Ladies and gentlemen, good day and welcome to L&T Technology Services Limited Q2 FY 2023 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 Mr. Pinku Pappan, Head of Investor Relations. Thank you. Hand over to you, sir.
Thank you, Faizan. Hello, everyone, and welcome to the earnings call of L&T Technology Services for the second quarter of FY 2023. I am Pinku, Head of Investor Relations. Our financial results, press release and investor release has been filed in the stock exchanges and are also available on our website, www.ltts.com. I hope you have had a chance to go through them. This call is for 60 minutes. We will try to wrap up the management remarks in 20 minutes and then open up for Q&A. The audio recording of this call will be available on our website approximately one hour after the call. Let me introduce the leadership team, present on this call. We have Amit Chadha, CEO; Abhishek, COO; and Rajeev, CFO.
We will begin with Amit talking about the company performance and giving an overview of the outlook, followed by Rajeev, who will walk you through the financial performance. I now hand over to Amit.
Sure. Thank you, Pinku, and thank you all for joining us on the call today. I hope all of you are keeping healthy and safe. With that, let me start with the key highlights for our Q2 performance. I would first like to share that LTTS, we at LTTS are very proud to have achieved the $1 billion annualized revenue run rate on a constant currency basis this quarter. This is a milestone that we had set for ourselves last year to reach it by Q2, Q3 of this fiscal, and we are happy that we have crossed $250 million in constant currency in Q2.
I would like to take a moment, thank all our employees that have come together on this journey, as well as our chairman, vice chair of the board, the entire board, and our first CEO, Dr. Keshab Panda, for having shown us the vision and had the confidence in us. Our momentum continued into the second quarter with a 4.5% constant currency growth led by transportation and plant engineering. The growth was accompanied by sound operational execution, with Q2 being the fifth consecutive quarter of 18%+ EBIT margins.
Total deal TCV remains healthy, and our large deal wins include a $60+ million deal and a deal of TCV more than $10 million. Let me now provide the segmental performance and outlook. Starting with transportation, we had a stellar performance with 9.4% QoQ growth in constant currency that was broad-based across subsegments of auto, trucks and off-highway and aero. Our differentiated EACV offerings have helped us get into strategic engagements with customers yielding us large deal wins consistently.
A INR 60 million deal in Q2 on the back of a INR 50 million deal in Q1 and a INR 120 million deal in Q4. The demand trends in transportation are supportive of our growth. Customer preference for electric cars is rising and increasing. Semiconductor shortage in auto are starting to ease. Global air travel has increased by 150% versus July 2021 levels, leading to more aircraft orders and a rising backlog at manufacturers and tier ones. Electrification initiatives are picking up strongly at trucks and off-highway and aerospace. We continue to invest in EACV. To highlight one in connected cars, we have invested in a next-generation digital cockpit domain controller solution that is currently being deployed at a customer production program. Last quarter, we talked about deals we were pursuing in the connected and autonomous space.
As you would have seen our press release in Q2, we have announced a deal with BMW to provide engineering services for their suite of infotainment consoles. To sum up, we see a good pipeline of deals with many in the $10+ million, $20+ million range that gives us confidence about our growth prospects. In plant engineering, we had a strong quarter with nearly 6% QoQ growth in constant currency that was broad-based across FMCG, O&G and chemicals. Clients in all three segments are investing either in greenfield, brownfield expansion or in asset management and digital twin programs. In Q2, we won a large deal from a chemical giant to implement a digital twin for one of its flagship sites in the U.S. We will create an analytics data platform that will help in sustenance through the plant life cycle.
This is for one of their sites, and we expect the program to be expanded to multiple sites with the customer. Sustainability is again a priority, with customers wanting to invest in waste management setups, processing and refining of plastic waste to make it reusable in another area where we are working on. Now, as some of the large deals stabilize, Q3 is likely to be muted for plant engineering. The deal pipeline in the U.S. and Europe continues to be healthy. That will drive growth for us in Q4 and beyond. Moving on to industrial products. We had a healthy growth of 3.5% QoQ CC, which was led by electrical machinery and power and utilities. There is strong demand for digital manufacturing programs as customers see immediate and certain ROI. We have developed connected factory solutions that help customers implement digital factory and enable factory automation.
In digital and next gen product development, we won a deal to help a global lighting manufacturer revamp and re-engineer their suite of products. Across our industry customers, we are seeing an increasing number of sustainability-led conversations about clean energy and carbon footprint reduction, and we are building solutions to capture these trends. We do believe that an energy transition is in progress. Our homegrown solution, Energy and Sustainability Manager, has been awarded the Frost & Sullivan Product Leadership Award in energy optimization and sustainability management. The U.S. government recently announced a $7 billion funding for clean hydrogen as it aims to decarbonize energy-intensive industries. This is leading to many of our customers starting programs on clean energy transition. We have created solutions around battery storage, hybridization, energy management that will allow us to participate in early-stage conversations.
Overall, for industrial products, we see growth continuing to be driven by digital product and manufacturing, sustainability and value engineering. In telecom and high tech. On constant currency terms, we had a flat quarter as the growth in Semicon and telecom was offset by weakness in consumer electronics, equipment and high tech side. In semiconductor, demand trends are positive as customers look to scale up offshore labs that will help in better speed to market for their new technology chips. We recently signed a partnership with Qualcomm, where we will leverage our chip to cloud expertise to develop and deploy solutions for the global 5G private network industry. These solutions are aimed at accelerating digital transformation for the smart manufacturing industry and tie in with our digital manufacturing big bet. On the media side, we are seeing large deal possibilities with vendor consolidation and cost optimization being the key drivers.
As I highlighted last quarter, there is softness in the high tech space, with companies being cautious in spends. However, we are optimistic about some of the recent technology, large technology companies that we have started engagements with. Overall, we expect the pace in telecom high tech to pick up as 5G and media deals in the pipeline close. Our play in this segment is very broad, which gives us the ability to target different areas of growth. Finally, in medical, we had a soft quarter as customers recalibrated spends on account of inflation and supply chain issues. QARA, remediation, digital health platforms are seeing spends continue. Our investments in software-based diagnostic devices are expected to yield us better traction in the coming quarters, The large deal traction and pipeline is looking up.
In Q2, we won a large deal from a global healthcare provider in QARA, product remediation and to build a data engineering platform to accelerate productivity and reduce training costs. We see growth in MedTech in Q3 post the recalibration of spends with our customers. Now a few highlights on our digital engineering and technology progress. On the innovation front, our engineers continue to innovate and file 25 patents for LTTS in Q2. We have been able to maintain this pace of about 25 patents per quarter for a few quarters in a row. I would like to call out that Everest Group has rated LTTS as a leader in connected MedTech services and in Industry 4.0. Let me now discuss the outlook. Across our six bets we see customer investments continuing unabated.
I am very confident that the solutions that we have developed across our six bets, which are helping us win deals. I talked about the domain controller and EACV, the digital thread in digital manufacturing, the Energy and Sustainability Manager in sustainability. Like we highlighted last quarter, there is caution at customers when it comes to newer business lines where the line of sight for revenue and profitability are stretched. The focus on immediate ROI is therefore creating cost and value-led deal opportunities across segments, in addition to the speed to market opportunities where digital is the key driver. We expect Q3 to have the seasonal furloughs and plant shutdowns. However, growth should rebound in Q4. Our FY 2023 USD revenue guidance is now narrowed to 15.5%-16.5% in constant currency.
With that, let me end by wishing you all very good health, a very happy Diwali in advance, and I would like to hand over to Rajeev now. Thank you.
Thanks, Amit. Greetings to all of you. I'm pleased to share our Q2 FY 2023 performance. It has been another quarter of good results with revenue growth and operational execution. Let me take you through Q2 FY 2023 financials, starting with the P&L. Our revenue for the quarter was INR 1,995 crores, a growth of 6.5% on sequential basis. Our double-digit year-on-year growth trajectory continues with Q2 revenue up 24.1% on year-on-year basis. Glad to share that despite the headwinds, we have been able to maintain EBIT margin at 18.2% in line with our aspirations. This has been the fifth consecutive quarter of 18%+ EBIT levels. During the quarter, we had high employee benefit costs on account of wage hikes, which were largely absorbed by better employee productivity, SG&A leverage, cost optimization measures, and rupee depreciation.
Moving to below EBIT, other income came at INR 26 crore, slightly lower on sequential basis due to relatively lower foreign exchange gains compared to previous quarter. Effective tax rate for Q2 was 27.2%, closer to our target range of 26.5%-27%. Net income for the quarter stood at INR 282 crore, which was 13.2% of revenue, up 3% on sequential basis, driven primarily by revenue growth. Moving to balance sheet, let me highlight the key line items. Q2 DSO improved to 78 days versus 80 days in Q1. Q2 unbilled days improved to 18 days versus 22 days compared to in Q1, resulting in combined DSO, including unbilled, of 96 days, which is an improvement of 6 days compared to Q1 and just shy of our target range of less than 95 days.
Let me now talk about cash flows. Our year-to-date free cash flows was INR 452 crore, which is 81% of net income. Our cash in investments rose to INR 2,436 crore by end of Q2 FY 2023. I'm glad to share that the board has approved an interim dividend of INR 15 per share. Moving to revenue metrics. On a sequential basis, dollar revenue growth was 4.5% on constant currency basis and 3.1% on reported terms, led by transportation and plant engineering segments. The segmental margin performance is better in three out of five segments on a sequential basis, with improvements in transportation, industrial products, and medical devices. Now let me comment on operational metrics. The onsite-offshore mix has shifted towards onsite due to new deal ramp-ups. Offshore percentage now stands at 54.9%.
We expect this to gradually improve to 57% range going forward as large deal ramp-ups stabilize. The TNM revenue mix was 73% in Q2 and reflects momentum of digital and leading-edge deal wins. On the client profile, which indicates number of $1+ million accounts, has shown sequential improvement in the $30+ million, $20+ million, and $10+ million categories. The client profile numbers have seen an improvement over the past few quarters, and this trend will continue in the coming quarters. On client contribution to revenue, all three categories, top 5, top 10, top 20, have shown a slight decline compared to Q1. This is due to stronger growth in top 20 to 50 accounts. Headcount has increased marginally on a sequential basis as we added 500+ freshers to support ramp-ups for new deal wins, while we have optimized on non-billable headcount and support staff.
Though attrition moved up to 24.1%, we believe attrition will likely soften in the coming quarters due to various employee engagement measures to manage it. Realized rupees for Q2 was around 80.8 to U.S. dollar, a depreciation of over 3% versus Q1. Let me give some visibility on the EBIT margin trajectory going forward. We are watchful of the headwinds from the current economic environment and like in the past few quarters, we'll continue to balance headwinds with opportunities on revenue growth, quality of revenues, and operational efficiencies. Summing up, we remain cautiously optimistic, and our aspiration is to remain in the 18% EBIT trajectory in the medium term. We thank all our stakeholders for their continued patronage and wish you all a very happy festive season in advance. With that, I now hand it over to the moderator for Q&A session.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we would request you to rejoin the question queue. The first question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.
Yeah, thanks. Amit, just wanted to get some sense on the deal flow. So have you seen any moderation in the TCV number. The larger TCV count has come down this quarter. While you mentioned that there are a number of deals in the pipeline, is this something to do with increased caution at the client end, or is this just a timing issue? The other question was on the guidance. Just want to clarify whether we should see this guidance in the context of last quarter's 14.5%-16.5% number, which was as of Q4 end, or is this FY 2023 over constant currency FY 2022? Just wanted to have some clarity given the volatility in currency movements.
Thank you. Number one on the deal flow, I do wanna confirm to you that our pipeline as it stands today is slightly better than what it was last quarter, and that was slightly better than it was previous quarter. Right? Year-on-year, there is a double-digit increase in pipeline. Now, in terms of deal closures, we have been closing three-digit deal wins for the last few quarters in a row now. If you remember, quarter four was a $100 million win, quarter one was a $50 million win, and this quarter there is a $60+ million win, right? Deal wins continue, that they are.
I would not read too much into the INR 10 million plus because, you know, there are deals that are in INR 9 million that closed, so you know, that's why we want to maintain the quality of reporting that we do. Therefore, we have singled out the INR 10 million, and I haven't called out the INR 9 million. At this stage, I am not concerned with the deal flow or the deal closures as we speak, right? That is two. Third, I do wanna call out that Europe for us has had a significant amount of wins this quarter as they go through three items. One, a cost challenge. Two, an energy challenge. And third, to stay ahead in technology. I do see that as an opportunity as we stand today. That's where we are on the wins.
I do hope when I come back in January, I should be able to announce further wins for you and give you the confidence that this continues on. As far as guidance is concerned, I'm gonna turn over to my colleague, Rajeev, to address that question.
Mukul, on your question related to guidance, I would say that you need to read the 15.5%-16.5% guidance relative to 14.5%-16.5% that we shared in the previous quarter. Like Amit said, we have now narrowed down the guidance, which means we have better predictability to be in a narrow range.
Thanks, Rajeev. That's helpful. Just one question, Amit, on the high-tech side. You know, we have heard some of your services peers speak about weakness in telecom and high-tech space, despite the 5G transition which is going on. While you may give some color, but if you can just, you know, kind of move a little bit deeper into this high-tech vertical and how we should think about you know, over the next 3-4 quarters.
Sure. Mukul, as far as high-tech is concerned, break it up into 6 parts. Semicon, operators, infra, media entertainment, and then, consumer electronics, if I may, and ISV, right? 6 sub-segments, if I may. I would say that we have seen across the spectrum other than operators, we have seen others come back and look at deals and look at spends, and question whether those will provide top line or bottom line expansion improvement in the near term. If they are not, then those deals are being questioned again and again, and therefore it is delaying some of that. High-tech, I had maintained last quarter as well that we were finding it a little tight, and I maintain we are finding it tight right now also. Now if I were to double-click, the biggest, shall I say, tightening that we have seen is in the ISV space.
Then after that, followed by consumer electronics, shall I say Semicon, then infra, then media entertainment, and finally operators. That's order we have seen. Of course, you know, there are people, peer group that is there, you know, we're seeing different things. This is what we are seeing. Second, because Semicon is not just delivering to high-tech, but also delivering to auto and others, that part of the business is continuing on in the Semicon companies. Third, 5G spends look at it as spends in U.S. and in India because both these countries have got clear roadmaps, while others are coming along. We have not seen the trickle effect of 5G coming right now.
I do believe it will take a couple of quarters for it to be seen by engineering providers like us.
Thank you. Mr. Garg, may we request that you return to the question queue for follow-up questions? The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Yeah, thanks for the opportunity. Just for clarity,
Sorry to interrupt you, Mr. Shah. Please use the handset because the audio is not clear from your line.
Yeah. Is it clear now?
Yes, sir. Please proceed.
Yeah. Just to achieve the guidance of 15.5%-16.5% in constant currency terms, just wanted to clarify the growth rate which I'm getting is 0.6%-1.7% QoQ in the next two quarters in constant currency to achieve the revised guidance. The question is whether this calculation is correct. Second, if it is correct, it shows a slowdown. It's largely from furloughs or some client-specific issues because of the deteriorating macro as well. Because the first half, the QoQ growth has been in the range of 4.5%-4.7% QoQ in CC terms.
Sure. The way I would look at it, right, is not to count quarter three, quarter four. See, quarter three generally is a soft quarter because of furloughs and vacations. This time, as you are aware, Diwali and Dussehra both, along with the entire Thanksgiving and Christmas and New Year, everything is coming in quarter three. Generally, Dussehra normally comes into quarter two, and the other comes in quarter three. This time everything is in quarter three. It's a festive season. This will be a little muted while we expect quarter four to be back at our standard growth rates. We have factored in all that. Having said that, you know, we've always been very we want to be able to deliver to you what we commit.
As things change, we will update you again.
Just wanted to clarify, is there higher than normal furloughs being factored into or as of now clients are not indicating the same? Whether my calculation on ask rate to achieve the guidance is correct, 0.6%-1.7%.
No, I'm not gonna comment on that 0.6%, 0.8%. I want to be able to think bigger and better rather than think that, so I won't. As far as furloughs are concerned, there are some clients that have planned for it. There are others that are talking about it. We are a little cognizant of all that.
Thank you. Mr. Shah, may we request that you return to the question queue for follow-up questions. Next question is from the line of Aditya Khairnar from Metaverse Equity Fund. Please go ahead.
Hello, sir. My question is, sir, in the aftermath of Ukraine-Russia war as well as the geopolitical condition in China, how will their business strategy change prior to the war and post? As well as I also wanted to add about Europe's recession part. What would be the changes in strategies?
Thank you. See, we are seeing three broad or four broad areas with the Ukraine war that we have seen emerge in the U.S. as well as Europe. Number one, countries, and not just countries, but states in larger countries are starting to think of localized supply chains. That does offer opportunity for people like us. Second, people are looking at. Last year, same time, cost was not such a big consideration. Technology advancement was. Now cost along with technology advancement that will either help the top line or bottom line, like I said, ROI, is a concern. Third, there is a transition in energy sources happening. It's happening quietly, but it's happening. People are moving from gas-fired to oil-fired, oil-fired to coal-fired plants. People are looking at alternative energy sources. Companies are doing it, governments are doing it, states are doing it.
I do believe that again provides once in a lifetime opportunity as this shift happens over the next 5-7 years. Electric vehicles is a part of that. Wind energy, solar panels, et cetera, is a part of that. I do believe that we are in a fairly volatile world, and these offer opportunity as long as we can be agile and we can continue to marshal our resources to retrain people, to move people around as well as and adapt to latest technology trends.
Okay. Thank you, sir.
Thank you. The next question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.
Hi. Thanks for giving the opportunity. Sir, I just wanted to understand on the, you know, I mean, it is pretty much clear about this particular FY 2023. But just wanted to get a sense, you know, how are you seeing the next year. Having any conversations around with clients, specifically the client budgets. And maybe some color over a 2-year period, your sense, how are you seeing the 2-year period now. What you are seeing last quarter, that will be really helpful. That was the only question.
Thank you so much, Mihir. We do believe we had given you guidance that we will hit a $1 billion run rate. Last year, September is when we had told you. We did achieve it in this quarter. We are reiterating our guidance of getting to a $1.5 billion run rate by FY 2025. That has not changed, and that's our goal from here on as we move forward.
Sure. Any conversations with clients around next year's budget?
Yeah, we continue to talk to clients, Mihir, converse. In fact, this is a time when we sit down and we do workshops with some of our larger clients and strategic clients. We sit and do workshops on next year projects and work, programs they wanna roll out, sustainable, you know, sustenance engineering that we are doing, how many changes do they want, what kind of, you know, patterns we are seeing. All conversations, and the entire sales, delivery, solutions team, everybody is running around, meeting with clients. All of that is going on.
Sure, sir. Just lastly on this, any quantitative understanding on the budget, would be really helpful.
Yeah. See, the bets that we had taken, the one thing we did, and I didn't put it in my comments, I wanted to share it because you are our community, you are our stakeholders. In the last three weeks, we have started a review of the bets that we had taken 18 months ago and said, "Are these relevant? Are these still relevant and can we change?" I'm happy to share that the six bets that we took on electric autonomous connected vehicles, sustainability, digital manufacturing, all three have already fired and are showing results, and there are further solutions being developed in these areas. In fact, happy to share that we inaugurated our EV charging station with our own homegrown, home-built hybrid energy controller in Vadodara on Friday. A lot of stuff happening in that area.
We do believe that 5G and MedTech are areas that we will have to further strengthen and take it forward as we move along. We do believe that we have the relevant bets for engineering and technology services to take forward.
Thank you. Mr. Manohar, may we request that you return to the question queue for follow-up questions. Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The next question is from the line of Vikas Ahuja from Antique Stock Broking. Please go ahead.
Hi, thanks for the opportunity. Just one clarification regarding the guidance. We have changed the guidance because last quarter we reported in USD terms, now it's constant currency. We did a release to the constant currency in the call last time. What led to, you know, changing the currency dynamics from USD to constant currency? Because currencies were equally volatile in Q1 also. Secondly, when I look at the peers, the cross-currency impact is closer to between 250-350 basis points. Is it similar for us? Thank you.
Vikas, this is Rajeev. Let me answer to that. When we talk about the guidance that we have provided, we've narrowed the guidance to 15.5%-16.5%, and this is comparative to 14.5%-16.5% that we provided in the previous quarter. Both were in constant currency. As you would appreciate and also trying to clarify to most of the other participants, dollar has been extremely volatile, right? It is an environment which has really had us to think through that a guidance can be rarely managed on constant currency basis as opposed to on reported currency basis because of the volatility. That's one part of the response. The second part of the response, yes, the dollar indeed moved up.
For us, we've seen a tailwind of close to about 80 basis points to 100 basis points in terms of managing the margin performance. That is how it has translated for us in terms of our performance in Q2.
Thank you.
Thank you. The next question is from the line of Pratap Maliwal from Mount Intra Finance. Please go ahead.
Hello. Am I audible, please?
Yes, sir, you're audible.
Yeah. Thank you. Thanks for taking my question. I just had a question around the transport segment in particular. As we see in the transport segment, particularly in the auto space, a lot of the strategic programs are kept in mind with the next few years kept in mind when it comes to programs around connected mobility, autonomous, shared mobility. As you said, with the quick ROI demand coming through from clients, so is there any possible change in the multi-year deals and the deal sizes going ahead? How would this trend actually play out in this sector, which is supposed to be showing strong tailwinds? Just had a question around that. Thank you.
One, we do see transportation segment looking at clearly moving to energy efficient vehicles, right? Be it auto, be it trucks, be it off-highway, be it, you know, skid steer loaders, et cetera, backhoe loaders, et cetera, et cetera. So much so that even floor cleaners people are trying to get a hybrid or an electric version out, right? These again can't be. It's not a magic wand that can happen in a 6-month period. These are versions of programs that run for anything between 18 months to about 3 years, and they address family of vehicles. You know, say somebody would look at a small sedan and do it, and then do it for a larger sedan, and then also do it for an SUV.
These three families of vehicles will require different kinds of wattage, voltage to be going in, right? Therefore, there is R&D to be done. I mean, there's a particular large program we are working on for a skid steer backhoe loader. In that case, the kind of wattage that we're talking about is about maybe 6x or 8x that we talk about for a car. There are different parameters. Long story short, these are not start-stop programs. These are programs that run over a period of time, and therefore they provide repeatability of revenue, predictability of revenue and constant potential growth opportunities for us.
Most of it is done offshore, and that I think is coming out in the transportation margins that we have released.
Just to confirm, we don't see any real change in the nature of work that we've been getting from this segment, going forward. There's no real change around it?
The kind of work we were doing 24 months ago to what we are doing today is different. For the next 24 months at least, I can confirm to you we see the same. Like I said, we will again do an analysis of our bets in about another 18 months and see if those are relevant or, you know, should we change them or modify them. At that point of time, maybe there's something new that comes up that will allow us to change.
Okay.
For the next 18, 24 months, I believe same kind of work will continue.
Okay. Thank you, sir. That's it from my side. Thank you so much.
Thank you. The next question is from the line of Bhavik Mehta from JP Morgan. Please go ahead.
Thanks for the opportunity. I have two questions. Firstly, to Amit. Amit, you talked about the client cautiousness on the spend. Is it broad-based across the verticals or are some verticals better placed than others when it comes to digital making? Secondly, to Rajeev, how should we look at the margin trajectory for the second half, given the fact that the biggest headwind of wage hikes is behind you now. What are the incremental headwinds and tailwinds you see for the second half of fiscal 2023? Thanks.
Okay. Bhavik, one, I don't think the caution. See, step back in terms of, you know, every time there's a negative commentary you think, right? Are you headed in the right direction? That's the reality. Having said that, see transformation, the tailwind in electrification and the tailwind in autonomous connected is something that is, that's a measurable tailwind, one. Second, for industrial and the process, digital manufacturing and energy, you know, can I call it rather than sustainability, I'll call it energy conversion or right, alternative energy, et cetera, are valid things that are again tailwinds that are required, that are going forward. They again go back to basic laws of human nature. Number of workers are less. They need, you know, stuff to be automated and digital.
The energy costs are high. They need to find alternative sources to keep the raw material costs down and your input costs down. All that put together, these are three clear tailwinds that we see. Having said that, high-tech there is a tightness that we see measurably across high-tech. Even in medical on new product development, unless it is something that is related to more healthcare compliant, FDA compliant, et cetera, we are seeing a little bit of a question being raised. Because again, I wanna give a little bit of color here. See, if you look at doctors, once they come out of college and they've learned on a certain set of devices, because of the amount of regulation that goes into recertify a device, it will be.
It takes time for new devices to come out and stuff to happen. I mean, I'm happy to have a longer conversation on this with you. Therefore, we see a little bit conservatism in MedTech always and then of course high-tech. That's where we are.
I'll take the second question in terms of the margin trajectory. I will weigh in a few things over here, right? If I look at really the plus and the minus factors, in terms of plus factors, clearly growth in revenues, better quality of revenues. In fact, when I touch upon better quality of revenues, there are sub-aspects to that, right? One, if you look at the growth that we've seen across segments, there have been three segments where margins have improved. We are indeed seeing growth come in segments that are having better profitability, and that's essentially helping us out and aiding in terms of the margin performance. The third aspect is also on the scale benefits. If you look at it in terms of G&A costs, we've kept it almost flat.
That's kind of played out well for us. We believe going forward as well, we'll be able to see scale benefits coming in. In terms of factors or other headwinds, the current economic environment, rather one more aspect that I will add in terms of the positive, which is around the rupee depreciation. That's been of course a tailwind in the current situation. Now talking about some of the adverse factors, the current economic environment is such that, like I said, we will be watchful and we will try to balance out some of the positives and the negatives. One that we will try to tread cautiously over the next few quarters until we see the environment stabilize. Attrition, we believe that we've reached a peak.
Going forward it should normalize and in that sense, yes, it is going to be a positive factor because it will take off the load in terms of the hiring, rehiring and of course, you know, the in and out in terms of the salary factors. So that should be a positive as well. Like you said, of course, Q2 had the maximum impact in terms of wage hikes. We believe there may be some intermittent wage hikes, but that's something that we should be able to counterbalance. Of course, these are all the factors that we feel we should be able to balance out while maintaining the EBIT trajectory in the medium term for an aspiration of 18% revenues.
Okay. Okay, got it. That's very helpful. Thanks. Thank you all.
Thank you. The next question is from the line of Akshay Ramnani from Axis Capital. Please go ahead.
Hi. Hi, Amit. so wanted to check on the guidance which you shared of the achieving the $1.5 billion run rate by FY 2025. We are at a $1 billion run rate currently and the difference to achieve that is about 50%-odd over a 2-year period. when the- Demand environment or to say there is some caution in the environment, from client side. What gives you this visibility over the next 2.5 years, still maintaining that aspiration of achieving that number? That was part one. How, the part two is that how should we think about the organic and inorganic component within this 2.5-year journey? Those two parts to that guidance slide.
Okay. Here is how I would see it, right? Our $1.5 billion includes three things that we have factored in this. A, we expect at some points right now, like I admitted to you, that about 3.5 bids out of the 6 bids are firing. We expect the remaining 2.5 to fire as well. For a period of time, we expect that all 6 bids will fire. We've done a modeling based on that. Then of course, you know, maybe one of them will fall off and et cetera, et cetera. There will be a period of time between now and the next by FY 2025 that all 6 bids will fire, A. B, we are considering some amount of large deals that we will be able to execute, sign, execute.
Our large deal engine continues to fire and very active. You've seen that, we expect to continue that. See, there is a little bit of inorganic built into it. That's the third part that we expect will happen. That is what is the build-out that we have done for the $1.5 billion.
Okay. On the large deal side, over the past few years, I think, over the past few quarters especially, we have been continuously winning these larger deals. Wanted to get a color on the large deal pipeline. We've seen you report those deals, but over the past, say, 2-3 years, do you see that large deal pipeline growth has been stronger versus what you have seen historically? If yes, then what exactly is driving that trend? Your thoughts there.
Sure. Actually, in fact, one of the litmus tests for us when we announced $1 billion, we announced three things last September. $1 billion, 18%, $1.5 billion. Crossing or touching $1 billion run rate in constant currency was very important for us because it was a litmus test. The 18% and staying at 18% for five consecutive quarters has been a litmus test for us. We are finally engineers, right? Therefore, we have confidence in the $1.5 billion. Now, second, in terms of the kind of pipeline, I do think our pipeline year-on-year, quarter-on-quarter continues to improve. We continue to size up deals, areas which we go in.
The one big change we have made is that we have been running the large deal process of thinking and ideating and all that is a continuous process running across the company in different parts at different times, so that you know it becomes like a wave that comes and everybody once in a while gets through the wave again and again. We are doing that. There are some other fundamental changes we have made in terms of how we think about large deals and what we think is the scope and size of those, et cetera. It's definitely expanded. Our closures have been in three digits. Net new more than $1 million for the past few quarters, and we expect that will continue.
You know, we want to sign bigger deals, and we'll continue to provide an update.
Thanks. Thanks a lot.
Thank you. The next question is from the line of Shradha from AMSEC. Please go ahead.
Hi . Just a few questions. The plant engineering segment shows a 200 basis points decline in margins despite a strong growth of 5%+. What really went behind margins in the segment?
Shradha, this is Rajeev. I will take that. Two parts to that. One, of course, there have been quite a few new deals that have started in this segment, which of course, when you start any new deals, you tend to see margins coming down in the initial period and then you sort of catch up on that. The second is also that, when you have these new deals starting, you may invest in subcontractors. Those are the two key reasons why we've seen margins slightly come down in plant engineering, but we believe that we should be able to improve as quarters go by.
Okay. Sure. Thanks. Second question, Rajeev, is you did mention that SG&A was flat on a QoQ basis. When I see SG&A as a percentage of revenue, it is at a six-quarter low number. Despite increased travel and other expenses that we are seeing for other companies, our SG&A expenses have been just flattish. What is going in SG&A, and how do we see that activity going ahead?
Shradha, 2, 3 points on that one. One, when I said flat, it is flat in absolute terms, right? Which is leading t o a percentage reduction to revenue. Now as far as investing on sales side, I think we continue to believe that's the way to grow. We will look at that more constructively. On the G&A side, and I think we've been fairly conscious. A few quarters ago, understanding that, yes, the economic environment is tough, we've started to put measures in place so that we can optimize costs. While we've come at about 11% on SG&A, I would guide all of you to take SG&A to be in the range of 11.5% while we counterbalance some of this, but that's how I will sort of guide in terms of projecting SG&A.
Right. The rationalization of the SG&A staff that we've seen, is it more to do with the G&A team or, we've seen some rationalization in the sales people as well?
It's more to do with the G&A team.
Right. Sure. That's helpful. Thanks, Rajeev.
Thank you. The next question is from the line of Sulabh Govila from Morgan Stanley. Please go ahead.
Yeah, hi. Thanks for the opportunity. There are a couple of questions from my side. One to begin with, Amit, I just wanted to compare the macro comments related to the last quarter. Would you say that the dynamics have been similar to what we saw last quarter, or has there been a change? 'Cause the two verticals we mentioned remain same, but just wanted to understand the intensity of caution around that.
Sulabh, the what we saw last quarter is what we are seeing now. There is no deterioration. There is no improvement. It's basically the same.
Sure. Understood. Second is to Rajeev. Rajeev, you mentioned the percentage for the margin this quarter. Would it be possible for you to quantify those percentages, the margin walk for the quarter?
We would not be able to do that, but you know, if you want to pick an offline conversation to get any clarity, feel free to touch base with Pinku so that you can have a more elaborate conversation on this.
Sure. I'll touch base. Thank you.
Thank you. The next question is from the line of Abhishek from InCred Capital. Please go ahead.
Hi, sir. Thanks for the opportunity, and congrats on a good execution. Just one question from a demand perspective. What are you seeing on the ground from captives? You know, given the challenges in Europe, you know, what are they doing, you know, are looking to ramp up capacities in India? Is that changing the competitive intensity in the market? Thank you for taking my question.
Sure, Abhishek. Thank you so much. Abhishek, you know, if you would have asked me this question 10 years ago, I would have said captives are competition. Honestly, Abhishek, it's a co-opetition model. You work with them and, you know, there's a core contextual that the client defines, core done by them, contextual done by us. What they define as core changes, what they define as context changes. That's how this flux happens. We have seen a little bit of a pause on, as far as high tech is concerned and as far as medical is concerned, we are seeing a slight pause from own employees being hired by captives. Right? That we have seen, and we see that potentially as an opportunity because we can, you know, flex up, flex down, et cetera.
That's definitely there. As far as auto is concerned, which has got or transportation has got huge captives here, they continue to expand as we see it, and so does parts of industrial. Plant doesn't normally have a lot of captives here, but yeah, we see that. See, the good part, another thing I wanted to point out, Abhishek, again, 10 years ago, captives would mean China, captives would mean India, it would mean Eastern Europe and Latin America. Today, China is off the table. It's basically between India, part of Eastern Europe, because part is, you know, as you are aware, offline, and part of it in Latin America. We believe that we are well positioned from that standpoint.
Great. That answers my question. Thank you.
Thank you. The next question is from the line of Arvind Chetty from Max Life Insurance. Please go ahead.
Yeah. Hi. Thanks for taking this question. This is more on the headcount on the sales and support side. While our aspiration for FY 2025 is about $1.5 billion revenue, which essentially means a 4%-4.5% compounded growth from now. With that aspiration and near-term expectation of large-scale hiring, our sales support has gone down by about 5% on a QoQ basis. Is that more of an aberration or, you know, it's more indicative of near-term trend?
Look at enabling functions, sales support as a slab structure, right? You need a certain set to make a certain number, and then you have a range, and then you again, you know, you continue to do that. I would not be worried. I mean, you know, $1.5 billion is FY 2025 is, we are right now in FY 2023, so there are two years to go. So we will see that. We are mindful of it, is all I would say at this stage. I would not worry about it, and I would not take it as a lead indicator or anything like that. On, yeah.
Yeah. Just to follow up on that, how do we look at this number, going forward?
We don't give guidance on sales support numbers going forward. Of course, our sales head wants more. Others also want more. We'll see.
Got it. Thanks.
Thank you. The next question is from the line of Karan Uppal from PhillipCapital. Please go ahead.
Yeah, thanks for the opportunity. I have a few questions from my side. In the auto segment, within EV, ADAS, connected and infotainment, which of these sub-segments are having the maximum contribution to your deals? Is the demand equally strong in European OEMs and U.S. OEMs, and how is the pipeline looking? Second question is on, just to follow up on the hiring part. Net addition has been soft in Q2, what's the outlook for FY 2023?
I would request Abhishek, our Chief Operating Officer, to answer the first question on how we see auto, which sub-segment and which region. Abhi?
Sure. So if you look at these three segments, clearly, at least at this point, electric is where we are seeing the highest traction, followed by connected and then autonomous. As far as the region is concerned, both U.S., Europe traction is equally strong for us at this point and also both automotive and tier ones. No, I mean OEMs and tier ones in the automotive space. We're also of course seeing traction on, interestingly on EV connected side on the truck and off-highway segment as well, which also is starting to pick up.
I think it was on Europe or U.S., so that's both, right? We answered that. Very good. Can you repeat your second question, Karan?
Yeah, just on the net addition side. Q2 net addition has been a bit soft. Just wanted to check what is the hiring outlook for FY 2023.
The net adds we knew I think Amit and even Rajeev tried to mention that earlier. This was a tight quarter for us, given that this was the quarter when we gave increments. We had to be very cautious in how we ran operations this quarter. Having said that, we have continued to hire freshers in this quarter also, and we will continue in the coming quarters as well. From a people perspective, we had enough and more people to deliver for the quarter, and we have reasonably good plans for the coming quarters as well. Please don't read too much into the headcount front because it was a move that we had to do this quarter from an operations perspective.
Thank you. The next question is from the line, Sameer Dosani from ICICI Prudential AMC. Please go ahead.
Yeah, thanks for the opportunity. I just want to understand how is the utilization moved in last two or three quarters. I mean, this is also in the context of headcount addition. Do we have enough room for increasing our utilization from that, this point of time, or we'll have to hire more? Thanks.
This is Rajeev. I'll take part of the question, and I will also request my colleague, Abhi, to add to it. Like we've said in the previous quarters, we have stopped reporting utilization because of course, there are areas of revenue that are not directly linked with utilization. I can certainly give you directionally, the utilization has been improving, right? That's part of what Abhi mentioned earlier, that we've looked at Q2 revenue, and we've tried to optimize on parameters that could eventually help us in terms of delivering this quarter. I will also request Abhi to add on to this, please.
Yeah. I think the same point. Utilization definitely has improved for us this quarter without touching on any specific numbers. Broad-based, if I may, our goal is to operate between the 78%-82% levels. That is the range that we are comfortable with. Anything above 82%, because we're an engineering company, is a red flag, and below 78% also is a red flag. The reason more than 82% is a red flag is because we want to continue to invest in R&D and engineering work for our customers and for our people. That's the range we play in.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Pinku Pappan for closing comments. Thank you, and over to you, sir.
Thank you everyone for joining us on this call today. It was a pleasure interacting with you, and we look forward to more such interactions during the course of the quarter. From all of us at LTTS, it's a goodbye and wish you a very happy festive season for the coming days. Thank you. Bye-bye.
Thank you. Ladies and gentlemen, on behalf of L&T Technology Services Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.