After bagging its largest-deal ever on Dec 10, L&T Technology Services (LTTS) is confident about growth next year, driven by clients’ technology spending and the growing focus on medtech, CEO Keshab Panda said.
When the engineering services firm won a five-year $100 million plant engineering deal in the oil and gas sector yesterday, it sent its stock price soaring to a 52-week high of Rs 1,883.45.
“We have signed large deals to the tune of $40 million and $50 million. But this is the biggest deal in any engineering services firms,” Panda told Moneycontrol.
Recently IT majors like Infosys and Wipro have also signed large engineering service deals with automotive firms like Rolls-Royce and Marelli.
“I am hoping Q3 and Q4 we will do more. So FY22 looks very good,” Panda added.
When the pandemic struck, while IT services providers were able to weather the storm better, the same could not be said for engineering service providers such as LTTS. For instance, for the June 2020 quarter, LTTS’ revenues declined 11.8 percent y-o-y. The September quarter, too, saw revenue dropping 9.9 percent.
In contrast, top IT services such as TCS and Wipro saw revenue decline 1.7 percent and 2.8 percent respectively in Q2 FY21. Infosys, however, was an outlier with revenue rising 3 percent.
Panda explained that unlike IT services, engineering is a core function, where investments are long term, and companies need to think hard before making a decision on investments. When the Covid-19 pandemic hit, it prompted a lot of companies to relook their strategies, including looking at leveraging technology to stay competitive. This is where companies like LTTS have benefited, Panda said.
There are a few areas where the company is seeing growth. One such segment, Panda said, is medical devices, which is seeing a lot of interest given the challenges posed by Covid-19.
Medical devices currently account for about 8.8 percent of revenue, but is going to be a growth engine for the company going forward, Panda said.
This was the only sector that saw high-double-digit growth amid the pandemic. It grew almost 35 percent in Q2 FY21, whereas other sectors such as transportation, industrial products, telecom and plant engineering declined.
Other areas of growth include, what Panda terms as the “Sell To and Sell With model.”
He explained: “Take chip design. (We tell the customer) We have been doing with you for a long time. So together (with the client, we) can sell it to auto or medtech customer. The number of chips you are doing will sell more. Combining it together is a great opportunity in the sector.”
There are also other digital-driven projects that the company is involved in such as electric cars, and autonomous vehicles. During the company’s Q2 earnings call in October, Panda said, “We opened an EV design lab in Bangalore last month, and we are seeing good opportunities to partner with customers in areas of power electronics, inverters.”
But there are challenges.
In the Q2 earnings call, the company said client spending is coming back, though the decision cycles for large deals are longer. "In telecom and hi-tech, we had a flat quarter due to decision-making delays for some of the large deals that slipped into Q3," Panda had said.
One of the key things to watch out for, according to Panda, is the US-China relationship. “This trade war between India and China, I don't know how it is going to impact,” he said.
Indian IT services firms' revenue exposure to China is small. As Panda pointed out, it is not clear yet how much of an impact it could be on engineering services, whose manufacturing clients have dependency on China.
However, there could be a positive side which could benefit companies like LTTS, he said. As companies look to move their (manufacturing) plants to their own country instead of China, that could mean more business for engineering service firms. “What we need to watch out is the trade relationship with countries around the world and how it is going to create opportunities for us,” Panda added.
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