L&T Technology Services Ltd
NSE:LTTS
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Ladies and gentlemen, good day, and welcome to the L&T Technology Services Limited Q4 FY '22 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Pinku Pappan, Head of Investor Relations. Thank you, and over to you.
Thank you, Stanford. Hello, everyone, and welcome to the fourth quarter FY '22 earnings conference call of LTTS. I am Pinku, heading Investor Relations. Our financial results, investor release and press release have been filed with the stock exchanges and are available for your review. I hope you have had a chance to go through them. This call is for 60 minutes. We will try to wrap the management remarks in 20 minutes and then open up for Q&A. The audio recording of this call will be available on our website approximately 1 hour after this call ends.
Let me now introduce the leadership team available 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 performance and outlook, followed by Rajeev, who will walk you through the financial statements and performance. Let me now hand over the call to Amit.
Yes. Hi. Clifford, I'm audible?
Yes, sir, you are.
Perfect. Thank you, Pinku, and thank you all for joining us on the call today. I hope all of you are keeping healthy and safe. With that, let me start with the key highlights of our Q4 performance. In USD terms, we had a sequential revenue growth of 3.6% in constant currency, with Transportation and Plant Engineering, leading the growth. We sustained the EBIT margins at 18.6% with operating margin efficiencies. Our large deals engine continues to fire with $100 million win -- $100 million-plus win in this quarter and our total deal TCV win in Q4 was the highest ever as well as in the FY.
As we wrap up the financial year, let me outline the highlights of our performance vis-a-vis as stated 6 dimensional strategy. Growth. As you have seen from the results, we have met our guidance, and we are happy to have achieved the 20% growth mark in constant currency dollar terms. More importantly, the growth was broad-based with all segments growth -- growing in double digits. Second, technology quotient. We had more than thrice the number of owned patent filing in FY '22 at 98 versus 28 in the previous year. This is a sign of the growing number of innovation and solution building programs that our engineers are working on and the results of our investments into labs and new age technologies.
This is also showing up in our Digital Engineering revenues, which were 57% in Q4 versus 56% in quarter 3. Third, customer centricity. Our client focus and proactive investments has helped us make progress across our 6 bets. We are participating in strategic transformational programs with our customers, leading to bigger scale and market share. The $100 million deal with John is a good example of this, and I will talk about this in detail shortly. Fourth, people engagement. We started many new programs during the year to drive greater employee inclusion in the areas of carrier progression and development and fraternity building.
Over the last 3 quarters, employees across the company went through an extensive exercise to refresh, revisit and define our vision, mission and values in line with our long-term aspirations. I urge you to visit our website and take a look at it. We are very passionate about this particular area. Four, operating -- Five, operating model. We improved EBIT margins by nearly 400 bps in FY '22 through operating efficiencies and better quality of revenue led by Digital. This resulted in an overall 44% increase in PAT to INR 957 crores for FY '22.
For ESG, finally, we launched our first sustainability report in March and unveiled our ambition to be carbon and water neutral by 2030. Additionally, we look at sustainability in a very holistic manner, and this means we are also working with our customers to build innovative digital solutions that will accelerate their transformation to net zero. Let me now provide a segmental performance and outlook. Starting with Transportation. We had a strong quarter with sequential growth of 7.8% with all 3 subsegments, auto trucks off highway and Aero firing well. Our E.S. EV big bet is playing out well with 2 large deal wins in Q4.
The first one was a $100 million-plus deal with John, where we will be their strategic partner, engineering partner to build an all-electric vertical takeoff and landing aircraft. As part of this deal, along with our center in Chennai, we will be setting up an engineering R&D center in Canada to provide end-to-end engineering support, which will involve multiple areas like flight control systems, battery management, power electronics, cockpit display, et cetera. This deal is an example of how we have taken our E.S. EV strengths in auto and truck off highway to the Aero segment.
We believe our Aero segment will be powered by the same trends towards alternative energy, electrification, hybridization, which are seeing massive spending today. I'm also happy to note that we won back to back a second $100 million deal between FY '21 and FY '22, as you will recall. We further won a $25 million deal with a new age company focused on autonomous and self-driving cars. Here, LTTS will be the exclusive engineering partner to design the autonomous and connected car platform.
We are increasing our traction with traditional OEMs and Tier 1s as well as these customers revert towards autonomous and electrification and kick off various programs. We recently got in panel with a U.S. auto major to work on both advanced and conventional areas and expect this to ramp up quickly. Overall, We are extremely pleased with our performance in Transportation. It is now a $300 million-plus segment on an annualized run rate basis and in FY '22 delivered industry-leading growth of 23% and nearly 19% EBITDA margins.
We see a good pipeline of deals in electrification, connectivity, autonomous, especially on the software side, and we remain bullish on the outlook in Transportation. Moving on to Plant Engineering. We had a good quarter with 3% sequential growth, which was broad-based across FMCG, O&G and chemicals. A common trend across the 3 segments is the investments being made to the companies towards capacity expansion and plant modernization as people look to do alternative sourcing, et cetera.
As a result, we are seeing good demand for EPCM services digital asset management and automation. As an example, for a U.S.-based food company, we are providing engineering support for their greenfield plant expansion happening across U.S. and Europe. On the sustainability front, we are seeing growing traction in projects related to carbon capture and wastewater treatment. Summing up, we remain positive on the outlook of Plant Engineering and expect steady growth to continue. At industrial products, while we saw demand across our customer base or supply chain disruptions and commodity price inflation, faced by a few of our top customers, had an impact on our overall growth in this segment.
We do expect this to be temporary as global companies in the industrial sector are spending more on new product introductions. This along with rising product digitization, digital products backed by digital manufacturing is giving us growth opportunities in the software and platform development side. In addition, our expertise in circumventing supply chain challenges through component reengineering and Semcon repurposing including FPGA, is being leveraged by customers.
As an example, one of the large deals we won with the U.S. customer, we are working closely with their Tier 1 and Tier 2 suppliers to identify and resolve supply chain bottlenecks. We also established a digital twin center of excellence in partnership with Microsoft and Bentley recently that will address and accelerate digital twin and digital thread requirements of new age manufacturing companies. For the year, industrial products had an impressive 21% growth, which is a faster pace versus the past years. The pipeline addition continues to be healthy, and we expect growth to be strong in the current fiscal too.
Moving on to telecom & hi-tech. As we evolve the newer technology, we have launched a new business unit for Metaverse and believe that this will help us with both growth and profitability in the medium term. In Q4, in spite of the decision that we made on not renewing a legacy program in the interest of better profitability for the segment, we grew 1% sequentially. We are seeing good demand across all key segments, Semcon, telecom & hi-tech. The 5G lab that we set up in Oran, private network design and device engineering for paving the way for deeper conversations with a few large telecom service providers and hi-tech customers.
We will be shortly launching a 5G lab at a couple of our global R&D centers too. Our play in 5G is to leverage the expertise across the spectrum. For example, in Metaverse we will be combining our 5G, consumer electronics, product and software engineering to build out solutions in a virtual augmented domain. The [indiscernible] that we had signed in the previous quarter with one of the world's largest technology companies has opened up multiple new opportunities, and we are expecting a good scale up in the coming quarters. We see a gradual improvement in the pace of sequential growth at telecom & hi-tech as some of the recently signed engagement started ramping up in full effect and our portfolio shift towards more advanced technology areas like 5G and AI.
Lastly, Medical. We are seeing a gradual increase in the pipeline, led by opportunities in software and digital platform where customers are investing. In Q4, we won a few remediation projects where we will be helping companies streamline quality management systems across product families and in component reengineering. We are also expanding the software as a medical device, SAMD space and are assisting medtech companies in clearing FDA compliance. Last quarter, I talked about a sepsis detection device that we developed across -- based on a microfluidics infection management platform.
Happy to share that this is -- won the big innovation award for the most innovation product in the year in the U.S. Overall, we expect a pickup in the growth pace in medical and definitely expect a better performance in FY '23. Let me move on to outlook. Over the past year, I had opportunity to meet face-to-face with multiple customers across Europe and U.S. The world has opened up. Clients have started meeting in their offices. Our customers are looking at us as partners for their strategic product road map, and I believe our investments in solutions being developed in the 6 bets are in alignment with their needs.
The large deal traction in pipeline continues to scale up well across the U.S., Europe and Japan. Our pipeline is higher than previous years, and we expect this momentum of deal closures to continue. On the supply side, we have ramped up our pressure hiring and the training in new technologies with almost 18,000 people having gone through our Global Engineering Academy training and reskilling in FY '22. In FY '22, we hired about 3,000 freshers and our GA faculty led by our Head of Global Engineering Academy and our COO, plus the infrastructure that we have developed to hire and train believe that this will help us to get better scale and pyramid in the current fiscal and beyond.
As you look at FY '23, the 2 areas we will keep focusing on to keep a close watch will be how global growth will be impacted in the backdrop of high inflation and supply chain disruption; and secondly, attrition, which we believe will continue to be elevated in the short term. I'm fortunate to be leading a very engaged workforce of 20,000-plus people, engineers, technologists who are excited about the possibilities of LTTS. I'm thankful to my leadership team, the entire extended leadership team and the employees of LTTS for their commitment, their passion and look forward to reaching many new milestones.
Our mantra of profitable, sustainable and inclusive growth across our 6 dimensions continues to be our guiding path. We reaffirm our earlier guidance of reaching $1 billion by Q2, Q3 of FY '23. I'm also saying for FY '23, we are guiding organic dollar revenue growth of 13.5% to 15.5%. With that, wish you good health. I'm around for questions. Thank you, and I hand over now to Rajeev.
Thank you, Amit. Good evening to all, and hope you all are doing well. Glad to share our FY '22 performance. It has been a year of consistent performance through the quarter and strong results across parameters, broad-based revenue growth, good improvement on EBIT and PAT margin and healthy cash flows and a high return on equity. With that, let me walk you through the details of our Q4 FY '22 and full year financials, starting with the P&L. Our revenue for the quarter was INR 1,756 crores, a growth of 4.1% on a sequential basis. Our double-digit year-on-year growth trajectory continues with Q4 revenues up 22% on a year-on-year basis.
We delivered EBIT margin at 18.6%, flat compared to Q3. During the quarter, we had headwinds from utilization and revenue mix changes, which were offset by operational efficiency gains, economies of scale and currency depreciation. Moving to below EBIT. Other income at INR 31 crores, slightly higher on a sequential basis due to higher ForEx gains. Effective tax rate for Q4 was 26.7% and for FY '22, it was 26.6%, which is in line with our expectations within 26.5% to 27%. Net income for the quarter stood at INR 262 crores, which is 14.9% of revenue, up 5.3% on a sequential basis, driven primarily by higher revenues.
For the year FY '22, revenue was at INR 6,570 crores, a growth of 21% over FY '21. EBIT margin at an all-time high of 18.3%, an improvement of 380 bps over FY '21. Net income for FY '22 at INR 957 crores, up by 44%, primarily from higher revenues and operating margins. Now moving to the balance sheet. Let me highlight the key line items. DSO was at 87 days end of quarter 4 compared to 84 end of quarter 3, while unbilled decreased to 15 days in Q4, which is a 6-day improvement over Q3. The combined DSO, including unbilled, stood at 102 days, slightly above our target range of less than 95 days, and we continue to work upon improving this.
Let me talk about cash flows. In FY '22, free cash flows was INR 851 crores, a healthy 89% of net income. Our cash and investments rose to INR 2,152 crores by end of Q4 FY '22. On capital return, the Board today recommended a final dividend of INR 15 per share, taking the total dividend of FY '22 to INR 35 per share. This translates to a dividend payout ratio of 39% for FY '22. Our return on equity stands at 25% for FY '22 versus 21% last year. Higher on account increase in net profit to INR 957 crores in FY '22 versus INR 663 crores in FY '21.
Moving to revenue metrics. On a sequential basis, dollar revenue growth was 3.1% in reported terms and 3.6% on a constant currency basis, primarily led by Transportation and Plant Engineering segments. The segmental margin performance was better in 3 out of 5 segments on a sequential basis. In respect of operational metrics, utilization was at 71.1% -- sorry, 75.1% in Q4 on account of full quarter impact of the strong hiring done in Q3. Going forward, we expect this to gradually move up to 78% level. On-site offshore mix has shifted towards on-site due to the initial ramp-up of new deal wins and sale of solutions.
Offshore percentage now stands at 54.6%. However, we expect this to be in the line of 57% range going forward. T&M revenue mix increased to 71.4% in Q3 and is likely to maintain at these levels. Client profile, which indicates a number of million dollar plus accounts, has shown a sequential improvement in the $5 million and $1 million-plus categories. The client profile numbers have seen an improvement over the past few quarters. This trend will continue in the coming quarters. Client contribution to revenue, all 3 categories, top 5, top 10 and top 20 continues to be broadly in the same range as Q3.
Headcount increased sequentially by 743 employees while attrition moved up to 20.4%. We believe the attrition trend will likely stay higher in the short term, while we continue on various employment engagement measures to contain attrition. Our realized rupee for Q4 was around 75.7% to the U.S. dollar, a depreciation of 1% versus Q3. Before I conclude, let me give some visibility on the EBIT margin trajectory going forward. A key part of our 6 dimensional strategy is to build a sustainable, operating model. We've seen good results in FY '22, and our aspiration is to maintain EBIT margin at 18% plus levels.
The headwinds in the coming fiscal will be intermittent wage hikes in a high attrition environment, likely increase in travel and administrative expenses. As part of our strategy, we will continue to make organic and inorganic investments to enhance capabilities and also to enable growth. We will look to offset these headwinds with growth, better quality of revenues and operational efficiency gains. With that, I conclude. Moderator, now we can take the questions, please.
[Operator Instructions]. The first question from Mukul Garg from Motilal Oswal.
Amit, I think good show on winning another $100 million deal this quarter. I just wanted to dig a bit deeper into your FY '23 guidance of 13.5% to 15.5%. If you look at the kind of deal flow you guys have been doing as well as the growth which you have been delivering, it seems a little bit subpar. And if you also look at your long-term guidance, around 19%, 20% range, this looks like quite below that. So if you can just help with the pulls and pushes of the revenue growth over FY '23, the impact of macro? And does this imply that your long-term growth will be more back ended?
So Mukul, thank you so much for that. So I take you back over 12 months, and we had started with a guidance of 13% to 15% last year as well. Mukul, there's a mantra that we are using outside of profitable, sustainable inclusive growth, and it's very simple, commit what you can deliver and deliver what you just committed, probably do more, right? So we are confident of 13.5% to 15.5% at this stage, in spite of what we are seeing coming out on a macro scale as well as you know what you've been hearing about inflation, recession, blah blah, et cetera. So we're comfortable with that range right now. As things change, we'll let you know, number one.
Number 2 is that we do see deal velocity has picked up for us through the year. And like I mentioned, our pipeline is at an all-time high. Deal closures are there as well. But as you are aware, Mukul, there are variables that are there. So we do expect broad-based growth across from here on, like I've say. But we'll continue to stay engaged, continue to try and do the best we can and take things forward.
Right. So, Amit, sorry to push back a bit on this. I do understand and appreciate the conservatives in which you are putting in numbers, but it would be a great help, if you can just kind of give some color from different verticals perspective? Because over the last 2 quarters, you have won $200 million-plus deals. And your vertical commentary continue to remain very, very good. But if you look at the lower end of the guidance, it does imply a very, very tepid kind of a performance throughout FY '23. So while it's fine to be conservative, but is this something which you feel that is a realistic number right now?
So Mukul if I look at -- and it's okay to push back. There's no problem, right? We're having a conversation here. So Mukul, if I look at Transportation, right? I do see the EACV segment as being a tailwind. I see the differentiators we have created, the labs you've created, the traction we've got, the excellent client relationships we've got across U.S. and Europe plus the paraments you've done, et cetera. continue to be bullish on this segment in terms of growth as we move forward. And that's in each subsegment, right? So it's auto, trucks off highway, aero. In the area of Plant Engineering again, I know the market has changed in terms of people wanting smaller plants, local plants, right, alternative from just in time they have gone to just in case.
So I do expect Plant Engineering also to continue to deliver healthy growth on an ongoing basis. I don't see a problem in spite of the war, et cetera, right? Now in the hi-tech segment, Semcon will grow. But again, you are aware, this is the most competitive segment, Red Ocean, if I may, for the engineering world. We are establishing Metaverse as a vertical to get out of this Red Ocean part and get to a Blue Ocean part. It will take some time. So therefore, we are a little watchful there. Though I've said that there are deals, there are closures, et cetera, it will take a little bit there.
In terms of industrial products, last 2 quarters or last quarter, we've been tepid. And the broad reason is not that we don't have deals and we don't have people or we don't have client relationships. It's a function of our discrete manufacturing clients facing various headwinds in their businesses because of supply chain. Now I do believe, short term, they will overcome it, but will they come back to a great extent, et cetera, to be seen, right? Finally, Medical. We have again made investments. In fact, I would rate my own solutions in medical to be at par with EACV, which has grown the fastest.
But there are certain challenges because Medical segment by nature is a little more conservative. So I am bullish about my own prospects, if I may, in our own capabilities, our technologies, our engineers. But at the same time, I'm mindful of the fact that we have a full year to go by. I assure you, Mukul, that as we go through the year and when I come back and talk to you again in quarter -- toward the end of quarter 1, I will provide whatever updates I can as I have done in FY '22. Rest assured, we are baking a lot of this plus and minus to provide you what we have provided you. Of course, like I always say, internal aspirations and targets are higher.
Thank you. The next question is from Vibhor Singhal from Phillip Capital.
Amit, just one question. I wanted to basically get your idea on [indiscernible], how we are looking at the business in terms of the commodity price hike and the growing inflation. I mean, if I see most of our business is basically pertaining to the manufacturing industry. You mentioned in your comments about industrial products as that segment is taking those [indiscernible] I think at some point of time, the Transportation vertical and [indiscernible] Plant Engineering vertical too will probably start seeing the heat as well.
So in terms of your conversation with the client, has anything started on that front that the clients are kind of expecting some kind of headwinds? Because the primary concern [indiscernible] is not what the clients are looking at today. But that inflation today could lead to lower cash flow tomorrow, which could lead to a lower IT spend day after tomorrow. So anything on that side that you are getting from the client in terms of the conversation, it would be really helpful. And then I'll ask a second question on the margin side.
Sure, sure. So if I may share with you, see recently in Europe, about 3 countries, 5 days, 18 meetings. Similar stuff happening in the U.S. In fact, our CSO, our CBOs there continue to travel. In fact, there are meetings happening every day now that people are meeting, right? And what we're hearing is, right? Number one, what we're hearing is people talk about the invasion of Ukraine, but they are yet figuring out the impact. In fact, one client told me that I actually have aborted up my factory in Western Ukraine and I continue to work. People go in the morning, come back in the night and they have put blackout windows and they continue to work inside the factory.
I was surprised, right? But they do that, right? Another customer told me that he has actually sent out food, [indiscernible] medicine to his employees in China, where they are in the office for the last 5 days and will be there for another 2 weeks. And for their families, they have been providing food, vegetables, et cetera, et cetera, because he has to do it for the employees. So you think about the extent to what people are doing to continue to stay normal. This is the new normal, unfortunately, right?
So what we're hearing is, one is invasion of Ukraine, but people are not sure where to go; second, we're hearing people talk about inflation. And believe me, some of these guys -- I was a with a CEO for 2 weeks ago of a $15 billion revenue company. Gentleman was sharing with me that I've already taken cost actions to help me with some of the commodity pricing increase I'm seeing, right? And then he was talking -- so -- but there are 3 things that are coming out with all this, right? One continue clients continue to turn towards digital to take care of absenteeism at factory and workplaces as well as further reliability of operations and predictability of operations; second, I do believe that -- and people are engaging us in that. Second, people continue to look for alternative sourcing, alternative material, alternative components to make sure they're able to continue to deliver; third, we are seeing that there is a workforce gap that is there between demand and supply at this stage.
So they continue to look at companies like ourselves to provide them with that extra talent and burst of projects to be able to take things forward. So if I was to look at -- and I said this when I was talking to Mukul, but EACV is a tailwind right now. I do see this carrying on for the next 3 years for sure, right? Digital products, digital manufacturing, both of these have not played out yet. I do believe that it will continue on. Medtech is starting off, and you can see peer results, others, medtech will grow, right? But it will take some time to become speed.
So sustainability, people are talking about alternative material, alternative sourcing, 0 liquid discharge, carbon neutrality, energy storage, et cetera. But again, this will take a little bit more time to come up. So I do believe that some of these are right now peaking or at high and will continue for the next 2 years. There are others that will pick up. So from a demand standpoint, I do feel fairly optimistic. I have not heard of any reversals or anything in [indiscernible] as I said at this stage.
Got it. That's really helpful. Just my last question is on the basically the salary hike and the margin spread. So if you could just basically share your plans as to when do we intend to get salary hike in this financial year, what is expected to be the quantum? And is the on-site salary hike, as again we have seen across the board, is it -- do you expect it to be higher [indiscernible] because of the higher inflation in the -- in U.S. and [indiscernible] countries?
So I'll -- let me take a part of the question, and then I'll hand over to our CFO, Rajeev, to answer the other part. One, I want to tell you that we did do some corrections and positive corrections, right? because somebody told me if you say correction, they may think you're so negative. Negative doesn't work in our industry, it's only positive. So we did positive correction in January for critical talent in the company because that was required. And the margins that you see are after that correction, number one; number two, our regular hike cycle increment cycle is July. We are right now in the middle of working out all those details and taking that forward.
But we will make sure we are looking at ring-fencing talent. We are looking at various options and various ways to do it, and we will continue to do that because finally, we have to look at a sustainable ongoing growth enterprise rather than worry about really just a short, short term. With that said, Rajeev, you want to add this, please?
Vibhor, I think you also talked about the margin part. And I think as most of you all would have seen, we continue to -- rather we have improved on the EBIT margin over the last 5 quarters. And in quarter 4, we've held at the same levels as quarter 3. Now like I said in my opening commentary, I mean, we will have headwinds and tailwinds to manage. The tailwinds will continue to be growth and quality of revenues. Second, if you look at some of the operational metrics, we did hire close to about 3,000 freshers during the year. You've seen that utilization has come down in Q4.
We believe many of these pressures will become billable as we enter into FY '23. Operational efficiencies, I think we talked about sustainable operating model. A large part of FY '22 really has been about building fresher's talent and improving on the pyramid. Our C&B costs as a percentage of revenue has indeed come down. So we feel that's going to be another lever that should play in our favor. So these are some of the tailwinds. While I talk about the tailwinds, of course, I should also talk about the headwinds.
So we believe that you will see savings that we had in FY '21 and '22 with COVID almost settling down now. Travel will start. It's almost -- begin to show up as Amit talked about. Most of our sales folks are traveling, meeting clients. So we expect that it will almost normalize in FY '23. Attrition and wage hikes, intermittent wage hikes, that will be another headwind that we will have to manage. And last but not the least, we will continue to invest both in organic and inorganic. But all in all, our aspiration will be to maintain at 18%-plus margin level going forward in FY '23 as well.
The next question is from Nitin Padmanabhan from Investec.
First is on the large deal, is it possible to give the rough tenure for these deals? And -- so that's one. And second, is the number of large deals seem to be accelerating, right? And you also mentioned that the pipeline also looks very strong. So just wanted your sense if you just compare maybe the last many, many years. I think this is a -- last year and this year, the last 2 years, we've actually seen a lot more large deals. And your commentary predicts that it's picking up. So from a growth perspective, fundamentally, if you think longer term, does this add a lot more predictability for you when you think about it? Just wanted your thoughts on both.
Sure. So number one, on the large deal, this is a $100-plus million deal. As we've explained in our -- in fact the press release has details on it, right? $120-plus million that's there. And generally, these air aircraft design cycles are across 6 to 8 years, right? And that's the period that this deal will run through, starting up sometime in Q2 as we start, right? So that is number one. Now in terms of traction, look, there are a couple of -- 3 things that we have fundamentally tried to change here. Number one is that as we look at solutioning, we actually step back always and see what are the white spaces that we should be investing it, right, and spending time more.
For example, if I look at the EV space, EACV space, we worked on developing in-house EV components. We also worked on creating our own integrated e-axle solution. If I look at medical technologies, we worked on creating a coughless, noninvasive BP algorithm. We created our own chest RAI. If I was to take the example of -- and I can go on and on, but broadly, what I'm trying to explain is that we look at the white spaces, we look at the technology, we do a buildup.
What that does is that rather than being known as a commodity supplier, we end up trying to gain mind share before we gain market share, right? And once you've gained mind share, then market share becomes a byproduct of that. In addition to that, while we do that with our CTO team and our practice teams that we are doing, our CSO CBOs have actually got a large deal engine full-time focused which has got finance participation, delivery participation, et cetera. It's a cross-functional team working 18/7 globally to continue to seed new ideas, create new ones, answer, et cetera, et cetera.
So knock on wood, I do have confidence that the momentum is there. And like I said, again, blessed to have our team that continues to think every day on newer ideas, newer things on how we can add value to customers, how do you unlock? Because once you unlock value for customers, what we get is a byproduct of that. So with that said, I do believe that the momentum will continue. One thing I will tell you that we learned last time, and I was sharing with some of you that we now realize that a $9.5 million deal should not be done. It should be a $10 million deal, right? A $20 million deal should not be done, aspire for $25 million. So the whole feeling in the company is to do bigger, better, more and we'll continue to strive towards that.
So just as a follow-up. So are you suggesting that this is something that's more LTTS-driven and focused in terms of the large deal engine? Or is it that the market itself is more -- has more large deals by nature? Or is it both?
Look, my first answer is it's only us and nobody can do it, but here is where we are. I do believe that deals are being done by -- across the board. The engineering segment itself is seeing more mature traction. I however, do believe the differentiator LTTS brings is the cross poly innovation that we talk about and the proactive nature of trying to bake proactive ideas. So that, I believe, is a differentiator, but I do think the engineering industry overall stand to benefit.
The next question is from Salil Desai from Marcellus Investment Managers.
Sir on the DSO base, when you look back at the year end, the target versus what the actual numbers are, what are the specific areas where the mix happened? And how would that change in the next 1 year for you to go back to the target?
Sorry, can you please repeat? Were you talking about deals or DSO?
DSO base.
DSO.
Yes. So Salil, let me take this one. So clearly, if you look at DSO, our focus is that we should be in the 95-day range, both for billed and unbilled. You -- as I mentioned in my opening commentary, we have come down in terms of unbilled DSO to 15 days compared to where it was 21 days in previous quarter. So that's an additional 6 days, right? What eventually does it -- it adds to the DSO build. Having said that, yes, at about 102, we continue to work upon it. But despite the fact that DSO is where it is, our free cash flows are at 89% to 90% of PAT, right?
So it has clearly been an area of focus that we want to ensure that the free cash flows continue to improve. It also helps us to build a war chest for inorganic growth in future. But having said that, Salil, our focus continues to be to improve DSO, and you will see that over the coming quarters, we will bring more stability in the DSO.
Yes. And the miss last year, was it something specific on [indiscernible] like particular clients? [indiscernible] confidence that things will not recur next year for you to kind of achieve the target? [indiscernible]
So there is -- yes, why don't you compete your question, Salil?
I'm saying are there any specific areas where you think things will improve this year for you to achieve the target? Or was there something [indiscernible]
So we did talk about in our commentary back in quarter 1 and also followed through in quarter 2. We've been through systems implementation during this year. Clearly, the idea is to bring more efficiency in the whole chain in the order to cash cycle. We believe that should be an area which would help us to improve DSO in the coming quarters. There is nothing in specific that I will communicate either as a cause of concern or as a miss.
The next question is from Kawaljeet Saluja from Kotak.
My question is on profitability or rather trying to understand the employee cost, Rajeev. Now when I look at your blended employee cost, that is down 13% compared to where it was 6 months back. And this is happening at a time where in your on-site mix in revenue has gone up from 40.3% to maybe 45-odd percent. I'm just trying to reconcile how this has been achieved. Now I understand that you have recruited freshers, but still the disconnected numbers is quite sharp. So can you just help me with the same?
Kawaljeet. I think 2 points, and I will also have our Chief Operating Officer, Abhishek, add to it. So we did talk about the fact that we have hired close to 3,000 freshers during the year. And I would have to step back, Kawaljeet, to really unfold the story. In FY '21, it being a COVID year, we did not hire employees. And that clearly led to the pyramid [indiscernible]. FY '22 gave the opportunity to course correct on the pyramid. It also gave us the opportunity with the growth to build for future capability. We hired close to 3,000 freshers, which is what led to the reduction in the CNB as a percentage of revenue.
Your point around the growth in on site, of course, and also trying to add back to the reduction in C&B, the fact being that the growth in on-site is more of a Q4 phenomenon. And that's more because some of the deals have started in Q4, you will see the follow-through and growth in offshore happening over the subsequent quarters. I will also have Abhi share in terms of the operational aspect around the C&B [indiscernible].
Yes. I think, Rejeev, you have covered it all. I mean we clearly saw few quarters back -- actually more than a year back, I would say, that the way the industry is moving, including the attrition part, if we do not invest in the freshers, we will not be able to have the right kind of operational excellence. And also the engine we have built on training these pressures because we're not just hiring them and then hoping that they'll start delivering. We start engaging with the freshers at least 6 months before they join us while they're in their colleges.
So when they come into the company, the quality of freshers, the quality of training is to the liking of our businesses and customers, if I may. And I think that strategy has really paid off for us. And the fact that we started this more than a year back is what is showing the results now.
Okay. If I may ask a follow-on question and that is for Amit. Amit, I'm just trying to understand the guidance philosophy because you may have given out a guidance of 13.5% to 15.5%. And at the same time, your have said that -- implied in many different ways that the guidance is conservative. Now I'm just trying to understand that -- you're not philosophical, do you think the guidance should be always based on the way you see the demand? Or do you think that we should try and guess every year, what's the kind of cushion that you have built into your margin [indiscernible] there's no revenue growth assumption? And how does that change every year?
Sure. So Kawaljeet, when we do the -- when we set up guidance and then we go through, we always look at all the positives, negatives that are there, the certainties, the deals won, the execution cycle, the supply side. We look at macroeconomics, et cetera. It's a fairly intense exercise that we do. It's an algorithm that we leverage internally to do that. So with that said, like I was explaining earlier also that see in some of the segments, I'm fairly comfortable, confident, I can see it. I can see -- I mean I have plans right up to the end of the year, believe me and some of those.
There are certain areas which I think are spotty at this stage from a variability standpoint, right, not our capability, a variability standpoint, things could change, et cetera. So that's where the guidance is coming from. But believe me Kawaljeet, we'll continue to work on this on a continuous ongoing basis and continue to provide an update to you. In fact, I didn't say it, but I'm truly thankful to everybody on the call that has worked with us through this last year. It's not been easy. So thank you.
The next question is from Abhishek Shindadkar from Incred Capital.
So one question and partly answered by Abhishek in the previous answer. It seems like our guidance, it seems like there is no challenge on the demand, but it's more on supply. And you alluded to the fact that you start training people 6 months ahead or when they are part of college. But -- just trying to understand that are they kind of billable immediately when they join or there is still a second level of training once they join? And is there another way to kind of get them billable early? Or if you can explain them -- explain this process, that would be really helpful.
Yes. Thanks for the question. See, the way it works is, yes, while we start engaging with them while they're in college, because we also engage with the faculty by the way of the colleges. So that they also train them in the areas of what industry needs. When they join us, we have them go through a more structured training process in our academy. Do understand that while they're in college is still online virtual training, but we insist on these students working from our Mysore, Baroda campuses and do more in-person training because we are engineers, right? I mean the work we do is hardcore. I mean, they have to apply what they learn.
We have all these investments, labs we have created. We've made them go through the labs that we have. Our practice, heads, practice managers engage with them and show them the kind of projects we do. There's a lot of hands-on training that we do while in the first many months that they're with us. There is no specific time line or something where we say they join in next month, they will get billable, but it varies from technology to technology, customer to customer. And that's the way it works. But yes, there is a lot of investment after they join in them before they can get into billable roles.
And more than billable, if I may add, I think our philosophy is we're doing engineering and technology work. It's not a lot of commoditized work. So you are working on products. You're working on designing a plant, you're working on a digital twin concept, et cetera. So unless we are satisfied that the work product will be beyond defect, right, will be super scale -- we don't want to deploy the people out. So at times, we will have do a little bit more retaining in a certain area. So we want to make sure that our customers love us for the work that we do because growth will happen, profits will happen, if clients love the work that we do. If we get into delivery issues and all that [indiscernible] mess for us.
Just one last one, we also put many of them through internal projects, practice projects that we run, which creates our technology assets on one hand also in the process they get trained. So that's how it works.
This is really helpful. And the second question is more about captive. So with the challenges, especially in the Eastern European part, based on your conversation with customers from Europe, is there any heightened conversation about setting up incrementally or making India as probably alternate destination right now, which may not be in their current setup?
Okay. So look, and this data, it's available. Across Russia, Ukraine and Belarus, there's about 275,000 engineering jobs that have gone offline, if I may, right? And that, therefore, has people moving some of those to Lat Am, some of those to India, some of those other parts of Europe, right? We continue to work with our key clients to support them through this difficult time. We are also -- so there are certain areas we have started to work with them. We have also established a center in Poland last quarter.
So we are providing -- we are open to -- we are working with engaging with people that are moving from these countries into Krakow where we can offer them employment as well. So we're working on various parameters in this area. I don't want to comment on one specific area or another. I also want to behave like a good corporate citizen where I don't to want to try and do this in the wrong way. But we are working with our clients, strategic clients to help them. Some of them have their own centers there, which are no longer operational. So we are supporting them on some of the programs. So we continue to engage. I don't want to put a number to it yet. But yes, there is stuff that's happening in that area.
Ladies and gentlemen, we take the last question from the line of Sandip Agarwal from Edelweiss.
So I have just one question on the supply side. While you have given a lot of detail on that front, but the key aspect which I wanted to understand how much is the difference between recruiting fresher to get them on billing in our ER&D industry versus the services industry? Is that gap couple of weeks or it is almost similar or it is higher?
No. So look at it this way, the answer will potentially vary, right, in terms of the areas we're putting them on. See some of the best analytical brains we are getting actually are people that are Masters that are coming out in specific areas. In some places, some PhDs. Now they will immediately get deputed to projects in a very short-term. There are others where we're doing build plans with them, getting them up to speed, et cetera. So there's no one answer. What I can definitely tell you because I've played both sides of this I've been in the IT industry and now in the engineering industry or more than a decade. It takes a little bit more but it varies depending on vertical skillset, technology area that we have got.
[indiscernible] We [indiscernible] that
But you can't -- but we do want engineers, we do need people with Masters. So the technology, the engineering pedigree, et cetera, is very important. Can't do it with just Bachelors, et cetera. That's a fact.
Yes. So if I can ask one more question. So we are hearing that some of these companies which have got impacted because of the geopolitical situation have become very aggressive in recruiting from some of the key supply cities in India. Has it impacted us or you are also seeing the same trend? Or you don't think it is something to be called out yet.
So look, we've got centers in 6 cities. Our primary focus to grow will be Chennai, Mysore and Baroda. Our secondary focus on Mumbai, Hyderabad, Bangalore, and then Pune as needed, right? So we have centers in these places, we are fairly diverse from that standpoint. Yes, there is a talent war out there. And we do believe it will take some time to shake out. But we -- the only answer is to go through with it. And 2 things: one, we offer a differentiated technology career path, road map, projects to our employees and our associates our -- people joining us, they'll be excited, right? So kind of projects, et cetera, we have them do.
The second thing is that can we be inclusive? Can we offer them opportunities outside of what they are doing right now? That's why I mentioned, go up to our website, look at the values, mission -- vision values that we are doing now. So we're working with various parameters to see how we can get the excitement up.
Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Pinku Pappan for closing comments.
Thank you, everyone, for joining us on this call today. We hope we were able to answer most of your questions. Please reach out to me in case you have follow-up questions. Well, here is wishing you great and safe time and hope to meet you soon in person. Thank you. Have a good day.
Thank you very much, sir. Ladies and gentlemen, on behalf of L&T Technology Services Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.