Ladies and gentlemen, good day, welcome to L&T Technology Services Limited Q3 FY 2023 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, 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, over to you, sir.
Thank you, Faizan. Hello, everyone, and welcome to the earnings call of L&T Technology Services for the third quarter of FY 2023. I am Pinku, heading investor relations. Our financial results, investor release and press release have been filed in the stock exchange 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 the management remarks in 25 minutes and then open up for Q&A. The audio recording of this call will be available on our website approximately 1 hour after this call ends. Let me now introduce the leadership team present on this call. We have Amit Chadha, CEO, Abhishek, COO, and Rajeev Gupta, CFO.
We will begin with Amit providing an overview of the company performance and outlook, followed by Rajeev, who will walk you through the financial performance. Let me now turn the call over to Amit.
Sure. Thank you, Pinku, thank you all of all for joining us on the call today. I hope all of you are keeping healthy and safe. Let me start with the key highlights on our Q3 performance. Our deal wins were strong this quarter with five deals greater than $10 million in TCV and a significant empanelment from Airbus, for which we have also issued a press release today. From a revenue standpoint, sequential growth was muted this quarter due to seasonality and higher than expected impact from furloughs, especially in plant engineering. In spite of this, we have improved EBIT to 18.7% and crossed the INR 300 crore milestone in net margins per quarter. From a technology standpoint, we surpassed the 1,000 patents filing mark as an acknowledgement of the tech prowess of LTTS. Let me now provide the segmental performance and outlook.
Starting with transportation, we had a good performance with 4.4% Q-on-Q growth that was broad-based across auto, T&OH, trucks and off-highway and aero. In auto, demand is being driven by electrification, connected cars and next generation digital cockpits. We are also seeing increased demand for cybersecurity as part of the software development platform work that we do. For trucks and off-highway, similar trends of electrification and platform development continue to provide us good opportunities. One of our $5 million-$10 million deals is from this area. In aero, driven by the rise in air travel, we are seeing demand for avionics. I want to highlight our selection by Airbus as a strategic engineering partner. This empanelment is significant contribution and recognition of our digital engineering capabilities and aerospace domain knowledge. The growth in transportation will continue into FY 2024.
In plant engineering, we were expecting a muted quarter as we had indicated in our Q2 commentary. The unexpected furloughs at some of our top customers led to a weaker than expected performance in Q3. I want to highlight that this is a one-off and not a reflection of the demand environment. We see growth coming back from Q4 onwards. Key drivers of demand are localization of supply chains, sustainability in operations, including energy, water and waste management, leading to greenfield/brownfield expansions. In the O&G chem segment or sub-segment, many of our customers are continuing to change their product mix, leading to design and digital engineering projects for us. One of our $10 million wins has been in this area. We see a strong deal pipeline in both U.S., Europe and Middle East that will help drive growth for us in Q4 and beyond.
At industrial products, we had a good growth in the quarter led by electrical machinery, power and utilities. For Q3, 3 of the 5 large deals that we won were in industrial products in the area of digital twin and sustainability driven product development, innovation and research. We see good demand in digital manufacturing to support automation and software development platform to improve equipment performance and viability. These in turn will become annuity contracts. We've been talking about energy transition, including green energy initiatives using hydrocarbon and hydrogen as a fuel, creating new opportunities for us. Overall, for industrial products, we see growth continuing to be driven by digital manufacturing and sustainability-led new product and process development. In telecom and high tech, we had a challenging quarter due to the weakness in ISV, consumer electronics and SemCon, where customers are spending less and frozen hiring.
We did offset some of this weakness from better 5G spends. We are seeing growth in 5G Lab as a Service, network engineering and cybersecurity. With SWC, we now have an end-to-end capability that will give us an edge in the market. As customers look to squeeze efficiency, we are also seeing cost takeout deals in the pipeline. These could give us an opportunity to consolidate and provide greater value to our customers. Overall, we expect the pace in telecom and Hi-Tech to gradually pick up as the environment improves. Lastly, in medical, we had a soft quarter, which has had more to do with customers shifting their spend to 2023. Demand is being driven by connected devices and digital health platforms, cybersecurity, regulatory compliance, and QARA.
In Q3, we won a large deal from a global OEM to assist in engineering solutions for their medical devices on annuity basis. We see growth in medical in Q4 picking back up based on our wins and good pipeline. Now a few highlights on our digital engineering and technology progress. On the innovation front, our engineers continue to innovate and have filed 25 patents for us and 30 for our customers in Q3. We have been able to maintain this pace of about 25 plus 25 patents per quarter for seven quarters now. We are also proud that we've crossed a 1,000 patent filing mark. Let me now discuss the outlook. As we highlighted last quarter, there was a caution in spending which played out in our Hi-Tech segment. Coupled with the furloughs in plant engineering, we had a muted Q3 in terms of growth.
However, we are optimistic about growth coming back in Q4 on account of the five deal wins and the significant empanelment with Airbus that we won. Our growth bounced back at plant engineering in Q4 with the furloughs behind us. We are now looking at FY 2023 USD revenue growth to be around 15% organic on constant currency using Q4 FY 2022 currency rates as a baseline. Finally, as we start the new year, we are having conversations and deal discussions, and these have picked up pace over the last few weeks and therefore, quarter four will see us adding at least 500 net headcount in order to get ready for FY 2024 as well as service quarter four. I now request Rajeev to walk you through the financials.
Thanks, Amit. Good evening to all of you. Hope you're doing well. Overall, our Q3 FY 2023 performance showed another quarter of double-digit revenue growth on a year-over-year basis, good operational execution resulting in improvement of EBIT margin and crossing a new milestone of INR 300 crore in net profit. Let me take you through Q3 FY 2023 financials, starting with the P&L. Our revenue for the quarter was INR 2,049 crore, a growth of 2.7% on a sequential basis. Our double-digit year-over-year growth trajectory continues with Q3 revenue up 21.4% on a year-over-year basis. EBIT margin at 18.7% increased by 60 basis points compared to Q2 FY 2023. This has been the sixth consecutive quarter of 18% plus EBIT margin.
During the quarter, we had benefits from improved employee productivity, better offshore mix and exchange gain, offset by a slight increase in SG&A %. Moving to below EBIT, other income came at INR 62 crores, higher on sequential basis due to higher foreign exchange gains compared to previous quarter. Effective tax rate for Q3 was 31.5%, higher due to conclusion of certain past year assessments. We expect this to stabilize in the 27% range going forward. Net income touched a new milestone of INR 304 crores at 14.8% of revenue and up 8% on sequential basis, driven primarily by operating margin improvement. Moving to balance sheet, let me highlight the key line items. DSO improved to 77 days at the end of Q3 compared to 78 days in Q2.
The combined DSO, including unbilled, improved to 94 days compared to 96 days in Q2. In our target range of less than 95 days. Let me now talk about cash flows. Our year-to-date cash flows, free cash flows was INR 826 crores at 96% of net income. Our cash and investments rose to INR 2,652 crores by end of Q3 FY 2023. Moving to revenue metrics. On a sequential basis, dollar revenue was flat on constant currency basis and up 0.4% in reported terms, mainly led by transportation and industrial product segments. The segmental margin performance was better in all the five segments on a sequential basis led by plant engineering and medical devices. Now let me comment on operational metrics. The onsite offshore mix has shifted towards offshore and is at 57%.
Our aspiration is to improve this ratio to 60% level in the medium term. In respect of client profile, which indicates the number of million-dollar plus accounts, this has shown a sequential improvement in the $10 million, $5 million and $1 million plus category. The client profile numbers have seen an improvement over the past few quarters, and this trend will continue in the coming quarters. In respect of client contribution to revenue, all three categories, top five, top ten and top twenty, have shown a slight decline as compared to Q2. This is due to stronger growth in top 20-30 accounts. Headcount improved sequentially by 175 employees, while attrition moved down to 23.3% and is showing signs of softening.
We continue various employee engagement measures to manage attrition. Reliance Rupee for Q3 was around INR 82.6 to the USD, a depreciation of over 2% compared to Q2. I would now like to hand it over to Amit to spend a few minutes on our recent SWC acquisition. Over to you, Amit.
Thanks, Amit. I hope we are clear. There was a slight issue, some disturbance on the line, I just push on. The SWC acquisition is a significant move that is deliberative and thought about and thought through. Add capabilities, solutions, technology, and most importantly, pre-qualifications that help us getting qualified for large deals in the communications segment. Post our call on the 12th, where we shared initial details and rationale of our acquisition, we received feedback and queries from you. We would like to acknowledge and thank you for the feedback. The queries were in three broad areas. One, how are we going to achieve the turnaround of shifting the business to services? Second, what are our integration plans? Third, what is the roadmap for revenue margins for this business and the company?
I shall address the first one. Rajeev will address the subsequent ones. Starting with how will we achieve the turnaround. We go down the basics. SWC business is broadly three parts, communications, smart cities, and cybersecurity. On communications, which is a space in which LTTS has a solid presence with a customer base of six of top 10 telecom infra OEMs and four of top 10 telecom operators in North America and Europe, we are going to leverage this customer base and our global sales engine and reach to sell these capabilities. Let me divide the target market into two sub-parts, enterprise and telecom, which include operators and telecom infra OEMs. Within our enterprise customer base, there is a demand for SOC, NOC, private 5G, and localized data centers. The competition is also fragmented here. The spending is also increasing.
SWC now fills the critical gap of SOC, NOC, and a greater and stronger 5G capability. I wrote to our top 100 clients about the acquisition after we announced it, and 55+ clients have confirmed interest in our expanded service offering. In addition, we will leverage our partnerships with Qualcomm, Nvidia, and Avnet, as well as our other hyperscaler relationships to penetrate the market faster. Within telecom, the second part, there are huge spends around network engineering, where we now can have both scale on-site offshore model to offer cost arbitrage and track record or pre-qual, as it's known in that particular industry, which is extremely critical in discussions and large deal processes. We will also work with our Indian customers and offer a more service-led model around core and RAN capability with the expertise that SWC and LTTS together possess.
In summary, for Communications, the LTTS heritage portfolio of around $60 million, combined with about $100 million from SWC, will together be a $160 million business unit, henceforth referred as NextGen Communications. Both portfolios will grow going forward. The heritage LTTS portfolio will see accelerated growth as we offer SWC capabilities, while the SWC portfolio will keep growing at a slightly less pace as we change positioning to core services for which the current pipeline and client relationships gives us a lot of confidence. The joint power of solutioning 5G use cases across a broad spectrum and technical assets like the GH Data Center, 5G Lab as a Service, gives us the confidence that the combined portfolio will be transformed to be largely service-led. Moving to sustainable spaces.
SWC brings capabilities in efficient campuses and cities, utilities, mobility, public safety, and environment, while we have expertise in smart buildings. LTTS has tie-ups with Microsoft and other hyperscalers. We have consulted experts who have validated that there is a sizable spending due to COP27 commitments from governments in U.S., Canada, and Europe. We also spoke to our top 100 clients, who have expressed interest in our client capability that they would like to leverage in their clients to improve their sustainability and digitization quotient. SWC's Fusion platform, coupled with our IBM's and Ubiquiti's platforms, along with their software foundry in Hyderabad, will help us accelerate solutions that can be commercialized for customers. Their integrated command and control center that have been built for cities is a real differentiator for us.
We will take SWC solutions to the U.S. and Canada and select countries in Europe, Middle East, and Asia, leveraging our existing footprint. We will have a direct sales team, as well as leverage our extensive partner network to expand these markets. We will have a combined portfolio of around $40 million, which is $30 million from SWC and $10 million heritage LTTS. We expect an accelerated growth for the combined portfolio as we target our enterprise customers and new markets that are ready for such solutions at scale and transform from a master systems integrator to a master software solutions player in the space. On cybersecurity, we will leverage the SOC in Chennai from SWC along with the talent that both the companies have recruited in respective companies.
We have multiple ongoing engagements in cybersecurity and the SWC team and leadership is a shot in the arm for us at the right time. With SWC, we will be uniquely positioned to offer full lifecycle threat management, OT product, IIoT and enterprise security. We are looking at almost tripling our combined revenues of INR 10 million currently over the next two years. The key messages that I want to leave you with around the ability to turn this around and grow is, number one, we have done our diligence, consulted experts, and engaged with our customer base on how our expanded capabilities can help them. Our global reach, existing strong relationships with telecom operators and telecom infra OEMs gives us confidence of growth. Two, we will transform the SWC business from being a master systems integrator to a master software solutions player.
Both SWC and LTTS portfolios will grow year after year, and together we will grow the combined portfolio at a pace faster than company growth. Another added synergy benefit that we will be able to leverage is a 360 degree partnership that will help us expand our relationship with industrial product customers or discrete manufacturing customers as they are vendors who are sustainable spaces business. I would like to confirm that we have the leadership bandwidth to take up this integration and are excited to take this opportunity forward. I would now hand over to Rajeev to address the integration plan and our revenue margin roadmap. Rajeev?
Amit, let me address how are we planning the integration. The pre-integration exercise has been kicked off. The senior leadership team of both companies are planning for joint delivery and go to market. We will run an integration program for the next 180 days that will focus on six areas: top line, service line, technology roadmap, enabling functions, bottom line, working capital and cash flows. We are setting up an integration management office with a full-time integration leader reporting into me. The integration management office will be responsible for ensuring readiness on day one, preparing the roadmap for synergy realization, and supporting various function leaders in planning and execution. Let me address the medium-term aspiration of revenue and margins. On revenue, with acquisition of SWC, we reconfirm our aspiration of a $1.5 billion run rate by FY 2025.
SWC EBIT margin in Q3 stands at 18.7%. In Q1 of FY 2024, there could be an immediate impact of 180 basis to 200 basis points on EBIT margin resulting from consolidation of SWC. With the transformational levers that Amit has earlier discussed in respect to SWC acquisition, we aspire to get back to 18% EBIT margin by H1 of FY 2026. Thank you. With that, I 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 one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star 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 on 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 Bhavik Mehta from JP Morgan. Please go ahead.
Thank you, and happy New Year to the management team. A couple of questions. Firstly, to Amit. If I look at what happened in Q3, was it just a function of furloughs or were there also cases where, let's say, a lot of the deals who had gone over the last 18-9 months, they didn't ramp up as per your expectations? Also if you look at 4Q, what are you hearing from clients when it comes to conversion of those leads into revenues? So that's one. Secondly, to Rajeev, you know, impressive performance on margins despite flat growth. You know, outside of SWC, can we expect 18.5% as a new base of margins going forward? Or do you think that 18% is the normal range to look at outside of SWC? Thank you.
Bhavik, a very happy new year. Number one, I am confirming that quarter three. See, normally, if you look at the quarter three, there's a lesser number of working days, right? I mean, that's about, if I may be exact, I'm an engineer, that's the problem, you want to be exact. About 3% lesser working days are there, right? We know that. That's how we had said we'll have a muted quarter. We got hit by additional furloughs, as we call it, because there were customers that came back and said that they would like to slow down the projects, et cetera, in plant engineering.
The good news is that they've since come back, and they confirmed at the time when they were slowing it down that it'll come back up January 2nd onwards, because versus the holiday. It did ramp back up from January 2nd, the team started again. Therefore, it was a furlough impact more than anything else, that's how I would leave it. From a deal velocity standpoint, I will say similar PCV, three digit of total de-deal closures that we have had. We are happy to share that there's $10 million-plus deals that we have had. Three of those clearly in industrial products, which is a high margin business for us. One of them in plant engineering, which is again, higher margin.
The fifth one in T&OH for us, which is transportation. You had that plus there are multiple $5 million deals that we have signed in medical, in telecom, Hi-Tech, right, et cetera. Deal velocity is similar. We talked about the empanelment as well, and that also came through last quarter. I do see that. In fact, I do wanna say that other than Hi-Tech, which we have called out in my commentary, right, those three sub-segments that are there, we are seeing project approvals, et cetera, and continuation of teams, et cetera. In fact, we've done well on utilization last quarter. What we've done is that we've given you a number, quantified the least possible increase in headcount. We're fairly comfortable at this stage.
With that, Rajeev, margins.
Bhavit, wish you a very happy New Year. In respect of margins, Bhavit, I just would like to say a few things. One, if you look at across all the five segments, we are certainly showing improvement in terms of EBITDA. I think the operating model that we've been talking about in the past, including the economies of scale, has played out quite well for us. We remain fairly comfortable that we should be able to hold for Hi-Tech the margin improvement that has come about. I did indicate that with consolidation of SWC in Q1 FY 2024, we should see a dip of 180 basis points-200 basis points, but that's something that would have been with any acquisition.
To sum it all, the operating model, the economics of scale have played out well for us. That gives us the confidence in terms of maintaining the margin going forward.
Thank you, Mr. Mehta. May we request that you return to the question queue for follow-up questions. The next question is from the line of Kawaljeet Saluja from Kotak Securities. Please go ahead.
Hi, everyone. you know, Happy New Year. Just a couple of questions. The first is on demand. you know, Amit, you did mention that the demand impact is largely furloughs, but, you know, when I look at your guidance, the guidance cut is $5 million-$15 million in revenues, whereas, you know, basis of furlough impact, the impact should not have been more than $2 million-$3 million. Just trying to reconcile some basic numbers, you know, behind the guidance cut. You know, is there more, you know, more to it, rather than just furloughs which would have led to a change in your guidance? That's the first question. The second question is, you know, more on relative comparison.
I know that's something which I hate, you know, a relative comparison, but, you know, tempted to ask this for the first time. You know, when I look at a company, you know, based in Delhi, company, you know, which has a business mix and portfolio similar to yours, they seem to be doing better on a far larger scale on growth. Whereas Hi-Tech, you know, despite strong win announcement, had, you know, continued moderation in growth rate. You know, is there any, you know, I mean, shift in share or loss of share which one needs to contend with or be worried about, you know, in your case? Yeah, those are my couple of questions. You know, the features, you can answer them. Thank you.
Sure. Kawaljeet, Happy New Year. Thank you. The change in guidance, you're saying we'll deliver 15%, is basically based on a muted Q3. That's where that is, and that's where that stands. Now, in terms of comparison, it was a specific plant engineering issue that I believe is since resolved. Of course, you know, finally proof is in the pudding. You will see that at end of Q4 when we come back and declare that to you. I would in fact say that if I look at our market share and our size that we have got going on, I think we are expanding with our clients.
In fact, if I look at the total number of clients itself, if I look at it year-over-year, I would say we've gone from 318 clients- 343 clients, and you've seen number of clients growing in the INR 1 million bracket, the INR 5 million bracket, the INR 10 million, INR 20 million as well as the INR 30 million. I also wanna add that I have visibility to the current run rate that we think we'll end up in quarter four, and I can confirm to you that market share has expanded rather than it declining. There was a, you know, we were not getting invited to certain telecom specific RFPs in network engineering, given the size of the deals and what we had as capabilities in spite of buying OT and growing organically.
We went in for this. I do believe that we stand in a position now, having crossed $1 billion revenue in constant currency and with SmartWorld, I do believe that we are head to head with a lot of people that are there, and our aspirations to get to $1.5 billion, as confirmed by Rajeev, by FY 2025, remain.
Mr. Sinha, do you have more questions?
I guess, you know, I have more questions, but you're restricting it to two, so I'll come back, later.
Thank you. We'll take the next question from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.
Thank you. Amit, I just wanted to follow up on the guidance part only. You know, we have seen historically, you know, you tend to be fairly conservative when you provide your revenue growth guidance, and like, generally not like to kind of cut it back as you had to do this quarter. You know, there is obviously this is happening in the backdrop of the macro constraint which you are seeing across the board. Are there any signs which have now started becoming visible, whether the increased furloughs, you know, in Q3 also were a factor of the macro pressure? You know, does this increases the risk to how you are kind of visualizing, you know, qualitatively FY 2024 spend from corporates?
Mukul, thank you for the question. You know, you've always been very deliberative, and I wanna give you a longish answer, if you don't mind here. Let's go segment wise. When we look at transportation, right, we have not seen any moderation in spends. In fact, you've seen the growth in that as well, in spite of, shall I say, smaller quarter seasonally. We do see new programs kicking in, et cetera. That's across auto, aero, T&OH. Industrial products is spending in specific areas of digital manufacturing as well as digitization of their products. That continues to happen and we don't see any slowdown. You've seen that in the growth as well as our commentary for quarter four. Medical that you have has always been traditionally the work we do, a very conservative sector.
Given the QARA pressures that they are under and notices they're receiving from various agencies and their need to check that, et cetera, as well as digitization, we are seeing spends and you will start seeing that growth, right? Fourth is Hi-Tech. I will say this, that there are five sub-segments in Hi-Tech. There's ISV, there is CE, there's SemCon, there is M&D, and then there is telecom, right? We have not seen any cutback in telecom, which is infra and OEMs and M&D. However, in ISV, CE and SemCon, we have seen a fair degree of caution that they're exercising last quarter also, this quarter also. We believe that the growth in telecom and M&D should be able to overcome that.
In Medical, actually, I forgot one thing, healthcare is investing, right? Come to Plant. Like I said again, Plant was a one-off issue in the quarter, since addressed. I wanna assure you that Plant will come back in quarter four and beyond. We are actively hiring, ramping up in Baroda and Chennai as well as in the U.S. and Europe for this particular sector. That's how I see this. Other than ISV, CE, actually parts of SemCon or maybe even ISV, CE, SemCon also, mostly you see a company specific cut if you see in terms of spending, but not a sectoral. I'm still cautiously optimistic about CY 2023.
Thank you. Mr. Garg. May we request that you return to the question queue for follow-up questions. We'll take the next question from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.
Yeah, hi. Good evening, Amit. Thanks for taking my question. Two questions from my side. Amit, you mentioned, I mean, we saw a very strong growth in the transport division in this quarter, and we also had this deals with the Airbus as well. Just wanted to basically understand the traction that we are seeing in the aerospace division. We've seen travel rebound significantly across the globe. Is it that kind of leading to more traction in this division?
Do you think it can sustain going forward, not just for us, I mean, as an industry, do you think there could be more similar kind of deals either for us or for the industry as a whole in this segment over the coming quarters, given that most of the airlines, hospitality and other guys are basically now into the green again, and they might start spending again on both the fronts? Secondly, my question was just a quick basically update, a quick clarification on the SWC margin thing. As it was mentioned that the first quarter of next year we will see a 182-1,200 basis point impact of margins.
Would there be any non-recurring impact of that as well, or is it just the integration which is going to reset the margin to that level, and then gradually we're going to ramp it up as the growth comes in and as we basically rationalize the operations? Yeah, that's the two questions from my side.
Sure. See, I will say thank you for asking that question. You know, one on Airbus, I do want to acknowledge one thing. Dr. Panda, as you're aware, is an aerospace engineer, so very kind of close to his heart. You know, we did start trying to pursue this while he was CEO, and I'm happy that after years we got empaneled first as a provider and then got selected. In fact, he was in our board meeting today, and, you know, he saw it. He said, "Chadha, one thing you delivered, very nicely done. It has been a dream." Right? I do wanna say, for an aerospace engineer, getting Airbus and panel for digital manufacturing, et cetera, is a dream. I do think and lot of people to thank, compliment, et cetera.
Having said that, I'll tell you, aerospace, the spend that is coming back is, one, there are design cycle that is starting again for the next-gen aircraft, right? People are looking at smaller aircraft. They're looking at single aisle. There are people that are talking about it. You can read the press on that. There is hybrid aircraft that people are talking about, et cetera. Those design cycles, concept cycles are starting. These are generally about a 7-10 year cycle, right? That is starting up. That's the good news, number one. Not just us, everybody. You will see more spend coming out for structures, for avionics, et cetera. 2nd, what's happening is there's a technology conversion happening from mechanical to electric power, electronics, et cetera, within the existing aircraft. That, again, is a smaller cycle.
That's about maybe a five-year cycle. That's kicking off as well. That's number two. Number three is the digital manufacturing part that they are bringing to the shop floor for a more integrated delivery, full lifecycle system, as they deliver aircraft and people take deliveries. That is what is happening. You will see spends in aero growing as you move forward, right? That's that. In fact, one more thing was that you remember at one time, Japan, they were trying to do something, and they stalled it because of COVID. They're again starting to have conversations where it should come back, et cetera. Lot of positivity, knock on wood, in that sector, that I believe gives a lot of breather to a lot of people.
Let me take the question on the consolidation impact. In the previous analyst call, I did indicate that the SWC margin is in the range of 8%-10%. Q1 truly is the impact of consolidating the two financials and of course the impact in terms of acquisition, et cetera. From thereafter, it is going to be progressive improvement, looking at both revenue synergies and cost synergies. What we believe is quarter and quarter, you will see that progressive improvement coming through, which is where, you know, our aspiration is to come back in terms of 18% EBIT in H1 of FY 2026.
Thank you. Mr. Singhal, may I request that you return to the question queue for follow-up questions. Next question is from the line of Ravi Menon from Macquarie. Please go ahead.
Hi. Thank you. Two questions. You know, first, within transportation, would you say that this year automotive is seeing the fastest-
Sir, I interrupt you. Please use the handset mode. The audio is not clear.
On the phone, can you hear me better now?
No, sir.
Still no? I am using.
Yes, yes.
Yeah. Within transportation, would you say that automotive is the fastest growing this year, followed primarily off highway with aerospace a little further behind? You know, Amit, from the way you sounded, it looks like aerospace is gonna pick up. How should we think about growth within transportation overall, you know, for CY 2023?
Ravi, can you repeat that, please?
I was saying within transportation over this year, you know, would you say that automotive was the fastest growing and maybe followed by Off-Highway and aerospace further behind? How should we think about CY 2023?
Ravi, thank you for that. Number one, transportation did grow, right? Let's wait for April to conclude which grew the fastest and slowest. I will say this to you that for CY 2023, see, there are four trends that we definitely see happening. One is a lot more electrification of automotive, that will continue. A, companies, however, have to remain profitable to be able to spend, right? B, T&OH, structure of highway, is seeing added autonomous as well as electrification and connected spend coming in. That is definitely happening. C, aerospace, we believe, is starting a design cycle, you know, more than mechanical, we believe this will be more avionics and electrification, et cetera, led and digital manufacturing led.
The reason I make that point is that earlier design cycles used to be a lot more mechanical led. This time we are seeing a change in that. We believe that we are well-positioned in that area because, you know, we are more electrical embedded driven than mechanical driven in this area. Overall, do I see the growth? I absolutely see, good growth coming, in this area, continuing in CY 2023.
Great. A follow-up on this telecom and high tech. You know, I think you mentioned that in ISVs there was some pressure. You know, how should we think about this? Will ISVs shut down some of these older legacy products? You know, do we say a hit? Or do you think there, that, you know, more shift offshore will actually compensate for that or maybe, you know, even provide some growth?
See, as for those that have followed us for years now and talked to us, ISV is one of our smaller sub-segments, right? Our exposure to ISV is fairly limited from a hit standpoint. Having said that, ISVs are reconsidering their spend. You know, there was a lot of pie in the sky ideas and projects that were getting talked about. All that definitely is taking a, you know, a back seat. Shall I say back bench, because they also wanna start delivering profits. They want to look at et cetera, et cetera. That's there. Telecom, high tech, I do wanna say that 5G spends are up and will continue to continue to do that.
ISVs are trying to stop some area spending, but they are starting to spend in devices that they are building that will work with 5G and then tomorrow 6G, Wi-Fi 6, et cetera. I do believe that that part will continue to grow. I am hopeful Semcon will definitely come back because the amount of semiconductor required in auto, that's required in data center, is there. The number of people buying laptops has gone down because, you know, all of us have purchased the laptops that we wanted to, going back to work now. Having said that, I think this is temporary because you look at the kind of production, capacity that companies are building, and design they're talking about, I do believe it will come back.
Overall, I do think that the Hi-Tech recovery may start in the second calendar year and then go up from there. That's how I broadly see it. For us specifically, though, my commentary is whole, that I do see our quarter four telecom, Hi-Tech being better.
Thank you. Mr. Menon, may we request that you return to the question queue for follow-up questions. We'll take the next question from the line of Sulabh Govila from Morgan Stanley. Please go ahead.
Yeah, hi. Thanks for the opportunity. A couple of questions from my side. One is on the auto vertical, particularly, which has been doing well for us as well as industry as a whole. There seems to be no major wins listed this quarter. Just wanted to understand, has there been a change incrementally in the way clients are awarding deals, or it's just a timing issue in this quarter? The second is, on the $30 million client bucket, there's a moderation in that number Q on Q. Is that also related to the client engineering related furloughs or that's related to some other client?
Hi. Thank you so much. Number one, auto not having a single $10 million deal. Again, you know, I said this to some of you once that engineers think like engineers, they don't think like business people. They don't know that $9 million is not counted and $10 million is. I would confirm to you that there are deals in automotive as well. In fact, there are incremental deals. I don't know whether we made it press or not. There were a couple of new ODCs inaugurated in this last quarter. Maybe they've not asked us for names to be published, so we didn't. There are a couple of new ODCs that have been published. There were earlier wins that have ramped up in auto as well.
There are some deals, exciting deals in progress in auto as well, and I believe that some of them, I mean, they're already closed or are closing in the current quarter. I would not be worried about not announcing a deal in auto. I was focused more on making sure that we get. Last quarter we got feedback on this, the nine is nine , it's not 10. We made sure that there are some deals between 10 and actually nearly close to $20 million also. We haven't called them out as $20 million because we believe in the practice of, you know, being a little conservative on these things. I would not worry about automotive. All I would say is that we continue to grow in this area, expand higher, et cetera.
Now in fact we're doing walk-ins in Munich, so anybody who has friends can even recommend people, and Bangalore, and Mysore. Now let me go on to the $30 million. I agree with you that $30 million, there was one client, in fact, less in sequential LTM. Let me just see, please, to answer this. In fact, not just $30 million, we were flat in $20 million as well, though $10 million plus it grew one sequentially and $5 million grew one sequentially. Of course, $1 million grew eight. So I have access to quarter four data, which I expect we'll do. You will see some of this, you know, furloughs did have an impact on across, right? So everybody, there were, it was a shorter quarter, et cetera.
What I can confirm to you is that this will correct itself, as we move forward, our focus on account mining stays and continues to be laser sharp so that we can expand.
Understood. Thank you.
Thank you. The next question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.
Yeah, hi. Thanks for giving the opportunity. Largely, I wanted to understand on the North American geography side, I mean, North America hasn't grown for us, this particular quarter. Any signs of demand moderation across this particular geography? Maybe your comments with respect to this geography that will be helpful. My second question was on this, you know, aerospace notification that we made. I mean, earlier also we were like a strategic engineering partner, and now we are there for advanced capabilities. I mean, you know, just wanted to understand, given the fact that our penetration and our capabilities are improving on the aero side. I mean, what kind of spends could be there for us specifically over the next year from the aero side?
Could it be like $5 million kind of a spend per quarter? Could that be the potential opportunity? Wanted to understand that. My third question was on the guidance that we have given. I mean, the 15% constant currency guidance that we have given, and it implies 4.5%-5% kind of a growth for balance part of the year. I mean, what is giving us that confidence that, you know, given a muted growth this quarter, we are still hopeful of having 4.5%-5% growth for the balance part of the year? Those were the questions.
Okay. Mihir, here are the answers. Number one, you can see that North America actually there was a 0.7% de-growth it shows here because of this revenue. The way we count, you know, currency, India shows 6.4%. I can confirm to you that we don't work in India, right? I mean, largely our India revenue that we report is actually INR billing, but it is done for U.S. and European customers. I would like to confirm to you that Europe, North America, both of these and ROW have grown. The India growth that you see, you should actually count it towards these three geos. India for India, we do very little, maybe, you know, maybe some million, $2 million per quarter, to that extent, right? $3 million. Please read it like that.
In fact next year we will review this and see if there's another way to present this because we get asked this question every quarter, so we'll review this. Second, Airbus. See, please understand, Airbus is a very, very, shall I say, I want to find the right word for you. They have a very process-oriented, methodical, empanelment exercise, et cetera. What happened last time around when we announced it, was we have been chosen by Airbus for its Skywise platform, and they had empaneled us as a vendor and given us an MSA et cetera, and signed globally, which was earlier only an In-India MSA.
What they have done is, specifically in digital manufacturing and other area, they have qualified our spend and said we will spend X amount of money, and we have been empaneled as one of. I again can't give a number because I'm not at liberty by Airbus to do that. One of, say, N number of suppliers, and N is a very small number, right? They will spend that $X amongst those very little vendors in those two particular areas. They've in fact given us a ramp-up plan, et cetera. The reason I'm again not quantifying it is because, you know, we are That's a discussion we've had with Airbus on. I am fairly confident that it will ramp up.
We've actually started recruiting, training, et cetera, et cetera, as well as building team organization structures, et cetera. I will actually request my colleague, Abhishek, our COO, to talk a little bit about the process he does to get ready for such ramp-ups. Third, Aero to be C growth. Yes, in avionics, in digital manufacturing. Lastly, guidance. 15% constant currency amounts to more than 3% growth as far as we are concerned. You know, a point was asked earlier, are we slowing down? See, we were at about that 4% growth rate in last year, and we had done that whatever 19%, 20% that we grew last year, right? Last year. This year, we've been on that 3% range, plus percent. Q3 was muted, right?
Next quarter we'll see, it's not paid out yet. That's why we give guidance, and that's why we don't give a firm number. We still have to bill, we still have to invoice, we have to collect. I can assure you that it will be greater than three. Will it be four? Will it be more? Is to be seen. Abhi, would you like to add on Aero specifically, what we're doing in terms of ramp-up?
Sure. I think, you all would have heard about the center we opened in Toulouse about four months back. No one invests in a center in France if they don't have the confidence of growing in the region. It was for Airbus, and that's the reason we opened that center. If you look at, I mean, of course, we can't share numbers, but if you look at our growth of Airbus in the last couple of quarters, it has been actually one of the fastest growing accounts for us. This is all in the backdrop of a very structured academy program that we have, training program that we have created in partnership with Airbus.
All our training materials, the way we go about it, there's an engine running on how we hire people, recruit, and train them, internally move people into the account. Our relationship with Airbus is at a very advanced, very good, very strategically placed. We have even won some awards. Again, can't share details. I think we are in a good space. This partnership that Amit spoke of, that we won the empanelment, I think that augurs well for us in the digital manufacturing space, especially.
Thank you.
Mr. Manohar, may we request that you return to the question queue for follow-up questions. We'll take the next question from the line of Akshay Rathi from Axis Capital. Please go ahead.
Hi. Thanks for giving me the opportunity. First question was on offshoring. In our opening remarks, you had mentioned that we see offshore revenue mix going up to 60%. Wanted to understand what are the drivers of this trend and which are the verticals where we expect this to play out.
Let me start by sharing the verticals, and then I'll request Abhi, my colleague and COO, to address, you know, the drivers for offshoring to increase, right? From a vertical standpoint, see, as we look at it, we expect it to be, and I wanna say this, you'll see this across verticals. It's not a vertical or a second vertical. You'll see this across vertical. I would also say that digital engineering, digital products and services, as well as embedded testing, parts of digital manufacturing, we'll see this a lot more, right? It's across, it's not like it's one or either. Abhi, would you like to give the drivers for offshoring? Additionally.
I think, when we looked at our operational strategy, while everyone knows utilization, freshers, pyramid, these are all usual levers that you look at for margin growth. Offshoring is probably one of the biggest levers that we have as a company decided to work on. Our near-term aspiration is to go to 60% of our revenue coming from offshore. We know that that's a big lever from a margins perspective. One of the things we have done well this quarter and hope to continue doing in the coming quarters is a very high degree of focus on fresher utilization. The freshers that we take every quarter, anywhere between 500-600 freshers that we take every quarter.
How do we make sure that they are ready to get into billable projects, that helps in margins, but more importantly, also helps in pulling more work offshore. The last point I would like to mention is we have very actively started engaging with our customers in pushing the work to offshore. We have kind of created an offshore ability index of our various service offerings, and we have started engaging with the customers actively on why a certain piece of work must be done offshore and of course, leveraging the whole hybrid working model that the COVID has taught us to say this work can be done from outside office, can be done from anywhere. That whole engine between sales and delivery has starting to show results.
We have been working on this for some time. I expect this to continue.
Got that. Thanks for the detailed answer. On the second one was on headcount addition. This has been soft for past 4 quarters now. Would it be fair to say that our utilization, which came back to about +75% , would have now normalized to our comfort range of 78-80%, and here on we would need to add headcount going forward. Is that the situation now?
Yeah. Number one was, yes, Q2 and Q3 saw us improving utilization, rationalizing pyramid, et cetera. I do wanna confirm that quarter four onwards, I do believe that headcount addition sequentially will come back. We've reached levels that we are comfortable with because, you know, we are a tech company. We do invest in labs. We invest in people working in labs, people creating solutions, practices, widgets, et cetera. We are comfortable with the utilization that we see now, and therefore you will see headcount increasing now sequentially as we move forward quarterly.
Thank you. Mr. Ramnani, may we request that you return to the question queue for follow-up questions. We'll take the next question from the line of Kawaljeet Saluja from Kotak Securities. Please go ahead.
Hi. Thanks for the opportunity again. My question is for Rajeev. Rajeev, when I was just doing some backup and re-calculation on margin guidance, and you know, it seems that you know, the way you have given guidance implies you know, no contribution or EBIT from the acquisition, SWC acquisition. Is this largely because of the amortization charge or you know, do you expect the core organic margins also to deteriorate from that 18.5% you reported?
Kawaljeet , let me clarify. This does not bake in any deterioration on the organic margin. I did mention it earlier that, given we've done 18.7% EBIT in Q3, with all the operational levers and improvement in offshore and many of those things that we've talked about earlier, we do see a fair bit of comfort of sustaining this margin organically as we spoke. As far as the SWC acquisition, there is part of amortization also baked into it. Plus there may be some investments that we would have to make.
As you would appreciate, you know, the strategy that Amit talked about in terms of next-gen communication, sustainable spaces and cybersecurity, we will bring in experienced sales leaders to be based in respective geographies where we want to drive growth, right, and be able to position this to the existing customers and also solicit newer customers. Part of that will be investments, but like I have said earlier, that progressively we should be able to see both revenue synergies and cost synergies play out.
Rajeev, just clarify what would be the EBIT margin that we have given the EBITDA margin for SWC 8%-10%. What would the EBIT margin be? You know, how much do you think it trends down to before it starts recovering, once the synergies kick in?
Kawaljeet, I can answer to what is historical. Like I've said, we've been in an EBITDA range of 8%- 10%. In terms of EBIT, very similar. I mean, there is not much of cost between EBITDA and EBIT that business entails. That is where it is. To your specific question, I may have said this in the previous call also. As we get more color, we will certainly provide that when we come back in Q1 of FY 2024.
Thank you so much, Rajeev. I appreciate.
Thank you, Kawaljeet .
Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Pinku Pappan for closing comments.
Thank you everyone for being present on the call today. We hope we have answered most of your questions. We'll be happy to connect with you during the course of the quarter to clarify any other questions that may remain. I would like to say bye and, you know, wish you all a very good day. Thank you.
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.