Larsen & Toubro Infotech has been a consistent performer over the past two years. Its stock price skyrocketed to Rs 6,600 on January 20 from Rs 1,400 in the beginning of April 2020.
In the quarter ended December, the company posted its highest sequential revenue growth since listing in 2016 on the back of strong demand as enterprises moved to digital. Revenue of $553 million in the quarter climbed 8.7 percent sequentially.
What is driving growth for L&T Infotech and will this momentum be sustained? CEO & MD, Sanjay Jalona answers these questions and more in an interview.
Edited excerpts:
This has been the best quarter for L&T Infotech since listing. What were the key things that worked for you this year?
This is our best ever sequential growth and we still have one quarter to go for the year. But I am comfortable enough to say this will probably be the best ever growth as a listed company that we have seen since 2016, when we listed.
We always have licence passthrough revenue that comes in Q3 and Q4 and 2 percent of the growth can be attributed to that. But barring that, I think we have seen good year-on-year numbers. All client buckets have grown about 25 percent. We added one more client in the $50 million client bucket. This year, if we look at a year-to-date basis, we have opened the highest number of logos (client additions) since our listing.
When Covid happened, there were comments that only big companies will survive and small companies will perish because they don’t have the muscle, incumbency and structure. Opening the largest number of accounts in these times, including Fortune 500 accounts, is testimony that client spending patterns and selection of partners have changed.
In the past, what used to be sourcing for scale is not what is happening and (deals) are coming in chunky bits. This is where I think we are able to make our difference. These logos we added – some will become larger, mid-sized accounts and growth accounts. It is a cycle and what we are opening today will feed 18 months or 36 months on and become very critical accounts for us.
We call out three reasons (for growth) – great restructuring, where everyone has to figure out a way to do things in the new normal; great resignation, where our clients are also facing double-digit attrition – this is why you see every IT company offshore proportion increasing – and the third thing is new areas have opened like ESG (environmental, social and governance) or cybersecurity. In the past 18-24 months, we have built up a $30-35 million portfolio on that, which was not mainstream business for the tech industry in the past.
One area that analysts say is still soft is cloud infrastructure. Can you comment on that?
This is only the (cloud) infrastructure part. Cloud engineering and others are not included in this. But cloud, overall, is growing at a much faster pace than even the company. But the infrastructure is obviously shrinking with everything moving to the cloud. So infrastructure, IMS (infrastructure management services) and CIS (cloud infrastructure services) as it was called in the old days, we have not been able to classify this. We are going to change the classification of this in Q1 (FY23).
Do you see this high level of growth sustaining for a longer period?
Growth and demand are two different things, right? Obviously, two quarters of 8 percent sequential growth is a lot and we grew because we laid some foundation six months ago. But where we sit today, demand is very high. The world has been in a complex space. Even 12 months ago, cars were not being made because semiconductors were not available and there were a whole lot of supply-chain challenges out there.
Inflation is at record high in the US at 7 percent. It will take four quarters for it to taper down. But despite all this, for multiple quarters now, we have not seen a let down on the conversations and the demand that we see in the market. Because customers have to deal with the way you and I are operating today, insurance companies’ claims have to be done differently. People are still very conservative and in Europe, you have to be able to operate in a hybrid model. And technology is the only thing that can work, so the demand is very high and the growth will continue.
Your attrition was 22.5 percent in the quarter, compared with 12.4 percent in Q3 of FY21 and 19.6 percent in Q2 of FY22. How will you address this?
If you look at the quarterly annualised basis, attrition has come down marginally. But I still don’t believe Q3 is any indication of it coming down. But the peak in attrition came down for two reasons. Any time the world sees one negative impact, like Omicron, people typically will clamp down, find secure havens in existing companies, and not be adventurous to go out. It is logical and psychological. You have a job, and the company takes good care of you. But I’m not saying this is a trend and that it will continue to come down.
What do we need to do? We do a number of things. First thing which we differentiate ourselves is we want to be a growth company. Everyone wants to be participating in a growth company because you get opportunities ahead of time compared to a company which is not.
Second thing, we know supply-chain constraints will be there. So how do you get ahead of the game and hire people and train people? So if you look at Q2, we hired 1,000 people in what we call an HTD – hire, train, deploy – model. You don’t have perfect full stack developers available. So find people who have 25 percent expertise on this and train them for three-four months. That’s why you see our utilisation was brought down, from 81 percent to 80.3 percent.
But what do you do when you don’t have people? I don’t think it (demand for talent) is going to go down in the market for the next three to five years. Startups are hiring and all companies are growing on steroids. You need to create an alternative talent. It takes time for industry, education institutes to create talent. Till then, you have to be aggressive and get ahead of the problem and create new talent.
Are you seeing a bigger number of smaller deals than mega deals? Because this also ties in with what ISG said recently that companies are increasingly breaking down deals because they want speed in execution.
Large deals used to break the growth pattern and go higher in the past. But what are large deals? These are maintenance deals, where you are either taking infrastructure support, app support and large deployments. When you think logically, companies have to change their fundamental way of operating because customers are changing their buying behaviour. I think there is so much demand from companies to help change that way of doing business. So running the business to cut down the cost has taken a backseat. Large deal likelihood is less since you are going to discover what needs to change together with the customer. Also, large deals can only happen when you have a very fixed scope. That is typically a support kind of an engagement. So that's why you are seeing the importance of large deals coming down.
Q3 is seasonally a weak quarter, with people taking time off. This strong growth you are seeing – what is the driving factor?
Nothing much has changed. The number of holidays has not changed and people have taken a lot of holidays. But the furloughs that used to be given by companies to cut down the cost has not happened because there’s so much to do. That is exactly what is happening. There is so much to do that people are on a treadmill to just keep doing all these changes for digital transformation for us. If you look at our Q3 for the last three years, we’ve always grown. We have closed deals at the right time. So nothing has changed, demand is too high.
Can you share your hiring targets for the fourth quarter and FY23?
We revised our fresher hiring to 5,500 for FY22. We started the year with a target of 3,500 but we hired 2,000 more freshers. If you had asked me last year if we would grow like this, I don't think anybody had an idea. Next year numbers are not closed yet because we are in the budgeting process ourselves and we will give the number of freshers that we will hire in the April time frame.
In December 2020, you announced two business units, cloud and data products. Can you share their progress and would you declare the revenue for these two business units at any time?
So for cloud, we will change the definition. But just think about how I do it. Because the cloud is all pervasive. Cloud also is in a large portion of enterprise solutions now. We have to take a call as a company – how do we actually show what revenue goes where? Cloud enterprise solutions define how much the services company understands the core business of our customers because you are changing their business processes or helping them do things differently. So that is why it gets difficult.
I think we said cloud will be a $1 billion dollar business and I think we are ahead of the plan, to be very honest. But I don't know how to show it to you. I can only show the cloud infrastructure and cloud engineering portion. And that's what we will start to do from Q1 FY23.
In terms of data products, we are a services company. Through the investments that we had done and two acquisitions that we did, we suddenly found ourselves with cool pieces of products. But we are in the core business of data to decisions. These products are growing very well and we get them externally evaluated. We have enough examples of Fortune 100 and Fortune 500 companies choosing our products. But the core thing is it reflects in data analytics growth, which is growing at 40 percent year-on- year. That is where it gets captured. But I don't think we will be calling out data products separately, unless we get investments externally, for which I have no plans.
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