It has been quite a quarter for LTIMindtree. As the company completed its internal merger of teams, projects and resources, it also entered the Nifty 50 index in July.
Overall, in Q2FY24, the IT services major has put up a good show, with strong deal wins, resilient profits and operating margin performance despite absorbing the wage hike cycle.
The company stood by its exit margin guidance of 17-18 percent for FY24 and expects a better H2 in terms of deal pipeline amidst an uncertain demand environment and delays in decision making cycles.
In an interview with Moneycontrol, Sudhir Chaturvedi, President- Markets, LTIMindtree, discussed the ongoing pessimism in the IT industry’s growth forecasts, LTIMindtree’s demand outlook, macroeconomic recovery, hiring plans and more.
Edited Excerpts:
We are seeing this trend of IT companies reporting strong quarters but slashing revenue guidance and so on. Even LTIMindtree, on October 18, said that deal closure delays continue. What’s driving this pessimism? What kind of delays are you experiencing at the moment?
I’ll address this a little bit more distinctly. We have a very strong pipeline currently. We have a record number of conversations going on with both clients and prospective clients. Our large deal pipeline is at a record level. Almost every week, we're receiving a deal in mind from our deal advisors.
I think we've become a very clear alternative to the Tier-1 firms, when it comes to clients looking to consolidate or looking to bring in fresh blood into their system. So, that is reflecting in our large deal pipeline and our order flow. So, it was $1.4 billion in Q1 and $1.3 billion in Q2.
Now, the translation of the order book to revenue is where people are seeing a gap. That’s because the revenue of existing accounts are the combination of discretionary and non-discretionary spends. So discretionary spend is what has come down in a cautious spending environment, and that cautious spending environment is now in both Europe and the US, our major markets.
The large deals that we currently have are mostly long-term, cost-reduction deals in the non-discretionary spend category. Right now, the revenue that is not accruing through discretionary spending is being made up by non-discretionary spend.
So, what is the range of large deals for LTIMindtree?
It is $20 million-plus in the total contract value (TCV). Today, 75 percent of these deals that we're bidding on are in the cost-reduction space. So, the good thing is that they tend to be a 3-7 year deal. These are long-tenure deals. It means we have an ability to get a sticky revenue, and we have an opportunity to plan better.
At the start of engagement, we are able to plan the way we structure our teams, manage costs etc., in a much bland manner. Whereas if they are discretionary projects, it’s real-time and you tend to hire in real time for specific skill sets that are in short supply. So, it's a different model of execution that we have for them and that's actually good from a long-term perspective.
These are multi-year deals and in a space clients are cautious in terms of spend. We are also looking at what new tooling is available out there, especially AI. So we have all of these bits like our AI-led intelligent operations and deals clients are really resonating with…But if I had to reflect, in my own career in this industry, the decision-making cycles are just back to pre-pandemic levels. In pre-pandemic times, we weren't used to these decision cycles. It's just that post pandemic, these cycles accelerated.
How is the deal win pipeline looking like in Q3 and Q4? It has been flattish at $1.3-1.4 billion in the past two quarters. Is that the range the company is looking for? Or now that the merger is complete, can we expect more changes to happen?
When we announced the merger from a revenue-synergy perspective, we said that there will be three areas of opportunity: one will be that the ticket size for deals will increase, and we will be invited to bid for large deals; number two was that we will be able to cross-sell and upsell to clients based on what we brought to the table. The third thing was that we will be able to essentially leverage our global capabilities much more effectively in all markets. So, if you see the impact, we will record large deal pipelines, and we continue to announce a significant number of deals.
Thus, hypothesis one is bearing out very well. In cross-sell and upsell also, we have the ‘Focus 100’ programme, for the focus on the top 100 accounts. This programme is actually delivering some good results. You just saw Europe growing 10.2 percent YoY this quarter.
We will continue to announce the order intake that we have and it is up 22 percent YoY. The current orders give you an indication as to the order intake versus our overall revenue growth. These deal wins will start to kick in during H2. We've got a good pipeline of deals for closure in Q3 and Q4 as well. So there is significant activity here. So, we think, as the market starts to turn, which we probably think will be by the middle of the next calendar year, we will be at a very good place where it's actually coming to FY25.
How are discussions on revenue growth expectations going on internally? After Q4, your CEO was hopeful of a double-digit growth. What’s the update now? How is FY25 looking?
Back then, the expectations we had budgeted for the deals were actually up. There was a Gartner estimate that client budgets were up around 5-5.5 percent. What the clients did not anticipate was all of the macroeconomic issues and especially inflation and interest rate hikes that happened both in the US and Europe, and that spooked clients.
Therefore, the recovery that we were expecting from October 2023 onwards, is going to be in the second half of the next year in June 2024. Right now, clients look to see how they can drive more efficiency…and that's the business area that we are currently in. About 75 percent of the large deals that we're currently pursuing are in that space. And we're focused on gaining market share through those large outsourcing deals.
LTIMindtree stuck to its 17-18 percent exit margin guidance for FY24, despite a drop this quarter. What’s giving you confidence?
After the merger, we actually put in place a robust set of margin improvement programmes within the organisation. The primary driver for margin improvement has been utilisation, which is now at 87 percent. That's something we'll continue to maintain. We will also be able to leverage our larger scale for better pyramid correction in terms of the projects that we signed and the teams we have. We've also been quite judicious in terms of how we manage our spends…All of these give us the confidence that we have a clear plan in terms of how we can reach that 17-18 percent guidance from a margin perspective.
LTIMindtree has, in a way, reversed the trend this quarter. You added nearly 800 people in Q2 and 1,400 freshers. What is driving this? Is there a fresher hiring target in place for FY24?
Our employee addition essentially reflects the confidence that we had in the guidance we provided: that our H2 will be stronger than an H1. We need to staff these engagements that we have, and will continue with fresher hiring. The thing is we are obviously calibrating hiring to demand.
As attrition slows down, we're also seeing that the supply-side challenges that were there in the previous quarter have started to ease. So we are able to hire good talent in time. This is the model that will continue. So, as I said, it is just reflective of our confidence in our demand and in expectancy in H2.
Also read: TCS, Infosys, Wipro, HCLTech employee count drops by 21,000 in second quarter
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