LTM — earnings call
The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.
Questions and answers
Moving on to the DSO
In Q1, the billed DSO stood at 61 days as compared to 65 days in the last quarter.
The DSO including unbilled revenue was at 100 days compared to 99 days in last quarter.
LTI Q1FY23 Earnings Call July 14, 2022 For the quarter, the net cash flow from operations was INR 2,256 million, which was a 35.6% conversion of the net income.
Like every year, this was impacted by our payout of annual incentive.
At the end of quarter, cash and liquid investments stood at INR 38,824 million as compared to INR 39,139 million last quarter.
The effective tax rate for the quarter was 25.5%.
Earnings per share for the quarter stood at INR 36.13 as compared to INR 36.34 in Q4. Diluted earnings per share was INR 36.08 versus INR 36.27 last quarter.
While we have taken you through all the Q1 numbers on growth and profitability, I also want to speak about our ESG goals at LTI.
Ensuring community welfare and upliftment forms an integral part of our long-term strategy.
We are cognizant of the fact that with the growth and expansion of our business, the utilization of natural resources on our part is bound to escalate.
And accordingly, we remain steadfast at reducing our environmental footprint and becoming a carbon and water neutral company by 2030.
We have a published ESG roadmap in place with specific targets on these goals, as well as other ESG related goals and track our progress against each of these regularly.
Our recently published Integrated Annual Report for FY’22 has all the details on this and is available on our website.
I also want to update you on the progress of the amalgamation.
As you must be aware, on May 6th, the boards of LTI and Mindtree approved a composite scheme of amalgamation.
The transaction is subject to shareholder and regulatory approval.
We reached out to all our key stakeholders post this announcement, and the overall feedback has been positive.
Sudhir, Nachiket and I visited several of our locations across India and had in person meets and town halls with our employees to communicate the strategic rationale for this merger.
We also organized a virtual meet for all our employees to discuss and provide any clarifications required.
Our employees are very excited about our next phase of growth and look forward to being a part of a larger entity with increased opportunities.
As Sudhir mentioned, we are already seeing the benefits of combining our complementary strengths to win in the marketplace.
A steering committee has also been set up which is meeting regularly to oversee the integration plan.
Our regulatory process remains on track.
We have received approvals from the stock exchange and filed with the NCLT.
Our shareholder and creditor meeting has accordingly been scheduled on August 10th.
Before I end my presentation, my team and I are very grateful for your generous support for LTI in the recently concluded Institutional Investor Survey.
Thank you for that.
With that I would like to open the floor for questions.
LTI Q1FY23 Earnings Call July 14, 2022
Moderator · Conference Operator
Thank you very much.
Ladies and gentlemen, we will now begin the question-and-answer session.
The first question is from the line of Sudheer Guntupalli from Kotak Mahindra AMC.
Please go ahead.
Sudheer Guntupalli
My question is around employee incentives.
It has been around 2 months since we announced a corporate action and Anil mentioned that you have done multiple town halls to take employees into confidence about the merger.
How are you seeing the employee morale within the company in general?
What are the key anxieties that some of the critical or key employees would have brought up in their conversations with you?
And how are you going to take care of those anxieties and nervousness at this point in time which is general for a large-scale corporate action like this?
And any employee sweeteners or incentives that you plan to kind of use as a retention technique at this point in time?
We understand that I think the current ESOP plan itself has a lot of unallocated ESOPs.
So, any plans to kind of reward employees to use them as effective retention sweeteners at this point in time?
Sudhir Chaturvedi
Sudheer, let me just give you some color of what Anil, Nachiket and I were doing along with Manoj who is our HR head in these town halls.
So, in these town halls, we actually presented to them the same presentation that we made to the Board.
We explained the merger rationale which is essentially a revenue synergy-based merger rationale.
The entire business case is around the 2 companies getting together to jointly grow faster than the market.
And what we were able to show clearly is where we see the market opportunity and what we see as essentially a large cross- sell, upsell opportunity between the 2 companies.
Between the 2 companies, we have 700 clients.
And now both companies have the ability to take many more service lines to these clients.
And the benefit of that is almost every person in the organization has an opportunity to explore new service lines or new verticals or new geographies in their future career path.
So, the key thing that we shared with them was how do we plan to actually realize the revenue synergies and that's where a lot of the planning has gone before we decided to proceed with the merger.
Therefore, as Anil also mentioned in his remarks, there is a lot of excitement around how we can do things together.
This is reflected even in the deals that we are working on currently.
So, we announced one deal win jointly, and we are working on several deals currently.
There's also an integration effort that is underway between the organizations and is being led by L&T corporate.
So, frankly, we are not spending that much time on it, but we are seeing that there is good collaboration happening between the teams on that front as we see the synergy benefits between them.
Nachiket Deshpande
One of the other things as we look at the merger between LTI and Mindtree and look at the complementary nature of both the organizations, you would have seen the merger deck on our website as well.
You will see whether you look at industry segment, whether you look at geographies or whether you look at service lines, there is a significant complementarity between the two.
And the 700 customers that Sudhir talked about, there is hardly single-digit customers where we both have meaningful presence.
Which means that for most of the organization, the LTI Q1FY23 Earnings Call July 14, 2022 resultant org is going to be an additive org.
There is no redundancy in their role.
They will continue to serve the client.
They will continue to be the delivery manager, project manager, account manager – the role that they are doing today.
And on top of that, they actually get additional opportunities to work for different segments, different geographies and different service lines.
So, actually, based on that explanation, we don't see any anxiety with our employees.
We actually see excitement because they are now seeing that there is no redundancy.
There is no risk on their role.
But in future, they have much better opportunities to grow together in the bigger organization.
Sudhir Chaturvedi
And as far as incentives are concerned, I think you also answered the question.
There is ample headroom in both the ESOP schemes of both companies.
And at LTI, as you are aware that we've had an ESOP scheme running, right.
So, we've had a 2016 ESOP scheme that is currently valid, which people have been part of.
So, we will continue with the same 5-year or multiyear ESOP plans that we have for our leadership teams.
That's something that we will continue to have in the future as well.
Sudheer Guntupalli
My second question.
Of late, we have been seeing a lot of negative news flow from some of the large U.S. banks.
And our top client also happens to be in that particular segment.
Any feedback or any concerns that you have been receiving from our top clients at this point in time, about this whole macro issue because they typically operate in a segment which is quite quicker compared to other verticals?
Sudhir Chaturvedi
Yes.
I mean BFS for us is growing at 31.5%.
I think the good thing about BFS for us is that we actually have BFS clients now in every geography that we operate in.
So, it's broad-based BFS growth that we see.
Now what we see including the client that you were referring to, what we are seeing is that they are in a multiyear technology modernization cycle.
And the state that they are at, there's actually no going back.
They have to complete the modernization of the technology stack.
So, if anything, they are looking to accelerate some of that as they have budgets available in this calendar year.
So, that is why we are talking about perhaps even if anything, we'll see a slight uptick in demand in the coming quarter.
So, BFS actually, we are very confident about.
And we are also pleased to see that insurance has actually bounced back in terms of growth we are seeing both on the back of our existing logos as well as some very exciting new logos, especially Fortune 500 logos that we've signed that we plan to scale up.
So, on BFSI, in fact, even if I were to look into the conversations we've been having with our clients, even if we look into calendar year '23, we see that there is good growth prospects even in the coming quarters.
Moderator · Conference Operator
Next question is from the line of Vikas Ahuja from Antique Stock Broking.
Please go ahead.
Vikas Ahuja
I'm sorry to harp on a macro question again.
I understand in the opening comments, you alluded to not witnessing any macro headwinds so far.
But do you sense any change in client decision- LTI Q1FY23 Earnings Call July 14, 2022 making pattern or if clients are preparing for a recession on their end?
Maybe some early indications like reluctance to negotiate on pricing.
Any color around that would be great.
Sudhir Chaturvedi
As I said, the first thing we watch out for is if there are going to be project cancellations or project deferments or delays in decision-making on programs that are currently underway or proposals that are currently underway.
So, we're not seeing any cancellations, or deferments.
On project decisions, again, nothing material on that front.
But in our conversations, we do sense that clients are a bit hesitant about the continuing macro environment and the impact that it will have going forward.
Which is why we are saying that in calendar year '23, we might begin to see clients and the way they look at their spending be a bit different.
But having said that, that's the point that Nachiket was talking about.
Even if clients are looking to gain more efficiencies from their technology spend, there are actually several areas especially in cloud, data, DSaaS.
These are the areas where there's been significant spend in the last 3 or 4 years, and a lot of this spend has happened with global majors.
So, this area of spend is actually ripe for efficiency programs.
So, for us, as Nachiket talked about, we are working on a completely new solution offering to actually provide efficiency on this stack, and that's something that if we reflect, on our large deal performance to date, we've had 39 large deal wins.
A majority of these large deal wins have come from what we call our Operate-to-Transform service offering for large deals.
And that's essentially around how do we bring more efficiency to a stack as well as modernize it at the same time.
And we think that, that muscle is quite strong.
We are good at that business, and we were able to bring that to bear even if the environment turns to one where clients are looking to cut costs or for more efficiency-led programs.
Just to answer that question in terms of pricing and cuts, we are not seeing any conversations on that.
In fact, right now, just to cover the point on pricing, we are still able to get some price increase in pockets because there is still a gap between demand and supply, especially on new technology talent and clients are open to increases for hot skills.
Vikas Ahuja
I just have one more question.
This is regarding Cloud Infra and Security service line.
Barring few Asian companies, the growth outlook there remains very strong, but we have been seeing some weakness there.
So, what is the disconnect there?
Nachiket Deshpande
For us in Q1, the softness in CIS, you see was largely because we had a few large SI deals that had a project kind of spend that got over in Q4. And these are India-based large deals, end-to- end SI deals that we really participate in.
So, it's more of that seasonality is what you see from Q4 to Q1. But we continue to see a good pipeline.
As Sudhir said, some of the large deals are in that space, and we feel confident that we'll be able to sustain growth momentum in Cloud and Infra.
And also, if you see this only includes infra part of the cloud, right?
As you can imagine, cloud is there in every service line.
So, we don't separately report holistically cloud revenue because it's all pervasive.
This is only data center exit type deals on Infrastructure and Cloud together.
LTI Q1FY23 Earnings Call July 14, 2022
Moderator · Conference Operator
The next question is from the line of Sandip Agarwal from Edelweiss.
Please go ahead.
Sandip Agarwal
The way we are seeing the gap in demand and supply, and it reflects in the attrition number also.
So, hypothetically, if for a moment, we assume that there will be a deep recession or a very strong recession in the U.S., which will lead to budget cut by clients and all.
Then in that case, will it be fair to assume that then our attrition numbers will also fall sharply the way we are seeing start-ups recruiting less now or pressure from start-ups going down?
Similarly, recruitment from banks and other companies which indirectly hurt us, will also go down and resultantly, we will see lower pressure on subcontracting costs and lower attrition related costs.
So, in a way, if demand really falls, then there will be at least a positive impact on the margins.
Is it a fair assumption?
Or you think the operating leverage will always overwhelm on the overall cost.
What is your sense on that?
Nachiket Deshpande
So, there are 2, 3 components to your question, Sandip.
Number one, as Sudhir alluded, I think we're not seeing sharp drop in demand as yet, right?
Because as we said that the technology transformation spend will continue even when the customers go into the recessionary period because some of this is going to be needed for them to continue their core modernization program.
Of course, a different kind of spend and a different muscle from our perspective will get engaged.
So, we don't see demand kind of falling off the cliff at least where we sit today.
Second, if you look at a skill set gap, especially around newer areas of technology around data, digital and cloud, I think it will still take a few years before that gap is genuinely bridged between the skill set availability and skill set needed because every business today around the world is a technology business.
And that gap in terms of the demand of those skill sets versus what's available across the globe, we believe that it is at least a year or 2 before that supply-demand gap is filled.
Now of course, the attrition rates are a function of a lot of things.
Supply-demand gap is one aspect.
But what we see is that with the start-up ecosystem challenges that they are going through right now, we would see that the inflation around the replacement costs that we typically get into because of attrition, that tends to cool off a little.
And that is really the first sign where the impact is felt.
When it translates into an overall attrition rate going down, I think it remains to be seen.
As I said in my remarks, we're seeing 2 quarters where it has stabilized.
Based on what we see from a Q2 perspective, we believe it will also remain in the same stable range.
So, if this trend continues, then yes, we'll see the downward trend in attrition.
But I think 2 quarters is too little a data point to call it a trend.
So, I would not venture into guessing on that, but there are multiple facets that we need to look at.
Sudhir Chaturvedi
This is very fundamentally different from the GFC, where we actually saw a very different behavior from our clients.
Today, they are watching the space to see what happens because ultimately, they will react based on how they individually get affected.
So, just to give you an example, our industrial manufacturing clients are actually dealing with record order backlog.
For example, one of our clients is in the HVAC business, and they have the highest order backlog they've ever had in their history because buildings of all types all over the world are looking to LTI Q1FY23 Earnings Call July 14, 2022 modernize their HVAC systems, partly driven by COVID, but also now looking at healthy buildings, ESG initiatives, all of that.
So, that cycle of modernization of the product stack, which essentially, by the way, is tech modernization, not as much a modernization of HVACs and equipment, but it's actually about software being put into an HVAC so that it operates optimally in a hybrid work environment.
For 2 days a week, if you don't have people, then it should operate differently than when people are there for 3 days a week.
So, the way people are looking to deploy technology in all aspects of their business, irrespective of the vertical they are in, that's a fundamentally different construct that we see today versus what we saw back in 2008.
Moderator · Conference Operator
The next question is from the line of Nitin Padmanabhan from Investec.
Please go ahead.
Nitin Padmanabhan
So, you mentioned that you are seeing a slight level of caution with clients, and this is causing some short-term acceleration.
One, if you could throw some color on what exactly are clients saying?
Are they suggesting that they believe that budgets could get constrained in the latter half of the year or next year and thereby, this is more like a budget flush wherein they can sort of try and complete as much work as possible before there's some clamp down?
So, that's the first question.
And the second is, where all are you seeing this behavior?
Is it just BFS or is it across the board?
So, if you can just give some color across verticals, is it broad-based or how things are?
So, these are the 2 questions.
Sudhir Chaturvedi
So, I think I wouldn't call it a budget flush.
I would say that what we are seeing is calendar year '22 budgets are available to them.
So, they know that these budgets are available.
And what they're looking to do is to ensure that they optimally utilize these budgets.
Now partly because of resourcing challenges that the entire industry has faced, there are some of these programs that they are looking to accelerate because they want to complete this.
So, what they're asking us is - I've got milestones that I need to achieve, can I accelerate those milestones?
And I'll answer this question in 2 ways.
See, 47% of our business is BFSI.
And frankly, as I said, they are in a secular technology modernization cycle.
I actually don't see that decreasing even in calendar year '23 because if they don't modernize their tech stack, they actually will not have a business to run given the kind of competitive environment that they face, not just from FinTechs but also from other banks all over the world.
Every banking business now essentially calls itself a technology business.
Insurance, if you see what the pandemic did is, if you look at the direct distribution of insurance or the straight through processing in insurance, it’s at scale that has never been seen before.
So, it's leading to very significant investments in the insurance stack as well.
And the third area is our Energy business.
Our Energy & Utilities business, which is 9% of our business, they are seeing record oil prices.
So, they are actually continuing to invest in technology, more focused on ESG.
And 14% of our business is industrial manufacturing which I mentioned has a record order backlog.
They are actually dealing more with supply chain challenges and chip shortages and those kinds of things rather than the macro ones which is that LTI Q1FY23 Earnings Call July 14, 2022 they have to fulfill the backlog.
And they're not seeing any reduction in terms of the backlog going away.
So, we see about 70% of our business is more of a B2B business than many of our competitors who may have a slightly different mix in terms of their clients.
So, therefore, that's why we are saying that these clients are looking to accelerate programs and utilize budgets that are currently available to them.
Now frankly, the boardrooms are reading the same news I think that everybody is.
So, even if they are not physically seeing a reduction in demand, they are going to react to the noise in the system because nobody wants to be caught out in case things turn south dramatically.
I’ve just spent 2.5 weeks in the U.S. There is a little bit of a disconnect between Main Street and Wall Street in terms of what you see.
Everything is at record prices.
Flying in the U.S. or trying to get any service in the U.S. - I've never paid more for anything ever.
But yet, I would say, actually, the supply-side crisis or the lack of resources are a bigger challenge for our clients today than perhaps the macro.
But I guess if inflation continues to be high for a longer period, if interest rates continue to rise, then it’s natural that consumer spending will come under pressure.
That will eventually have an impact on B2B clients as well.
But as we said, we are in the cost-cutting business as well.
We will re-pivot to making sure that there are other service lines that we can deploy to actually help clients with that side of the house as well.
So, we are well poised whether clients invest in the growth stack or the efficiency stack, I think we have something good to offer to them on both areas.
Nitin Padmanabhan
How is attrition at the senior levels within LTI?
Is there any increase or it's still at whatever levels you have seen historically?
Nachiket Deshpande
No increase in the attrition actually.
Absolutely no impact on the attrition at senior levels at LTI.
Sudhir Chaturvedi
The senior levels in LTI are aware of what is going to happen post-merger.
And they see that all of us will have a larger playing field.
In fact, I said this during some of our analyst interactions that we will actually need more leadership bandwidth as we go ahead.
You can imagine 2 companies growing at a pace that we are currently and with the ambitions of growing even faster in the future, we are actually going to need more talent as we go forward.
And I think, it’s an exciting platform.
If you think of us together, we have US$3.5 billion as of the last financial year.
You can only imagine what we will be by the time we get together.
If that business can grow at industry growth rates for the next few years, there are not many companies that can provide that kind of platform for growth in the industry.
And we are nice people to work with, we are a fun organization.
So, I think people are looking forward to it.
Moderator · Conference Operator
The next question is from the line of Sandeep Shah from Equirus Securities.
Please go ahead.
Sandeep Shah
As you guys are not witnessing any impact of the macro on demand as a whole, but is the picture similar within Europe?
Because in Europe, we are very spread out outside U.K. as well.
And LTI Q1FY23 Earnings Call July 14, 2022 your commentary also suggests that the supply side challenges is impacting the clients more than the macro challenges which is actually more intense in Europe as a whole.
Sudhir Chaturvedi
Sandeep, so we grew 31% Y-o-Y in Europe and my European Chief Business Officers are fairly bullish.
I think their biggest impact is on the currency side of the house.
But again, if you look at our business in Europe, it is also predicated on our core verticals.
BFSI, Manufacturing, Energy, Utilities, they continue to be the strongest parts of our European business as well.
Actually, in Europe, the other advantage we've had is our alliance deals, especially in data, our deals with our partners, our product partners in the data space.
We've done some very significant number of deals together with them in that space.
And so that's really helping us.
And Europe still has a strong ERP footprint.
And that ERP footprint is modernizing.
So, if you put that together, we are in the right verticals, data is a good growth driver and ERP continues to be a strong service line across the board for us.
That's still holding Europe in good stead for us.
So, our markets there, as you know, we are strong in France and Nordics.
But now U.K. and Germany and our Luxembourg market with our Syncordis business unit, they are also showing good signs of growth.
But I just do want to clarify that I keep talking about calendar year '22 because that's what we can see, that's what we are having conversations about as we speak to clients.
Are clients going to be cautious about calendar year '23?
The answer is yes.
We'll see what materializes as we'll probably come to know more of that in Q3 and Q4. But as we said, we are in sectors where we think that there will be a good level of demand even in the next calendar year.
Sandeep Shah
In terms of margins with wage inflation largely behind and supply side challenges, though it's not coming down, but it's not going up as well on the attrition side, is it fair to say that growth is likely to be stronger in 2Q and 3Q, 4Q seasonally better?
For us, the margin at EBIT level will also have an upward bias from 2Q to 4Q?
Nachiket Deshpande
Traditionally, yes, on margins quarter-on-quarter as the year progresses.
We will definitely recover some bit of our wage hikes related costs.
And hence, with the growth momentum that we have seen, we're confident to stay in our PAT guidance of 14% to 15%.
Sandeep Shah
And just last 2 questions for the CFO.
Generally, in a rupee depreciation scenario, our Forex gain and the other income as a percentage to the revenue comes down.
This time, it's slightly different.
So, is there any change in our Forex hedge policy?
And second, in terms of annual report, if I look at, the FY '22 cash balances is actually higher than INR 378 crore versus what you mentioned.
So, that INR 378 crore is a noncurrent cash equivalent.
So, I think you are not counting that when you give the figure for the cash and cash equivalent.
Anil Rander
So, I think when you're talking about Forex gain, this also includes not only your gains due to hedges, but also your debtor’s revaluation.
It will cover all INR depreciation against dollar and dollar appreciation against other currencies.
So, that will be the net of the amount in gains due LTI Q1FY23 Earnings Call July 14, 2022 to our foreign exchange.
There is no change in the policy.
I think we have been consistent in terms of reporting and in terms of the policy.
Also, in terms of classification of cash, so we will come back to you because we need to understand the numbers you are quoting.
Sandeep Shah
I was talking about the corporate deposit and the corporate bonds, which were there in the FY’22 annual report, and you have not counted as a part of cash equivalent.
Anil Rander
We will revert to you.
Moderator · Conference Operator
The next question is from the line of Mohit Jain from Anand Rathi.
Please go ahead.
Mohit Jain
Yes, Sir, 2 things.
One was related to the deal pipeline.
So, when you have accelerated over the last 3 quarters in terms of large deal wins, so how is the impact on pipeline at your end?
That was one and the second, if you could give some color on the deals won during the quarter.
This US$80 million like which region, which country has come from?
Sudhir Chaturvedi
They came across verticals, actually, these 4 large deal wins, BFS, Hi-Tech, Energy and Utilities and Others.
And in terms of regions, there are 2 from the U.S., 1 from Europe and 1 from our emerging market regions.
So, it's a good spread across verticals and across regions.
In terms of deal pipeline, actually looking quite good.
We have some deals currently in their final stages.
So, we will announce them in due course.
So, next quarter, expect some more deal announcements from us.
As we said, in fact, if I look at the overall pipeline and though we don't sort of share order intake numbers, but all of those indicators looking quite strong for us right now.
Mohit Jain
And the other one was on wage hike.
Are we completely done with it?
Or is there some spillover which may happen in 2Q from a wage hike perspective?
Nachiket Deshpande
So, almost 80% of our organization actually 85% of our organization gets covered in our April cycle.
Only the senior level which is less than 10% or 12% gets covered in July.
But if you look at from an impact perspective, almost all the impact has come into this quarter.
Mohit Jain
Okay.
So, from 2Q onwards, we can sort of assume steady improvement because wage hike is behind as you mentioned and some of the revenue ramp-up happen?
Anil Rander
Yes.
So that impact would not be material.
I think it would be about 10 basis points.
Nachiket Deshpande
And from a positive perspective, as I said, we tend to recover our wage hike related dilution over 3 quarters through productivity and pyramid rationalization, so that program continues from Q2 onwards.
Moderator · Conference Operator
Ladies and gentlemen, that would be our last question for today.
I now hand the conference over to Mr. Sudhir Chaturvedi for closing comments.
Thank you, and over to you, Sir.
LTI Q1FY23 Earnings Call July 14, 2022
Sudhir Chaturvedi
So, thank you very much for taking the time to join us today.
I know it's a little late, but I love Bombay in the rain.
So, I hope you are enjoying it safely.
Once again, thank you very much for your time and look forward to interacting with you next quarter where we've got a lot of good prospects ahead of us.
Meanwhile, if there is any other questions or any other information that you need, please do not hesitate to reach out to us at any time.
Thanks once again.
Moderator · Conference Operator
Thank you very much.
Ladies and gentlemen, on behalf of LTI, that concludes this conference.
Thank you all for joining us, and you may now disconnect your lines.
Thank you.
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