take to -- offsetting attrition?
I think one thing positive for us is we don't see any red light yet. Our on-site attrition is very low, and our offshore is much better than many other companies. So I think attrition is a non-issue today. And I think -- again, last time, I think we talked about our attrition today is -- there are voluntary and then we have forced attrition, right? We do -- people who come below a rating, then we ask them to leave. So I think rate -- whatever attrition you see there, there is forced attrition included in as a part of this. But if you see, every location where you see -- our attrition in Mysore is the minimum, [ it was more or less ] the minimum, sometimes double digit or low single digit or low double digit. So I think overall, for the locations what we have, in addition to that, remember that we hired -- we went to U.S. university, and university undergrads and grads, we hired. And those engineers can do the same work, then the engineers who are doing [ little ], replace them by Indian engineers in the customer site for a long time. That rotation part, I think, is helping us as well. So attrition is a non-issue today. That's what I would say.
And my second question is on the European geography. So the revenue from Europe has been stagnant at around $30 million from last 3 quarters. So in previous 2 quarters, there was currency -- cross-currency impact as such, but in this quarter, there was not much currency impact. So -- then also the revenue has not grown compared to the -- our overall growth. So what are the factors affecting the growth in the European -- Europe geography?
So first of all, if you look at it year-on-year, Europe growth is at 22%, right? And that is close to the company average. That is the overall company growth. Second, we are -- we've been seeing good conversion of deals in Europe and ramp-ups in Europe as well, and we are seeing traction in transportation, petrochemical, oil and gas, and industrial products in the region. And we remain very confident about our prospects in the region going forward as well.
I think a couple of things happened though. For engineering and technology company making -- looking at quarter-on-quarter, comparing that is a little difficult. If you say year-on-year, I think Europe did very well. There is no doubt about that. Europe had, as Amit said, 22% growth. We did [ Europe ] as a whole; quarter 4, yes. I think depending on which project is going on, I think the fixed project is going for the next quarter, move to next quarter and few other things. So I don't think Europe is a concern area at all. We've did reasonably well in FY '19 and we believe FY '20 will continue to be the same.
Actually, further to what Dr. Panda talked about, Amit did say that our Europe growth has happened 22% as compared to the previous year FY '18. It's important to note the 2 important verticals we have a significant amount of traction. One is transportation and the second one is plant engineering or process industry. So as we have seen process industry as an account or as a vertical itself has demonstrated reasonably good growth in FY '19 as compared to previous years, the last part of the growth actually has come out from Europe itself.
Okay. And my last question is on the offshore proportion. So offshore has increased considerably in this quarter. So like -- is it like that we have got any large project, which has a larger part of offshore work or it is the trend like we are seeing the shift from on-site to offshore? And at what level we will be comfortable?
I'll look at this way. Usually, the last 2 quarters, you will see when you get a large deal and usually start knowledge transfer on site and then move to offshore. This stabilizes to offshore. We have been consistently saying that. So I think the offshore component increased. I think, today, it's 53-47, on-site, 47%; offshore, 53%. But can I give a -- tell you that is that going to be same next quarter? We'll sign a large deal. Maybe there is again knowledge transfer coming on this. But our intent is -- I think during my -- what I was talking about, when you sign a large deal, it's always you look at it, can we stabilize this offshore-onsite ratio where we improve our margin? Is it 1 quarter it takes, 2 quarters it takes? But definitely, we'll be -- we'll do that, then we sign a large deal. That's something -- we are very careful about it and that, we follow. And every segment is different. I know some of these large deals we signed earlier and that come to offshore, and we will continue to be in same way.
The next question is from the line of Akshay Goswami from SBI Securities.
Congrats for great execution. So there has been a Supreme Court order with respect to the statutory liability for Indian employees of IT companies [ and because of which we saw ] Cognizant having a huge impact on margin. So there's some confusion regarding the impact to the retrospect or prospective. So any update on that order? Or how it will affect your margins or the liability?
Okay. That particular case is, I guess, a lot -- the Supreme Court judgment, which has come, I think you're referring to the PF applicability, right?
Yes. Yes. Yes.
Okay. I think the judgment has come out, but it's not clear on its applicability as it stands, okay? And in our case, we have to await for its applicability as if it is for retrospect or is it prospective. Our understanding by common law in such kind of pronouncements or judgments which happens, it will always be prospective because that's the intent, I believe, as part of a court order, but the matter is still sub judice. I guess the entire industry has put it up across to the court to get some additional clarifications. So pending that, it would be improper of us to comment the impact because it all depends on its applicability.
Okay. So if there is any clarity within next quarter, will we be seeing a commentary by you for the margin for that [ entirely ]?
See, if it is prospectively, which is the logical thing in such kind of judgment, I wouldn't say that it would have any material impact on our margins.
The next question is from the line of Sandeep Shah from CGS-CIMB.
Congrats on a great execution. I just wanted to understand what we are writing on the margin as an improvement over FY '19. So just can you give some color about what are the headwinds and the tailwinds we are looking at for the year as a whole in FY '20? Because in FY '20, there would be a wage inflation hitting in Q2 and Q3. So what are the tailwinds which would come?
See, I think PR talked about [ the said ] cost. He talked about employee cost in next quarter. I think that's the 2 things he clarified. And we don't give a guidance for FY '20. We don't give a clear guidance now, but only thing we could say is like last year and the levers available, we are working on that and we are confident that we'll continue to work on this.
Sandeep, just one point I wish to add while I summarize the performance for the benefit of all on this call. On EBITDA margins, as you may be -- all of you may be aware, there is a new accounting standard which comes on leases, which is Ind 116, it will get implemented from 1st of April 2019. This new accounting standard is on lease and especially on real estate users. Considering the fact that LTTS operates most of its delivery centers in India around long-term lease, there would be an impact on EBITDA margin, reported EBITDA margin as far as this standard is concerned. Our belief is that it will improve our margins at constant currency, same volume as what we [ suppose if we were to ] just translate our FY '19 EBITDA margin at 18%. Under Ind-AS 116, probably there will be an additional improvement or we would be reporting slightly higher between 150 to -- 140 to 160 basis points, but having said this, this gets completely offset so at our net income margin, the whole thing will get neutralized because the cost would get reflected in both amortization and finance cost.
Okay. Okay. So even, PR, on the EBIT level, the margin may not have a big impact?
No. Some impact will be there because some part of the lease rental also gets factored in the interest cost, not finance cost.
Okay. Okay. Okay. So when we said a margin improvement Y-o-Y in the EBITDA margin, we considered this factor in the initial remarks by Dr. Panda?
Yes.
Yes.
Okay. Okay. Okay. And just on the SG&A, can you quantify what could have been the higher provision of letters? And what is the higher cost provision for the management?
So I think...
So I just want to understand whether 13% will continue going forward as a percentage to revenue.
The first one, I think we talked about the EBITDA improvement. I did not say any statement like that. I'm only saying our intent is always look at the levers for improvement. At the same time, I also talked about when you get a large deal, an on-site component could go up and increase there, that might offset the increase of what we [ get in operations ]. So I think we will go by quarter-on-quarter. What -- only thing I can give you confidence is that we understand, recognize the levers available for us today, which will have impact on the margin in FY '20. That's our intent. That's what I said.
Just to answer to your question, our [ PPDD ] provisions, which are higher based on -- as I talked about some of the accounts, clients with whom we were interacting, there was a little amount of declaration of, I would say, understanding that they don't have money. So [ including fee ], I did provide that attributed to almost $2 million equivalent. And as I talked about higher cost provisions at corporate level, we have kept another $1.5 million to $2 million. So that's what has been factored in other expenses.
So what one should model the SG&A, PR, just going forward?
See, I mean I can't talk about provision for doubtful debts. I say you'll need to take a model because usually, it has happened that whatever we have been invoicing, most of them do get collected. I would say this provision for doubtful debts is -- has some sort of a one-off in a sense that it has happened because of a particular event, which was present in one of the client accounts. Otherwise, I think we would say that it is steady state. You have to take more or less on a yearly basis or the first 3 quarters basis to map your numbers if you...
Yes, I think one thing is clear. The doubtful debts, when you talk about the company, 250 customer, 1 customer applies bankruptcy. So what happens to that? So I think that doesn't happen in many case, nothing to do with the delivery or any issue there because of that. So that is where -- I think we are careful about it.
Okay. Okay. Just the last question on the demand outlook though. We have already discussed this in detail. Any client discussion which is leading to any instance of a project delay or a start because of the macro-related issues?
So we do -- so overall macro trend remain positive. I mean you saw the reports coming out. The U.S. fed released some results today also. So overall, macro trend remains positive. So what we're seeing in digital is only increasing our forecast like that. There may be a one-off that may happen where projects get slightly delayed in the 5G area because especially in 5G, we are rambling for investments, et cetera. So there may be some of that, but otherwise, we don't see any challenges anywhere.
I think one point I must tell you that when you look at -- in the market, 2018 to 2022, we are talking about 15 80 billion dollars. And then the $568 billion new technology and $1,018 billion of the existing technology. So I think size of the opportunity is there. And in a case like this, if something comes up, it might come up, but I don't see -- at least still today, we have not experienced anywhere that customers are getting delayed or chances have been delayed. That's -- I think we don't hear that. We have not heard that yet.
The next question is from the line of Sudheer Guntupalli from AMBIT Capital.
So you did mention that in some of the verticals like process engineering that clients are going for vendor consolidation. So our understanding is that these verticals are usually less crowded by vendors. So even among these few vendors, what is driving this vendor consolidation?
I think what is happening in this segment that our local vendors -- so if somebody has resigned from the company or retired from the company with 10 people, 20 people, they were doing it. There's a risk on the business. Companies are looking at -- because of our maturity level, working with them is growing. They do not like to work with the local vendor, with a small number of people and others. They will consolidate all that. That is number one. Number two, there are a lot more contractors working with the companies, many contractors. So the opportunity for us is once you have this, all the knowledge, technology and comfort with the engineering community -- so they would like to combine this together, then a contractor is coming tomorrow and now he's not sure. If you have a firewall contractor you're dealing with, you are not sure whether they will show up next day. So I think the way strategically these companies are looking at it, can we bundle all together? We know this company, Larsen & Toubro, is a big company, L&T Technology Services, 15,000 engineers. They operate in 32 countries -- 33 countries. So I think the bundling together where you can provide services globally, they are more comfortable in that [ realized ] than we talked about. That's where this industry is moving.
Sure, sir. And in FY '19, there was a meaningful [ state ] in revenue mix from fixed-price and T&M contracts. There was almost a 5% increase in the share of revenue from fixed-price contracts. So is there no impact because of the [ state ] on margins?
I -- again, this is something that I was talking to the team. The definition of fixed-price and time and material itself, I'm very uncomfortable the way engineering community work, technology innovation community work. So I think the way -- the 2% or 4%, 3%, I don't think that you can relate directly to that.
The next question is from the line of Pratik Lambe from ARM Research.
Presently my question was just one question on the other investment or CapEx that you maintained. Presently, the investments that are made are around INR 885 million versus the previous INR 511 million. So why has there been a significant jump? And what has been actually going into -- going around the investment? So I just wanted to get more color on that because again, on an FY '17 basis, there was just a 14% increase in FY '18. So now that the number has increased by almost 70%. So what has been contributing to it, sir?
Okay. Let me tell you -- you're talking of our CapEx investments, which we've reported as INR 511 million for FY '18 and INR 885 million for FY '19?
Right, sir.
So there has been 1 or 2 centers where we have expanded in LTTS. As we have expanded, a number of people have gone up. We have also increased centers. We expect that for FY '20 to -- just to give you a perspective, for us CapEx is -- almost 60% to 70% is IT equipment and 30% is on what we call a real-estate-related CapEx. Having said that, what we see in FY '20 would be in the range of INR 100 crores to INR 110 crores. That's the level I see, out of which almost, I would say, INR 25 crores to INR 30 crores would come from real estate CapEx and the balance INR 50 crores to INR 60 crores should be coming from what we have billable CapEx. That is tools, mostly IT hardware and software and service.
That was the last question. I would now like to hand the conference back to the management team for closing comments.
Thank you, everyone, for joining us on the call today -- this evening. We look forward to meeting you over the course of the quarter. And if you have any questions, please feel free to write to me. Thank you so much. Buh-bye.
Thank you.
Thank you very much. On behalf of L&T Technology Services Limited, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.