Bulk of integration to be completed within this fiscal year, that’s a tall order: LTIMindtree CEO 

LTIMindtree CEO Debashis Chatterjee

Posting its first earnings as a joint entity, LTIMindtree unveiled an interesting set of numbers for quarter ended December 31, 2022.

Although net profit declined by 15.8 percent Quarter-on-Quarter (QoQ) and 4.7 percent Year-on-Year on the back of integration costs, touching Rs. 1,000 crore, the company, formed through the merger of Larsen & Toubro Infratech and Mindtree, crossed $1 billion in revenue.

Revenue was $1.04 billion, or Rs. 8,620 crore.

The IT services company’s Earnings Before Interest and Tax margin, or operating margin, took a hit, dropping by about 360 basis points (bps) in Q3, coming in at 13.9 percent, down from 17.5 percent in Q2. One basis point is one-hundredth of a percentage point.

Deal win TCV (Total Contract Value) stood at $1.25 billion.

In an interview with Moneycontrol, the company’s Chief Executive Officer and Managing Director Debashis Chatterjee discussed LTIMindtree’s merger, deal pipeline, client spending trends, operating margin targets and much more.

Edited excerpts: 

At the time the companies were merged, you said that you hope to complete the integration by the end of FY23. Does the timeline still hold? 

We are very confident that the bulk of the integration activities will all be done within this fiscal. That's a very, very important thing, and that's a very tall order. I think I'm very proud of the team for the way they have rallied around and done the integration work.

You count Microsoft as a key client and the company recently laid off 10,000 employees. CEO Satya Nadella has said that he wants to align cost structure with revenue. What is the knock-on impact of that? Is that likely to impact growth in the hi-tech vertical? 

We used to talk about a top client in the erstwhile scenario because there was a significant amount of revenue concentration, but in the new scheme of things, we are going to track the top five accounts. If I just look at the top five accounts, it's around 25 percent of the company's overall revenue, the top 10 accounts are around 35 percent. The top five accounts have grown 17.5 percent Year-on-Year. Coming to specifically one of the clients within the top five, there are a lot of news articles, but as far as we are concerned, we have not seen any significant impact with respect to that account.

But again, going forward, I would like to focus on our top five accounts because that's the right percentage we should focus on in terms of tracking the growth.

LTIMindtree has been big on sectors like BFSI (banking, financial services and insurance) and hi-tech, both of which have been impacted from an industry perspective as well as in terms of client spending and macroeconomic challenges. What is your outlook and how are you reading into the client spending and demand to expect in these sectors in Q4 and 2023? 

BFSI itself has a $1 billion run rate as of last quarter, which is a significant milestone. But BFSI in the combined entity grew around 22 percent year-on-year. We still have a very robust pipeline in this particular vertical, we are very bullish about BFSI.

One thing which I want to call out is that some of the conversations that we used to have in this vertical, which was more of discretionary spending, that has now changed to cost takeout deals. That also helps us in creating more annuity deals, but this cost takeout is purely with a view to fund the in-flight transformation that we are already going through with some of the clients. Overall, in the BFSI scenario, we are extremely confident that that growth will continue as we go along.

As far as hi-tech is concerned, there was a bit of decline in this current quarter, because of the furloughs. Within hi-tech as well, there are certain situations where clients have delayed their decision-making and have not started the programs the way they expected to start. The good news is that there is no cancellation per se. So yes, there is a a one-off situation where things have slowed down, most of the furloughs will come back in the next quarter in terms of revenue. Overall, again, we are not concerned about hi-tech, and we are confident that some of the opportunities we are chasing will materialise as we go along. And again, the same story-- there are conversations around efficiency also in that space.

There is a trend of cost takeout deals, vendor consolidation deals in the upcoming quarters as compared to the larger transformation deals that we were seeing earlier. Do you expect the deal sizes to slightly go down in the upcoming quarters and also 2023? Will that eventually have an impact on the overall margins? 

I’ll first respond to the impact on margin. It is based on how you run the business — in terms of how many deals you do and how you structure those deals. Definitely, there is an opportunity of getting into deals which are larger in size, because they will be more cost takeout. These typically tend to be 5-6 year deals, and we'll have more TCV with those deals.

Of course, there's an efficiency play. You have to design and structure the deal in such a way that it's a win-win for both LTIMindtree as well as the client.

If there are vendor consolidation opportunities, given the strength of these two organisations’ capabilities which have come together, we are actually very well poised in terms of any sort of vendor consolidation opportunities that we get into.

Are there other areas where you're resilient? Could you name some of the segments? 

If you look at travel, insurance, healthcare, life sciences, these are all quite resilient. The only area where I can call out is hi-tech which has taken a little bit of beating, but we are very hopeful that it will bounce back. And retail CPG (Consumer Packaged Goods) has been a little soft because of inflation, etc. That is something which we are watching very carefully.

One of the things you mentioned at the time of that integration was being able to sit at the table for larger deals. How is that coming along? Overall, in the demand environment, are large deals slowing down?

Many of these opportunities when you talk about large deals are opportunities that you have to proactively create. I think we are in a position to create some of those opportunities for ourselves. The deal pipeline is fairly strong, we are very confident about the pipeline we have, but the pipeline has more cost takeout and efficiency deals compared to the transformation deals. That's all I can say at this point in time. But overall, we are well-geared to convert some of these large deals into revenues as we go along.

There has been a decline in headcount sequentially. What’s the reason behind that? 

We really started working as one company on November 14 last year -- in the middle of Q3 -- so we just had a few days as one organisation. There will be a lot of work that we need to do during the integration. One of the big things that we need to do during the integration is to create synergies across talent, to understand how to best leverage your talent within the integrated entity. Consequently, we were a little cautious in terms of the gross intake, etc. That's why you see a slight decline, but that is in no way a reflection of the growth plans that we have.

What are the plans like going in the next few quarters in terms of backfilling attrition and hiring freshers? 

I don't want to celebrate it as a victory yet, but the attrition has come down by around 170 basis points from the previous quarter on a last twelve-month (LTM) basis. Though we don't call out attrition on a quarterly annualized trend basis, even the quarterly annualized was very encouraging, at 18.1 percent. We still have room, and if the attrition comes down, that will also alter our overall intake plans to some extent. Overall, our intake will have a good mix of laterals as well as freshers and it is going to be purely based on the needs of the business.

Are you seeing any redundancies or overlaps in terms of employees and their skill sets? 

Not at all. In fact, we have been very clear in our mind that as the two organisations come together, we want to ensure that we have room for everybody. We have looked at organisation design and structure keeping that in mind, and also keeping in mind our clients. Clients and our employees have been the two most important aspects as we went through this whole integration exercise. I don't think there is anything about redundancy that we need to worry about.

You had two markets presidents, and Venu Lambu then exited the company. What was the thinking behind having two people for that role? Is it likely to be filled or will Sudhir Chaturvedi continue? 

If you look at the rationale of this merger, we are very concerned and careful that our clients don't get impacted. We have client connections very well established already across the two organisations that we wanted to continue with there. We evaluated and felt it is most optimal in the current scenario to have a two-president model because significant verticals are also aligned to them. That's the optimal model as we speak. if there is any change in thinking as we go along, once everything stabilises —  the clients and the employees — that you will definitely get to know.

Margin declined by 360 bps, you had mentioned about 100 bps was due to the integration itself. Are we likely to see any more impact in Q4? Margins were also impacted by employee costs. What is the cycle of hikes like and are off-cycle hikes also being given to retain talent? 

Let me answer the second question first. I think we will follow the normal increment cycles as we go along, which typically tends to be around the middle of the calendar year. There was certain ESOPs (Employee Stock Option Plans) rolled out to the most valued employees, and that is where you do see a little dip in terms of the margin.

We are very confident that as we get into Q4, we will have at least 200 to 250 basis points of margin which will be clawed back in Q4. As we get into FY 24, we should be back to the margins we were as a combined entity, which was always our mantra in terms of profitable growth. So net-net Q4 we will definitely claw back 200 to 250 basis points and as we get to FY24, we should be back to our normal way of working.

Is there a range or guidance that you can give in terms of a comfortable range of operating margins LTIMindtree would like to achieve going forward? 

We don't give any guidance, but if you do the math and if you look at where we were in Q2 as a combined entity, that will give you a perspective.

We also feel that over the next four to five years, given the scale given and the efficiency we can generate from an operational standpoint, we should be able to take our margins up a further 200 basis points of Q2 margin numbers over the next four to five years in terms of synergy.