L&T Technology Services Ltd
NSE:LTTS
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Ladies and gentlemen, good day, and welcome to the L&T Technology Services Limited Q1 FY '24 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. Thank you, and over to you, sir.
Yeah and welcome to the earnings call of L&T Technology Services for the first quarter of FY '24. I'm Pinku, Head of Investor Relations. Our financial results, investor release and press release are -- have been filed in the 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 up the management remarks in [indiscernible] 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. With that, let me introduce the leadership team present on this call. We have Amit Chadha, CEO and MD; Abhishek, CEO and Executive Director; Alind Saxena, President Sales and Executive Director; 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 you, Amit.
Sure. I hope I'm audible and clear. Thank you, Pinku, and thank you all for joining us today on the call. Trust all of you doing well. Let me provide you key highlights on our Q1 performance. We had a quarter of growth despite the macro challenges and slowdown in decision-making in pockets. Overall, we grew by 10% year-on-year in constant currency. The comparison on Y-on-Y is more like-for-like given the fact that H2 is always higher than H1 for the Smart World business.
Our revenue grew by 0.6% sequentially organically with Transportation leading the growth at 4%, while Medical and Industrial had about 0.5% to 1% growth. Overall, sequential growth organic was 7.5% CC. Operational performance was strong with EBIT margin at 17.2%, which is post the addition of Smart World. PAT at INR 311 crores were up 13% Y-o-Y.
Our large [ deal ] engine continues to fire with a total of 6 deals above $10 million, of which one of them was the $50 million deal TCV that we signed this quarter. All deals have moved to execution. On other dimensions, happy to share that we filed for 55 patents for our customers and ourselves, taking a cumulative count of 1,145 patents. We were rated as a great place to work in India again and Poland for the first time. Attrition is down 330 bps to 18.9%. We expect this trend to continue.
Moving on to Industrial segmental performance and outlook. Starting with Transportation, strong show of 4% quarter-on-quarter growth that was broad-based across auto traction of highway and aero. Demand continues to be strong, led by EV and connected cars in auto electrification in trucks and off-highway and avionics in aerospace. We won a $10 million-plus deal with our transportation customer who had earlier chosen us as their preferred engineering partner.
We continue to invest in transportation capabilities for the future like software-defined vehicles. We are working on creating a digital architecture of a future state software-defined vehicles that will require a centralized platform with high computing processing power, cybersecurity and high-speed connectivity.
We filed 8 patents in Transportation in this quarter. My colleague, Abhishek, as required, will provide more details on software-defined vehicles. In the connected car area, we are seeing incremental opportunities to manage so -- by leveraging our Smart World capabilities. Overall, we see a good pipeline of opportunities across all subsegments and expect the growth momentum to sustain.
In Plant Engineering, this differentiated segment remains in a solid footing. Q1 was a one-off as we were impacted by decision-making and supply delays by customers that slowed down the pace of ongoing projects. We see a bounce back in the next quarter as the pace of decision-making, regulatory and other factors have seen an improvement in June and July. FMCG customers are undertaking capacity expansion as we move towards more localization.
We have won a $15 million deal from our global agri food company to provide engineering design services for the new plant in Europe, will also help us set up a local office in Europe for Plant Engineering and strengthen our European presence. This large deal, along with a few $5 million to $10 million deals that we won, gives us good growth visibility in Q2 and the coming quarters.
Across all 3 subsegments of O&G, FMCG and chemicals, we are seeing good opportunities on the sustainability side with companies wanting to use advanced technologies to recycle water, waste plastic, et cetera, to meet their sustainability goals. We are confident of growth in Plant Engineering in Q2 and beyond.
At industrial products, we grew slightly on the back of the demand and good demand from the machinery and electrical segment, though we were hit by decision delays in building technologies and power segment. We see a rising adoption of digital in multiple areas like supply chain and productivity improvement under the larger industry 4.0 initiatives. This is leading to an increased scope for deploying AI, private 5G and cybersecurity as trends in software platforms, factory automation and sustainability increase.
We are focused on making accelerators and reusable solutions that can be used to reduce the time to market and improve ROI for customers. The segment filed 20 patents in this quarter and remains a flagship segment in innovation. We won a $10 million-plus deal in [indiscernible] U.S. customer to optimize supply chain and improve manufacturing efficiency. Overall, we see a good pipeline of opportunities in the digital space and expect the growth momentum steadily to build up in industrial products.
Moving on to Telecom & Hitech. Organically, we had a marginal decline, although when combined with SWC, we were up year-on-year. Let me discuss organic Telecom & Hitech business first. The key highlights of the quarter was a $50 million deal with a U.S.-based hi-tech customer to enable new opportunities for digital video platform. We will enhance their suite of products and optimize it for better user experience using AI -- and generative AI as we move forward. We are seeing more such opportunities in the media subsegment as customers look to engage us to develop their next-generation digital platforms.
As we had indicated in the previous quarter, there is a weakness in the semiconductor side. While this industry is still in inventory correction mode, we are moving up the capability spectrum and winning some deals in this area, I would like to highlight a post Silicon validation deal that we won in Q1, which will involve setting up a design studio offshore. As we partner with chip companies to develop new age chips for cloud computing data center as well as automotive industry, our growth is set to pick up. We are also seeing good opportunities as global ER&D companies move manufacturing from China to India. One of the $10 million-plus deals we won in Q1 is of that nature where we partnered with a global technology giant to provide next-gen wireless and productivity engineering -- Product engineering from design labs that we've set up in India exclusively for the customer.
On the Smart World side, we have fully integrated this into our Telecom and Hitech organization with a dedicated sales team and leadership in place in the U.S., Canada, Europe, Singapore and the Middle East. The operational improvements will be discussed by Rajeev in his commentary.
Let me share the progress in 2 channels that we've activated for Smart World. One, our game plan of taking Smart World Global has seen early wins, including critical partnerships with telecom service providers, equipment manufacturers and execution of these deals should start in Q2. I'm thankful also to our enterprise customers who are actively engaging with us on specific opportunities in next-gen communication, some of which should close shortly. We were awarded cybersecurity deals, which have already started execution.
The Smart World business requires an ecosystem play. To the same, we are providing our partner working on our partnership with key players. You would have seen the announcement of LTTS partner in the Palo Alto Networks to provide enterprise with operational technology and cybersecurity services. Teams have been formed on either side to take it forward.
Another one is a partner with BSNL to drive and enable global enterprises in their private 5G network deployments. With Qualcomm in North America, LTTS is working together to offer 5G-driven next-gen connectivity solutions. This leverages LTTS's chip to cloud expertise. In Q1, we had a few wins in next-gen communication overseas, and we see the momentum building with the pipeline increasing. We believe the measures we have taken will create a robust foundation for future growth and transition this business from domestic only to a mix of domestic and international business.
Summing up, we do see growth in the combined telecom hi-tech portfolio driven by media and telecom. However, the Semcon challenges may persist for another quarter. Lastly, Medical, we see strong demand for digital as customers prioritize areas like medical device-as-a-service, connected devices in cybersecurity. In Q1, we signed a 15 million-plus deal to design and develop a digital surgery platform that will connect with customers' robotics, surgical and operative devices, and we use to deliver better outcome for patients. We are building reusable solutions for various areas like complaints management in [ Quanta ]. The pipeline of deals gives us confidence that our growth momentum should improve as some of the large deals closed.
Let me now discuss the outlook. Our growth is tied to our long and strategic relationship with customers. I am happy to share that we are the first advisory -- customer Advisory Council in Washington, D.C. comprising of CXO Board members of 16 of our customers with a collective market cap of $2 trillion and a revenue of $400 million. These organizations are advising us on our direction and investments so that we can bring more relevant offers to the market, builds to clear relationships, thus helping us elevate our customer lifetime value journey. The large deal we won in the quarter are in affirmation that our customers continue to spend on transformation technologies.
We remain front and center as a choice provider to them, and we can deliver speed to market cost synergies in innovation. We are accelerating our investments in 3 emerging technologies, AI, software-defined vehicles and cybersecurity. I talked about our investment in software-defined vehicles in our partnership with Palo Alto for cybersecurity. In AI, our focus will be auto manufacturing medical segment, and we will partner with hyperscalers and Semcon companies with joint development or readily deployable solutions. We are strengthening our AI team in the coming months to achieve our goals.
Let me conclude by saying that we grew in Q1 despite delays in decisions and deal closures getting pushed out. The pace of deal closure has improved from June which combined with a healthy deal pipeline, which is bigger than year-on-year and quarter-on-quarter, we see gives us the confidence of growth momentum strengthening in the coming quarters. We maintain our FY '24 guidance of 20% plus in constant currency. We also reconfirm our aspiration of $1.5 billion run rate in FY '25.
Let me, with that, wish you good health. We'll start with questions. Thank you so much, and I hand over to Rajeev now.
Thank you, Amit. Good evening to all of you, and I hope you're keeping safe and healthy. I'm pleased to share our Q1 FY '24 performance. It has been another quarter of good results with healthy addition of deals and operationally strong performance. This is our first quarter of reporting financials after completion of the AWC acquisition. In compliance with India's requirements applicable to common control transaction, we have restated our past financials to include SWC from 1st April 2022. As a result, all figures in the investor release include the comparison reflecting these restatements.
Let me take you through the Q4 FY '24 financials. As said earlier, throughout the commentary, I will elaborate on the restated combined financials that include SWC in all the comparable quarters as well as organic numbers, excluding SWC. Starting with the P&L. First, to address revenue. Organically, revenue for the quarter grew 0.6% on a sequential basis and 12.6% on a Y-o-Y basis in INR terms.
On the combined financials, Revenue for the quarter was INR 2,301 crores, a Y-on-Y comparison is more accurate indicator as Q1 FY '23 numbers have also been restated to include SWC. On a Y-o-Y basis, our double-digit growth trajectory continues with Q1 revenue up 14.7%. SWC business at current state delivered higher revenues in H2 as compared to H1 on account of seasonality.
Moving to EBIT. Earlier in our Q4 commentary, we had indicated that we aspired for FY '24 combined EBIT margin to be in the range of 17%. I'm pleased to share that our Q1 FY '24 combined EBIT margin came in at 17.2%.
Let me explain the evolution of margins from 18.7% that we reported in Q4 FY '23 to the 17.2% in Q1 FY '24. Organically, margin was slightly down on account of investments made for large deals. Amit did refer in his opening comments around the large deal that we have won, a $50 million deal in Hi-tech segment. As we had highlighted earlier, SWC business has a lower margin profile. Hence, on a combined basis, Q1 FY '24 margins have come at 17.2%. Overall, we've been able to integrate SWC as planned and maintained operational performance within the range that we had aspired for.
Moving to below EBIT. Talking about other income. Other income came at INR 35 crores, slightly lower on a sequential basis due to lower income from investments, primarily due to cash outflow of purchase consideration of INR 800 crores for SWC acquisition at the beginning of this quarter. Effective tax rate for Q1 was 27.6%, in the same range as an expectation of 27.5%. Net income for the quarter was up 13% on Y-on-Y basis and came in at INR 311 crores, which is 13.5% of revenue.
Moving to balance sheet. Let me highlight the key line items. To begin with DSO. DSO for the organic business was 92 days versus 90 days that we have reported in Q4 FY '23. As indicated in our previous commentary, SWC is a high working capital business and had DSO of over 400 days at the time of acquisition. We are pleased to inform that we have improved on the DSO of this business since then. On a combined basis, Q1 FY '24 DSO has come at 117 days within our expected range of 115 to 125 days for FY '24. Needless to say, we will continue our efforts to improve on combined DSO.
On shareholder funds. Shareholder funds was at INR 4,817 crores at the end of quarter 1 versus INR 4,951 crores that we have reported at the end of Q4 FY '23. As per accounting standards applicable to the common control transaction, the excess of purchase consideration paid over the net assets acquired is shown as a reduction to shareholder funds. The reported value of INR 4,817 crores, therefore, reflects the adjustment of this impact.
Now talking about cash flows. Our free cash flow came in at INR 228 crores, a healthy 73% of net income. This reflects our operational rigor on improving combined DSO -- our cash and investments rose to INR 2,394 crores by end of Q1 FY '24, which is after payment of INR 800 crores for the SWC acquisition.
Moving to revenue metrics. On the combined financials, dollar revenue was up 9.1% in reported terms and 10% in constant currency terms on a Y-on-Y basis. Organically, dollar revenue saw a 0.6% sequential growth, both reported and in constant currency, led by Transportation segment. The segmental margin performance was better in 2 out of 5 segments on a sequential basis. Our Telecom & Hitech margins came in at 8.8% in Q1 versus the then reported 12% margin in Q4 FY '23. This is on account of lower margin profile business of SWC and investment made on large deal wins. We expect the margin trajectory to improve as we transform SWC business.
Moving on to operational metrics to begin with on-site offshore mix. Offshore percentage now stands at 59.3%, compared to around 57% then reported in Q4 FY '23. This increase reflects the fact that currently SWC business is completely offshore based. Talking about T&M revenue mix, fixed price percentage is at 35.6% compared to around 29% then reported in Q4 FY '23. SWC business is largely executed on our fixed-price model.
Talking about client profile, which indicates a number of million dollar plus accounts has shown a sequential improvement in the $30 million, $20 million, $10 million plus and $1 million-plus categories. The client profile numbers have seen an improvement over the past few quarters, and this trend will continue in the coming quarters. SWC has added a few large customers to our client base. including one $30 million and 3 additional accounts of $10 million plus.
Talking about client contribution to revenue. On a combined basis, top 5, top 10 and top 20 have shown a slight uptick as compared to Q4.
Moving to headcount. Headcount stands at to 23,392 at end of Q1 versus 22,233 then reported end of Q4 FY '23. This sequential increase of 1,159 employees includes the addition of around 800 people from the acquisition of SWC. On attrition, pleased to share that it declined to 19%. This is as a result of various efforts on employee engagement. We believe this trend will continue downwards. Realized rupee for Q1 was at INR 82.2 to the dollar, flat compared to Q4.
Before I conclude, let me give some visibility on the EBIT margin trajectory going forward. We continue to focus on profitable growth and maintain our operational result. This will help us achieve our aspiration of 17% EBIT levels in FY '24. In Q4 FY '24, we will offset headwinds from rate hikes that are effective July '24 through a combination of growth and operational efficiencies, which is as planned to roll out wage hikes committed to our employees. In the medium-term, we aspire for 18% EBIT level by H1 FY '26.
With that, thank you to everyone. Moderator, now we can take the questions, please.
[Operator Instructions] The first question is from the line of Mukul Garg from Motilal Oswal Financial Services.
Amit, just one question from my side. And I think -- sorry about this being a recurring topic. But given the delays and pushouts which you saw in the first quarter, what is giving us the confidence of delivering a 10% organic growth in FY '24? What really are you seeing in terms of client visibility that such issues might not recur anytime over the next 3 quarters? Because currently, if I kind of do a rough number crunching, it looks like your compounded quarterly growth rate would be upwards of 4% for the next 3 quarters. If you could just help us walk through what really is the kind of behind this confidence of maintaining the revenue growth?
Thank you, Mukul. So a couple of things here, and I'll answer it broadly. So we look at growth, right? Number one, some of the deals did get delayed in terms of decisions. We were expecting them to be signed end of April, early May, but they got signed in the -- towards the end of June, right? So that's a given.
Second, if I look at Plant Engineering, it was actually not a deal problem. It is more getting input from customer on time problems. So that book of business still is with us and therefore, can be accelerated, executed. So I don't have a problem there.
I have an issue in Semcon, which I don't know it will be a 1 quarter pain or is it a 1.5 quarter pain, right? So that's the only blip that I see. But given the fact that the pipeline is stronger now than it was a quarter or year-on-year. Second, the 6 deals that we have won that have gone into execution. And third, there are other deals in the pipeline that we are expecting to close or very close to closing. I do have confidence of retaining the guidance.
Now also, on Smart World, it's H1 to H2 business, H2 being much better than H1. So overall, that 20%-plus holds that we are at this stage.
Right. Sir, just a quick follow-up on that. Given that you have seen scaling up in these 6 deals in the last few months, is the confidence also kind of baking in a fairly strong second quarter, which gives you enough buffer for any potential trouble down the line in the second half?
Yes, Mukul. See, I'll tell you what we did. So after I went back in April, we have spent time talking to the clients, working with them through their decision-making process. One reality is where a deal would take 2 signatures it now takes 4 signatures, right? That's the reality. So how do we get that done quickly? Is the whole thing that we continue to work on. Now there was -- that's one.
Second, I'm betting on the fact that some of the deals that we are sitting on in Semcon or in consumer electronics will close faster than what I saw in Q1. And second -- thirdly, I do expect H2 to be better than H1 as we stand today. So working on all 3, in fact, I should confirm to you that net headcount will at least go up by 750 people in Q2 as compared to Q1. And we're already on our way to making those offers, people have been joining us, et cetera. so fairly comfortable and confident.
But we'll keep you updated, Mukul. I mean we've always been very transparent, very direct, and we thank you all for your confidence in us. So we continue to work on this and come back to you. We, in fact, hosted our client Advisory Council first time ever in our history. So about 15 clients controlling about -- close to about, like I said, a huge amount of revenue and market cap came together, spend some time with us. So we've got some trends from them. We've got some why don't you approve, what you don't approve also. So fairly good conversations, candid conversations, I'm fairly comfortable.
The next question is from the line of Sulabh Govila from Morgan Stanley.
My first question is on SWC. So on the numbers that is reported, which is 1Q F '23 and the 4Q F'23 I just wanted to understand that in this business, is there some variability involved in other expenses because they don't change much as a percentage of revenues?
Sulabh, this is Rajeev here. I'll take that question. So like I said, we've had to restate financials of the previous quarter to include SWC. So what you see in terms of other expenses is more like-to-like. And hence, there is nothing in addition we don't expect that the other expenses will increase or decrease materially. This pretty much reflects what is the reality of that business.
Sure. Understood. Maybe I'll take that offline. My second question is with respect to Plant Engineering business. So in the past 2, 3 quarters, we've seen some volatility in this business. We saw a decline in Q3, and then we saw a sharp bounce in 4Q, and we thought that the vertical has sort of recovered. Now the issues could be different in different quarters. But just trying to understand that what's giving us the confidence that the volatility, which we have seen in the past 2, 3 quarters will not recur in the coming quarters?
Sure. So if I look back at our Plant Engineering and I'm scrolling through data as I look at it for you, right. If if I look back at FY '22 or I look back at -- so right, if I go back to FY '22, and I see there was a constant increase quarter-on-quarter, every quarter, right? I go to quarter, I come to FY '23, and yes, there was a one-off decrease in quarter 3 but it continued to the upward trajectory, right?
And if I look at now quarter 1, we've had a blip, and we are sharing with you that some of these decisions -- for design decisions from the customers were delayed and it was not a budget issue. And therefore, under the backlog that we have got, the new orders that we have signed with the rigor that we have put in, I do believe that this [indiscernible] has passed.
Additionally, we are winning new digital factory and digital plant deals from customers in Plant Engineering that give us the confidence that we will see upward from here. In fact, now we are adding some resources that we can immediately hands on [ debt ] to make sure we're able to deliver. I also want to share that we have established now outpost in the U.S. for clients in Plant Engineering, that should help us in terms of engaging a lot more local talent. And the same will be happening in Europe. So we're fairly comfortable with it.
Sulabh, this is Rajeev again. You may have seen, of course, our [indiscernible] financials and try to compare the other expenses for any variability. To clarify, in this quarter, there are lower subcontracting costs and of course, a lower legal cost as well and nothing to do in relation to the Smart World business. Again, I just wanted to add because it's more like-to-like. I hope that clarifies all of your points on other expenses.
We have the next question from the line of Nitin Padmanabhan from Investec.
So when you look at the SWC business on the numbers that have reported, is the Q4 to Q1 dip the usual sort of seasonality in the business. And typically, if you could give some color in terms of typically what's the sort of the mix between first half and second half, how does it normally look?
So Rajeev, do you want to take that?
Sure. So Nitin, to your point, yes, this business is seasonal in nature. Typically, you will see H2 to be better off compared to H1. In terms of mix of business, you will see H2 to be at 60% versus H1 at 40% . So that's the reason we say that you tend to see H2 to be better off compared to H1.
Sure. And the variability from Q4 to Q1 that we have seen this time, is there a common feature of this business? Or do you think as we -- you spoke about, I think, one $30 million and three $10 million deals, as these deals keep adding up, that should sort of come off? How should we think about it at least as we go over the next 12 to 24 months?
So 2 points here. One, the point that I made that H2 is better than H1, and hence, you're seeing that Q4had better off revenue for SWC when compared to Q1. That's one. Second, when you compare Q1 of this year to Q1 of last year, in fact, we have done better off, right? So I hope that clarifies your point, Nitin.
The next question is from the line of Vimal Gohil from Alchemy Capital Management.
My question on SWC has been answered. Second question is on the industry per se. We have seen a lot of influx or a lot of news on lot of global companies setting up GCCs in India. And there has been news of a lot of aggressive hiring from them. How do we participate in this particular trend? Do we partner with them in their -- in this entire process of setting up their centers? Or do we look at these GCCs as our potential competition?
Sure. Vimal, thank you. So I'm part of the -- I just joined the NASSCOM Executive Council and only engineering R&D -- ER&D company member on the council other than gentlemen who's been co-opted from the ER&D council, right? So on the -- general council. So here, GCCs are an opportunity. If I look back and I look at the number of STEM graduates coming out of colleges in India, it's huge. It's more than 2 million people coming out in the -- per year in STEM, right? So they will find their ways to global competency center.
Now here's the good news in the silver lining. All the business that was potentially going up to a Ukraine or going up to Russia or going up to other parts of Eastern Europe has started getting diverted to India. A significant part of what was being given to China has been given to India. So if I look at it, the India pie itself has grown, right?
Second, if you would have talked to me 15 years ago, I would have said they are all competition. But I've learned,, the industry has learned, everybody has learned to coexist. In our customer premises, often there are discussions that happen about green badge and red badge or blue badge and red badge. Blue badge or green badge is their own employees, while red badges are people like us. They continue to look at what is it that can be, is core. We will keep whatever that could be contextual or that was core yesterday or could be given to us.
Additionally, GCCs focused on only their area of focus. So an automotive will focus on automotive. Telecom will focus on telecom. But they need cross-domain vertical expertise, they will not be able to deliver to that. For example, for -- I've been executing a number of connectivity projects for a lot of my auto customers who have their centers here, but I work with their teams in Europe, U.S., and they give me work directly, right? So that cross vertical domain expertise that we bring is not there with GCCs because they are single cylinder focused.
Lastly, the fact to be considered is that the world is moving to a lot more fixed price consolidated work kind of model. So therefore, we are the gainers there because they look at us and they actually let us deliver on an envelope basis rather than worrying about attrition and this and that. So I do welcome GCCs being here. We've been hiring from them. They've been hiring from us. It's a 2-way street. I do welcome the whole ecosystem being built up in India because overall, it adds to the fundamentals of the ER&D business and companies like us.
Amit, just a follow-up to that. How do you look at our cost structure versus the GCC cost structure? Is there a significant differential for our potential customers to say that the Indian ER&D service providers like us still have a better edge in terms of executing projects at a much better cost efficiency versus them doing within their captive or within -- or in-house?
Vimal, actually -- 2 things here actually. Number one is that GCCs, their cost structures are higher than us. That's clearly the case. They work on a cost center model, and we work on a profit center model, right, number one. Number two is because they are single cylinder -- they are single cylinder, they can't offer a lot of career growth or job enrichment to their software engineers or hardware engineers, et cetera, because they have to do the same work. In our case, we are able to provide that.
So I will not say we pay less, our cost structures are lower. But if I look at the total package of what we would be able to offer to our engineers, which is career growth, which is job enrichment, which is job rotation, plus customer interactions is something that we are able to provide that are not there in an in-house setup. So we -- I do believe that's there. But having said that, I again will reiterate. Together, we are creating an ecosystem that is good for India and good for sourcing from India.
The next question is from the line of Ravi Menon from Macquarie.
I just want to check on the growth in North America. It looks like we've seen some good revenue addition there. It's almost as good as what we saw last year. So what were the things that came in well this quarter...
Ravi, Rajeev here. I'll take this one. So it's more relative in terms of when you look at the growth for North America, and that's probably because we have restated the Smart World financials in Q1 as well as in Q4. And because Smart World is a cyclical business, you're seeing, of course, Q1 to be lower relative to Q4. And consequently, the proportion of business that you see shows a growth in North America when compared, right? So it's just relative. That's what I would say, Ravi.
And Amit, [Foreign Language] semiconductor, we are starting to see the [ decision ] cycle get better. So I want to check, but you also said that you don't know if it's probably one quarter pain or more than one quarter. So could you just explain that?
So I'll answer it 2 ways, right? One, on Semcon, I will share but I will then request my colleague, Alind, to add to what he's seeing in the market as well. So one, from a Semcon standpoint, there is a little bit of pain that's there in terms of they are shifting, consumer electronic devices are not being sold so much. So the demand is not there. They are all trying to switch to data center chips and AI chips today, all of a sudden, AI is the only word they use, everybody uses, right, including all of us. So therefore, there's a shift happening, in fact, and we see that spend coming.
Now will that come in a quarter, will it be 2 quarters? To be seen. I would request Alind to add on the color of the market as he sees today in North America.
So we have worked with more than one Semcon companies. So totally, if you look at about 4 or 5 Semcon companies. And if you look at the trajectory, which is there broadly driven by AI and then by default, the requirements at the data center for them to be up and running, we see that continuing. There are chips which are going to come in markets which are going to change fundamentally the way compute is going to happen. They are lucky that we are involved in quite a few of them. We do believe that in more of a quarter's time, we will see the growth trajectory come back up again, and we are confident of the progress there.
And are you using those downturns or semiconductor to deepen your capabilities in any areas, any white spaces maybe in the analog side or anything else where you think you lack?
So from a capability standpoint, it's Amit again, I do believe that we have capability across the spectrum, and we are working towards -- in fact, we've executed projects now on 7 nanometer as well. And we continue to work on different areas is that tying up with this global ecosystem as well. So we're fairly -- so just have to start some of these have to get signed off and start.
The next question is from the line of Sandeep Shah from Equirus Securities.
My first question is, last time in the Q2 earnings call, we said that more than 20% constant currency growth, the organic growth would be more than 10%. Whether that assumption changed? Or do you expect that growth could be slightly higher in the case of SWC calculation because the first quarter run rate for SWC or Y-o-Y has been [indiscernible]. So whether the 10% organic growth guidance more than 10% [indiscernible]?
So Sandeep, thank you. So the way we look at it is, number one, as you've seen in the numbers, we have reported Smart World mostly in the Semcon -- in the Telecom segment, right? Because operationally, we have integrated. I mean there are leaders from our Smart World -- L&T Smart World family that today are responsible for one of our -- 2 of our centers in India, execution centers. There are leaders, senior leaders from our side from the LTTS heritage side, that are responsible for the next-gen comms business, which has been integrated between both of them.
So we do commit to that 20% plus CC and we are watchful that we don't sign lower-margin deals, and that has been a conscious effort. And shall I say, cadence developed in the last 3 months in the company to ensure that. So I'm confirming 20% plus CC, H2 better than H1. And broadly, the split will be what we have told you.
Okay. So organic growth will also be more than 10%?
At this stage, 20% plus, yes, organic 10% plus, and that's where we are. But you should know that both teams have merged and integrated.
The next question is from the line of Bhavik Mehta from JPMorgan.
Just one question from my side. Just going back to the guidance, how should we look at the mix of growth within your portfolio? Do you expect all verticals to show strong book going forward? Or do you think that some verticals will do better than the other than hence they have not been [ lifting ] to offset weakness in maybe some other verticals. Just a color on that would be helpful.
Sure. In fact, I'm going to answer this 2 ways, if I may. One, I'm going to give you an industry view and then I'm going to ask one of my colleagues here, Abhishek, to actually talk to you about what we are doing in software-defined vehicles in AI because that's a huge path forward for us. So from an industry standpoint and growth standpoint, I do believe that transportation will continue the strong growth we've had because of the differentiated story of EV that we have created and the early investments in SDV that we are doing.
When it comes to industrial products, given the fact that we are seeing deal closures happening for us in digital as well as software platforms and people discussing AI in a very interesting manner for shop floor applications for us. We believe that growth for that will continue, not maybe at the same rate of transportation, but better than what we have done this quarter, we do see the growth continuing.
Plant, we do see the growth coming back next quarter and then continuing from there. Our backlog is fairly strong, and people continue to do design -- call us for designing of newer plants, expansion, et cetera. And with this outpost we are creating in the U.S., which has already been staffed, we are very confident that it will grow.
Now the 2 areas that I am a little conservative about, one is hi-tech, even though next-gen comms will continue to grow given 5G cybersecurity, I don't know how long the pain in Semcon and consumer electronics will continue. I do believe it's a quarter off, but we don't know. So that's something that I'm a little concerned about at this stage and cautious is the right word.
And finally, in Medical. Now we've had some good traction, some very nice dialogue around connected platforms, [ Quanta ], AI. But it's, again, how much do they want to give and do in the same quarter is to be seen. So that's where we broadly see it. I would invite my colleague Abhishek, to talk a little bit about investments we are making in AI and SDV, Abhishek, because that will help us in terms of growth as we move forward.
Yes. Thanks, Amit. So clearly, as our customers, Amit earlier mentioned about the Advisory Council. We are clearly seeing SDV, AI in the third leg -- like cybersecurity as the 3 legs where we see a lot of investments coming in. The good news is, from a timing perspective, the SWC acquisition that we made the whole NGC, next-gen communication skills that comes through that and the cybersecurity area are a direct segment into the SDV space.
And why I say that is because if you look at the software kind of vehicle architecture, a lot of it is a high compute architecture. And what that means is the skills that come from 5G Internet and areas are directly relevant for the way the vehicles are going to be designed. And interestingly, cybersecurity is a sweet spot for us because vehicle stock is something that need automotive skills and deep cybersecurity skills.
And this acquisition gives us both in a very nice way. And that is probably going to be one of the key differentiators as we get into the space. I mean as we speak, we're already doing at least 4 or 5 SDV programs for most of the customers actually in Europe right now, and we see a decent pipeline on the SDV front.
Coming to AI, our sweet spot there is going to be manufacturing Automotive and Medical. And here also, I think the domain expertise that we bring to the table, it's very clear that AI is not just going to be about technology, it's about domain as well. And our deep domain expertise in these areas definitely helps us take some good strides ahead. So we will be, of course, focusing on these 3 segments. But apart from that, the investments you have done over the last couple of years, we have taken some AI-specific solutions as well. That should help us.
The work we do with hyperscalers, semicon partners. I think this is a great recipe for different domain segments coming together to provide domain-specific AI solutions to customers. In both of these areas, we are investing big time in internal trainings and the partnerships with various entities in the ecosystem itself. And you will definitely hear more from us in the coming quarters on these areas.
The next question is from the line of Rohan Nagpal from Helios Capital Management, India.
One quick question on your India business. notice that there is a significant reduction in the -- there's about a $10 million reduction in your India business. Is it just on account of SWC seasonality or what is going on here?
Yes, that's largely SWC. I don't see it another way.
Okay. And then one of the things you mentioned was your the deals that you've signed have already gone into execution on [indiscernible]? Could you provide some color on the time line of deals in terms of what is the typical time line from signing to execution? And some color on the pipeline that you're currently seeing?
Sure. So when it comes to the deals that we signed, the $50 million deal actually was something that we had been pursuing for more than about 4 months. And it took time, and we actually have been -- we were waiting, we were investing and waiting, right? And it took a lot of decision, approval, et cetera, to go through with that, but it's already moved to execution and we've gone live.
Now the other 5 deals that are there, the $10 million-plus deals, they have all gone into execution. I want to confirm towards the last week of June, right, and ramping up as we speak and should get to steady state sometime in this quarter. So we are continuing to work on those.
Now as an example, one of the hi-tech deals that we signed, $10 million plus, not the $50 million plus, that took us 3 months and took us multiple meetings to sign. So what we have done as a team is that we've actually improved our funnel. We've increased the number of deals that we are chasing. We have hired more salespeople. They are on the ground and leaders. And I believe that, therefore, we are comfortable with the fact that we'll have to put in more effort to be able to do this.
The moment the deal gets signed, right, the ramp up is fairly immediate. So these are not long-term, that they'll take 6 months, 9 months to do. Ramp up is immediate. And therefore, we've beefed up our recruitment engine as well as well as Abhi is very passionate about the Global Engineering Academy is also running full time to make sure that we are able to repurpose people, turn them around, et cetera.
In fact, in one of the particular deals that we signed, which was not a $10 million deal because it's a shorter period. We have -- actually, we had invested in hiring and holding about 100-plus resources for some period, and they have gone live now in billing. So some of that training upfront execution is required. And we have more deals on the back of these that we are working on. And we will continue to update you as we close them.
The next question is from the line of Mihir Manohar from Carnelian Asset Advisors.
Sir, largely wanted to understand on the synergy, which is the SWS acquisition. So which are the internal KPIs that we are tracking? And how are we progressing on those KPIs -- that internal KPIs that will be really helpful. My second question was on the deal pipeline. I mean, you mentioned the deal pipeline is quite strong, has improved materially. So if you can quantify what is the quarter-on-quarter or a Y-o-Y improvement in deal pipeline that will be really helpful.
And specifically, which are the areas where you are seeing good deal pipeline in that context? And my last question was just on the external environment. I mean you are appearing to be more optimistic on the external environment when compared to your earlier commentaries. So if you can throw some more color, I mean is the external environment very just behind us? And how do you see the external environment per se? Yes. So those were the questions.
So, this is Rajeev here. Let me take the part on the synergies from SWC acquisition. So we've, of course, briefed this earlier as well, 3 areas that we are working towards. The integration did conclude as of April 1, 2023. So both the companies are now together. And we are reporting SWC under our Hitech, Telecom & Hitech segment.
In terms of synergies, 3 areas: one, internationalization of revenue. Amit did talk about that we've beefed up our sales leaders in U.S., in Europe, in Middle East. And clearly, the idea is to build pipeline. Some of that progress indeed has happened. The second is in terms of improving the EBIT margin. SWC has been a lower margin business, more so because most of the revenue has been India-based, right?
And of course, taking it international will help us getting comparable margins much like our heritage business. And third is in terms of improving DSO. DSO because the deals that we're executing in India are deals that are like -- are with the government entities. So as we do deals with global customers, we will see DSO terms closer to what we have in heritage LTTS business. So these are the 3 areas. We'll continue to update. We did mention that our aspiration in terms of the combined EBIT margin is 17% levels.
In terms of DSO, the range that we maintained combined is between 115 to 117 and we will continue to update on that. Of course, Amit did reiterate in terms of the growth aspiration, which is 20% plus, including the SWC acquisition.
Amit, do you want to take the second one?
So pipeline -- where and its external environment. If I look at external environment, the fact that we are in 5 segments is what gives us confidence when one goes down, another goes up, it is a portfolio. That's point number one. Number two, being an end-to-end engineering provider from mechanical to hydraulic electrical to Plant Engineering to digital skills. And in that across the track from VLSI to hardware to software, from -- all that gives us the confidence that we are fairly in the right place.
Now having said that, I'll tell you where the problem is. The problem is that some of these deals that we are talking about, and we have chunkier deals like the $50 million that we closed in our pipeline. So the number of $50 million-plus deals, the $25 million plus deals for us at this stage is higher than it was last quarter or it was same quarter last year. And that is driven by the fact that some of the investments we made in EV, some of the investments we made in digital manufacturing, some of the investments that we made in VLSI capabilities is coming to bear and digital skills.
Now, so that's what gives us the confidence. Now the issue is, instead of 2 signatures, stuff is taking 4 signatures. The reality, I will not shy away. I will acknowledge it. I mean I should tell you the number of miles that Alind or even Rajeev, Abhishek, our HR head [ lack ], is putting on in the last 2 quarters is much higher than they would have traveled over the last year because clients need that reconfirmation from the entire management team and not just 1 or 2 people, right, A.
B, in Semcon and consumer electronics, like I said, there's a little bit of pain left. I cannot quantify for you how long, but that's the reality. Third, any project that doesn't have a profit pool or a revenue pool associated and is being done for the love of mankind or womankind is getting delayed. So these are 3 realities that are there. But having said that, we continue to be agile. We continue to look at various areas like I requested Abhi to talk about today on SDV and AI. We are thinking ahead of the market. And I believe that these investments will carry us forward.
The next question is from the line of Aniket Kulkarni from BMSPL Capital.
Yes. So just a small question from my side. It is regarding the ROE number which you are doing right now. So are we comfortable at these numbers? Or is there any specific bracket where we want to be going forward?
Aniket, this is Rajeev here. So of course, you may be looking at ROE at a quarter level, but we certainly try to aspire for an annualized number. At this stage, we are comfortable in terms of the ROE, where we are or rather where we ended for FY '23. The aspiration certainly is to improve at the back of 18% by Q1 FY '24 -- sorry, Q1 FY '26. So we believe over the period of these next 5, 6 quarters, we should be able to improve the ROE. But at this stage, we are comfortable with where it is.
Ladies and gentlemen, we will take that as a last question for today. I would now like to hand the conference over to Mr. Pinku Pappan for closing comments. Over to you, sir.
Thank you all for joining us on the call today. We hope we were able to answer most of your queries and happy to do follow-ups with you through the quarter. With that, we're signing off from this quarter's call, and have a good day and wish you all a great day ahead. Thanks.
Thank you. On behalf of L&T Technology Services Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.