Despite geo-political turmoil, demand environment in Europe remains strong

L&T Technology Services achieved $1 billion revenue run rate on annualised basis during the second quarter of FY23. Despite slowdown fears, the company also raised its revenue guidance to 15.5-16.5 per cent for the current financial year. The L&T Group company was also able to manage its operating margin above 18 per cent. In an interaction with the Bizz Buzz, LTTS' MD & CEO, Amit Chadha said the company is fairly confident of maintaining the growth momentum in the second half of this fiscal. He said that despite geopolitical turmoil affecting the world, demand environment in the Europe remains strong. Rather, areas like clean energy and electric vehicle are witnessing increased IT spending by enterprises. With regard to 5G, the CEO of LTTS said the spend is yet to trickle down but will start happening in 2023. He said that the company is confident of maintaining its large deal win streak in coming quarters. In the second quarter, the company won deals in the range of $50-$100 million for the third consecutive quarter.

Chadha said the company is confident of winning such large deals going ahead. On the margin front, the company said various levers are available to increase margins in coming quarters. Higher offshoring, increased utilisation, and automation are some the avenues available with the company to achieve the same, he said. With regard to employee addition, the company said it will continue to add employees in coming quarters

L&T Technology Services has raised its full year revenue growth guidance to 15.5- 16.5%. It has also achieved the $1 billion revenue milestone on annualised basis in Q2 of FY23. How is the demand environment? What are the factors driving this optimism?

As far as environment is concerned, companies that have products and customers, demand from that segment has not been impacted at all. Where the company is doing well, and its products are doing well, demand remains unaffected. But the era of free money is over. We are seeing that playing out in different parts. There are some companies which are not doing well, they want to spend later. But companies which are doing well, are going forward with their spends.

In Europe, a lot of companies are spending money to get into energy generation through oil instead of gas. Many officials are saying that it is another crisis. So, companies are resilient and they will find a way out. Nobody I have spoken to say that there is a long-term recession. The only thing, I keep hearing is, let's see how things develop. If we compare footfalls in malls, that has not reduced. Airports are full, planes are oversold, hotels are booked; that means people are consuming. So, we continue to see good traction in demand.

There are six themes we are seeing spend. One is spend on electric vehicles remains untouched. In Europe, a lot of projects are talking about wind-fired plants, and solar among others. Thirdly, digital manufacturing is picking up because there are plants that are not running owing to lack of human resources. We are digitizing a lot of shop floors. On the (digital) product side, where there is (good) return on investment (RoI), spend is going on.

Does new spend coming in or are those previous commitments?

That is a little volatile. It depends on how the company is doing and how the product is doing. When Covid hit, it stopped everything. After the bounce back, it was all spend. Now, it is something like spend-check-spend. On the 5G, a lot of conversation is going on but the entire spend on this segment is yet to trickle down. We should see spend coming up in 2023.

LTTS has been winning deals worth $50 million-$100 million for the third consecutive quarter now. Will this trend continue in coming quarters?

This will be consistent. Three-digit TCV should be expected each quarter. I think, we have been fairly consistent in this aspect.

What will be the future trajectory on offshoring going forward? Will the margins go up as utilization improves?

I think, we have avenues to increase the offshore component. It is not an overnight thing and it takes a bit of time. Secondly, as we continue to hire freshers, the pyramid will be right sized. That is another avenue we do have. We are also constantly focussing on higher level of automation. We have delivered EBIT numbers at more than 18 per cent for five quarters in a row. We have been focussed on delivery and performance.

Net employee addition numbers in the second quarter seems to be in contrast with the demand outlook. How should one read it?

Don't look the net employee addition in the second quarter as the lead indicator. I wouldn't worry about it. We have actually added 500 plus freshers in the second quarter. The choice was we could have done the addition and not done the optimisation, then margins would have gone down. It was a tight rope walk in the Q2 which we had to do. Net headcount addition will again start in the third quarter.

Attrition numbers should come down in the second half of the current financial year. Is that the indication in broader term?

Yes, it should happen for the industry. On LTM (last twelve month) basis, it should show downward trend. If you look at the gross hiring numbers, it will depend on attrition. Many of us hired a chunk of resources last year and the goal is to make them billable. We need to make the utilization at a healthy level to fund future growth. It can't be at a level where it starts hurting our bottom line to a large extent. We have hired same number of freshers that we had hired last year and we are also promoting internally.

What is the company's approach to resuming work from offices?

We have got three principles. Firstly, leaders have to lead from the front. So, leaders have to come back to office at least four days a week. And they are coming. Another thing is that you can't dictate people on this issue (coming back to office). It doesn't work. If you look at other industries except IT and a few others, everyone is back in office. Bank employees are back in office. Industry is back in office. So, we said, at least three days a week, you should be here. We have never sent out an email saying you have to do this. We have been urging people to come back. And any given day, we have around 40-60 per cent attendance depending on the location. In our small centres, we have most staffers in offices.