Ladies and gentlemen, good day, and welcome to LTIMindtree Limited Q3 FY 2024 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Vinay Kalingara, Head, Investor Relations, LTIMindtree. Thank you, and over to you, sir.
Thank you, Niraj. Good day, everyone, and welcome to the LTIMindtree Quarter Three FY 2024 earnings conference call. Today on the call, we have with us Mr. Debashis Chatterjee, Chief Executive Officer and Managing Director; Mr. Sudhir Chaturvedi, President Markets; Mr. Nachiket Deshpande, Chief Operating Officer; and Mr. Vinit Teredesai, Chief Financial Officer. We will begin with a brief overview of the company's quarter three performance, after which we will open the floor for Q&A. During the call, we could make forward-looking statements. These statements consider the environment we see as of today and carry risks and uncertainties that could cause our actual results to differ materially from those expressed in today's call. We do not undertake to update any forward-looking statements made on this call. I now turn the call over to DC for his opening remarks.
Thank you, Vinay. Good evening, and good morning to everyone on the call. Thank you for joining us today. I wish you all a very happy new year. As we mark the one-year anniversary of LTIMindtree, I'm proud to share that LTIMindtree has been named a Global Future Fifty company by Fortune Magazine in its latest edition. What makes this achievement even more special is that LTIMindtree is the only IT services company to feature in the Future Fifty list of global companies. I would like to acknowledge the dedication and hard work of all our associates that led to this recognition. In terms of our performance, we observed a higher level of seasonality during the quarter, along with an unchanged macro and demand environment.
While we had expected the furloughs to be above average, they ended up being higher, both in terms of their degree and extent of impact. Despite these challenges, we delivered a resilient performance this quarter and achieved our highest-ever order bookings. Our revenues came in at $1.08 billion, which marks a year-over-year growth of 3.5% in U.S. dollar terms and 3.1% in constant currency. Our sequential revenue growth in U.S. dollar terms was 0.8% and in constant currency was 0.7%. The sequential trajectory reflected the broad-based impact of furloughs across all verticals. Our manufacturing vertical saw a strong 20.1% year-over-year growth. Our EBIT margin for the quarter came in at 15.4%, while the net profit margin was 13%.
We recorded a strong order inflow of $1.5 billion, registering a growth of 21% year-on-year, despite the unchanged cautionary environment. With this, our nine-month FY 2024 order inflow stands at $4.2 billion, a 19% growth year-over-year. Our strong order inflow reflects the increasing relevance and strength of our H2 experience capabilities across all markets. During the quarter, we added 23 new clients and increased our count of $10+ million clients by 8 year-over-year. Our $20+ million clients have increased by 3, and our $50+ million clients have increased by 1. Furthermore, our $1+ million client band has now got 388 clients, an increase of 14 clients on a year-over-year basis. Let me now turn to our industry verticals.
Our banking, financial services, and insurance vertical declined 1.4% year-over-year due to higher furloughs. This vertical continues to show a cautionary approach towards new spend. Our high tech, media, and entertainment business grew 0.3% year-over-year, despite the impact of greater than anticipated furloughs. This vertical remains resilient for us. The manufacturing and resources business showed a strong growth of 20.1% year-over-year due to the seasonal higher pass-through. In the energy and utilities vertical, we have capitalized on opportunities arising from consolidation and secured a significant deal for transformation and supplier consolidation during this quarter. Our retail CPG and travel, transportation, and hospitality business grew 0.6% year-over-year. In the retail and CPG vertical, businesses are focused on optimizing their costs by consolidating suppliers and leveraging automation technologies.
Within the travel, transport, and hospitality vertical, we are seeing demand for our services related to data. Our health, life sciences, and public services business grew by 6% year-over-year. LTIMindtree was recognized as a major contender in Everest Group's Healthcare Digital Payer Services PEAK Assessment 2023. In terms of geographies, North America contributed 72.7%, Europe contributed 14.5%, and rest of the world contributed 12.8% of our revenue during the quarter.... Our North America market saw year-over-year growth of 4.1%. The demand environment remains cautionary. What remains unchanged is the prioritization of spend, focused on cost efficiency and transformation projects with a clear return on investment.
We have observed clients using supplier consolidation as a lever to achieve their objectives, and are reaping the benefits of this approach, as some of this consolidation is being directed towards our company. I would like to call out a few important deals that we signed this quarter. A U.S.-based premier oil and gas producer selected LTIMindtree as their strategic partner for end-to-end technology services. As part of the partnership, LTIMindtree will provide services across several value-based portfolios, covering digital solutions, platforms, and operations. A global leader in the design, engineering, and delivery of customized facilities for high-tech industries has selected LTIMindtree as their preferred strategic partner for their digital transformation journey over the next five years. LTIMindtree will drive transformation across the technology landscape through multiple services, including cloud migration, end-user services, security, and application development and support.
A diversified multinational mass media corporation has chosen LTIMindtree as their preferred ServiceNow transformation partner. This engagement will help unlock the value of their ServiceNow investments, improve ROI, and drive cost efficiency. A leading U.S.-based energy producer has expanded its infrastructure managed services scope with LTIMindtree. A global financial services technology company has chosen LTIMindtree for its product development initiatives. A utilities company in the Middle East continues to strengthen its relationship with LTIMindtree by signing another three-year agreement with LTIMindtree, where LTIMindtree will support its transformation journey by identifying areas of expansion and optimizing the technology landscape. We are now participating across broader areas of customer spend. For example, we are working with McAfee, a worldwide leader in online protection, as a preferred and strategic partner for their transformation initiatives across products, IT, and commerce divisions.
As part of this partnership, LTIMindtree will be providing engineering services and operation support at a global scale, helping McAfee drive cost efficiencies, agility in innovation, and product delivery. We recently announced the amalgamation of LTIMindtree subsidiaries, Syncordis and N+P, to form a specialized banking transformation practice. This practice will focus on delivering end-to-end consulting, digital, and IT services to banks and capital market firms. With digital transformation emerging as the cornerstone of competitive advantage and sustainable growth in today's business landscape, our partners and customers continue to actively explore and invest in AI-led opportunities. To fully capitalize on this opportunity, we have set up a new service line called Enterprise AI. This service line will enable us to create cohesive and comprehensive AI-first strategies by bringing generative AI interventions into all our service lines, and across four customer priority areas: foundation, core, innovation, and experience.
We have also trained over 10,000 employees on GenAI to stay ahead in this, in this ever-evolving AI landscape. I will now turn the call over to Vinit for Q3 financial highlights. Vinit?
Thank you, DC. Hello, everyone, and I wish you all a Happy New Year. I will now take you through the financial highlights for Q3 FY 2024, starting with the headline numbers. Our revenue stood at $1.08 billion, up 0.8% sequentially and up 3.5% on a year-over-year basis. The corresponding constant currency growth was 0.7% quarter-on-quarter and 3.1% year-over-year. Our EBIT margin came in at 15.4%, compared to 16% in the previous quarter. The key moving parts for the margin decline are 200 basis points owing to higher furloughs, lower working days, and seasonal pass-through revenue. This was offset by 80 basis points improvement from SG&A and 60 basis points from operating efficiencies.
Despite significant cash outflow due to dividend payments and mid-year incentives, our cash and investment balances crossed the INR 10,000 crore mark, and we had a strong treasury income of INR 151 crore. The effective tax rate for the quarter was 24.3%, compared to 23.5% in Q2 of the FY 2024. PAT margin for the quarter was stable at 13%. Basic EPS was INR 39.50 for the quarter, as compared to INR 39.30 in Q2 of FY 2024. We continue to make significant improvements to the fundamentals of our invoicing and collections. For quarter three, the total receivable days, including the unbilled DSO, was 85 days, compared to 94 days last quarter. You may recollect that we significantly improved our unbilled DSO last quarter as well.
In Q3, we further reduced our unbilled DSO by 3 days. The unbilled DSO in Q3 is 23 days versus 26 days in Q2. With our focus on collections, the billed DSO reduced to 62 days versus 68 days in Q2. Going forward, we aspire to continue this momentum and bring the total DSO closer to 75 days. We had a significant improvement in our cash conversion metrics in Q3. The operating cash flow to PAT was 155.7% this quarter on account of strong collections, as against 92.1% in the previous quarter and 65.8% in the same quarter a year ago. Furthermore, free cash flow to PAT has shown a strong improvement to 143.7%, compared to 75.1% last quarter and 35.6% in the same quarter a year ago.
I'm proud to note that our OCF and FCF conversion figures are the highest ever and have crossed 100% for the first time. We hope to continue this momentum. We closed the quarter with significantly higher cash and investment balances that stood at $1.216 billion or INR 10,115 crore, compared to INR 8,947 crore in Q2 of FY 2024. Return on equity for the quarter was steady at 26.6%. As of December 31st, 2023, our cash flow hedges stood at $3.3 billion, and hedges on the balance sheet were $295 million.
Our utilization, excluding trainees, further improved to 81.2%, compared to 86.6% in the previous quarter because of the pickup and availability. Our attrition continues to be stable. For the quarter, our LTM attrition was 14.2%, down from 15.2% last quarter. We added more than 500 freshers this quarter. With the supply side easing up, we continue to plan hiring on a relatively real-time basis. Creating meaningful change forms the foundation of our CSR strategy, and we continue to positively impact our society through our CSR initiatives. For example, LTIMindtree has installed a solar power cold storage unit in Karnataka with a substantial capacity of 5 metric tons. We are committed to installing 12 solar power cold storage units, each with 10 metric ton capacity, in various rural locations across India.
Our Mahape campus in Mumbai has received LEED Platinum certification from USGBC, making it a part of select group of sustainable and innovative LEED-certified buildings. We are pleased to announce that LTIMindtree won the prestigious Golden Peacock Award in 2023 for its exceptional sustainability efforts. The Institute of Chartered Accountants of India has conferred LTIMindtree a special recognition for gender equality and presented a silver shield towards business responsibility and sustainability reporting leadership for FY 2023. These awards affirm our stakeholder engagement and commitment to environmental and social impact. I now hand it back to DC for the business outlook.
Thank you, Vinit. Against the backdrop of a continued challenging macroeconomic environment and delays in client decision-making, we expect Q4 performance to remain similar to the current quarter. In this environment of restrained client spending, we continue to expand our value proposition to become a partner of choice for our clients. Despite experiencing higher than anticipated seasonality in Q3, our strong order inflow and healthy deal pipeline set the stage for our medium-term growth. While our margin optimization program continues, we remain committed to investing appropriately to capture growth opportunities, because of which our aspiration of a 17%-18% exit margin will get pushed out by a few quarters. With that, let me open the floor for questions.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. First question is from the line of Sulabh from Morgan Stanley. Please go ahead.
Yeah. Hi, thanks for taking my question. So my first question is, on the near term, as you mentioned about 4Q, growth rates being similar to 3Q. So just trying to understand that, what is primarily leading to, a continuing softness in 4Q, given that, one would have imagined that, these larger furloughs and deeper furloughs would have reversed in 4Q and given you a reasonably strong 4Q? So just wanted to understand, what are the moving parts there?
... Yeah. So, essentially, you know, you know, as far as the fourth quarter is concerned, at this point of time, our thinking is that, you know, some of the furloughs will come back, but, not all the furloughs will come back. They will be coming back gradually. So essentially, the recovery will be gradual. And, you know, we, we will continue to have a bit of pass-through in the next quarter as well. But, it's pretty, pretty much the furloughs which... And overall, the—as I said, the environment is fairly cautionary, and, we, we have to still wait and see how the, the macro plays out.
Because at this point of time, there is a delay in decision-making, which was there earlier also, and that continues to go on as we speak. Even as we work with our clients in terms of their budgets, a lot of clients have still not frozen their budgets. Still, their plans are also in a flux, which kind of makes our planning also very difficult. So those are some of the things that's, you know, kind of making us feel that Q4 will be very similar to Q3.
Understood. Understood. And my second question is with respect to the sales activity on the ground. So it's been a year since the time we started operating as a combined entity. So just wanted to get some context as to now, are we able to target larger-sized deals related to the past? And how many such deals do we have in the pipeline, and how have been our win rates on such deals versus company average? So just wanted to understand how the merger has panned out versus from a revenue synergy perspective.
Yeah, I will request Sudhir to answer. But before that, the short answer is that, you know, you will appreciate the fact that when the merger was announced, we were very keen to integrate our capabilities in a very short timeframe. So we actually got the merger completed in a very, very short timeframe to capture the market opportunities. Unfortunately, we never expected the macros to play so heavily in terms of not being conducive to the, you know, the situation that we're expecting. But in terms of overall cross-selling and upselling opportunities that we got or getting a seat on the table because of our size and scale, I think all those things have worked out fairly well.
Let me request Sudhir to add more color.
Sure. Thanks, DC. Yeah, as DC mentioned, you know, what we've seen is a very significant uptake in our large deal you know overall pipeline. So our overall pipeline currently is around $4.6 billion, and it's, you know, it's about 30% up from the same time last year. So that merger thesis has certainly played out well. And the other metric that I'll share with you is that the number of advised deals is very, very significant. You know, we are participating in almost 30+ advised deals right now, which means that deal advisors are seeing us clearly as a you know... I think what we are seeing in the market is as the best possible alternative to some of the larger players in the sector.
So, that part is certainly playing out, and it's also playing out in our order book, as you've seen, right? This quarter also, we've recorded $1.5 billion order book, which is on the back of the deal win, some of which were also mentioned in DC's opening remarks.
Thank you.
Okay. Then, yeah, just... Sorry?
Sorry, sir. Go ahead.
Yeah. Service line, I'll just say that, you know, we are seeing strong growth in our ERP service line. It's been a traditional strength of LTIMindtree , and we are continuing to see strong momentum there as people look for core modernization-related work, and that's the other part of the large deal portfolio also that we are seeing.
Thank you very much. Sulabh, I'll request you to come back in the question queue for a follow-up question.
Thank you.
Thank you. Next question is from the line of Ravi Menon from Macquarie. Please go ahead.
Hi. Thank you for the opportunity. DC, you mentioned that next quarter, too, we might have a little bit of the pass-through. So would much of this go away then, and should we think about this as a headwind for revenue in Q4?
No, I think, what I said is, you know, we, we had a, you know, higher than usual pass-through. But if you look at our overall, you know, if you look at the last financial year, there was a pass-through, which is, you know, seasonal with respect to Q4. I think it will be similar in line with whatever we saw in, Q4 of, last financial year.
This quarter, it looks like there is a significant element of pass-through because we are looking at your segment margin for manufacturing and resources. That seems to be practically flat, QOQ, you know, the segment profit while revenue is up. So should we think about this going away next quarter?
Ravi, this is Vinit. So the pass-through revenue, you, seasonally, it, it was always there in the second half. This year we had a slightly higher number in Q3. Q4, you will see a little bit, again, on a similar ground, a little bit of a higher pass-through than what you have seen traditionally. But yes, by... We are, we are not right now looking and comment, talking about the Q1 of FY 2025. By that time, we'll have some other levers to offset this headwind that will be coming.
Thank you. Bless you.
Thank you. Next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
... Yeah. Hi, good evening. So with reference to the headwinds that you're facing, if you would give us some context on which verticals are really seeing this extended pain, because some of our peers have actually called out maybe a bottoming out on BFSI and so on and so forth. So just wanted your thoughts on you know those verticals and how things have evolved, and what's really causing the pain going to next quarter.
So first of all, you know, rather than calling out vertical, it's always a reflection of the clients that we manage in our portfolio. And, of course, as we called out, we did see a decline in, you know, BFSI. And I would say, though, the insurance part of the portfolio has been resilient, but we did have some challenges in BFS, and it's again, you know, the higher the furloughs. And, we expect that some of the furloughs will be gradually coming back as we get into the next quarter. But, overall, in terms of, you know, if you ask me, where do we see growth?
The growth will be fairly broad-based across industries and, you know, and geos, because I don't think there's anything for us to call out, saying that only one vertical will grow, because we are anyway focused on very limited set of industry verticals, limited geographies. We feel that, you know, the growth, when it comes back, it will be kind of broad-based.
Sure. So, what I was a little unclear about is that some of the furloughs will sort of recover, and we will also see we've had pretty strong even so the last four quarters consistently. So, when that happens and our pass-through is, will also continue. What is the big drag, is what I'm unable to understand. Is it very broad-based drag, or is it specific to any specific area?
So, sir, Nitin, this is Vinit. The furloughs, what we are talking about is that the furloughs will return back, but not necessarily all the furloughs will return back from January 1. They will come back gradually. So that's the one part of it. Secondly, the pass-through revenue is a seasonal component, but this is also a part and parcel of some of the ramp-ups that are happening as a part and parcel of the deals that we have signed in the past. Eventually, these deals will see this pass-through revenue will go away in Q1, but at that point of time, our other services revenue, et cetera, will return back to offset that.
Perfect. Perfect. And just the last question for you, Vinit. On margin, how are you thinking about it at this point in time versus the earlier target? Is there a new thought process or a thing in mind? And is this delay primarily because of the weakness that you're seeing, that's sort of hurting? So would it mean that, you know, maybe Q1 you have salary increases, but, so just wanted your thoughts broadly on margin.
This is DC here. Let me just explain to you our thought process on margin.
Mm-hmm.
See, when we got these two companies together, we pretty much, you know, focused on our margin expansion plan. And when you create a margin plan, it is also linked to the overall, you know, top line that you expect, the revenues that you expect to kick in. So margin plan doesn't work in isolation without having a top line and, also, you know, certain levers that we apply to get to a margin target. So we were, you know... And also, if you look at it, our utilization has also gone up fairly significantly, and, you know, I don't think it is healthy for us to, you know, take the utilization any further.
So keeping all these things in mind, we feel that, you know, at some point of time, when the, when the recovery does take place, we should be, you know, because the fact that the order book is so strong, we have been also part of some vendor consolidations. So keeping all these things in mind, we need to keep on reinvesting back into the business. And if we do that, we have to, kind of chase the margin target, maybe, you know, a few quarters down the line. So essentially, at this point of time, what I can say is, our margin program that we have put in place, I don't think that's going to change.
That's remaining intact, but only the targets that we have set, we will probably, you know, delay that, defer that a little bit, maybe a few quarters. But, in that process, during those quarters, we want to reinvest back into the business, keeping in mind that the order inflow is very strong and we need to do some investments in terms of, you know, either SG&A or bench, et cetera. So we need to, we want to focus on that and want to be ready for anything that happens in terms of growth. We should be able to stay ahead of the curve. I mean, if you have looked at the commentary, listened to the commentary that we have made, I mean, we have set a target.
We have set a target that we will be training a cross-section of our associates in terms of GenAI, and we have, we have set a target of 110,000, and I think we have met that target. So our investments will continue. We want to double down on some of the investments even further, and that's why we feel that, it is appropriate for us to, defer the margin program by a few quarters. But that doesn't mean that we are going away from the overall margin program that we have already embarked on. Does that make sense?
Yes, it's absolutely. That's very helpful context. Thank you so much, DC and Vinit. All the best.
Thank you. The question is from the line of Manik Taneja from Axis Capital. Please go ahead.
Thank you for the opportunity. Just wanted to prod you further with regards to your outlook. When you, when you spoke in October, you were very confident about the deal ramp up, helping us grow strongly in both-
Manik, sorry to interrupt you. Your audio is not coming clear. Can you please speak through the handset?
Yeah, I'm speaking on the handset. Is this better now?
No, your voice is still echoing.
Any improvement now?
Slightly better.
Yeah. So my question was with regards to the outlook that you provided in the month of October, when you were very confident about a strong second half led by the deal ramp ups, helping our performance. What's changed between then and now is, have you had some negative surprises with some of these deal ramp ups? That's question number one. The second question was more, from a longer-term standpoint. When the two companies came together, the merger rationale was that you would be able to accelerate growth and grow faster than each of the individual companies. But when we look at our growth performance now compared to some of our tier two peers, we have seen a far much sharper moderation. So what's driving that, if you could delve into that as well? Thank you.
Hello? Yeah, so, I, I think, the first of all, if you, you know, if you compare our, growth, et cetera, we should compare with some of the larger peers, because we are a much larger company. I mean, I'm probably answering your second question first, but, in terms of, you know, the deal ramp ups that we have, the deals that we have closed, the ramp ups are happening, well on track, you know, maybe a little slower than we expected, but still the new deals, the ramp up is happening. I don't think there is any issue with that. But, where we have a challenge is some of the portfolio that we had, which was more of, you know, discretionary.
Those portfolios, as they have ramped down, I don't think they have been able to, you know, they did not really ramp up at the same pace. Now, like, for example, we expected furloughs in Q3, but we did not expect that the furloughs will be deeper as well as wider. In fact, there are industries where we did not have furloughs before, but, you know, like, oil and gas, for example, we don't have... We never used to have furloughs, but even they also went through furloughs. So, having said that, you know, some of the decision-making is still pending. Some of the deals which are in the final stage, the decisions are still pending, so, we expect those decisions anytime.
So long story short, I think the furloughs are much more, much deeper and wider. The deals which we have closed are ramping up fairly well, the new deals, but some of the discretionary spend that we have been having we did have in some of the accounts, that thing is not really coming back, because that's where we kind of had a challenge.
Sure. Thank you, and have a rest of the day.
Thank you. Next question is from the line of Mohit Jain from Anand Rathi. Please go ahead.
Yeah. Sir, one is a follow-up to the previous one on furloughs. So we do not have much decline, so to say, in BFSI, which used to be into furloughs higher than other verticals, and second, on the North American side as well. So is this more specific to, like, Europe, where you have declined more, or will you end retail, or do you think it is more to do with BFSI and, say, U.S. as well?
Yeah. So BFSI did have furloughs. You know, it is. But it is probably offset by the pass-through that we had. In fact, we had some additional pass-through in that vertical, which is offsetting the, you know, the impact of furloughs is turning out to be smaller because of that reason.
So we used to have pass-through in manufacturing, right? Or this time is it in BFSI?
It's both.
Okay. So what would be, like, services decline for BFSI on a like-to-like basis? Because we are looking at YoY and QoQ numbers. Does it look like there's a big decline?
No, we don't call that out, but at an overall level, I think we know that BFSI, as I said, BFSI has been under a bit of stress and you know, insurance portion of the portfolio have been quite resilient. And you know, again, it's a portfolio of clients that we manage in a particular vertical and that's where you know, that's how we look at it. But over a period of time, I'm sure it will all recover.
Your projection of BFSI is not changing for the fourth quarter, right? You're saying the weakness may persist.
Yes, that's right.
Okay. Second, for Sudhir. The TCV growth, we are now maintaining 20% for few quarters, and you spoke about that order, not backlog, the deal pipeline number, $4.6 billion. Should we expect this TCV growth to continue now that we have more number of deals, et cetera, for signing?
Yeah. No, as I mentioned, right, we have a good pipeline, good deal momentum. In fact, we have several deals in their final stages of closure, that we're seeing. We're, you know, seeing some delays in decision-making in deals, but, you know, the closures are still continuing to happen. So I think based on all of those, we are seeing that, you know, the order intake that we've been announcing will continue to maintain that momentum. So that will continue as planned.
Right. Is there any revised margin guidance, like by when do you guys expect to get back to the previous guidance of Q4?
No, as I said, I mean, our overall margin program is not going to change, but we just want to ensure that we don't get given where we are, given the, you know, overbearing macroeconomic situation as we explained, we don't want to be, you know, short-sighted and forget about investing. So I think it's a conscious decision that we will, we have taken to, you know, kind of, kind of get back on track after a few quarters. But, you know, in the meantime, reinvest back into the business so that we can be ready for capturing any of the opportunities that comes, you know, when the market opens up, because there is a lot of investment that we need to do on the business also.
On a net basis, we should expect it to be like 15%-16% in the near term?
Well, we are not, you know, saying that, but, you know, in the longer term, the 17%-18% target that we have, that is still something that we will chase in the longer term after a few quarters.
Okay. Thank you, sir.
Thank you. Next question is from the line of Vibhor Singhal from Nuvama. Please go ahead.
Yeah. Hi, good evening, sir. Thanks for taking my question. So two questions from my side. DC, if I keep this, the performance of Q, let's say Q3 and Q4, which was marred by the higher furloughs, and that you're expecting in Q4. If you keep that aside, given that our deal flows have been quite strong, 20% YoY for the last couple of quarters itself, do you expect the execution of these deals to pick up at some time in FY 2025? I mean, a lot of our peers have commented that, a larger peer commented that BFSI has bottomed out for them. Another large peer commented that, they're seeing green shoots in discretionary spends.
So we know there has been a delay in decision-making and these deals converting into revenue, but do you see that those picking up somewhere in FY 2025, leading to some good growth momentum for us, in that year?
Well, I think, you know, if you look at the nature of the deals, bulk of our deals that we have closed and even the pipeline that we have, most of the deals are, you know, efficiency-led, cost takeout kind of deals. And if you look at the nature of these deals, they do take a longer cycle time for closure. And on top of that, we also have delayed decision-making. And when they close, these typical deals are typically multi-year, but they also involve, in most of the cases, some kind of a transition. So keeping all these things in mind, you know, we knew, we anticipated that some of these deals will kind of, you know, ramp up over a period of time.
So there is no reason for us to believe that the ramp-ups won't happen in these deals, whichever we have closed, because these are mostly, you know, efficiency-led deals. So this is across all the sectors. It's not just one particular vertical. It's pretty, pretty, you know, broad-based. So to answer your question: The short answer is this: over a period of time, these deals will all ramp up. You want to add anything?
Got it.
I think just to add to that, right, the combination of, you know, these deals which are... So the good thing is these are multi-year deals, so, you know, we will get the benefit of this over a longer period of time, as they start to ramp up. The ramp-ups are happening, gradually. At the same time, the discretionary spend is lower to, you know, has stopped in several industries. So which is why, you know, our discretionary book is not getting refreshed as before. So hence, you know, you know, the reliance more on these longer-term cost takeout deals for growth.
But again, not a cause for concern, because we have a significant pipeline for that, and, you know, we'll continue to build on that, as you can see with the order inflow, and we, we feel that we can, you know, continue. We know we'll continue with that in Q4 as well. So, you know, we'll build that growth momentum over a period of time.
Got it. Got it. Thanks a lot for that, detailed explanation. My second question is for Vinit. So, Vinit, a commendable performance on the cash flow conversion. But on the margin front, you mentioned that there were 200 basis point of impact from, furloughs and, lesser number of working days and the pass-through. Now, agreeing that, some of the pass-throughs and the furloughs, as you mentioned, might be there in the next quarter itself, but shouldn't large part of this 200 basis point of impact in this quarter, shouldn't large part of that get reversed next quarter?
Yeah. As we said, the portion which is pertaining to the furloughs, it will definitely-
Yeah.
Some portion of that will come back. The only thing, the traditional assumption, which was there, that all the furloughs return back on January 1, that doesn't happen.
Mm-hmm.
That we are seeing it, it happens in a gradual fashion, and that's the reason the impact, while, while the revenue from a run rate perspective at the end of the March probably may come back to that level, but the impact during the quarter is going to be felt on the margins.
Got it.
There will be some positive, there will be some positive clawback that will happen definitely in Q4. But we also want to, we also want to be cautious, given the uncertainty which is prevailing at that point of time, to be how much of that is, how much of headwinds we may get as a surprise and how much of that we want to invest back into the business. So that is also something which you, as DC has alerted, that we want to, continue doing it.
Got it. So as a just a follow-up to that, as you have mentioned, that the target of reaching 17%-18% by Q4 has been pushed out by a few quarters. We had also mentioned reaching full year margins of 17%-18% in FY 2025. Does that also stand pushed out by a few quarters or whatever the time frame is? Or do we-- I mean, how do we see that in the current context?
Yeah, extending that logic, absolutely, it will. But we will continue to watch the situation, and if there are any course corrections that needs to be made, we will do that course corrections. Our... The fundamental principle in terms of the margin improvement program and some of the efficiencies that we need to bring in our business, that program continues. Some quarters may see some investments happening, some quarters might be a little bit liberal, and you may see that money coming back into the margins. So that is something we'll watch over the period of time and, as the business situation goes on.
Thank you. Vibhor, I'll request you to come back for a follow-up question. The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Yeah, thanks. Thanks for the opportunity. DC, the question is in terms of one of the negative surprises which you called out to miss the predictability on the fourth quarter, has been the discretionary spend outlook not improving. But that statement was loud and clear for the whole industry for the last two to three quarters. So why we were not able to budget that, and at that in the October month, why we were so optimistic about the H2 being better than H1? We can understand Q3 has a higher furloughs, but why we were optimistic in terms of a discretionary spend outlook improving in the fourth quarter?
Well, I think the, you know, the, the primary reason for where we are today is, basically the, the wider and the deeper furloughs that we have seen. And, you know, we normally anticipated above average furloughs, but the furloughs which we have seen are much wider. We used to see furloughs restricted to couple of industries more than the others, but this time the furlough was fairly broad-based. It's much wider. And even the, the, the depth of the furlough, you know, within each of those industries, we have seen significantly higher furloughs than what we normally see. I think this was not something that we anticipated. Probably that is the single most reason why we feel, or the single most reason for us to be where we are.
And, you know, some of the discretionary, we knew it will not come back, but some of... I mean, so some of the discretionary spend, once you finish a project, if it's a regulatory or something, that project continues, but in some situations, those also did not continue. So essentially, it is not that we did not, you know, we did not know that discretionary will be impacted, but still there was some portion which we were very confident about that did not come back.
Okay. Okay. And last question, in terms of any large client-specific issue, especially in BFSI or high tech, because your top client in BFSI is on a roll of big cost-cutting exercise globally. So is it impacting us, and that is also making us slightly more bearish on the BFSI outlook?
No. As of now, I would say no, but we are watching the space very closely. I think the—when you talk about BFSI, as I said, there is impact on BFS. It's not; it's slightly more broad-based rather than one client. But yeah, I know what you're talking about, and we are watching the space very closely.
Okay. So as of now, no indication-
I will request you to come back for a follow-up question.
Oh, okay. Thanks. All the best.
Thank you. Next question is from the line of Abhishek from InCred Capital. Please go ahead.
Hi, good evening, and, thank you for giving me the opportunity, and, you know, Happy New Year to everyone. I just have one question. You know, we have seen a sequential decline in, you know, almost, three of our large verticals. Yet, you know, the top five and six to 10 accounts have seen a sequential strong growth. So how should we read, you know, this dichotomy? Or if you can add any color in terms of, you know, is there a material change, in the large client mix that historically we have been knowing, or, or any color could be really helpful?
I think that's the only color. I think if you look at the top five clients, then some clients do change positions from time to time. I think that's the primary reason why you see the change. But that's the only thing I can say.
Okay. Thank you for taking my question.
Thank you. Next question is from the line of Sumeet Jain from CLSA. Please go ahead.
Yeah, hi. Thanks for the opportunity. So DC, when you mentioned that, you know, the growth in Q4 will be similar to Q3, and you... when I look at your manufacturing vertical seasonality in the last two to three years, it is not as strong in Q4 as in Q3. So are you expecting other verticals than manufacturing to see some growth in Q4, despite furloughs still being there?
Yes, absolutely. Absolutely.
And-
We expect that, as I said earlier, the overall growth that we are expecting as we go along is going to be fairly broad-based. It's not just going to be based on only one specific vertical.
This, this revival in growth across verticals will be led by your large deals, or is it the discretionary demand reviving back?
It's mostly the large deals that we have already closed and the ramp-ups have started.
Got it. Got it. And my second question is around, you know, in terms of your margin target of 17%-18% over, you know, next few quarters, may be pushed out. But what will be the key levers for you to achieve that target, given when I look at the various levers in terms of utilization, offshoring effort, or maybe rationalization of tail accounts? Almost all of them have been utilized to a large extent. So just to know, what levers will you press upon?
Well, uh...
Okay, go ahead.
So, see, it is multiple levers that we are looking at, and some of these levers will be our gross margin improvement, mainly. You know, there are multiple accounts. We have what we have called out in the past as one of the program that we are running is the Red programs. You know, accounts which have lower margins, negative margins, which we are trying to work on with the clients to improve that. That is one something that we will do it. Secondly, is the pyramid rationalization. As you have seen in this, as I mentioned in my remarks, we have started adding freshers. This is the second consecutive quarters we are added the freshers, so that pyramid rationalization is something that we are working upon.
The third part is in terms of looking at how can we reduce down on average cost of our resources, you know, that will be the third one. And fourth, at the end of the day, when we have these multi-year deals, you know, those also continue to give us a little bit of an advantage in terms of managing the pyramid and managing the cost within those projects in a much better way. So all those levers are at play. The only challenge, what we are saying is, at this point of time, we thought that we should be able to do a good progress by Q4. That has been delayed.
The other reason of the delay is also the fact that we want to invest back into the business, because our utilization has reached now the peak. We and we have called it out in the past quarter also, that we, you know, this will remain in the short run at this level, but it is definitely at the peak, and we have to now look at adding some bench for the growth that will be coming in, as soon as it comes in. Yeah, and on another note, I must tell you that, you know, whatever we talk about margin program, you only have so many levers, and these levers are.
There is no additional lever. I mean, whatever levers you run in, within a program, maybe everything is not applicable to every client situation at the same time, but you just have to run like a disciplined... It is a discipline that we are running, and that will continue.
Got it. Got it. And I think just one last question around, you know, your large banking customer. I think when they reported their results last week, it was quite evident that they have been insourcing quite a lot through entire calendar 2023. So have you got any plans? What are they thinking of in 2024, given the cost-cutting exercise they are doing across the globe?
I think, you know, over the years, we've told you that, you know, the work that we do for this client is, is in very core areas, you know. So we work on core platforms, in the corporate banking space mostly, and in the RegTech space. So therefore, you know, we have resilience in the work that we do, in this client, and that continues. Now, of course, as DC said, you know, these changes have been announced recently, and we're watching the space closely to see how things pan out. But as of now, you know, this, it's been proceeding as per, you know, what our plan for the year was.
Got it. Thanks a lot for taking my questions, and all the best.
Thank you. Next question is from the line of Rishi Jhunjhunwala from IIFL. Please go ahead.
Yeah, thanks for the opportunity. Two questions. Firstly, so if we look at our growth rate deceleration that has happened this year, it's almost close to around 15 percentage point from the 20% that we grew last year on a CC basis, and it would be among the highest, you know, if you just look at companies which are considered to be high-growth companies. What do you attribute it to specifically for us, given that it is higher than most of the other high-growing peers? That is one.
Secondly, in a period where growth is a bit challenging and we have pushed out our margin targets also in the near term, given that we now have almost like INR 10,000 crore of cash on the books and we've not been much acquisitive, do you think it's time to, you know, potentially increase payouts, given that if we look at most of the large cap companies, they have payouts anywhere between 70%-100% of their free cash flows?
Well, I'll let the Vinit answer the second question. But on the first one, you know, if you talk about growth and if you talk about, you know, what we anticipated as growth, as we always said, that when these two companies were brought together, it was not really considering any of the market conditions or macro or anything. It was more with a basis that both the companies should be coming together when both are doing well in their own rights. And that's exactly what we did. And our intention was also to integrate as quickly as possible so that we can do the cross-selling and up-selling with our, you know, with our clients much more aggressively. I think all those things have worked out well.
The only thing which probably did not go the way you know we wanted was because of the macro changing, the discretionary spend has come down significantly. Both the companies even earlier and LTI Mindtree as a combined entity, we had a significant portion of spare revenue, which was coming from clients' discretionary spend. That's one thing which has come down, but you know converting or rather getting ourselves geared up for large deals, which are more of efficiency deals, we kind of switched that very quickly. But having said that, the large deals take more time to materialize. There has been... The decision-making has been delayed. So all those things also played in terms of whatever you see in the growth. Vinit, you want to take this again?
Yeah. So Rishi, on the cash, you know, the cash allocation policy, you know, one thing which we want to ensure is, first, this momentum, we want it to sustain, and we want to build upon the cash, good amount of cash balance. Number two, on a daily basis, we do evaluate multiple candidates for M&A opportunities, so that exercise continues. So at the right time, when there is a right opportunity available, we do want to consider and look at making those investments. Third part, the payout policy is a reflection of the profit. Has to be based on the profitability, not based on the cash balance that is sitting with us. So, you know, at the end of the day, our aim is to generate a little bit higher returns.
... and higher cash flow returns, then we can think about improving our cash, the cash payout. But at this point of time, there will not be any change in the short term.
All right. Thank you. All the best.
Thank you. Next question is from the line of Rakesh Kumar from BNP Paribas. Please go ahead.
Hi, good evening. Thank you for taking my question. I have just one question. So your commentary related to growth and that of margin, there seems to be dichotomy between those two. So while you are uncertain about the growth outlook and accordingly, your, your guidance for the second half coming down materially, whereas when you are talking about the margin, you are preparing yourself for growth. This higher utilization ideally should not have surprised you, because you were already preparing for much stronger growth in second half. So I'm trying to understand that. Where is this dichotomy coming out from?
Yeah. So, typically, if you look at, right, the resources in, in most of our business, and especially with the large deals that we're talking about, which has transition involved, the resources typically, you know, lead the revenue, right? And typically, the revenue shows up in our PNL anywhere between two to three months down the line, based on the construct of the deal. And, higher utilization part that we are talking about or we're looking at lowering that utilization, in the short term, is coming from that angle, where we need to now be prepared for the deals that we are in the final stages for. And as we close those deals, we need to be prepared to have sufficient bench to be able to ramp up those deals on time. And that's really the commentary around taking the utilization down.
The higher utilization in the earlier quarters, again, the utilization was expected to be higher, but you know, not to the levels that we've ended up taking it. If you remember, even in last quarter, we talked about 85% is our comfort zone from a utilization perspective, longer term. So in, you know, for in some quarters it will be up or down, but that's really... Today, we are at 87.4%. So that's where the, you know, we believe that it's much higher than what we would like to be, and hence we would like to lower that in order to prepare for the deals that we are closing.
Rakesh, do you have any follow-up question?
No, that's it. Thanks a lot for answering that.
Thank you very much. Ladies and gentlemen, we will take that as a last question. On behalf of LTIMindtree Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.
Thank you.
Thank you.