Deal win momentum will sustain in coming quarters: L&T Tech CEO

L&T Technology Servicesposted a strong set of numbers in the first quarter of FY23. The engineering services firm said despite all the talks of recession, demand from clients for engineering projects have not slackened. Rather, segments like automotive, product engineering and others are showing much growth prospects. In a conversation with the Bizz Buzz, Amit Chadha, MD & CEO, L&T Technology Services, said that the company has reconfirmed its revenue guidance for this fiscal given the current demand scenario. He also said that given the rising spend in Europe on renewable energy, the L&T Group company may see clinching bigger deals in coming quarters.

On rising attrition, Chadha said that this may stay for a couple of quarters more but will stabilize after that. He also said that attrition is not rising in absolute term. In terms of margin outlook, the CEO of LTTS said the company is likely to operate at a similar band that it currently has. Despite cross-currency headwinds and increment cycle in July, the company is hopeful of maintaining the margin in the current level through various levers including utilisation, employee pyramid and rupee fall among others. The company is on track to be $1 billion revenue company by the second or third quarter of this fiscal year.

L&T Technology Services (LTTS) posted a good set of number in Q1 of FY23. What are your views on demand visibility in second half of this fiscal year and beyond FY23?

Zinnov has come up with a report which said that total engineering spend was $1.6 trillion. By 2025, this spend is likely to be $2 trillion on conservative basis and $2.3 trillion on optimistic basis. Most of the new spend will come in digital and in digital, more will come in hi-tech and service-led verticals. So, demand is there and will continue. Even if there is a recession, spending is not going to go away. Retail spending is still there, companies in oil & gas are still spending. Air travel is back to normal.

So, I do believe that the prospects are there. There could be some companies running into issues. It is not a segment issue. Of course, things keep changing and as far as we are concerned, we are reconfirming our guidance that is 13.5 -15.5 per cent revenue growth rate. Secondly, we are reconfirming that we will be a billion dollar revenue company by second or third quarter of FY23. Thirdly, we are reconfirming that we will reach $1.5 billion revenue mark by FY25. So, the colour of the demand is changing. For example, there is so much demand in plant engineering that we are actively hiring in Baroda and Chennai. Demand in auto, digital products and manufacturing is there. There are areas, where you have to a little careful but that's part of the business.

What are your views on the tepid sequential growth in telecom and hi-tech vertical of LTTS in Q1 of FY23? Does it indicate decision deferral in terms of digital projects?

We have walked away from a large programme of a customer in fourth quarter of FY22. Despite that, we grew in hi-tech vertical sequenstially during that quarter. So, this is not a demand issue. Rather, we are choosy in what we take and what we execute.

How do you see demand coming from startups given the current scenario of low funding and uncertain demand environment?

We do see business line of customers that were not making money are deferring their spending. Startups with no clear revenue streams are deferring projects. In fact, I will put it in another way. There is no more free money. So, there are projects which are making money, generate cash and these are not seeing cuts.

Employee attrition continued unabated despite some market participants believing that it may come down in the first half of this financial year. How do you see demand for talent playing out in coming quarters? Can we expect attrition to come down in the second half of FY23?

Maximum hiring in the US happening in the technology sector. I do believe that demand for talent will continue and it is not going away. But the colour of the demand is changing. And if you are not agile, you will get hit. So, agility is the game.

As far attrition is concerned, it will take another couple of quarters. In absolute term, attrition has not changed. Give us another two quarters, it will stabilize. As far as fresher hiring is concerned, we hired 3,000 freshers last year and we have deployed them. We will hire same number of freshers this year. Around 2,500 offers have gone out. But, we will play between quarters in the headcount based on utilisation. If the utilisation goes out of hand, there may be problem with margin. So, we have to do a tight rope walk between hiring, utilisation, employee pyramid and onsite-offshore balance. That's the way we look at it.

What is your outlook as far as onsite, offshore mix is concerned? Will offshore touch around 60 per cent in coming quarters?

In coming quarters, we will get to that number. We will revolve around 54 per cent to 60 per cent. That's the corridor, we will operate.

Deal sizes in the engineering services space are increasing. So the fundamental assumption on engineering services contracts that these are smaller in sizes seems to be changing. What is your view on this aspect?

When we joined LTTS 13-14 years ago, engineering used to be largely mechanical engineering. If you see, definition of engineering has changed. Today, engineering is about software engineering, hardware engineering, mechanical engineering, hydraulic engineering, normal engineering and all of that. When that changes, and as you go into programmes from projects, and you get to manage product lifecycle, the nature of revenue changes. Secondly, I have always told that continue to aspire and get ideas from IT services, how they get deals and leverage that for engineering. So, we have done all that. The industry has matured. All engineering companies are reporting increase in deal sizes. We have a very nice deal engine. We have got a large deal group that continues to work for bigger deals. The number of large deals coming in automotive is helping the growth. The deal wins in the plant engineering are helping that growth.

How do you view the cross-currency movement impacting the earnings of the industry? What is your outlook on the margin going ahead?

As far as margin is concerned for LTTS, our margins have improved both in sequential and year-on-year term. This is despite the fact we provided ESoPs to certain set of employees. As far rupee-dollar movement is concerned, it helps slightly because of rupee depreciation. But, depreciation of other currencies to dollar created a headwind. Our salary increments will happen in July. But, we have certain parameters like fall of rupee, utilisation, pyramid that will work in favour of us. So, we are working. It's our aspiration to stay in the similar band (of margin).