L&T Technology Services Ltd

NSE:LTTS

Earnings Call Transcript 2019-Q2

[Operator]

Good day, and welcome to the L&T Technology Services Q2 FY '19 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.

[Pinku Pappan, Head of Investor Relations]

Hello, everyone, and welcome to the second quarter FY '19 earnings conference call of LTTS. I am Pinku from the Investor Relations team. I hope you have had a chance to go through our investor release and financial statements. If not, you can download them from our website Lnttechservices.com. On today's call you will hear from Keshab Panda, CEO; Amit Chadha, President, Sales & Business Development; Bhupendra Bhate, COO; and P. Ramakrishnan, CFO.We will begin with Dr. Panda providing an overview of the results and a commentary on the business outlook. Amit will provide an update on the large deals and geo-wise strengths. PR will walk you through the financial statements. We will then open the line for questions.Let me now turn over the call to Dr. Panda.

[Keshab Panda, CEO, MD & Whole Time Director]

Thank you, Pinku. And thank you all for joining us on the call today, and good evening to all of you. First, let me walk you through the highlights of Q2. We had a strong Q2 with 5.5% quarter-on-quarter revenue growth in constant currency. Growth was broad-based and all 5 of our industry segment grew at double digit on a year-to-year basis. With industrial products also turning around this quarter, we won 5 multimillion deals across 3 of our segment. Profits, we executed well on the operational front with EBITDA margin improving to 18.1% in quarter 2 despite wage hike this quarter.Our net profit in Q2 is up by 56% year-on-year driven by higher EBITDA margin and other income. Let me now talk about our 5 industry verticals. Number one is transportation. We had a strong growth of 8.5% quarter-on-quarter in transportation, which is the strongest quarter-on-quarter growth we have witnessed the last 3 years. I'm encouraged to see the growth being driven by equal majors, by each of our 3 subsegment like auto, truck and off-highway and aero.Auto and truck and off-highway. In auto we have seen a trend of higher spend towards improving customer experience using new technologies, complying with the new regulation and adapting to our supply chain. Whereas in truck and off-highway we are seeing customers mirroring the technology you will see in auto segment and around the autonomous and electrification. So there are more demand in embedded and software areas against hydraulic, what used to be hydraulic and mechanical earlier.Some of the deals we own in Q2 are for off-highway. Off-highway customers, we are helping them with value engineering to make the existing products more competitive in new marketplace and also high-end acoustic engineering to reduce noise level for a generator, say this is again we call as off-highway's segment. For American Q1 we are developing active sound modules to enhance user experience in this segment.So you see adaptation of new technology is opening up a lot of opportunities for us in this quarter and is happening in the previous quarter as well. And the reality is that there is shortage of talent, especially in the leading-edge technologies and we see tremendous demand still to be tapped given our positioning and the broad client base we have. So despite the new flow around trade tariff, demand continues to be robust and we are very optimistic on our growth for coming quarters as well.In aero. In aero we had a strong quarter laid by ramp up for the large deals we own earlier which we have communicated earlier in my past call. We are finding good traction in our strength areas like air traffic management and avionics. This is a growth area again. We are also in conversation with customers in digital engineering as the market is opening up in the aftermarket segment and manufacturing engineering space -- space. This quarter we started work in newer areas like aero engine work and airborne optronics.In industrial product -- moving on to industrial product. In industrial product we had an issue with growth in FY '18. And during the Analyst Day in August we committed to increase the growth to double digit which is happening now. Happy to report that in Q2, industrial product grew by 6% quarter-on-quarter and touched 11% in year-on-year growth. We have seen customers trying to improve products' serviceability and customer experience by infusing new technology, digital into physical. At the same time they are also focusing investment into new edge technology without increasing the staff stress. And this availability of those staff is always a issue globally. The long-term relationship we have with our customer put us in a right position to fulfill both these requirements.In Q2 we won a deal to assist a customer in their digital marketing and sales using our engineering expertise to provide them a competitive edge. We also won large deals in Europe which we announced in September, and Amit will talk more about this later on.We are seeing good traction in IDM, one of the platform we -- this is a smart campus management platform with IoT-enabled devices and reengineered to reduce cost of devices. So this is more and more we see traction there. This is, I talked about last time, it is available in Microsoft Azure platform. Overall, our pipeline in industrial product has improved from 1 year back and looking good. And we believe we will be able to sustain the double-digit growth trajectory this year.Telecom and hi-tech. Coming to telecom and hi-tech, Q2 was a soft quarter for us in a couple of large programs, in the semiconductor space until steady state accompanied by a fifth [indiscernible] from outside to offshore. Our competitive positioning continues to improve. We delivered an end-to-end turnkey chip design project with next generation features like facial recognition, artificial intelligence and so on. Such chips have multiple application across industry. And our success in this area what we delivered recently will help us win more such end-to-end chip design projects. This was helpful by acquiring the Esencia what we did and recent M&A we did in semiconductor segment.Our recent acquisition of Graphene will [indiscernible] design, VLSI chip design and embedded software and will also improve positioning of semiconductor space globally. In the media side we own large deals with European telecom and networking company where we will be working on audio, video completion software to develop a video processing platform.A notable wave in Q2 have been to start of engagement with a large Asian OEM in the field of consumer electronics. LTTS will be providing the complete software support for firmware all the way to Android programming. So on the whole, the pipeline in telecom & hi-tech is robust and we will see more top-line and margin improvement in Q3.Moving on to process industry. Plant engineering had a 10% growth quarter-on-quarter in Q2 on the back of 14% sequential growth in Q1. So plant engineering again FY '18, mid of FY '18 onwards is coming back and the growth as well, both top-line and bottom-line growth. This growth has been on track. On the back of large bills that have ramped up as per schedule and good demand across chemical, O&G and CPG industry.In Q2 we owned and EPCM project with an European chemical major. We are seeing a lot of planned investment happening in Europe now which we're seeing the more traction coming there and we are looking to capitalize on the existing client relations as well as few promising new client additional. We are seeing good opportunities in the pipeline. And we expect the growth to continue in plant engineering in the coming quarters.Now moving on to medical. In medical devices we were able to pick the momentum up in Q2 with 6.5% quarter-on-quarter growth and year-on-year I think 18% growth year-on-year. Demand continues in product design and value engineering type of work with customers looking to engage with us on making devices IoT compliant and enable digital patient healthcare and so on. Some of the deals we own in this quarter with a Japanese client to reengineer the products, we are starting with 40 products in the surgical side which will expand to other areas going forward.With a U.S. manufacturer we are working on reliability, support of devices in the optical side. So we remain focused on accelerating growth in this segment in the coming quarters as well.Platform and solution update. On the platform and solution side in Q2 we have seen progress with the sale of our NB-IoT product stack called nBon, NB-own, [ i-beam ] and [ MK Solution ]. They are 3 platform we have been able to sell in quarter 2. The solution lever is our [ nBon ] start, the nBon is basically NB-IoT which I talked about last time, finding application in smart meters, smart lighting and fleet tracking system. These structures of the innovation with the company is helping drive more effort to solutions and platform.Let me conclude by providing outlook on the business going forward. Overall, we continue to see our customers investing in new technology areas to transform their business and stay competitive. Our strong positioning across the industry segment along with the investment we are making into focus area we identified such as edge computing, smart manufacturing, IoT, electric and autonomous vehicle is helping us gain market share and grow ahead of the industry.The focus is reflecting in our revenue from digital and leading edge technologies, which has increased to 33% in quarter 2 and 66% year-on-year. The industry recognition we secured this quarter that show us the leadership position in southwest by Everest, [ ISG ], HfS, further validates our confidence in being well positioned to partner with our customers.We had an issue with growth in plant engineering, industrial product, both of these were laggard in FY '18, that's behind us now and looks very promising and positive moving forward. The step we have taken in first four quarters has helped us to fix it with plant engineering rebounding with mid-FY '18 and industrial product touching double-digit growth this quarter onwards.Coming to guidance, the pipeline and demand outlook at our top customer is healthy. And we now expect to grow organically by at least 21% in FY '19. We remain committed to the roadmaps and the competency building for each of our verticals and will help us reach the target we have set. One of the initiatives we have on the talent side we have started now is hiring fresh engineers in U.S. which we started last quarter onwards, they are already engaged with our existing customers which we will expand shortly in Germany and Israel as well.The first time we hired young engineers in Israel and that process will continue. This we feel is necessary step towards becoming a more global company with global talent, hiring global engineers, hiring the right solution for our customer.I now hand over to Amit.

[Amit Pal Singh Chadha]

Good evening. And thank you, Pinku and Dr. Panda. I will be covering 3 areas, large deal wins, deal pipeline and T30 outlook, geo outlook. From a large deal standpoint, we continue to see traction and closures driven largely by 2 streams, proactive proposals and RFPs for dedicated development centers for sustenance engineering and digital services.Let me briefly highlight 3 large deal wins in this quarter to bring out the differentiated work that we do. One is the 40 million deal we won with the leading products company. We will be enhancing user interaction and experience on a wide range of office and personal products that are used globally by consumers. We have ramped up a team with UI UX and [ ICM ] capabilities globally as well as India. We will be leveraging a platform that we have built internally for this function. The work has already commenced and will show positive impact in quarter 3.Second, with the specialty chemicals company we have won a plant engineering job, design job in Germany where we will leverage our unique onsite offshore design centers to deliver over the next 18 months. We won this job because of our differentiated offerings in lean design principles which basically reduces wastage at construction and buildup. The work again has already started and will continue to show positive impact in the coming quarters.Third, in the auto sector in Europe for electric vehicle battery operations and charging, we've been awarded a software development and upgrade engagement. We are working in an offshore development center model here and are leveraging our strength in power electronics. And again, this work has already ramped up and will continue to deliver.Moving on to the second part, which is deal pipeline and T30 outlook. We continue to have traction and are working to close some deals in the hi-tech sector in specific with a U.S. equipment major and another ODC proposal with a media majors. We are also seeing continued traction in industrial products where we are pursuing to close a global development and sustenance center with a electrical and automation major.In auto, aero, both, we have opportunities. We are pursuing in EV, electric vehicles, autonomous driving as well as avionics and signaling for aero. All of this in the software area which is a sweet spot for us. And we are hopeful to get closures in this quarter. We therefore continue to see a healthy deal pipeline.From a client pyramid standpoint, as Dr. Panda already talked about, we've increased revenue across most of our T30 accounts. Sequentially we have added 1 client into the $30 million-plus category, 2 additionally in the $10 million-plus category, 1 in the $5 million-plus category and added 5 in the $1 million-plus category. As you can see, growth and movement is broad-based across the pyramid.Finally, geo outlook. For the U.S. with the recent trade tariff announcements, we seen an enhanced opportunity for us to engage and deliver. In fact we are seeing that the industry is experiencing a bigger gap in the skill set as opposed to earlier. A clear trend here is engineering being done for planning phase or factory upgrades and relocations from China to other Asian countries as well as back to the U.S. As well as smart manufacturing for existing plants.We are also seeing volumes and discussions for new product launches, digitalization and 5G across all our sectors. In Europe, we see a healthy pipeline and demand for automotive, aerospace and industrial products. In ROW we clearly see plant engineering demand with MNCs, building more plants in India and Asia. Our strong focus on client intimacy and value creation coupled with the successes in large deal pursuits has helped us establish a sense of credibility amongst our clients which we are sure will help us going forward on our journey to our goal.I would now hand over to PR for comments.

[Parameswaran Ramakrishnan, Chief Financial Officer]

Thank you, Amit. And good evening to all who have joined this call. I hope you would have gone through our fact sheet and also our advertisement where we have shown the numbers. You have heard Dr. Panda talking about revenue numbers, so I would not like to repeat again. But just to start the conversation, our Q2 dollar, reported dollar revenue was at $177.2 million as compared to Q1 at $168.9 million, showing a growth of around 4.9% sequentially, sequential revenue. And on constant currency terms, it's around 5.5%.Now, coming to EBITDA. Our EBITDA for the quarter is at 18.1% as compared to the previous quarter at 17%. So there is an increase of around 1.1% in the -- between the 2 quarters. The breakup or the bridge on this increase of 1.1% I would like to give a high level summary. One is, exchange rate has definitely helped us to improve the EBITDA of around 1.5%. This was completely offset by 1.5% impact due to the wage hike which we also communicated when we gave our Q1 earnings forecast. So we had a major part of the wage hike happening in Q2. That impacted our numbers by 1.5%.Then we had a saving of 0.5%, because in Q1 we took the visa charge, so that was hardly there in Q2. So that gave us an impact of plus 0.4%. And then, because of operational efficiency, if you see in the fact sheet, you would have seen our utilization numbers at 80-odd percent. So that has given us a clear 0.75% to 0.8% improvement followed by a revenue mix. Our onsite offshore revenue mix today for Q2 is what we achieve -- what believe is an optimal 48%, 52%. So that has given us further improvement in EBITDA of 0.4%.We had IP led revenues of around $600,000 during this quarter, that also gave us an impact of 0.4%. So all these positives was partially negated by a increase in subcontracting expenses because of the nature of engagements which happened or which went into invoicing during Q2. That impacted subcontracting expenses for the quarter was higher and that is reflected around 1% adverse on the EBITDA.So this is how our EBITDA movement from 17% to 18% has been explained. Coming to other income, last quarter our other income was INR 978 million to which we had clearly stated that there was a onetime nonrecurring other income of INR 786 million arising of a particular transaction with a every leading client.In the current quarter we have roughly around INR 152 million arising out of foreign exchange differences. Actually, the foreign exchange is a net of hedge cash flows along with translation and transaction differences. Others largely comprise accrual of our export licenses for the quarter.So coming to depreciation and amortization. We have reported a depreciation, amortization charge of INR 270 million, just want to say that it has a onetime obsolescence charge of almost INR 50 million on account of write-offs on old assets.In terms of income tax rate. Our income tax rate continues to be in the range of 25%, 26%. And I think going forward that's how it's most likely to -- we are going to end the year between -- around 26%. So net income is being reported at INR 1,910 million as against Q1 reported of INR 1,975 million. Just to reiterate again, the Q1 net income had that onetime recurring -- onetime nonrecurring other income of INR 786 million. Just to give a summary of our segments. All the segments have shown growth barring for telecom hi-tech due to some marginal, the growth as compared to the previous quarter to which Dr. Panda did explain that there was a shift of one or two segments shifting from onsite to offshore.And when you shift from onsite to offshore also had an impact in the margin because of there was some transition cost which is onetime and we expect the margin for telecom hi-tech in subsequent quarters to improve from what it is today.Coming to operating margin segment wise. All the segments have shown an improvement in the 3 major segments which is transportation, transportation operating margin jumped from 12.8 to 16.3, industrial products from 23.5 to 25.6, process industry or plant engineering from 22.7 to 22.9, medical devices from 21.5 to 24.8, and the drop in telecom hi-tech from 15 to 30, so that summarizes our segment performance.Coming to the balance sheet. One is -- one -- I think the important point here is our DSO for the quarter has gone up. We reported at 86 as compared to the previous quarter's 79. We expect the rebound to happen. We will improve in the subsequent quarters. Otherwise, no major change from a balance sheet perspective.Our CapEx cash outflow for the quarter was INR 220 million as compared to INR 110 million for the previous quarter.So there are other metrics that's already there in the fact sheet. So I have tried to give an overall summary of the way the P&L has, and the margins have come during this quarter. Now I'm requesting Rayo to probably transfer this call for any queries on the performance. Thank you.

[Operator]

[Operator Instructions] We have the first question from the line of Pankaj Kapoor from JM Financial.

[Pankaj Kapoor]

My first question is on the execution at our environment in the U.S. especially. Are you seeing any impact of slow grant of H-1B visas or delays in renewals affecting your exclusion engine over there?

[Keshab Panda, CEO, MD & Whole Time Director]

Not really. But the only thing we are sure, the visa process takes longer than what it used to take before. The more paperwork is required today than what used to be in the past. So this is happening. But we have prepared ourselves well. This time in quarter 2 we had 40 young engineers from the engineering school in U.S., so they are all -- out of 40, 29 are already in the customer locations. So the young engineers, training them, as you know we have a center in Illinois, one in Iowa and one in, you know, California, the company we acquired in California. So these engineers when you hire form local engineering colleges, they are distributed in different locations and they've gone through training and immediately they are on the customer location. So I think this mitigation point of view, we have done that. So, so far any project got delayed not having visa, we have not had the situation yet, but I think we are preparing ourselves to make sure that if there is a delay we should have engineers who are ready to take up from a local center itself. So that, there's no issues so far.

[Pankaj Kapoor]

Got it. That's helpful, Dr. Panda. And just related to that, how should I then look at the margin picture panning out in the remaining part of the year given that the kind of expansion that we have seen and some of the headwinds which are now behind? What is your view in terms of reinvestment of the currency gain? And do you see the subcon expenses increase that we have seen? Is it something which can be a potential headwind even going forward? So net-net, I mean what kind of a margin outlook we should be looking at to end the year with? That's the question.

[Parameswaran Ramakrishnan, Chief Financial Officer]

Pankaj, it's P. Ramakrishnan. We have talked about some of the segmental margin, right? If you see industrial, medical, plant engineering, he talked about, it is somewhere around 25 already at this time. So the segment where we have lot more opportunity to improve margin and the telecom hi-tech he also talked about, we see the improvement plan and that's going to happen in coming quarters. And same thing to, you know, if you see transportation segment, transportation is 3 component, aerospace, auto and truck and off-highway. So a segment like truck and off-highway the margin is high. So I think we are looking at it more than anything else segmental improvement. And also if you see, engineering on the, skill-based engineering bottom side of the pyramid using automation on every segment. So every segment automation there are rooms for improving margin. So we believe that the current margin what we have and will continue to improve on that.

[Pankaj Kapoor]

Got it. So essentially the -- any currency benefit you -- do you plan to reinvest back in the business? Or you will let it flow into the reported margins?

[Parameswaran Ramakrishnan, Chief Financial Officer]

So I think business point of view, any time we look at it we did some M&A earlier. And the last time we talked we a CTO organization, we are focusing heavily on the platform development what we are doing it. If you're not focusing on new technology, new platform, we are going to -- you're not going to [indiscernible] the marketplace. So investment on -- we have a team of 200 people working fulltime on. Earlier that was not the case. The investment in new technology and what we are doing there that will continue. In addition to that, we did a M&A, we did 1 announced only a month ago. And we are always looking at one of the technology gap which takes long time to build and we acquired them. So this process will continue and whatever extra money we get. And then we have announced the dividend which is 35% to 40% is what we pay our net income on the dividend. And rest, I think we will make better use of that, using -- making sure that we do the right investment so that we get the right ROI.

[Pankaj Kapoor]

Got it. So just last question, PR. How should I look at the ForEx part of the hedge impact going forward? I know you don't share the hedge position but how should we look at the hedge gains or losses in the coming quarters?

[Parameswaran Ramakrishnan, Chief Financial Officer]

Okay, Pankaj, I think we closed September at $71, realized rate at $71.26 or so. And now we are seeing maybe around $73.5. So the fact is obviously the hedge book will be -- will not be -- will be further negative, but will be partly offset by transaction translation gains. But that all happens how the rupee, when we are doing the billing and when we are collecting. So we expect that in Q3 and Q4 this part of the book will be more or less, I would say, muted at this point of time.

[Operator]

The next question is from the line of Abhishek S. from Equirus Securities.

[Abhishek Shindadkar, IT Analyst]

Amit had a comment about traction, strong demand in automotive, especially in Europe. Now we have already heard 3 of the largest European automotives calling out for a profit warning in the last 2 weeks. So could you help us understand that where the demand is and how should we relate their commentary with what you're seeing on the ground?

[Amit Pal Singh Chadha]

Sure. So Abhishek, not just Europe but also the U.S. as well as in Japan there are clearly 3 areas that automotive companies and partially truck and off-highway companies are investing in. It is electric vehicle, hybrid vehicle technologies. So right from charging mechanisms to being able to elongate the life of the battery, et cetera. Second being autonomous in various levels, right. Most of them are already at level 0, level 1, they're operating it between level 1 and 2 trying to get up to level 3, right. So that is the second one. And they are working on model years, if I may, '21, '22, right. And the third is infotainment where most of the work is in security area because infotainment part was already completed. So now it's more to do with securing the car, et cetera, as well as the vehicle. So in all these 3 areas we are seeing enhanced interest, traction and continued interest not just from OEMs but also from Tier 1s, okay. Also in the U.S. area because with this deal that we have signed, the 40 million deal that we have talked about, the U.S. capabilities that we are getting are higher-end capabilities. And therefore we are seeing that additionally. Also -- that's one part, that is all future. Also they are all -- the part they're talking about, what you brought out about profit warnings, et cetera. So there, there is a constant demand for them to reduce their cost and therefore a shift towards moving some of the work that we are doing or they are doing with others to offshore. So therefore from our standpoint, we remain fairly certain that we see an upswing for ourselves.

[Abhishek Shindadkar, IT Analyst]

That is helpful. And the second, from a data perspective PR called out an increase in the subcon cost, and Dr. Panda talked about hiring of engineers in the U.S. So is that data point related? Or that is captured in the employee cost? Just wanted to understand.

[Parameswaran Ramakrishnan, Chief Financial Officer]

No, it's not related. It's absolutely what, I think what Dr. Panda talked about is to partially negate the effects of any visa related issues. We are consciously as a company we have started increasing intake of local fresh engineer trainees in other parts of the world, mainly U.S. That has -- I mean they will be taken as, obviously as employees they will be trained and put into local engagements. Whereas subcontract cost depending on the nature of job, Abhishek, as you are aware, besides services we do, do sometimes fixed price engagements that leads to lot of certification work and getting work done through other outside parties including sale -- purchase of components. So this -- sometime it can happen depending on how the job progresses. So just to answer to your question, the engineer intake and subcontract are different. Subcontract relates more towards material and component subcontracts. And in some engagements where a portion of the work gets subcontracted to a specialized agency because of instead of taking that kind of skill sets on roll we get it subcontracted to a specialized third-party. This is in alignment to fulfillment a larger job, so.

[Keshab Panda, CEO, MD & Whole Time Director]

Abhishek, I think if you -- the local hiring what we are doing today, look at all the customers, we see onsite engineers are there. And what is the cost and type of work they do, can we get it done by local engineers. We are not hiring experienced engineer who are expensive. If you hired these engineers, young engineers who come from college you would train them 3 months or 2 months or whatever time required, they do this job saying that 7 years or 8 years engineers going from India was doing it. So we move them out to a better engagement, use these young engineers to do that job on the [indiscernible]. That is how I think it is working out. That's a long-term plan again.

[Abhishek Shindadkar, IT Analyst]

Thanks. That's helpful. And just last from my side. Dr. Panda, the engine seems to be fighting expediently. Do you foresee or what could be the top 3 risk in the top of your mind which can impact our growth?

[Keshab Panda, CEO, MD & Whole Time Director]

Abhishek that you look at it every time we wake up and see what are the new technology coming in, do we know this? And number two, when you say, when you sized up the company now, we have 13,000-plus employees, are we as dynamic as what we were before. And third is availability of talent and training them on the new technology so that they are -- we continue to fire the engine. What we -- firing we did last quarter or last year is different from what firing we are going to do this quarter and this year on the new technology. And then, a risk point of view it is on us than anything else. And again, look at global scenario today, the global economy is doing well. But this visa what is coming there and you know what is happening with America and China, America and Russia and all those, we always observe that. We just watch that very carefully. Every particular time, every day morning wake up and make sure that all the industry team is aware of what is going on globally. They're going to impact us. We always watch it. And as we see at this time I don't see too many risk, that at this time as I see that. But I think this is always we -- we always look at it and see what could happen tomorrow.

[Operator]

The next question is from the line of Priyankar Sarkar from Motilal Oswal Asset Management.

[Priyankar Sarkar, Investment Analyst]

Sir, I just wanted to understand the new project that Amit mentioned. What are the duration of the projects? Especially in process engineering. Are they also short-term oriented or they tend to be more than a year? If you can kindly give us some granular view on the duration of these project please?

[Amit Pal Singh Chadha]

So for the deals that I spoke -- I mean, are you speaking, are you asking specific to the one that I spoke about? Are you generally asking the question?

[Priyankar Sarkar, Investment Analyst]

Well, I wanted a more granular one in terms of the deals which you won in auto compared to a industrial product or process engineering, that way, yes.

[Amit Pal Singh Chadha]

Sure. So the 40 million deal that we talked about, leading product company, that is an annuity deal that will go on and on, it's a 5-year deal. And I am assuming that it will continue on. These don't go away because once you get into design, support and -- you continue to deploy the user experience you continue. The second one was the specialty chemical company. That's an 18-month job that will finish but we have an [ MSA ] with this particular specialty chemical company. And we have already won another job with them at another site in Europe. So we've become like a partner to them and it becomes like a cycle. But that particular job that I talked about was 18 months. Third, the auto sector is an ongoing ODC, so we will be continuing to work on various parts of battery management for them and therefore is a long-term relationship. So therefore each of these is longer term. So the first one and the third one is longer -- is annuity long term. The second one is a project but there's multiple projects coming up from the same customer and therefore long-term relationships.

[Priyankar Sarkar, Investment Analyst]

Right. And, sir, if I can just squeeze in another one. In the specialty chemicals deal who were the other competitors because I understand there are not many other offshore players from India who compete in this space with us. So who were the global guys who were competing for this deal, please?

[Amit Pal Singh Chadha]

So for -- from an India standpoint you're absolutely right. We don't see competition coming in but we do have people internationally, people like Jacobs and others that are -- that we do see in the marketplace. And what's helped us here is our lean design principles which again we can get on a separate call and explain what lean design principles are, but they are actually helping them save X percentage while they get into construction. And that's how we won this job and that is particular to us and given our heritage.

[Operator]

Next question is from the line of Shyamal Dhruve from Phillip Capital.

[Shyamal Dhruve, Analyst]

My first question is on the decline in Europe. So is this decline is due to the muted performance in telecom or it is largely due to the cross-currency impact?

[Amit Pal Singh Chadha]

So the decline in Europe is because of, like Dr. Panda spoke about that particular project that has moved offshore. And we had shadow resources which -- just because of that one reason that you're seeing that decline there.

[Shyamal Dhruve, Analyst]

Okay. And my second question is on the aero side. So in your opening remarks you mentioned that you are seeing good deals flow from the aero side. And couple of our Indian competitors have very good presence in, on that particular segment. So how, like what type of differentiating services we are providing and hence getting large deals?

[Keshab Panda, CEO, MD & Whole Time Director]

I think there are 2 areas I talked about, in-flight entertainment and air traffic management, right. These are the areas we talked. And if you see last year, we announced the last deals we own and that is helping. Avionics is one area we are focusing on. So the areas which we believe, that area is not crowded and those area is where we focus, that is given as the growth. And some of the system design we do, right. If you do a system design for a electrical system for aircraft, for running the motor and many other things. So I think there have been not very many, many players in those areas. The traditional aerospace we talk about, those areas we don't pay attention to. And I think our initial strategy of getting into areas which is going to make a difference, I think that is making a difference now.

[Operator]

The next question is from the line of Ravi Menon from Elara Securities.

[Ravi Menon]

Really good growth considering the offshore shift that has happened. Well this is actually, I think we are at almost the lowest level that we have been offshore. So should we start now seeing little bit of move back onsite? And how should we think about margins from that standpoint?

[Keshab Panda, CEO, MD & Whole Time Director]

You're asking about more onsite and less offshore?

[Ravi Menon]

[Indiscernible].

[Keshab Panda, CEO, MD & Whole Time Director]

See listen, I think every time when you look at it our -- see, you got to look at it how you can do better, faster and cheaper for a customer. I think all the parameter has to be balanced. So what we're trying to do is we're -- our business model is onsite offshore, but the one point we are very clear is we are looking at the global workforce to make sure we balance it out well. In terms of -- in the political situation whatever is going on in Europe -- U.S. right now and that we protect that. So onsite to offshore we have improved now. I would see logical number is 47:53 is the right number at this time. But it could change from different segment to different segment like areas where we do more and new technology, areas where there is new technology involved it may require more onsite than later offshore. So we can't generalize that at this time.

[Ravi Menon]

It's great. And on utilization again, we're close to the highest level we are operating at. So yes, so what do you think will be the kind of talent intake and how you -- do you expect it to be more fresh hiring in which case should we see utilization continue at this level for a couple of quarters before it comes on?

[Keshab Panda, CEO, MD & Whole Time Director]

Yes. I think fresh hiring, we always look at it. We always believe that young engineers come in with new ideas, new technology and we should be able to create a platform, use them effectively which you have done well now, and more and more maybe one business unit does better than others business unit in terms of hiring locals. So as a company we are going to all the premier engineer schools and talking to people of what type of work we do and type of technology we are doing it. And we have hired lot of from premier engineering schools the engineers working on the new technology. That we'll continue to do. Entry level engineering hiring, if you do not do that I don't think we'll be able to get into new technologies. I think overall our hiring process from the campus will increase not only in India, we will do that globally.

[Ravi Menon]

And one last thing on the offshore shift, is -- could we read this through and correlate that with the decline in, slight decline in telecom & hi-tech?

[Parameswaran Ramakrishnan, Chief Financial Officer]

Can you repeat that question?

[Ravi Menon]

Sorry, so the slight revenue decline in telecom & hi-tech should we correlate that with the shift offshore?

[Parameswaran Ramakrishnan, Chief Financial Officer]

No, no, no.

[Ravi Menon]

Could we say that some of the large deals that we have worked on over there has shifted?

[Parameswaran Ramakrishnan, Chief Financial Officer]

No, not necessary, Ravi. So you can't put into conclusion that way.

[Operator]

The next question is from line of Madhu Babu from Prabhudas Lilladher.

[Madhu Babu, IT Analyst]

Sir, in terms of the guidance we said that 21% growth, so that will require only 1% CQGR over next 2 quarters. So is there any furlough impact or it's just conservatism kind of?

[Keshab Panda, CEO, MD & Whole Time Director]

Listen, I think last quarter I think same question came why you're 16% and why you are that. If you look at quarter 1 number we said we are doing more than this. We are making sure, 100% sure that we do. This time I said I'll tell you in quarter 2 what would be and quarter 2 we said 21% organic growth we are going to do. At least 21%. Quarter 3 when you come back and we'll talk more about, let's see how it goes. So I think we don't see, there is no risk involved that we are seeing something is going down, that's not the case. That is not what we see today.

[Madhu Babu, IT Analyst]

And sir, second question just on the semiconductor, apart from automotive that is one area where you're seeing a stronger acknowledged shifts. So how do we see the opportunity on the semiconductor especially from the 2, 3 large players over there?

[Keshab Panda, CEO, MD & Whole Time Director]

On semiconductor side, if you look at it we did one in California, one here now. And I did talk in my opening remarks, I talked about designing a chip, now we delivered. See, once you remember those, this is no more semiconductor, how do you use your domain knowledge in automotive, medical design a chip there but being a part of end-to-end design that is the game we are playing now. So the one we delivered now, which is end-to-end and we are -- 2 more are coming on different areas. Application of that chips in different areas that is what it's going to be. And we are not -- we'll take some time. Whatever we have done works now, acquiring these 2 companies. And the competency what we have we'll stabilize. And we don't intent to acquire a company in this segment immediately. So we look at the other areas we need to do that.

[Madhu Babu, IT Analyst]

Sir, and last one on the ADAS. I mean, ADAS itself we are reading report that lot of R&D budget for the automotive companies are going in the ADAS, that. So we last -- last quarter we said that the clients are asking us to send employees onsite for these ADAS kind of work. So how do we see the potential just on ADAS alone over the next 2, 3 years?

[Keshab Panda, CEO, MD & Whole Time Director]

Yes. I think we are bullish about it. We have built a [ CT ] organization which is now working on interface with the customers, some of the OEMs and Tier 1s we have we are working with them very closely. What I cannot give you right now is what is the opportunity size and what percentage it's going to grow. I can only tell you that our investment there and in terms of people, in terms of technology I think we are doing very well.

[Operator]

[Operator Instructions]. The next question is from the line of Arjun Ashar from Envision Capital.

[Arjun Ashar]

Would a tighter interest rate environment in the West, would it translate to some reluctance by our potential clients to invest in captives and work with firms like ours?

[Keshab Panda, CEO, MD & Whole Time Director]

[ Start seeing that ]. I think captives is always there. Engineering, when you look at it, captive is always there. We work with them very well and all our top customers if you see they have captive. But one thing, remember though, investment in lab and new technology what we have been able to do that and we continue to grow. The West when they look at in captive, and I don't think that their thinking is going to change when you do work in India or we do in the Eastern Europe or we do in Israel. And for them as far they're concerned it goes out of the geography, it goes out of geography. Whether you do captive or do in our center I don't think makes a difference. So we don't at least -- so far we have not seen any [indiscernible] coming from anybody saying that we'll focus more on captive and this, that has not happened so far.

[Parameswaran Ramakrishnan, Chief Financial Officer]

In fact, just to, Arjun just to add to what Dr. Panda just now communicated, also wanted to say that decision of overseas clients to invest in a captive is just not a capital investment decision or anything to do with a better rupee exchange rate or a change in U.S. interest also. I think it's a pure business decision which they do. And also we should tell you that most of our clients have a very active captive [ sector ] in India. So we do work with them, we do work with the clients directly.

[Arjun Ashar]

And sir, for Q2 and Q1 what would be the organic constant currency dollar revenue growth?

[Parameswaran Ramakrishnan, Chief Financial Officer]

5.5%, no...

[Keshab Panda, CEO, MD & Whole Time Director]

Q1 to Q2, 5.5 in constant currency. This is quarter-on-quarter, yes.

[Arjun Ashar]

Year-on-year do we have the figures?

[Keshab Panda, CEO, MD & Whole Time Director]

Yes, 29.5.

[Arjun Ashar]

But this is the -- this is just the organic?

[Keshab Panda, CEO, MD & Whole Time Director]

Yes. We don't -- inorganic we don't have -- a very minimum, very small number. There is no inorganic there in that.

[Arjun Ashar]

And then -- but then you have -- since you're guiding 21% for the whole year what would you attribute to surge in H1, 2, because that implies a softer H2?

[Keshab Panda, CEO, MD & Whole Time Director]

No. I did say that at least 21% organic we said, right. In last quarter I was saying at least 16% we do. Now we revised to at least 21% we do.

[Operator]

[Operator Instructions] The next question is from the line of Ankur Rudra from CLSA.

[Ankur Rudra, Research Analyst]

I just wanted to get a sense of, your business used to be a lot more project oriented earlier, but the last 1.5 years you seem to have signed a lot of deals which are probably a bit more of analytic component. Has there been a change in the mix, A. And B, a follow up is on the pipeline side. Do you see any changes in the pipeline? The more project based kind of business in verticals like transportation, hi-tech and telecoms.

[Keshab Panda, CEO, MD & Whole Time Director]

Ankur, I think the pipeline, I would request Amit to talk about it. But one thing I can tell you that our investment in focusing on large deals. If you recall at the beginning we said we have -- a tail account will drop and pull out some of the engineers, senior leaders who are going to focus on proactive proposals to the customer that is paid up. So when you go to a customer we are not saying that we will do one project for you for 1 million or 0.5 million. When you go and say this is what I am going to do for you, using new technology or your old product or cost account or anything we talk about, put package together and say this is project more, we are going to deliver this for next 5 years or next 3 years. I think that strategy worked reasonably well for us. So I think this beginning decision, making a decision 2, 3 years ago 2 years ago saying that this large deal group. Now we have gone one step beyond this. We said large deals not at the company level but large deals in a vertical level. Every business segment should have a vertical level large deals group and we measure them depending on how many deals they win in addition to what the day-to-day business there are. So this has become a part of the DNA now. And like the patent filing which you are looking at every week, we complete one as -- one in business rate to second business rate, how many patents they have filed, how many new ideas they got. I think this has become the part of the DNA that has helped about the -- Amit you want to take? Please.

[Amit Pal Singh Chadha]

Sure. Absolutely. So Ankur, there are 5 things that have helped us in terms of the better outlook and the results that we've had. The first of them -- first of that is like Dr. Panda talked about, our focus on T30 accounts, building more client intimacy and getting higher wallet share and mindshare from the client, right, so that's one. The second one has been these large deals that he again just alluded to. Being proactive in nature as well as reactive in some cases has helped us. Third is that anywhere wherever we have got into a project, our goal is not to just complete the project but actually delight the client, create value there and convert that into an [ MSA ]. Or wherever a client talks to us, first do the MSA and then get into projects because our whole goal is to get to a factory model. So churning out projects and products one after another. The other thing is we are seeing a shift. In some of our clients they say, you pick up our sustenance engineering, pick up our defense engineering and do variant engineering for us and that's where we have seen stuff growing annually. Last thing is new technologies that we have been able to take cross-verticals, so hi-tech technology, somebody asked the question about [ Semcon ]. So Semcon is not just for Semcon. Actually Semcon is being used, the physical design et cetera for IoT, user experience and 5G, all 3. And that goes into -- from healthcare to industrial products to automotive. So becoming a true technology partner. So if I put it in one nutshell, you are seeing us mature from an engineering services company to a technology services and solutions company, and that's where you are seeing this growth coming from. I hope I have answered your question on pipeline as well as growth.

[Ankur Rudra, Research Analyst]

Sure, that's helpful. I just wanted a bit more color on some of the verticals where maybe the macro is beginning to weaken a bit around autos, transportation, semis and such. The project-based businesses where you keep winning there, have you seen any change to your pipeline on that side?

[Amit Pal Singh Chadha]

So we have not seen [indiscernible] but we have not seen any reduction in interest in any geography and any sector that we have been working on as of yet. And we in fact are having a lot of conversations, see 2 things also are happening additionally as you talk about these trade wars, et cetera. There is people that are calling us in and discussing. Suppose I was to do a little bit of local sourcing of components, right, medical companies are calling us and saying I want to move my supply chain, suppliers from China, to say Taiwan or Malaysia, can you help me do that. And that's not just shifting a factory but actually the supply base and recertifying them et cetera, et cetera. Automotive, they are saying can I do castings in the U.S., can you help me? Europe is talking about, let's say I start doing final assembly here, what do we do? So we're seeing a lot of conversations happening with them which is all positive news for us because this is where we start building up.

[Keshab Panda, CEO, MD & Whole Time Director]

Ankur, I think one point, you see, if I look at 8 quarters ago and today how many customers we had, 20 million or 10 million, 15 million, the confidence of a customer saying that you know we have delivered these number of customer of this size, that also building confidence with the customer. When we starting beginning we will learn ourselves. We work with the customer quite some time and then customer also saw our scalability what we have been able to do. Our muscle power today that how -- which we will not have done, customer would not have trusted us 2 years ago and they trust us today. So I think the scale also matters and our maturity in processes, technology, investment, in lab, and the customer, I guarantee you, any customer comes to India, goes through our lab, we have 42 labs now, and they go and look at it, what we do, innovation we talk about in these labs, I think that gives them a confidence, overall point of view not just do one project. One -- Amit talked about the factory model and the product, there are multiple models available, possible, and we do some of the innovation model. We don't even know definition of what these engineers are doing still not clear. So customer is saying let us work together, innovate something new. What are the new areas depending on the product line. So we work on those areas where you are. So when we -- I always look at it, top 30 customer -- our top 30 customer, the reality spend is as high as $75 million. So if they spend $75 million once we always internal we talk about, if they spend $75 million what is that you get, what technology they use, what are geographical spreads they have, what are the product line they work, who are their companies and what are the challenges they go through. I think we have become a little more mature in understanding that, and how we approach them in a systematic way from the balance sheet to the technology to the competition and so on. That I think is helping us in a mature way to grow the size of the project and size of the order.

[Operator]

Thank you very much. That was the last question in queue. As there are no further questions I would like to hand the conference back to the management for closing comments.

[Pinku Pappan, Head of Investor Relations]

Thank you everyone for joining us on the call today. We look forward to interacting with many of you during the course of the quarter. Let me wish you all a very great evening. Thank you.

[Keshab Panda, CEO, MD & Whole Time Director]

Thank you.

[Parameswaran Ramakrishnan, Chief Financial Officer]

Thank you.

[Operator]

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