L&T Technology Services Ltd
NSE:LTTS
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
4 359
5 829
|
| Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
You don't have any saved screeners yet
Ladies and gentlemen, good day, and welcome to L&T Technology Services Q4 FY '21 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I would now like to hand the conference over to Mr. Pinku Pappan, Head of Investor Relations. Thank you, and over to you, sir.
Hello, everyone, and welcome to the fourth quarter and full year FY '21 earnings call of LTTS. I am Pinku, heading Investor Relations. For those of you who have joined from India, thank you for participating at this late hour. We apologize for having to hold the call at this time. Our financial results, investor release and press releases have been filed on the stock exchange and are also available on our website, www.ltts.com. I hope you've had a chance to go through them. For this call, we will go on for 60 minutes. We will try to wrap the management remarks in 20 minutes and then open up for Q&A. The audio of this call will be available for replay on our website approximately 1 hour after the call ends. Let me introduce the leadership team present on this call. We have Amit Chadha, CEO; Abhishek, COO; and Rajeev Gupta, CFO. We will begin with Amit providing an overview of the company's performance and outlook; followed by Rajeev, who will walk through -- walk you through the financial performance. Let me now turn the call over to Amit.
So thank you, Pinku, and thank you all for joining us on the call today. I wish you and your families well and hope all of you, especially in India, are safe and healthy. Firstly, I would like to thank all our employees who in a difficult year have risen to the occasion, taking care of themselves, their peers, their families and still being resilient in meeting the demands of our customers and keeping the customer satisfaction high. The safety and health of our employees remains on the top of our minds today. We recently rolled out a few additional measures towards the health and wellness of our employees and their family members, and we are working on a vaccination drive to cover all employees in India as quickly as possible. Moving on to our quarter 4 performance, I am happy to note that our revenues is back on positive year-on-year growth path. We achieved a sequential growth revenue of 3.9% Q-on-Q and Q4, and equally important, all 5 segments grew sequentially. Operationally, we had a good performance with EBIT margin at 16.6%, which, like our revenue, is better than pre COVID quarter 4 FY '20. We continue to generate good free cash flow, which has risen to a record high of INR 1,252 crores in FY '21, led by good collection and operational improvement. Our large deal pipeline and conversion remains robust. In quarter 4, we have won 7 leads across all segments, out of which 2 deals are more than TCV $25 million, and 4 deals are in the $10 to $15 million range. Now allow me to briefly touch upon FY '21 performance. We had tough Q1, but we pulled back starting Q2 and have delivered 3 consecutive quarters of both revenue and margin improvement. Our FY '21 dollar revenue is down 6.3%, which is better than what we had initially forecasted. If you remember in quarter 1, our guidance for '21 was for a decline of 9% to 10%. The performance was aided by a gradual improvement of macroeconomic conditions in the developed economies and our focus towards pursuing and closing large deals and strategic partnerships. All along, we have also worked on improving and retooling our talent development programs that include innovation labs, which has helped us forge stronger ties with our customers. Let me now provide the segmental performance and outlook. Starting with transportation. We had a sequential growth of 6.5%, led by auto and traction off-highway, while Aero and Defense had a marginal growth. We see traction in auto and traction of off-highway both in new areas like electric, autonomous, connected vehicles, but also the traditional areas where spends are opening up. Customers continue to look at ways to optimize R&D costs and invest heavily in the transition to electric technology, autonomous driving, which involves much higher digital engineering. We are having conversations with OEM beyond the product and into services like connected car platforms, AR/VR support. In Aerospace, the defense side is doing well; while on the commercial side, the deal traction is slowly picking up as we diversify more into the digital side. The Skywise partnership is an example of the same that we recently announced. Overall, for transportation, our EV lab investments are paying off, and we are currently pursuing multiple large deals in areas of EV, autonomous mobility, and we are optimistic about the growth momentum continuing across all 3 subsegments. In plant engineering, we had a strong quarter with 10% Q-on-Q growth. All 3 segments grew. While oil and gas grew strongly aided by the early ramp-up of the large $100 million deal. Both in oil and gas and chemicals, we continue to see deals in the substance engineering space around plant digitization, engineering value center setup, et cetera. Meanwhile, CapEx spend in oil and gas are slowly opening up with oil prices steady. In CPG, brownfield expansion, sustainability-led projects like wastewater management, energy conservation are all growth areas for us. Coming up, on plant engineering, we see large deal opportunities across regions and expect the growth to continue in FY '22. Although Q1 may be a bit muted as a good part of the ramp-up with a large $100 million deal happened in quarter 4 itself, and they will stabilize for a small bit. At industrial products, we had a steady quarter with 1.5% Q-on-Q growth, with all 3 subsegments showing growth: electrical, machinery and building automation. Demand is strong both in digital and traditional areas of product development and cost optimization. Recently, we invested in a sensor lab for rapid design and prototyping of main specific sensors, which will help us in differentiating our offerings further. Customer spend in this segment are likely to rise due to the pickup of manufacturing activity in U.S. and Germany. Investment areas reach from industry-fold initiatives like smart and connected plants, digital twin, sustainability projects centered around energy consumption and optimization of energy storage using hybridization. We see momentum in industrial products strengthening from quarter 1 onwards. In telecom and high tech, we had a flat quarter and decision making for the large deals remains a bit sluggish, even as we continue to win smaller deals. In semi, there is good momentum in chip design and testing, media for platform modernization is also observed in telecom for network monitoring and 5G experience and as a service. Overall, customer discussions and deal pipeline is moving positively, and we are working on closing deals quickly. Lastly, in Medical, We have nearly 1% Q-on-Q growth, a bit softer than we expected as COVID slowed the decision especially in the diagnostic device side. OEMs are investing in digital platforms, robotic surgical equipment and connected care where we won deals recently. Cost optimization in quarter using new age technologies like AI ML and other areas are of traction. We expect growth traction to see a jump from Q2 onwards as large deal traction improves. Shifting gears, as an engineering and technology company, it is important for us to continue to focus on digital engineering and technology investments. A few highlights I'm happy to share that our digital engineering revenues are 52% in quarter 4 versus 49% in quarter 3. We see this trend continuing. On the innovation front, despite limited access to labs, our engineers continue to innovate and filed 148 packets in FY '21. In quarter 4, RAI and IBM solution were both recognized with 2021 Big Innovation Award in the U.S. Lastly, TECHgium, which is our initiative to connect to universities, had its fourth addition recently where a record 350-plus universities participated. Let us now discuss the outlook. From a geography standpoint, we see a strong demand outlook in the U.S., while in Europe, customer discussions are progressing well, and we are seeing strength in pockets. in Japan and in India, the decision-making is a bit slow given the recent uptick in infections. The deal pipeline is strong across all industry segments. Our customers are turning more optimistic about investing in new technology, which gives us confidence of broad-based growth. Our guidance for FY '22 in dollar terms is 13% to 15%. I must add, however, that the COVID-related uncertainties are not fully behind us, as you are aware, the infection count in India has gone up significantly since April, so the impact on the delivery side is something we have to be watchful of. We've taken several measures to help our employees and their family members who are impacted by the pandemic, and we are hopeful that the situation will improve in a month. Let me end by wishing all of you good health. Thank you, and I now hand over to Rajeev.
Thank you, Amit. Good evening to all of you. I wish and pray that all of you and your families are keeping safe and healthy during these challenging times. Let me walk you through our Q4 and full year financials, starting with the P&L. Our revenue for the quarter was INR 1,441 crores, a growth of 2.8% on Q-on-Q basis. As mentioned by Amit, which was the third quarter of -- and margin improvement since the pandemic hit quarter, and we are now back to pre-COVID levels, both on revenue and margin. The EBIT margin increased by 140 basis points Q-on-Q to 16.6%. The improvement was driven by a combination of better utilization, higher offshore revenue mix and improvement in operational efficiency, partly offset by rupee appreciation against dollars. We also had a 70 basis point benefit from lower amortization in Q4 compared to Q3. Q3 had higher intangibles related amortization due to Orchestra acquisition. Moving to below EBIT. Other income was lower on a Q-on-Q basis due to lower export incentive income. We did not accrue any export incentive income in Q4 as the Government of India has yet to process the claims of fiscal year FY '20. We are following up with the authorities to expedite claims for FY '20 and also to provide clarity on the export incentive scheme going forward. Net income for the quarter stood at INR 195 crores, which is 13.5% of revenue, up 4.5% on a sequential basis, driven by higher revenue and operating margin. On an annual basis, our revenues for FY '21 was INR 5,450 crores, a decline of 3% largely because of the pandemic which hit us in Q1. EBIT margin for FY '21 at 14.5%, down 200 basis points. Again, because of the pandemic impact in Q1, points which we have now recovered. Net income for FY '21 at INR 653 crores, down 19% because of lower operating margin and other income. However, Q4 net profit level has come very close to the pre-COVID levels of INR 200 crores. Moving to the balance sheet, let me highlight the key line items. DSO was 75 days at the end of Q4 compared to 73 days in Q3, while unbilled days remained flat Q-on-Q at 17 days. So combined DSO, including unbilled stood at 92 days, which is within our target range of less than 95 days. The sustained efficiency collections and improvement in operating margin has resulted in our cash and investments rising to INR 1,700 crores plus by end of Q4 FY '21 compared to around INR 1,500 crores end of Q3 FY '21, and far better compared to around INR 900 crores end of Q4 FY '20. Let me about talk cash flows. In FY '21, we generated a record free cash flow of INR 1,252 crores, which is nearly double of our net income. Like I have mentioned in the previous quarter, this performance was driven by the significant improvement in DSO in the first half of the year to sub-95 days, which we were able to maintain in Q3 and Q4. So you can expect the free cash flow conversion rate to see some moderation going forward as the DSO steadies at current levels. Moving to revenue metrics. The dollar revenue growth was 3.9% in Q4 with all 5 segments growing sequentially as highlighted by Amit. Growth was mainly led by transportation and plant engineering. The segmental margin performance was steady on a Q-on-Q basis, with transportation and medical improving marginally, while plant engineering marginally declined. Now let me comment on operational metrics. Utilization improved by 140 basis points Q-on-Q to 78.9%, while on-site offshore mix improved in favor of offshore by around 80 bps Q-on-Q to 57.9%. The PMM revenue mix improved to 64% in Q4, owing to some of the recent deal wins. This has been between the 50 to 55 range in the past few quarters. In terms of client profile, which is a number of million-plus accounts across categories, showed a sequential improvement in the $1 million in $10 million-plus category, while others are either marginally down or flat. I mean, as I mentioned in the previous quarters, this metric is measured on a last 12-month basis and not on a quarterly annualized basis. Hence, we will see a better reflection of this quarterly picture in Q1 FY '22 as we would move past the Q1 FY '21 quarter, wherein the revenue dip quite sharp. As regards client contribution to revenue, here again, this is on a last 12-month basis. And it appears that top accounts have declined on a Q-on-Q basis. We've seen growth across top 5, top 10 and top 20 accounts on a Q-on-Q basis, in line with the overall company growth of 3.9%, increase in headcount by 383 on a Q-o-Q basis, while attrition moved up marginally to 12.2%, well below industry levels. Realized rupee for Q4 was around INR 73 to the U.S. dollar, an appreciation of 1% versus Q3. Lastly, on capital return. The Board today recommended a final dividend of INR 14.5 per share, including total FY '21 dividend to INR 22 per share. This translates to a dividend payout ratio of 35% for FY '21. Our return on equity stands at 21% for FY '21, lower than last year, mainly on account of the pandemic which hit us in Q1, leading to a drop in net profit of INR 663 crores in FY '21 versus INR 818 crores in FY '20. However, we've recovered well, both on revenue and margin since the pandemic hit quarter to come back to pre-COVID levels. Before I end, let me give some color on the EBIT margin trajectory [ we'd have ] going forward. In Q1, we will have the headwinds of wage hikes as we roll out to employees at junior levels. This is likely to have an impact on operating margin. We will try to offset this impact through improvements in the combination of operational levers like utilization, offshore ratio, employee improvement and productivity. We are also working towards improving margins in segments like telecom and high-tech and transportation, while pursuing for better growth in the high-margin segments like medical products and plant engineering. Overall, while we do not provide a guidance on margin, we will continue to work towards sustaining the progress made so far and adding on efficiency through strength in the operating model. With that, thank you, everyone. Moderator, we can now take questions.
[Operator Instructions] The first question is from the line of Sudheer Guntupalli from ICICI Securities.
Amit, my first question is that there's a lot of noise around the chip shortage disrupting pricing across industries from Hi-tech to auto. One of our top accounts is also a key player in this ecosystem. Even otherwise, across our different verticals starting from telecom and high-tech to auto, we may be working on several projects, where chips key inputs. So how do you think this disruption is any will shape up going forward?
Okay. So number one, the chip shortage that you're hearing about is manufactured delivery of chipsets and not design of chipsets, number one. Number two, in automotive, all the programs that you work on, on R&D is actually years -- that are 2 years out. So they are on current models that you're working on. So as far as we are concerned, we haven't seen any impact of the chip shortage on our business volumes, neither in auto nor in semicon. We continue to see both the areas investing in the -- in our work product areas.
Sure, Amit. And the second question is in terms of guidance. Actually, given the very favorable base of FY '21, where actually revenue has declined. Ideally, the growth expectations would have been higher. But your guidance of 13% to 15%, so is it building in some sort of conservatism given the ongoing situation in India? And possibly factoring in some of the issues like absenteeism -- employee absenteeism, so on and so forth. Or as mentioned in your remarks, this remains to be a risk on even that 13% to 15% number. Potential employee absenteeism and all remains a risk on that 13% to 15% number.
So where we are today is that -- so we paid 2 scenarios for you, right? Two sites that went into this decision of giving 13% to 15%. From a market standpoint, we do see the U.S. coming back almost at pre-COVID levels from a decision-making standpoint other than commercial aerospace. We do see Europe in most pockets or a lot of pockets to be strong in terms of decision-making. Japan decision-making has been a little slow. And India, of course, as we are aware. So that's number one. Number two, what's gone into our heads, and this is pandemic is not over yet. And it continues to wage on in different shapes and forms and affecting lives and health of people. So we have taken both these and the health of our employees, et cetera. We feel that if anyone's comfortable, 13% to 15%, of course, we'll come back to you next quarter again. In case there's a change in let you know. So our aspiration is to be -- to provide sustainable profitable growth. And we'll continue down that path. So we'll continue to visit that. Deal pipeline remains strong. It's just that the closure cannot be accurately predicted. So some of that like we saw in Telecom and Hi-Tech last quarter. So some of that is also a big thing, but we are very comfortable at this stage, but we will continue to update. But the management team is working very hard to make sure that we come back strong.
The next question is from the line of Mukul Garg from Motilal Oswal.
Amit, just following up from the previous question on the guidance. If you look at the 13% to 15% number, it basically implies between 2% to 3% Q-o-Q run rate. Now if we again look at the last 3 quarter performance, it has been significantly hasn't that despite us being in a COVID-induced lockdown plus all the uncertainty around that. So while that definitely should form one part of your analysis, what other areas are kind of leading to the quarterly slowdown over next 4 quarters versus last 3 quarters in your assessment? And is there some sort of conservative you have baked in on the risk of the flare-up of another large COVID related lockdown at your client ends? Or is that more of an industry visibility you have?
Okay. So Mukul, 2 parts here. Number one, we have been growing at that 4% clip, and we want to keep on doing that. No questions there. But having said that, I mean, if I would have talked to you at the end of Feb, I may have had a different discussion. You've seen the number of infections that have gone up in India in the last 3 weeks, we zoomed up. And this is India. Now there is -- that's number one. Number 2 is though vaccinations in the U.S. has been fairly high, U.K. have been fairly high, there is still the fear and the thing that COVID may resurface in one of these countries. Number three, decision-making, like I told you, in the last 4 months has been fairly robust, really good for us. Not on our total TCV closures that we've had in quarter 4 actually has been better than quarter 3, if I took out the $100 million deal. And our pipeline is also very strong as compared to where we were last year same time. We are not seeing client cancellations. In fact, if anything, there is empathy and sympathy, plus 100% of our workforce is work-from-home enabled. And approximately 200 people are still coming to office because of et cetera, but everything else will be sorted out. So the only problem I see right now is this COVID, and that's why we're giving you the guidance that we're giving you at this stage. But rest assured, we'll continue to work to make sure that we come back to pre-COVID as we can.
Understood. That's quite fair. Amit, the second question was on the large deals. You obviously had a very $100 million deal last quarter. But if you look at your top 10 clients, while there is a base effect. But looking at the slightly longer-term time horizon from 2018 onwards, it has lost a reasonable share of overall company revenues, and that probably is also partially on account of lack of very large regular deal wins. Can you share some thoughts on how do you see a pipeline in terms of large and small deals going forward? And is there a possibility of maybe $50 million, $100 million deals of coming in at a regular clip given the demand out there? Or will it still remain predominantly a smaller deal market?
Okay. So Mukul, I'll answer your 2 questions. Let me talk about deals, then I'll talk about account. So from a deal standpoint, I would like to assure you that we are looking at a lot more. If I was to look at our deals that we have been closing, I see a lot more $25 million deals -- $25 million TCV deals closing as opposed to what I would have seen 2 years ago. So let's take the $100 million deal out, just talk about normal $25 million to $40 million to $50 million deal. So the closures that we've seen in the current year or have just gone by have been higher as compared to past though. Our $10 million-plus deals that we have closed in FY '21 has been higher than what we have closed in past years. That's 1 and 2. If I look at my future pipeline today, the number of $10 million deals that are not going on or $25 million deals going on, $50 million deals going on, there is a fair degree those deals continue. So you will agree with me, however, that the bigger deals that you had $50 million deal or $100 million deal take some time. It doesn't close overnight. Closure cycles are longer. So we are seeing that. We are definitely seeing -- we are monitoring very closely and ask our teams on their on the size of the deals that they close. So it's not this closing deal or the deal and bulking up the conversation and signing bigger deal. So that will continue to happen. As we go forward, we'll be able to share more with you, but that's the continuous process. Now let me share with you on account side. So on account side, if you look at it, Mukul, we used to have 4 accounts that were -- I mean, we had 4 accounts of more than $30 million some time ago. And then of course, it dropped because of COVID. But I do see that our whole aspiration as a management team, as an operations team at the company is to get accounts as big as possible and be able to aggregate that. The good news is that clients also are helping us in this area to be able to go forward. I'm hopeful when I come back in quarter 1, at the end of it, you will start seeing this time pyramid improving, and we are focused on this. There is account management effort. There is delivery-led growth that we have institutionalized inside the company. So all those put together, we think, will be helpful for us as we move on.
The next question is from the line of Vibhor Singhal from Phillip Capital.
So Amit, my question was on 2. One is on the Medical Devices segment. So segment has actually grown quite for us in the last 2 years. We've increased our revenue share for this segment from around 6%, 7% to now 12%, 13%. But last 2, 3 quarters, then you would have thought that because of the pandemic and as other companies also are trying to make it onto the segment, this segment would completely be able to compensate for the lack of growth that we had in other verticals. So anything that you can probably point out in this segment that -- why the growth has been kind of soft in this quarter, especially? And how do you see this segment going for us over the next, let's say, 3 to 4 quarters?
Sure. So Vibhor, as we see the Medical segment, we do see work happening in 4 clear areas or 5 clear areas, R&D focus that is there in Medical. One is telehealth and the expansion of that. Second is connected devices over there. Third is cybersecurity. Fourth is patient experience. And the fifth is digital manufacturing or automation, whichever you want to call it. Just 5 -- sixth one is regulatory compliance certifications that are there. Now we had a good run-up last year in medical devices. Last quarter, we've only grown 1%. We are expecting some more deal closures as we speak. The big deal that we won last quarter in Medical has to still ramp up. So you're expecting ramp-up that slowed down a little bit, but the oil and gas expanded faster. There's a give and take here. But so having said that, we are seeing traction in this area. And quarter 2 onwards, you will see clear growth coming back in this segment. This remains as a very important and high visibility segment for us.
And as a management, I'm sure you have those targets from auto. Any specific number that we're looking at, let's say, this segment probably grow maybe 15%, 20% of revenue at some point of time? Is there something that you're looking in a broader kind of a number? Or is it just in one quarter at a time?
Vibhor, we, of course, have internal targets that we've given out to our teams. The teams have taken based on where they see their pipeline and where they see client traction, client confidence, where they see trains, all that. But there is a little bit that is left to what happens finally. So I don't want to comment to a specific percentage by segment, but I can tell you with confidence that it is an important segment as we look at it going forward. Just keep in mind that November through -- November 2 through Feb 4, the caseload in the U.S. infections was the highest. It was about 100,000 So that need a little bit of decision making, and then again came down, et cetera. But post coming down, stabilizing March being much better. So we will have some closures. And that's why I'm saying I'm confident that quarter 2 onwards, we should be seeing the growth
Sure, sir. So 1 more question from my side, on the supply side. So are we seeing any pressure from the supply side in terms of talent availability and the kind of basically the talent that we want, a mismatch between what we are looking for and what we are getting? Is it also partly reflected in the high accretion number that we have in this quarter? And if at all, on what are we doing about it?
Sure. So I'll address it 2 ways. And then I will -- if I miss out something, I will request my colleague, to add to it. So number one, from a talent standpoint, let's call it, recruitment, let's call it retention, and then let's call it, retention and innovation. That's how we will do this. So if I look at the recruitment part, you've seen the about 400-odd headcount increase that's happened in the last quarter. And our utilization also is at record levels. Utilization will improve slightly. We may be able to take it to about 80%. But we are an engineering technology company. We don't want to push it beyond that, because there has to be innovation that has to continue to happen. We have to continue to differentiate ourselves, continue to invest, et cetera. So I do believe a little bit of optimization there. But recruitment will continue if I give you a number, we have taken in more than 300 freshers in the last quarter alone. Over the next year, I do expect more than 1,000 freshers to be added into the company. So that is from a recruitment standpoint. Now we continue to be in the market to recruit talent. All the 5 centers are hiring. So Baroda, Chennai, Mysore, Bombay, Bangalore, we are hiring. And we are seeing a lot of people wanting to join us because we're engineering and technology companies, and are seeing a lot of excitement there. So can we hire faster? Of course. But I think the pace that we are at right now, I'm kind of satisfied with it, and we are working on trying to improve that in India, U.S. from a recoupment standpoint. Now from a -- I'll request Rajeev to talk about the training that we are doing because he's running that engine very efficiently and effectively with his leadership. Second one is on retention part. And that, again, Vibhor, we were used to be at about, if you remember, 14%, 16%, we came down about 10% last quarter -- last year. Quarter 4 for us has been 12%. We have given a wage hike, who are juniors effective, and mid-grade effective April 1. Seniors will be effective July 1. So as you will agree with me that there was seasonality to that. But there will be a slight uptick. But we will still be within industry standards and below our all-time high. I'm confident of that. And we're all working towards it as a single team to do that, and that's the retention part of it. So I'm hopeful that we'll be within the parameters that we govern ourselves on. Abhi, would you like to take the question on training and supply a little bit and explain to Vibhor as well, please?
Sure. Thanks, Amit. Vibhor, one of the, I think, great things we had done last year when just before COVID started was setting up a global engine academy, as we call it, for crossing, upskilling talent. In fact, our confidence on taking on roughly almost 400 fresh grads working every quarter. We did that last quarter. We did that this quarter, and we'll continue to do that over the coming quarters as well. Plus the actual talent joining the company, upskilling them has been possible because of the academy we have set up in place, which has more than 15 faculty members, including PhDs and senior leaders.I think the other interesting part is for -- I mean, which way you look at it, we anticipated -- I shouldn't say anticipated, but we didn't want to be blinded this time around. So we set up the academy in a manner, assuming some or other event like a pandemic might happen again. So most of our cros-skilling, upskilling trainings are actually set in a manner that can be done online and through training modules that we have created. Of course, a small part of assessment which is done in class as well. But that has given us confidence about hiring and upscaling folks, which is going to be critical in our growth in the coming quarters.
The next question is from the line of Pankaj Kapoor from CLSA.
Amit, my first question is, normally, you see some kind of a business attrition due to project completion in a year. Do you think the impact this year might be lower that is in FY '22, it might be lower than the traditional levels because of the normal revenue growth that we have in FY '21?
Pankaj, thank you for the question. At this stage, where we are right now, yes, business attrition or you're saying project completion, right, as we're starting from a lower base, we think will be lower than previous years, yes.
And this would be normally around 10%, 12% of the revenues, if I recall, right? Is that the right understanding?
We don't normally quantify, Pankaj. Yes, but I mean, it will be more than that previous years is what we're anticipating right now, because we've done our account planning, we've gone through with accounts and all that. And what we're seeing is largely ramp-up conversations. And I'm touching wood as I say it, staying all healthy, all safe. The biggest unknown is over, but [indiscernible] takes care of itself, we are discussing ramp-up conversations with most of the decision-makers.
The next question is from the line of Sandeep Shah from Equirus Securities.
Amit, Just on your initial remarks, you said the $100 million deal is largely ramped up in Q4. So does that mean that incremental growth from this deal in the 1Q is unlikely to be that way? And if that is true, then Q4 growth outside this deal will slightly softer as a whole. And a related question, if 1Q for the coming financial year is likely to be soft, is the guidance baked in a back-ended kind of a growth for FY '22? That's question number one. Question number 2 is in terms of what the CFO has said. Are we looking to maintain the current margin of 16.6% in FY '22 despite the rate hikes coming in 1Q and 2Q as a whole because even LTM increase in attrition indicates what the annualized attrition could have increased decidedly in this quarter. And we have not given any wage hike in FY '21.
Okay. So let me take the different parts that you asked. So your question was around the $100 million deal ramp up. So what's going to happen, Sandeep, is that the deal is slated to ramp up in parts, right? So wave 1, wave 2, wave 3 and then stable. And that's broadly it. And then once it goes past wave 3, then there is a digitization part that we are to start doing on the site while these waves are happening so that we can help transform it. That's how we want to see, but it's not just a cost play. It's also play of digitization. So wave 1 ramp-up that we were expecting to happen in April actually happened earlier than that. That's the point I was making there. And therefore, I mean we will be able to bring wave 2 in as well. Of course, no. I mean that's something we were working towards right now. And that's why we have not said -- we haven't said soft. We've used the word muted in quarter 1. And of course, there are different deals that we continue to have and do, et cetera. And as things improve, we will come back on quarter 2 and talk to you as well. So that's where we are on that $100 million deal plant. Now if I was to address your EBIT part, wage hike part, I'm going to look to Rajeev to answer that. Rajeev?
Sure, Amit. So Sandeep, I think your question was, would we be able to sustain 16.6% EBIT margin in FY '22? The way I'd like to respond to this is we still have levers. And If you look at utilization in Q4, it's at 78.9%, with about 100 basis points headroom and we'll continue to optimize there. In terms of segmenting margins, again, headroom for improvement in transportation. We've seen some uptick in transportation margins compared to Q3, and that's going in the right direction. Telecom, there is still headroom, and that's an area that we will continue to work. It will take us a few quarters to get there. But we are persistent to be able to deliver better margins in telecom, hi-tech segment. Amit and Abhi both touched upon adding pressure. And I think that's also an opportunity because when you look at FY '21 and if you step back Q1 and Q2, with revenues coming down, clearly, we did not have the opportunity to optimize on the employee pyramid. Q4, we've started to add pressure, and that opportunity we're going to continue in all of FY '20. So truly our employee pyramid and our ability to bring in mid- to junior-level resources with the whole academy part that Abhi talked about gives us that much more ability to further optimize on the pyramid, and thus, project margin. And there are other operational levers also. The good part also that we've seen, rupee depreciating compared to what we saw in Q3. I mean, at least beginning of April, we've seen rupee depreciate. That will also be sort of a tailwind that we will count on. So these are a few factors that will help us balance to the point that we made around wage hike in Q1 and Q2.
The next question is from the line of Vimal Gohil from Union AMC.
Sir, firstly, I just wanted a clarification on your client metrics. What I noticed is you had a $30 million client, which cannot be seen in the quarter plus there has also been a reduction in your $20 million client now. If you could just provide some clarity over there. Is the deal side got smaller there? Or what has happened? That's question number one. The second question is again on the overall growth prospects of the industry. I just wanted your perspective on the longer-term growth process of this particular industry. While as an investor, my expectations have been that this industry has a potential to sort of -- IT services industry by a long way because we are at a very nascent stage of accepting outsourcing in ER&D services. So does the 13% to 15% growth reflected potential of the industry? Or maybe you have -- I mean, probably the growth rate could become up post '23, maybe '21 related
Sure. So we will answer the question, your 2 different questions. On client metrics, Vimal, we follow last 12 months. If you look at the IR that we have released, it said clearly last 12 months. So it takes into account the last 12 months. You know we had a very bad dip in quarter 1 of 12.5%. And therefore, some of the clients went down. Plus, If you remember, we had 2 clients that -- one of them that walked away from a business. They were in -- and the second one that became privately owned, and therefore, showed the work, et cetera. So all that is taken into account in that quarter 1. So as you start seeing -- next quarter when we come back, so quarter 1 will be over. Quarter 1 will no longer be considered. Q2, Q3, Q4 and Q1 of FY '22, you will see this metric coming back up. Please rest assured the company is divided up hunters and farmers in the company from a delivery standpoint and from a sales standpoint and delivery-led growth with ADM account delivery from a delivery standpoint and solution architects from a standpoint. So we have done all those 3, and we are pushing all keep growing our accounts. So hopefully, last 12 months averages will change, numbers will change and the rates will look better as we continue to talk to successive quarters. So that is as far as client metrics is concerned. And there is an ability in engineering for accounts should be 30 million plus 50 million plus. I am confident of that. We have had a setback in quarter 4 -- quarter 1 of last year, and we are working through it. So it will be from an industry standpoint, I'm going to put some numbers that no published recently in March, okay? So for them, The ER&D industry in 2019 was $1.49 trillion. That number went down to $1.4 trillion because of the pandemic in 2020. So a 6% decline year-on-year. We are expecting that the engineering ER&D spend will jump to close to $1.8 trillion to $2 trillion in the next 3 years. So are we saying that the growth has tapered out? Absolutely not. We absolutely share your enthusiasm for this industry. Does that -- COVID has been a setback. We do believe, knock on wood, it should be behind us and infections in India should come down, and we should go back to. We aspire to be at levels where we used to be at. And the industry, also there are opportunities. Now when you ask me kind of work that digital engineering work is picking up, and that's where we are picking up as well. And there is engineering work also coming in. So we're hopeful both of these will help as we go forward. But we share your enthusiasm of the industry.
And you're -- Amit, you're also hopeful of outpacing the industry because obviously that's the whole double mandate, right? You're hopeful of opportunities presented in the number.
So if I look at my competition right now, in terms of where, who fell how much -- and it's not a good way to do it, but who fell how much in the current fiscal year, our growth from an engineering standpoint, has been -- we're not falling as bad as peers. That we recovered faster than peers because we have differentiated offerings. We've got 5 verticals. We've invested in labs. We've invested in patents. We've invested in our own platforms. So I do hope that we'll come back -- just give us some time as we go forward. We are -- we've always looked at all of you for support. You've been very supportive. We look forward to making sure that we come back, and we continue to perform.
The next question is from the line of Kunal Tayal from Bank of America.
I have other questions from my side. The first one is regarding the auto vertical, you were mentioning that the demand is strong, both in the traditional and the new areas. So I was wondering if you would give the growth prospects of the segments to overshoot the pre-COVID range over a period of time? Or should we think about the segment sort of going back to the regional trajectory or the pre-COVID trajectory? That's one. And then second, just a follow-up on the delivery risks you were talking about. I mean, the delivery risk part of it, is that just related to the health and associated disruption? Or should also projects which are sensitive to, let's say, an office location probably slowing down because employees potentially can't get your office for a period of time.
Sure. So I didn't get your name. Can you repeat your name for me, please?
Sure. This is Kunal Tayal from Bank of America.
Kunal, okay. So I got Bank of America So Kunal, number one, automotive, we definitely see growth happening in electric autonomous connected area, right? And this is a clear area -- and let me take a minute on that and talk about it. See if I -- when I talk about electric autonomous connected, it is not just -- that you will get -- so the kind of work that you will get will be around the train components and vehicle controls, which is software and hardware. You will get work on onboard energy management, which, again, in hardware and software work. Offboard energy management, which again is hardware software work. Then there's an EV design, because the car itself is on the loading factor, et cetera, changing. So therefore, the loads are changing. So therefore, there will be -- that will be the legacy work that we cover. And finally, connected or autonomous will also be a lot more software. So there is software, hardware and mechanical electrical work that will come in, in auto. And not just auto. I should also add that if I look at or trucks in off-highway, they want connected vehicles. They would like to have kind of safe environment where we can see a surround view open object, do analytics properly, so they don't -- our construction site, the crane boom -- boom cranes and all that don't hurt people, right, because you don't want people to get hurt. So all that. So it's not just auto, it's clean works and auto. And I'm hopeful at some point, the commercial air will come back and we'll start talking about narrow-body and start talking about alternative energy, talking in a bigger way, the design cycles are, of course, much longer, 10 years long. So I do expect that to happen. So I do expect the deals with -- we've had, plus I talked to some of you earlier last quarter that we had made investments to start working with the new-age auto companies as well, right. And that, again, is starting to see some colorant group for us coming in from California. So I do hope that all that put together will help us in improving our -- in growth in automotive [indiscernible]. Both of those. And defense also, we are getting contracts in the centers in the U.S. So that should help us if we go forward. So broad-based, all the 3 subsegments will should fire and grow for us as far as transportation is concerned. Now let me address your second question, which is delivery risks. My -- all -- so I'm going to say this, and I thank again everybody on our call, management teams have done this. And Abhi, especially, along with our admin team, our HR team, et cetera. 100% of LTTS employees are enabled to work from home. But 98% to 98.5% of people work from home, there's about 1% population -- 1% to 2% population that needs to come to work. So here's what we've done about it. We've actually created something called bio bubbles. So in Bangalore and Mysuru and Bombay, we've taken these small apartments where we are sending in sanitation crews, cleaning crews, et cetera. There are people that stay there, and they walk to work and go back. So we're trying to get around this. We've created home labs. So there are people that have bigger homes, et cetera. They've taken equipment home. They've sell up, we've fitted them, backup power, et cetera, so others can log into that and do it. Our IT teams and our admin teams, I would call them our warriors because they continue to go to work to make sure that the rest of the company is functioning. So all that is there. But yes, our delivery risk is not from people not being able to work, but actually, the health part where people fall sick, and they cannot work or a close relative is sick and they have to take care of. I mean, these are times where, Kunal, we -- I mean, the only word that I've been repeatedly using in our whole management team uses is empathy. Our empathy and prayers are what we need right now to go out, and that's what we are doing. But that's the risk that we see. It's not work-from-home enabled, et cetera, because IT, et cetera, we've learned whatever we had to with the bio bubbles and labs, et cetera, that we've already done. So we've done that. Abhi, anything I missed that you like to add to this?
No, I think you've covered it all, Amit. Thank you.
The next question is from Dipesh Mehta from Emkay Global.
A couple of questions. First is about -- I just want to get sense about the leadership change with if you can help us understand how the responsibility get realigned across different functions. Second question is about do we see, let's say, now from pandemic, any change in spending segment, any new kind of demand which you are witnessing and which is accelerating your growth trajectory over medium term? And last question is about the amortization charges. Now Orchestra acquisition, I thought it would be a steady kind of number. We have seen some volatility, if you can provide some more detail.
Okay. So I'll take your spend leadership and spend time -- questions, and then I will request Rajeev to take the Orchestra Technologies question. So from a leadership standpoint, this has been -- as a lot of you are aware, I have worked for Dr. Panda for about 20 years now, 2 decades. And thankful to the fact that he's trained me, coached me, mentored me through a journey. I've been in the company for about more than 11 years now. I've played different roles. I started off as the Head of Sales for North America, and then I picked on different responsibilities, including being the Chief Sales Officer at one time, along with running delivery and operations for a part of the company as well as running -- I had the mandate to build up the digital offerings for the company prior to me joining the company. So I've had experience through the functions. So I don't know what I don't know. That's the reality. But I think I've been trained well, coached well. We crossed 1 month yesterday, and we've so far stable. Second, the other CXOs in the company, the Chief Operating Officer, who's on the call, CFO who's on the call, our CTO, is also on the call and CHRO, have been with the company for some time. And we've been working as a true management, one management team to take things forward. There were -- some of the changes that we had to make in the running of the company that we made while Dr. Panda was around. So we made sure that we are good and stable. Only time will tell, but I'm really excited of the opportunities that have been provided by the Board. And with the coaching inventory we have received, I look forward to taking this forward to greater heights with the employee base that we have today. And I'm thankful to them for having their trust and faith and support. From a sales standpoint, we have appointed -- last year, while we were going through the transition, we appointed a Chief Sales Officer for Americas and Asia and a Chief Business Officer for Europe. And they work directly with me, and the other Chief Business Officers work with these guys. And so we are fairly stable from that standpoint as we see it today. In fact, some of the growth that we have had is because of the stability that we've been able to provide from that standpoint. Now we talk about spend patterns. Spend patterns in the U.S. in most of the segments are near pre-pandemic. It's not truly there, but it's near there. The optimism in the market is there. Every day, the moment infections keep going down, vaccination numbers keep going up, we see there's a lot of positive net in the market. The Biden $2.1 trillion plan that he's talking about, plus another $2 trillion for families. Europe is talking about their own plan in the range of about -- I guess, about EUR 1.8 trillion. So all this is creating good sense in the U.S. Europe, however, if I may be very clear, we've seen where we operate. So Germany, U.K., Sweden, Denmark is areas we operate. And those -- and then France and Netherlands. We're seeing a lot of positivity in people's moods, but it's not as much in the U.S. We expect it to come back. Japan and India. India, of course, will actually -- full-blown recovery till 4 weeks ago. All engines fired. But more than business sentiment, I will say there's an emotional sentiment that is low. We, as a management team, are working very hard within our company to keep the morale of the company high and employees to keep the morale high. But that's there. And Japan, again, has been a lot of kind of a little soft because again, they are not very used to making decisions on video. So that's the part that we have. But I overall see spend patterns to be improving from last year, and I'm confident of the future. Rajeev, would you please take the OT question?
Sure, Amit. So I think your question in terms of amortization in Q3, pertaining to OT, 2 parts to it. One, there are certain intangible assets that are more near term that had to be -- in Q3, that is not onetime. As far as the amortization continues even in Q4, and that will continue, of course, for a period of time. So that onetime amortization that we saw in Q3, that's the benefit we have seen in Q4, and we already called out that's about 50 basis points of improvement that we see in Q4 compared to Q3.
That was the last question. I would now like to hand the conference over to Mr. Pinku Pappan for closing comments. Over to you, sir.
Thank you. Thank you for joining us on the call today. We hope we were able to answer most of your questions. If you have any follow-up queries, please reach out to me on e-mail. Wishing you safe times. Goodbye, and have a great day. Thank you.
Thank you. On behalf of L&T Technology Services, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.