September quarter was big and the next will be even bigger, says Larsen & Toubro Infotech management

LTI's Nachiket Deshpande, Chief Operating Officer and Executive Board Member (left) and Sudhir Chaturvedi, President Sales and Executive Board Member

Larsen & Toubro Infotech (LTI) reported a strong second quarter ended September 30, most likely the company’s last quarter before it starts announcing combined numbers with Mindtree once the merger is complete.

The company’s revenue grew 28.4 percent year-on-year (y-o-y) and 6.9 percent sequentially in Q2FY23 to Rs 4,836 crore. Net profit after tax (PAT) came in at Rs 679.8 crore, up 23.2 percent y-o-y and 7.17 percent quarter-on-quarter (q-o-q).

Deal wins total contract value (TCV) came in at slightly over $80 million. The company expects the pipeline to grow stronger in Q3 with its combined might with Mindtree.

After seeing a drop of 20 basis points (bps) sequentially in attrition rate in the previous quarter at 23.8 percent, it rose to 24.3 percent in Q2.

In an interview with Moneycontrol, Sudhir Chaturvedi, president, sales, and executive board member, and Nachiket Deshpande, chief operating officer and executive board member, LTI, discussed the company’s demand outlook for upcoming quarters as the merger with Mindtree nears, sectoral performances, opportunities in the slowing market and thoughts on hiring and the moonlighting crisis.

Given the kind of macro uncertainties we are seeing in some key markets like the UK, Europe and the US, how are the conversations shaping up with clients in terms of deal proposals, budgeting etc?

Chaturvedi: We’ve announced 13 large deals in the last three quarters. And in this quarter also we announced four large deals. Total TCV (total contract value) was just over $80 million. When we look at our growth in the US and Europe, the US grew 21 percent for us in constant currency (CC) terms y-o-y and Europe grew 29 percent for us y-o-y in CC terms. So we are seeing broad-based growth momentum across deals and across regions and, in fact, across verticals as well. So overall, if I look at the trajectory that we are on, we are foreseeing a stronger Q3 than even our Q2. We have good momentum with us today.

The last time you had sort of given a guidance that CY22 looks pretty good, but were going to remain cautious for the next year, probably FY24. What’s the outlook for that now?

Chaturvedi: What we are seeing in the market, the macro concerns are sort of feeding themselves down. We’re not seeing any cancellations or deferments. What we are seeing is people potentially just moving things across a slightly longer period of time. But the fact is clients actually have a book of business today. There is work to be done from an IT perspective.

So what we are foreseeing ahead, based on our conversations with clients, is that they will look at two types of spend—one will be on the efficiency side, where they will look to get more efficient than what they’re currently spending on, especially in IT terms. But on the business front, the digital dollar or the business revenue dollar—those funds are secured. Clients will continue to invest in them. So it’s really about chasing the right dollars. In the past, we did that, in the first year of the pandemic, you will recall we grew 9.5 percent even that year. We have the ability to actually make sure that we chase the right dollars, both from our business revenue dollar perspective as well as efficiency dollar perspective.

Which are the sectors you think are well positioned for you? And also, how are you assessing the BFSI sector right now given it’s the largest for LTI?

Chaturvedi:  BFSI for us, even this quarter, grew over 20 percent q-o-q. In fact, BFS on its own grew 29 percent q-o-q. Last year, business grew at 33 percent y-o-y. We are actually not seeing any weakness in our BFSI sector spend. And I think it’s because we take a different outlook to the market, across verticals. I think what clients are looking to do is to actually optimise their spend in certain areas and that’s vertical-agnostic.

Deshpande: Opportunity across sectors is in the cloud data and digital space where customers are all evaluating whether their business cases have been met. In many cases they’ve not. So the macroeconomic factors are essentially forcing them to go back and look at how they would be able to meet their business cases of cloud data and digital. And that play is basically giving us the opportunities to capitalise on those, to apply the efficiency levers on to that new digital stack.

See, many of these transformation projects are multi-year deals, and there is no way they can stop those in between, right. So the idea is in a challenging macro environment, how do we help our clients find those right dollars and continue to invest in the areas they want to invest in, which is where we believe we have the right mix of the offerings. We’re able to capture that momentum, which is really where the confidence comes from.

I think this is going to be the last quarter where LTI and Mindtree are separately announcing their results. This is indeed a major merger that’s in the works, how are things shaping up?

Deshpande: We are in the final stages of approval. Most likely, we are expecting that somewhere during Q3, between November and December, we will start operating as one company and hence Q3 will become our first combined quarter. As we said, the one good part about this merger is we are very complementary to each other. We are complementary to each other on sectors, on geographies and on service lines. So that actually makes the combined portfolio far more resilient than it will on its own.

If there are any sectorial headwinds, we are able to compensate for that in the other sectors. If the service line mix is seeing different traction in the market, we are able to capitalise on it. So the points that I and Sudhir made about opportunity, actually, our position just strengthens as a combined entity to capture that, given the complementary capability and complementary industry segments that we will bring together.

And from an integration standpoint, our approach is that we will hit the ground running. We’re not expecting any merger-related disruptions or distractions. We expect most of our integration activities to be done by the end of this financial year. So that’s really what our plans are. And we are executing towards those.

LTI has been growing quite fast as a company. And it has been really aggressive in terms of growth over the past few years. How are you approaching the whole cultural mix between Mindtree and LTI?

Chaturvedi: Mindtree also over the last three years have shown that they are also a high-growth organisation. So in fact, both companies, you know, growth is in their DNA. And that is what we really want to play it on, specially to employees. We are going to now be able to offer a platform in the industry of two of the highest growth companies getting together to grow even faster than they were growing on their own. And that’s the whole plan that we have. So we will build on that growth platform that we are creating in the industry, that’s what the culture is going to be about, supernormal growth.

5G finally launched earlier this month. How does LTI plan to capitalise on that?

Chaturvedi: We’re not present in the telecom sector. So for us the 5G-related opportunity largely lies in the industry use cases that will exploit the platform created by 5G. We are already working with a number of our customers on whether it is around the IoT-related opportunities given by 5G or metaverse type of opportunities accelerated by 5G. Our focus will continue to be on those industry use cases. As a combined entity, there will be a bigger play. The Mindtree Next portfolio has a certain set of capabilities that focuses on Industry 4.0 in a closed-loop 5G kind of setup. So there are some use cases being built on that. So I think for us, largely, our focus will be on business use cases that are exploiting 5G. And we’ll continue to focus on that, but it’s still I would say a longer-term commercial opportunity for us.

Can you shed some light on the net hiring numbers for Q2? What’s the fresher hiring plans for the upcoming quarters?

Deshpande: The net headcount addition for this quarter was 2,200, which is sort of aligned with what it was in the previous quarter as well. And we will continue on the same momentum as we get into Q3, we are not looking to temper our hiring plans at all, neither laterals nor freshers. Our fresher hiring plans that we had set out, that also remains unchanged for the year at this point in time because we continue to see the same growth momentum in our business that we had anticipated. So we’re not changing any of those plans at this point.

We have added 1,600 freshers in Q2 as against 1,000 in the previous quarter. Our net fresher addition target for FY23 remains at 5,500.

Variable pay delays or deferments was an issue we were seeing with the top two-three IT companies in the past quarter. How is it going for LTI?

Chaturvedi: We’ve never made any change to our variable pay policy. It is as it was before. It’s the reflection of performance, it has three factors to it. It has the company performance, it has a unit performance and the individual performance. And in our case, you know, the company performance has been good. So it’s really a question of individual performance and unit performance. That’s how we look at it. We are not making changes to our policy.

Moonlighting has been a challenge for the IT sector lately. What is LTI’s stance on this?

Deshpande: For us, it’s not a thing that has been a big problem or a big focus area for us. We have had some cases that we identified a couple of quarters ago and we’ve, you know, let those individuals go. But it’s not been a big problem for us.

Chaturvedi: It’s a miniscule number, frankly. It’s not worth talking about. I think our job is to make sure we provide very exciting work and growth opportunities to employees and we’ll continue to do so.