L&T Technology Services Ltd

NSE:LTTS

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the L&T Technology Services Q2 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pinku Pappan, Head of Investor Relations, LTTS. Thank you, and over to you, sir.

[Pinku Pappan, Head of Investor Relations]

Thank you, Faizan. Hello, everyone, and welcome to the second quarter FY '22 earnings call of LTTS. I am Pinku, heading Investor Relations. For those of you who have joined from India, thank you for participating at this late hour. Our financial results, investor release and press release have been filed with 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 20 minutes, and then open up for Q&A. The audio recording of this call will be available on our website approximately 1 hour after this call ends. Let me now introduce the leadership team present on this call. We have Amit Chadha, CEO; Abhishek, COO; and 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's turn the call over to Amit.

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

Sure. Thank you, Pinku, and thank you all for joining us today on the call. We hope all of you are safe and healthy and things are improving. In fact, I'm in our offices in Mumbai, visiting our centers later this week in India and next week. And I do believe this is a sign of returning back to normalcy, whatever normalcy is now defined as. As you may be aware, on September 23, 2021, we completed 5 years as a publicly listed company. I and the management team of LTTS would like to acknowledge and thank you for your continued confidence in us. During Q2, we held our Investor and Analyst Day, where we outlined our vision and steps and strategy to get there. We also talked about our 6 big bets in the areas of electric autonomous connected vehicles, 5G, med tech, digital products and AI, digital manufacturing and sustainability. I am happy to share with you that we're progressing well in terms of deal traction, pipeline and solutions in these areas. The key highlights of our Q2 performance are, in USD terms, we had a sequential revenue growth of 6% quarter-on-quarter in constant currency terms, driven by healthy traction in digital across all our 5 segments. This was the highest quarterly growth we have notched up in the last 3 years period. Our broad-based growth was accompanied by a rise in EBIT margin, which at 18.4% is the highest we have reported. The large deal pipeline and conversions remained healthy. In Q2, we won 9 deals across all segments, out of which 5 deals were $10 million-plus; and 2 deals, $25 million plus. Let me now provide the segmental performance and outlook for you. Starting with Transportation. We had a sequential growth of 6.2%, led by good demand across all 3 subsegments, auto, trucks, off-highway and aero. Auto companies are going through rapid transformation, and we are partnering with them in the areas of electrification and connected vehicles. We are ramping up with the traditional OEMs in Tier 1, but also deepening our engagements with some of the new-age names on the EV side. In trucks and off-highway too, we are seeing customers modernize at a high speed. And we are winning deals in electrification programs across product categories like trucks, RVs, off-roaders, et cetera. Our EV lab, based in Bangalore, backed by end-to-end domain expertise, is generating a lot of interest with customers and is helping us win larger deals. In Q2, we won a $25 million-plus deal to expand an auto customer's design center in India and create a dedicated technology hub to work on EV and power electronics. Switching to auto, we are seeing signs of a recovery. with the deal pipeline steadily improving as customers invest in connected solutions and data analytics to provide an improved operational efficiency. Summing up, we expect the growth momentum to continue in transportation across all 3 subsegments. In Plant Engineering, we had a good quarter with 4% Q-on-Q growth driven by O&G and FMCG, followed by Chemicals. In O&G, we continue to win new engagements with major O&G customers as their global partner for site sustenance and digital engineering. In FMCG, the traction continues with wins for us in the areas of automation, line expansion and sustainability. In Chemicals, we are seeing EPCM services opportunities as the CapEx outlook improves. Overall for Plant Engineering, we continue to see a good set of opportunities that will drive growth in the coming quarters. Our industrial products. We had a second consecutive quarter with 8% or more in Q-on-Q growth, with all 3 subsegments showing good growth, electric machinery and building automation. The trend for platformization, servitization continues as customers invest in software platforms to improve their own products and to extend better features to their end-to-end customers. We are seeing broad-based demand for collaborative and intuitive products, leading to digital initiatives like digital twin, analytics and AI-led decision-making. Customers are open -- opening up to engage partners like us, leading to continuous wins in deal flow. We expect IT to be one of the fastest-growing segments this fiscal. In telecom & hi-tech, growth was a bit muted with semi, semcon and telecom infra growing well, although there was some softness in media due to delays in project renewals and ramp-ups. In semi, lab-as-a-service continues to expand as we ramped up some of the recently won engagements. As 5G deployments happen, investments are being made by companies across multiple segments, computing, communications, consumer electronics, satellite pay streaming providers, semcon, et cetera, to build newer products and platforms. In media, we won a $25 million-plus deal to build a software platform for a new customer that partnered with us to accelerate time to market. Overall, we are seeing a demand and expect growth traction to improve in the coming quarters. Lastly, in medical. Medical has shown a strong bounce back in Q2 with nearly 10% sequential growth. And I'm happy and proud to share with you that our youngest vertical has crossed the $100 million annualized revenue run rate milestone. This is a testament to our deep domain knowledge, our differentiated solutions, our amazing leadership and teams that have helped us gain market share and become strategic partners to our customers.In terms of demand, we are participating in building software platform with digital health, robotic surgery and patient monitoring as well as quality assurance and compliance. With supply chain issues in chip and electronic parts affecting our customers' ability to meet demand, we are also helping them resolve the problem of designing alternative components. Overall, we do see a good pipeline of opportunities in medical that will help continue the traction. Now a few highlights on digital engineering and technology progress. Our digital engineering revenues were 55% in Q2 versus 54% in Q1. We see this trend continuing. On the innovation front, our engineers continue to innovate and filed 25 patents in Q2. Our patent filings have been largely in the collaborative and intuitive spaces in digital. This past quarter also saw us being ranked by [ ISC ] as a leader in IoT consulting and services and by Zinnov as leader in autonomous, connected, electric and shared mobility automotive engineering. Related to our overall talent scale-up, we have substantially increased the pressure intake, which, in addition to optimizing the pyramid, will help us tackle efficiently, leveraging the Global Engineering Academy that was set up by our COO earlier last year. We have tied up with top universities to source and proactively train talent so that they can be productive faster. There will be a bump-up in head count, growth in Q3 and Q4 as these pressures are inducted in the company. Let me now discuss the outlook. The demand outlook in U.S. and Europe continues to be strong, while ROW and India are seeing signs of recovery. In our conversations and recent face-to-face meeting with customers, we are getting positive signals on CY '22 budgets as CTOs, COOs, Heads of Engineering, et cetera want to partner with us as they invest in growth and transformation. There are worries, however, about the current supply chain issues, labor shortage and cost inflation. At this point of time, it is not clear these worries are temporary or they could stretch for a longer period. But it is something to be watchful about and that we are monitoring closely. Q3 has some seasonality on account of furloughs and shutdowns. We believe broad-based growth is likely to continue, and any furloughs beyond normal are likely to be specific to certain customers rather than across the entire segment. As we cross the fiscal half year mark and the benefit of better line of sight, I am happy to raise our revenue growth guidance for FY '22 in USD terms to be between 19% and 20%. Finally, to celebrate the 5-year listing milestone, the company has declared a special dividend of INR 10 per share. I wish you all and your families a very Happy Diwali in advance, and would like to now hand over to our CFO, Rajeev.

[Rajeev Gupta, Chief Financial Officer]

Thank you, Amit. Greetings to all of you. I hope you and your families are keeping safe and healthy. I'm pleased to share a strong Q2 performance with healthy improvement across all parameters, the revenue, EBIT margin, PAT and free cash flows. With that, let me take you through the Q2 FY '22 financials, starting with the P&L. Our revenue for the quarter was INR 1,608 crores, a growth of 5.9% on a sequential basis. Our double-digit year-on-year growth trajectory continues with Q2 revenue up 22% on a Y-on-Y basis. We touched a new high on EBIT margin at 18.4%, making it the fifth consecutive quarter of operating margin improvement. The 110 basis point sequential improvement in EBIT margin to 18.4% was driven by operational efficiency measures, including productivity improvement and cost optimization that helped to absorb mid- to senior-level wage hike impact; second, scale benefits realized from account mining-driven growth; and thirdly, favorable depreciation and amortization as a percentage of revenue. Moving to below EBIT. Other income was lower on a sequential basis due to reversal of SEIS accrued income taken in FY '21. As you may be aware, the government of India recently notified FY '20 SEIS incentives, which have now been capped at INR 5 crores. FY '20 SEIS incentives were accrued in FY '21 as per the then prevailing incentive rate of 7%, hence, the need for reversal. However, we could partly offset the SEIS reversal with higher foreign gains resulting from appreciation of rupee against dollars, which moved in a range of 73 to 75 during the quarter. Going forward, income from SEIS incentives will not be material for LTTS anymore. Our effective tax rate for Q2 was 26.6%, flat on a sequential basis and in line with our full year ETR expectation of between 26.5% to 27%. Net income for the quarter stood at INR 230 crores, which is 14.3% of revenue, up 6.4% on a sequential basis, driven primarily by higher revenue and operating margin. Now moving to the balance sheet, let me highlight key line items. DSO was 85 days end of quarter 2, remaining flat versus Q1. While unbilled days improved to 15 days in Q2 compared to 27 days in Q1. The combined DSO, including unbilled, stood at 100 days, which is an improvement versus Q1, but slightly above our target range of less than 95 days. We expect further improvement in the coming quarters. Talking about cash flows. Because of the improved DSO in Q2, our free cash flow also improved to INR 423 crores for year-to-date, a healthy 95% of net income. Our cash and investments rose to INR 1,958 crores end of quarter 2 FY '22. Amit already talked about the dividend. I'm once again pleased to share that the Board has declared a special dividend of INR 10 to celebrate 5 years of LTTS' listing on the stock exchanges. Moving to revenue metrics. On a sequential basis, dollar revenue growth was 5.7% in reported terms and 6% on a constant currency basis, with all 5 segments growing, as highlighted by Amit. Growth was led by Industrial Products and Transportation segments. The segmental margin performance was better in 3 out of the 5 segments on a sequential basis, with transportation and telecom & hi-tech continuing the path of improvement for the past 5 quarters consecutively. Now let me comment on operational metrics. Utilization reduced slightly to 78.1% because of strong hiring undertaken to fulfill demand and to improve pyramid. We target to maintain utilization within the 78% to 80% band. The on-site/offshore mix continues to improve favorably towards offshore at 59.2% versus 58.1% in Q1. The T&M revenue mix increased to 70% in Q2 and is likely to stabilize around these levels. Client profile, which is the number of million-dollar-plus accounts, showed a sequential improvement in all categories, 1 million-plus to 30 million-plus. As we indicated in the past, owing to the LTM nature, the client profile numbers have started improving from Q2. This trend will continue in the coming quarters. Moving to client contribution as a percentage of revenue. Here, again, on an LTM basis, the improvement is visible in top 5 and top 10 clients. Head count increased by 1,011 employees sequentially, while attrition moved up to 16.5%, which is now an industry-wide trend. We are proactively taking various employee engagement measures to contain attrition. Our realized rupee for Q2 was around 74 to the U.S. dollar, a depreciation of 0.2% versus Q1. Before I end, let me give some color on the EBIT margin trajectory we see going forward. During our Investor and Analyst Day held in September 2021, we shared our aspiration to reach a $1.5 billion revenue run rate and 18% EBIT by FY '25. While we have achieved EBITDA of 18% plus in Q2, there are a few headwinds that we will have to manage. First, with improving economic recovery, we anticipate that temporary savings from travel and facility-related spend could gradually be given up in the coming quarters. Second, the current demand environment may lead to slightly higher than normal headwinds from attrition and wage hikes. Finally, we plan for organic and inorganic investments to support growth. Therefore, the margin trajectory is not going to be a straight line. Having said that, our aspiration is to move towards a sustainable 18% EBIT margin level by FY '25, and we'll see a path to reach there. We will continue to work on improving operating margins using levers like growth, quality of revenue and productivity improvement.As I conclude, I would like to thank you all for your continued belief in us and wish you all a happy festive season ahead. Moderator, we can now take the questions.

[Operator]

[Operator Instructions] The first question is from the line of Mukul Garg from Motilal Oswal.

[Mukul Garg, Research Analyst]

Good quarter, guys. Amit, just 2 quick ones from my side. First, on the attrition side, your attrition performance this quarter, clearly, was much better than what other Indian IT services companies have reported over the last few days. But have you seen any cancellation or like loss or probably pushout of some of the business to third quarter, which is giving you the confidence in your growth trajectory despite the furloughs which are coming up in the December quarter?

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

Sure. You said 2 questions. Was there a second one?

[Mukul Garg, Research Analyst]

Yes. Sir, second one was on the margin side, 18.4% is a fairly sharp pickup. Do you expect to continue to benefit from operating leverage in Q3, Q4 also? Or do you think your hiring plans over the next 2 quarters will kind of bring it down from current levels?

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

Okay. So let me address the first one and request Rajeev to take the second one. So the first one, on attrition, I do want to acknowledge, Mukul, that it's been a tough time for us, right? One -- on one side, we've had deal wins and the curated vision that we had created for ourselves around 6 dimensions and 6 bets has got traction, and we've seen deal wins happening, therefore, right, and solutions being there. At the same time, there's been attrition, right? I want to complement the work done by our middle management across delivery organization, sales organization to manage some of this. And I can share with you proudly and I believe that we haven't had client cancellations because we lost people, right? So that hasn't happened. But yes, I mean could we have done -- could things have been more? Have we had lesser attrition, would be able to hire faster? There's always that plus and minus that continues to happen, right? We'll be mindful. We don't want to hire in advance to demand so much that we get into a problem. So there should to be a balance here to find, and we work in that balance. That's number one. Number two is from a hiring standpoint, I want to confirm that we have got onboard 1,200 freshers in the last 2 quarters. And we are going to be taking another 2,000 freshers in Q3 and Q4, loaded largely towards Q3. So you will see Q3 head count going up from a pressure standpoint. If you remember, Mukul, we had set up a Global Engineering Academy or Training Academy. So it's done by our COO last year. That has come into good use. From one side, our CHRO has done an amazing job in widening the net to colleges that he has been able to get, and people he's continued to get for us and ramp up a lateral hiring engine in the U.S., in Europe and in India, right, and Japan. Then on the second side, the Head of Trading Academy as well as all the business units, has really taken advantage of this Global Engineering Academy to take people in, keep open minds and then starting to deploy them. So all of that, if you ask me, is going to help us as we move forward into the year. Again, do I have all the answers? No, but we continue to work around our access to see how we get there. Margins, Rajeev, would you comment?

[Rajeev Gupta, Chief Financial Officer]

Sure. Mukul, in terms of margin, I think your question was will we continue to see such a sharp spike going forward. So what...

[Mukul Garg, Research Analyst]

Rajeev, it was about whether Q3, Q4 should see a moderation versus Q2 because of the new hires coming into the system.

[Rajeev Gupta, Chief Financial Officer]

Sure. So I would call out, of course, the tailwinds and the headwinds, right, which is, of course, where we've got to balance it out. So one, in terms of growth and the quality of revenue is going to be a major lever in terms of improvement on margin. Also, that will lead to economies of scale like we've seen in Q2. The second is if you look at productivity improvement, and that's been one of our consistent ways of improving margins. That's another area that we'll continue to look at. The third is around the segment mix. We talked about improving margins on transportation segment and telecom & hi-tech. Transportation, we are now in the range of 19%-plus margins. Telecom & hi-tech has also started to show improvement. We believe we've got further headroom around telecom & hi-tech, and that will show improvement in the coming quarters. So these are some of the tailwinds that we have. In terms of the headwinds, like I said in my opening commentary, there are going to be, of course, challenges to deal around attrition. And there could be wage hikes that we will have to deal with in the coming quarters, and that's going to be a balance to strike. The second is there could likely be inorganic investments that we make to support growth. And finally, we may see travel come back in the coming quarters, not in entirety, but it will gradually start to show up. So that's where it is. We will balance this out to be able to see how best to manage this operating margin trajectory.

[Operator]

The next question is from the line of Pankaj Kapoor from CLSA.

[Pankaj Kapoor, Research Analyst]

Amit, my first question to you on the longer-term outlook for the growth. Near term, we have a very strong visibility, and that's the reason why you have taken the guidance also up. But if I just try to extend it further, what other typical markers one should look at? Your deal win is good, but it is broadly in line with what we have been doing. So anything else, which I should be looking at to take a view on how the revenue growth could we see on '23, '24 onwards?

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

Sure. So Pankaj, longer term, right, our business is built on consumer demand. It's built once the products are consumed. If products are manufactured, we are in business, right? And that's what is the basis or we are -- one. Second, when the demand pattern shift or there is flux, if I may call it, in the market, or in the demand, it is good for us. It will create opportunity, right? So as I see it today, I'll share the tailwinds that I'm seeing, right? And then I'll also share the headwinds very honestly. So the tailwinds I am seeing right now are around in transportation, the demand in electrification, in auto, in trucks as well as connected vehicles. And I'm starting to see electrification conversations in aerospace, right? So that's one. Second, in medical, I'm starting to see people talking about home care, miniaturization of devices, bringing things -- making it easier for a patient to do a lot of self-diagnostics, et cetera, telemedicine. So that's the second that I'm seeing is a tailwind. Third, industrial products. We continue to see demand for digital products, digital services, digital engineering, if I may, and digital manufacturing, right? So those are 3 clear areas. Now let me come to the not so -- or for us, right, and others could be different. And in plant, people are starting to talk about new CapEx. Oil companies are talking about upgrading stuff, et cetera. But the money has yet to hit the market, right? So one. We will talk about sustainability across, but that money is still to hit the market. Third, on telecom, 5G has been a buzzword for a very long time, but money still has to start flowing like it's growing in transportation today, right? So those -- that's where it is. Digital manufacturing, digital products, we continue to see around connected, collaborative, intuitive. We've talked about it. I won't spend more time. But it's moving towards intuitive and collaborative. Finally, the headwinds, and I called it out in my remarks as well, is that today, if you look at CEOs of large companies and our customers that I've been meeting in the last few weeks and talking to Chief Operating Officers, their mind script is clouded and they are thinking about supply chain a lot more than they used to. So that's one thing. I don't know how it will play out. So longer term, I'm reiterating what I had said in our IAD conference that we are confident to get to $1.5 billion in FY '25 as a run rate. So that still stays. And we'll continue to update you. We'll continue to talk on how things go forward.

[Pankaj Kapoor, Research Analyst]

Amit, that's very helpful. Just one clarification. Do you sense that there was some pent-up demand this year, which -- of course, while structuring things all remain good, may probably normalize next year?

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

So again, it will depend. So Pankaj, very clearly, we've been looking at quarter-on-quarter growth rather than annual because last year was a very low base. We all know we didn't have -- we had a bad year, right? So we're looking at sequential growth. It's how we charge our teams internally on. Though they look at long term for solutions, which is a 2- to 3-year period, service offerings are like annual, and then performance and execution is quarterly. So I would be fairly comfortable at this stage to say that maybe there was a little bit of pent-up that was there earlier. But I do see this demand to be there for some time.

[Pankaj Kapoor, Research Analyst]

That's very helpful. Just one small bit. How many of your employees are now back in office?

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

Thank you for asking that. We've got about 26% of our employees that are back in office. There is no formal mandate or dictate to come back. Our HR, our delivery teams have worked and function teams have worked very carefully to make sure that we make it a safe working place. And we are nudging people back to come back. I do believe longer term, because before you ask that -- so the way we are modeling this is I do believe that once we have passed these waves and all that, I do believe that we will get back to about 80%, 90% back to office. But that's where you will be. Smaller cities like Baroda, Mysore will go to maybe 90%. Bigger cities like Bangalore, Mumbai, will go to 80%. That's where it will be. I don't see 100% coming back, but we are at 26% right now. And we are -- so our focus is not to get people back in office. Our focus is to make sure people are safe. People are vaccinated. And once we get them completely vaccinated, we will start porting people to come back further. Just last point, we lead from the front. So I'm going to be in India. I am in India already. Our offices in Mumbai this week and Bangalore, Mysore, and there are leaders that have traveled from overseas, plus the leaders here are traveling to other locations. So we are trying to lead from the front and create this effect that it's safe to come back. If we are here, you can come back as well. We are not making big talks nor we want to make any press releases about this. We will work it in our way, but we will get it done.

[Operator]

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

[Vibhor Singhal]

Congrats on a great performance again. I'm just going to have 2 questions from my side. One is, just wanted to pick your brains on the auto segment. I know you only talked about it at length. But -- yes, sorry. So just wanted to check basically, on the auto segment, has there been a difference in the kind of engagements or in the kind of demand that we have seen pre-pandemic and post-pandemic? I mean in the kind of nature of work or, let's say, a more shift towards the electric vehicles part or has that gotten [ spurred ]? So any changes that we might have seen in the auto segment, which is potentially different from [indiscernible]? And my second question was on an interesting number that I just wanted to pick your brains on is on the fixed price contract share of our revenues. So that number has actually been coming down over the past few quarters. And at the same time, of course, our digital share of revenue has also been increasing. So is this just a correlation or a causation here that is leading to a higher in terms of what customer [indiscernible]? And if not that, any specific view that we would want to around the fixed contracts coming down?

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

Sure. So let me address this question in 3 ways. One, I want to talk about the overall pre/post on auto. I will request my colleague, Abhishek, who's here to talk about some of the solutions that we're building that is helping us in that journey. And then Rajeev will pick up the FP and T&M. So auto segment pre/post, I'll tell you one thing that happened was, and immediately knee jerk, the moment the pandemic hit, which was April -- March, April, May -- I was talking to the Head of engineering and the head of -- close friend who was Head of Engineering and Supply Chain, right? And he was saying, "I don't see not coming back for the next 3 years. I don't see that." And immediately, they stalled, they stopped these engineering development programs or delayed it, right? And that's where we got hit. And this -- we don't know whether we will sell or not. That is pre-pandemic or pandemic -- in pandemic. Pre-pandemic, there were projects that always -- as you are aware, the design cycle is generally about -- so if you want to launch something in 3 years, you do the engineering now, then it goes through whatever, whatever. And we get engaged in that 3-year prior period to what you see coming out, right, 2, 3 years. So pre-pandemic is continuing. Also, the amount of discussion on electrification and autonomous, there was a discussion. Infotainment, there was a lot of discussion. But electric as well as autonomous, there was conversation, but there was not a huge amount of conversation. Come post-pandemic or we're not even post-pandemic -- I'm saying post April, May, June, the moment they realized that people are not stopping from buying cars, actually are buying more cars because now they wanted their own, right? They didn't want to sit in a bus. They didn't want to sit in a train, right? So they saw that happening. Immediately, the conversation shifted to how soon can you start getting stuff done, a.B, the amount of conversations and the amount of work that we are getting now in electric and connected area is -- there is a huge demand that we are seeing right now. And everybody wants it like yesterday, right? There's an idea that we use in consulting language, which is hurry up and wait. So it's been the other way around where we've had to -- it's all of a sudden, right? And we're working towards it. And that's part of the training, et cetera, we're doing. Second part of it that we've seen is solutions that we have built on, especially EV. I want to request Abhi to spend a couple of minutes about it. And then we'll hand over to Rajeev on FP and T&L. Abhi?

[Abhishek Sinha, Whole Time Director & COO]

Yes. Thanks, Amit. So what we've done on the automotive sector, especially with regards to investments over the last, I would say, 1.5 years is paying itself very well. We did investments in 2 segments. One is internally, we have structured ourselves by practices, powertrain practice connected, autonomous, body engineering, electronics. And each of these practices were very clear detailed plans on investment areas. I'll just touch up on the EV front, which is something which is giving us great returns over the last few quarters. So we have an EV lab, which we have spoken off in the earlier quarters in which we invested quite a bit of money to -- during the COVID times to set up this lab. What we've also done now is we have a complete, I would say, electric car, we have developed. Now when we say electric car development is not about getting into the car segment, but to demonstrate our capabilities on every element of what goes into electric car. The battery management system is our technology. The cable wire harnessing that has been done is ours. The vehicle control unit, power distribution unit, every component that you can think of in the electric car is something that our engineers have developed in-house. And we continue to enhance this. In fact, in the connected part of the car, where we have Alexa integrated in the car and Alexa takes commands to start, stop various elements of the car unit, is something that our engineers have done. So I think the way we are going about it is we are keeping ourselves ready to demonstrate capabilities to our customers. And Amit spoke about -- from business front, 6% growth quarter-on-quarter. And I think this journey will continue. We are seeing extremely good traction.

[Rajeev Gupta, Chief Financial Officer]

Vibhor, to answer to your question around the T&M mix, I think I've already touched upon it in my opening commentary. I mean we are seeing the incremental signing happened on the T&M side. And this is more so because when there is a greater share of, let's say, new technology or a generational leap in product or processes that customer is undertaking, we are seeing more of T&M kind of contracts being signed. For example, use of scrum methodology. Our take is that we will be in this range going forward as well, Vibhor.

[Operator]

The next question is from the line of Abhishek Shindadkar from Incred Capital.

[Abhishek Shindadkar, Analyst]

Congratulations on a great execution. My question is, generally, the perception was ER&D firms have to have employees in office, but If get the offshoring mix, we are almost now at 60%. So is this a structural shift in terms of clients engaging ER&D firms and then off-shoring can reach further? That's first question. And the second question is on the margins. What would be the key reason for lower-than-company average margins for telecom & hi-tech? Is it that it is more on-site driven business? Because we are not yet anywhere close to the peak margins. And how much of that is a lever in the margins going ahead?

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

Okay. So Abhishek, the way we are seeing this is that all our customers, right? So I'm not talking about one that are -- where we do very small business, but our top 30 or next 20 customers. They have almost treated our employees as their employees. There is a new thing called envelope of health, safety, emergency envelope. What HSE envelope means is, Abhishek, that whatever they do to their employees, they want it done 2 hours. That's how they want to operate, the principle. So if they don't have their employees coming, they don't want our employees coming to office, right? And they have gone through great length. And I thank our customers and our partners as I've done that, where they are enabling this work from home, right? So we've been thankful to them for having enabled that. Having said that, short term, you've seen offshoring improved. You also know that countries have shut down their visas, et cetera, et cetera. We were not able to fly people in, recruiting locally blah-blah. I do believe that a little bit more offshoring could happen. I mean that's to be seen, how things develop. Because the point is a lot of behaviors have changed over a period of time. Let's say, all of a sudden 1 day COVID goes away, right? Then how will people behave? I don't have that answer. But I do believe that whatever offshoring has been achieved is something that is sustainable, and we love to see as to how this can further go in a direction, et cetera, right, A. B, what we have done in terms of this is to make sure that we've been able to -- so you again said engineering can't be done remotely. It's not correct because yes, there are some mechanical pieces of work. There is some immediate work, there's some plant engineering work that needs machines, that needs people in offices. But there is other stuff that can be done remotely, which is being managed. Again, do I have a golden bullet answer for this? The answer is no. We'll continue to work on this. On lower telecom margins, again, I'll hand over to Rajeev to address this.

[Rajeev Gupta, Chief Financial Officer]

So Abhishek, in terms of the lower margin on telecom & hi-tech, I think this is something that we've called out in our earlier earnings calls as well. There were 2 segments that we are consciously working in terms of improving margin. One was transportation; second, telecom, IT. Transportation, as you may have noted, over the last 2 quarters, consistently, were able to see improvement in margin. And largely that is driven by growth and also optimization measures. As far as telecom & hi-tech, we made conscious investments in telecom & hi-tech. And that also follows from the fact that we did the Orchestra Technology acquisition Q3 of last year, right? So some of these investments have been deliberate. I may also call about investments in 5G. What we believe -- I think those investments will now start to yield benefit. So the margin trajectory for telecom has started to move on the positive side. We believe in the coming quarters, it will be even better than what we see.

[Operator]

The next question is from the line of Vimal from Union AMC.

[Vimal Gohil, Research Analyst]

Amit, my other question is I just wanted to pick your brains on the industry growth for ER&D, especially. Over the past 1 year, you've seen this industry take ground. I mean we've come up from Q1 FY '21 till today. In this 1.5 years, have you changed your view -- or have you increased? We've clearly seen growth increase for LTTS, but do you see this for the industry as well more? The growth rate for the industry has pretty much remained where they were expected to be over the longer period. And you expect LTTS to sort of ultimately gain market share, and that is where the increased growth for LTTS is coming from?

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

So there are 2 things here, Vimal. One, and I'll refer to the data from people like Xeno and IDC and market analysis they've done. So they're talking about that the engineering industry in 2020 was about $1.5 trillion, right, broadly about $1 trillion in legacy engineering, about $0.5 trillion or $500 billion in digital, right? Now if I look at a view on, say, 2026, right? So I know that one of you also talked about a longer-term view. So if I look at that, the expectation is that this $1.5 trillion will go to $2.6 trillion, right? The legacy will only grow at about 2%, but the digital will grow at about 19% CAGR. Now all of this cannot come to people like us. It will go to capital centers. It will go to people like us. Maybe in Eastern Europe, it may go to, et cetera. But broadly, there's an increase in engineering spend that is seen that we expect to come out. Second part, and this is also going to come out in different verticals, so be it transportation, be it industrial products, be it medical and health care, telecom, hi-tech. So each of these will have their own trajectories of growth in engineering spend, be it digital, be it legacy. And some digital will also start getting call legacy tomorrow. The second part is on the digital part itself, we expect that -- so you broadly break up, if I may, digital into connected, collaborative, intuitive, right? And where today, 60% of the digital spend is getting into connected. People are still connecting. And intuitive will only be 5%. If you look at $1.5 trillion, when it gets to, we would expect connected to only be at about 30%, with the majority of the spend going into collaborative and intuitive. So I do think that there is avenues of growth that is there from a spend standpoint. From LTTS standpoint, there are 5 segments that we've agreed to work on. And there are 4 horizontal areas that we work on that we have talked to you about. And we believe that as long as we can continue to build solutions, as long as we can continue to remain agile, think long term, plan medium-term, execute short term, I can -- I do believe we'll continue to gain market share in the market and specific areas.

[Operator]

The next question is from the line of Nitin Padmanabhan from Investec. As there is no response from the current participant, I have muted the line. The next question is from the line of Sudheer Guntupalli from ICICI Securities.

[Sudheer Guntupalli, Research Analyst]

Amit, just starting [indiscernible] for most of us analysts and investors is that growth rates in ER&D tend to be higher than in IT services. But if we look at the FY '21 performance and FY '22 performance -- expected performance rather of LTTS and kind of benchmark it with some of our services -- IT services companies, a couple of [indiscernible] and so on and so forth. Clearly, the growth differential seems to be very wide for FY '22. Now this is despite the fact that FY '21 has not been a very bad year for some of them, like it is for us. So on a 2-year figure basis, if I look at it, we are running close to around 8% FY '21 and FY '22. And this comes on top of FY '20, which is also -- which was also a weak year. So just trying to understand your perspective around is anything changing in the cycle in terms of the expectation around whether ER&D growth rates can be higher than the top IT or will those be lower than that of IT? That's my first question.

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

What's your second question?

[Sudheer Guntupalli, Research Analyst]

Related to the same. Again, we are running at around 8.5% sort of EBIT for the last 2 years despite FY '20 being very weak. And I think referring to one of the earlier questions from Pankaj, there would have been some pent-up, which would have come into the system in this year. Even after that, we are talking about around 20% sort of growth. Going ahead, when this pent-up kind of presents out, our guidance is sort of hinting at around 17%, 18% overall growth, in which I'm assuming an organic growth rate of at least around 13% to 15%. So how do you think about the achievability of those organic growth rates?

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

Okay. So Sudheer, if I may, I would request don't look at -- don't take a base year of FY '21 rate. In fact, if you remember, if you've been with us for some time, you will see. So after we went IPO, we had -- we did have a bad year at that point of time, which where we had certain -- there was issues. Beyond that, we ran 2 years at successive growth rates that were above 20%, right, organic. And then we are in a year where we had 2 client situations, not in our control. Had those not been there or if I was to remove those 2 client situations, we would have still been at that 20% clip, right? So not -- right? Last year was an aberration. You look at us as a 3-year, 5-year CAGR. I would not look at it as a 1-year, 2-year defined way, please. And having said that, engineering and technology industry is different from IT, right? And therefore, I would look at us differently. I do believe that each one has their own trajectory. Each has their own nuances. We are -- we work out of a profit center. The IT is largely a cost center play and not a cost play or a cost center play, right? We are more on an innovation model. That's a difference. So there is differences there. So I would not do that. That's what I would say, one. Second, how do you see the '19 to '20, is that good? Is that bad? It's something we will see. We continue to work on our numbers. We continue to see where the opportunity is. We are focused right now -- more than our trajectory, we are focused on basic principles. I'm sorry, Sudheer, we are all engineers. We are focused on getting to technology, making sure we are competitive, making sure we are giving our clients their competitive advantage. And with the shifts in technology that we are seeing, we do believe that we are not at the top of the S-curve in terms of that it's done and the days are over. I do believe we are in a part of an S-curve that will see further decline.

[Operator]

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

[Nitin Padmanabhan, Lead Analyst of IT & Telecom]

Am I audible now?

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

Yes.

[Nitin Padmanabhan, Lead Analyst of IT & Telecom]

Apologies. So just a couple. So one is if I look at the attrition, I think the attrition number there, something that we aren't used to. If I look at history, it is clearly at the top end. And first question is, do you think the attrition has peaked or you see this going up further? Two, are you seeing attrition more on the domain side or on the horizontal side of things? Or is it just experience-based attrition that you're witnessing at this point? Third, you spoke about wage increases. Just wanted your thoughts on -- you expect that to happen in the second half of the year? And so that was the third one. And finally, in terms of acquisitions, just wanted your thoughts on the areas of focus. And do you just expect tuck-ins like history, or do you expect a larger one? Those are the questions.

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

Okay. So if I may, I got 16.5%, not good. Has it peaked? Or will it be more? Third was wage hike. Are you planning wage hike? What was the second question? Can you repeat that, please? Sorry, I didn't catch that.

[Nitin Padmanabhan, Lead Analyst of IT & Telecom]

Yes. So on the attrition was higher than history. And will it go higher? Is it more domain-specific or horizontal-specific or just experience-wise of 3 to 5 years or 1 to 5 years? So those are the questions on attrition. And obviously, wage increase in the second half do you expect it to have a meaningful impact. So those are all on the attrition and wage. Maybe I'll ask the last question after that. Yes.

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

Nevermind, I already got it. So I'm going to request Rajeev to talk about M&A, but I will cover -- let me cover the attrition part for you. And then if I miss out something, my colleague, Abhishek, can add to it. So number one, we are not proud of 16.5. I want to be very honest with you, it personally hurts my heart when I see an employee go. Because at some point, I think he does not believe in our dream. Does he not believe in our 6 dimensions? Does he or she not believe in our bets? But reality is, I cannot match dollar to dollar. This can't happen, right? Don't have an open wallet. Don't have an open checkbook, number one. Number two, the opportunity in India and U.S. and Europe has expanded. We had somebody talking to us -- in fact, we had somebody talk to us on our subject. And he said the number of changes he's seeing on LinkedIn, he has never really like seen so many people changing jobs. And they, of course, have access to data that you and I don't. Maybe you do, I don't, right? So I do believe that attrition -- so again, do we think it's peaked? We are working various measures. And let me take some of those. Number one, we had a very bad year last year. We didn't give increments. But this year, we divided it up. Juniors got increments in April. Seniors got increments in July. The reason that was done was we wanted to make sure people understand that leaders don't eat first, they eat last. Second, we have done corrections where we have not been able to do enough, et cetera. But like I said, limited dollars, limited checkbooks on these things. So we've done what we could. Having said that, we are trying to provide a holistic experience. We are running a program within the company called [ Project Can Do ] that is focused on trying to enhance, improve employee experience. Two weeks ago, while we closed the quarter, the CHRO, the COO, the CFO, myself, the CTO and the business unit heads and some of the select field heads sat down, and there are 130 people involved in the company that came and gave us suggestions on what do you need to do in 5 specific areas around [ Project Can Do ]. And we've given approvals to implement some of those. The others will get done over the next 3 months. To be able to, we'll do a pulse check again on our employees in quarter 4 of this year. So we are doing that to provide a holistic experience. Third, while COVID is going on, we continue to process our CEO Club, Youth League. We created a Leader's League on and on to make sure that we are not just talking about dollar to dollar, but what are we doing beyond. Third, technical training was established, and that continues to enrich our employees as they move further. Now are we going to do any further corrections? Maybe. We are working, we are starting the situation and we will see what we have to do in specific areas, and we will make that intervention happen if it needs to be done. Lastly, on domain. It's been broadly broad-based in terms of attrition that we've had -- I have -- I mean we don't give out data on city-wise, but we have gone down to city-wise attrition, gone down to business unit-wise attrition, and we are taking various steps to try and stem it. I, again, want to say, in spite of the attrition we've had, I'm proud to say that I lead a team that has made sure they can make things happen. It is nerve-racking, but people are doing it. And we'll take various measures and try and improve it. Abhi, anything you would like to add before we hand over to Rajeev?

[Abhishek Sinha, Whole Time Director & COO]

No, I think you have covered it all. Yes. I think just one point, which is we're getting very good feedback from employees is the broad-based training programs that we have done, more than 75% of our employees have been touched by at least one of the training programs globally and not just in India, globally in the last 6 months. And that, I think, is -- we're getting very good feedback on that from employees that we continue to invest in them.

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

Having said that, I do want to say that our plan to address attrition is there. We've got backup plans, and we are working towards it. We are hiring professionals. We're training people. We're hiring laterally. So all that is happening. I've given out numbers earlier to one of the questions as well. So we believe that we'll work this out. This is an industry thing, not just in India. Think it's India, U.S., Europe combined. We'll work towards it. Rajeev, would you like to take everything else?

[Rajeev Gupta, Chief Financial Officer]

Sure. Sir, I believe your question was, are we looking at more like tuck-in acquisitions. So let me clarify, and we've said this earlier as well in our IAD. So we are looking to do acquisitions to really build capability in the white spaces. And the space is really, one, on the auto new tech, the med tech and ISP.The second is, while in the past, we've done acquisitions more in the range of $20 million to $25 million, we are now open to do even larger acquisitions that could be in the range of, say, $50 million to $75 million range. And for that range, we believe that there could be capabilities that could expand beyond the 3 spaces that I talked about, right? So it's not necessarily that it is only going to be a tuck-in acquisition. But we are not closed, right? I mean what we're looking to do essentially is to build capability in the white spaces, and that's the length we're looking at.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Pinku Pappan for closing comments.

[Pinku Pappan, Head of Investor Relations]

Thank you all for joining us on the call today. We hope we were able to answer most of your questions. I am available on e-mail, so please write to me if you have additional queries. Look forward, as always, to connecting with you, and we wish you all safe times and a good evening. Thank you.

[Operator]

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