Ladies and gentlemen, good day and welcome to the LTI Q2 FY23 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 the 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 Ms. Sunila Mathews, Head Investor Relations, LTI. Thank you, and over to you.
Thanks, Aman. Hi, everyone, and thank you all for joining us today to discuss LTI's Q2 FY 2023 earnings. The financial statements, press release, and quarterly fact sheet are all available in our filings with the stock exchanges, as well as on the investor section of our website. Today on the call, we have with us Mr. Sudhir Chaturvedi, President, Sales, Mr. Nachiket Deshpande, Chief Operating Officer, and Mr. Anil Rander, Chief Financial Officer. Management will give you a brief overview of the company's performance during the quarter, post which we will do a Q&A session. As a policy, LTI does not provide any specific revenue or earnings guidance, and anything said on this call which reflects our outlook for the future or can be construed as a forward-looking statement must be reviewed in conjunction with the risk the company faces. Over to you, Sudhir.
Thanks, Sunila. Hello, everyone. Thank you all for dialing in, especially on a Saturday, to discuss our Q2 results. We truly appreciate your time with us today. I know it's been a hectic week for all of you, because of the earnings season, and I hope you have a restful Sunday. Let me start with our headline numbers. We are happy to report 4.6% QoQ and 21.6% YoY revenue growth in constant currency. This translates to growth of 3.6% QoQ and 18.1% YoY in USD terms. We're also happy to continue our large deals trajectory and have closed four large deals with a net new TCV of over $80 million during the quarter. Three of these are with existing logos and one is with a global Fortune 500 client.
One of these is a new logo. Similar to previous quarters, these deal wins are broad-based and are spread across our portfolio, i.e. insurance, high tech, manufacturing, and services. Both these wins, our large deal pipeline remains similar to our previous quarter. That's approximately $2 billion. We look forward to sharing more such wins with you in the second half of the year. On the new logo front, we added 22 new logos with the highest number of new logo additions coming in our BFS vertical. We also had double-digit YoY growth across all our top client buckets and also added one client to our $50 million bucket. Let me give you some color on demand. We continue to see some challenging economic indicators as marked by high inflation and geopolitical issues.
We've seen both the pace of decision-making as well as the nature of demand change, frankly, since the pandemic. During the first year of the pandemic, organizations needed to reimagine their operating models and to embrace digital technologies in order to ensure that they continue to do business. Decision-making cycles were accelerated, driven by the need for survival. As we progressed into the second year, we saw the pace of digital transformation accelerate. The nature of demand and expectations around execution also changed. Discretionary spends picked up as clients invested in modernization and broadening of revenue-generating streams and understood transformation journeys in order to enable this. Speed was the biggest differentiator here, and hence the key driver for these journeys.
Now that we are in the third year, we are seeing a little more regular decision-making cycles, although even this is still faster than what we used to see pre-pandemic. With that backdrop, it is reasonable to assume that the overall macroeconomic environment and the anticipation of recessionary trends that we are seeing will have some impact on client spending, especially as we enter the new calendar year, CY 2023. While we at LTI have not seen any outright cancellations, there are signs that there are clients that are looking to spread out their investments in technology. Customers, more importantly, want to bring control to their run spend. They have made significant investments in cloud, data and digital and this new stack over the last two years, and many of these implementations were done at high price points because speed was of the essence.
There is now a need for organizations to go back and meet the planned business cases for all these programs, and therefore, there will be an efficiency play on the new stack. During this time at LTI, we are staying close to our clients to understand their needs. Business-driven transformations are still a priority with clients, so we continue to see that dollars that are allocated to business growth will continue. When we look at what they will seek to do with the new growth stack, we will see that they will programmatically run value realization programs to help them meet their business case and also use those monies to fund the strategic transformation initiative. Moving to the performance of our industry verticals, geographies, and service lines during the quarter. Our BFSI portfolio now accounts for 48% of our total portfolio.
BFS grew 29.1% in constant currency and overall budgets in our clients continue to grow in GRC, payments, and commercial banking. We have a strong pipeline across our key clients, mostly due to our presence in these programs, which are going ahead as planned. Insurance, we saw 15.8% YoY growth in constant currency. If you all know that our growth numbers in this vertical have seen improvements over the last few quarters, led by both large clients and several new logos that we have added in this sector since we added new leadership to run our insurance business in the U.S.. Manufacturing grew 11.9% YoY in CC terms, and we are seeing some caution in the environment here. With rising inflation, customers are looking to reduce their spend on discretionary items.
Hence, cost expense management is going to be critical, and there will be a focus on operational efficiency and outsourcing. Our pipeline is building up in these areas, and we feel that we are well-positioned both on strategic discretionary spend as well as the imperatives that they have in the efficiency space. Energy and utilities grew 29.9% YoY in CC terms. Demand environment continues to be strong here. We see large-scale ERP data and cloud projects underway or kicking off, and clients are not revisiting these decisions. CPG, retail, and pharma grew 21.8% in CC terms, driven by the growth in our large accounts and our large deals announced last year. High tech and media was flat YoY or slight negative.
This was on account of one of our large engagements transitioning from a fully on-site mode to offshore, moving to a global delivery model as part of the original deal structure. Others had a strong YoY CC growth of 48% as our marquee services customer continues to ramp up sequentially. This account is on track to be a $50 million account for us. On our geographies, again, we saw broad-based growth. North America and European markets continue to be key drivers, expanding by over 21% and about 30% respectively YoY on a constant currency basis. Excluding impact of currency, both of these will continue to grow well for us. In Europe, a large part of our growth is driven by continued large deal traction and new logo wins.
We see strong demand for our key capabilities around ERP and data and cloud, and we are monitoring the situation. Going into Q3, we'll continue to remain close to our clients and see how spend patterns emerge. With this demand outlook, I now request Nachiket to talk about our service lines and supply side. Over to you, Nachiket.
Thank you, Sudhir. On our service lines, both analytics, AI, cognitive, and enterprise integration mobility have grown well at about 44% and 38% YoY, respectively, in constant currency terms. These reflect the strengths of our data and digital engineering sub-service lines, with revenues from both of these practices doubling over last three years. Performance of these service lines also ties into what Sudhir said earlier on demand, where we see several clients reviewing their business case for their cloud migration and data journeys. We talked about this opportunity last quarter, where we are trying to solve for an efficiency expectations of our clients in these large investment areas that they have made in new digital stack. Our proven expertise in the efficiency play with our deep-seated and premium partnership with hyperscalers is helping us to see continued traction in this space.
LTI remains well poised to capture this opportunity. Post the merger with Mindtree, this will further strengthen along with their expertise in customer success and digital transformation. To further build on this momentum, we continue to make investments along with our strategic partners. We opened our joint insurance innovation lab with AWS in Hartford, Connecticut. We already delivered one joint solution from this center between AWS and LTI. We were also named a launch partner for Salesforce Automotive Cloud, which is the new product offering from Salesforce, unveiled at the recently concluded Dreamforce event. Now moving to supply side. We are proud to have crossed the 50,000 headcount mark this quarter. Our hiring engine continues to work well, and we're not planning for any moderation in our hiring plans in Q2-Q3.
Our net headcount addition of over 2,100 people in Q2 has been in line with our earlier quarters, and we continue to build momentum for demand and growth going forward. On the attrition side, we are seeing some softness in hiring premiums and cool off and designation numbers. We are likely to see some moderation in attrition numbers in H2, but for certain hot and niche skills, supply-demand mismatch will continue and will take several quarters to be bridged. Before we look at business outlook, I want to talk about the progress on our merger with Mindtree. We're happy to be on the last leg of required regulatory approvals and should be able to combine forces by end of calendar year 2022. As we had explained earlier, the merger rationale is essentially a revenue synergy-based rationale.
The business case is around two fast-growing companies coming together to grow even faster. As this merger offers an exciting and broader growth platform to all of our employees, we also see a lot of excitement among our workforce. We have been working to ensure speedy and seamless integration through our steering and integration committees. Focusing on interoperability in the first quarter and then accelerated consolidation of key systems and operating models is our primary focus. The majority of integration activities are expected to be concluded by Q4 FY 2023. Now moving to outlook on Q3 and FY 2023. While macroeconomic indicators point to a near-term softness in market volatility, we see these challenges also as an opportunity. We remain close to our clients across all levels to understand and align our investment plans. We continue to execute well and deliver in a challenging and changing environment as demonstrated in the past.
We expect our Q3 performance to be as strong, if not better than our Q2 as it has historically been. We'll continue to be in the leader's quadrant for growth with a stable PAT within the guided band for FY 2023. In the near term, while we are not immune to impact of global economic events, we feel we are much better positioned than earlier to address any future shifts. Both LTI and Mindtree are growth leaders, and post-merger as a combined entity, we will leverage our scale to move from being the best challenger to tier ones to setting the foundation for the leadership. With that, let me hand over to Anil.
Thanks, Nachiket. Hello, everyone. It is great to be back with you all with another quarterly earnings. Let me take you through the financial highlights for Q2 FY 2023, starting with the revenue numbers. In the second quarter FY 2023, our revenue stood at $601 million, up 3.6% sequentially and 18.1% on a yearly YoY basis. The corresponding constant currency growth was 4.6% quarter-on-quarter and 21.6% year-on-year. Reported INR revenue of 48,367 million was up 6.9% quarter-on-quarter and 28.4% year-on-year. We are very happy to have crossed the $600 million revenue milestone. Now coming to profitability.
EBIT for the quarter was INR 7,809 million, translating into an operating margin of 16.1% as compared with 16% in the previous quarter. Increase in employee costs and moderation in utilization was offset by currency benefit and a working day impact. Reported profit after tax was INR 6,798 million, which is translated into a PAT margin of 14.1% compared with 14% in Q1. We remain comfortable with a guided PAT margin of 14%-15% for FY 2023. Moving on to people front. Utilization without training was 82.1% as compared to 81.8% last quarter, and utilization including trainees was 80.3% versus 81.3% in Q1.
We continue to strengthen our workforce, and during Q2, we added 2,215 people on a net basis. The total manpower stood at 50,981, of which our production associates were 95.5%. In this quarter, attrition was at 24.3% versus 23.8% last quarter on LTM basis. Our cash flow hedge book stood at $1,938 million as of 30th September 2022, versus $1,795 million as of 30th June 2022. While the on-balance sheet hedges stood at $140 million versus $108 million last quarter. Moving on to the DSO. In Q2, the billed DSO stood at 62 days as compared to 61 days in last quarter.
The DSO including unbilled was at 99 days as compared to 100 days in last quarter. For the quarter, the net cash flow from operations was INR 3,608 million, which was at 53.1% conversion of net income. At the end of the quarter, cash and liquid investment stood at INR 32,636 million as compared to INR 38,824 million in the last quarter. Earning per share for the quarter stood at INR 38.75 as compared to INR 36.13 in Q1. Diluted earnings per share was INR 38.7 versus INR 36.08 in the last quarter. On the ESG front, we remain steadfast at reducing our environmental footprint and becoming a carbon and water neutral company by 2030.
In Q2, LTI has been certified as a water positive company based on third-party audit. With a positive index of 1.87, LTI is one of the top water savers. With that, I would like to open the floor for questions. Folks, before we take questions, I just wanted to say that this is likely to be our last call with you as standalone LTI. It's been a fascinating journey since our IPO to now being an established player in the industry. We are thankful for the constant support that we get from the L&T Group, AMN, SNS, and RSR, who were actively involved in enabling every part of our growth journey. I want to thank the L&T board for their mentorship, and I wanna take this opportunity to also thank Sanjay Jalona and Ashok Sonthalia, who are an integral part of this journey.
We would like to thank our employees who have always gone the extra mile as our employee numbers went up from 19,000 when we IPO'd to over 50,000 today. As always, we wanna thank our clients for the faith they have placed in us at all times, there have been some difficult times and otherwise, to deliver their most difficult programs and drive their growth agenda. We look forward to building on all of this together as LTIMindtree and seek your support and advice in the exciting journey ahead. Now we can open the floor for questions. Thank you.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the 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. First question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.
Yeah. Hi, good evening. Congrats on a very good set of numbers, and also best wishes for the festive season and also best wishes for the integrated company going ahead. I have only one question that, you know, when I hear your commentary, it looks little, you know, measured in the sense that on one front you are highlighting the risk of the macro, which you are probably also seeing the way the whole world is seeing. And at the same time, you know, you are also acknowledging the fact that if risk to economies or the macro environment worsens from here, then the need to optimize cost will accelerate. Which obviously implies that people will use the cheapest possible option to achieve their goals, which is obviously outsourcing in the technology stack.
I am trying to understand little more clearly whether you are more inclined towards the macro uncertainty, how you see today, or you are more inclined towards the opportunity which it will throw up in the sense. I am obviously inclined will be towards the opportunity. What I am trying to understand is today, as you see, which side you are seeing, the whole environment tilting.
I think, you know, if I step back and look at the conversations that we're having with clients, right? Clients are spending money where they're either enabling business growth, right? Where there's revenue growth. Those programs, you know, those are in many cases multi-year programs. That spend is continuing as planned. The efficiency is coming in places where some, frankly, some of the money was spent perhaps not as judiciously, you know, because it was spent for speed, right, in enabling cloud data and digital journeys. Those, you know, those consumption costs have risen. Those Azure service costs that they have gone up, so they're seeking to rationalize their spends to get back to the business case. I think those are the two trends that we are clearly seeing, and we feel, you know, well-positioned to do both.
If you see our large deal track record, right? Most of our large deals have actually been in the outsourcing space. We are actually well poised for that spend pattern to shift. It's really a question about chasing the right dollars. You know, chasing the right digital growth dollars and chasing the right outsourcing dollars. We think we are in a good position to do both. You know, frankly, volatility, I know we are seeing some now, but you know, nothing compares to the volatility that we saw in March 2020, right? If we could deal with that and grow 9.5% even in a pandemic year, where frankly everything was up, right?
Compared to that, you know, this is an environment where we have runway to actually have discussions with clients and change, you know, as they change their, if they need to change their spend patterns. You know, we will make sure that our strategy is in line with where the dollars are being spent.
So.
We've had a bigger crisis. We are very confident about this one also.
Thank you. Thank you so much for that, answer, and wish you best of luck for the current quarter. Thank you.
Thank you.
Thank you. The next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.
Hi. Thanks for the opportunity. One, you get a sense on why our cash generation is so weak. What is the outlook on the same? Because our FCF to PAT is just 14% in the first half. Our CFO to EBITDA is just about 34%. Even in the last year, the FCF to PAT was weak at around 34%. Just want to get a sense in terms of why last earnings growth numbers are very strong if I look at it over a two-year duration. If you look at your FCF over a two-year duration on a run-rate basis, there's a 40% year-over-year decline. Just wanted to get my head around why the cash generation is so weak.
Yeah. Thanks, Ashwin. I think there are few key reasons why, and these are more, I would say, transient here. I think that this quarter we had. Last quarter we did have an incentive payment on which there was a TDS liability. Obviously, this was paid during the current quarter. Obviously, in terms of the advance tax, the overall quantum is higher as compared to the last quarter. That is also another reason. Actually, there is a premium payment for one of our insurance policy, which actually fell due on the last day of the quarter. That is also a key reason for why this cash generation has been lower.
It's been higher than Q1, but we are confident that we'll pull it back in streak in terms of Q3.
Okay. Just a second clarification was, we did talk about that Q3 could be similar or better. Do we expect our typical seasonality, wherein our second half is generally better?
Yes. Q3 will be better than Q2, and second half will be a bit stronger than H1.
Sure. Thanks a lot and all the best.
Ashwin, just on FCF also you had raised a question. Obviously, there is an investment which we are making into our own premises in Mahape, and that investment is also going in, and that's the reason why FCF is low.
Anil, what is the kind of capacity increase that we are doing in Mahape?
It's about 8,000 seats, Ashwin.
Okay. This is happening over the last year and this year because our CapEx last year was also elevated. Is it
Yes, yes. We've just actually inaugurated that facility last week, and it would be ready to occupy from January onwards.
Okay. Thanks, Nachiket. Thanks for the clarification.
Thank you. The next question is from the line of Mohit Jain from Anand Rathi. Please go ahead.
Hi, sir. One question on margins. How should we look at margins? Because that is one metric where we are relatively lower on EBIT compared to pre-pandemic. How do you guys see this going forward in the second half? Second related question, but should we consider some merger related expenses in second half of FY 2023?
Yeah. You know, Mohit, we've always guided that our margin will be between the band of 14%-15%, and we are sticking to that. I think the important thing for us is that, you know, we are seeing, as you can see, a broad-based growth environment, right? You see our growth across verticals. You know, even this quarter, high tech, which we had a client-specific reason, every other vertical has grown. We've grown in North America, we've grown in Europe. Our focus is making sure that we exploit the growth opportunity that is there. If you see our net employee addition continues to be strong.
You see our, even our operating expenses, things like our travel, et cetera, has gone up because we wanna focus on making sure that the growth that is there in the market is achieved. We think that that is the right strategy in this environment to adopt because ultimately, you know, we together with Mindtree will offer even more scale benefits. You know, I think the margins over a period of time as we, you know, as we scale will improve, but we have to ensure that, you know. The best way to do that is to ensure that our growth momentum continues to be well maintained. We'll always invest for growth.
In Q3 and Q4, there would be some one-time expenses that could come up because of integration, because as I said, we are looking at a very speedy integration, and all our systems and processes will be consolidated by end of financial year. These two quarters, you might see some one-times coming in for the integration costs.
Any quantification there? How big or small could that be?
We're still in the process. I think once we get all the regulatory approvals, we'll have the clarity on exact timelines, then we can quantify.
Yeah. Last thing, sir, one follow-up on high tech. If you adjust for that one client shift that you spoke about, what kind of growth rate and outlook do you have for high tech vertical?
High tech consistently, if you look at the last two years, right? High tech, you know, on average is a 20%+ YoY business for us. We continue to see that. In fact, one of the large deals we announced with a global Fortune 500 company is also a high tech player. It's really one client, one quarter. Everything else.
From your perspective, the outlook has not changed in high-tech vertical.
No, no, not at all. In fact, we are seeing some good growth there. See, remember, you know, as I said, the combination of service lines, because we are also selling, you know, the number of deals that we're doing together with Mindtree has also gone up significantly. Now we are able to bring, you know, sort of full, you know, a much wider array of service lines to clients, and that is also something that we are leveraging in this vertical.
Sure. Thank you, sir. That's all. All the best.
Thank you. The next question is from the line of Vibhor Singhal from Phillip Capital. Please go ahead.
Yeah, hi. Good evening. Thanks for taking my question, and congrats on a solid performance. So, Sunil, just two questions. One is, as you mentioned in your opening remarks about the macro headwinds that clients are kind of facing at multiple levels. Just wanted to basically dig a little bit more into it. Any specific pockets in terms of verticals that we are seeing more, let's say, a concern or more pushback than some other verticals? The general tendency is that B2C companies tend to feel the heat of these dwindling demand and economic downturn or recession earlier than the B2B companies. Maybe retail or BFSI. Are we seeing that trend also here?
Any color that you could provide on that. Secondly, on the margins, of course, as you've just mentioned that, I mean, we would definitely look at it, but, and I mean, our margins have definitely fallen much below over the last couple of years. Even if I remove the travel benefit that we had during the COVID pandemic time, pre-pandemic also our margins are basically down off of those levels. Now that I believe the multiple base hikes that we had to give is behind us, attrition also, as sir mentioned in the opening remarks, is expected to cool down. Do we expect margins to expand significantly in the coming quarters?
I mean, I know we have a lot of visibility, but on our standalone basis, do we expect the margins to expand significantly? Adjusted for the one-off expenses, of course, that you called out.
Vibhor, okay, let me answer the question that you had related to macro and demand. See, in terms of macro, right, what we are seeing in BFSI, which is 48% of our business, actually we are not seeing. In fact, the areas we are in, right, compliance, you know, commercial banking, wealth management, actually we are not seeing any change here. Perhaps our exposure to retail banking being low potentially helps us. Mortgages we are not present. Payments is something we are very strong in, which is actually one of the fastest growing areas. You know, in BFSI, we grew, I think 33% last year. This quarter also we're growing 29%. You can see the momentum we already have in this sector.
BFSI, if anything, will continue to actually be our growth driver, exactly the reverse of what I think people are expecting. We don't have much you know, exposure to retail and consumer. It's a smaller part of our business. We're seeing a little bit in some of our manufacturing where clients are just, you know, they're spreading out their investments over a longer period of time. That's what we are seeing in manufacturing. But you know, I think as I said, right, you know, all the indicators that I mean, the places that we thought will have an impact, for example, Europe or BFSI or some other you know, sort of service lines, we're actually not seeing that pan out. You know, we're growing in Europe as well, 29% YoY. I think, you know, we've
When I look at why we are confident about Q3 being stronger than Q2, it's because, you know, we've got our top 20 growing. We've got large deals that we've done over the last three quarters. I think we've done 13 over the last.
12.
12, over the last three quarters. We've got our largest vertical is growing. Europe is also holding up in terms of growth, showing good growth. Finally, our employee additions are strong. You know, we are in a good position to exploit all that for growth in the coming quarter. With that, I'll hand over to Nachiket for the margins.
On the margins, actually, as you said, right, if you look at last couple of years across the industry, and that's true for LTI as well, large part of the pressure came with the replacement cost being higher for attrition. It wasn't driven by the usual wage hikes, but it was driven largely by the replacement cost for attrition backfill being higher. Attrition has started to come down, but it is still very high. It's still much higher than what we would like, and it's much higher than what industry had operated in the past. That pressure is starting to ease a little bit, but I would say that it's still not gone away fully. And as Anil said, we'll continue to remain in our guided range of 14%-15% PAT.
We'll pull different levers as we see the situation improve. As Sudhir also said, our focus will continue to reinvest back into our growth as we have always done. For us, yes, there are some parameters which are improving. We'll pull different levers to stay within our guided PAT margin and continue to seek the leaders quadrant in growth.
Got it. If I could just maybe drill a bit more. Just one quick thing. So given the wage hikes are behind, adjusting for the runoff that you mentioned, would we expect H2 EBIT margins to be better than H1 EBIT margin?
We don't guide for EBIT, right? We always guide for PAT to be in 14%-15%, and we continue to maintain that guidance.
Sure. Great. Thank you so much. Thanks for taking my questions, and wish you all the best.
Thank you. The next question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.
Thank you. Sudhir, I just wanted to, you know, kind of, get a bit deeper into a comment which you just made about what number of Mindtree deals with Mindtree have gone up, as you guys are able to bring an array of capabilities. While, you know, I know you guys probably will talk a lot more about it next quarter, but, is it possible to get an early glimpse into, what really is happening in, areas where both, LTI and Mindtree have presence and what you are bringing to the table and what they are bringing to the table to kind of, accelerate the opportunities?
Yeah. No, thanks, Mukul. You know, we've. As you have heard from us before, right, the service line synergy, especially between the two companies, are extremely strong. LTI traditionally strong in ERP, data, and cloud. Mindtree traditionally strong in customer success, which is, you know, customer experience, digital marketing, e-commerce, that entire suite of offerings is very, very strong there. That's where the, you know, cross-sell momentum is there. Today, between the two companies, there are 80+ pursuits that are underway where both companies are jointly pursuing deals. You can see there's been a significant increase since, you know, we announced in May. That momentum is also, you know, that it's one of the best ways of integrating as well, right?
Because, you know, you're doing joint deals together, you know, both teams are already working together to pursue this, so which is why we feel that, you know, we have, you know, we've planned the integration well, and we can hit the ground running on day one itself. As well, you know, obviously complete all the merger, you know, systems and processes thing. From a business perspective, our momentum should continue to only go up. You know, that's something we'll continue to do together.
Sudhir, is it possible to share an example of, you know, a big deal where you brought something to the table and they brought something, and you guys were able to put together, you know, an opportunity for a much larger offering to a client?
Last quarter, we talked to you about a client in the travel technology space. In this quarter, you know, there is a significant large deal that is happening in the consumer space, where we have, you know, this is a client that is putting up their entire tech spend up for rebid. This is not an existing client. I mean, it is a small existing client of ours. What we are doing is they are looking to. Actually, this is a consumer goods company that's investing very significantly in their e-commerce channel as they go direct to customer. This program is actually right from all the things that they need for omni-channel commerce, all the things they need from digital marketing, right down to the supply chain, right down to finance and data, right?
That entire chain is what they are you know talking to us for. That's the conversation that we are having jointly. In the past, we would have had the conversation from on finance and supply chain. They would have had the conversation on e-commerce. Now we are able to put all this together and bid together. That's on the transformation side. On the, if I look at the cost reduction side of the house, right? Where we're also seeing. There's another client of ours, it's in the high-tech space, which is looking to you know reduce their tech spend in the areas. That's where we are getting together, again, with a combination of technologies that we both are good you know strong at.
There we are bringing our strengths in ERP and data. They're bringing their strengths in a lot of the consumer-facing technologies that are there. Our ability to cover the entire technology spectrum for them is very strong, and that's the other deal. These are both very significantly sized deals for us. That's just to give you some examples.
Super. No, no. Really helpful, and I'm excited to see the combined company from next quarter onwards.
Yep. Thank you.
Thank you. The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Yeah. Thanks for the opportunity. The first question is, Sudhir, I think, consistently we are seeing last three.
Your voice is not very clear. Request you to come closer or use the handset.
Better? Hello?
Yes, better now.
Yeah. The question is in terms of the large deals, we are consistently winning last three quarters. Is there any pattern change because of the?
Sorry, Sandeep, again, your voice is.
Start of the project, ramp up of the project. I only just wanted to understand?
Sandeep, you're not audible. Can you hear me, Sandeep? This is the operator. Sandeep, I'm sorry to interrupt you, but your voice is not very clear. Please use the handset.
Sandeep, sorry. Maybe I got part of your question, but help me understand if that's okay to answer that. You're asking us if we are seeing a change in pattern in our large deals. Is that right?
Yeah. After winning the large deal, is there any change in pattern in ramp up because of the challenging macro?
No. Actually, no. No change in ramp up. You know, the deal cycles are, you know, large deal cycles, I think, consistent with what, you know, typical large deal cycles have been. In some cases, you know, these deals, in fact, you know, now that we've learned how to do transitions also remotely, you know, completely remotely in the pandemic, et cetera. Actually, you know what used to. You know, there used to be some time for ramp up of resources and, you know, placement of resources. In fact, that's also gone now. You can start these ramp ups fairly quickly.
Where I think clients are, you know, if I look at the nature of the deals that, you know, that are there in our $2 billion pipeline, I think what we are seeing is what Nachiket was referring to, right? It's, you know, the traditional technology, you know, as I call it, legacy in today's world, right? That has already gone through multiple rounds of outsourcing and very heavy offshoring. There isn't much to save there. The savings are really on the cloud data, digital, D-SaaS, you know, all that stack. That is where we are seeing the changing nature. They are asking us to save them money on this spend. Because this spend is metered spend, right? It only goes up every month. As their consumption goes up of technology, they spend more and more every month.
It's not a one-time control. It's a, you know, you basically rearchitect an entire run operations on a continuous basis. It's a different type of outsourcing to what we have done in the past. It has to be led with tools rather than people, and that is what we are able to show to clients that we are capable of doing that. That's why we feel confident about those deals in that space.
Okay, thanks. Just a follow-up, Sudhir, how to read some of the born-digital software companies like Salesforce, Pega being downgrading guidances growth outlook for slowing macroeconomic. Duck Creek is also concerned. While LTI also gets almost 28%-29% revenue from ERP, as well as Mindtree also getting a material portion of revenue from Salesforce. In this scenario, does that makes us slightly upset?
Yeah. You know, I'll separate this. If you look at, you know, if I look at, for example, SAP or even if I look at Salesforce or ServiceNow. See, I think the one key thing to see in their numbers is how much has moved from what used to be license sales, which got recognized immediately as revenue, to what is now as a service, right? Where they only can recognize revenue as the software gets consumed. You know, the amount of consumption of the software actually determines their revenue. Their change in business model, you know, will have an impact in terms of their revenue cycle. Because now if they're born SaaS companies like Snowflake, et cetera, that, you know, you'll see that trajectory is continuing to do. Even they are actually focusing on consumption.
Now if you want to drive consumption of software that has been sold, frankly, you cannot do it without services companies. Because services companies will implement those industry use cases or those business use cases which lead to the consumption of technology. That's why if you see, you know, Nachiket gave you the example of AWS insurance industry, right? The innovation lab that we have set up together and the deal that we have sold together is that if that was an existing AWS client, it was, you know, an AWS setup was already available to them, but we are driving consumption through our solutions. If you see the partnerships are actually in fact, I think we are having partner conversations almost every day and at the highest levels, you know. This is at the CEO levels.
Because they're working with us together to say, "You build the industry use cases for us to drive consumption because that's what will drive our revenue." Sandeep, I think that's the big shift, right? We call it disruptive SaaS. Disruptive SaaS is all about consumption, and that is all about industry benefits. You know, how do you provide essentially, and if the benefits are on the revenue side of the house, we get immediate traction.
The last one I can squeeze, Sudhir, just wanted to understand the growth demand perspective. Anything materially changed versus Europe versus U.S. for LTI or even Mindtree? If you can comment on a merged entity basis, whether our exposure to some of the European industries will make us slightly weaker in terms of the growth ramp up going forward.
See, Europe, frankly, you know, we can't do much about the currency obviously. If I look, as I said, Sandeep, before also, right, we are growing at 29%, and we'll continue. We're continuing to do well. We see a decent business in Europe. You know, we've got, I think, resilient clients also in that space. So not concerned. You know, we know the outlook for Q3 very closely, so we know that's why we can confidently talk about it. I think Q4 we'll see new budgets come in, but as I said, right, we know. You know, we know how to chase the right dollar. That's the one thing LTI knows extremely well.
Even, you know, as the market changes, where it changes, we'll make sure that, you know, we're in the right conversations for that.
Okay. Just a last bookkeeping on the depreciation side, is there acceleration in this quarter and will that go back to normalized level in the coming quarter even after the Mahape capitalization from Q4, will it increase?
It'll go back to the normal level. Anyway, Mahape is likely to come only in Q4 or next Q1.
Okay.
Yeah, Sandeep, any more last questions?
No thanks. Sorry. Sorry for this.
No, no. Always a pleasure to talk to you, my friend. Thank you.
Thanks.
Thank you. Next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.
Thanks for the opportunity. Two questions from my side. First about just want to understand high-tech vertical. Now this quarter softness you partly alluded to offshoring in one of the large account. If I look your margin profile, margin remains under pressure. Typically, during offshoring we see generally benefit happening at margin level. That is one thing about why it is not getting reflected in margin performance. Second, even if I look one client kind of offshoring, YoY growth rate is also fairly weak compared to company average. If you can give some perspective what is playing out in high-tech vertical. Second question is about manufacturing. You indicated some kind of caution. If you can help us understand sub-segment where demand remained resilient and where you see more weakness, particularly when Q3 we see seasonality.
Generally, manufacturing's growth accelerate. Considering that in mind, if you can help us understand how you expect that acceleration to play out this year. Second question is about SG&A expenses. Now they remain fairly low and we are not seeing any uptake. Even the work from office kind of expenses started inching up in some of your peers' financials. If you can provide some perspective. Thanks.
Those were four questions, by the way, Dipesh. Okay. I'll answer the first one then hand it over to Nachiket Deshpande. On the high-tech account where the delivery model sort of moved from on-site only to global delivery model and offshore. You're right, the margin profile should improve on that. As you can imagine, this is a transitional quarter, right? When we move from on-site to offshore, in any quarter when the transition happens you see some trouble increase. That's why the margin is not reflective in the P&L directly there. Also many of these deals are structured, so you can see a relatively flatter margin profile that is there across the quarters when the deal was structured, as well.
Actually high-tech growth, Dipesh, last four-quarter average growth is 21.2%. As I said, you know, we have a good pipeline, some decent large deals, so no concerns on high-tech growth. Manufacturing. Manufacturing, as I said, you know, again, if I look at our average four-quarter growth in manufacturing, that also has been 21% by the way. In manufacturing, I think the environment on our customers, you know, spreading out their investments over a longer period is something that we are seeing. We, you know, I think even now, you know, we're growing, you know, this quarter we grew 12%. You know, it's still more than double digits. We'll continue to focus on this.
There are some large deals in the manufacturing portfolio as well. That picks up, you know, we'll start to see growth back. I think across all our verticals, right, we are only seeing current sort of, you know, slightly lower growth than our company average only in manufacturing. If you saw, insurance is already on the way up, in terms of growth, so we're confident about that. Which is why I keep saying we have broad-based growth, so we're not worried that much about, you know, any particular, vertical or region. Our focus is really on the deals that are currently underway at LTI, all the AT pursuits that we're doing, plus pursuits that we're doing together with Mindtree and the large deals of the pipeline that we already have.
All the things that we can already see.
On the SG&A, Dipesh, you mentioned that, you know, so it appears to be flat, but if you see there is an increase in the absolute amount, and also we are getting in some G&A efficiency, due to which that number appears to be.
With the return to office, Dipesh, all of our offices in India are now open. We are seeing, you know, a hybrid model that we have adopted. People are coming in for two to three days a week as we expect. Office-wise, I think all of our offices in India are now open for.
Thank you, Mr. Mehta. Request to join the queue for any follow-ups as there are several participants waiting for their turn. Thank you. We have the next question from the line of Manik Taneja from JM Financial. Also, participants are requested to limit a question to one per participant. If time permits, you may join the queue for any follow-ups.
Thank you for the opportunity. I had quick couple of questions. One was what you understand like you also indicated about flush in financial services for this year, and you also commented that BFSI will remain good in FY 2023. Does our commentary and our conversations with clients still suggest the same? That's question number one. The second was a quick one. With regards to the fresher hiring, if you could help us understand how many freshers have you added in second quarter and first half, and does the plan to hire 6,500 freshers for the year stay the same? Thank you.
Manik, sorry to interrupt. You were not clearly audible. Maybe please repeat.
I think, got this.
Manik.
Manik, I think we got your question. Sorry, your line isn't great, but I think we got it. You know, you had a question on fresher hiring and your earlier question was on BFSI, right? Do we see sustained momentum even in Q3? The answer is yes. Yeah, absolutely.
On the fresher hiring, we are on track with whatever our hiring guidance of 6,500, which we will hire this year, which is of course for the FY 2024. As far as the fresher onboarding is concerned, we onboarded about 1,600 freshers in Q2 as against about 1,000 in Q1. We are on track to onboard whatever we have offered from a FY 2023 perspective.
Sure. Thank you. All the best for the future.
Thank you. The next question is from the line of Rahul Jain from Dolat Capital. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Basically, as this merger announcement has been made for six months now, and you might be interacting with your clients already on this thing. So is there any change, good or bad, that you could highlight, both A, from external point of view in terms of clients and partners, and internally, how you think it changes in terms of nimbleness, approval, reporting workflows for your team?
Right. Actually, you know, from a client perspective, they're wondering why it's taking six months. You know, they I mean, you know, they can see the benefits. We, you know, we've also communicated very, very regularly to them. They can see the benefits of the, you know, the combined LTI, Mindtree set of offerings, especially to each, you know, across verticals, across regions, across service lines. I think there's a, as Nachiket said in his comments also, there's excitement about, you know, about this both in our employees and our clients as well. You know, we hope that this will happen soon. In terms of.
In terms of process and.
Yeah.
nimbleness, since we still, because of the regulatory approvals are still in the last leg, we are operating as independent companies, separately listed, right, and accountable to separate set of stakeholders. That part hasn't changed. LTI is operating the way LTI has been, and Mindtree is operating the way Mindtree has been. Our plan for integration, the endeavor is that, as Sudhir said in his commentary, that we would not want to lose growth momentum. That's the fundamental premise of this integration is that we want to grow faster together than we were growing individually. The endeavor is that anything that enables that growth, we will not want to disrupt. And all of our operating model processes as well as organization structure is designed in such a way that will enable that, high growth, as we go forward.
today, as it stands, we are operating as individual companies as we were before.
Right. That means we may not be very closely integrated, but leveraging the best of the other, but more acting like a sister concern in near future rather than acting as one.
No.
No. I think, see, you have to think of it as an additive organization, right? Because we've got not much overlap, so therefore you have to create an additive organization that actually has wide scale, right? Our whole thing is to maximize coverage and maximize scale. You'll see on the sales side, you know, the whole endeavor is to maximize coverage. On the delivery side, it is to maximize scale benefit. That is how we are designing.
At the same time we will move to a single set of systems and single set of a process by the end of Q4. We are actually doing a very accelerated integration. You would actually see us operate like one company much sooner than you typically expect when these two sides of the companies come together. A part is that, so the common processes where scale will help, like hiring, like bench, we would operate as one. The areas where individual expertise needs to be preserved, because that's the cross-sell and up-sell promise to our customers, we'll continue to preserve those differences, as we go to the market. That's where, as Sudhir said, the organization will be more additive.
To stretch a point a little bit more. My question, just to give you one example, is like today if you're chasing a certain size of a deal as a large deal because you're a certain size business, but tomorrow you are a much larger business. What you call as your large deal by logic, it should look like a much bigger deal. That's why the thinking and the deal you chase in the market changes. Technically if you are chasing it as a $5 billion organization versus a $3 billion organization or whatever.
From that perspective is what I was trying to understand.
Yeah, you're right. The definition will change, and we already talked about, as I said, right, when I mentioned the 80+ sort of joint pursuits that we have, you know, we are obviously looking at materially larger deal sizes, jointly.
Thank you, Mr. Jain. Request to join the queue for any follow-up. The next question is on the line of Apurva Prasad from HDFC Securities. Please go ahead.
Thanks for taking my question. I'm trying to reconcile some of the earlier comments with so is the move to efficiency likely to increase deal durations? Therefore, do you see large deals pipeline inching higher from INR 2 billion? It's been fairly static there, and that's despite the joint deal pursuits. Should we see this as durations that remain fairly static and macros slowing down the deal velocity?
First thing, yes, as people look to do more efficiency, those tend to be longer duration deals. Absolutely. If you look at the deal pipeline and TCV, also remember, you know, the wins also contribute to part of this. Sometimes the entire TCV is not awarded to us, it's awarded to multiple parties, so that also has a bit of an impact on the TCV. Overall, as I mentioned, you know, I think the spread of this $2 billion that we have today is quite interesting. The number of deals that we are already seeing in the final stages is what gives us that confidence.
So that, you know, we have a good balance between, as I said, the business growth kind of deals as well as the efficiency kind of deals and the efficiency in the new areas, which is where that investment will sustain over a period of time.
Got it. Thank you. Best wishes.
Thank you. Next question is from the line of Abhishek Shindadkar from InCred Capital. Please go ahead.
Thank you for accommodating me, and congrats on a good quarter. Just one question, Sudhir. In your prepared comments you mentioned about, you know, an uptick in the large scale ERP programs, if I heard that correctly. Any color in terms of, you know, what is driving it now, and is it happening across, you know, the large, mid, small market of, from an opportunity standpoint? Thank you for taking my question.
Yeah. Abhishek, thank you for that. You know when we look at ERP, right? We've got three things sort of going for us. One is there is a move to cloud on ERP. Where they're moving from existing on-prem to going forward. The second is, you know, journeys like S/4 or OC, Oracle Cloud applications. You know, where they're looking for, essentially modernization, consolidation and simplification of the landscape. Those programs are also underway. Those tend to be, you know, multi-year programs. That's why the programs don't stop. The third is we are seeing an uplift because, you know, that's naturally something that we bring to all Mindtree customers. Those joint pursuits that you mentioned, that's another area where we are seeing that, you know, Mindtree clients are now being exposed to our ERP expertise.
You know, there are other areas like supply chain visibility, et cetera, which were key during, you know, the pandemic, et cetera, which also require ERP interventions. You know, ERP is, I think we're seeing the shift towards, you know, the projects being in the transformation side of the house. That's where we are seeing the spend in the ERP, on ERP roadmap.
Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Sudhir Chaturvedi for closing comments. Thank you, and over to you, sir.
Thank you, folks. Thank you very much for your time today. Again, you know, thank you for bearing with us on a Saturday. Once again, you know, wish you all a very happy Diwali, and we look forward to our continued interactions and, as we will keep you informed, you know, at all times as our merger discussions progress. Hopefully, you know, we will be able to close that in Q3 and meet together as one in the next quarter.
Thank you very much.
Thanks.
Thank you. Ladies and gentlemen, on behalf of LTI, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.