L&T Technology Services Ltd

NSE:LTTS

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to L&T Technology Services Limited Q1 FY '22 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Pinku Pappan, Head of Investor Relations at L&T Technology Services. Thank you, and over to you, Pinku.

[Pinku Pappan, Head of Investor Relations]

Hello, everyone, and welcome to the First Quarter FY '22 Earnings Conference Call of LTTS. I am Pinku, heading Investor Relations. To those of you who have joined from India, thank you for participating at this late hour. We apologize for having to hold the call at this time. Our financial results, investor release and press release have been filed with stock exchanges and are also available on our website, www.ltts.com. I hope you have had a chance to go through them. This call is for 60 minutes. We will try to wrap the management remarks in 20 minutes and then open up for Q&A. The audio recording of this call will be available on our website approximately 1 hour after this call ends. Let me now introduce the leadership team present on this call. And we have Amit Chadha, CEO; Abhishek, COO; Rajeev Gupta, CFO. We will begin with Amit providing an overview of the company's performance and outlook, followed by Rajeev, who will walk you through the financial performance. Let me now turn the call over to Amit.

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

Perfect. Pinku, you can hear me fine?

[Pinku Pappan, Head of Investor Relations]

Yes. Go ahead, Amit.

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

Perfect. Thank you, Pinku, and thank you all for joining us today. Again, apologize for the late call, India time. I hope all of you are safe and healthy. I'm happy about our strong Q1 performance that was in spite of the challenges we faced on account of the second wave. I would like to first start by thanking our employees for their resilience, their commitment and the teamwork, and then our customers who're standing by us during these extremely tough times. We've rolled out multiple measures to support our employees and our focus is now on getting our employees vaccinated as soon as possible to be able to get back to some degree of normalcy. Let me now go on and talk about our quarter 1 performance. In USD terms, we had a sequential revenue growth of 4.2% Q-on-Q and crossed the $800 million run rate on an annualized basis. If you remember, we came very close to this milestone pre-COVID, so it is definitely very gratifying and satisfying to get past this. Growth was broad-based with 4 of our 5 segments growing in the range of 4% to 8%, led by industrial products. The EBIT margin of 17.3% despite wage hikes reflects the gradual portfolio shift towards more digital engineering as well as operational efficiencies around hiring operations, cross-skilling, productivity improvements and cost optimization. Our large deal pipeline and conversion remains healthy in Q1. We won 11 deals across all segments, out of which 6 deals were $10 million plus, 2 of these were actually $25 million-plus TCV. Before I discuss the segments, I would like to highlight our strategy to build scale in core new technology areas which was first presented in FY '21 annual report that got published earlier last month. As part of this strategy, we have identified 6 strategic investment areas. Electric autonomous and connected vehicles, 5G, med-tech, digital manufacturing, AI ML-driven smart products and sustainability. These 6 areas, we believe we will be able to build a sustainable growth engine aiming at building innovative concepts and solutions that can help our customers build next-generation products and offerings and reduce time to market. We will keep our investors and other stakeholders engaged on the progress on this as we move forward. Let me now provide a segmental performance outlook to you. Starting with transportation. We had a sequential growth of 4.3%, led by strong demand in electrification led programs and platform development across both auto trucks and off highway. In the U.S., you would have read about the infrastructure spending plan, which seeks to accelerate the transition towards electric by investing in a nationwide charging network. These are similar -- there are similar goals set in Europe. This sets a very clear direction for OEMs and Tier 1s to invest in new technology areas and EV production capacity. EACV or electric autonomous connected vehicles is 1 of the 6 technology focus areas for us. Our EV lab that we had invested in last year, plus solutions that we are building like ePowertrain, onboard offboard energy management connected car will help us go forward. In Q1, we won 2 $25 million plus deals in auto, both in the EV space, 1 with a new age OEM and 1 with a major Tier 1. The scope of work with a new age OEM covers the entire value chain, including vehicle design, while the Tier 1, we are providing software and system design in their power electronics portfolio. We believe such early wins in new technology will help deepen our strategic partnership with our customers. In Aerospace, we are seeing the commercial segment slowly coming back, airline manufacturers and operators are spending more on digital transformation and connected platforms. Overall, for transportation, we are optimistic about the growth momentum continuing across all 3 segments. In Plant Engineering, we had another strong quarter with 4% Q-on-Q growth with growth being driven by FMCG followed by oil and gas and chemicals. In FMCG, customers are leveraging our expertise as we open new plants. Recently, we won an order from a food giant to design a plant to meet the most stringent global food and beverage standards. We are also deepening our expertise on the sustainability side with one more win on the wastewater treatment area. Sustainability is 1 of our 6 bets or strategic investment focus areas where we are investing, and we expect a lot of spending to happen in the future. In oil and gas and chemicals with strategic partners to our customers, we are working with them across the globe in brownfield expansion, asset digitization. FX spend outlook is improving with oil prices going up and few oil and gas majors are having discussions around product mix optimization as well as quicker transition to green fuels. Summing up for plant engineering, we continue to see a good set of opportunity that will...

[Operator]

Sir, sorry to interrupt you.

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

We had a strong quarter with almost 8%...

[Operator]

Hello, Mr. Amit, can you hear us? Hello?

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

For industrial products, we had a strong quarter with 8% -- almost 8% quarter-on-quarter growth with all 3 subsegments showing good growth, electrical, machinery and building automation. While industrial products was...

[Operator]

Hello, Mr. Amit. Can you hear us?

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

Expect it to grow faster than the company as we move forward. The large account focus with continued demand for product digitization and personalization, shop floor automation and digital twin has been driving this growth. The pickup in industrial CapEx and manufacturing activity across U.S. and Europe should aid the momentum in this segment. We are seeing a good pipeline and opportunities in industrial products and expect the growth traction to continue. Moving on to telecom & hi-tech. The growth rate bounced back in quarter 1 to 4% driven by semi consumer electronics in telecom. In semi, there is a strong demand for chip design services for end industries like automotive, consumer electronics, data centers and telecom. Our recent win in providing labs as a service and co-investment into new labs and technologies along with customers will help us drive growth as we move along. In telecom, there are huge investments being made in 5G, leveraging open-brand technologies, both in traditional telecom as well as intra OEMs as well as some of the ISV. We recently announced a partnership with Mavenir, a leading 5G player in network automation. We believe such partnerships are key to building the software that will run on next-generation telecom gear. Overall, the deal win momentum has provided telecom hi-tech, the 1 -- 2 $10 million plus deals in Q1, gives us confidence of sustained growth as we move forward. Finally, Medical. In line with our Q4 commentary, we had a soft quarter 4 quarter in Medical, but we see the outlook improving for diagnostic devices with the rising vaccine penetration in U.S. and Europe. Demand for digital products, platforms and optimization of manufacturing processes are key growth drivers in this segment. Med-tech is another area of focus for us. We have deep domain knowledge, have built reusable assets and believe that will help us with the work being done in AI-based diagnostics decision-making and infection management platforms. We expect growth traction to see a jump from Q2 onwards as the deal traction improves. Now for a few highlights on digital engineering and technology. Our digital engineering revenues were 54% in Q1, versus 52% in Q4. We see this trend continuing. On the innovation front, our engineers continue to innovate and filed 23 patents in Q1. This is a record high. We are committed to increasing our talent pool and digital engineering skill and our Global Engineering Academy, which was established last year, will continue to work to ensure that we are able to get the right talent as we move forward. Let me go on to discuss the outlook. From a geography standpoint, we see a strong demand outlook in both U.S. and Europe, while in Japan and India, decision-making environment is slowly recovering. We are confident that the growth will continue to be broad-based with better line of sight for FY '22. We raised our USD revenue guidance to 15% to 17% for FY '22. I would like to make one more important announcement before I end, we are planning an Investor Day in September and look forward to your participation. We hope to provide more color on our new strategy in the 6 investment areas during the event. Pinku will be communicating the details to you shortly. Let me end by wishing all of you the best of health and safe passage. I now hand over to Rajeev. Thank you so much.

[Rajeev Gupta, Chief Financial Officer]

Thank you, Amit. Greetings to all of you. I hope that you and your families are keeping safe and healthy. I'm glad to share a strong Q1 performance with healthy improvement across the revenue, EBIT margin and PAT. Let me walk you through our Q1 FY '22 financials, starting with the P&L. Our revenue for the quarter was INR 1,518 crores, a growth of 5.4% on sequential basis. As you would have observed, we are back on double-digit year-on-year growth with Q1 revenue up 17% year-on-year. Also, EBIT margin crossed 17% in Q1, making it the fourth consecutive quarter of operating margin improvement. The 70 basis point sequential improvement in EBIT margin to 17.3% was driven by portfolio shift towards digital engineering, operational efficiency measures, including productivity improvement and cost optimization and rupee depreciation that together helped fully absorb wage hike, higher subcontracting and third-party contracting expenses. Moving to below EBIT. Other income was slightly higher on a sequential basis due to higher treasury income and ForEx gain. We did not accrue any export incentive income, and this will be the case going forward until we get further clarity from the government. We continue to follow with the authorities to expedite claims for FY '20. Our estimated tax rate for Q1 was 26.6%. We are moving to the new tax regime from FY '22 onwards and expect the full year ETR to be between 26.5% and 27%. Net income for the quarter stood at INR 216 crores which is up 14.2% of revenue, up 11% on a sequential basis, driven by higher revenue and operating margin. Moving to balance sheet. Let me highlight the key line items. DSO was 85 days at the end of Q1, compared to 75 days in Q4, while unbilled days was 27 days in Q4, compared to 17 in Q4. The combined DSO, including unbilled, stood at 112 days, which is above our target range of less than 95. This is because we embarked on the first phase of system transformation in Q1, which is a precursor to a full rollout later this year. This resulted in delayed invoicing. Let me talk about cash flows. As a result of the increase in DSO, the free cash flow dropped to INR 69 crores in Q1. We believe this is temporary, and we will see normalcy return in the coming quarters. Our cash and investments rose to INR 1,777 crores, end of Q1 FY '22. Moving to revenue metrics. The dollar revenue growth was 4.2% sequentially in Q1, with 4 out of 5 segments growing sequentially as highlighted by Amit. Growth was led by industrial products. The segmental margin performance was better across all 5 segments on a sequential basis. The transportation and plant engineering showing marked improvement. Transportation segment has improved to 19.3% EBITDA resulting from growth in revenue and focused measures undertaken. Now let me comment on operational metrics. Utilization improved slightly to 79.2%, and so was the case in on-site offshore mix, increasing marginally to 58.1%. The T&M, the time and material revenue mix increased to 66% in Q1. This metric has been in 60% to 65% range in the past few quarters. Moving to client profile, which is the number of million-dollar-plus accounts, showed a sequential improvement in the $20 million plus category and the $5 million plus category, while others are flat. Like we highlighted in the past, this is on last 12-month basis, Q1 FY '21 quarter was a challenging quarter and is not anymore in the mix. Hence, you will see this metric improved, going forward, reflecting the growth in top line. Client contribution to revenue, here again, this is on an LTM basis, and we can see the improvement across all the 3 buckets, top 5, top 10 and top 20. Headcount increased by 520 sequentially, while attrition moved up to 14.5%, which is at levels below what we've operated in the past. However, we are proactively taking various employee engagement measures to contain attrition. Realized rupee for Q1 was around INR 73.8 to the $1, a depreciation of 1% versus Q4. Before I end, let me give some color on EBIT margin trajectory we see going forward. In Q2, we will have the headwind of residual wage hike as we roll out salary hikes for mid- to senior-level employees. We aim to offset this impact through improvement in combination of operational levers like employee pyramid and productivity. Rising attrition, which is an industry-wide trend is another headwind that we'll have to keep a close watch and are taking several measures to contain it. Growth and quality of revenue is the major lever that has and will continue to aid margin improvement. Further, we continue to work towards improving margin in telecom & hi-tech. While pushing for better growth in higher-margin segments like medical, industrial products, plant engineering and transportation. Overall, while we do not provide a guidance on margin, the effort will be towards sustaining the progress made so far and strengthening the operating model. With that, I now pass it on to the moderators to open it up for questions.

[Operator]

[Operator Instructions]. The first question is from the line of Alroy Lobo from Kotak Investment Advisors.

[Alroy Lobo]

Yes. Can You hear me now?

[Operator]

Yes, sir, we can.

[Alroy Lobo]

Yes. Congratulations on a good set of results. I have about 3 questions. The first 1 is on your client profile. You have about 5 $20 million clients, about 20 $10 million clients. I just want to know what is the potential to which you can mine this client? Can there be $50 million accounts, $75 million accounts? Or will they get capped at around $30 million, $35 million? So that's my first question. The second question has to relate with your progress on the ISV business for the telecom business. If you can just give us some update on what progress you have made to build capabilities, about capabilities in these 2 spaces. And just wanted to also check with you as far as going forward in terms of the growth trajectory, are you seeing increased spending and more of the capital business coming into the outsourcing market in the ER&D space? Can you comment on that?

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

Sure. So thank you so much, you hear me fine? Am I audible?

[Alroy Lobo]

Yes.

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

So -- okay perfect. So number one, in terms of client profile, as you see it, right? We definitely feel that we can actually -- it's normal in our business to actually have clients that are more than $50 million as well, right? So you're not capping off at 30 to 50. In fact, I go back 3 years, and we used to have a couple of clients in that range, right? So having said that, there is a clear mining focus in the company, account mining, there is a hunting focus in the company, and we continue to work on this. The reason the metrics in Q1 do not look up to you right now is because we use trailing 12 months of revenue to be able to report the client range. But as we move forward and the FY '21 metric gets -- revenue gets flushed out and the new revenue comes in, and you see it, you will see the client pyramid improving. This is a core focus area for the company and will continue to be one, as we move forward. In fact, we have talked about a Tier-3 strategy. That has not gone away. That continues to be the case as we move forward. Your second question was on capability building in hi-tech and ISV. So as far as we are concerned, high-tech for us is actually 6 subsegments. There is semiconductor, there is telecom infra, there is telecom operators and communication media. There is consumer electronics, there is ISV, right? So those are the other segments broadly that we -- or subsegments we operate in. 5G is one of those areas which will cut across a lot of these subsegments and is a clear attention and focus area for us as we move forward, including the company that we bought last year and the semicon building capabilities we have got through acquisition. We have design capabilities that we've got in-house as well. Having said that, on the ISV side, software capability continues to be something that we are building on, be it cloud techno product cloud, be it cybersecurity, be it DevOps/SecOps, be it UI/UX, et cetera. So these are capabilities that continue to be built out in the company. And as we move forward, you will continue to see progress in these areas. We are also actually taken ISV and actually broken it up into focus on medical, focus on industrial, et cetera. So there are use cases that we have built out in the software side to take to the market, and we are fairly comfortable and confident that you will see growth here. Can you repeat your third question?

[Alroy Lobo]

Yes, the third question was to do with the outsourcing in ER&D. Are you seeing an increase from the capital? Or is it stable. What's the trend you're seeing there? And if I can just also chip in another question. Mindtree recently acquired the NxT Digital Business from Larsen and Toubro I would have thought that this would've made better sense for LTTS. So if you could comment how are these acquisitions being made at the group level? How do you connect with the group to make sure that some of this actually come into your plate rather than going to one of the other group companies.

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

Sure. So let me address the growth part. So as we look at it, and these are numbers that are publicly available -- The ER&D space today is about $1.4 trillion as of 2020 spend, right? Of this $1.4 trillion, it is supposed to grow to anything between $1.75 trillion to $1.95 trillion by 2023, right? Now out of this $1.4 trillion, that's of CY '20, $80 billion is outsourced to engineering service providers, and India gets $16 billion of that $80 billion. Global competency centers of captive centers is about $50 billion of spend, out of which similar $16 billion, $18 billion comes to India, but there is an equal amount going to China. And then there is Latin America, et cetera, et cetera. As we see going forward, we do expect R&D spends to grow. We do expect outsourcing to engineering service providers like ourselves and others in India, Inc. as well as Western Europe, Eastern Europe to grow. We also expect global competency centers to pick up. Having said that, you may see some more global competency center spend going to Eastern Europe and LATAM. And China slowing down from a global competency center standpoint. So that's broadly the contour that we are seeing it today. And there's interest there, further details that we can get into, but broadly, that's where it is. If I go on to L&T NxT being bought over by Mindtree. So L&T NxT has some very targeted product reusable widgets that they have built in the areas of digital for construction companies, which is being used by L&T. And the group sought that Mindtree acquiring it was the right answer. Having said that, I cannot comment on that being right or wrong. All I can say is we have a clear strategy in the 6 investment areas that I have outlined for you. And we do believe that, that growth will stand us in good state sustainably, profitably as we move forward.

[Operator]

[Operator Instructions]. The next question is from the line of Sandip Agarwal from Edelweiss Financial Service.

[Sandip Kumar Agarwal, Vice President]

And congrats on a very good execution and very good quarter. I hope and wish everyone safe health. Sir, I have only one question, Amit. We are in a situation where the demand from the consumer side is at very high. Factories have not worked to their optimum levels so there's a big gap between demand supply across the globe on the consumer side. The outsourcing of the ER&D has to go up tremendously because this is -- ER&D has not gone through the outsourcing which the software industry has gone through. On top of that, there is serious scarcity of manpower in whole of Europe. And on the -- and if you add to that, our market leadership, our capability in each of these areas and also the world's urgency and desperation to upgrade the future products into smart products. If you take all these 5 things together and even if you apply a very, very pessimistic approach to that, then also it looks like you are getting into a golden decade of growth in your business. So why that kind of confidence is not reflecting in our commentary. Is it because we are not so sure about any third wave or fourth wave impact, which can happen because of COVID. Or it is because that you are still finalizing your strategy and you would be more opening up or could be giving more clarity going forward because no way I am able to reconcile this that when there is such huge tailwind, I have not thought of this kind of tailwind. I don't think such huge tailwind has ever come together in the last 20, 30 years, then why our commentary is not reflecting that same optimism.

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

So Sandip, 2 things here so that we can level up and be clear. Number one, I share your optimism around demand. your optimism around the 5 vectors that you talked about. Having said that, Sandip, you will agree with me that there is only a certain amount any company spends in any given year, right? That's one. Second is that, given that, if you look at the 6 strategic investment areas I talked about and during our Investor Day, we'll share more color, these are not quarter bets. These are bets that are made for the next 3 years, 5 years. And that's what we have done. But we have taken all these 5 tailwinds that you talked about, and there are tailwinds per sector, right? And we've created this investment roadmap for ourselves in 6 areas, which we believe will give us a sustainable trajectory as we go forward. So we are taking that into account. Having said that, let me then focus only on the year. On the year so far, we've already upgraded our guidance to 15% to 17%. We will come back and update you as we move forward into next quarter and where we stand. And we'll continue to be honest, direct and transparent with you because we really treasure our relationship with this community. So that's where we are at this stage. But we mirror your sentiment in terms of tailwinds, and we'll continue to provide an update to you.

[Operator]

The next question is from the line of Mukul Garg from Motilal Oswal Financial Services.

[Mukul Garg, Research Analyst]

Amit, first, I just wanted to get a bit of an understanding on the Q1 performance. It clearly looks like it was better than what you initially expected, especially the COVID supply impact. So can you just highlight whether it was supply or demand, which materially moved the performance this quarter? And how do you see it play out currently as you enter Q2?

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

Okay. So number one, when we met last time in May, we met under the shadow of a wave 2 that was rearing its head up, right? If you remember that. And that played on our minds as to where we are. I do want to acknowledge that we've also had fatalities like everybody else in our workforce. We've had workforce that has been infected. And like I said at the beginning of my commentary, things have been -- things have gone through very harrowing times for our employees and their families, right? I'm sure you will understand that. So we took that into account when we had given you commentary last time. At this stage, where we stand today, we are fairly comfortable with the fact that wave 2 is done. We hope and wish that wave 3 will not be as bad because vaccinations are going up, right? we're actually getting our employees vaccinated, families -- their families, vaccinated, et cetera. Demand is there. So in fact, if anything, demand has slightly improved, spend has slightly improved. And as I said, this is a progressive quarter. Let's go through it. I've also acknowledged to some of you in part as well as to the whole team on this call that our internal targets are there, that we continue to try and achieve to and aspire to. We haven't forgotten years when we've grown higher in past years, and our aspirations will be the same. But again, at this stage, this is where we are, and that's what we wanted to communicate to you.

[Mukul Garg, Research Analyst]

Sure. On the demand side, and as you mentioned the demand environment is good. we heard recently from ISG also that deal sizes in the ER&D space are increasing. But at the same time, we are also hearing about increased competition with Accenture, highlighting it as a focus area. So both from a deal size perspective and competitive perspective, is there any change which you have seen in last quarter, in the last 2 to 3 quarters or things remain the same?

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

So number one, would be definitely seeing is that clients are willing to talk and commit to larger spends and longer spend -- cycle spend. So like TCV of 3 years they are willing to sign a document, right? About 4 months, 6 months ago, there was a little bit of trepidation, they didn't want to do that, et cetera. So we're seeing a lot more confidence back in the market in terms of making commitments. Number two, longer-term commitments, bigger commitments. So that's definitely one that we're seeing. That's how we've won the 2 deals in EV, et cetera, et cetera, onwards, right? Second, we are looking at clients making strategic decisions in terms of, if I want to be able to get to 5G rollout in subsector A, use case A and B, et cetera, or I want to get to electric vehicle, electric vehicle I have broken it down. I will first move to power distribution unit. I'll next get to higher end of wiring. I then get to inverter design and there are clear phases people are drawing out as if this is a multiquarter or multiyear thing rather than sprints, right? It is very heartening because you are having a longer-term conversation that provides more strategic direction and more warm and fuzzy with clients. In fact, I'm happy to share, I have completed my first set of face-to-face meetings in the last 4 weeks and so have some of my leaders in the geographies where we operate out of. So stuff is coming back, and that provides us that confidence. The third thing we are seeing is, specific areas that have picked up interest in pace, like electric vehicles has picked up pace. 5G has picked up pace. Sustainability has picked up pace, changing the composition of fuel, right, to higher mix -- higher value mix has picked up pace. So that gives us a lot of confidence as we move forward. And this is not the case if I may be very clear, this was not the case 5 months ago, 4 months ago.

[Operator]

The next question is from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, Director of Research]

Congrats on very good institution, both on revenue and margins. Just on margins, so one of the pavements which we have witnessed, which we have said that the portfolio mix has been shifted more towards digital engineering as a whole. So on a Q-on-Q basis, yes, it has gone up by 200 basis points, but we never called out this as a tailwind on margin in earlier quarters. So is it the pricing which is going up on a digital engineering? Or is it the margins between the digital engineering are now different in first quarter versus what it used to be earlier? Will It be a sustainable structural tailwind going forward.

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

So it's not just and I'll request Rajeev or Abhi to add from Mumbai here, but it's not just one factor. It's a multiple factors that have played to this, Rajeev, Abhi, would you like to add to this?

[Rajeev Gupta, Chief Financial Officer]

Sure, Amit. Let me add to it. So there are various factors that have led to the improvement in margin, right? One is, of course, the growth and the quality of revenue. things like digital engineering and the increase that you talk about, I mean, these are things that take a little time to play out. More importantly, it's the quality of revenue that is beginning to now aid margin. And in terms of the sustainability, we still feel that there are opportunities. For instance, growth and scale of revenue will bring in economies across cost, right, and that's around sales, communication, legal, all of those costs. Segmental margins, we talked about it earlier as well. We've got opportunities in 2 segments, transportation and telecom & hi-tech. Transportation, we've already now seen EBITDA margins go up to 19% plus the range. Telecom hi-tech, it is taking us a few quarters. We are focusing and working towards it. we should hopefully be able to see better margins in telecom and hi-tech in the next few quarters. Further opportunities also in terms of improving employee pyramid. We've started to hire a lot more freshers over the last 2 quarters, and we believe this strategy will help us in building the employee pyramid and also in a way try to bring down the C&B cost as a percentage of revenue. These are some of the factors that we feel will help us in terms of sustaining the margins going forward as well.

[Sandeep Shah, Director of Research]

Okay. Okay. And just a follow-up question. Are you trying to say that in the coming quarters, we will be able to sustain the current quarter margin or we may further improve rather than any decline despite the partial that you're spending? That is what we are guiding from 2Q to 4Q.

[Rajeev Gupta, Chief Financial Officer]

So I called out the various factors and of course, the levers that are available in terms of sustaining margin. Of course, when you look at various factors, we still need to see the performance in terms of revenue. Amit talked about the improvement in terms of guidance from 13% to 15%, raising it to 15% to 17%. So some of these we still need to see in terms of the execution. Like I said in my opening commentary, we continue to remain focused, and we will see how better -- how best to sustain the margins that have been delivered in Q1.

[Operator]

The next question is from the line of Hiten Jain from Invesco.

[Hiten Jain, Research Analyst]

I have 2 questions. First is, I think you touched upon in the opening remarks, but maybe you could clarify it more on the receivable days going up and even the -- especially the unbilled part, what's the savings to that?

[Rajeev Gupta, Chief Financial Officer]

So I'll take this. So we went through a system transformation program in Q1. We kicked off the first phase that led to delayed invoicing. We believe this is temporary. As you would have noticed all of last year, we improved DSO and consequently, we improved free cash flow. Q1, of course, is a temporary, I would say, situation. we will improve this in the coming quarters. The system transformation should conclude over a quarter or so. So Q1 is only a temporary position, so to speak.

[Hiten Jain, Research Analyst]

Okay. Understood. And the second question is on the headcount growth. So are we operating at a higher utilization level, are we seeing good demand, I mean, in terms of commentary and potential deal wins. But headcount growth seems to be muted even sequential and obviously, on year-on-year basis. So what are the hiring plans going forward?

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

So we don't normally comment on exact headcount addition, but what we will definitely tell you is that as you can see, the headcount has gone up by approximately 700 people. right? This was partly freshers, partly laterals. Going forward, the plan of the company is to continue to hire about 400 to 450 freshers plus laterals, every quarter. Now of course, there will be attrition when we exit. So you will continue to see net increase, but we don't provide guidance on exact number or headcount increase quarter-on-quarter. And Rajeev or Abhi, if you want to add to this, you can, please.

[Rajeev Gupta, Chief Financial Officer]

No, I think that's clear, Amit.

[Operator]

The next question is from the line of Nitin Padmanabhan from Investec.

[Nitin Padmanabhan, Analyst]

On the transportation side of the business, the margins there seem to be at the higher end of what they have done historically. Just wanted your thoughts in terms of what's changed within the transportation mix that's actually driving this margin up. Is it a mix in terms of the kind of business that we're doing? Or is it that -- or what exactly is basically driving this margin up? And how sustainable is it?

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

Abhi, you're on the call. Sure, sure. if you're on the call, would you please answer this?

[Abhishek Sinha, Whole Time Director & COO]

Yes. So thanks for the question. See I think the one is from a sustainability perspective, of course, that's what our intent is. Why has the margin grown up so much? The quality of revenue has definitely improved. Our business in transportation sector, especially in the software embedded side has shown very good improvement. So growth is one of the primary reasons, I would say, for this. And growth in the right areas and with higher, I would say, better quality of revenue.

[Nitin Padmanabhan, Analyst]

So when we say better quality of revenue, if you could just give some color what that means?

[Abhishek Sinha, Whole Time Director & COO]

Yes. So our investments, like Amit said at the start, one of the big bets we have is on the EACV segment, which is electric vehicles autonomous areas. And we clearly are seeing more growth in those areas, more wins in those areas, ePowertrain areas. And that helps, of course, the investments we have made in the reusable solution, the EV labs that we spoke of in earlier quarters, those are also helping us attract more customers and growth.

[Operator]

The next question is from the line of Vibhor Singhal from PhillipCapital India Private Limited.

[Vibhor Singhal]

Sir, 2 questions from my side. So the first question that I wanted to take your thought on is, if you look at our total revenue, we are now -- we have now crossed that $200 million of quarterly run rate. This is where we were in 3Q FY '20. So around [indiscernible] that. So I mean, [indiscernible] in the next quarters, 4Q and 1Q and somewhere this is our optimal rate of recovery. So I just wanted to say that now that we are now back to those 3Q FY '20 level, are majority of our clients also back to their pre-COVID level spending for us? Or is it that in the meantime, we have gained new customers and new businesses and many of the large clients are still much below their pre-COVID levels. And that basically backlog of that revenue is yet to be gained by us substantially for potential growth in any of the above in the next couple of years, or next few quarters maybe.

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

Sure, sure. So number one, thank you so much, and some of you tracked us and been with us since we went IPO and prior as well, and we appreciate the confidence. Having said that, as you will recall, we touched close to $200 million in Q3 of FY '20, right? And from there, from there, we declined, right, because of COVID in quarter 4 and then beyond and then we've come back like you said, right? What has changed is two things. Number one is, pre-COVID, I'm going to get a little specific here, right? So -- and then I'll come to accounts as well. So we pre-COVID the amount of conversation on electric vehicles was not so much there. And autonomous, it was largely a lot of infotainment in autonomous, right? But post-COVID, we are seeing a lot more conversation, money being spent in electric, autonomous and connected. Cyber security is another area that's added on in transportation. As an example, pre-COVID, there was not a lot of spend in medical in the areas of telemedicine or in home care, right? And those 2 areas are picking up speed as we speak now post-COVID. Third, digital manufacturing was a conversation pre-COVID. Post-COVID, we are seeing money being spent in that. The point I'm trying to make is that the color of the dollar has definitely changed. The conversations have changed, digital as well. And digital is a very broad word. So I don't want to go there. I'm an engineer. So I don't want to just say digital, but that's where it is. So color has changed. In fact, our Global Engineering institute that we have set up, which, Abhi, as well as people that he'd hired setup, has been instrumental in turning the color of even some of the talent that we have got. So that has been a change. So it's not like go back to the same old, same old, et cetera. Second, from a client's standpoint, in our -- if I look at our $30 million run rate clients or I look at my $20 million run rate clients that has fairly been the same. Couple of them, we have dropped off for various reasons of -- we had already told you that one of them had sold their 5G business, one of them had divested to a private equity. But we have seen a fair mix to be steady and growing with us. So somebody had asked the question, are clients getting deeper with you? The answer is, 2 of the clients are getting deeper with us. Having said that, the word of caution, right, that I would definitely want to say, because we want to be honest and whatever we see, we want to tell you, right? What we don't know is, will wave 3 come back in a much bigger way, right? We are seeing hospitalizations down, even though infections are up in Europe, [indiscernible] is almost back to normal. But will this continue, there are some variables that nor do you have an answer or nor do we, but we will continue to stay engaged and tell you. But I can tell you that your company for sure, has seen a change in the type of work we are doing, and we are confident that we have the right talent and the processes in place to scale up in that area. Well, I am sure, I hope I have addressed what you asked.

[Vibhor Singhal]

I think that was quite some answer. I just have one more question. You mentioned that in the plant engineering segment, we had a deal with an FMCG client. We designed the entire new plant with the most engines. So I mean, to get a color on the segment -- was that a one-off? Or are we seeing FMCG companies, that will have more and more plants across the world and there are more competitions happening in that business?

[Abhishek Sinha, Whole Time Director & COO]

So there are 2 things that we are seeing. And I'll again break up the segments for you. So if I look at food and beverages, we are definitely seeing a trend of smaller plants coming up. So that means smaller CapEx coming up that are more regional suppliers, that are supplying to the demand in the region as opposed to mega plants. So that in food and beverages, we are seeing, right? Now is this a trend that will hold. It is a trend that a change don't know, but right now, we are seeing that, right?It was there in Asia. By the way, we Google, it was there in Asia, it was not -- there were mega plants in the U.S. and Europe, while there used to be smaller plants in Asia. Now we are seeing smaller plants in U.S. and Europe as well coming up as opposed to mega plants. While we have one food and beverage, you've seen that. I don't know how long that will continue. Second, what we are seeing is in plant engineering, that oil and gas companies are coming back and talking to us about changing their fuel mix. So the output that they give will be less gasoline, will be more jet fuel, maybe more chemicals, et cetera. So there is brownfield upgrades and changes people are talking about. So I do believe that, that is again different than what we saw about 4, 6, 8 quarters ago. So those were the 2 changes.

[Operator]

The next question is from the line of Mayank Babla from Dalal & Broacha.

[Mayank Babla, Research Analyst]

Yes. Am I audible?

[Operator]

Yes, sir.

[Mayank Babla, Research Analyst]

Congratulations on a good set of numbers. sir, while we have seen additional headcount during the quarter, the sales and support headcount has fallen from Q4 to Q1. So if you could shed some light on that. And a related question to that was that will this see a reversal in the upcoming quarters, if we have to see that growth surpassing the 20% mark going ahead?

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

So I'm going to request Rajeev to take that. But on a principal basis, I want to tell you that it's not like we hired salespeople or support just because the revenues went down. We haven't skimped on that, but we've optimized for sure, but I'm going to request Rajeev to take this question.

[Rajeev Gupta, Chief Financial Officer]

Sure, Amit. Mayank, to respond to your question. I mean we continue to invest in our sales organization. When you look at sales and support, it's not that it has taken a big drop, right? This is just part of the thinking ahead in terms of how do we work more effectively. So to put it in a short context, we continue to invest in sales because we see the opportunity, right, with the kind of demand. We'd like to see investing into sales functions so that we can see further growth coming in newer and newer accounts and also being able to expand on our current set of accounts. It is just that we are trying to manage this more effectively, more on the enabling side.

[Operator]

The next question is from the line of Udit Methi from Stanley-Laman Group.

[Udit Methi]

Can you hear me, guys?

[Operator]

Yes, sir, we can.

[Udit Methi]

Yes. Yes. So I just wanted to ask, during your performance highlights, I could see that an American automotive has selected LTT as a strategic partner for the EV and power electronics products. So I just wanted to understand that due to this lack of supplies for semiconductors and things like that. you guys planning to ramp up your production for this, because I see that this is a big opportunity that we could jump on? And do you plan on any CapEx expenditure in terms of power electronics?

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

Okay. So number one, to answer your question, we do not do manufacturing, right? We are largely focused on design sustenance engineering, right? So therefore, the chip shortage is not impacting us per se, right? If anything, design cycles are where they were, et cetera. so we don't see that. Do we see overall an opportunity with chips and FPGA and the likes in the automotive sector? Absolutely, yes. And we are continuing to hire build, train, cross-train all of those to relatively take advantage. In fact, our whole strategy around multi-vertical strategy is playing out well for us because we are able to leverage, getting some con design wins in automotive, et cetera, on and on and on. So that's definitely there, right? And can you repeat your second question?

[Udit Methi]

That was the only question I had.

[Operator]

The next question is from the line of Pritesh Vora from Mission Holdings.

[Pritesh Vora, Vice President]

Can you hear me? Sir hello. Sir, can you hear me?

[Operator]

Yes, sir, we can hear you.

[Pritesh Vora, Vice President]

Amit, you've highlighted that U.S. government is investing in infrared investment. What do you see impact in which of the verticals this will play out over the next 5 or next decade? And second question is how private investment client -- private investment climate shaping up in U.S.A?

[Operator]

[Operator Instructions]. Ladies and gentlemen, please stay connected while we they rejoin Mr. Amit back to the call. Ladies and gentlemen, thank you for your patience. We have line from Mr. Amit reconnected. Pritesh can you please repeat your question once again for Mr. Amit.

[Pritesh Vora, Vice President]

Yes. So I will repeat the question. Amit, you highlighted USA. government infrared investment in some of the areas. What do you see impact of this inflated investment by U.S. in next 10 years in which of the vertical, it will play out for us? And second question is how private investment climate is shaping up in USA.

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

Okay. So first of all, I apologize. The line had got cut. This time around other than mobile, I had asked them to connect me on landline. So as you can see, mobile is more effective than landline. So we'll keep this as a lesson for the future, right, again, I apologize. Now if I go back to the spending, see the U.S. government talked about and last time I had covered that, they talked about infra spending, right? That was -- that will impact us in the areas of trucks and off-highway for sure, because companies like Caterpillar, John Deere, others will benefit from that. Second, as infra improves, automotive itself will benefit. Third, because of green energy, electric vehicles, et cetera, we expect that to continue to grow. So that's space number one. Number two is, because of climate, green energy, et cetera, people are talking about this whole industrial product sector that we have got, digital manufacturing as well as sustainability are 3 areas that will see an upswing in terms of spend and attract investments, et cetera. If somebody is interested, you can actually see that the number of wind turbine on the shores of the U.S. is going to go up drastically. And interestingly, the problem is not that wind turbines cannot come to the U.S. It's also because there is a shipping law that requires ship to be of a certain type or owned by certain people that can only bring the submarines into the sea. I mean it is very interesting when I read about it. And so whole ships are being built to try and transport it. So very interesting, whole ecosystem coming up. So I do believe that, that will help for sure. Third, I do see spending in private sector changing with the chemical -- actually, you can go Google it, Exxon has talked about it. Look at the fuel mix that they are saying will happen in 2030 coming out of the refineries as opposed to what's coming out today. There is a huge change in that, that will require refineries to be changed, and I believe that is a spending area. Fourth is the recent act with the U.S. past called the Innovation and Competition Act, it's a $270 billion plan, which is -- part of it is CHIPS for America Fund. There is technology that is getting money. There is Department of Energy getting money. There's a competition around digital connectivity, cybersecurity. So these may directly not get revenue from it, but my belief is that was -- that will build an entire ecosystem, and we will be participative in this ecosystem and will help us. Finally, One thing not going away, which is U.S., Europe, even, India as well, is that -- and I'm going to say this because a lot of my colleagues from finance and others on the call, I often say that people that could afford to buy a [indiscernible] plant 10, 5 years ago, will definitely spend money on a small blood pressure monitor 5 years from now. So you will see home health care definitely go up. So believe that there is avenues opportunity. Now what is to be seen is, what is the pace of that that's going to come out? How much of it companies will do themselves? How much of that will be coming to people like us. Will we be able to ramp up to be able to build that capability? Do we have reusable assets, a lot of that is going on. A long answer, but that's how we see it.

[Operator]

Thank you very much. I now hand the conference over to Mr. Pinku Pappan for closing comments.

[Pinku Pappan, Head of Investor Relations]

Thank you, everyone, for joining us on the call today. We hope we have been able to answer most of your questions. If you have any follow-up queries, please write to me an e-mail. Also, I look forward to hosting all of you on our Investor Analyst Day coming in September. We will communicate the details very shortly. Thank you again. Have a good day and wish you safe times.

[Amit Pal Singh Chadha, CEO, MD & Whole Time Director]

Thank you so much.

[Operator]

Thank you very much. On behalf of L&T Technology Services Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.