L&T Technology Services Ltd

NSE:LTTS

Earnings Call Analysis

L&T Technology Services Reports Growth in Revenue and Strategic Deal Wins

L&T Technology Services (LTTS) showcased strong performance in Q2 FY '25, achieving a sequential revenue growth of 4.5% to INR 2,573 crores, with a year-on-year increase of 7.8%. Growth was led by sustainability, up 6.5%, and mobility, up 5%. The company won multiple large deals, including two over $20 million. Despite facing a slight decrease in EBIT margin to 15.1% due to investments, LTTS reaffirmed its FY '25 revenue guidance of 8% to 10% growth and aims for a 16% EBIT margin for the year. The strategic focus remains on mobility, sustainability, and leveraging technology for future growth.

Revenue Growth Across Segments

In the second quarter of FY '25, L&T Technology Services reported a robust revenue of INR 2,573 crores, which reflects a sequential growth of 4.5% and an impressive year-on-year growth of 7.8%. The growth was broad-based across various segments with sustainability leading at 6.5%, followed by mobility at 5%, and technology at a slower growth of nearly 1%. This diversified growth indicates a strong performance amidst a fluctuating economic environment.

Continued Client Engagement and Expansion

The company experienced notable progress in client engagement, winning two significant deals worth over $20 million and four deals over $10 million in value during the quarter. The number of accounts contributing more than $30 million in revenue increased to seven. This uptick highlights L&T's effective client mining strategies and the confidence clients place in their innovative solutions.

Financial Performance and Outlook

Despite the solid revenue growth, the EBIT margin for Q2 FY '25 was recorded at 15.1%, slightly down from the previous quarter due to increased sales and technology investments. SG&A as a percentage of revenue also rose by 40 bps sequentially. Looking ahead, the company is committed to improving EBIT margins, aspiring for a 16% level for the fiscal year and forecasting growth for the second half of FY '25 to be above H1 levels.

Guidance Reaffirmed for FY '25

Management reaffirmed its fiscal guidance, projecting a revenue growth of 8% to 10% for FY '25 in constant currency. They expressed confidence in achieving this target due to a healthy pipeline of large deals ranging from $25 million to $100 million, as well as expected improvements from operational efficiencies. Additionally, it is noted that EBIT margins in H2 are expected to outdo those in H1, driven by planned operational improvements and increases in revenue quality.

Cash Flow Improvement and Capital Allocation

The company reported a notable improvement in cash flows, with free cash flow for Q2 standing at INR 417 crores. This figure contributed to a year-to-date free cash flow of INR 328 crores. The effective management of Days Sales Outstanding (DSO), which dropped from 102 days in Q1 to 99 days in Q2, illustrates L&T's enhanced collection processes, aligning with their goal of maintaining a DSO between 115 and 125 days.

Investment in Future Technologies

L&T's focus on pioneering technology and restructuring its service lines has positioned it well for future growth. Investments into segments like AI and factory automation (the ‘Factory of the Future’ strategy) have already begun to show promising signs in terms of deal inflow and revenue potential. The company envisions building each of its three strategic segments—mobility, sustainability, and tech—into standalone billion-dollar units over the coming years.

Challenges and Market Dynamics

While the outlook remains positive, the management acknowledged certain challenges. The tech segment remained flat, and in the context of the global landscape, they must navigate through possible project delays and changing client requirements, particularly within Tier 1 companies in the automotive sector. Adjusting strategies in response to these shifts will be crucial for maintaining momentum.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Q2 FY '25 Conference Call of L&T Technology Services Limited. [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, Mr. Pappan.

[Pinku Pappan, executive]

Thank you, Robin. Hello, everyone, and welcome to the earnings call of L&T Technology Services for the second quarter of FY '25. I am Pinku, heading Investor Relations.

Our financial results, investor release and press release have been filed on 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 the end of this call.

With that, let me introduce the leadership team present on the call today. We have Amit Chadha, CEO and MD; Abhishek, Executive Director and President; Alind Saxena, Executive Director and President; and Rajeev Gupta, CFO.

We will begin with Amit providing an overview of the company performance and outlook, followed by Rajeev, who will walk you through the financial statements and performance. Let me now hand the call over to Amit.

[Amit Chadha, executive]

Sure. So I hope I'm audible. Okay. So thank you, Pinku, and thank you all of us -- all of you for joining us on the call today. If I look back at 2021, we created a vision, a mission and a value charter. And based on that, we are repositioning our brand as purposeful, agile, innovation. This embodies the fundamental way of how we will do business and deliver meaningful transformation for all our stakeholders.

Purposeful stands for our vision of building a sustainable tomorrow on a better world, leveraging technology and delivering inclusive growth for all stakeholders.

Agile relates to our ability to learn, evolve and adapt to changing technologies, market dynamics while harnessing the image of our engineers -- imagination of our engineers.

Innovation involves anticipating and investing in future technology, systems and processes to bring world-class solutions to our clients across products, processes and operations. As we continue to pivot on growth, this refreshed visioning will help us accelerate engineering the change for our clients.

I'm confident this will create a platform for the future and establish LTTS in 3 strategic segments: mobility, sustainability and tech, and build each of them into stand-alone billion-dollar units over the coming years.

With that, let me provide the key highlights of our quarter 2 performance. We had a strong quarter, with revenue growing at 3.9% sequentially, which was broad-based across regions and segments. Sustainability led the growth with 6.5%, mobility grew by 5% and tech by nearly 1%.

We won 2, $20 million-plus deals, 4, $10 million-plus deals and 2 significant empanelment agreements. These wins have been across segments.

Our customer mining has seen steady improvement on year-on-year and quarter-on-quarter basis. The number of $30 million accounts has increased to 7 now, up by 1 quarter-on-quarter and 3 year-on-year. Similarly, the number of $10 million accounts has increased to 33 now, up by 2 quarter-on-quarter and year-on-year.

In line with our earlier commentary, we have made focused investments into 3 segments. We are starting to see the results in terms of pipeline deal wins, revenue growth, including this quarter, as you've seen. These impact -- investments have impacted EBIT in H1. We expect with growth continuing in larger deals in our strategic areas, the EBIT trajectory will move upward.

With this, let me provide segmental performance and outlook. Starting with mobility, we had a strong 5% growth in Q2 on the back of 6% in Q1, driven by large deal ramp-ups in SDV and hybridization. As we had highlighted during the Investor and Analyst Day, a lot of the SDV development is happening at the OEM and in our exposure and presence at OEMs, especially with the European and U.S. OEMs has increased significantly over the last year.

The key value proposition that we offer to our customers with advanced automotive solutions across ADAS, virtualization and AI for specific use cases, digital twin and connected apps, SDV digital cockpit, all of which accelerate the time to market and help them stay competitive.

In trucks and off-highway, we continue to see good demand as hybridization and SDV adoption continues to rise.

We launched LTTS [ iDrive ], our proprietary framework for accelerating SDV implementation, applicable for both auto and trucks and off-highway. We've already won 2 programs, one each in U.S. and Europe, leveraging LTTS [ iDrive ].

Within aero and rail, we are beginning to see more deals in rail. We signed a partnership with Etihad Rail for the development of digital solutions and creating of an intelligent transportation system. We have multiple solutions in rail leveraging AI and augmented reality that has been successfully deployed by customers.

Overall, we see a robust deal pipeline for mobility. However, Q3 will be slightly soft on account of seasonality, we expect this to rebound in Q4.

Now on to our second segment, sustainability. In line with our expectations, we saw a strong rebound in sustainability performance at 6.5% growth. As compared to Q1, we're only processed or plant engineering was firing. In Q2, we had industrial performing equally strong. We are seeing a turnaround in industrial as customers are looking ahead and investing as we see a more promising outlook.

These investments are towards automation in the form of digital platforms, manufacturing and supply chain optimization. As a result, there's a strong demand for setting up centers of excellence of clients around the same.

In the process of segment, we continue to see demand in projects, engineering and plant modernization. Leveraging digital technology is a priority for our customers. One of the large deal wins in Q2 is with an O&G customer where we are developing a digital twin of the refinery, which allows the customer to see an integrated 3D view of all the assets in the refinery.

Similarly, in other empanelment, we are a project engineering partner for a new plant where we are setting up command center, which will allow them to remotely control and manage the refinery.

In the CPG subsegment, the 3+1 strategy is benefiting us as customers are setting up new plants and expanding operations in India. We are therefore seeing an uptick in project engineering in India from our global clients.

Leveraging our deep expertise in Industry 4.0, we have now launched our proprietary factory next framework for the factory of the future, covering smart sensors, edge, robots, IIoT and data lakes. Our framework enables cobots to enhance productivity, which is getting good traction. We have had started 2 departments in the U.S.

In summary, for sustainability, we are seeing a good pipeline and a number of deals in the pipeline, both across the industrial level, expect the growth momentum to sustain in Q3 and beyond.

In tech, we had a good growth in our Semcon and ISV subsegments. With our hyperscaler accounts, we have now won 2 deals, 1 on device and other on platform engineering. These have gone into execution in October. Given the tailwinds in AI, Semcon subsegment continues to ramp up for us with multiple programs across the value chain.

In comms and media, while performance was soft in Q2, we are seeing a few transformational deals that could potentially close in Q3 in the area of network management and vendor consolidation.

In the MedTech subsegment, we continue to see a rebound led by our strategic focus areas of QARA, digital health and digital manufacturing as part of our collaboration with a leading AI Semcon major. We're building an AI solution for a customer for image enhancement and vision care.

Overall, with the pipeline in large deals in play, we expect tech growth to improve in Q3, led by our work with Semcon, hyperscalers and MedTech.

Now a few updates on our technology and innovation charter. Our engineers added a total of 51 patents filings in Q2 and a cumulative patent filing now stands at 1,394. The innovation is also reflected in the rankings we have been ranked as leaders by HFS and IoT services. Avasant in digital engineering services, Zinnov in data and AI. To help customers accelerate their AI, Gen AI journey, we have launched GenIQ, our software development platform for AI applications.

Let us now discuss our outlook. Our pipeline continues to grow at a very healthy pace with a good number of large deals in the $25 million to $100 million range. We are tracking these deals closely and expect a good number of closures in Q3 and early Q4.

In fact, some of these would have closed in Q2 itself, but got delayed due to elections and macro-related wins.

A common thread in most of these deals is clients are excited about our differentiated solutions and positioning and want to leverage our expertise as they continue to develop new products and transform their operations, manufacturing and supply chain.

This priority was further validated during our recent concluded client advisory council meeting, which consisted of 16 members, with combined market cap of $2 trillion and a revenue of $400 billion. We are just confident of broad-based growth continuing in the coming quarters and reaffirm our FY '25 guidance of 8% to 10% revenue growth in constant currency and aspiration of 16% EBIT margin levels.

Before I close, I do want to reconfirm that we stand strong in wanting to build $3 billion segment and get to revenues of $2 billion with 17% to 18% EBIT margin in the medium term. This ambition has been met with excitement by our employees, leaders and support from our key customers and Board members. We remain committed to this journey.

With that, I now hand over to Rajeev. Thank you and look forward to taking your questions.

[Rajeev Gupta, executive]

Thank you, Amit. Good evening to all of you. I would like to start by saying that our Go Deeper to Scale strategy is indeed showing encouraging results. We had a strong quarter with broad-based growth and deal wins across segments and regions.

As we had indicated during our Q1 commentary and Investor Analyst Day, we are pivoting on growth. Accordingly, we've been making investments ahead of the curve in building new set capabilities and adding leadership in segments for delivery and sales across the globe. Consequently, this has had impact for H1 FY '25 EBIT margin.

With that, let me take you through Q2 FY '25 financials, starting with the P&L. Our revenue for the quarter was INR 2,573 crores, a growth of 4.5% on a sequential basis. Our year-on-year growth for Q2 FY '25 came in at 7.8%. Our gross margin remained flat. However, on account of investments in sales and technology, our SG&A as a percentage of revenue increased by 40 bps sequentially. Hence our EBIT margin for the quarter came in at 15.1%, slightly lower compared to Q1 FY '25.

Now moving to below EBIT. Talking about other income. Other income was INR 53 crores, slightly higher on a sequential basis due to ForEx gain. Our effective tax rate for Q2 was 27.4% within the range of our expectation of 27.5%. Net income for the quarter was up 1.3% on a year-on-year basis and came in at INR 320 crores, which is 12.4% of revenues.

Moving to the balance sheet. Let me highlight the key line items. Our Q2 DSO was at 99 days compared to 102 days in Q1, unbilled days were at 17 days in Q2 compared to 23 days in Q1. The combined DSO, including unbilled, stood at 116 days compared to 125 days in Q1, which is within our target range of 115 to 125 days for the year.

Let me now talk about cash flows. As a result of improvement in DSO, our Q2 free cash flow came in at a healthy INR 417 crores, leading to year-to-date free cash flows at INR 328 crores. We will continue the effort to improve cash flow during the rest of the year.

Our cash and investments stood at INR 2,849 crores at the end of quarter 2 versus INR 2,784 crores at the end of quarter 1. This is after final dividend payout of nearly INR 349 crores in quarter 2. As you would have seen today, the Board approved an interim dividend of INR 17 per share.

Now moving to revenue metrics. On a sequential basis, dollar revenue growth was 3.9% in reported terms and 3.4% on a constant currency basis. We saw a broad-based growth in Q2 with all segments growing sequentially, led by sustainability and mobility segments.

Moving to operational metrics. The on-site offshore mix was at similar range as compared to quarter 1. Offshore percent now stands at 58.3%. We continue to work on measures to gradually improve this metric to our aspiration of 60%.

The T&M revenue mix was 62.5% in quarter 2, slightly lower as compared to quarter 1. Client profile, which indicates a number of million dollar plus accounts, has shown a sequential improvement in the $30 million, $20 million and $10 million-plus category. The client profile will continue to improve in the coming quarters.

Client contribution to revenue has shown an improvement in the top 20 and the top 10 category as compared to Q1. We expect revenue from top customers to improve going forward as we are running targeted programs on client mining.

Headcount was at 23,698 in Q2 compared to 23,575 in Q1, while attrition has slightly gone down as compared to quarter 1.

Realized rupee for Q2 was at INR 83.90 to the U.S. dollar, a depreciation of around 0.6% versus quarter 1.

Before I conclude, let me give some visibility on the EBIT margin trajectory going forward. As mentioned by Amit and me, we have prioritized investments in H1 FY '25 to accelerate growth, build leadership and technology solutions ahead of the curve. We expect this will lead to a step up in revenue growth and better quality of revenues, providing us with a path of $2 billion revenue aspiration and EBIT margin of 17% to 18% range in the medium term. In addition, we will continue our improvement efforts on operational levers like offshoring, pyramid optimization, higher productivity using tools and reusable platforms and indeed SG&A optimization.

For FY '25, we reaffirm our revenue guidance of 8% to 10% and aspire H2 and expect H2 EBIT margin to be better than H1 and continue to aspire for a 16% EBIT level for the year.

Thank you. Now I hand over to the moderator for questions.

[Operator]

[Operator Instructions] The first question is from the line of Bhavik Mehta from JPMorgan.

[Bhavik Mehta, analyst]

A couple of questions. Firstly, Amit, if I look at the ask rate for the next 2 quarters now, it has gone up significantly. Now I understand that 4Q is a seasonally strong quarter because of SWC, but how can I think about 2Q given its typically a weak quarter from a seasonality perspective, and we did highlight that mobility growth could slow down because of that? So what gives us confidence of still achieving even the lower end of the guide? And what are the thought process at least cut the guidance at the lower end because it just seems like the top end of the guidance is out of reach right now?

[Amit Chadha, executive]

Yes. So Bhavik, we are reiterating and holding our guidance. There was a similar question that was asked last quarter as well. On the ask rate, we are well aware of ask rate. And given the pipeline that we have got and the order conversion we've got, we are fairly comfortable with where we are. I would not like to state whether we are at the top end or bottom end, but there is work to be done, but we are fairly comfortable on where we are right now.

[Bhavik Mehta, analyst]

Okay. The second question was on margins. I remember last time, it was mentioned that margin trajectory should improve from 2Q onwards, and we have seen margins declining this time despite not having wage hikes. I'm assuming we'll have wage hikes in 3Q. So how should we think about margin trajectory from here on?

[Rajeev Gupta, executive]

Thank you, Bhavik. This is Rajeev here. So I'll answer 2 parts of the question. One, of course, the improvement on the EBIT margin. We indeed see EBIT margins improving from quarter 3 onwards. And on the wage hikes, yes, we plan them for to be in quarter 3 and will be effective from November onwards. So we will see likely 2 months of impact in quarter 2, quarter 3 for increments.

Just to complete, Bhavik, the point, we should likely see in a full quarter an impact of close to about 100 to 125 bps on account of increments. The fact that this is 2 months in a quarter, it will be lower, impact, to start off with, but conscious of the fact we aspire for 16% EBIT levels, and we'll be able to absorb this increment in quarter 3 as well.

[Operator]

The next question is from the line of Ravi Menon from Macquarie.

[Ravi Menon, analyst]

Congrats on a very good quarter. I wanted to understand why tech was flat, more or less this quarter, despite SWC, which should be slightly positive to the seasonality? And second part of the Maharashtra cybersecurity deal, wasn't there any revenue this quarter?

[Amit Chadha, executive]

So in H1 tech grew about 1% like I said, that the hyperscalers did well for us in this quarter. There was a couple of specific areas where the projects got over, et cetera. But quarter 3 will be a good quarter for tech as well as for sustainability because we've got the visibility right now, in fact, close to announcing a significant collaboration with an AI major. We'll do that, and you will see that coming out. So we're fairly comfortable there.

Now in terms of cybersecurity, it continues to grow. We don't call out cybersecurity as a percentage of revenue just like AI, but both AI, Gen AI projects as well as cybersecurity and OT as well as products, cybersecurity and continue to expand for us. We are actively hiring in these areas.

[Ravi Menon, analyst]

I was asking specifically about the Maharashtra cybersecurity deal that we had.

[Amit Chadha, executive]

Okay. Okay. Okay. Yes. So that was launched. There's some work still to be done in that area. So I was thinking, you were talking about cybersecurity internationally in the U.S. and European clients. So yes. So specifically to Maha cyber, it got launched. Congratulations to the Maharashtra government for thinking ahead of the curve and helping us execute or asking us to execute the project. It's not completed yet, it has been launched. There's other work to be done there. So it will continue for a little more time.

[Ravi Menon, analyst]

And that seems to be asset-light? There is no real fixed asset increase due to that project, right?

[Amit Chadha, executive]

One second. Can you repeat that question?

[Ravi Menon, analyst]

I'm saying that there seems to be no fixed asset increase on your books even though the Maharashtra cybersecurity got launched?

[Amit Chadha, executive]

Yes. It's largely -- there's a little bit of hardware assets, but largely a software project, like we had mentioned that Maha cyber is more like a traditional LTTS project, if you ask me the way we have executed it and what we run it as a software program.

[Ravi Menon, analyst]

All right. And SWC...

[Amit Chadha, executive]

I'm sorry. Sorry, Ravi. And that is a marked departure from what software, what SWC used to be. In fact, we have a pipeline now that is built up for SWC in the Middle East as well. And as we move forward, hopefully, we should be able to announce some closures there as well. So we are on that trajectory, and we have committed to you that SWC that we'll start to internationalize it, take it to more master software SI, the asset light. So we're working on all these directions right now.

[Ravi Menon, analyst]

Thanks for the clarification. And Q3, how should we think about SWC? I know that Q4 is supposed to be really good. But how is the seasonality for Q3?

[Amit Chadha, executive]

Think about Q3 as a growth quarter in revenues and margins. And on the previous question, I want to reiterate, when Rajeev had made commentary about 2 quarters ago, he had said H1 margin will be lower than H2, and that's what has happened. And if you look at it, the gross margin is maintained. The increase is only in Q2 in SG&A, which is sales cost, which will start to -- have started to give us backlog and then will give us revenues as well as tech investments where compute, storage costs are fairly significant that we have had to incur for AI investments and SDV and factory next launch.

[Operator]

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

[Sulabh Govila, analyst]

So my first question is on the deal wins. So I just wanted to understand, we had called out in the analyst meet that our pipeline is 2x of last year. And on top of that, we expect win rates to improve, which would translate into higher number of deal wins being reported going forward. So just wanted to understand by when one should expect to see a higher number of deal wins on a realistic basis? By when do you think that can happen?

[Amit Chadha, executive]

Yes. Sulabh, thank you. So see, if you look at the deal wins, the absolute value TCV deal wins are higher in Q2 as opposed to Q1. That's #1.

Two is that we have a significant number or a large number of $50 million deals as well as a couple of $100 million deals and a lot of $25 million deals. And we are comfortable to say that we are trying to get them closed in Q3 for us and then operationalize in margins towards the end of Q3 and then Q4 from there. Just like the Maha cyber deal that we have got, which is fairly quick paced. So we are looking at some of this to come in. And we will start seeing some of that reflecting out either in press releases or through the quarter or at the end of the quarter as we go forward. We've actually appointed a large deals leader, Chief Business Officer for Strategic Initiatives in large deals based on our Dallas, Texas, and we have reorganized the team and we're taking it forward.

[Sulabh Govila, analyst]

Okay. Understood. And with respect to Mobility as a segment, just wanted to understand what you are hearing and seeing on the ground, particularly in Europe with respect to how OEMs are behaving? Have you seen any sort of project cancellations? Or have you seen any pause in the ongoing projects that are going on? So just wanted to understand what's the outlook from your perspective there?

[Amit Chadha, executive]

Sure. See, we had a strategy about 8, 12 quarters ago that we will start to improve our OEM dependency and reduce our dependency on Tier 1s. That has played out well for us because now, a percentage revenue in automotive and Tier 1s that we do with OEMs is quantum shift from OEMs as opposed to Tier 1. So Tier 1 exposure has been, I will not say minimalized. We love the work that we do for anybody. We respect our customer relationships. But we have -- our top 50 accounts, we've got OEMs now more than Tier 1s, right? So that's #1.

Number two, when it comes to OEMs in the U.S. and Europe and the one that we work with in Japan that we had shown the recording to you during the IAD, they continue to work with us. We have not seen any slowdown there.

Tier 1, there's a couple of them that are in a problem and we are actually creating deals to help them overcome some of their transitionary pressure that we've got. I've got my President and Executive Director colleague here. He'll add to this mobility now on in terms of the work that we're doing in other areas.

[Rajeev Gupta, executive]

So in addition to what Amit said, what we are also seeing is an increased spend on the SDV side. And for most of our customers here, we are seeing those requirements come up throughout. So that we do see continuing. Now on the traditional engineering that we have been doing, there are deals that we are working on, which are on consolidation, which will we believe, help perhaps in Q3, Q4 as we go through on increasing our revenue and footprint by their customers. But that's making us more strategic to our customers. And that trend, we believe, will continue from the point where we are at today.

[Sulabh Govila, analyst]

Okay. Understood. And last question on margins from my side. Rajeev, when we say that there is a 2-month impact of wage hikes in this quarter, which is roughly about 80 basis points. So what are the tailwinds you have on the margins, which will negate this and you'll be able to deliver a growth on Q-on-Q basis on the margins?

[Rajeev Gupta, executive]

Sulabh, to understand your question, of course, you did the math, right? I mean, 2 months in the quarter, about 80 basis points on the increment side. Your question is more to understand what are more tailwinds that can likely have an impact of margin. Did I get that correctly?

[Sulabh Govila, analyst]

Yes. So what will help you negate this headwind, which is there...

[Rajeev Gupta, executive]

Understood. I mean first and foremost, Amit talked a lot in terms of pipeline, large deals, quality of revenue. These are all tailwinds that will help in terms of margin accretion. The second is, look, a lot of the investments that we called out indeed have played out in H1. So that's behind us, right? So like we've said earlier, H2 margins will be better than H1. So you will see margins increase anyway in Q3.

Last but not the least, we'll continue to see productivity improvements. So this is on account of optimization of pyramid in terms of offshoring and also as we continue to see pressure intake we will see a lot of deployment on some of the newer deals that should lead to margin improvement.

[Sulabh Govila, analyst]

Just a quick clarification. When we say better quality of deals, does that translate into higher gross margins than the deal?

[Rajeev Gupta, executive]

Yes, it does. And in addition to that, right, and these have been all focused initiatives, we will also see likely accretion coming from improvement in build rates, right? These are focused initiatives that we do, and we tend to target an X amount of dollars coming from improvement in bill rate.

[Amit Chadha, executive]

I'll add that we've sequentialized. If you ask me, we planned this out to make sure that when the investments were there, we didn't do the increments. And now that we've got tailwinds coming in the margins, we are doing the increment. So it's a thought-through strategy to be able to deliver the 16% level that we initially guided at the beginning of the year.

[Operator]

We have the next question from the line of Nitin Padmanabhan from Investec.

[Nitin Padmanabhan, analyst]

Yes. On the margins, do you think -- do you -- whatever increase we have seen in the SG&A, is there any element which will not be there next quarter or everything will be growth driven in terms of the margin offsets broadly?

[Rajeev Gupta, executive]

So see, I've already mentioned to that. Again, maybe I'll sound repeating what I mentioned. A lot of the investments that we called out in terms of AI, SDV, factory of the future, building the leadership, all of that has taken place in H1, right? So when you talk about going forward, these are not going to repeat, right? So you will see some of that normalization come into SG&A costs. Our SG&A costs have indeed increased if you look at it on a year-on-year basis. We see they will normalize between that 10% level, and that's what we're working towards.

[Nitin Padmanabhan, analyst]

Got it. That's very helpful. On the Maha cyber deal. Are you -- do you think is there's any milestone payment that could come through considering they've gone live that should also help the margin? Or it would just be the SG&A benefit?

[Amit Chadha, executive]

Are you asking us payments? Are you asking us revenue?

[Nitin Padmanabhan, analyst]

Revenue. So any milestone revenue that comes through, which will flow through and add margin.

[Amit Chadha, executive]

See, there is various elements there. There are payments to be made, et cetera. And yes, there is a milestone payment that will come through that will also help. So these are all part of the planning that we have done at the beginning of the year as we saw these projects unfold. So that's why we are -- our comfort for delivering growth in the margins comes from some of these elements.

[Nitin Padmanabhan, analyst]

Got it. Got it.

[Rajeev Gupta, executive]

I can just add to that, right? So Maha cyber as a project, this is a fixed price project, right? And all these milestones are planned and all revenue recognition is tied to those milestones being achieved. And we are, in fact, on target in terms of achieving those milestones, which, of course, will trickle down in terms of revenue.

[Nitin Padmanabhan, analyst]

Okay. That's very clear. Now on the growth, I think what the guidance is implying is 4.5% to 7% kind of CQGR for the second half. Now I think based on your comments, it's basically based on the deals that are already in the bag plus closures that you expect in Q3 that will drive a stronger Q4 along with the SWC seasonality that should help you land within the range. And so -- is that the broad thought process? Is that a fair characterization?

[Amit Chadha, executive]

Yes. I couldn't have said it better. Thank you so much. You're absolutely right. And there was a couple of deals that we were hoping that we'll close it this quarter. They wouldn't have increased our revenues, because this was the revenue we had planned. But they should slip into October and close. So that's where we are broadly, but we are comfortable in that right now.

[Nitin Padmanabhan, analyst]

Okay. But you are not worried? There's no worry on any extended furloughs or any such thing considering macro at this point in time? We're not seeing anything on the horizon?

[Amit Chadha, executive]

We are seeing furloughs in automotive, like I said, and that's why we said it will be a little soft. The other areas don't get so impacted by furloughs, but this is a work in progress. We are fairly comfortable with the stage, like I said, but there is a direction uncertainty that we'll go through, and we'll see where it goes.

[Operator]

We have the next question from the line of Manik Taneja from Axis Capital.

[Manik Taneja, analyst]

And I know you've answered a lot of questions around the implied arithmetics, et cetera. But Amit, when you spoke last quarter, you have spoken about a very strong pipeline and which was reiterated even during the Analyst Day. In the current quarter, when you spoke, you said that you did see some delays due to election related uncertainty et cetera, et cetera. Do you think -- and given what you're talking about third quarter, do you think we'll probably see good deal results now and thereby helping us in terms of growth in Q4 or probably just push through the next year given the typical seasonality of O&G? That's question #1.

And the second question was for Rajeev. If you could help us understand how the pressure intake for FY '25 has progressed through both Q1 and Q2. And the likely trajectory in terms of pressure fresher onboarding for the rest of the year?

[Amit Chadha, executive]

So the pipeline is, year-on-year, bigger. Quarter-on-quarter, bigger, #1.

Number two, the number of [ serious ], $100 million deals, $50 million deals, $25 million plus deal is higher than where it was 2 quarters ago, right? We continue to work with our clients to get these 2 closures. The reality is that there is a little bit of question around which way policies will be after the U.S. election, reality. But we do think that when we spoke to you last time, we were expecting some of this. But having said that, nothing is grinded to a halt. Decisions continue to be made. And if all goes for whatever we forecast right now at this stage, we will have a decent quarter 3 and a bumper quarter 4. Now on freshers.

[Rajeev Gupta, executive]

Yes, I'll take the second part of the question. So in terms of fresher intake. For FY '25, we planned around 2,000 freshers to be hired. We've been implementing that. So accordingly, we've seen freshers in Q1 and Q2, that intake has indeed happened. In fact, this year, our fresher intake will be higher than what it was last year. Last year, we did close to about 1,500 freshers hiring. So like I said, we will do close to about 2,000 fresher hiring in FY '25.

[Manik Taneja, analyst]

Okay. Would it be possible to get the number for H1 and thereby probably trying to understand the impact in terms of...

[Rajeev Gupta, executive]

So much of specific, but we'll certainly let you know the annual plan that we have. So that's where it is.

[Operator]

The next question is from the line of Vibhor Singhal from Nuvama Equities.

[Vibhor Singhal, analyst]

Congrats Amit and team for a very solid execution in this quarter. So Amit, just wanted to dwell on 2 aspects. One is on the mobility segment. You mentioned that you are looking at a seasonal weakness in Q3 in the mobility segment. Will you -- I mean, are we certain about the fact that the weakness that we're looking at is more of seasonal and not much of structural? We've had a couple of auto OEMs, some of the profit modelings we've had, a couple of your peers already talk about weakness in the auto segments, specifically in Europe and specifically in Germany. Their spend on most assets have been curtailed. SDV continues, but I think those are also kind of talked about in [ touchstone ]. So any color on that would be very helpful?

[Amit Chadha, executive]

So we were -- I'll do a little bit and then I'll request Alind to add. See, when you look at mobility, the reason we've said seasonality is because normally, last year also, you look at 2 years ago, you look at these guys leverage the quarter 3 -- our quarter 3, their quarter 4 holidays to try and offset some of their costs, and therefore, we see that seasonality coming.

Now -- and I will say very clearly, OEMs, we continue to see expansion. And I knock on wood, as I said, with our differentiated solutions. But Tier 1 has been a little bit of a challenge. They've had a challenge themselves, and they have passed their challenge on to us. Having said that, because our Tier 1s are in a challenge and we, as nice and good partners, are trying to find solutions where we can help them pick up some of that work and leverage our capabilities, like we had done the deal with Forvia in quarter 1. We similarly can do some more of those deals, and that is where the pipeline is very strong to see what can flow. We closed this quarter, and that operationalizes in quarter 4 for us and helps us in growing.

Second part is the investment in SDV. I'm sorry, actually Alind should talk about it. The investments made now...

[Alind Saxena, executive]

No, I think Amit covered it. So you know that we have launched the new solution, LTTSDrive, which is picking up speed, which is getting attention and which is helping us move. Now to your point, very specifically about the industry and specifically in Europe.

So we are not seeing large cancellations or stoppages of work. There is a slowdown, which is there for sure. So the growth trajectory, especially short-term in Q3, maybe like we have said, would be muted. But otherwise, we remain very aspirational of continuing our presence and our strategy with our customers. And we think that, that's going to play out well for us in long-term. This is the time to align with our customers and be able to continue to provide those services at good quality, which I'm very thankful that our team is doing, and we'll stay focused on that and move on.

[Vibhor Singhal, analyst]

Amit, I got second question, you got the Maharashtra Cybersecurity project. So just want to understand the dynamics of it. So you mentioned there is some bit of work left on this -- in the project. After that, we will probably get a milestone payment. And post that, does this project come to an end? Or is there some other maintenance revenues that will keep clicking on for the next forthcoming years as well?

[Amit Chadha, executive]

So let me say that see Maha cyber, there's some stuff that we can't share specific to a contract, there is stuff that we can't. So what we can share it. There is work to be done and completed. It's been launched. A part of it is live, there is other parts that are not live that need to get done over the next 3 to 6 months.

Beyond that, there's an O&M maintenance phase that we have got in this that we will execute over a 5-year period. So that's where that is that we are doing.

[Vibhor Singhal, analyst]

Got it. So this -- I mean -- and I'm assuming the O&M part, of course, will, of course, be significantly lower than the kind of work that we're doing at this point of time, but it will continue for the 5-year is what you're expecting?

[Unknown Executive]

Yes, yes.

[Operator]

The next question comes from the line of Ruchi Mukhija from ICICI Securities.

[Ruchi Burde Mukhija, analyst]

So you guys mentioned about a weak seasonality in mobility due to furloughs. I wanted to check, is this broad-based across client or skewed in few accounts only?

[Amit Chadha, executive]

Yes. So this is -- is it broad-based to specific clients? Let's say it's largely broad-based. I mean this is a Detroit phenomena. This is a Europe phenomena, yes.

[Ruchi Burde Mukhija, analyst]

And in other 2 verticals, do we have any early indications for furloughs from the clients?

[Amit Chadha, executive]

No. Normally, no. So we don't have early indications of furloughs for tech. We -- I want to actually confirm. For sustainability, actually, in the process area, they are asking us to ramp up, right? In tech, also, the orders we have won, we talked about today, we are ramping up in quarter 3. So tech will ramp up quarter 3 for sure. Sustainability will ramp up quarter 3 for sure. Mobility, all I'm saying is soft. So allow us some time to work it. The quarter is not done yet. And we continue to work across the globe and my colleague, Alind talked about LTTS [ iDrive ] and others. These are license revenue programs. We, in fact, generated a couple of those this quarter. So we continue to work on those. Absolutely.

Look, again, Ruchi, so I can say this, not just to you, but everybody. See, we've always been -- our whole goal has been to be transparent and be upfront, so we don't create any surprises. We had come in the year, we had told you about the margins. We're following our trajectory. Revenues, we have followed our trajectory. And that's why we're saying, mobility may be soft. But work to be done? The quarter is not over just actually -- the quarter has just started.

[Operator]

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

[Abhishek Shindadkar, analyst]

Congrats on a good quarter. I had couple of questions. The first one is regarding the furloughs, especially for the aero and also your comments on the Hi-tech -- the tech furloughs. So the commentary by one of the OEMs in aero has been relatively weak. So any color in terms of furloughs for that space?

And the second is on the Hi-tech side. So is your commentary on furloughs driven by the ramp-up of the project? Or it is generally in the Hi-tech space, furloughs this year could be lower than last year? That's first question.

The second question is for Rajeev. The accounts receivables number or the absolute increase has been material over H1 compared to the revenue growth. Now is this largely related to one cybersecurity project? Or are we seeing -- generally seeing a delayed cycle across customers?

And the last one is for Amit again. Any comment on the sequential decline in the number of active clients?

[Amit Chadha, executive]

Okay. So Abhishek. First, divide this up. Aerospace, furloughs. Alind, would you like to say something? Will this impact us or not impact us?

[Alind Saxena, executive]

Not majorly. I mean we have seen furloughs previously in quarter 3 as well, and this is a regular phenomena that happened. Yes, and we are referring to one particular customer. And there will be some rippling effect of that down to some of the customers that we work with. But that's something which is manageable that we are working with, and I don't see any major impact on that beyond what we have already talked about.

[Amit Chadha, executive]

Yes. Now on Hi-tech, the furloughs. See, the furloughs are a normal phenomenon. But as you win deals, you're able to overcome that when you're ramping up, right? Broadly arithmetic. And therefore, I'm saying Hi-tech will increase, confirmed pipeline, confirmed bookings, that will help, right?

That said, your third question was sequentially decline. I'm trying to see where there is a sequential decline in clients. Is there a material? Nothing. In fact, I thought that we had improved. I thought somebody will complement us today as the number of $50 million accounts and all that has gone up.

Maybe you see, Abhishek. I don't see. There is no material impact.

[Abhishek Shindadkar, analyst]

Got it. And maybe Rajeev can answer on the accounts receivables.

[Rajeev Gupta, executive]

Yes. Abhishek, let me answer on the accounts receivables. I was just waiting for Amit to conclude. So look, Abhishek, I tend to guide in terms of the DSO, right? Our range is between 115 to 125. We came in at 116 days, right, which is the lower end of the DSO guidance, and we continue to work to improve this.

Now movement in terms of accounts receivable, et cetera, given that we are a growing business, you will always see that. So I will not have you worry about the fact that look for 1 quarter, you see an uptick because largely, we'll continue to manage how we look at DSO and optimizing and of course, improving on the free cash flow.

[Abhishek Shindadkar, analyst]

Understood. And just a follow-up to that. We have been referring to a milestone payment also. So assuming that comes in, would our free cash flow to net income number be similar to FY '24 in FY '25?

[Rajeev Gupta, executive]

Yes. We aspire to maintain that. In fact, I did clarify it even during the Investor Analyst Day, it's following a very similar pattern like we had in FY '24, where our H2 free cash flows were better than the H1 free cash flows, you will likely see that same trend mapping out even in this year.

[Operator]

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

[Sandeep Shah, analyst]

Congrats on good execution. Rajeev, the questions -- sorry to harp again on the margins. But if I look at the aspiration and target of 16% versus first half being 15.3%. So second half, you have to be 16.7% kind of an EBIT margin to achieve the full year at 16%, versus that, we have wage hikes, which is coming into play in Q3, Q4, and there would be a ramp-up in SWC seasonal, which is generally the low margin business versus your traditional export business. And we are starting on a base of 15.1%. So what can go wrong in terms of achieving this target?

[Rajeev Gupta, executive]

So Sandeep, I think some of the parts I have already talked about, but maybe I'll kind of repeat and reiterate that. So one, we did call out that, look, H1 will have investments. Consequently, we'll see H2 to be better compared to H1 in terms of EBIT margin, right?

So you're starting off with a better base compared to what you're seeing in H1, right? It will definitely improve on the account that we will not see those levels of investments in H2.

Second, you have tailwinds in terms of growth. Amit talked about deal wins, growth, all of that is mapped in Q3 and Q4, which also will aid in terms of margins. Another part -- another part is that, look, our productivity improvement initiatives continue, and we will see benefits from those. What -- see the fact that we've got revenue growth plan. We've got some of the initiatives already working. We will -- we continue to aspire for the 16% level, right?

Now what can go wrong is the fact that, look, we see large deals coming, which may have a start. But as of now, I think some of that is already factored in. So the fact that, look, we continue to follow the revenue part should allow us to meet the 16% level for this year.

[Sandeep Shah, analyst]

Okay. And that's the bookkeeping for the Maharashtra cybersecurity project, is it fair to assume the bulk of the Phase 1 of the revenue in terms of the project completion could be booked in Q4 and Q1 of next year rather than Q3 of this year?

[Rajeev Gupta, executive]

So maybe without getting the specifics because we already talked about bookkeeping, I'll probably keep it at a level which is understandable. We talked about the fact that Maha cyber is a fixed price project and it is milestone based. So as we meet the milestones, we recognize the revenue. I think Amit already talked about the fact that, look, you've got a CapEx part of this deal, which continues to be executed. The remaining part of it is over the next 3 to 6 months, then follows the maintenance part, which is going to be over the course of next 5 years.

We are on course, and that's at least to ensure that, look, we are -- and like I said, some of this is already planned for. It's not that we will see any one-off bump because of it, it's all planned for in Q3 and Q4.

[Operator]

The next question is from the line of Dipesh Mehta from Emkay Global.

[Dipesh Mehta, analyst]

A couple of questions. First about SG&A. You indicated about some normalization of SG&A spend. Do you expect absolute number to go down because of the investment which we made and you highlighted in a few areas where we made investment? AI, SDV leadership all those stuff. So first question, whether absolute amount of reduction you are expecting or absolute remain same revenue growth will drive some kind of percentage benefit?

Second question is about headcount. If I look at headcount addition remain muted, considering the ask rate, what we are aiming for in H2. Do you expect headcount addition to mirror it, reflecting the ask rate? Or you think there is enough utilization potential level, which can require much lower headcount addition entering into H2?

And last question is about segmental margin. If I look Hi-tech and Sustainability margin, segment margin remain under pressure for both the segments. So if you can provide some details on what is playing out because Sustainability had a good quarter, but margin remained under decent sizable pressure kind of thing?

[Rajeev Gupta, executive]

Dipesh, let me answer to all 3 of your questions. So first, on the SG&A side, I think both will play out, right, both the percentage and the absolute will play out. I already talked about that SG&A should normalize at about 10% levels. So we should see certainly an improvement. And part of that will come because you're seeing growth. Part of that will come in absolute as well, right?

Second, in terms of the headcount addition. What you may have noted over the past few quarters, I think we've got the headroom to deliver growth with the headcount that we've had, even going forward, at least for the next couple of quarters. We see the headroom. Some of that has been planned consciously, given that we have some large deals going on. So we've got the headcount ramp up. Keeping in mind that these deal wins have transpired or likely to transpire. So you will not see a lot of headcount addition coming in the next 2 quarters. And that also dovetails to the fact that look, you will see revenues drop down to margins.

Lastly, on the segment margin. So if you look at Mobility at about 19.4%, that indeed has improved compared to Q1. If you look at Sustainability, it has been around that 25% to 26% level. What you saw in Q1 was probably slightly better off compared to where it has been. So it's kind of normalizing between that 25% to 26% level. Wherever there's an opportunity to see revenue and optimize in terms of cost, you will definitely see that trickle down in terms of margins for Sustainability.

Hi-tech, it's a mix of a lot of businesses, including SmartWorld. Like you've known SmartWorld relatively is at lower margins compared to the other businesses. But what you will see in H2, this business also will have improved margins relative to what we've seen in H1. So those are some of the points I wanted to share for your questions, Dipesh.

[Operator]

Thank you. Ladies and gentlemen, we will take that as a last question. I would now like to hand the conference over to Mr. Pinku Pappan for closing comments. Over to you, sir.

[Pinku Pappan, executive]

Thank you all for joining us on the call today. We hope we were able to answer most of your questions. If there are questions that you'll still need clarification on, I'll be happy to answer them. And we really hope to meet all of you during the course of this quarter.

With that, on behalf of the leadership team here, we are signing off, and have a good day. Thank you.

[Operator]

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