Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Mohta, Head, Investor Relations, LTIMindtree. Thank you, and over to you, Mr. Mohta.
Thank you, Tanvi. Ladies and gentlemen, good day and welcome to the LTIMindtree Q3 FY23 Earnings Conference Call. Please note that this Conference Call is being recorded. 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 Q3 FY23 performance, after which we will open the floor for Q&A. Please note that the numbers presented in our earnings release and fact sheet and reference in today's call pertain to the performance of the combined entity, LTIMindtree, unless stated otherwise.
For the convenience of our investors, our Q3 FY23 fact sheet has an addendum that presents comparable quarterly performance of LTIMindtree for the past seven quarters, starting Q1 FY22. During the call, we could make forward-looking statements. These statements are considering the environment we see as of today and carry risk 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'll now turn the call over to Mr. Debashis Chatterjee for his opening remarks.
Thank you, Nitin. Good evening and good morning to everyone on the call. It is an honor to be part of this historic moment as we report our first-ever earnings at, as LTIMindtree. We are proud to have entered the elite league of top-tier IT services companies by merging LTI and Mindtree in a record time. What makes the feat even more remarkable is that we achieved it without taking our eyes off the business. This is validated by our strong growth in our very Q1 as a merged entity. It signifies the perfect launch pad to capitalize on a broader range of opportunities created by the growing appetite for digital transformation across every sector. I'm pleased to report that the combined entity has started out with a quarterly revenue run rate of more than $1 billion.
For the quarter, our revenues came in at a healthy $1.05 billion, up 16.3% year-over-year in constant currency. We are pleased with our top-quartile growth performance, despite it being a seasonally soft quarter due to furloughs and fewer working- days. We expect our sequential growth momentum to accelerate in Q4 as the impact of furloughs eases. We delivered an EBIT margin of 13.9%. As expected, our Q3 profitability has seen a one-off impact of merger-related integration cost to the tune of 100 basis points. With the bulk of the integration cost behind us and in view of the growth tailwinds ahead, our endeavor is to return to our normalized profitability in Q4. We are pleased to report a robust order inflow of $1.25 billion.
Although LTIMindtree began operations only in the middle of the quarter, we are encouraged by early indications that the merger rationale is beginning to play out as expected. This ranges from complementarity of clients and solutions, opening up to increase participation in multi-year, multi-tower deals by stitching together end-to-end solutions. I will cite a few examples later in my prepared remarks to illustrate this point. Digital transformation as a means to serve the dual objective of driving revenue growth as well as cost efficiencies is an ongoing business imperative. We are at a point where technology and experience transformation have become so integral to business strategies that it is not easy to reverse or stall digital transformation programs. With our expanded, well-diversified offerings as a combined at-scale entity, we are better positioned to help businesses address both objectives of digital transformation.
LTIMindtree combines LTI's engineering and Mindtree's experience DNAs, blending their problem-solving and digital-first strengths into a unique value proposition that spans core to experience to edge. Clients across sectors recognize this value proposition. In several instances, our increased scale has started paving the way for our elevation to a tier one partner. We are pleased with our client conversations around cross-sell and upsell possibilities. While we see a higher level of caution baked into spending plans across sectors on account of macroeconomic dynamics, there have been no program cancellations to date. Although some clients have deferred certain projects and are taking relatively longer to make decisions, the overall focus on longer-term transformation remains intact across sectors. For now, there is a marked emphasis on initiatives that generate cash conservation and speedier ROIs.
In a number of instances, clients are focusing on cost- takeout to fund their in-flight transformation projects. The pressing urgency to drive technology-led innovation to prepare for future opportunities holds a significant long-term upside for our full- stack end-to-end capabilities and deeper cross-industry exposure. With that, let me now turn to our businesses. Our banking, financial services, and insurance business surged 22% year-over-year. We are pleased to share that banking and financial services portion alone is at an annual run rate of $1 billion. The continued revenue momentum was driven by significant deal wins, including new logos, rate increases, and a growing pipeline of large deals. While marketing technology and operations, cloud, risk and compliance, and M&A integration drove sustained demand, we are seeing cost optimization, customer experience transformation, and regulatory or efficiency-focused initiatives emerge as the key areas of focus.
In case of an American multinational financial services company, where erstwhile Mindtree was supporting MarTech operations, we have now expanded our engagement with erstwhile LTI's Temenos capabilities to modernize the client's core banking platform. In insurance, we are a partner of choice to global insurers in digital transformation and core platform modernization across segments, that is property and casualty, retirement, and health and life. The merger has resulted in an increased breadth of coverage in this sector, especially in life and annuity. We have also deepened our domain expertise with significant skill sets across all major core insurance platforms. For example, based on our enhanced competencies, a North American specialty insurer has chosen us to modernize and migrate to the cloud its core platform spanning multiple product lines and countries. Notably, the revenue from insurance platforms has hit the $100 million annual revenue run rate.
Our high-tech media and entertainment business grew 9% year-over-year. The strong growth momentum that we witnessed in the high-tech vertical earlier in the year decelerated on account of furloughs. We continue to see demand across operations transformation, managed services, and cloud engineering. Within media and entertainment, we secured renewals of some of our large managed services deals. In particular, we are seeing strong demand for platform services and application modernization, leveraging cloud for OTT streaming. Our manufacturing and resources business grew 8.8% year-over-year. The growth in manufacturing was the result of an improved outsourcing pipeline and good deal wins, especially in the automotive sector. We are seeing good continuity of spending as well as cross-sell opportunities in ERP, customer experience transformation, IoT, AI cloud, infrastructure, and security. Our resources portfolio continue to see traction with clients focused on the digital transformation of core operations.
We are pleased with the opportunities we see across areas such as advanced metering, operational technology, security, asset management, ERP-led large-scale transformation, and cloud adoption and modernization. Our retail CPG and travel, transportation, and hospitality business grew 10.7% year-over-year. Within retail and CPG, clients are being cautious because of high inflation. Even so, they continue to invest in digital and data platforms to drive their digital transformation journeys. Our travel, transportation, and hospitality business witnessed robust growth. We expect the momentum to continue in this business, except for the real estate portion of the portfolio that could experience headwinds due to the increase in interest rates. In the case of a global airline, an existing ERP client of the erstwhile LTI, we have expanded our engagement into other cutting-edge business areas leveraging erstwhile Mindtree's domain knowledge.
Our health, life sciences, and public services business grew 11.9% year-over-year. The strong performance of the health and life sciences business, which grew 23.6% year-over-year, was partially offset by the project-specific softness in our public services portfolio. In the health segment, we are seeing traction in consumer healthcare, where clients are concentrating on areas such as remote patient monitoring and home healthcare. Life sciences clients are focused on clinical transformation, leveraging digital engineering and cloud capabilities. We see significant market opportunity in health and life sciences and continue to make investments to drive further growth. In terms of geographies, North America contributed 72.3%, Continental Europe, UK, and Ireland contributed 14.9%, and APAC, Africa, and Middle East contributed 12.8% of our revenue during the quarter.
I take this opportunity to thank our expanded family of about 90,000 talented professionals for their dedication and hard work in seamlessly supporting our clients through the merger. We have undertaken a number of employee engagement initiatives and are encouraged by the response. An important part of the merger exercise has been to determine exact talent synergies and requirements for the combined entity to maximize its potential and the opportunities ahead. With that done, we are now ready to increase the momentum of hiring in line with our business demand. As anticipated, attrition is showing clear signs of stabilizing. For the quarter, our LTM attrition was 22.4%. While we do not typically call out quarterly annualized attrition, it is pertinent to highlight that our quarterly annualized attrition declined by more than 6% to around 18%.
We believe there is room for attrition to trend down further. I will now turn over the call to Vinit for Q3 financial highlights.
Thank you, DC. Good evening and good morning to everyone on the call. It is great to be with all of you for our Q1ly earnings as LTIMindtree. We celebrated the historic inception of LTIMindtree through a green gesture by planting 1 lakh saplings, one for each member of the LTIMindtree family across six states in India. Let me now take you through the financial highlights for Q3 of FY 2023. We are happy to start our combined reporting with a strong quarter of the top quartile performance. Our revenue stood at $1.05 billion, up 14% on a year-on-year basis. The corresponding constant currency growth was 16.3%. EBIT margins came in at 13.9% as compared to 17.5% in the previous quarter.
The impact of furloughs and fewer working- days was 130 basis points. Integration-related costs amounted to 100 basis point, and increased employee and operational costs resulted in an impact of 130 basis point. Net Forex gain for the quarter was $5.9 million compared to $2.5 million in the previous quarter. PAT margin for the quarter was 11.6% compared to 14.5% in the previous quarter. The absolute PAT in Q3 was INR 1,000 crores. The effective tax rate for the quarter was 23.6% as compared to 23.9% in Q2 of FY 2023. Basic earnings per share was INR 33.80 for the quarter as compared to INR 40.20 in Q2 of FY 2023.
In Q3, the billed DSO stood at 61 days compared to 56 days in the previous quarter. The DSO, including unbilled revenue, was 90 days compared to 85 days in the previous quarter. For the quarter, operating cash flow to PAT was at 65.8% versus 63.6% in the previous quarter. Our robust cash management led to cash and investment balances of $978 million or INR 8,086 crores compared to INR 7,703 crores in Q2 of FY 2023. Return on equity for the quarter was 30.3% versus 32.6% in Q2. Our utilization, excluding trainees in the quarter, was 82.9% compared to 83.5% in the previous quarter.
As of December 31st, 2022, our cash flow hedges stood at $3,878 million. Hedges on the balance sheet were $370 million. The board of directors have recommended an interim dividend of INR 20 per equity share. I now hand it back to DC for an update on integration and our business outlook.
Thank you, Vinit. As you are aware, LTIMindtree came into existence, effective November 14th, 2022. Since then, both organizations have fully aligned under the new jointly evolved organization structure and vision. Thanks to our extensive change management experience, all vital aspects of the integration, including ongoing client projects, knowledge transfer, and talent realignment, are progressing as planned. We are ready with a roadmap to realize the revenue and cost synergies presented by the merger. It encompasses a wide spectrum ranging from further diversification of offerings, cross-selling, upselling, and cross-pollination of learnings and capabilities to gain wallet share across our expanded portfolios to pyramid optimization, working capital efficiencies, inorganic growth, and operating leverage resulting from scale. It is evident that we are embarking on our journey as LTIMindtree from a position of strength.
Our end-to-end services portfolio, comprehensive capabilities, strong sales engine, proven account mining and healthy balance sheet position us well to continue delivering industry-leading revenue growth as a combined entity. As clients are still finalizing their IT budgets for next year, we will have greater clarity on the exact spends only later during the Q4 . Notwithstanding any near-term impact of budget changes on short notice, we still remain upbeat about the longer-term demand for our end-to-end offerings. In a rapidly converging world, giving rise to newer business models and revenue streams, our promise is to help businesses harness the full power of technology and reinvention to get to the future faster. We are now ready to tap into our enhanced diversity of scale and capabilities to advance towards that goal, and look forward to reporting many more successes in the coming quarters. Let me now 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 touch- tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management. Please go ahead.
Good evening, gentlemen. Thanks for giving me the opportunity. DC, couple of questions. Looks like the weakness in both, revenue and margin was largely led by the erstwhile, top high-tech account. Is this entirely furlough-led or any part of this was driven by certain, let's say, client-specific spending bottlenecks, or maybe our internal sales or delivery bandwidth issue, given that we are also going through integration and naturally there would be some distractions during the quarter?
Let me give you some high-level comments, and then I'll let Vineet and my other colleagues comment. As far as the, you know, the margins are concerned, and as far as the integration is concerned, we have been very upfront that we will see some one-time impact of integration. What you see in terms of the drop in margin, and as Vineet articulated, 100 basis points is due to the one-time integration cost we have already baked into Q3. You know that Q3 is a seasonally weak quarter, and we tend to have, you know, furloughs during this quarter, and also the number of working- days are little less.
Given all these things, we knew that there will be some impact on because of furloughs. To add on to that, we have also seen that because of some, you know, macroeconomic conditions, some clients, you know, we have witnessed a little higher furlough than what we had anticipated. That's the furlough part. Which is again, you know, we hope that as we get into Q4 and beyond, the impact on the furlough is not going to remain and, you know, majority of the loss that we had because of furloughs should be coming back. In terms of your other point in terms of sales and delivery, et cetera, I don't think there is any issue over there. I think the structures are all laid out.
You have to also appreciate that we just had 6 weeks of time beyond November 14th for us to, you know, really share data, understand some of the synergies, et cetera. We had anticipated some of these things as we went along. Our overall endeavor and confidence is that, come Q1 of fiscal FY 2024, we should be able to again get back to our, you know, industry-leading profitable growth story, as we have demonstrated as the two independent entities, erstwhile earlier. I hope that, you know, clarifies. Vinit, anything to add?
No. Sudhir, to specific point which you mentioned, while I wouldn't want to call out any specific client, I wanted to clarify that there is no weakness found in that erstwhile top account that you are referring to.
Sure. Sure, DC and Vineet, thanks for that. Basically, a lot of this will be regained in the subsequent quarter if it is just a furlough/working- day kind of an impact. Is that understanding correct?
I think that's a fair understanding.
Thanks, DC. Vineet, you mentioned there is an increased employee cost of 130 basis points. Is this a sort of one-time bonus or anything you have given to employees because of the integration? Second, a related question is that I think some of your exchange filings earlier suggest that the earlier ESOP plan is being distributed to some employees. If you can speak about how broad-based the coverage would be and what % of senior employees would be covered, and how they would be taken care of, given that naturally when the corporate actions happen, it is natural for everyone to expect some sweeteners or retainer benefits.
No. When I mentioned on account of operational aspect, I, we need to understand that, as some of the revenue which has got eliminated, the percentage of employee cost to that extent has gone up. There is a CA one, sort of a once- in- a- quarter seasonal impact of
As the freshers come into the mainstream, some impact of their annual increment comes into the play. ESOP, yes, that's a new cost that has come in in this quarter and but it's only for the part of the quarter, so there will be a little bit of additional uptick in the next three quarters. After that, it may start a little bit subsiding down based on the current grants that have been given. You have to look at the cost. As such, if our cost base, the % has not gone up, it is only because of the sort of a revenue that has gone down because of the furloughs. It looks like the % of the employee cost has gone up a little bit.
Sure, Vineet. One last question if I may? Even if you expect, there is some incremental ESOP-related costs, you still believe that, we'll be able to reach back to our earlier profitability levels by the next couple of quarters?
Well, the whole intention of this merger was obviously to get the revenue and cost synergies over a period of time and revenue synergies on the front-ending side of it.
Right.
As we enter into that, our hope is that starting from FY 2024, we should be able to come back to our industry-leading profit, industry-leading profitable growth, story.
Thanks, DC and Vineet. All the best, and, you know, wish you a great success in the larger organization.
Thank you.
Thank you. The next question is from the line of Vibhor Singhal from Nuvama Equity. Please go ahead.
Yeah. Hi. Thanks for taking my question, and congrats DC and the team for the successful integration of the business. DC, couple of questions from my side. One for you and one for Vineet, probably after that. In terms of the overall, I mean, we've seen very good growth in the BFS segment and also the vertical that basically in terms of a strong growth in the retail and transport vertical as you mentioned. Just wanted to pick your brain in, specifically in these two segments. I mean, I think BFS, they would not have been too much of a client overlap, but let's say retail or travel or high tech.
The client overlap that we've had, I mean, the little client overlap that we've had in this, how is that process going on in terms of the overall aligning the sales team and all? To that extent, I mean, how are we equipped? I mean, how much have we made progress in terms of allocation of all the sales head, geography heads, vertical heads to the entire team? I mean, are there any white spaces which are yet to be addressed? Or is the integration and the allocation of roles and responsibilities complete at the company level? If you can answer that, I'll probably follow it up with a question for Vineet.
Thank you, Vibhor. See, if I understand your question correctly, if you're talking about the overlap of clients across the two erstwhile entities, they are very minimal. They are just a handful. I think that was one of the exciting part of this integration because we can cross-sell and upsell to a host of 700 plus clients, where only one of the organization was present earlier. You know, one of the things that we ensured that none of these clients see any change on the ground in terms of the teams that they have been working with, and we kind of took care of those aspects and all those designs are complete as we speak.
I don't think there is anything else that we need to address per se as we go along. There is no wide space per se in terms of any of the accounts where we have to, you know, you know, get new leaders and all those things. This is like, one of the objective of the integration was to ensure that we keep the same leadership, the same client behaviors, the client confidence in terms of most of the clients. You asked about BFSI. I think, I can say that, you know, BFSI is one segment which had an overlap, on between the two organizations. I'm happy to say that the growth that we have seen in BFSI, the accounts on both the sides have grown fairly well.
Now obviously we have an integrated BFSI practice where, you know, it's kind of all come together. BFSI looks extremely bullish for us. I don't think there is, you know, so far we have not seen any indications that clients want to stop many of the programs that are doing, especially BFS is very strong. As far as the retail, travel, transport is concerned, I said that, you know, that has also done well, but we do have some portfolio which is on the real estate side.
Obviously, given the interest rates, increasing, there has been some impact on a specific portfolio, which I think hopefully should come back at some point of time when the, you know, you know, when the client is realigning their priorities and budgets. I hope I've answered the question. Anything else you want to add to this? No.
Yes, yes. Yes, we are quite comprehensively. Thank you so much for answering that. My second question for Vineet. Basically, we just wanted to delve a bit deeper into the margin bridge that you talked about. As you mentioned, around 100 basis point was the integration impact, which of course you and DC have called out is gonna be a non-recurring one, and we'll see that reversal next quarter. The furloughs in the fewer working- days, of course, 130 basis point. That of course should take care of itself when the growth comes in the other quarter. Just on the increase in employee co-cost, if I can run that once again.
The impact of this 130 basis points, I mean, if I understand correctly, you are trying to say that, basically, as a percentage of revenue that has kind of gone up. I mean, is that the... Has the cost gone up in terms of some retention bonus or annual increment, as you mentioned in this quarter, which is going to maybe even out in the coming quarters as growth comes in? Or is it going to be a recurring part and is part of the base now?
No. It is, it is the latter. It is part of the base, and it is going to continue. The only thing is you'll not see an incremental impact coming up. As I mentioned, the majority, while it is, from a percentage perspective, the cost has gone up a little bit, but compared to the revenue growth, the increase sounds a little bit higher. Only component which is driving, which has come up in this quarter, which is driving down the cost a little bit is, as I called out, the cost on account of increased, sorry, the annual increment that gets rolled out to the freshers as a part of after they come into the mainstream population.
Got it. We are going to follow this Q3 incremental cycle, increment cycle for the freshers, hereafter? That's yet to be decided in terms of when we are going to provide those on an annual basis?
No, it doesn't. It is not a Q3 cycle. It all depends upon when the freshers come into the.
Okay.
come join us. The impact of that gets scattered over a period of full year. We don't take all the freshers in one go. We take them over a period of 4 quarters. As each one of them each batch completes the annual anniversary, they get that incremental impact.
Got it. Okay, thanks, Vinit. Thanks for taking my question, and I wish you all the best.
Thank you. The next question is from the line of Mohit Jain from Anand Rathi. Please go ahead.
Just a follow-up on the previous one. I was not sure if you were following the same practice earlier, because this time, for the first time, we have this 130 basis point increment coming up in the Q3. While estimating ahead, should we assume that this will keep recurring every Q3, or will you sort of revert back to 1 wage hike cycle during the year?
Yeah. You also need to understand, Mohit, that both the companies had a different intake cycle of freshers. Now what you're seeing is basically a combined effect. Some will come in Q3, some will come in Q4. With the growth, I don't think so this impact is a cause of worry. This will get easily absorbed. Our fresher intake and fresher absorption into the mainstream is very, very strong, and that's where we believe that once we are into the normal period of once in a normal period in FY 2024, we will be able to leverage this and gain momentum on our margins.
The next hike we should factor in is approximately Q2 or Q3 for FY 2024?
No, Mohit, the, are you talking about the freshers or are you talking about the general?
No, the overall impact that we are going to experience in the margins.
That, so that we are not yet defined because both the companies are at a different cycle. We are in the planning process right now. In the next quarter, we'll be able to give color in terms of when to anticipate that impact.
Okay. Second was, is there any reclassification from gross cost to SG&A because of the integration? Because when I try to adjust your INR 80 crore amount, for the 100 basis points, merger-related expenses, even then it appears that SG&A has gone up quite sharply, and because of which my EBITDA growth is not there, even on a year-over-year basis.
No, there is no reclassification, apart from some marginal ones, but nothing material to call out.
This 100 basis point includes INR 50 crore that you have put in the footnote of the release?
That's right.
This stamp duty provision, the 100 basis point includes that provision as well? Or should we take into account-
No, no, that's right. That 100 basis points includes the impact of the INR 50 crores-
INR 50 crores.
stamp duty. Yeah.
Last one on the revenue side. Is there any pass-through which we have experienced? LTI usually had a strong seasonality in second half. Is there any breakup that you guys can give on pass-through that we would have got in the Q3?
Yes. We do have a pass-through, but now in a combined organization, that number has become insignificant to call out.
We will not get it going forward, is it?
We will. The number from earlier, from $600 million to now looking at that number remains constant.
Okay.
that now on a billion-dollar base has become insignificant for us.
Right. We should safely assume whatever happened in 3Q should be the number in 3Q 2023 as well?
Yes.
All right. Thank you, sir. That's all from my side.
Thank you. The next question is from the line of Saurabh Goela from Morgan Stanley. Please go ahead.
Hi. Thanks for the opportunity. The first question that I had was with respect to the normalized profitability levels. DC mentioned that we hope to return to these levels in FY 2024, starting from the next 2, 3 quarters. Just wanted to understand what are those levels now? I mean, LTI used to operate at 14%-15% PAT levels and Mindtree at 20%+ EBITDA. In a combined LTI, how should we look at that?
Saurabh, we are not giving any guidance. What we are saying is that we will return back to those industry-leading profitable growth, that's our aspiration, and that's what we are confident on. As you know that the levers are pretty much the common. We will try to leverage more on getting us much more, I would say, going to the customers, getting little bit of a price increase benefit for the niche skills, keeping our utilization in check, keeping our headcount, given that the base has now become pretty strong. Right now, out of out of the general macroeconomic caution, we will not go and do excess hiring than what is needed, leverage our bench very well.
These are a couple of the things which, you know, as we will be in a position to sort of, use it very, very, to our advantage and bring the margin back on track.
Understood. Understood. With respect to Q four, if I may, I mean, out of these margin impact that we mentioned, how much of it is sort of reversing? Because it wasn't very clear to me if everything is reversing here with respect to furloughs and the merger-related costs.
The merger-related cost, as DC had called out, most of that has been already baked in Q3 numbers. There might be some portion, marginal portion, not, definitely not to the extent of 100 basis point impact coming up in Q4. Similarly, on furloughs, the impact is 130 basis points. Some portion may remain, but not to the extent of 130 basis point as what we have called out. You can make the math and look at what to expect.
Okay. Sure. Understood. Then my question was with respect to the leadership structure that we have right now. I just wanted to understand that which verticals and sub-verticals right now would have a co-head structure, given that some of the verticals were or sub-verticals were overlapping. How have you gone about that?
Yeah, I think, you know, you know, there are... You have to understand one thing, that one of the things that we thought about as far as this merger is concerned, that we should have minimal impact to our clients. That's why that was one of the prime consideration as we designed the structure. While designing the structure, we also ensured that we can get the synergies across the leadership and across the organization in terms of the various industry practices. For example, we have now brought in the Banking, Financial Services and Insurance of both the [HCL] companies under the leadership of one particular leader in the organization, under one market leader. We have done some of those adjustments internally, just to share one example.
overall, we have ensured that there is zero disruption, and we feel that there's a lot of work to be done. There's a lot of cross-selling and upselling that needs to be done. keeping that in mind, we have gone with the structure that we have talked about.
Okay, understood. If the last question, if I may, just a bookkeeping one, that, Vinit, how or should we expect on the tax rate going forward? Is the current tax rate, the tax rate we should be building?
For the next quarter, you may see it to be pretty much in the current range of 23.6%-24%. From FY 2024, you can anticipate it to be in the range of 25%-25.5%.
Okay. Thank you. That's all from my side.
Thank you.
Obviously, this is subject to no changes in the budget.
Thank you. The next question is from the line of Ruchi Burde Mukhija from Elara Capital. Please go ahead.
Hi. Congratulations on the merger.
Sorry to interrupt here, Ruchi. If you're using external headphones, we would request you to use the handset instead.
Handset?
Yeah, yeah.
Firstly, congratulations on the merger. I wanted to take your thoughts on the cost deals. We have heard from you, also from your peers, that there are a lot of cost- focus or cost- optimization deals. Could you talk about in terms of tenure and other deal dynamics, how what do you see are the large tenure or any other characteristics that you would want to call out?
Let me give you some color, and then I'll request Sudhir to add. See, Ruchi, what happens is, you know, typically, when clients are looking at cost takeouts, it has to be a multi-year transformation deal because you typically cannot do the cost- takeout unless it's a, you know, 4, 5 years tenure. That's something which we are seeing right now in the marketplace. That we need to understand is that the last 2 years, the clients have started so many transformation initiatives within their organizations. It is very important for them to continue with the transformation initiatives and not stop them. Because if they stop them, then they will lose the benefit of all the effort and cost they have spent.
Keeping that in mind, given the fact that there are some uncertainties in the macroeconomic economy and the, you know, the uncertainties in terms of recession, in terms of interest rates, all these things, clients are now looking at, you know, how can they self-fund their transformation. Which means that if you can look at opportunities of cost takeout, and if you can take that cost out and, you know, fund your ongoing transformation. We are seeing quite a few opportunities like that, where clients are very keen to discuss in terms of cost takeout, and typically they are 4 to 5 years or even 5 years or longer as well in some cases. And the only difference I would say is that it is purely...
It is very much keeping in mind that they want to continue with the ongoing transformation. Again, going back to the commentary that I made, there are certain situations where we see clients are slowing down their programs. We have not come across any situation where clients are completely stopping their programs. Sudhir, you want to add anything?
Yeah. I think this is the only thing I'll add is that, you know, If you look at, you know, there are pockets of growth in, in some verticals and service lines. From a cost perspective, you know, there has been a quite a significant investment in digital data and cloud related technologies, especially over the last three years. Clients are looking at the ROI from these investments. Those they are structuring as multi-year deals, and that's where we see net new deal activity happening besides the multi-generational outsourcing deals that continue.
Okay. I have just one more question. Are you seeing your competition changing? This is I'm asking more in the context of multi-tower deals that DC spoke earlier. This I'm asking, keeping in mind that though the formal or the legal entity took shape in mid-November, this merger was in making for a good close to 1 year. Have you seen change in competition especially for large deals that you might be, I would say, might be in pipeline for you?
Well, look, I think, you know, even if you look at the erstwhile entities of Mindtree as well as LTI, we were anyway winning deals and we were anyway competing and winning deals against the tier ones as well as, you know, mid-tiers, et cetera. So I don't think there is any change in terms of our competitive landscape. But the good thing is, given the fact that we have brought the, you know, strengths of the capabilities together, our ability to support deals which is typically core to experience to edge proposition, I think that's much more compelling at this point of time. And we think that is going to give us an edge in terms of stitching end-to-end solutions with many of the deals that we are pursuing right now.
Thank you.
Thank you.
Thank you.
The next question is from the line of Ravi Menon from Macquarie Group. Please go ahead.
Hi, gentlemen. Congrats on the merger. I have two questions. One, DC, do you think that with the merged entity having a size, you know, close to 100,000 people, are you able to now target larger deals? Are you starting to set up a large deal team to go after perhaps even deals as big as $500 million?
The answer is, absolutely yes. We don't need to set up a large deals teams. We already have large deals teams across both the erstwhile entities. We have just ensured that we have a common leader across those two and bring all the capabilities together. One of the rationale of this merger was that we should be able to pursue larger deals. You know, when we talk about cost takeout, that is when the large deals get created. I'm hoping that we should be able to talk about more of this in the, you know, coming weeks and quarters.
All right. Thanks. Second is, you know, as a, as a combined entity, do you think that in absolute, you know, because the employee base is now much bigger, will we top our utilization at a higher level than we did as individual firms?
That's the endeavor. I think we should be able to do that, but you have to give us some time. We should be able to do that as we bring in more operational efficiencies and rigor.
Great. Thank you so much, and best of luck.
Thank you. The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Hello. Thanks. Yeah. Can you hear me?
Yes.
Thanks for the opportunity. DC, just wanted to understand, because the expectation from the management side as well as investor side is the merger will lead to 1 plus 1 being greater than 2. How are we measuring these KPIs in terms of large deal traction, where average size of deal is above $50 million-$100 million? Are you witnessing that, despite we are very new in terms of post- merger announcement, the pipeline in terms of number of deals above $50 million-$100 million cross-selling, upselling has started firing, or it will take slightly longer time and, one can expect this to happen more in FY 2024 rather than second half of this financial year as a whole. How are we tracking this, as a metric?
Well, that's a great question, Sandeep. I think, you know, one plus one more than two is not just only for deals. You know, it's for across the organization. You know, if there is any internal message that has gone to the organization, is everybody, whoever is doing whatever in their sphere of life, they should think of how can they do things better. That is what we mean by one plus one more than two. So across the board, across all activities, across all aspects of the business. But to your specific question on deals, yeah, we don't, we, you know, we talked about the order inflow and the pipeline, which we have not talked about.
We have a very, very healthy pipeline, and we are seeing some, you know, large deals in the pipeline. As I said that, you know, some of the cost- takeout deals as we are pursuing now, they tend to be multi-year, and eventually they also tend to be slightly larger in terms of size and scale. Absolutely, yes. As I said earlier in the previous answer, that we are very hopeful that we should be able to talk about some of these things, some of these large deal wins, because we are in advanced stages in many of these opportunities, and we should be able to talk about this in the coming months and quarters.
Okay. This total order, one can expect this reported each quarter as well.
Sorry to interrupt you, Sandeep. Your voice is breaking up in between.
The total order intake which we have reported this quarter is a metric which can repeat every quarter.
Yes. Yeah. That's the intent.
Yes. Also, you know, just to add on, Sandeep, I think the other thing which I should also call out.
You know, with as a management team, when we have got together and tried to look at the metrics, the other important metrics is that, is that over a period of four to five years, we want to create a synergy revenue of at least $1 billion, and we should be also able to get a synergy of at least 200 basis points in terms of margin over the next four to five years. That's the target at a very broad level we want to set for ourselves.
Okay. Okay. This is helpful. Because of the macro issue, is there any client-specific issues are we witnessing in our top 10 or top 20 accounts as a whole? We have lot many clients within the high-tech as a vertical, and lot many has announced the cost- takeout plans, layoffs as a whole. Is there any budget pressure in some of our top clients as a whole?
No, as I said, Sandeep, there is no pressure per se, but, you know, there is definitely, at least in isolated cases where clients have, you know, they've, they have deferred the start of some programs, and they have also slowed down some programs. I guess this is purely temporary in terms of in nature. In the same client scenarios, we are also working with them in terms of cost takeout. You know, the reality is the amount of transformation that each of these clients have started in the last 2 years, they just can't stop the transformation. They can, you know, slow it down, but slowing down doesn't mean you don't do anything. Instead, what they're doing is they're looking at how can we take some cost out of the system.
As we are doing transformation, which is slowed down a little bit in some cases, but there are also cost of takeout opportunities in the same client. We are working on that, and that's what I told you, that we are very confident that we should be able to talk about more of some opportunities in the coming months.
Okay. Last question, any policy on a payout, at a, as a merged entity in terms of cash distribution back to shareholders?
That continues to be in line with what we have delivered in the past by both the [HCL] companies. While we have not stated that in those many terms, but our intent is to sort of, keep the payout in the 35%-40% range annually.
Okay. Thanks, and all the best.
Thank you. Participants, we request you to please limit your questions to 2 per participant, so that management is able to address the queries from all the participants in the queue. The next question is from the line of Pankaj Kapoor from CLSA. Please go ahead.
Yeah, hi. Thanks for the opportunity. DC, my first question is on the order book that you have reported. I'm presuming it is for the entire wins, not just limited to large deals. If you can give some perspective to this $1.25 billion number, how does it compare to on a YOY or a QOQ basis, so we can understand how does it play out and we can interpret correctly? That's the first question.
Let me request Sudhir to answer that.
Pankaj, this $1.25 billion is the overall order inflow in this quarter. Okay? That's the way to look at it. This is the Q1 that, you know, we are adopted this, this measure and this, you know, we're disclosing it. This will be, you know, tracked from this quarter onwards going forward. If you were to look at, you know, comparison, I think you compare it with quarterly revenue, but look at it over a four-quarter cycle at least. You know, that will give you the overall trend. That's what our advice on this new disclosure that we are making from this quarter onwards.
Okay, fair enough. My second question, Vineet, is on the margins. Last year, same quarter, we had 18.5%. Previous quarter, we have 17.5%. I understand that some of the costs over here are one time, which will not be recurring. Still looking it from a longer- term perspective, when the merger synergy should come in, especially on the cost part, you think we should go back very quickly to the pre-merger margin level of 17.5%, or you think it will take time? I think you spoke of 200-300 basis points improvement over a period of time. If you can give some color in terms of how quickly we can at least go back to the pre-merger levels itself.
Pankaj, As I mentioned earlier, the expectation is that the Q3 we had the maximum impact on both operational as well as the merger- related issues. Marginal impact will come up in Q4, but we, on an overall note, our expectation is that we should be able to climb up on our margins. Starting FY 2024, our intention is to return back to the industry-leading profitable growth story. The point which DC mentioned about 200-200 basis points incremental margin, that is over a period of 4-5 years compared to what both the companies would have probably forward or were delivering independently. That's in addition to what our aspiration of industry-leading growth is going to be in FY 2024.
Thank you. We'll move to the next question from the line of Dipesh Mehta from Emkay Global. Please go ahead.
Thanks for the opportunity. Just on continuing on the margin point, I am bit not clear about the employee-related costs which you explained. Is it something different which we are doing for freshers compared to the earlier practice which both company used to have about giving annual increment? Because I think that might be the usual practice where we might be giving annual increment at the end of first year. If you can clarify that thing.
This is not something new. This is something which we have been doing it consistently in the past. As we mentioned that in the past, two years, we were in a very high growth trajectory. The impact of furloughs, et cetera, was not as high as what we have seen in this particular quarter. That's why you are feeling it that this time the cost is as a % has gone up because of the severe impact of the furloughs. This is not something new. This has been done in the past. The only difference is both the companies have different cycles of intake of freshers. That's why you will. In the past, in independent companies, you would have probably seen that impact in one quarter or one or two quarters.
Now you may see it slightly evenly spread out across the year.
Can you hear me?
Yes.
Yeah. Broadly, furloughs impact is separately given, so 130 basis points would be called out. This 130 basis points is now part of the cost structure and likely to persist. That's what broadly you are suggesting?
Yes.
Understand. Last question is about if you can provide some sense about how we also expect growth trajectory in high tech, media, and entertainment concerning the overall macro situation? I think some of the peers indicated some kind of softness in that sector. Thanks.
let me request Sudhir Chaturvedi to take that.
I think, you know, I mean, let me give you a broader demand outlook, right? If you look at the overall, you know, demand picture. There is, you know, there is actually work to be done. You know, if you look at the CIO book of work, right, there is work to be done. There is boardroom caution which is filtering down to, you know, spending decisions. That is what we are seeing in the market on an overall basis, which was DC was referring to, that there are certain projects that are being, you know, done over a longer period of time or being deferred. In that, if we look at vertical, banking, insurance, energy, utilities, travel, and public sector seems to be resilient even in these macro scenario.
From a offerings perspective, you know, the multi-year transformation initiatives continue. In addition to this, the spend on data, cyber, cloud continues to be unaffected. Actually, clients, you know, the ex- spend on the experience-related technology base, you know, which is critical for their revenue growth, that also continues to be resilient. In that context, you know, there are a couple of verticals where there has been some reset in terms of budgets, and in terms of priorities of spend, which we, you know, where, you know, for example, high- tech is one of them. We are. You know, we've got.
I think the good thing as LTIMindtree is, you know, we've got a overall group of verticals where we can continue to focus on the right verticals for growth, and we should see some return to growth back in these, in the, you know, the verticals that were slightly soft in Q3, we should see that back in Q4.
Thank you. The next question is from the line of Kawaljeet Saluja from Kotak Institutional Equities. Please go ahead.
Hi. Hi, DC. Hi, Vinit. You know, my question is twofold. Vinit, you mentioned, you know, and some participants earlier questioned that the impact in this quarter in high- tech is not related to the largest account of former Mindtree. Is that correct? Is that something that you mentioned?
That's right.
Right. Right. You know, how come basically then the impact... I mean, you know, given the dominance of that client in the overall vertical revenue, I'm just surprised that, you know, why did the margins of high- tech segment then decline so much on sequential basis?
It's an account of furloughs that you have seen in some other accounts in the high- tech part of it. That's the reason for the decline.
Okay. Seems to be disproportionate. Okay, the second question I had is, Vineet, again, on profitability. You mentioned that 130 basis points impact was due to compensation increase at possibly the fresher level. Is that reading right? I mean, do freshers, you know, cause that much of a hit on profitability?
The entire 130 basis point is not on account of freshers. It is one of the component that is driving down the cost, which I wanted to call it out. Obviously, as we look at the comparative number, some portions of the cost that were there in Q2 not fully baked in for the quarter are now hitting us from a run rate basis for the full quarter for both the companies put together. There are those two, three factors that put together are causing that impact.
I'm sorry to persist, Vineet, you know, wasn't the full comp increase in both the companies already announced effective July 1st? you know, I think, in case of, API, it happened in the Q1 itself. What was that incremental cost?
Kawaljit, while we do our annual increment cycle in a specific, in specific periods, but we also continue to do certain interventions in between wherever the need arises. The demand, while the attrition numbers are showing the softening of demand, the certain skills, certain niche skills do still have certain inflationary pressures, and we have to do those interventions also and do some corrections on the way.
Right. How do you claw this back, Vineet, given that the cost increase seems to be intervention-based and sticky in nature?
We continue to go back to our clients and look at price increases, rate increases wherever possible. We have been able to gain that in the past, multiple times, and we intend to get this back, what, in the, in the coming year.
Okay. Just a final question, Vineet. You know, I guess you would have had, you know, too many on profitability. Our various participants have asked, you know, what's the normalized level of profitability, 18%, 17%, you know, 10.5%, 18.5%. Now, I understand that, you know, your focus is profitable growth. Whereas what all of us are waiting for is that, you know, the definition of that profitable growth. You know, would you be able to detail out what that profitable growth implies?
Kawaljit nice try, but as you know that we do not give any guidance with reference to our profitability. See, what we intend to say is that both the companies independently were delivering a certain amount of profitable profit margins. Our intent is to return back initially to that margins in FY 2024. From there, over a period of time as a part of this merger, gain momentum and add another 200 basis point over the next 4 to 5 years in terms of profit margins. That's the intent what we are trying to say. I think so while I have not called out the numbers, but I have given you the indication in terms of where it's likely to be.
Right. Right. Right. No, got it. Yeah. I'm weak at picking, indications, so. Anyway, I think this answer is very helpful, yeah. Thank you so much.
Thank you.
Thanks, Kawaljeet.
The next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.
Hi. Thanks for the opportunity. just wanted to check in terms of our cash generation. our cash generation seems to be muted at around, 48% CFO to EBITDA or 36% FCF to PAT, and this was similar last quarter as well. What essentially is driving that and when do we see that come back to our normalized levels?
Ashwin, as you know that our merger happened in the middle of the quarter. We initiated the novation agreements, et cetera, with the customers. This being sort of probably a very difficult it probably is not the best quarter in terms of getting those co-contractual changes done in a very quicker way because most of the customers go on vacation post the December 15th . We had only 30 days honestly to push for and get few of these things done.
This delay in some of these novation, et cetera, is resulting in delay in doing the invoicing as well as delay in collection of some of the past dues because some of the customer systems also need to update the latest name of the company, and ensure that the bank accounts related to the right profile are being tagged to. All of these things I don't want to bog you with the operational details, but the fact is that this sort of difficulties have resulted into a little bit of a lower cash generation this quarter. We are absolutely putting our best foot forward to bring back that mojo of doing the collections well in time.
Our anticipation, our, my personal aspiration on this would be to get back to that 50-55 days bill DSO range in the next couple of quarters. Between Q3 and Q4 you may see a little bit of a disruption, but starting Q1 we may return back to those old days.
Yeah. Thanks, Vineet. Thanks for the explanation. Just one more strategic question. As we start to chase some of these larger multi-year cost efficiency deals, would we need to spend or invest in terms of the large deals team as well as maybe relax some of our operating parameters like say we are the most offshored in terms of effort within the IT universe at almost 85% offshore efforts? Would some of that change? Some of your larger competitors work at almost, say, 8%-10% higher offshore or on-site effort compared to you.
Ashwin, I don't think. See, first of all, as far as the large deals team is concerned, we already have everything in place, so I don't think there is anything to do additional. In terms of some of these large deals, you know, what it tends to happen is for a multi-year deal, the first, you know, 12 to 18 months, seems to be a little, you know, challenging in terms of, you know, margin dilutive to some extent. We have to take a prudent call in terms of how to manage that so that overall, over a period it is kind of profitable for us. Beyond that, I don't think there is anything specific that we worry about large deals.
In fact, we are very excited that we are able to engage in some of these conversations. As I said earlier, we should be able to, you know, talk about some of these things, some of the announcements as we go along. I can only tell you that as a part of the pipeline, there are quite a few conversations we are having with respect to some of these, you know, multi-year, cost- takeout opportunities.
Okay. Thanks, Vineet. Thanks for your answers.
Thank you. The next question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.
Yeah, thank you. Just a couple of clarification, you know, first one from Sudhir. Sudhir, while we understand like now this is, you know, the first time you guys are giving that combined order inflow number, can you just help us qualitatively how we should kind of look at this? Because earlier, you know, obviously both these companies used to adopt different ways of kind of sharing that information. While we are seeing a fairly, you know, strong growth in terms of the deal flow across your peer group, you know, can you share some senses in terms of, you know, how you are seeing order inflow versus how things used to be earlier?
Yeah. Mukul, I think, you know, just let me reiterate, there's a difference between order inflow and order book. Okay? This is not a book, this is the inflow within the quarter. The deal wins within the quarter totally added up is what we are reporting to you on an order inflow basis. I would say, I would reiterate what I said earlier, please compare it vis-a-vis our revenue run rate. You'll see, you know, it's approximately 20% above our revenue run rate for the quarter. That is the metric you should keep in mind and then track it over a full quarter period. I mean, you know, use this as the base and then. We'll continue to provide this data to you across the two quarters, I mean, as LTIMindtree.
Right. Just just to again kind of persist on this, how should we look at this inflow number? Are you seeing, you know, more, you know, kind of increase in deals which are kind of flowing in, you know, from your clients? Or like now is the pace kind of moderating as, you know, the different cycle kind of gets elongated?
Yeah. I think as DC mentioned, you know, the overall pipeline actually of the organization continues to be strong. In fact, the large deal pipeline, I would say is at a record level, you know, at the LTIMindtree level. We are seeing good deal traction as clients look to do both, right? There's a cost- takeout play that is there in every, you know, there are several deals where there are cost- takeout plays, as well as there are deals where clients are still continuing on multi-year, you know, transformation programs, whether it be in the digital and cloud arena or in the ERP arena. We are seeing both those spends continue.
Sure. DC, one clarification. You mentioned that, you know, you're kind of trying to keep the structure intact. You know, how should we kind of think about the structure of co-head of sales? Will that also continue or is that being folded in now?
Well, I think, you know, the initial thought process has been that there is so much of activity right now we require two market leaders. At some point of time, I think it will get folded. At this point of time, given the activities, given the clients, given the cross-selling, upselling we need to do, that's why we wanted to have that. Over a period of time we will see a change.
Great. Thanks for answering the questions.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Nitin Mohta for closing comments.
Thank you everyone for joining us.