LTIMindtree Ltd

NSE:LTIM

Earnings Call Analysis

LTIMindtree Q2 Performance and Outlook

LTIMindtree's Q2 performance saw healthy revenues of $1.08 billion, a 5.2% year-over-year growth with strength in the Manufacturing and Resources vertical (16.2% growth) and a steady BFSI performance (5.9% growth). The EBIT margin hit 16% despite wage hikes, sustaining profitability. The quarter's order inflow was a robust $1.3 billion, marking a 20% year-on-year rise. Looking ahead, the company is on track to achieve their target EBIT margin range of 17%-18% for FY24, thanks to improvements in utilization and operational efficiencies.

Financial Performance and Strategic Focus amidst Macro Uncertainties

Despite higher dividend payments reducing the surplus cash, the company reported another quarter of robust treasury income at INR 140 crores, an indicator of a well-managed investment strategy. The profit after tax (PAT) margin remained consistent at 13.1%, and basic earnings per share grew slightly from INR 38.90 to INR 39.30. The Days Sales Outstanding (DSO), including unbilled revenue, held steady, and improvements were seen in both operating cash flow to PAT, reaching 92.1%, and a significant year-over-year jump in free cash flow to PAT from 36.1% to 75.1%. Despite macroeconomic uncertainties leading to cautious client spending, the company continues to solidify its position as a desirable client partner. An above-average furlough is expected in the next quarter, however, the company anticipates a stronger performance in the second half of the fiscal year (H2 FY '24), hence setting an optimistic tone for the following fiscal year, FY '25.

Forecast and Expectations in Challenging Times

For the company to achieve a 7% growth, a compound quarterly growth rate (CQGR) of 3.7 is required in the second half. While there are challenges such as furloughs and cost-cutting pressures, the company's leadership remains positive. The continued ramp-up of deals closed in previous quarters, combined with actions taken to align with current realities, fuels the confidence that H2 will be stronger than the first half of the fiscal year.

Sector-Specific Insights and Longer Decision Cycles

In the banking and financial services industry (BFSI), customer spending remains cautious. However, the company is observing strong deal activities, particularly in cost efficiency and tech stack modernization projects within the fintech sector. The insurance segment, despite challenges, shows double-digit year-over-year growth. Interestingly, while deal execution ramp-up is on schedule, the company acknowledges elongated decision-making cycles for closing deals.

Operational Expenses and Margin Improvement Opportunities

The spike in selling, general and administrative (SG&A) expenses is primarily attributed to the recent wage increases. The leadership has also indicated a conservative approach in their provisioning, particularly regarding unbilled revenues. Expanding from the BFSI sector, confidence for a positive H2 stems from across the board, fueled by the ramp-up of deals from previous quarters and a current series of significant deal activities.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the LTIMindtree Limited Earnings Conference Call. Please note that this conference is being recorded.

[Operator Instructions]

I now hand over the proceedings to Mr. Vinay Kalingara, Head Investor Relations, LTIMindtree. Thank you, and over to you, sir.

[Vinay Kalingara, executive]

Good day, everyone, and welcome to the LTIMindtree Quarter 2 FY '24 Earnings Conference Call. Today on the call, we have with us Mr. Debashis Chatterjee, Chief Executive Officer and Managing Director; Mr. Sudhir Chaturvedi, President, Global Markets; Mr. Nachiket Deshpande, Chief Operating Officer; and Mr. Vinit Teredesai, Chief Financial Officer.

We will begin with a brief overview of the company's quarter 2 performance after which we will open the floor for Q&A. During the call, we could make forward-looking statements. These statements consider the environment we see as of today and carry risks and uncertainties that could cause our actual results to differ materially from those expressed in today's call. We do not undertake to update any forward-looking statements made on this call. I now turn the call over to DC for his opening remarks.

[Debashis Chatterjee, executive]

Thank you, Vinay. Good evening, and good morning to everyone on the call. Thank you for joining us today. We are pleased to report strong financial and operational performance in Q2 despite an ongoing challenging business environment. Our results highlight the strength of our capabilities, our disciplined execution and the exceptional value that we continue to deliver to our clients as they navigate their business -- their current business priorities while also transforming for the future. Our revenues came in at healthy USD 1.08 billion, which marks a year-over-year growth of 5.2% in U.S. dollar terms and 4.4% in constant currency. Our sequential revenue growth in constant currency was 1.7%. And in U.S. dollar terms, it was 1.6%.

Our manufacturing and resources vertical continues to grow with a year-over-year increase of 16.2% in U.S. dollar terms. Our BFSI vertical grew 5.9% year-over-year in U.S. dollar terms and is navigating an environment of caution within the industry. Our Hi-Tech media and entertainment vertical showed a decline of 1.3% year-over-year due to a higher base but continued its growth momentum sequentially, registering a growth of 1.9%. Geographically, our American market, which accounts for 73% of our revenues grew by 6% year-on-year, while Europe continued its strong growth trajectory with an impressive 10.2% increase year-on-year, both in U.S. dollar terms.

Our EBIT margin for the quarter came in at 16% after absorbing wage hikes across the board, and our net profit margin was 13.1%. We added 30 new clients in the quarter. On a year-over-year basis, we increased our count of USD 10 million plus customers by 13 while our USD 20 million and USD 50 million clients have increased by 3 each. It is worth noting that we also experienced a sequential increase in our USD 10 million, USD 20 million, USD 50 million clients indicating the success of our cross-sell and upsell through our account mining efforts.

Our order inflow for the quarter was a robust USD 1.3 billion registering a growth of 20% year-on-year. With this, our H1 FY '24 order inflow stands at $2.7 billion, a 19% growth over H1 of FY '23. We continue to see the prioritization of spending from discretionary areas to cost optimization. This is driving significant deal momentum towards large longer-tenure deals for vendor consolidation. Our strategy of exploring cross-selling and upselling opportunities within our existing accounts continues to yield positive results for us. While cost optimization remains a primary focus, clients are still investing in projects that have a clear ROI and contribute to their business growth.

I would like to call out a few important deals that we signed this quarter. One of the largest semiconductor manufacturers in the world has chosen LTIMindtree as their key digital transformation partner to modernize its SAP application landscape, enrich user experience, streamline business processes and deliver contemporary digital operations across both SAP S/4 HANA and SAP cloud solutions. A leading U.S.-based apparel retailer with over 900 stores selected LTIMindtree for a multi-year managed services deal for application and infrastructure services. Our U.S.-based insurance and retirement major has awarded LTIMindtree with a multi-year application and maintenance program.

This program comprises 500-plus applications across different services development, testing and maintenance. Our U.S.-based global fast casual restaurant chain chose LTIMindtree as their strategic digital transformation partner to provide application development and support data and analytics, quality engineering and assurance services. We remain invested in our integration of Gen AI into our solutions. We have engaged in over 100-plus conversations and have 20-plus active engagements with our clients. In addition, we are developing 2 key offerings on our platform, Canvas.ai light and Canvas.ai control plane. Canvas.ai light will focus on productivity use cases for development while Canvas.ai control plane will enable secure, moderated and responsible use of AI with the choice of commercial open source and custom LLM models.

We have collaborated with several partners to revolutionize our offerings and provide unparalleled value to our customers. Furthermore, we plan to train over 10,000 employees by the end of the third quarter. This will help us build a skilled workforce and stay ahead in an ever-evolving AI landscape. With that, let me now turn to our industry verticals.

Our Banking, Financial Services and Insurance business grew 5.9% year-over-year. Our insurance vertical has remained resilient even amidst prevailing industry headwinds owing to significant deal wins. There is continued caution in the sector because of seasonal and macro uncertainties. Large financial institutions are actively seeking opportunities to consolidate and optimize their spend. Our Hi-Tech media and entertainment business experienced a decline of 1.3% year-over-year due to a higher base, although it grew by 1.9% sequentially. We expect to continue to maintain our growth momentum in Q3. Our Manufacturing & Resources business showed a healthy growth of 16.2% year-over-year. We expect to sustain our growth trajectory in the manufacturing sector on the back of our expansion into new accounts.

In the Energy & Utility sector, the outlook remains promising. The increase in the large AMS and IMS deals from utilities clients and our ability to secure such deals indicate expectations of consistent growth. Our retail CPG and Travel, Transportation and Hospitality business grew 4.8% year-over-year. Our retail and CPG vertical has seen an uptick in the large deal pipeline across its portfolio with several deals expected to close in Q3. Our travel, transport and hospitality vertical has witnessed a recovery in the international leisure and business travel sectors. Our Health, Life Sciences and Public Services business grew by 1% year-over-year. In the health care sector, we are observing significant traction in data-led transformation deals. In the life sciences industry, our domain expertise is increasingly becoming -- is being recognized. I'm pleased to share that LTIMindtree was recently recognized as a Major Contender in Everest Group's Life Sciences Smart Manufacturing Services Peak Matrix Assessment in 2023.

North America contributed 73.4%. Europe contributed 15.3%, and ROW contributed 11.3% of the revenue during the quarter. In the European market, we saw a 10.2% growth year-over-year, primarily due to the successful ramp-ups in key accounts. As anticipated, attrition continues to be stable. For the quarter, our trailing 12-month attrition was 15.2%, down from 17.8% recorded last quarter.

I will now turn over the call to Vinit for Q2 financial highlights. Vinit.

[Vinit Teredesai, executive]

Thank you, DC. Good evening, and good morning to everyone on the call. In quarter 2, we delivered strong profitable growth while continuing to invest in our people. We are pleased with our disciplined execution amid the prevailing macroeconomic uncertainty. Let me know -- let me now take you through the financial highlights.

Our revenue stood at USD 1.08 billion, up 1.6% sequentially and 5.2% year-over-year. The corresponding constant currency growth was 1.7% quarter-on-quarter and 4% year-over-year. EBIT margin came in at 16% and compared to 16.7% in the previous quarter. This is after absorbing the impact of wage hike cycle across the entire workforce, including promotions and corrections wherever applicable. The salary hike was effective July 1. The wage hikes resulted in a margin impact of 200 basis points, which was partly mitigated to an increase of 60 basis points due to improvement in utilization and 70 basis points from operational efficiencies and absence of visa costs. Our margin improvement program commenced last quarter and is yielding promising results. The program is well on track and as we continue to take proactively approach to identify areas of optimization we remain confident of being in the 17% to 18% EBIT margin range as we exit FY '24. Net ForEx loss for the quarter reduced down to USD 0.3 million compared to a loss of USD 1.5 million in the previous quarter.

Despite the reduction in surplus cash balance due to the dividend payments. We had another quarter of strong treasury income of INR 140 crores due to our focus on treasury and robust investment strategy. The effective tax rate for the quarter was 23.5% compared to 25% in Q1 FY '24. The PAT margin for the quarter was stable at 13.1%. Basic earning per share was INR 39.30 for the quarter compared to INR 38.90 in Q1 of FY '24. The DSO, including unbilled revenue remained stable at 94 days compared to 93 days in Q1 of FY '24. The unbilled DSO has significantly reduced to 26 days compared to 33 days in Q1 of FY '24. The billed DSO has increased to 68 days due to the significant reduction in the unbilled. The increase in build presents an opportunity to focus on collections, and we endeavor to bring the billed DSO below 60 days in the coming quarters.

The operating cash flow to PAT continues to improve and is at 92.1% this quarter on account of strong collections as against 89.8% in the previous quarter. Furthermore, free cash flow to PAT has substantially increased from 36.1% to 75.1% year-over-year. Our cash and investment balances stood at USD 1.08 billion or INR 8,947 crores compared to INR 9,235 crores in Q1 of FY '21. Return on equity for the quarter was steady at 26.9%.

As of September 30, 2023, our cash flow hedges stood at USD 3,612 million, and hedges on the balance sheet were USD 369 million. Our utilization, excluding trainees, further improved to 86.6% compared to 84.8% in the previous quarter on account of continued bench optimization. We onboarded 1,400-plus pressures this quarter. We continue to align our headcount additions to our requirements based on the demand and our efficiency program. The Board of Directors have approved an interim dividend of INR 20 per equity share of par value INR 1 each.

We are pleased to announce that we have received 3 awards at the prestigious Bombay Chambers DEI Awards 2023. First runner-up for the disability confidence and inclusion, second runner-up for the LGBTQIA+ inclusion and first runner-up for the DEI Champion. LTIMindtree has been certified as water positive. Much ahead of our 2030 target. Our efforts aligned with the green carbon energy and environment services, water positive gold standard, and we have achieved and impress 2.8 water positive index. All these recognitions validate our firm's commitment to our ESG goals. I now hand it back to DC for the business outlook.

[Debashis Chatterjee, executive]

Thank you, Vinit. In the phase of ongoing escalating macro uncertainties, leading to cautious client spending, we continue to strengthen our position as a partner of choice for our clients. Although we anticipate above average furloughs in Q3, we are confident that our robust order inflow and healthy deal pipeline will help us deliver a stronger H2 of FY '24, setting a promising stage for FY '25. Our integration activity was a significant milestone in our ongoing path to success. Thanks to our team's hard work and dedication. With the completion of this activity, we are now strategically placed to take advantage of the market recovery and further cement our place in the industry leaders quadrant. With that, let me now open the floor for questions.

[Operator]

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session.

[Operator Instructions]

[Vinay Kalingara, executive]

We'll take a question from the text queue. The question is from Nitin Padmanabhan, the question is as follows: second half requires 3.7 CQGR for 7% growth. Do you believe high single-digit growth is at risk?

[Debashis Chatterjee, executive]

Thank you, Nitin. I think all that we can say at this point of time is our H2 definitely will be better than our H1. And as we have covered in our commentary in our prepared remarks, all the opportunities that we have been focusing on and the deals that we have closed in the last 2 quarters, they seem to be ramping up well. But of course, that is offset by some furloughs and some pressures in terms of the cost takeout in the existing book of business as well. But overall, considering all the aspects, we still feel that our H2 will be definitely better than H1.

[Vinay Kalingara, executive]

We'll take the next question from Abhishek Bhandari. Could you please talk about the demand trends in the BFSI vertical and where the client priorities are? On related lines, are the deal ramp-ups taking longer than usual.

[Debashis Chatterjee, executive]

Sudhir, do you want to cover that?

[Sudhir Chaturvedi, executive]

Sure, so [indiscernible]

[Operator]

Sorry to interrupt you, sir, you are on mute.

[Sudhir Chaturvedi, executive]

So on the BFSI question, firstly, let me just separate banking and insurance. So in the banking sector, we are seeing that clients remain very cautious about spending, and we are seeing that across the board. The deal activity in banking though continues to be strong. And there are a few deals that we have signed in the first half of the year, and the deal pipeline continues to be strong. These are efficiency cost takeout type of deals that we are seeing in the market. But we are also seeing deals where we are seeing some level of investment -- clients, certain with clients, especially in the fintech space are making on the modernization of their tech stack.

So that's the banking commentary. We also expect that the furlough season is using Q3 in banking, and we expect that to be on the lines that we've seen before. In terms of insurance, we've grown well. We've got -- sorry, we've got double-digit growth in insurance year-over-year. And we are continuing to see spend in those areas despite high [ cat ] losses that clients have suffered insurance clients have suffered. But that's mainly on the account that they are continuing to modernize their tech stack. So insurance, we see resilience, banking, where we are seeing continued deal activity, but cautiousness in spending.

In terms of ramp-up times, actually, deal ramp-up times are not taking -- that's proceeding as per plan as per whatever the contract will -- what we sign in contracts. But what is taking longer is essentially the deal decision-making cycles are much longer than it.

[Vinay Kalingara, executive]

We'll take the next question from the line of Ankit Jain. What is the reason for sharp jump in SG&A this quarter, levers for margin improvement from here on, given utilization is already running at 86% plus.

[Debashis Chatterjee, executive]

Well, I think the primary reason is we have gone through the revisions and the hike cycle, as we said from July, that's the primary reason. Otherwise, there is no other reason for the SG&A. I mean if you look at the overall gross margin, I think the impact that you see is because of the rate hikes, I mean, the hikes in the wage hikes. Vinit, do you want to add anything?

[Vinit Teredesai, executive]

No, DC I think we have covered. And obviously, a little bit of a provisioning on a conservative basis that we have done with reference to some of our unbilled revenues et cetera.

[Vinay Kalingara, executive]

The next question is from the line of Gaurav Rateria. How are you able to get confidence on 2H? Is it based on BFSI recovering or led by other verticals?

[Debashis Chatterjee, executive]

Well, the confidence that we get on H2 is basically -- it's not just BFSI, but across the board. I mean, as Sudhir articulated about BFSI, but even if I look at the other industry verticals, there will be -- we have also baked into the fact that there will be larger-than-average furloughs and which is going to be extended beyond BFSI. So keeping all these things in mind, we also have closed opportunities in Q1 and Q2. And all the deals that we have closed, I think they are going to ramp up very nicely in the next 2 quarters. That gives us the confidence that -- and there's a significant deal activity right now as we speak as far as Q3 is concerned, and we expect many of them to close in Q3 as well. So given all these things, the strong pipeline, the deal momentum and the activity and the deal closures that we had in the last 2 quarters, which are ramping up nicely, we have the confidence to say that H2 will be better than H1.

[Vinay Kalingara, executive]

Next question is from the line of Ruchi. Could you elaborate on which particular segments of business will see higher than usual furloughs?

[Debashis Chatterjee, executive]

Sudhir, do you want to cover that?

[Sudhir Chaturvedi, executive]

I think DC just covered it, see typically...

[Operator]

Sorry to interrupt you sir.

[Sudhir Chaturvedi, executive]

So just covering the furlough question. So typically, there are a couple of industries usually banking and Hi-Tech where have furloughs in December. But what we are seeing, as DC mentioned, is we're seeing this in more sectors beyond these two. And in these two sectors, it will be on the lines of, as I said, they are already cautious about spending. So it will be on the lines of some of the more conservative furloughs that we've seen in the past.

[Vinay Kalingara, executive]

The next question is from the line of Abhishek. Can you characterize demand trends in FSI? What services are clients investing in? Any initial thoughts on CY '24 spends and when we could see an acceleration in momentum.

[Sudhir Chaturvedi, executive]

I think we are speaking to clients as we -- this is their budgeting quarter, so they usually budget between October and December for the next calendar year. And we are seeing that -- I mean, recent geopolitical tension aside, I think the commentary prior to that was that a lot would depend on the interest rate cycle, especially in the -- both the U.S. and European markets. But there was a feeling that they would be increased spending from -- in the next calendar year. But I think it is yet to be borne out. I would say that let's -- we should wait for a few more months or a couple of months more to understand exactly what impact the recent events are going to have on client priorities going into calendar year '24.

Speaking about us specifically, as DC mentioned, for us on back of the deal wins that we've had, and despite some of the commentary that we've shared with you on furloughs, we think both Q3 and Q4, we are poised to make sure that H2 is better than H1. And that's on the back of our own specific -- the deal -- signed deals and continuing deal momentum.

[Vinay Kalingara, executive]

The next question is from the line of Karan Uppal. The question is, you mentioned that client focus is on cost optimization, which is leading to vendor consolidation. Have you gained market share in the last few quarters? And as a follow-up, are you doing that without [ BPO ] offerings? And are you able to participate in mega deals?

[Debashis Chatterjee, executive]

Well, I think when you talk about efficiency deals or cost-focused deals, Yes, it kind of leads to vendor consolidation. And I can only say that we have participated in several vendor consolidations and I mean from whatever we have seen so far, we are in good shape. I mean, of course, you win some, you lose some, but at this point of time, we have done very well in the vendor consolidation situations. And most of the opportunities that we are chasing right now, it doesn't really have a BPO. But over a period of time, that's something which we'll be also looking at as we are setting up as we are expanding our platform operations business.

[Vinay Kalingara, executive]

The next question is from the line of Apurva. Based on the type and nature of deals in the pipeline and the renewal cycle, what is the book-to-bill required to get to low to mid-teen growth?

[Sudhir Chaturvedi, executive]

Actually, okay. I mean -- so book-to-bill -- see, we've got a strong order book, right? We have $1.4 billion in Q1 and followed by $1.3 billion in Q2. And the Q1 order book included a large renewal as well. So this quarter's order intake is on the back of essentially multiyear deal wins that we've had, large deal wins that we've had and continuing momentum that we are seeing in the market. So that's where we essentially -- there isn't a direct correlation win book-to-bill because we know there is a lot is that is, especially a business that is time and materials that is actually won and delivered during the quarter itself.

So it's a combination of factors. My suggestion is if you look at all our parameters, especially if you see what's happened with our account pyramid. So our focus 100 program is paying dividends because our 10 million clients are up greater than 10 million clients are up 13 year-on-year. 20 million are up 3 on-year and 50 million are also up 3 year-on-year. So it's a combination of account mining, all the cross-sell, upsell efforts that we are doing, as well as all the large deal invitations. So the thesis we had going into the merger that these would be the areas that would drive future growth is what we are seeing driving the growth as well as the order book.

[Vinay Kalingara, executive]

A follow-up to that question. How are synergy opportunities or conversion playing out with respect to the $1 billion synergy pipeline that you had mentioned?

[Debashis Chatterjee, executive]

Vinit, you want to talk about it?

[Vinit Teredesai, executive]

As we have mentioned that the synergy, the cross-sell, upsell opportunities have started playing out. Obviously, at this point of time, we don't think we can publish a meaningful number. But we definitely promise you by the end of the financial year, we will start publishing our synergy benefits, both on the revenue and cost to the extent possible on an annual basis.

[Debashis Chatterjee, executive]

Yes. And just to add on to what Vinit said from an organization standpoint, when you talk to our sales teams and the market-facing teams, they have a very clear view in terms of how to increase the cross-sell and the upsell. Like, for example, if you are working with the client and you are delivering 3 service lines, can we increase it to 6 service lines. So there are specific KRAs that we are driving. And if you look at the $10 million plus $20 million plus and $50 million plus accounts from 1 year back to now, you will see a steady increase in those numbers. And that basically means that the cross-sell and upsell is working as we have planned.

[Vinay Kalingara, executive]

A follow-up from Apurva. Could you elaborate on the outlook for BFSI any impact seen from the organization restructuring in the large banking amount? Do you see that as a consolidation opportunity? Or are you seeing continued cost pressure in that account?

[Sudhir Chaturvedi, executive]

Okay. So my commentary on BFSI already mentioned, talking about, I think, the account -- the client that you're mentioning, we actually don't see any impact from that. The work that we do has been over many years in the key areas of the bank that continue to be the drivers for the bank, whether it's corporate banking, it's governance, risk and compliance. So those areas remain resilient as the bank continues to grow in those areas. So -- we -- I will still call out that banking is a sector that does have furloughs in Q3. But other than that, we do not see any impact.

[Vinay Kalingara, executive]

The next question is from the line of Shradha. Could you elaborate on the seasonality in the manufacturing business that we see play out every second half? Will it play out this time as well? And as a follow-up, whether the growth in the Hi-Tech was top client or broad-based?

[Debashis Chatterjee, executive]

So let me answer the second question first, and I'll request Sudhir to add on the manufacturing. See, we don't really talk about any client specific. But at an overall level, when you're talking about Hi-Tech, it has been fairly broad-based, I can say. And let Sudhir comment on the manufacturing.

[Vinay Kalingara, executive]

The seasonality in the second half.

[Sudhir Chaturvedi, executive]

Yes. I mean we expect that it will continue on the same lines as previous quarters on manufacturing.

[Vinay Kalingara, executive]

We'll take the next question from the line of Darshit. Could you provide a view on revenue and both EBITDA, PAT margins going forward in the next 2 to 3 years. And the key drivers broadly along those lines.

[Debashis Chatterjee, executive]

Well, I think look, I think when we came together as LTIMindtree. We had to set certain goals. And we set some goals from the -- from a short term, medium term, which was mostly focusing on the cross-selling and the upselling. And we also set a goal from a longer-term perspective where we laid out an aspiration to become a $10 billion enterprise over a period of time, it will take 4 years, 5 years, combination of organic as well as inorganic. And we also set 2 other goals. One is synergy revenues as well as improvement of margin over a period of time. We also said the revenue synergy should be more front-ended as we go over the next 3, 4 years. And the synergies in terms of -- in margin, which we called out as 200 basis points will be more back ended.

So these are the things that we are targeting right now. These are the broad level framework that we have laid out. I can only tell you that when we came together on day 1, 14th of November last year, we were more focused in the integration. We were -- I think we did the integration in record time. We also ensured that all the solutions that we want to take it to the market, the training our go-to-market workforce. All those things have been done so that we can do the cross-selling and the upselling properly.

And we have recently, just 2 weeks back, the management team actually met together and we rolled out our overall exercise for the larger strategy, which is like how do you get to the $10 billion mark over a period of 4 to 5 years. That is kind of underway as we speak. I cannot share any more details at this point of time. But I just want you to know that we have a short to medium as well as a longer-term plan, and we are working towards each of those activities as we go along. If anybody wants to add anything.

[Vinay Kalingara, executive]

We'll take the next question from the line of Ravi Menon. Hi-tech media entertainment is a vertical that is challenged for most, but you have done well. Is this new -- due to new deal wins? Or is it just a matter of different set of exposures such as lower telecom?

[Debashis Chatterjee, executive]

Well, I think I will let Sudhir provide some color. But before that, let me tell you that when you work in a particular vertical, you also try to take the best practices and the learnings from one account to another account. I think that's something which is working very well as far as Hi-Tech is concerned and media is concerned, and that's something which we are doing very aggressively as a part of our cross-sell and upsell plan. And what you see is a culmination of that. And it's also a reflection of the portfolio of clients that we have. I mean sometimes the portfolio of clients is more important rather than just looking at the overall industry. So the portfolio of clients that we are managing, I think we are able to expand into those clients fairly well, fairly aggressively. Sudhir?

[Sudhir Chaturvedi, executive]

Yes. So we grew 1.9% sequentially this quarter in Hi-tech Media & Entertainment, and we expect that growth trajectory to continue then because the growth is broad-based. It's across multiple accounts as well as new logos. And we are also seeing opportunities for essentially software product development and investments that clients are making in some of this -- in their own tech stack modernization as well as some of their processes from a sales and marketing perspective, some of the investments that they're making, that's some things that we see in the pipeline right now, which also gives us a good mix of efficiency spend plus sort of new product development and some sales and marketing spend.

[Vinay Kalingara, executive]

We'll take the next question from the line of Vibhor. Specific to H2, what is the outlook for BFSI and retail sector. Is the growth that we have seen in the Hi-Tech in Q1 and Q2 sustainable in the second half of the year?

[Debashis Chatterjee, executive]

I think Sudhir has already answered that question, but maybe Sudhir, you can just briefly summarize once again, if you don't mind.

[Sudhir Chaturvedi, executive]

As I said, overall, H2 better than H1 at the company level, which means our 2 top sectors in BFSI, especially call out insurance, we'll continue to drive the growth driver for the sector and the deal activity that we see in banking is going to help us maintain that the growth that we expect to see. The -- in terms of Hi-Tech media and entertainment, I just answered that we think there, we've got some good broad-based accounts as well as new logo related growth opportunities available to us. So again, notwithstanding the furloughs that we'll see in Q3. I'll just repeat that from an outlook perspective, we expect that both of these sectors will show, I mean, growth in H2, and therefore, the H2 better than H1 comments.

[Vinay Kalingara, executive]

We'll take the next question from the line of Anmol. On the deal wins, we would like to understand from the perspective of LTIM that your peers have indicated strong wins, which is not translating into revenue to that extent to which it should have. Are clients transferring work from one provider to another. In view of higher efficiency gains? Or is this something related to pause or cancellation of higher discretionary work won previously?

[Debashis Chatterjee, executive]

Sudhir?

[Sudhir Chaturvedi, executive]

Actually -- okay. So a little bit momentum is continuing, but I think where -- what we are seeing is that the existing programs, when they come to an end or clients having reduced budgets in this financial year. So essentially, the second part of your question is where the current -- that's where there is some pressure in terms of client spending as well as therefore, reflected in our performance in the existing world, especially the discretionary part of their spend. And -- but the good thing, as I said, is these multiyear deals are actually structured deals, and we've seen several of them on the table. This gives us growth opportunities over the next 3 to 5 years. And more importantly, also gives us predictability in terms of how we plan for the execution of these deals. In discretionary, you have to do a lot of JI just-in-time hiring and execution whereas here, we can take a more planned approach to executing these programs. And therefore, from a longer-term perspective, these are -- these deals will stand us in good stead going forward.

[Vinay Kalingara, executive]

The next question is from the line of Mohit Jain. This is on the book-to-bill ratio. The book-to-bill is not going up. Could it be because of the revenue conversion rates are better? From a pipeline or deal announcement standpoint, are we gaining momentum? Or is it similar to the previous quarters?

[Debashis Chatterjee, executive]

Well, on the book-to-bill ratio, I'll let Vinit comment, Vinit and Sudhir. But where we are right now, I think it's a comfortable range, comparable ratio. And if I get your second question in terms of announcing deals, et cetera, if I understand correctly, see, we -- when we come to the quarterly earnings, we always talk about the pipelines and the deals and the and how the client metrics are moving, but please also understand that where we do announce deals, but there also client confidentially. So if we don't announce, it doesn't mean that we are not winning deals. And what we win is reflected in the other metrics that you see. Vinit, Sudhir you want to add anything?

[Vinit Teredesai, executive]

No, I think so the book-to-bill ratio, as DC rightly said, it's in a comfortable range. Please understand that the nature of deals that we are signing now are definitely long-oriented deals. So to that extent, that will -- there's a transitionary phase going on, and it will settle down. But we are pretty much compelling [Technical Difficulty] at this amount of time.

[Vinay Kalingara, executive]

A follow-up from Mohit. Margins are slightly below expectations on a year-on-year compare. When do you expect to come back to your planned margins and a related comment, could you elaborate on the sharp increase in the SG&A in the context of growth?

[Vinit Teredesai, executive]

So Mohit we always mentioned that what you're comparing today on a year-on-year basis is a merged entity versus 2 entities working differently. I think so, this is the -- we are completing now 4 quarters after the merger gets over. So from next quarter, if you look at it, you'll see a year-on-year comparison of merged entity financials. So to that extent, [Technical Difficulty] available with you.

Secondly, as we have already mentioned in our margin program, if you look at our current quarter also, we have delivered 16% margin, which is just a 0.7% drop in our operating margin after absorbing a 200 basis point of full wage impact. And this is basically because we continue to do, despite of a little bit of a challenging business environment, we continue to do our cost optimization program, which is yielding results and offsetting our -- the headwinds that we are getting. As stated earlier, we are confident that we will be able to exit FY 2024 with an operating margin between 17% to 18% and build up on that. As mentioned in our Investor Day earlier we expect a 200 basis point over the 17% to 18% by FY '27.

[Vinay Kalingara, executive]

A follow-up on the margin question. The utilization is high. Do you think we can sustain it at these levels?

[Nachiket Deshpande, executive]

But at the same time, the market situation on hiring joining ratio [Technical Difficulty] maintain this utilization and manage our just-in-time hiring with, in line with our expected revenue growth.

[Vinay Kalingara, executive]

We see your headcount addition going ahead. Do we have to increase headcount aggressively to service growth or is there still room for utilization to?

[Nachiket Deshpande, executive]

We don't target a particular head count increase as we go into the quarter, it's always reflective of how this growth is shaping up. We had 3 quarters of decline in the headcount this quarter with our utilization at the peak, we have seen a net increase in the headcount. So we will continue to see the same trend in the next 2 quarters as well as we go along. We don't see, as I said earlier, we don't see any need for us to sharply increase our headcount in order to deliver the growth. We'll do it in line with the current bucket conditions and our ability to hire I think we will be able to do it in line with the growth expectations in the next subsequent 2 quarters.

[Vinay Kalingara, executive]

We'll take the next question from the line of Abhinav Ganeshan. Do you expect BFSI grow faster than the company average in H2? Is this giving you the confidence of H2 better than H1?

[Debashis Chatterjee, executive]

Sudhir?

[Sudhir Chaturvedi, executive]

So we don't give color on industry-specific growth guidance. But what I'm saying is, for us, the sector banking insurance is a key sector for us and for momentum that we see in terms of deal activity and where we are in existing accounts. I think it will remain a key vertical for us. But we will see broad-based growth. The key thing for us is we are seeing broad-based growth across multiple verticals. DC called out in his comments as well that retail and consumer goods, for example, is a place where we have several large deals in final stages right now. So growth will come from multiple verticals across the board. So that's what we're focused.

[Vinay Kalingara, executive]

A follow-up on the travel hospitality segment from Abhinav. Would the travel hospitality segments maintain their growth in H2? What are the key drivers of growth in these segments?

[Sudhir Chaturvedi, executive]

So travel and hospitality. So travel is doing, I mean, obviously, there's record travel happening right now in the hospitality sector also continues to grow. But there are rising cost pressures there as well that are being faced in terms of inflation and as well as increase in sort of people costs in those sectors. So we expect that those 2 sectors will continue, some of the modernization or the work that they were doing from the investments that they were doing, experience transformation, et cetera, are being done over a longer period of time now. But for us, that sector based on, in fact, some of the -- a couple of the deal wins that we called out in today's prepared remarks as well, then the back of the deal wins, we'll see steady progress in that sector.

[Vinay Kalingara, executive]

Next question is from the line of Ashwin Mehta. What is our expectation on growth that comes from pass-through in 2H? And a follow-up, do you see margins increase from here on in a scenario of high furloughs contribution of pass-through and utilization at its highest in the last 10 quarters.

[Debashis Chatterjee, executive]

We don't really specifically talk about pass-through. But I can only tell you that this is very negligible in the overall context of the business. But I can say that the confidence that we have in terms of our margin ending up between 17% to 18% by exit rate in Q4. This is after factoring all the other impacts that we can have potentially like a furlough, et cetera. So we're fairly confident that we should be able to get to that path in Q4 as we have always been saying.

[Vinay Kalingara, executive]

We take the next question from the line of Girish. How would you characterize the mood of clients? Would you say that they seem more optimistic or pessimistic today compared to six months back? Do you think we will have an annual budgeting exercise? Or will it be more tactical spending, which is by month or quarter by quarter. So we will probably not get the full picture in early 2024?

[Debashis Chatterjee, executive]

Well, I think I can only say that most of our clients have a typically January to December fiscal. So keeping that in mind, they will be, they are getting back on the drawing boards as we speak in terms of their overall plans. I can only say that the cautiousness that we have seen in terms of spend that has continued and that will probably continue till end of this year. Hopefully, we should be able to see some spend coming back as we get into the new calendar year. But beyond that, it's very difficult to call out at this point of time, unless we go through a few more months.

[Vinay Kalingara, executive]

The next question is from the line of Urmil Shah. What is the planned employee addition in H2? Is the optimization that you've spoken about of headcount is that complete?

[Debashis Chatterjee, executive]

I think Nachiket has already answered that to some extent, but maybe you can summarize this.

[Nachiket Deshpande, executive]

So we don't target a particular headcount or the headcount addition. I think as we said our utilization is at a level where we would like to maintain it at that level may not take it -- tick up further. And we continue to look at our headcount addition proportionate to our revenue growth that we're expecting in Q3 and Q4. Headcount increased momentum will continue in next 2 quarters.

[Vinay Kalingara, executive]

Next question is from the line of Rohan Nagpal. Anecdotal evidence suggests that deal duration is going up. One of your peers came on TV and said that average deal duration has gone up from 2.5 to 2.7 years to 3.2 to 3.5 years. Could you provide some color on the change of duration in the deals that you're currently seeing? That's the first question. Is the growth a result of ACV increasing or increase in deal duration?

[Debashis Chatterjee, executive]

Well, I think it is both, but let me explain to you one thing. When you talk about the transformation kind of work, there may be short cycle deals, opportunities, but they tend to get renewed as we complete one program and go to the next program, whereas, if you look at the efficiency in the cost takeout deals, you cannot really commit to that efficiency to the client unless it's a slightly longer tenure because you need to understand the environment and then do a few things in terms of whether it is Gen AI or whatever you say, all these things can be done only when you have a longer tenure. So that's why I may not be able to give you some specific about average deal tenure, but I can only say that the number of deals where the tenures are higher, those deals are significantly increasing. In fact, most of the deals that we are closing right now are longer tenure deals and more of cost takeout or efficiency types. Anybody wants to add anything?

[Vinay Kalingara, executive]

The next question is from the line of Aniket. Is your margin guidance intact? If yes, what are the levers present to achieve that guidance in FY '24?

[Vinit Teredesai, executive]

Yes. As I mentioned in my comments, we are confident of exiting the FY '24 with that 17% to 18% operating margin range. And remember that the couple of levers that we have identified, we have talked about pyramid rationalization. We intend to continue, while we may not see a drop in our utilization or increase in utilization, we do not anticipate the utilization may continue at a flat level. So we'll continue to hire as the need comes in. We are working on programs which will help us in terms of improving our margins in terms of certain clients, whereby they have been low.

So productivity efficiency, bench optimization. So multiple of these common levers which are available, as you remember, that these 2 companies came together at a time when both the companies were growing very, very fast. So we had a little bit of an excess flab into the system. We had mentioned this very categorically that we are not going to -- don't look at our headcount additions for the next 3 quarters, and we will hire as the need comes in. We are using all these levers and they are helping us in terms of offsetting the headwinds that are coming on our way. At the same time, obviously, our efforts will be to grow our business at a faster pace, continue to maintain the industry-leading quadrant position which will help us in terms of absorbing some of these headwinds.

[Vinay Kalingara, executive]

The next question is from the line of Salil Desai. A follow-up to Sudhir mentioning that some new deals you are getting are structured deals. Can you please elaborate on what kind of deals these are and the scope of these deals as an example.

[Sudhir Chaturvedi, executive]

So yes, structured deals are where it's essentially large multi-year deals where we -- where the combination of the scope is usually across multiple towers. And therefore, what you do is and involves client usually involves global client locations, et cetera. So an example of a structured deal would be, for example, a deal to where which involves an element of people take over from our clients, right? Those deals are structured differently from the normal sort of -- or typical outsourcing deals that we do. So that's what we meant by structured deals. It will involve other parameters. And frankly, we welcome these deals because this is a good long-term commits that clients do on the back of such structured deals.

[Vinay Kalingara, executive]

We'll take the final question from the line of Abhishek Kumar. When you say 2H better than 1H, are we talking about better Y-o-Y growth or sequentially better 2H compared to 1H, asking this question as 2H comps on Y-o-Y basis is favorable.

[Debashis Chatterjee, executive]

Well, at this point of time, without getting into too much of details, we can say that better than the first half, at least on a sequential basis, so that's all I would say and leave with at this point of time because we are very confident that, as we said, we have factored in all the furloughs, which seem to be a little more than what we usually used to have, factoring all those things, we still feel that we will have a H2 better than H1, at least on a sequential basis.

[Operator]

Thank you very much. Ladies and gentlemen, that was the last question. On behalf of LTIMindtree Limited, that concludes this conference call. Thank you all for joining, and you may now disconnect your lines.