L&T Technology Services Ltd

NSE:LTTS

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to L&T Technology Services Limited Q2 FY '23 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, executive]

Thank you, Faizan. Hello everyone, and welcome to the Earnings Call of L&T Technology Services for the Second Quarter of FY '23. I am Pinku, Head of Investor Relations. Our financial results, press release and investor release has been filed with the Stock Exchanges, and are also available on our website, www.ltts.com. I hope you've 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 one hour after the call. Let me introduce the leadership team present on this call. We have Amit Chadha, CEO; Abhishek, C0O; and Rajeev, CFO. We will begin with Amit talking about the company performance and giving an overview of the outlook, followed by Rajeev, who will talk you through the financial performance.

I now hand over to Amit.

[Amit Chadha, executive]

Sure. Thank you, Pinku, and thank you all for joining us on the call today. I hope all of you are keeping healthy and safe. With that, let me start with the key highlights for our Q2 performance. I would first like to share that we at LTTS are very proud to have achieved the $1 billion annualized revenue run rate on a constant currency basis this quarter. This is a milestone that we had set for ourselves last year to reach it by Q2, Q3 of this fiscal year. We are happy that we have crossed $250 million in constant currency in Q2.

I would like to take a moment to thank all our employees that have come together in this journey as well as Akhavan, Vice Chair of the Board, the entire Board and our first CEO, Dr. Keisha Panda, for having shown us the vision and had the confidence in us. Our momentum continued into the second quarter with a 4.5% constant currency growth, led by Transportation and Plant Engineering. The growth was accompanied by sound operational execution with Q2 being the fifth consecutive quarter of 18% plus EBIT margins. Total deal TCV remains heavy, and our large deal wins include a $60 million plus deal and a deal of TCV more than $10 million.

Let me now provide the segmental performance and outlook. Starting with Transportation, we had a stellar performance with 9.4% Q-on-Q growth in constant currency that was broad-based across sub-segments of Auto, Truck & Off Highway and Aero. Our differentiated EACV offerings has helped us get into strategic engagements with customers, yielding us large deal wins consistently. Our $60 million deal in Q2 on the back of $50 million deal in Q1 and a $120 million deal in Q4.

The demand trends in Transportation are supportive of our growth. Customer preference for electric cars is rising and increasing. Semiconductor shortage and Auto are starting to ease. Global air travel has increased by 150% versus July 21 levels, leading to more aircraft orders and a rising backlog at manufacturers and Tier 1s. And electrification initiatives are picking up strongly at Trucks and Off Highway and Aerospace. We continue to invest in EACV to highlight one in connected cars. We have invested in our next-generation digital cockpit domain controller solution that is currently being deployed at a customer production program.

Last quarter, we talked about deals we were pursuing in the connected and autonomous space. As you would have seen in our press release in Q2, we have announced a deal with BMW to provide engineering services for their suite of infotainment consoles. To sum up, we see a good pipeline of deals with many in the $10 million to $20 plus million range that gives us confidence about our growth prospects. In Plant Engineering, we had a strong quarter with nearly 6% Q-on-Q growth in constant currency, that was broad-based across FMCG, O&G and Chemicals.

Clients in all 3 segments are investing either in greenfield, brownfield expansion or in Asset Management and digital twin programs. In Q2, we won a large deal from a chemical giant to implement a digital twin for one of its flagship sites in the U.S. We will create an analytics data platform that will help in sustenance through the plant life cycle. This is for one of their sites and we expect the program to be expanded to multiple sites to the customer. Sustainability is again a priority with customers wanting to invest in waste management setups, processing and refining our plastic waste to make it reusable in another area where we are working on. Now, as some of the large deals stabilize, Q3 is likely to be muted for Plant Engineering. The deal pipeline in the U.S. and Europe continues to be healthy that will drive growth for us in Q4 and beyond.

Moving on to Industrial Products. We had a healthy growth of 3.5% Q-on-Q CC, which was led by electrical machinery and power and utilities. There is strong demand for digital manufacturing programs as customers see image and certain ROI. We have developed connected factory solutions that help customers implement digital factory and enable factory automation. In digital and next-gen product development, we won a deal to help the global lighting manufacturer revamp and reengineer their suite of products.

Across our industrial customers, we are seeing an increasing number of sustainability-led conversations about clean energy and carbon footprint reduction, and we are building solutions to capture these spends. We do believe that an energy transition is in progress. Our homegrown solution, Energy and Sustainability Manager has been awarded the Frost & Sullivan Product Leadership Award in energy optimization and sustainability management. The U.S. government recently announced a $7 billion funding for clean hydrogen as it aims to derive energy-intensive industries. This is leading to many of our customers starting programs on clean energy transition. We have created solutions around battery storage, hybridization, energy management that will allow us to participate in early-stage conversations.

Overall, for Industrial Products, we see growth continuing to be driven by digital products and manufacturing, sustainability and value engineering. In Telecom & Hitech, on constant currency terms, we had a flat quarter as the growth in semicon and telecom was offset by weakness in consumer electronics, equipment and hitech side. In semiconductor, demand trends are positive as customers look to scale up offshore labs that will help in better speed to market for their new technology chips.

We recently signed a partnership with Qualcomm, where we will leverage our chip to cloud expertise to develop and deploy solutions for the global 5G private network industry. These solutions are aimed at accelerating digital transportation for the smart manufacturing industry and ties in with our digital manufacturing big bet. On the Media side, we are seeing large deal possibilities in vendor consolidation and cost optimization being the key driver. As I highlighted last quarter, there is softness in the Hitech space, with companies being cautious in spends. However, we are optimistic about some of the recent technology, large technology companies that we have started engagements with.

Overall, we expect the pace in Telecom & Hitech to pick up as 5G and Media deals in the pipeline close. Our play in this segment is very broad, which gives us the ability to target different areas of growth. Finally, in Medical, we had a soft quarter as customers recalibrated spend on account of inflation and supply chain issues. Quora, remediation, our digital health platform are seeing spend continued. Our investments in software-based diagnostic devices are expected to yield us better traction in the coming quarters. The large deal traction in pipeline is looking up.

In Q2, we won a large deal from a global health care provider in Quora, product remediation and to build a data engineering platform to accelerate productivity and reduce trading costs. We see growth in medical in Q3 post the recalibration of spend at our customers. Now a few highlights on our digital engineering and technology progress. On the innovation front, our engineers continue to innovate in file 25 patents for LTTS in Q2. We have been able to maintain this pace of about 25 patents per quarter for a few quarters in a row.

I would like to call out that Everi has rated LTTS as a leader in connected medical services and an industry 4.0. Let me now discuss the outlook. Across our 6 bets, we see customer investments continuing unabated. I'm very confident that the solutions that we have developed across our 6 bets, which are helping us win deals. I talked about the domain controller and EACV, the digital thread in digital manufacturing, where energy sustainability manager and sustainability. Like we highlighted last quarter, there is caution at customers when it comes to newer business lines where the line of sight for revenue and profitability are stretched.

The focus on immediate ROI is therefore creating cost and value-led deal opportunities across segments in addition to the speed to market opportunities where digital is the key driver. We expect Q3 to have the seasonal furloughs and plant shutdowns. However, growth should rebound in Q4. Our FY '23 USD revenue guidance is now narrowed to 15.5% to 16.5% in constant currency. With that, let me end by wishing you all very good health, a very happy Diwali in advance.

And I would like to hand over to Rajeev now. Thank you.

[Rajeev Gupta, executive]

Thanks, Amit. Greetings to all of you. I'm pleased to share our Q2 FY '23 performance. It has been another quarter of good results with revenue growth and operational execution. Happy take you through Q2 FY '23 financials, starting with the P&L. Our revenue for the quarter was R. 1,995 crores, a growth of 6.5% on a sequential basis. Our double-digit Y-on-Y growth trajectory continues with Q2 revenue up 24.1% on a Y-on-Y basis.

Glad to share that despite the headwinds, we have been able to maintain EBIT margin at 18.2% in line with our aspirations. And this has been the fifth consecutive quarter of 18% plus big levels. During the quarter, we had a higher employee ticket costs on account of wage hikes, which were largely absorbed by better employee productivity, SGA leverage, cost optimization measures and rupee depreciation.

Moving to below EBIT, other income came at Rs. 26 crores, slightly lower on a sequential basis due to relatively lower foreign exchange gains compared to previous quarter. Effective tax rate for Q2 was 27.2% closer to our target range of 26.5% to 27%. Net income for the quarter stood at Rs. 282 crores, which was 14.2% of revenue, up 3% on a sequential basis, driven primarily by revenue growth.

Moving to balance sheet, let me highlight the key line items. Q2 DSO improved to 78 days versus 80 days in Q1, Q2 unbilled days improved to 18 days versus 22 days compared to in Q1, resulting in combined DSO, including and of 96 days, which is an improvement of 6 days compared to Q1 and this shy of our target range of less than 95 days.

Let me now talk about cash flows. Our year-to-date free cash flow was Rs. 452 crores, which is 81% of net income. Our cash and investment grows to Rs. 2,436 crores by end of Q2 FY '23. I'm glad to share that the Board has approved an interim dividend of Rs. 15 per share.

Moving to revenue metrics, on a sequential basis, dollar revenue growth was 4.5% on a constant currency basis and 3.1% on reported terms led by Transportation and Plant Engineering segments. The segmental margin performance was better in 3 out of 5 segments on a sequential basis with increments in Transportation, Industry Products and Medical Devices.

Now, let me comment on operational metrics. The on-site offshore mix has shifted towards on-site due to new deal ramp-ups. Offshore percentage now stands at 54.9%. We expect this to gradually improve to 57% growth going forward as large deal ramp-ups stabilize. The P&L revenue mix was 73% in Q2 and reflects momentum of digital and leading-edge deal wins.

On the client profile, which indicates number of million-dollar-plus accounts, has shown sequential improvement in the $13 million , $20 million and $10 million-plus categories. The client profile numbers have seen an improvement over the past few quarters, and this trend will continue in the coming quarters. On client contribution to revenue, all 3 categories; top 5, top 10, top 20 have shown a slight decline compared to Q1. This is due to stronger growth in top 20 to 50 accounts. Headcount has increased marginally on a sequential basis as we added 500-plus pressures to support ramp-up of new deal wins, while we have optimized on non-billable headcount and support staff.

Though accretion moved up to 24.1%, we believe accretion will likely soften in the coming quarters due to various employee engagement measures to manage it. Realized rupee for Q2 was around USD 80.8, a depreciation of over 3% versus Q1. Let me give some visibility on the EBIT margin trajectory going forward. We are watchful of the headwinds from the current economic environment.

And like in the past 2 quarters, we'll continue to balance headwinds with opportunities on revenue growth, quality of revenues and operational efficiencies. Summing up, we remain cautiously optimistic and our aspiration is to remain in the 18% trajectory in the medium term. We thank all our stakeholders for their continued patent and wish you all a very happy festive season in advance.

With that, I now hand it over to the moderator for Q&A session.

[Operator]

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

[Mukul Garg, analyst]

I just wanted to get some sense on the deal flow. So have you seen any moderation in the PC number, the larger PCV count has come down this quarter. And while you mentioned that there are a number of deals in the pipeline, is this something to do with increased caution at the client then or is this just a tannish issue? The other question was on the guidance. Just want to whether should we see this guidance in the context of last quarter's 4.5 to 6 half number, which was as of Q4 end? Or is this FY '22 over partial currency FY '22? Just wanted to set some clarity given you volatile movements.

[Amit Chadha, executive]

Thank you. Number one, on the deal flow. I do want to confirm to you that our pipeline as it stands today is slightly better than what it was last quarter, and that was slightly better than it was previous quarter, right? Year-on-year, there is a double-digit increase in pipeline. Now in terms of deal closures, we have been closing 3-digit deal wins for the last few quarters in a row now.

So if you remember, quarter 4 was a $100 million win, quarter 1 was a $50 million win, and this quarter, there is a $60 million-plus win, right? So deal wins continue that they are. I would not read too much into that $10 million plus because there are deals that are in $9 million that closed. So that time, we want to maintain the quality of reporting that we do. So therefore, we have singled out the $10 million, and I haven't called out the $9 million. But at this stage, I am not concerned with the deal flow or the deal closures as we speak. Right? That is 2.

Third, I do want to call out that Europe for us has had a significant amount of wins this quarter as they go through 3 items: one, a cost challenge, two, an energy challenge, and third, to stay ahead in technology. So I do see that as an opportunity as we stand today. So that's where we are on the wins. I do hope when I come back in January, I should be able to announce further wins for you and give you the confidence that this continues on. As far as guidance is concerned, I'm going to turn over to my colleague, Rajeev, to get that question.

[Rajeev Gupta, executive]

So Mukul, on your question related to guidance, I would say that you need to read the 15.5% to 16.5% guidance relative to 14.5% to 16.5% that we shared in the previous quarter. So like Amit said, we have now narrowed down the guidance, which means we have better predictability to be in a narrow range.

[Mukul Garg, analyst]

Just one question, Amit, on the hitech side, we have for some of your services peers speak about weakness in Telecom & Hitech space despite the 5G addition, which is going on, while you gave some color, but if you can just kind of move a little bit deeper into the technological and how we should think about over the next 3 to 4 quarters.

[Amit Chadha, executive]

Sure. So Mukul, as far as Hitech is concerned, break it up into 6 parts: Semicon, Operators, Infra, Media Entertainment and then Consumer Electronics -- if I may, and ISV, right? 6 subsegments, if I may. So I would say that we have seen across the spectrum other than operators, we have seen others come back and look at deals and look at spend and question whether those will provide top line or bottom line expansion improvement in the near term.

And if they are not, then those deals are being questioned again and again, and therefore, it is delaying some of that. So hitech I had maintained last quarter as well that we were finding it a little tight. And I maintain, we are finding it tight right now also. Now if I were to double click, the biggest -- shall I say tightening that ISV that we have seen is in the ISV space.

And then after that, followed by Consumer Electronics, shall I say Semicon, then Infra, then Media Entertainment and finally Operators. So that's order we have seen. And of course there are people or the peer groups that is there, they may be seeing different things is what we are seeing. Second, because Semicon is not just delivering to hitech but also delivering to Auto and others, that part of the business is continuing on in the sem con companies.

Third, 5G spends -- look at it as spends in U.S. and in India because both these countries have got clear road maps, while others are coming along. And we have not seen the trickle effect of 5G coming right now. I do believe it will take a couple of quarters for it to be seen by engineering providers like us.

[Operator]

Mr. Garg, may we request that you return to the question for follow-up questions. The next question is from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

Just a clarity…

[Operator]

Sorry to interrupt you, Mr. Shah, please use the handset mode the audience to have from your line.

[Sandeep Shah, analyst]

Yes. Is it clear now?

[Operator]

Yes, sir, please, proceed.

[Sandeep Shah, analyst]

Yes. Just to achieve the guidance of 15.5% to 16.5% in constant currency terms. Just wanted to clarify the ask rate which I'm getting is 0.6% to 1.7% Q-on-Q in the next 2 quarters will constant currency to achieve the revised guidance. So the question is whether this calculation is correct, and second, if it is correct, it shows a slowdown. So it's largely factors parlous or some client-specific issues because of the deteriorating macro as well. Because the first half the Q-on-Q growth has been in the range of 4.5% to 4.7% Q-on-Q in CC terms.

[Amit Chadha, executive]

Sure. So the way I would look at it, right, is not on quarter -- see, quarter 3 generally is a soft quarter because of furloughs and locations. This time as you are aware, Diwali and the share of both along with the entire thanksgiving and Christmas and your everything is coming in quarter 3. Generally, the sera normally comes into quarter 2 and other tons in quarter 3. So everything is in quarter 3. It's a festive season. So this will be a little muted while we expect quarter 4 to be back at our standard growth rates. So we have factored in all that. But having said that, we've always been very, very -- we want to be able to deliver to you what we commit. So as things change, we will update you again.

[Sandeep Shah, analyst]

So just wanted to clarify, is there a higher than abnormal furloughs being factored into or as of now clients are not indicating the same? And whether my calculation on a rate to achieve in is correct 0.6 to 1.7.

[Amit Chadha, executive]

No, I'm not going to comment on that 0.68. I want to be able to think bigger and better rather than things that so I won't. But as far as forges are concerned, there are some clients that have planned for it, there are others that are talking about it. So we are a little cognizant of all that.

[Operator]

Mr. Shah, may we request that you return to the question queue for follow up questions. Next question is from the line of [ Kanika Karma from Metair Equity Fund ].

[Unknown Analyst]

So my question is, sir, in the aftermath of Ukraine-Russia as well as the geopolitical condition in China. So how will the business strategies change prior to the war and post as well as I also wanted to add about the Europe's recession part. So what would be the changes in strategies?

[Amit Chadha, executive]

So thank you. See, we are seeing 3 broad or 4 broad areas with the Ukraine war that we have seen emerge in the U.S. as well as Europe. Number one, countries -- largest countries, but states in larger countries are starting to think of localized supply chains. And that does offer opportunity for people like us. Second, people are looking at -- so last year, same time, cost was not such a big consideration, technology advancement was. But now cost along with technology advancement that should either help the top line or bottom line, like I said ROI, is a concern.

Third, there is a transition in energy sources happening. It's happening quietly, but it's happening. People are moving from gas-fired to oil-fired, oil-fired to coal-fired plants. People are looking at alternative energy sources. Companies are doing it, governments are doing it, states are doing it. So I do believe that, again, provides a once in a lifetime opportunity as this shift happens over the next 5 to 7 years. Electric vehicles is a part of that. Wind energy, solar panels, et cetera, is a part of that.

So I do believe that we are in a fairly volatile world. And these offer opportunity as long as we can be agile, and we can continue to marshal our resources to retrain people, to move people around as well as it can adapt to latest technology trends.

[Operator]

The next question is from the line of Mihir Manohar from Carnelian Asset Management.

[Mihir Manohar, analyst]

Sir, I just wanted to understand on the -- I mean, it is pretty much clear about this particular FY '23. But just wanted to get a fine how are you seeing the next year, having any conversations with clients, specifically to client budgets. -- some color over a 2-year period of years? And how are you seeing the 2-year period now versus what you were seeing last quarter? That will be really helpful year. That was the only question.

[Amit Chadha, executive]

So thank you so much, Mihir. So number one, we do believe we have given you guidance that we will hit $1 billion run rate. Last year September is when we had told you, so we did achieve it in this quarter. We are reiterating our guidance of getting to a $1.5 billion run rate by FY '25. That has not changed, and that's our goal from here on as we move forward.

[Mihir Manohar, analyst]

Sure. I mean any conversations with clients around SDS budget?

[Amit Chadha, executive]

Yes. We continue to talk to clients, Mihir. In fact this is a time when we sit down and we do workshops with some of our larger clients and strategic clients. We sit and do workshops on next year projects and work programs they want to roll out, sustainable-use engineering that we are doing, how many changes do they want, what kind of patents we are things, all conversations and the entire sales delivery solutions team, everybody is running around meeting with clients. So all of that is going on.

[Mihir Manohar, analyst]

Sure, sir. Just lastly, on the any quantity to understanding is the base.

[Amit Chadha, executive]

Yes. See, the bets that we had taken, the one thing we did, and I didn't put it in my comments, I wanted to share it because you are our community, you are our stakeholders. So in the last 3 weeks, we have started a review of the bets that we have taken 18 months ago and said, are these relevant? Are these still relevant? And can we change? I'm happy to share that the 6 beds that we took on electric autonomous connected vehicles, sustainability, digital manufacturing, all 3 have already fired and are showing results, and there are further solutions being developed in these areas. In fact, happy to share that we inaugurated our EV charging station with our own homegrown, home-built energy, hybrid energy controller in Vadodara on Friday. And so a lot of stuff happening in that area. We do believe that 5G and med tech are areas that we will have to further strengthen and take it forward as we move along. So we do believe that we have the relevant bets for engineering and technology services to take forward.

[Operator]

Mr. Manohar, may we request that you return to the question queue for follow-up questions. [Operator Instructions] The next question is from the line of Vikas Ahuja from Antique Stockbroking.

[Vikas Ahuja, analyst]

Just one clarification regarding the guidance. We have changed the guidance because last quarter we reported in USD terms, now it's constant currency. And we did release to the constant currency in the call last time. What led to changing the currency dynamics from USD to constant currency because currency was equally volatile in Q1 also. And secondly, when I look at the peers, the gross finance impact is lower to between 250 to 350 basis points, is it similar for us? Thank you.

[Rajeev Gupta, executive]

So Vikas, this is Rajeev. Let me answer to that. So when you talk about the guidance that we have provided, we narrowed the guidance to 15.5% to 16.5%. And this is comparative to 14.5% to 16.5% that we provided in the previous quarter, both were in constant currency. And as you would appreciate and also trying to clarify to most of the other participants, dollar has been extremely volatile, right? And it is an environment which is really harder to see through that guidance can be really managed on a constant currency basis as opposed to on a reported currency basis because of the volatility. So that's one part of the response. The second part of the response, yes, the dollar indeed moved up. For us, we've seen a tailwind of close to about 80 bps to 100 bps in terms of managing the margin performance. So that is how it has translated for us in terms of our performance in Q2.

[Operator]

The next question is from the line of [ Natalia ] from Mount Intra Finance.

[Unknown Analyst]

Am I audible, please?

[Operator]

Yes, sir, you're audible.

[Unknown Analyst]

So I just had a question around the transport segment in particular. So as we've seen in the transport segment, particularly in auto space, a lot of the strategic programs was kept in mind with the next few years kept in mind when it comes to programs around connected mobility, autonomous shared mobility. So as you said, with the quick agave demand coming through from clients. So is there any possible change in the multiyear deals and the deal sizes going ahead? How would this trend actually play out in this sector, which you're supposed to be showing strong tailwinds? Just had a question around that. Thank you.

[Amit Chadha, executive]

So one, we do see transportation segment, looking at clearly moving to energy-efficient vehicles, right, be it auto, be it truck, be it off-highway, be it skid-steer loaders, et cetera, labor orders, et cetera, et cetera. So much so that even floor cleaners, people are trying to get a hybrid or an electric version out, right? So there's a massive shift that is happening in that direction. These again, can't be -- it's not a magic one that can happen in a 6-month period. These are versions of programs that run for anything between 18 months to about 3 years and they address family of vehicles.

So say, somebody would look at a small sedan and do it and then do it for a larger sedan and then also do it for an SUV. Now these 3 family of vehicles will require different kinds of what age voltage to be going in, right? So therefore, there is R&D to be done. I mean, there's a particular large program we are working on for our skid-steer backhoe loader. And in that case, the kind of wattage that we're talking about is about maybe 6x or 8x what we talk about for a car. So there are different parameters. So these are long story short, these are not start-stop programs. These are programs that run over a period of time, and therefore they provide repeatability of revenue, predictability of revenue and constant potential growth opportunities for us. And most of it is done offshore. And that I think is coming out in the transportation margins that we have released.

[Unknown Analyst]

Okay. So just to confirm, we don't see any real change in the nature of work that we've been getting from this segment going forward. There's no real change around this?

[Amit Chadha, executive]

The kind of work we were doing 24 months ago to what we are doing today is different. And for the next 24 months, at least, I can confirm to you, we see the same. Like I said, we will again do an analysis of our bets in about another 18 months and see if those are relevant or should we change them or modify them. So at that point of time, maybe there's something new that comes up that will allow us to change. But for the 6, 18, 24 months, I believe same kind of work will continue. Okay, thank you for that, Mr. Amit. Thank you so much.

[Operator]

The next question is from the line of Bhavik Mehta from JPMorgan.

[Bhavik Mehta, analyst]

I have 2 questions. Firstly, to Amit. Amit, you talked about the client cautiousness on spend. So is it broad-based across your verticals? Or are some verticals better place than others when it comes to digital making? And secondly to Rajeev, how should we look at the margin trajectory for the second half given the fact that the biggest segment of wayside is behind you now. So what are the incremental headwinds and tailwinds you see for the second half of the term?

[Amit Chadha, executive]

Okay. So Bhavik, one, I don't think the caution -- see, and again, step back in terms of every time there's a negative commentary you think, right? Are you headed in the right direction. That's the reality. But having said that, see, transportation, the tailwind in electrification and the tailwind in autonomous connected is something that is -- that's a measurable tailwind, one.

Second, for industrial and the process, digital manufacturing and energy, can I call it rather than sustainability or call it, energy conversion or right, alternative energy, et cetera, are valid things that are, again, tailwinds that are required that are going forward. And they again go back to basic laws of human nature, number of workers are less, they need start to be automated and digital -- the energy costs are high. They need to find alternative sources to keep the raw material costs down and our input cost down. So all that put together, these are 3 clear tailwinds that we see.

Having said that, Hitech, there is a tightness that we see measurably across hitech. And even in medical, on new product development, unless it is something that is related to more health care compliant -- FDA compliant, et cetera, we are seeing a little bit of a question being raised. Because, again, I want to give a little bit of color here. See if you look at doctors, they -- once they come out of college and they've learned on a certain set of devices. Because of the amount of regulation, it goes in to recertify our device, -- it will be -- it takes time for new devices to come out and stuff to happen. I mean, I'm happy to have a longer conversation on this with you. But therefore, we see a little bit of conservatism in medical always and then, of course, hitech. So that's where we are.

[Rajeev Gupta, executive]

I'll take the second question in terms of the margin project. So I will weigh a few things over here, right? So if I look at really the plus and the minus factors, in terms of plus factors, clearly, growth in revenues, better quality of revenues. In fact, when I touch upon better quality of revenues, there are some aspects to that, right? One, if you look at the growth that we've seen across segments, there have been 3 segments where margins have improved. So we are engaging growth come in segments that are having better profitability. And that's essentially helping us out and aiding in terms of the margin performance.

The third aspect is also on the scale benefits. If you look at in terms of G&A costs, we've kept it almost flat. That's kind of played out well for us. We believe going forward as well, we'll be able to see scale benefits coming in. In terms of factors or other headwinds, the current economic environment, rather one more aspect that I will add in terms of the positive, which is around the rupee depreciation. That's been, of course, a tailwind in the current situation. Now talking about some of the adverse factors, the current economic environment is such that, like I said, we will be watchful and we will try to balance out some of the positive under negatives.

So one that we will try to trade cautiously over the next few quarters until we see the environment stabilize. Attrition, we believe that we've reached a peak going forward, it should normalize . And in that sense, yes, it is going to be a positive factor because it will take off the load in terms of hiring, rehiring, and of course, the in and out in terms of the salary factors. So that should be a positive as well. And like you said, of course, Q2 had the maximum impact in terms of wage hikes. We believe there may be some incrementing rate hike, but that's something that we should be able to counterbalance. Of course, these are all the factors that we feel we should be able to balance out while maintaining the EBIT trajectory in the medium term for an aspiration of 18% levels.

[Operator]

The next question is from the line of Akshay Ramnani from Axis Capital.

[Akshay Ramnani, analyst]

So I wanted to check on the guidance which you shared of the achieving the $1.5 billion run by FY '25. So we are at $1 billion run rate currently. And the difference to achieve that is about 50-odd percent over a 2-year period. And when the demand environment or to say there is some caution in the environment from client side, what gives you this visibility over the next 2, 2.5 years, still maintaining that aspiration of achieving that number, that was part one. The part 2 is that how should we think about the organic and inorganic component within this 2.5-year journey. So those 2 parts to that guidance side.

[Amit Chadha, executive]

Okay. So here is how I would see it, right? Our $1.5 billion includes 3 things that we have factored in this. A is, we expect at some points right now, like I admitted to you, at about 3.5 bets out of the 6 beds of firing. We expect the remaining 2.5 to fire as well. And for a period of time, we expect that all 6 bets will fire. We have done a modulation based on that. And then, of course, maybe one of them will fall off and et cetera, et cetera.

But there will be a period of time between now and the next by FY '25. They're all 6 bets. B, we are considering some amount of large deals that we will be able to execute, sign, execute so our large deal engine continues to fire and very active. And you've seen that we expect to part. C, there is a little bit of inorganic built into it. And so that's the third part that we expect will happen. So that is what is the build-out that we have done for the $1.5 billion.

[Akshay Ramnani, analyst]

Okay. And so on the large deal side, so over the past few years, I think we -- over the past few quarters, especially we have been continuing these larger deals. So I wanted to get a color on the large deal pipeline. So we've seen you report those deals, but over the past, say, 2, 3 years, past 2, 3 years, do you see that large deal pipeline growth has been stronger versus what you have seen historically? And if yes, then what actually is driving that trend to your thoughts there?

[Amit Chadha, executive]

Sure. Actually, in fact, one of the litmus test for us, when we announced $1 billion, we announced 3 things last September, $1 billion, 18%, $1.5 billion. So crossing or touching million donate in constant currency was very important for us because it was a litmus test. The 18% and staying to 18% for the 5 consecutive quarters has been a litmus test for us. We are finally engineers, right? And therefore, we have confidence in the 1.5%. Now second, in terms of the kind of pipeline, I do think our pipeline year-on-year, quarter-on-quarter continues to improve. We continue to size out deals areas, which will go in.

The one big change we made is that we have been running the large deal, shall I say, the process of thinking and ideating and all that is a continuous process running across the company in different parts at different times so that it becomes like a wave that comes and everybody once in a while gets to the wave again and again. So we are doing that. There are some other fundamental changes we have made in terms of how we think about large deals and what we think is the scope and size of those, et cetera. So it's definitely expanded. Our closures have been in 3 digits net new more than $1 million for the past few quarters, and we expect that, that will continue. And we want to sign bigger deals and we'll continue to provide an update.

[Operator]

The next question is from the line of [ Shradha from Amsec ].

[Unknown Analyst]

I have 2 questions. The plan for the moving segment shows that 200 bps to model margins despite a strong growth of 5%. So what can even margins in the bps?

[Rajeev Gupta, executive]

This is Rajeev. I will take that , so 2 parts to that. One, of course, there have been quite a few new deals that have started in this segment, which, of course, when you start any new deal, you tend to see margins coming down in the initial period and then you sort of catch up on that. The second is also that when you have these new deals starting, you may invest in subcontractors. So those are the 2 key reasons why we've seen margins slightly come down in plant engineering, but we believe that we should be able to improve as quarters go by.

[Unknown Analyst]

Okay. Sure. And second question, Rajeev, you did mention that SG&A was flat on a Q-on-Q basis, but when I see SG&A as a percentage of revenue, it was at a 6-quarter low number. And despite of increase of travel and other expenses that we are seeing for other companies or those expenses have been [ disflattished ]. So what is going in G&A? And how do we see that going on?

[Rajeev Gupta, executive]

So the 2, 3 points on that one. One, when I say flat, it is flat in absolute terms, right, which is leading to a percentage reduction to revenue. Now as far as investing on sales side, I think we continue to believe that's the way to grow. So we will look at that more constructively on the G&A side, and I think we've been fairly conscious a few quarters ago, understanding that, yes, the economic environment is tough. So we've started to put measures in place so that we can optimize costs. While we have come at about 11% on SG&A, I would guide all of you to take SG&A to be in the range of 11.5%. While we will counterbalance some of this, but that's how I will sort of guide in terms of projecting SG&A.

[Unknown Analyst]

Yes. And the rationalization of the SG&A staff that we see most to do with the Genie or you're seeing some rationalization in the salespeople as now?

[Rajeev Gupta, executive]

It's more to do with the G&A.

[Operator]

The next question is from the line of Sulabh Govila from Morgan Stanley.

[Sulabh Govila, analyst]

A couple of questions from my side. I want to begin with, Amit, I just wanted to compare the macro comments related to the last quarter. So would you say that the dynamics have been similar to what we saw last quarter? Or has there been a change? Because the 2 verticals we mentioned remain same, but just wanted to understand the intensity of caution behind that.

[Amit Chadha, executive]

So, what we saw last quarter is what we are seeing now. There is no deterioration. There is no improvement. It's basically the same.

[Sulabh Govila, analyst]

Sure. Understood. And second is to Rajeev. Rajeev, you mentioned that put some for the margins this quarter. So would it be possible for you to quantify those percentages, the margin work for the quarter?

[Rajeev Gupta, executive]

We would not be able to do that. But if you want to pick an offline conversation to get any clarity, feel free to touch base in so that you can have a more elaborate conversation on this.

[Operator]

The next question is from the line of Abhishek from InCred Capital.

[Abhishek Shindadkar, analyst]

Congrats for good execution. Just one question from a demand perspective. What are you seeing on the ground from captives given the challenges in Europe, what are they doing or looking to ramp up capacities in India? And is that changing the competitive intensity in the market? Thank you for taking my question.

[Amit Chadha, executive]

Sure. Thank you so much. Abhishek, if you would have asked me this question 10 years ago, I would have said captives are competition. But honestly, as we say, it's a cooperation model. So you work with them, and there's a core contextual that the client defines core done by them, contextual done by us, what they define as core changes, what they define as context changes. So that's how this flux happens. We have seen a little bit of a pause on -- as far as Hitech is concerned and as far as medical is concerned. We are seeing a slight pause from own employees being hired by captives, right?

And so that we have seen -- and we see that potentially as an opportunity because we can flex up, flex down, et cetera. So that's definitely there. As far as auto is concerned, which has got our transportation he's got huge capital here, they continue to expand as we see it. And so does parts of industrial plant doesn't normally have a lot of capital here, but yes, we see that. See the good part, another thing I wanted to point out wise, again, 10 years ago, capital would mean China, capital mean India. It would mean Eastern Europe and Latin America. Today, China is off the table. So it's basically between India, part of Eastern Europe with is part is, as you are aware offline and part of it is Latin America. So we believe that we are well positioned from that standpoint.

[Operator]

The next question is from the line of Arvind Chetty from Max Life Insurance.

[Arvind Chetty, analyst]

This is more on the headcount on the sales and support side. So while our aspiration for FY '25 was about $1.5 billion, which essentially means a 4% to 4.5% compounded growth from now. With that aspiration and near-term expectation of large steel engine fire in our sales support has gone down by about 5% on a Q-o-Q basis. So is that more of an aberration or it's more indicative of near-term?

[Amit Chadha, executive]

So, look, look at enabling functions, sales support as a flat structure, right? You need a certain set to make a certain number and then you have a . And then you, again, you continue to do that. So I would not be worried. I mean, $1.5 billion in FY '25 is we are right now in FY '23. So there are 2 years to go. So we will see that. We are mindful of it is all I would say at this stage. I would not worry about it. And I would not take it as a lead indicator or anything.

[Arvind Chetty, analyst]

Yes. Yes. So just a follow-up on that, how do we look at this number going forward?

[Amit Chadha, executive]

We don't give guidance on sales support numbers going forward. Of course, our sales debt wants more other so we'll see.

[Operator]

The next question is from the line of Karan Uppal from PhillipCapital.

[Karan Uppal, analyst]

So in 2 questions from my side. So in the auto segment, within EV ADAS interior, which are the subsidies and having the maximum contribution to your dealers. Is the demand quite strong in European OEMs and U.S. OEMs? And how is the pipeline being? And second question is on just a follow-up on the hiring part. So net addition has been soft in Q2. So what's the outlook for FY '20?

[Amit Chadha, executive]

So I would request, Abhishek, our Chief Operating Officer; to answer the first question on how do we see auto, which subsegment and which region, Abhi?

[Abhishek Sinha, executive]

Sure. So if you look at these 3 segments, clearly, at least at this point, electric is where we are seeing the highest traction for the connected and then autonomous. And as for the region is concerned, both U.S., Europe traction is equally strong for us at this point and also both automotive and Tier 1s. I mean, OEMs and earns and automotive space, but also, of course, seen traction on interestingly on the connected side, on the truck and off-highway segment as well, which also is starting to pick up.

[Amit Chadha, executive]

Thank you. On Europe or U.S., so that's both, right? -- we answer that -- can you repeat your second question, Karan?

[Karan Uppal, analyst]

Yes. Just on the net addition side. So Q2 that addition has been a bit soft. So just to check what is the hiring outlook for FY '18.

[Amit Chadha, executive]

The net adds, we knew -- I think [ Amanji ] mentioned that earlier, this was a tight quarter for us given that this was a quarter when we gave increments. So we had to be very cautious in how we run operations this quarter. Having said that, we have continued to hire prices in this quarter also, and we will continue in the coming quarters as well. From a people perspective, we had enough and more people to deliver for the quarter, and we have really good plans for the coming quarters as well. So please don't read too much into the headcount front because it was a move that we had to do this quarter from an operations perspective.

[Operator]

The next question is from the line of Sameer Dosani from ICICI Prudential AMC.

[Sameer Dosani, analyst]

I just want to understand how is the utilization moved in last 2 or 3 quarters. I mean, and this is also in the context of headcount addition do we have enough room for increasing of utilization from that at this point of time or we'll have to hire more?

[Rajeev Gupta, executive]

So, this is Rajeev. I'll take part of the question, and I will also request my colleague, Abhi to add to it. So like we've said in the previous quarters, we have stopped reporting utilization because, of course, there are areas of revenue that are not directly linked to utilization. But I can certainly give you directionally, the utilization has been improving that, and that's part of what Abhi mentioned earlier that we've looked at Q2 revenue. And we've tried to optimize on parameters that could eventually help us in terms of delivering the quarter. I will also request Abhi to add on to this, please.

[Abhishek Sinha, executive]

Yes. I think the same point, utilization definitely has improved for us this quarter without picking on any specific numbers. Broad-based refining, our goal is to operate between the 78% to 82% level. That is the range that we are comfortable with anything above 82% because we're an engineering company is a red flag and below 70 red flat. But the reason we as rate as a reg flag is because we want to continue to invest in R&D and engineering work for our customers and for our people. So that's the range we claim.

[Operator]

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

[Pinku Pappan, executive]

Thank you, everyone, for joining us on this call today. It was a pleasure interacting with you, and we look forward to more such interactions during the course of the quarter. From all of us at NPDs, it's a goodbye and wish you a very happy festive season for the coming days. Thank you. Bye-bye.

[Operator]

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