Q2 Review: LTIMindtree Management Decodes Numbers
Q2WithBQ: LTIMindtree's revenue and net profit rises in second quarter.
President Sudhir Chaturvedi discusses the company's performance.
President Sudhir Chaturvedi discusses the company's performance.
Transcript
00:00 Hi, welcome to this special conversation on BQ Prime. I'm Tamannah Anamdar. IT stocks
00:11 have been in focus with many of them getting the thumbs down from investors post their
00:16 quarterly results. I would say LTI Mindtree is an exception in that sense. Their Q2 numbers
00:21 were announced yesterday and after that corn call, the stock has been doing fairly decently
00:28 in a relative term today. It has got that thumbs up. Why exactly is that? One of the
00:33 reasons is a relatively optimistic and robust guidance that the management has given going
00:38 ahead between 17 to 18%. What is behind that optimism? To speak on this, I'm joined now
00:46 by Sudhir Chaturvedi. He's President and Executive Board Member of LTI Mindtree. Mr. Chaturvedi,
00:51 thank you so much for speaking with us today. I hope you're doing well a day after those
00:55 numbers are out. And let me put that question to you that I've mentioned in my introduction.
01:01 Where is that optimism coming from for a relatively more robust guidance?
01:07 Thank you, Tamannah. It's good to speak to you this morning. In terms of what we've informed
01:18 investors on the calls as yesterday was that our H2 will be stronger than H1. And the reason
01:24 we believe in that, that we're confident about that is the order inflow that we've had over
01:30 the last two quarters. So we had $1.4 billion of order inflow in Q1 and followed by $1.3
01:37 billion in Q2. $1.4 billion in Q1 included a large renewal contract, whereas the Q2 revenues
01:44 are mostly from new deals that we won. So the combination of those two, the order inflow
01:52 that we've had in H1, as well as the nature of the order inflow, makes us confident that
01:57 we will continue to grow in Q3 and Q4, and therefore our H2 will be better than our H1
02:04 in terms of growth.
02:05 On that investor call yesterday, there was also talk about the margin improvement program.
02:11 Can you give us a bit more detail on that? What exactly are the mechanics of this program?
02:18 So as the two companies got together post-merger, we had capacity in the system. So we essentially
02:25 focused on maximizing utilization. So you can see the utilization is 87%, which is an
02:33 all-time high for us. And we continue to be comfortable at that range. We've also had
02:38 employee addition this quarter, significant employee addition this quarter. And we will
02:44 continue to operate in that utilization range. That has been the biggest driver.
02:48 In addition to that, there have been mergers synergies that we've exploited. So there are
02:52 certain mergers synergies in SG&A. There will be more mergers synergies which will come
02:57 in future through real estate consolidation, et cetera, that will happen in subsequent
03:01 years. But there were some SG&A areas that we could look at.
03:06 And last but not the least, we are also seeing how we can use technology more efficiently
03:12 to drive more productivity within the business. So the combination of these three factors
03:17 is how we're doing margin maintenance here.
03:20 You spoke about your order inflows and 30 new clients this quarter. One big theme, I
03:27 think, this result season, especially when it comes to your sector, is whether those
03:32 order inflows and those robust order books are actually translating into revenues, margins,
03:38 in very uncertain times when things sometimes change. Can you give us your view on that
03:43 and some perspective on that? Is there some sort of choke in that pipeline? What are you
03:49 experiencing and seeing?
03:51 Actually, interestingly, we are seeing a very robust pipeline, actually. The conversations
03:58 that we're having with clients are at a record high. The number of large deals that we currently
04:03 have in the portfolio and the value of them is also at a record high. So most of these
04:08 are cost takeout deals, efficiency deals. That's over 75 percent of the deals that we're
04:13 looking at are of that nature. As clients are fundamentally living to reject their cost
04:18 base from a tech perspective after three years of quite strong spending that they've done
04:23 in technology. So I think it's an expected efficiency cycle, and that's something that
04:27 we are seeing.
04:28 I think post-merger, what we've seen is that our deal invites have gone up significantly.
04:33 We have several deal advisors now reaching out to us almost on a weekly basis for deal
04:39 invites. And the reason for that is that I think we are seen as the best alternative
04:46 to the tier one players where clients are looking to see if there is a switch that they're
04:50 looking to make. So that's the kind of pipeline that we see.
04:56 Now, in terms of that translating to revenue, what's also happening is in a conscious spend
05:00 environment, the discretionary spend has reduced considerably. So what we used to have as discretionary
05:07 spend is now being actually fulfilled by these new deal wins. But what we have is with the
05:13 quantum of new deal wins increasing and these are large multi-year deals, we'll begin to
05:17 see when the cumulative effect of those deal wins, we will start to see in Q3 and Q4.
05:23 So you talked about how you're being looked at a great alternative to your tier one companies.
05:29 What is that competitive edge in this environment?
05:34 Well I think we're a breath of fresh air, frankly. As the two companies have merged,
05:39 there's excitement within the organization. We're close to 90,000 people now, so we have
05:45 the capabilities. And we have focused verticals, so we focus only on a certain set of verticals
05:52 and we can maintain that focus even post-merger. So in those verticals, we have the capabilities
05:58 of any of the large players. And then we have the speed, the agility, the nimbleness, the
06:03 responsiveness, frankly, of a player, of a smaller player. So I think we bring the best
06:10 of both worlds to clients and that's something that they're beginning to see.
06:14 Having said that, let me talk a bit about your verticals and your BFSI segment. I think
06:20 about 5% growth in this vertical. Are you looking at a continuing sort of headwind there,
06:30 especially from your big base, North American base, about 74% of your business? Do you see
06:35 the pain points there continuing, looking at where the US economy is heading? No one's
06:39 talking of recession anymore, but the fears are very much still there.
06:44 Sure. So what we've seen in BFSI, and if I break BFSI into banking and insurance, insurance
06:50 for us has actually been quite robust. We've got approximately 10% growth in insurance,
06:57 IOI, and that continues to be robust because clients and insurance are investing in modernizing
07:03 their technology stack in a very significant manner, in spite of all the cap losses that
07:07 they've had due to weather events more recently. That investment cycle is still being maintained.
07:13 Banking is where we're seeing caution in spending as well as freezes in onboarding new resources.
07:21 So that will continue into Q3 as well. We also expect that, I think it's a good time
07:28 for me to also say that in Q3 this year, we're expecting more furloughs to be higher than
07:33 in previous. So post-pandemic, we saw furloughs reduce. Now furloughs are going back to how
07:40 they used to be pre-pandemic. So we're going to see furloughs in banking sector that traditionally
07:47 has these furloughs in December. So overall, BFSI, I think we're still confident that it
07:54 will continue to grow even in the second half of the year. But what we are really looking
08:00 forward to in the second half of the year is broad-based growth across verticals. So
08:04 for example, our retail and consumer goods vertical, retail consumer goods, travel, transportation,
08:09 and hospitality, basically our consumer sector-oriented verticals are actually seeing a good uptick
08:14 based on the deal wins that we've had and the continuing deal pipeline that we see there.
08:18 Let me talk about your attrition rates, which have moderated and continue to moderate. Do
08:24 you expect that trend to continue? We've seen that steadily over the last, I would say,
08:29 four quarters. And do you see that trend continuing?
08:31 Yeah, we're approximately about 15.4% now. And I think we will see that trend in that.
08:38 I think we traditionally we were in the 13 to 15 range, so we will see it sort of settling
08:44 back into that range. And what we are seeing is that as we grow, the ability for us to
08:54 continue to add resources in line with demand is there. The kind of pressure that we had
09:03 seen on supply in the past has reduced significantly, which also helps in terms of us managing our
09:09 costs and also ensuring that we are responsive to our client needs.
09:15 I want to just come back on your outlook and the base sort of point of you expecting H2
09:22 to be better. In your view, do you think the worst is over on the US macro front? Because
09:28 nobody is very clear what's happening there. How are you looking at it going forward and
09:34 how are you preparing for an either or scenario?
09:38 In fact, this is the budgeting quarter for most of our clients. And most of our clients,
09:43 especially in the US, have a Jan to December year. So this is the quarter where the budgets
09:48 tend to get finalized. Now, notwithstanding the recent events that have happened in the
09:52 last two weeks, because it's too early for us to know exactly what that impact on our
09:57 client budgets are going to be, but I think it's fair, it's sort of safe to assume that
10:01 there will be some, it'll lead to more caution. So I think what we were already hearing from
10:06 clients that there were going to be more caution in spending, even continuing into the new
10:12 financial year. But what they are focused on is efficiency-led deals. I keep telling
10:19 my teams that I'm very happy to be in the cost reduction business. It's a great business
10:23 to be in. It's something that we are extremely good at. So it's not like it takes away opportunities
10:29 for growth, but what it does is it reduces the opportunities for growth through discretionary
10:33 spend. So we want, then we need to shift our emphasis to growing within the existing spend
10:41 areas, essentially to take market share away from others.
10:45 Does that also impact deal sizes, though? The cost reduction business, are those spends
10:50 then lesser than discretionary spends? The cost reduction, actually what happens
10:55 is these are usually five, three to five to seven year deals. So they're longer term deals.
11:01 The TCV of these deals tend to be higher. Yes, these deals are hyper competitive and
11:05 clients are looking for savings. So there's always pressure that it puts on pricing from
11:09 that perspective. But as long as you've got strong solutions, we've got some really good
11:14 AI, intelligent operations solutions that are in play, that we know that we can actually
11:21 do these, deliver the cost savings that the client need as per our margin expectations.
11:27 So I think we can balance that out based on the investments that we made, especially in
11:32 our AI led tooling in this space. So I think for us, this is actually good news
11:38 because we get secular revenues over a longer period of time. And also these programs have
11:43 a ramp up time. So there's a ramp up phase. So you can plan and execute much better. And
11:49 you can also make sure that the team size and the team composition is more appropriate
11:54 to these kind of deals. Whereas with discretionary, it's almost always just in time, resourcing
12:00 and looking for skill sets, which are sometimes scarce. It's a different business. We ideally
12:07 like a combination of the two. But yes, today's scenario is much more around cost saving led
12:13 deals and pipeline. But we are happy with that as long as we continue to win and that
12:18 space will continue to grow. Just because you spoke about AI and it's everyone's
12:23 buzzword and by everyone, I mean everyone, even companies that are not in your space
12:28 are getting into AI now. What is that landscape like? Can you share anything new and exciting
12:35 happening there? Yeah, I think from the perspective of LTI
12:38 23, we were always very strong in data. Data is our largest practice unit in the organization.
12:45 And that gives us a good base for us to look at AI initiatives. We also have our own data
12:50 platform called Phosphor, which is an AI led platform. So we actually entered the space
12:55 earlier than others. Now, what we see with Gen AI is that we're using Gen AI across the
13:01 board in the organization. In fact, I think the easiest way for me to describe it is that
13:07 everything that we do for our clients, from the way we develop software to the way we
13:12 maintain software and hardware to what we do in testing, in each and every area, we
13:19 have an AI led intervention in each and everything that we do. So it's almost like we are an
13:24 AI inside company in everything that we do. In addition to that, clients are looking at
13:29 very specific AI use cases, especially in the customer operations side of the house,
13:34 contact center, CRM. Now, these are the areas where we are seeing significant investments.
13:41 Marketing continues to be an area of focus from a Gen AI perspective. So we are seeing
13:46 we have about 100 odd conversations going on and 22 active engagements, which are just
13:51 Gen AI focused. But all our large deal wins that we've had recently that DC spoke about
13:58 in his opening comments yesterday, are all AI operations led, where we infuse AI into
14:05 how we deliver operations led efficiency to our clients.
14:09 All right, that's exciting. Thank you so much, Mr. Chaturvedi for speaking with us today.
14:14 Thank you, Tamanna. Such a pleasure.
14:16 Likewise.
14:16 Thanks.
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