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Continues to set the pace for ER&D innovation

We attended LTTS’ analyst day, where the management spelt out its aspiration of achieving a revenue run rate of USD2b and EBIT margin of 17-18% over the medium term. Growth drivers remain intact for key verticals across the ER&D client universe, and LTTS has carved out three new verticals to alter its go-to-market (GTM) strategy. The company’s GTM strategy now focuses extensively on high-growth areas such as Mobility (software-defined vehicles and electrification), Sustainability (industrial products and plant engineering), and Tech (medical devices, communications, hi-tech, smart cities). The new strategy may not alter the growth path in the short term, but if executed correctly, it could boost long-term growth for the company, in our view. We raise our target multiple to 40x FY26E EPS, as we believe the new strategy opens up new avenues for growth, especially in hitherto weak areas such as Mobility, which is growing fast across its peers. We keep our estimates unchanged and maintain our BUY rating with a TP of INR6,300 (15% upside).

All eyes on the future, but immediate present slightly marred by demand uncertainty

* The technology cycles are shortening, and the need for faster speed-to-market continues to increase the addressable market for outsourced ER&D, where India is expected to play a key role going forward.

* LTTS believes a revamped GTM strategy with a more relevant verticalized structure could unlock long-term growth. The management delved deep into its three key verticals: Mobility, Sustainability, and Tech. It aspires for each of these verticals to be a USD1b+ business. Each segment currently has P&L accountability. While we are encouraged by the ambition, there is no timeline around when this could be achieved. For context, annualized revenues from Mobility, Sustainability, and Tech stand at USD416m, USD354m and USD411m, respectively.

* These three segments will be flanked by domain-agnostic capabilities around three areas: AI & software, embedded systems, and digital manufacturing solutions.

* Interestingly, 60% of LTTS’s workforce will be strapped to domain-agnostic service lines, whereas 40% will be vertical experts. This allows LTTS to retain its deep domain expertise and implement cutting-edge technological solutions such as AI and embedded systems, regardless of vertical exposures.

* As for the near term, the management indicated that conversations and pipeline have markedly improved as compared to last year, but deals continue to take longer to close.

* We estimate a CAGR of 10% in USD revenue over FY24-26 and EBIT margins of 17.3% in FY26 (17.1% for FY24

Mobility: Focus on scaling OEM accounts in transport encouraging

* For a company of LTTS’s size, its conspicuous absence in key auto OEM accounts over the past 4-5 years was certainly a concern, and the company laid down a progress path to change this.

* It is now empaneled and continues to engage with key OEMs. It showcased its capabilities across the entire SDV stack, which it hopes will help it gain wallet share from key competitors.

* While LTTS is slightly late to the SDV party, its SDV stack on show at the investor day was impressive.

* We will keenly monitor its progress on client mining in key auto OEMs, especially across Europe, over the next 2-3 years. ? In Mobility, the revenue CAGR for past three years was 19%, whereas its medium-term CAGR aspiration is 20-22%.

Sustainability: Highly profitable, aspiration to grow at early teens CAGR

* LTTS focuses on both downstream (oil and gas, chemicals, FMCG) and upstream (machinery, building technologies, EPC) sectors. The company highlighted a notable increase in global capex and growth in crude oil and energy markets.

* Strategic priorities include project engineering, sustainable manufacturing, plant modernization, and digital technologies. The shift from EPC to EPCM will be a key catalyst for growth across the industrials segment.

* In Sustainability, the revenue CAGR for past three years was 13%, whereas its medium-term CAGR aspiration is 14-16%.

Tech: High-growth areas exist, but too many sub-verticals could hinder focus

* The tech vertical now comprises multiple engineering segments such as medical technology, communications, media, hi-tech and smart cities.

* LTTS focuses on various engineering areas like silicon, device, platform and system integration. In med tech, which is relatively new to outsourcing, 8-10% of client revenues are attributed to R&D, with strong EU investment and growing use of AI/ML providing a hunting ground for deals.

* There is a renewed emphasis on device engineering and digital manufacturing, including digital twins and automation, while regulatory compliance remains a costly concern, making it a prime candidate for outsourcing.

* In semiconductors, the company is involved in high-performance computing projects and expanding its VLSI teams.

* Additionally, the company is active in media, consumer tech, and telecom. It is leading in Android engineering and next-gen chipsets, with a broad customer base from chip design to cloud services and a focus on cybersecurity and network infrastructure.

* As opposed to the other two verticals, the tech vertical seems slightly clustered and potentially takes away focus from high-growth areas such as healthcare and med tech.

* In Tech, the revenue CAGR for past three years was 18%, whereas its mediumterm CAGR aspiration is 18-20%.

Margins could be range-bound in short term

* Margins in two of the three segments showed a secular improvement over the past three years. Mobility margins increased from 14.7% in FY21 to 19.6% in FY24, whereas Sustainability margins expanded by 400bp over FY21-FY24 to 28.2%. Tech margins, however, declined from 18.9% to 15.5%

* Overall EBIT margins expanded by 260bp from FY21 to FY24.

* The management aims to improve long-term margins to 17-18% from 17.1% in FY24.

* We believe margins could be largely range-bound in the short term, but unlocking growth across mobility and sustainability could drive margins toward the top end of the aspired range over the next three years.

Valuation and view:

Maintain BUY, upgrade target multiple

* We raise our target multiple to 40x FY26E EPS, as we believe the new GTM strategy opens up new avenues for growth, especially in hitherto weak areas such as mobility, which is growing fast across its peers. We keep our estimates unchanged and maintain our BUY rating with a TP of INR6,300 (15% upside).

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