L&T Technology Services Ltd
NSE:LTTS
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Ladies and gentlemen, good day, and welcome to L&T Technology Services Limited Q3 Fiscal 2018 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.
Thank you, Ali. Hello, everyone, and welcome to the third quarter FY '18 earnings conference call of LTTS. I am Pinku, from the Investor Relations team. I hope you all had a chance to go through our investor release and financial statements. If not, you can download them from our website, lnttechservices.com. On today's call, you will hear from Keshab Panda, CEO; Amit Chadha, President Sales & Business Development; Bhupendra Bhate, COO; and P. Ramakrishnan, CFO.The agenda for today's call is as follows. Dr. Panda will provide an overview of the results and comment on the business outlook. Amit will talk about our sales execution in detail. Bhate, he will comment on the margin performance and operational levers. And PR will walk you through the financial statements. We will then open the line for questions. Let me now turn the call over to Dr. Panda.
Thank you, Pinku. Good evening all of you, and welcome to this call, and happy new year to all of you. This is the first call in 2018. Let me walk you through the highlights of quarter 3. We had a good quarter, with over 8% sequential growth in dollar terms. Growth was broad based. All our verticals grew on annual basis, including Process Industry, which has turned around from last quarter onwards. The deal pipeline is robust. And this quarter too, we won several multi-million-dollar deals across the board for our multiple verticals. We have seen a healthy demand in the market. All client across the board invest in technology upgrades, smarter system, digital engineering and artificial intelligence. That's our differentiator, I think that we do reasonably well. Today, digital engineering is 20% of our portfolio, and it has been rising quarter-on-quarter. And if you recall, last year, it was 12.5%, now -- it's 20% now. I would like to highlight that our multi-vertical exposure and competency allows us to scale up and bring in innovation for our clients globally. Profits. Our EBITDA margin held steady at 15.3% as last quarter, despite wage hike. As you know, last time we talked about wage hike happen in this quarter 3, still we are able to maintain that. Our net profit growth of 16% year-on-year in quarter 3. Let me now talk about our 5 industry verticals. First, let me start with transportation. We had good growth of nearly 4% quarter-on-quarter in transportation, which was led by auto and truck and off highway. While aerospace had a marginal growth up, but we see lot more opportunity coming in aerospace area. On the auto side, we are seeing a very good pipeline of opportunities. We are participating at fairly large deals in this segment. The key growth across -- key growth areas continue to be autonomous and electric vehicle, which we are present across the spectrum: hardware, software, mechanical, electrical, et cetera. In our truck and off-highway segment, we are seeing a demand of functional safety, set-up automated test system, value engineering and competitive benchmark project. I'm happy to say very truly this segment is opening up very well this last few quarters, we'll continue to grow. We expect strong growth to continue both in auto and truck and off-highway segment. Let me go to aerospace now. In aerospace, we are happy to report the large deals. We announced last week $50 million deal with a global aerospace electronic system manufacturer. This deal, which will kick off in quarter 4 itself, this quarter itself, involves working on the customer's next-generation suite of in-flight system, that is our focus area. We are also ramping up projects at a newer client in the commercial segment, which will continue to grow in coming quarters. We have seen a few large opportunity in this pipeline, and we expect growth to pick up in the coming quarters in this segment -- at this segment as well. Medical. In medical, we did lot of innovative work for customers, especially in Japan, the futuristic technology areas. In medical, we are seeing a lot of demand from medical equipment manufacturers in the area of kidney, lung and ophthalmol. Hardware support certification and compliance testing is an area where clients were increasingly outsourcing, and that's where we play -- that is our strength that we also understand. We have started ramping up in the Japanese logo that I talked about last time -- last quarter. This quarter, too, we have won a few logos with the leaders in medical equipment manufacturers. Let me now -- we continue to grow in medical segment coming quarters as well. Let me talk about industrial products now. We had flat growth in industrial product this quarters Q1 -- Q2 to Q3, which typically a weak quarter for industrial segment, which is what we saw here. We expect growth to pick up in quarter 4. We have few deals recently, and we believe quarter 4 is going to be better for industrial product moving forward. Within IT, we are doing well on the building automation side with project in security, surveillance, safety and HVAC system. I think that's our growth area, that is our strength as well. As an example, LTTS has an IoT solution, which we had built for a European airport to make it smart and connected. And we believe this can be taken to multiple customers as well. In here, we do smart bins to monitor wastage level, sensor to monitor outdoor groundwater. We are also looking at selling this solution to other multiple customers in Europe and outside. We are leveraging our expertise in video tracking and analytics to win more project in the industrial segment. We won an exciting project with a new client this quarter, focusing on artificial intelligence in manufacturing, using it to prevent failures. And we are also working on practicing into new solutions.On the power side, demand is strong in renewal energy and smart electric devices, where I think that's our strength area as well. So this is something we believe is going to grow in coming quarters. Now Process Industry. As we indicated last quarter, the Process Industry, the worst is behind us, and we are now seeing growth picking up last quarter onwards. We saw this quarter as well, as this process will continue. This quarter, we had nearly 8% quarter-on-quarter growth, led by projects in the customer, specialty chemical area and also in the CPG area. Consumer and chemical clients are investing in digital expansion. We are involved in everything from design, detail engineering, to construction management, and that is an area which is, I think, continue to grow. We are also participating in a few plant digitizing project at some of our top clients. Based on the pipeline, we expect the growth to continue in quarter 2 -- quarter 4 and beyond. Telecom & hi-tech. We are at 25% quarter-on-quarter growth in Q3, helped by the growth across our client portfolio as well as ramp up of one of our large deals I spoke about last quarter. In semiconductors, with the help of Esencia, as you know, we acquired the company, Esencia, which is California based, we are now being considered for large projects of different complicated chip design and so on. This is again a growth area. I think we did reasonably well. Jointly with Esencia, we have been able to win a few large projects involving VLSI chip design in storage and computing area, and we believe that is the future, and we'll continue to grow in this area. We are also ramping up on a field-testing project for a 5G mobile chipset. In the computer electronic space, we are seeing demand for upgrades, enhancement, localization of mobile and POS devices. In the media and entertainment space, the large deals we own with the U.S. technology company has ramped up as per the schedule, and we are leveraging the skill set acquired to win the new deals with the different MSOs, which is called multi-service operators. This expertise also helped us win a new logo -- a new large deal in the Internet media platform space, I think which is -- we are very excited about it, which continue to grow again for coming quarters. We remain very positive about the vertical and expect healthy growth going forward. Let me conclude by providing the outlook on the business going forward. We continue to be optimistic about growth on the back of -- in the back of healthy demand. I must have covered around 25 customer in this quarter. I visited across geography, Japan, Korea, Europe and U.S., and we see lot of demand and each -- our various areas, I think we continue to grow. We expect a broad-based growth in quarter 4 also. We will end FY '18 with at least 18% U.S. dollar revenue growth this year. On margins, in Q3, we managed to offset the impact of wage hike with operational improvement, thus keeping our margin steady at 15.3% same as what we got last -- what we did last year -- the last quarter. In the near term, we do face margin headwinds. This could be rupee appreciation. Utilization maybe need to come down a little bit, because I think in engineering services, utilization you cannot continue to grow beyond 78% to 80%. We believe that, I think, we have achieved that. Whereas we have multiple levers we have worked out, but we remain committed to improving margins going forward. We have other levers we have identified, greater offshoring, on-site/offshore ratio, higher bill rate, which we have achieved some -- some accounts we'll continue to do further customer as well, optimize the employees' pyramid, which we have -- part of it we achieved, we'll continue to push that, adjust leverages as we increase our scale to our T30 customer. So to summarize, we are very happy with the progress we are making with our clients, the kind of program we have been invited to participate and our focus on driving innovation with the company. The one point which I have been saying every time that T30 account we talked about. The T30 account are invested in technology and artificial intelligence, machine learning, IoT. I think that is paying us reasonably well now. The growth happening with 67% of the business comes from T30, that T30 accounts last quarter and this quarter has done reasonably well. We are bullish about the coming quarters as well. The demand pipeline what we see in the market, this is going to drive the growth for coming quarters. Now I hand over to Amit Chadha, our President Sales & Marketing, who will highlight the key deals we own this quarter -- last quarter. Amit?
Thank you so much, Dr. Panda. Thank you, Pinku. As has been stated in the release and earlier on this call as well, we continue to see growth driven by 3 factors amongst other things; one, demand for digital solutions that are bigger in scope and extending beyond proof of concepts; second, large deals; and third, T30 account focus and a clear drive to move clients up the pyramid. So getting into a little more detail. Large deals, this past quarter, we have had success across all segments with significant ones been in aero, telecom & hi-tech and plant engineering segments, as well as ramp ups within the quarter from past deals. To give some examples. Specific to quarter 3, in the oil and gas sector in Europe, we have closed a deal which will allow us to digitize our client's assets across multiple refineries in the U.K. and mainland Europe, which will help our client to improve this utilization, improve their safety compliance and reliability of operations. This deal was won based on our domain experience in oil and gas as well as our ability to take pre-existing constructs and algorithms to the client. We are also in the final stages of a large contract to digitize assets, including building an artificial intelligence framework for a global oil major, but we will speak about this more in our next quarterly call as the agreements are just being signed. A second example is the aerospace segment, where we've been awarded 2 contracts. The first one, like Dr. Panda said, is to have grading and supporting our client's in-flight entertainment system product. This was won because of our unique managed services model, where we will take on responsibility for the -- for releasing the existing products with upgrades as well as newer product lines for that same product family on behalf of our client. We've also won a contract to provide end-to-end testing for a North American aero client to provide EMI/EMC as well as environmental testing for all their electrical system products for the aerospace segment. Our journey, third, on the telecom hi-tech segment continues with 2 deals. One is the development of a global contract for a client's media platform being rolled out globally. Here, we've been able to leverage the qualifications that we gained from an earlier deal. The second one is, like again Dr. Panda mentioned, ASIC design and testing work for a client, where this time we are moving some of their labs overseas, and we'll provide a worldwide test set up to them. We do see continuous flow of large deals in all verticals, and we'll continue to report on this in the next quarter. Moving on to our top 30 accounts. We've just concluded our account planning exercise across the company. And given efforts from the teams as well as our CTO organization, I am happy to share that for quarter 3, we have moved 1 client to the $40 million-plus category, and we've also grown other clients, including adding one more in the $30 million category. If I look at our quarter 3 run rate -- exit run rate, we actually have 2 clients in the $40 million-plus category. We've -- our growth is not just limited to these, but from our top 5, top 10, top 20 clients. If you go through our release, you will see that we've also added 2 new logos into our $5 million-plus category. We see a promising demand and continue to see a run rate to grow our accounts up the pyramid in the mid-tier range as well. From a geo standpoint, the U.S. continues to show growth for us across verticals, with specific mention our telecom, hi-tech and media as well as ground transportation. Coming to Europe, we've reported -- we continue to see progress again. Europe has grown 13.3% sequentially. And we see key traction in automotive, industrial IoT and smart manufacturing as well as chemicals in the O&G sector. For ROW, Israel, we won our first significant project on ASIC design and development on the back of the team that we have set up there as we announced last quarter. We continue our journey to build a central hub for security solutions, center of excellence there. Japan continues to grow in transportation, auto and medical, like we said earlier. With that, thank you so much. And I'll hand over to Mr. Bhate, our Chief Operating Officer.
Thank you, Amit. I will briefly talk on margins, operational metrics and some of the steps that we are taking to improve margins. This quarter, we sustained EBITDA margins at 15.3% despite the impact of the wage hike, slight bit of rupee appreciation. The levers that helped us were utilization and employee pyramid optimization. If we talk about utilization, it showed an uptick of 217 basis points quarter-on-quarter, driven by strong volume growth in the quarter. We might see utilization temper down marginally from here as we hire more for the growth. Segmentally if you see, we have had margin improvement of nearly 400 basis point quarter-on-quarter in telecom, where we were able to optimize the pyramid and reduce some of the employee cost. Pyramid optimization is an ongoing effort across verticals and will be one of our key margin levers going forward. As we increase our scale in the top 30 accounts, we will have better flexibility to increase pressures and thereby, reduce overall employee costs.Our offshore mix remain flat quarter-on-quarter at 49%. We are working on increasing this in the near to medium terms. However, the offshore mix does get impacted when we win large deals, which are typically on-site heavy during the initial phase. On the bill rate, we have won bill rate increasing at select clients and this is an ongoing cost exercise, plus in new age technologies, we get higher bill rates and the margins. And as we take this share higher, we expect this to be a major margin contributor. To sum it up, we are working on various operational levers and remain committed to improving margins. Thank you.
Thank you, Bhate. Good evening to all of you. This is PR, P. Ramakrishnan. I will summarize the financials for the quarter and the 9 months ended, then concluding with the explanation -- explaining of through the various metrics, which we have put in the factsheet. And then afterwards, we will have the question, answer.I mean, at the cost of repetition, like just to tell you that the revenues for the quarter at INR 9,691 million grew on Q-on-Q basis at 7.6%. And when compared to Q3 FY '17, the revenues grew at 19.6% consolidated revenues. In dollar terms, the revenues for the quarter was $151 million equivalent as compared to $139.3, registering a Q-on-Q growth of around 8.3% and a Y-on-Y growth of around 25.6%. In constant currency, given the fact that the dollar rupee was fairly stable during the period under revenue -- under review, the Q-on-Q growth in constant currency has been around 8.3%. Coming to the EBITDA part. Despite the wage increase, which we had in the current quarter, we also had around 400 people being added to the company. But while the 400 people addition has happened, this quarter we have seen additions more on the freshers or on the people we pay lesser. I mean, that's one of the reasons when Bhate was explaining about rejigging the pyramid, so that journey to improving profitability by improving the pyramid has started. So in the current quarter, we had more of lesser experience people joining the company, and plus, we also saw a little amount of increase in the overall cost related to subcontracts. That is one of the reasons partly offset by the savings which we had on account of rejigging pyramid. But despite that, we still have maintained the EBITDA margins for the quarter at 15.3%.The other income, which we have reported for the quarter at INR 435 million, assuming let us say, it's INR 44 crores, broadly split into 3 main items. The first would be the foreign exchange cash flows that is on account of hedge and translation differences is around INR 26 crore. Then we had -- like the way we had earlier quarter, we also had a nonrecurring sale of certain export licenses around INR 14 crore. And the balance INR 3 crores, I would say, was related to largely treasury income. So that's how the other income has panned out. Our net profit for the quarter is at 126 -- INR 1,265 million, which has -- I mean, it includes a blended tax rate for the quarter, it was around 28.4%. That's the -- that's not been a major change. Last quarter, I think, it was just below 28%. So not a major change in the tax rate for the quarter. Now coming to the vertical performance. For the quarter, transportation segment contributes is the -- continues to be the biggest share of the company in terms of revenue share as almost around 31% followed by industrial production at 22%. Telecom, hi-tech because of the last deals which we secured in the later part of Q2, that obviously we have seen the complete 3 months of revenue. So that's one of the reasons that telecom, hi-tech's revenue share has increased to 28%. Plant engineering or Process Industry is around 13%, and the last medical is around 7%. Coming to revenue by geography. Before I go to revenue by geography, would like to talk about the segment operating margins. Transportation segment operating margins for the quarter has been relatively, I would say, unchanged barring for a small drop -- a final drop of to 12.1% from 12.3% of the previous quarter. Telecom, hi-tech, we did see a good improvement in operating margin as Dr. -- Bhate pointed out. We almost saw almost close to 400 basis points improvement. And as I explained to you, it's because of the initial large deals which we secured in earlier quarter as people get realigned, and we start process of the offering, that's one of the reasons. Plant engineering also, we have had because of the increase in overall revenue small margin increase, we have been able to see almost a 30 basis points improvement in operating margin from 19.1% to 19.4%. Industrial products was actually a drop. It's not that it was unplanned because of industrial products for their on-site revenues, there were some amount of furloughs which happened in the U.S. So that's one of the reasons that you saw a drop in operating margin from almost 21.7% to 20.9%. So with this, I come to the revenue by geography. North America continues to -- may be a significant contributor with 59% of the revenues coming from North America. Europe follows second at 17%. The rest of the world, excluding India, is at 13% and India it's around 11%. The increase in the share of India is because one of the large deals which we secured at a large India base.So with this, I come to the revenue mix. We still continue to have in the current year, I mean, in Q3 as well, the on-site/offshore revenue mix continues to be at almost 51:49, which is largely unchanged from the -- that of Q2. The Q3 is also at 51:49. Fixed price contracts is in the -- to T&M is in the ratio of around 38:62. As far as the client profile is concerned, we have not added any new clients during the quarter, but wish to tell you that on an annualized basis, this quarter we saw 1 client moving to a $40 million-plus account, and we have one more client joining $30 million plus. So in the previous quarter, we had none in the $40 million size bracket. So we had 1 client moving there. And in the $30 million account, we had from 2 clients in Q2, it has now become 3. That demonstrates that Dr. Panda talked about and also collaborated by Amit, that our emphasis on T30 and the emphasis to grow in some of our major clients, I think that, that is gaining strength.Now coming to utilization. Dr. -- Bhate did mention that our utilization now is almost 79%, which in our opinion, which we have been maintaining that utilization anywhere between 78% to 80%, is the most optimal considering this kind of work which we do in the engineering services space. We don't find any kind of major uptick from this current levels. However, having said that, we still have a lot of room in terms of overall pyramid fixation in our pursuit to improving operating margin, besides also bringing down the on-site/offshore revenue mix. In terms of employee statistics. As I explained to you earlier, we had around 400 people who joined during the quarter and all of them have joined on the billable side. So our total headcount is 11,000 -- around 12,000 people. And the exchange rate for the quarter -- the closing exchange rate was INR 63.88 and the average exchange rate was INR 64.19. With this, I have given you overall flavor of performance for the quarter. And we are now free to take questions.
[Operator Instructions] We will take the first question from the line of Pankaj Kapoor from JM Financial.
Dr. Panda, I just wanted to get some flavor in terms of the client interaction that you mentioned you had during the quarter as well as the pipeline do you see. You think the kind of a strong growth that we had this year is something which can probably continue, say next year, on a qualitative basis? If you can give some commentary that would be very helpful. And my second question was to Amit, if he can help with the order backlog and the pipeline data that you share every quarter.
Yes, Pankaj, I think -- thank you for joining. I think you were always there from the first one. Thank you for that. I think the -- what I talked about the meetings we had customer side altogether, if you see last 2 quarters ago, I said to -- the growth is going to be double digit. Now we announced the 18% we are going to do this year. What I can see very confidently say next year, again double-digit growth, it's possible the order on hand what I see in customer location. There is no problem on double-digit growth next year. When we progress little further in 1 or 2 quarters, we'll tell you exact number where we are going to hit. But double digits is something absolutely going to happen. I've no doubt about that.
Amit?
Sure. So Pankaj, thank you so much. Pankaj, as Dr. Panda has already -- we've been providing pipeline as well as order backlog every quarter because we weren't giving a percentage for the year. We have substituted that by giving a percentage for the year and saying we'll at least have 18% growth. So for -- and we do see a healthy pipeline as well as order backlog plus a queue of large deals that have closed, are closing and continue to be pursued and at least see that as the pipeline as well as order backlog going up quarter-on-quarter. And we do see next quarter -- next year being double digits. So we'll pause at this time rather than giving any more quantitative information.
Okay. And PR, just couple of question on the margin side. Given that our deal engine continues to be extremely strong, do you see the room for you to maneuver on the reported margin could be relatively less? And given that we are obviously trying to mitigate some of these things, like the employee pyramid, with utilization you are probably getting the -- on the top end. So on an overall basis with the kind of a wage hike and the kind of a rupee scenario we have, do you think that more or less the focus on FY '19 will be again on the revenue growth and margin could still be stable? Or you think that you will have a scope for improving margins further from where they are?
Pankaj, I think let me attempt to do that. The margin improvement when you look at it, of course, there are multiple levers we worked out, and we are very confident that the margin is -- continue to increase. There is no question about that. We are working towards, I think the -- one of the levers available, as you know, when you start a large deal, knowledge transfer takes some time in the beginning, but that's what is happening now. How quickly -- once you do knowledge transfer the second deal, first deal stabilize and so on. So -- then pyramid, what Bhate talked about, Bhate talked about pyramid and also on-site/offshore ratio. This is something which we are going to work out. And there are multiple other areas we know we have. We believe that there -- I think there is a -- there are rooms for improvement. I'm pretty sure about that.
We will take the next question from the line of Priyankar Sarkar from Motilal Oswal Asset Management.
Sir, just wanted to understand what was the quantum of the wage hike? And what was the impact of that on the margin? And then my second question is on the nonlinearity of the revenue. I mean, what is the kind of IP that you are finding this quarter? And how much percent is the nonlinear revenue as a percentage of your overall sales?
Overall impact, I would say as far as the wage hike is concerned, it will be around 1%. So 1% to 1.2% on the margins. But as Bhate talked about that the increase in wage hike has been partly compensated because of -- we had a better pyramid fixing and that journey continues. So to some extent, we have been able to absorb this. So that is the impact which I just now communicated.
And on the second part of your question, you asked about nonlinear, this is our effort always to do that, and we are working on it. There are multiple things our investment in terms of nonlinear creating a solution around the patent or platform, this is ongoing now. And I am pretty sure we will be able to make that happen in due course of time.
Right, sir. Sir, just to follow-up on the wage hike, I think on the margin impact, I wanted to know what was the actual quantum in terms of on-site revenue hike and offshore?
Sorry. I didn't get your question?
Sir, I was asking what was the...
So, there has been, I would say that the offshore wage hike would be in the range of 6% to 7% and on-site would be -- maybe around 1.5% to 2%.
We will take the next question from the line of Abhishek S from Equirus Securities.
The first question is regarding growth. Sir, how should we look at the growth of the company? Not -- I'm not asking from a quarterly perspective, but over a 1- to 2-year time frame. We have 2 quarters of high single-digit sequential growth rate. So is this a burst that is happening after a period of silence? Or do you feel that this growth is sustainable?
Yes, I can tell you that. If you look at it -- if you see the growth point of view, 2 years is a long period in technology company. I can only see that 1 year, 18 months and so on. Today's technology is old tomorrow. I can tell -- only tell you that the growth what we got now, double-digit growth, is something we see next year, there's no doubt about that. Beyond that what happens 2 years, 3 years, we continue to innovate. I'm sure I think we are leading the segment. There is no reason why we cannot maintain beyond that.
Okay. That's helpful. And second question is to PR. From a margin perspective, you highlighted that the impact of wage hikes was 100 basis points. If I look at the offsets, the FBP has increased almost 500 basis points. And obviously, there was a tailwind from utilization as well. So is there anything else in terms of margins that we are missing out apart from the decline in segmented margins that we should be aware of?
Okay. Abhishek, as I talked about that when I was deliberate -- when I explaining to you about the segmental margins, I did explain about transport -- I mean, transportation being where it is despite the increase. I mean, the wage hikes have been across, but it's been related to the best performing people within the company. And having said that, the only thing where our margins have dropped during the quarter I would say is only related to the industrial products. And that's more to do with because of the fact that there was a drop in revenue because of the some furloughs in some of the accounts which happened in the month of December, and some of the fixed price contracts getting into completion. So I don't think that we have anything which is unusual for us to -- in the quarter in terms of the margin -- in terms of margin, what you say, compression. Going forward, I believe that in Q4, especially industrial products and the medical division and plant engineering, that these 3 segments, which roughly around 50% of our revenue, will come back into the normal margin trajectory even after having absorbed the additional wage cost at today's exchange rates.
We will take the next question from the line of Ravi Menon from Elara Securities.
Do you have any one-off impact that led to the sharp increase in other expenses? Or is this largely subcontracting?
This I explained when I was explaining to you that part of the margins which has -- despite the wage hike, there has been increase in subcontract cost, and that was one of the reasons which is almost relating to some of the jobs which got completed. So I would believe that, that is something one-off and it's not going to recur in the same manner.
And sir, what impact did furloughs and holidays have on your realization this quarter?
I would not say it is substantial. It was related to industrial product. Because of that, we actually saw some amount of flattishness there. So otherwise, it's not that it's going to be of a material significance for other businesses, barring for IT.
And I think Mr. Bhate talked about how you look at realization as a significant driver for margins going forward. What would be the kind of -- is it the service mix change? Or are you looking at asset-based contracts? What would really drive up the realization from current levels?
So one thing we did mentioned that increasingly, our offerings are getting more in the digital space. And that is where we are seeing a better rates at a better margins.
I think you look at it this way. Our digital and new technology has grown to 20%, right? Artificial intelligence, machine learning and in industrial IoT, we do many more projects in this area as we believe there are even for existing customer, we get a rate increase because of the new technologies coming in. So that is always going to be helpful. What are we trying to say always is, when an engineering company is 70% to 80% when you do utilization, I think we have to go different way of doing it. Drive pyramid and get more money for the services you provide and which I think we have been successful in doing that, that we'll continue to pursue.
We will take the next question from the line of Madhu Babu from Prabhudas Lilladher.
Sir, the $50 million deal which we have won, so how was the competition? And could you just give us how the deal has been won? What are the competitors and some view on that?
One thing I'll tell you, I think before we talked about the 2 areas we focus in aerospace. One is ATM is called air traffic management, and in-flight entertainment areas, right? I think we have created solution for this for a quite some time. You know who are the player in this segment. There is somebody working on that, we replace them. We got the deal there, and I had also been on that. Any deal you go to, there are all the mains in the segment, they're always there, and they were also there in this segment.
Okay. So you are talking for larger Tier 1, which has a good engineering practice or a mid-cap company, which has an engineering -- I mean, who have we replaced?
I would not comment on this. This is -- I think I would not go beyond this. Only thing I could tell you, if you look at in the aerospace who was strong, who was there, you can figure it out, I think. I would not go beyond this.
Okay. And second, sir, we are talking of pyramid correction. I mean, our specialization is on -- more on the high-end engineering as well as some of the new technologies which we are talking of. So would pyramid correction really be a lever or -- I mean, that we would be fine with this kind of margin and chase absolute EBITDA growth?
Pyramid, we'll have to look at multiple things. Pyramid, automation and multiple areas when you look at it. The automation in pyramid is more effective when you look at a skill-based engineering. The bottom part of the pyramid, right? When you go to the top tier part of the pyramid, what are the levers available. So I think when you look at it, we always look at it what is possible, which area, that is what we examine always.
We will take the next question from the line of Vibhor Singhal from PhillipCapital.
Sir, I had a couple of questions on the business side of our growth this quarter. So I think the first question that I have -- Hello?
Go ahead.
Yes, sorry. Yes, so the first question that I had is on the process design segment. So sir, after many quarters I think we've seen some growth in this segment. So just wanted your ideas and you mentioned that the growth was driven by the power segment and maybe E&U companies probably recovering after a stable crude oil price. So how do we see this segment going forward? I mean, is this kind of growth -- maybe not the quantum or at least the direction of that is sustainable in the coming quarters? And also, will we -- are we also seeing some green shoots in the, let's say, CPG or a FMCG companies putting more planned CapEx, which could provide additional boost to this growth in this segment?
So if you look at this segment, last quarter itself we started growing. There was a big growth few quarters before that, and we saw the positive sign from last quarter onwards. And we grew last quarter. We continue to grow this quarter. And the order book is about multiple things. Plant engineering, they are different segment. CPG, food and beverage industry, then specialty chemical, then oil and gas. Now if you see segment altogether, only thing I can tell you is that the order pipeline we have on hand today, what we own and what we are likely to win, these segment will continue to grow in coming quarters. The worst is behind us, which we have gone through few quarters of drop. And now last quarter onwards, we started growing, and this is a highly profitable business as well. So both the growth and profit, I think both -- this will do well moving forward. As you know, oil price going above that also is helpful, there is no doubt about that. We have couple of deals we are working on right now. Hopefully, we'll announce soon. Well, Amit talked about a deal which is hopefully in a final stage now. We'll make an announcement soon.
Sir, will that growth be...
So if you look at that -- when I look at -- see, look, Dr. Panda just spoke about it, so I'll divide 3 segments. If you look at process segment, right, oil and gas, upstream as well as downstream, both of these we see deals happening. Some deals closed and ramp-ups happening, right? And that is driven by there -- one, they're wanting to digitize, right, number one. Number two, use artificial intelligence algorithms. And third, their need to become much more reliable, right? So that's the oil and gas side. CPG, we continue to see plant expansion. You asked the question specifically. So we see plant expansion opportunities where we are supporting people in Asia as well as in India. So both these are adding to our CPG story. Not only that, in the U.S. also, we are seeing growth in that area, so that will also grow. Specialty chemicals, Dr. Panda spoke about and again, that's an area where we continue to win not just specialty chemicals in Europe, but specialty chemicals in the Far East, where we're supporting European clients to try and expand their footprint. So therefore, we are bullish about the Process Industry segment, subsegment and overall segment as well.
Sure, sir. That's really helpful. Well, Amit, so if I can just ask -- perhaps take this opportunity to ask you another question. You also mentioned about this deal in the aerospace in which we have gone into the in-flight entertainment. And Dr. Panda mentioned that who's who of the IT industry was probably there. So in fact, I want to take that to a broader level as to, are we seeing kind of a convergence between the engineering services and also the kind of traditional services that the other traditional IT companies tend to provide, so things like IoT or even some digital expertise that you provide. So are we going to see kind of an overlap if more and more companies which were, let's say, not qualified to bid for these kind of engineering services contract till now, they're also becoming our competitors over the next couple of years?
I think it's one -- one positive part from our side is we do engineering and only engineering, right? When you talk about IT, we understand what data counts. The complete ecosystem when you look at it, starting from sensor, to gateway, to the cloud, to the final analytics what we do, right? So I think overall point of view, the customers when you talk to them, they look at engineering players who you understand whether what sensor data we did, what sensor they need. And then they also look at it, the gateway design. What gateway to select, how to do the programming for the gateway. So complete ecosystem when you go to a manufacturing company, industrial company, they would prefer to do an engineering player like us than looking at IT. But there is a conversion, IT/OT conversion which is happening in the world, I think it is important for us, which we are working on that making sure we understand this part of it. And for example, we have made a huge -- a team, which is called LTTS technology team on technology architecture. So how can you find out the new technology? We have qualified people who are trained, who can look at it complete architecture of a system and you design IoT system, I think altogether. So I think overall, are they going to be there, everybody? Not that we are the only smartest people in the world, people know that. But I still believe the differentiator which we continue to maintain as an engineering company, understand the product design, understanding manufacturing software, I think that becomes very, very important for us, and we'll continue to do that.
We will take the next question from the line of Apurva Prasad from HDFC Securities.
So my first question is, I mean, are you really seeing bill rates improving within the top accounts? Or is it more volume led?
So we do see -- so again, we've talked about this often that we are, we want -- we are and want to position ourselves as a value player, okay? So being a value player, we are able to get rate increases from our clients for our T&M projects and fixed bid projects. We are able to command a premium. And we see that trend continuing positively across the client pyramid and regions.
Okay. And on the telecom & hi-tech piece, is it possible to split how much of the incremental growth would have been ramp-up of the large deal?
So if we look at -- so like we talked about, Apurva, last time, it was not just 1 deal. We had reported last time 1 large deal and a couple of medium-sized deals that we had got. And all 3 have ramped up for us, including the organic business that we had already, the small orders as well. So there has been broad-based growth across. So it's not just 1 deal or 1 client that has ramped up for us in telecom, hi-tech.
We will take the next question from the line of Ankur Rudra from CLSA.
My first question is on the IP business. We haven't seen an IP deal in, I think, close to 4 quarters. So just sort of want to get a sense of what gives you confidence that it can come through perhaps this year?
Ankur, I think we are working on that still. We are going to customer. It's not that we are -- we talked about last year and few quarters we have not been able to. But I think we are very close to doing that. I'm sure it's going to be this quarter, next quarter, I cannot tell you right now. But I see lot of action happening there. I see lot of interest from the customer happening there. And I see that differentiator positioning I think is happening there. So I still believe -- if you sell a license and there are few cases we did, but is giving you much more the services revenue by doing that. So in the IT revenue which is going to happen, of course, is going to happen, only thing is matter of time. See, there are a few areas. We thought we straightaway go and sell it. Now there is a team working on creating a solution around that. So that I think should be ready. And we have discussed with the customer -- multiple customer across geography. I am very positive about this year we are going to make it happen.
Okay. And if I look at your margin performance this quarter, I think the gross margin level, you appear to be almost back at your historical best, which is about 35%. And I think it can only go up only if you have maybe IP deals in future. But outside of that, if I just look at your margin commentary, it seems like a lot of the margin initiatives are still gross margin focus. I think you speak about pyramid, you speak about on-site/offshore ratio. Whereas I feel if I just look at the numbers, it just seems to be more on the SG&A side where the increase has -- in expenses have happened. So just want to understand where would margin improvement come from? Will it come from further gross margin improvement? Or will it come from better SG&A management?
I think in multiple things, right? We are working on multiple things. Pyramid is one, rate increase we talked about. And also on the IP side as you know, we announced recently Microsoft and us together some of the platform updates that we have quoted in Microsoft cloud. And we are -- there are multiple deals we are working along with the Microsoft there. So one is on-site/offshore ratio. When you start a new deal, on-site is more. As PR said, 51:49. And that there is a possibility of changing it. We are working towards how we do that. Rate increase, we have been successful in many customers now and many more customers are going to come. So I think multiple levers available, not just the SG&A. And I'm sure I would request PR to add too.
Ankur -- thanks, Dr. Panda, for adding up. Ankur, I think your question is valid that when we talk about margin improvement, it is just not gross margins coming from execution of jobs. The fact is margin improvement from the execution of the jobs, which will come through a blended combination of pyramid fixation by a way of lowering cost for the same rate. And as Amit talked about, we are in the process of -- we have bill rate increases selective in some of the select accounts. And we see that robustness of the bill rate increases happening in some of the few select accounts even from this quarter. So pyramid rejig, then on-site/offshore mix from what we are today at 51:49 to possibly what we were last year around 49:51, that's one more area. Now that is the levers which are resulting into improvement in overall the gross margin. But I see that as the fact is last year, we were at $484 million, and today, we have gone to the next level. As Dr. Panda talked about that we see almost a 18% growth in the current year. So going back in the next year, whereas we go into the growth story, we definitely see some savings accruing in SG&A because as size goes up, I think we will be able to achieve overall leverage in the overall sales and marketing and general corporate expenses.
We will take the next question from the line of Omprakash from Spark Capital.
Just wanted to understand how the trade receivables have moved this quarter? And what are the kind of DSO days you are more comfortable with going forward?
Yes, our trade receivables last -- in the month of September, our DSO was around 85. So today, we have improved it to 83. And just wish to tell you that we believe that we have some more room to improve it from what it is today. But structurally, we see our DSO coming between 80 to 83 these kind of levels. So yes, there is some scope for improvement, and we are working towards it.
We will take the next question from the line of Pankaj Kapoor from JM Financial.
PR, just one question on the impact of the U.S. tax reforms. Any quantification or any assessment that you'll have done how it will impact us? That's all.
Pankaj, first is, we have -- we know of 2 things. One is that we hear and we have read that there is an increase -- that there is a drop in the overall tax rate from 35% to 21%. We also hear about the new legislation, which is called the BEAT legislation. But having said this, we are going through the act, the provisions, but I think the regulations have not yet come in terms of the way it will apply as to how do you break the revenue from a tax perspective into how much of work which you are getting it done in India, out of India and reporting in the U.S. branch. I think we await further pronouncements or the rules for us to actually work it out. Having said that, I believe that a drop in tax rate from 35% to 21% will definitely will be good for us from a perspective that we have 2 subsidiaries in the U.S., which is the LLC company and also Esencia. And once the clarity comes on BEAT, I think we will be in a position to possibly quantify as to how it'll impact. But I think it's premature for me to say in the absence of rules on certain of this provision, especially related to BEAT, it could not be proper of me to comment and quantify the impact of that.
[Operator Instructions] We will take the next question from the line of Prakash Chellam from JM Financial.
I know there was some commentary made on the telecom piece. Just wanted to get some sense if you could give some color, what are the outstanding parts of your performance has been on the telecom side as a segment? Could you just give us some color in terms of what's driving this growth? I notice that in the first 9 months, in absolute terms, it has contributed close to 80% of the absolute growth. So if you have any color that you could share on that, that would be helpful.
So Pankaj (sic) [ Prakash ] couple 3 things here.
Prakash.
Not Prakash.
Sorry, Prakash.
Prakash, yes.
Sorry?
Both are JM, so...
So there is couple 3 things here. Number one is that if you look at the telecom, hi-tech segment, for us, telecom, hi-tech segment is consumer electronics, it's media entertainment, right? There is ASIC, VLSI, right? Semiconductor, right? That is third segment for us that we work on. And the fourth is telecom operators. Now we have seen growth in all 3 segments, consumer electronics, VLSI semcon as well as media entertainment. And if you look at the deals that we have signed, right, has been all 3 areas. In fact, not only that, there is a number of our clients in the consumer electronics space as well as the media entertainment space that are wanting to up the game in IoT. And that's where we are putting a lot of focus and interest to take it forward. In fact, one of the things that we've tried to differentiate is that for us IoT is not just connectivity, but the telecom, hi-tech segment is working on various kinds of subsets of pervasive technologies, perceptual computing as well as connectivity solutions, and all 3 have helped us in doing that. Other part is not just development, but middle of life support because a new TV comes out every 6 months, but you are able to change the TV in our living rooms every 7 to 9 years. So there is a fair bit of support that is required on these products that happens for middle of life, and that we think is a niche that we have picked up on in the last, shall I say, 18 months that we've been pursuing effectively and helping us grow as well. Lastly, like Dr. Panda mentioned in his commentary, a lot of people throw a lot of stuff out in the market in terms of introducing it, but then testing, verification, validation are extremely critical there to give error free, beautiful experience to the consumer, and we've been able to leverage that as well with our frameworks, et cetera, to go after it. So that's been pretty broad-based across segments, across sub-service lines that we've been able to do.
Prakash, in today's world, number of chips used in the car is called autonomous car, there are hundreds of them. Now some of chips we developed with Esencia, the company we acquired, the Esencia and LTTS together, connecting with the security solution what we do in Israel together, I think that is the exciting journey what we are in. It is mid-of-life product that's continued to be there. But it is a transformational thing what we do. Without Esencia, we would not have been able to do that. Now these chips designs is continuing what some of the customers we have been very exciting in working for. In terms of virtual reality, some of the chips required for those applications, auto application, there are multiple application. These are the high-tech area which we do, I think Esencia plays a very important integral part of this segment. That is the growth we get from there.
And one more last thing. We're also building out in cybersecurity using the Israel center as a COE, and we'll report more as we go forward, but that's another subarea in telecom, hi-tech that we are focusing on, that will go across segments as well.
We will take the next question from the line of Apurva Prasad from HDFC securities.
PR, just a couple of bookkeeping ones. If you can help us with the operating cash flow and CapEx for 3Q and -- or 9 months?
Okay. The operating cash flow for Q3 after CapEx was around INR 118 crores, and we had a CapEx spend of around INR 10 crores this quarter.
Okay. And if you can also help me with the subcontracting cost for this quarter as well as the previous one?
We will have a separate -- I think you can get in touch with Pinku and...
We will take the next question from the line of Achal Phade from Wealth Managers Private Limited.
My question is related to other income. So the nonrecurring sale of export licenses is around INR 14 crores and last quarter, it was around INR 18 crores.
Correct.
So like as far as export licenses are concerned, as far as my understanding goes, they are like as long as we are going to export our services outside, it's going to keep on accruing. So why would we call it as nonrecurring? And how long should we expect this other income?
Achal, that's a good question, but please understand that when I apply for licenses, I am eligible under the SES benefits, which the Government of India has given for engineering services, but as an -- I mean, it is good that when we apply the licenses, we are -- we should get those licenses, right? So only once we have the visibility that we are going to getting the licenses, then the question comes. That's the reason I talked about that -- I mean, we are technically talking of a nonrecurring. But yes, as a business model, till sustain -- the scheme the continues, we will continue to get it, but it's a question of when we actually get the license. So as and when we get the license, we will [ elaborate ].
Okay. And my second question, sir, was with respect to margins of process engineering and industrial products segment. So last year quarter 3, those margins were around 23% and 24%. And today, they are around 19% to 20%. So what could be the sustainable level for the margins for these segments?
Actually, 23% is not the number. Last around, we see 21.87% or something that last time. These 3 segments...
He is talking about previous year, so that...
No. I think if you look at last quarter to this quarter, if you see, I think these 3 segments contributes almost 50% our business, that is always the 19%, 20% range. Last year, if you see that our dollar to rupee rate was INR 66.67, it's come down to INR 63.50. So that has impacted, nothing has changed from last year to this year.
Thank you. That was the last question in queue. I now hand the conference over to the management for their closing comments.
Thank you, all, for joining us in the call today. We hope we were able to answer most of your questions. In case you have follow-ups, please feel free to reach out to me. Have a good day.
Thank you, again. Bye-bye.
Thank you.
Thank you.
Ladies and gentlemen, on behalf of L&T Technology Services Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.