Predicting FY25 will be crystal ball gazing with macro uncertainties still around, says LTIMindtree COO

Nachiket Deshpande, COO, LTIMindtree

In its first quarter after completing a year of merger, LTIMindtree’s earnings for the third quarter ending December 31 was a mixed bag. While net profit and revenue growth marginally missed Moneycontrol’s estimations, operating margins declined to 15.4 percent from 16 percent last quarter.

Net profit was up 16.8 percent YoY at Rs 1,169 crore as compared to Moneycontrol's estimate of Rs 1,181 crore. Consolidated revenue came in at Rs 9,016 crores, growing 4.6 percent YoY, against estimated Rs 9,050 crore.

The company reported its highest ever quarterly deal pipeline of $1.5 billion. LTIMindtree is also going big on generative AI, with 140 customers discussing opportunities and 30 customers already in partnership to deploy the technology.

In an interview with Moneycontrol, the company’s Chief Operating Officer (COO), Nachiket Deshpande, discusses the company’s outlook on demand and discretionary spending recovery, operating margin targets, expectations from FY25 and more.

Edited excerpts:

Last quarter, despite a sequential drop in margins, LTIMindtree retained their exit margin guidance of 17-18 percent for FY24. Do you still stick by that? What’s the update?

We are postponing the aspirational 17-18 percent exit by a few quarters. And the main reason for that is in Q4, we would like to invest back into the business. While our margin optimisation programme continues as planned, we want to invest back into the business and largely in the area of building some bench as well as some other investments.

You can see our utilisation is at an all-time high. At this utilisation, we feel that it puts a risk in our ability to capture growth as some of these deals close and we need to run the course on time…We need to be prepared for that so we are relaxing utilisation in Q4.

Do you expect it to further decline in Q4, or will it improve?

We don't expect margins to go down in Q4. It will definitely improve. It's just that we are not committing for it to improve to the level where we could have a 17 percent exit margin but definitely there will be improvement.

You managed to get your largest quarterly order book in Q3 at $1.5 billion, which is contrary to all your other four peers who reported a sequential decline. What’s driving this? Do you expect the quarterly order book to expand further? Any guidance on that?

We've seen a steady increase in order inflow, quarter on quarter for the last two or three quarters, and we continue to feel that it will be the same. As we go further, we'll continue to see a bit of improvement. And the reason we see that is, even this quarter we have a number of deals that we are in the final stages of closing. So as we close them, we see that the same momentum continues, some ups and downs will happen within quarters based on renewal quarters in certain customers. So you might see some fluctuations there. But overall, we feel confident that we can sustain that level of order pipeline.

You just completed one year of merger in November. How have client conversations shaped up around that in the past year? Will this mean the company is seeing more large deals and even trying for mega deals of $400 million plus?

As far as the merger anniversary is concerned, I think customer conversations have been fairly positive, if anything, in the one year we've completed the integration. For our customers there is no longer LTI and Mindtree, it’s always LTIMindtree they have been dealing with. They've already experienced the new structure.

Internally, we've stopped talking about the merger for all practical purposes.

In terms of large deals, we have the highest number of advise deals and a good percentage of our pipeline is made of advisory-led deals. That essentially also tells you that the hypothesis that we had was that as a larger entity, we would get invited to more such deals.

We've also seen the cross sell-upsell hypothesis play out, because you'll see our ERP service line, which was supposed to be the biggest cross sell opportunity for the erstwhile Mindtree portfolio, has also had a very robust growth this year.

Regarding mega deals, we do have aspirations to participate but at this point in time, we're not seeing anything that we are part of today and could talk about.

CEO Debashis Chatterjee mentioned that a lot of deals coming are on the vendor consolidation side. Will these deals mean the margins are going to be low and since these are multi-year, revenue will take some time to kick in?

These are definitely multi-year deals and a majority of these deals do have some transition time baked into those, and hence it takes time for them to show up in the revenue. This has played out in these two quarters as well. Multi-year deals definitely are more competitive, many of these are second or third generation outsourcing deals. So simple arbitrage opportunities are not there anymore. But there is a lot of productivity with Generative AI and other technology interventions already baked into it.

So it does come with an aggressive productivity expectation, but it also provides us better levers to manage our margins. We have better control of the pyramid, we have the ability to plan our headcount better. It provides us with levers to manage our cost structure better. We do believe that while yes, these do come at a very competitive pricing, it also provides us levers to manage that with our budget.

Will this mean that we can expect a better FY25 as compared to FY24?

Difficult to say, with the macro uncertainty still hanging around. It will be crystal ball gazing, which is why it's very difficult to call out as to what kind of discretionary spend would return or what kind of deal activity will return. But we do continue to see the deal pipeline being healthy.

BFSI declined both YoY and QoQ which accounts for 35-40 percent of your revenue. You had said that furloughs are a big reason, can you give us a breakdown of how it’s played out? Within BFSI, which areas are going to drive recovery and by when?

I think the wider and deeper furloughs were largely in the BFS space; insurance has been resilient. We saw that across the board. It wasn't limited to certain clients or geographies.

While the earnings of many banks have been very strong in the US as well, they still continued to be very cautious on their outlook. And of course, our large customer is also on a significant cost-based structuring initiative as well. So with all of that going on, I don't think we are seeing any material change in the outlook for our BFS customer. That’s why we said it will continue at least till next quarter.

We see them continue to be cautious. On the other hand, it's getting balanced with deal wins and the pipeline that we have in the BFSI space across the globe as well.

Your attrition is down to 14.2 percent? Are you comfortable in this range or do you expect further decline?

We said that, 14–15 percent is a comfortable range for us based on our business levels. Of course, macro environments will influence it and some quarters will be different. But I think we believe this range is what we are comfortable with from our operations risk perspective.