‘Expect June quarter to be soft, despite strong deals pipeline’: LTIMindtree CEO

LTIMindtree, which started trading as a merged entity held under Larsen & Toubro from 24 November last year, ended FY23 with 27.1% annual rupee revenue growth. Speaking ahead of the upcoming Q1FY24 earnings, Debashis Chatterjee, chief executive of LTIMindtree, said that despite initial expectations, the June quarter is likely to remain “soft”. He also spoke about why the company’s targeted operating margin rise will happen over a long term, how tech deals across industries have changed due to macroeconomic slowdown, and why generative artificial intelligence (AI) will take time to translate into billable projects. Edited excerpts:

The June quarter was widely forecasted to be a weak one. How has it panned out so far?

We knew that Q1 will be different from the rest of the quarters, as it has been as per expectations so far. The LTI and Mindtree merger is now behind us — we’re now on one set of unified processes. All of this was mostly conducted within the first week of April. While we’re still taking care of a few smaller aspects, at a broad level, the merger activities are over.

Having said that, the commentary for both the erstwhile entities had indicated cautiousness in boardrooms.

In terms of FY23, we had a 20% CC growth. It ended pretty well. We’d indicated earlier that Q1 (FY24) will be soft, but if you look at the overall deals pipeline, there’s a lot of activity. A year ago, when we spoke about deals, most of them were transformation contracts — of trying to reimagine business models with digital transformation. However, looking at the pipeline now, the deals are mostly efforts to increase efficiency and save on cost by companies. The shift is evident, and the narrative in tech spending has therefore changed.

The impact is because these efficiency-focused deals are typically longer-tenured — of five years or so. While that is good, they also take more time to be closed and billed, since they involve transition of companies and teams, vendor consolidation and more.

Do we expect an impact on your operating margin this fiscal?

We’ve stated clearly that as a part of our merger, we defined profitable growth at 17-18% Ebit by FY24. In the longer term, we’d want to see synergies in terms of our revenue and margin. As a result, we do expect our margin to expand by 200 basis points over the next four to five years. But, this margin expansion will be more back-ended (i.e. come at a later stage), while revenue growth will be front-ended.

For instance, we can consolidate the number of physical campuses in cities, with the new work structure. But, any realisation of these opportunities will only come at a later stage, and we cannot leverage the impact today itself, since there are leases involved in facilities. We will undertake some of these activities, but they will not take place overnight. Benefits will come, but a little later.

Has the quantum of deals gone down now?

There are multiple macroeconomic factors in the slowdown this quarter. I can’t say that what we are seeing is consistent across every geography or every sector. But, there is a sense of apprehension in most places, and discretionary spending gets hit at such times.

Having said that, deals are there in the market, and our pipeline is very strong. We are not concerned about deal activities in the marketplace. What we’re a little worried about is the time it takes for a deal to close, and the cautiousness in the client environments right now. The momentum remains strong nonetheless.

But, what we need to understand is that efficiency deals anyway take longer to be signed and worked on. Plus, billing such deals take equivalently longer. This makes the transition phase between two deals being executed to be too long. Whereas, in transformation projects, the execution time is much shorter, and the transition window between two deals being executed by us is much shorter.

Are there any specific sectors that you’re targeting to increase returns during this phase?

Not specifically. We’ve definitely seen cautiousness in the high-tech sector, but at the same time, niche technologies have also opened up many opportunities for us. For instance, we’re building a next-gen enterprise IT support platform for a company called OnSemi — it is a unique situation. This is so, because while this company did not want to stop working on digital transformation, they also wanted to undertake cost reduction exercises. This is a classic example of the kind of deals we’re seeing today, where the cost saved through innovation deals are being recycled into innovation projects.

But, there are no specific sectors that we’re focusing on or overlooking. Sectors go through their own shifts — for instance, oil and gas is doing well right now, and some parts of banking and financial services are also doing well. We can thus not say that we’ll focus on one, and not on another.

The BFS slowdown made many headlines in the past quarter. Has that affected you as well?

We mentioned last quarter that some large deals got affected as clients in the BFS sector went into freeze. But, we’re not really impacted by the slowdown in regional banks — we don’t have a big presence there. The way we look at it is that irrespective of what happens in any industry, what matters more is your own portfolio. Within ours, barring a few isolated situations, the others are doing quite well.

Coming back to your growth projections on this point then — you'd suggested some slowdown for FY24. Do you still expect this?

It’s too early to call, but FY24 will not be like FY23. Our focus is that whatever the industry grows at, we should be growing at a slightly faster pace. That’s what we’re aiming for, but there are significant headwinds in the industry.

In terms of employee cost, would this remain high in FY24 too?

There was some increase in employee cost in the interim, but we have clear strategies in place to bring employee cost down, since ultimately, that affects our margin. There will be some corrections to the employee pyramid, as more freshers come into play. But, do understand that one of the reasons why employee costs increased were due to significant retention, policies of harmonization across teams, and so on.

Over a period of time, this will normalise.

So, are you still hiring, or would you increase your bench utilisation rate?

We’ve always maintained that we focus on profitable growth, and one of the advantages of our merger gave us access to a larger bench. Irrespective of the slowdown, we knew beforehand as well that we can rationalise our bench more effectively, and that would result in lesser hiring requirements.

Having said that, we continue to hire. There are niche skill requirements in the present market that our clients look for and are willing to spend — cyber security is one such area where the demand is persistent. As a result, we continue to hire in this field.

It was known to us that we’ll have to increase bench utilisation effectively, which will lead to lesser hiring. But, we’ll continue to hire as per the business that comes in, and that is business as usual for us.

What is the hiring market and attrition like right now?

Attrition levels have come down significantly — from two quarters ago to now, it is at least five percentage points down. It should stabilise at this level, and this is something that we can work with.

How did the merger affect your attrition rates?

During our merger, we created a framework called LTIMOne. Through this, we looked at unified capabilities, one GTM strategy and more. Culturally, both companies were fairly similar. In terms of GTM strategies, both companies had their own unique strengths. During the merger phase, there was a phase of higher attrition, although attrition levels were anyway high about three quarters ago.

Going forward, any attrition that we face cannot be blamed on the merger. We had to take a few hard calls when the two teams came together. Now, whatever happens will be business as usual.

Talking of new areas and industries to look at in this phase, generative AI is one such field that everyone’s talking about. What is your take on this, and is LTIMindtree coming up with services for clients in this sector?

See, any new technology, whenever they come along, is always good for industries in the long run. There could be apprehensions that jobs will go away, but at the end of the day, they’ve always created more opportunities.

More than this, while all of this is great, we really need to create appropriate use cases for businesses. We need to understand how specific businesses will benefit from it — be it cost, or time to market. Eventually, these have to be developed.

Third, generative AI is still at a stage where the business cases are still being developed. As a result, we too have launched our generative AI platform, which focuses on the ethical use of generative AI, sustainability, data privacy and more. We’ve also set-up labs where we will experiment with specific business use cases, with the help of our clients. Once these are approved, and there can be value, we’ll work more on them.

We’re observing this space, and are involved, but it’s too early to say if and how it’ll transform the entire industry.

Are conversations with businesses translating into billables?

We’re still in the process of working with clients to create valuable business cases. Once they are successful, that’ll translate into larger programs.

But, looking at the present macroeconomic conditions, has it affected the way you invest in your own development use cases?

We invest in multiple ways — one, in new areas such as generative AI. There is another area of investment, which is in more essential and regular areas such as sales processes. One area that we’re focusing on is in go-to-market solutions, cross-sell and up-sell, and such solutions, for which we have over 700 clients under our umbrella now.

These also come under investments, and they are still on track. Many deals are carved out while working with our clients from within the investment process. The biggest opportunity for us is cross-selling and up-selling our solutions into our existing client base, and that has been yielding decent results for us so far at an early stage.

If we’re to compare market conditions pre-pandemic and now, what are the key differentiators?

When the pandemic happened, nobody worried about cost. Everyone focused on transformation and changing their business models. This is why we saw so many cloud and data projects during the pandemic.

Once there was an indication of a slowdown, this focus shifted to efficiency. These are longer cycle, larger annuity deals. The main difference is that in the post-pandemic world, a lot of investments have gone into digital transformation — brands don’t want to kill these initiatives midway and still derive returns on investments.

Some deal slowdowns have led to 18-month digital transformation deals being prolonged to 30 months. At the same time, the focus is on efficiency, which is what is fuelling transformations today.

So, is interest in areas such as metaverse and mixed realities dead in the market right now?

I wouldn’t say that. There are fewer conversations happening about the metaverse than about cost efficiencies. But, fields such as augmented reality will play a big role in fields that we focus on, such as retail, consumer goods, and oil and gas. But, definitely, conversations have shifted away for now.

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