L&T Technology Services Ltd

NSE:LTTS

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to L&T Technology Services Limited Q4 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Pinku Pappan, Head of Investor Relations. Thank you, and over to you, sir.

[Pinku Pappan, executive]

Hello, everyone, and welcome to the earnings call of L&T Technology Services for the fourth quarter and full year FY '23. I am Pinku, Head of Investor Relations. Our financial results, investor release and press release has been filed on the stock exchanges and is also available on our website, www.ltts.com. I hope you have had a chance to go through them.This call is for 60 minutes. We will try to wrap 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. With that, let me introduce the leadership team present on this call. We have Amit Chadha, CEO and MD; Abhishek, COO and Executive Director; Alind Saxena, President Sales and Executive Director; Rajeev Gupta, CFO. We will begin with Amit providing an overview of the company performance and outlook, followed by Rajiv, who will walk you through the financial performance.Let me now turn the call over to Amit.

[Amit Chadha, executive]

Thank you, Pinku. So thank you, Pinku, and thank you all for joining us on this call today. I trust and hope all of us are doing well. I would like to start by welcoming my colleague of more than 12 years at LTTS, Alind Saxena, to the Board of LTTS. He was elevated earlier today to President Sales and Executive Director. Alind is a graduate from IIT Kanpur, has lived in the U.S. and Europe for more than 2 decades, been with LTTS since 2009 and a member of the Executive Leadership Team for the past few years. Prior to this appointment, he was the Chief Sales Officer responsible for North America and Asia.With that, let me provide the key highlights of our Q4 performance. In USD terms, we had a sequential revenue growth of 2.8%, with 4 verticals: medical, plant, telecom and high tech and industrial products growing in excess of 4% sequentially. We sustained the EBIT margin at 18.7% as we continue to strengthen the operating model to make it sustainable.Our large deal engine continues to fire with a $40 million win in this quarter and 3 additional deals of $10 million TCV plus each. Overall, when we look at FY '23 as a whole, we are quite happy with our performance and the milestones we've achieved. A, growth. We crossed $1 billion on a run rate basis and grew by 16% in constant currency during the year. 3 of our 5 verticals grew in double digits. Transportation at an industry-leading organic 22%. Plant and industrial products more than 10%. When we look at the geo split, all 3 geos, U.S., Europe and ROW grew in double digits.Second, large deals. In FY '23, we closed a total of 18 deals greater than $10 million TCV, which includes 3 deals in the $40 million to $60 million range and 3 in the $15 million range. Third, from a technology quotient standpoint, we continue to file patents in the rate of about 50 per quarter, taking the total to 222 for FY '23. Cumulatively, we have now filed 1,090 patents as of FY '23 of which 363 are our own and 727 on behalf of the customers. Patents showcase the innovation culture that we have in the company and how our engineers are helping customers leverage advanced technologies for their products and services.Operating model. Our FY '23 EBIT margin was the highest ever at 18.5% on the back of consistent focus on strengthening the operational playbook. PAT for the year crossed the INR 1,000 crore mark at INR 1,170 crores, another milestone. We also have grown PAT at an 18% CAGR over the last 5 years, demonstrating consistency in operations, et cetera.M&A. We acquired SWC, which is the largest acquisition for us yet. The combined offerings of LTTS and SWC give us scale and an end-to-end portfolio coverage. We are gaining momentum in building a large pipeline here. We've already closed 3 deals, which include one 5G deal that we have announced to the press and another one which is a telecom infra OEM leveraging SMBC capabilities we have closed in the current quarter as reported in our results.With that, let me now provide the segmental performance and outlook. Starting with transportation. We continue to invest in transportation capabilities. The current investments are in the software-defined vehicle space, setting up higher wattage EV labs for auto, trucks and off-highway equipment and electrification. There is a good pipeline of opportunities of connected vehicles and V2X solution development. In transportation, we have filed 27 patents for ourselves in the last 2 years, which is nearly 50% of the overall patents that we have filed in this domain, giving you a clear indication that our pace of innovation has picked up in this sector. Leveraging SWC, we are entering conversations to set up data centers, [ SOC ] operations for autonomous and connected vehicles. In Q4, we had a flat quarter as we had ramped up some deals in Q3 and stabilized in quarter 4.During the quarter, we have signed a $40 million-plus deal with a U.S. transportation major for a complete transformation of their tech stack, cutting across design, development, analytics, et cetera. Additionally, we have signed 2 $10 million-plus deals in transportation, which puts us in a good position for growth in Q1 and beyond. Overall, transportation had a stellar year. We grew 22% in FY '23 organically, and this is now a $350 million annualized business. We continue to see strong growth prospects in this business.Second, plant engineering. Demand in O&G and chemicals is driven by digital twin and asset reliability where digital technologies are being leveraged in a big way. We are leveraging our own asset health care solutions, which is in digital manufacturing, AI framework that will proactively address asset and plant shutdowns. In CPG as well as in oil and gas and chemicals, the broad trend is towards localization, capacity expansion and setting up engineering value centers. As we had indicated in previous quarters, we saw a good bounce back in quarter 4 with a 6% growth sequentially, which is broad-based across the 3 subsectors.We have won multiple sub-$10 million deals with MNCs to set up their newer plants in countries, including India. Plant engineering grew at an impressive 16% this year, and we're optimistic on the growth momentum continuing. Third, industrial products. Digital demand is increasing with customer spending and manufacturing new product and application development. We are seeing strong traction in digital products and services as well as in AI and digital manufacturing. IP as a segment has always been very innovative, and we have filed 131 patents for our customers in the last 2 years alone. We are investing in capabilities that help companies transition towards green energy like battery energy storage and containerization. As part of our sustainability big bet, we have executed projects in electrolyzer design for green hydrogen and see more opportunities coming up. Eaton, one of our long-standing customers has engaged LTTS to work on projects related to sustainability, where we will leverage SWC capabilities around smart and sustainable spaces. Again, our press release has been issued to this effect.In Q4, we had a 4% sequential growth led by machinery and building automation. For the year, industrial products grew at 10%. We see a good pipeline of opportunities in the digital space and expect growth to be in strong in the current fiscal going forward as well. In telecom and high tech, we are in conversations with customers wanting to make their supply chains more resilient as well as optimizing cost and efficiencies. With SWC we won a deal with the telecom intra company to set up a complete 5G network to validate their next-gen 5G product. We've also won a deal with a North American rail operator for 5G private network deployment.Cyber security expertise is another area that we are leveraging SWC capabilities by partnering with cybersecurity providers to build products for OT security. There were ramp-downs in the Semcon space. However, we were able to offset that with growth in other subsegments like telecom OEM, service providers, media and entertainment. So overall, we've had a good 4% growth in Q4 despite an overall challenging environment and puts us in line to continue to grow as we go forward into next year. Additionally, SWC capability will give us a bigger play in 5G NOC and SOC globally. There are a few deals in play that we expect to close in the quarter.Lastly, in Medical. Again, a very innovative segment. We filed 32 patents of our own over the last 2 years, which is a majority of the patents we have filed in this segment. As I had indicated earlier, the pace of filings have increased over the last 2 years, and these solutions are world-class. We are investing in digital health care solutions and AI-enabled solutions of QARA. We've been diversifying our growth in medical with more contributions coming in from Europe and ROW. Overall, we had a strong quarter with 7% growth led by ramp-up on deals that we have won recently. We are seeing a good pipeline of deals. However, they take a little bit longer, as you are aware, in medical [indiscernible].Medical growth for the year was in single digits, though the rebound in quarter 4 has created a good momentum. The deal pipeline gives me confidence to confirm this will grow faster in FY '24. Let's now get on to outlook. Even as the global GDP normalizes to pre-COVID levels, there are 3 clear areas that will attract ER&D investments and increase the total addressable market pile by for people in our segment. These 3 are around energy transition and electrification, digital new age technologies for a variety of use cases that cover user experience, automation and communication, business transformation to optimize costs and increase returns and thereby increasing outsourcing and offshoring.There's some data points we will take. Digital transformation spend continue, and as per latest market reports will grow from $800 billion currently to $1.4 trillion in 2026, led by cybersecurity, AI, hyperautomation, enhanced speeds of connectivity, better and higher computation and cloud adoption. The global AI market itself is expected to grow from $400 billion to $900 billion in 2026, with spends towards hardware, software and services, industry-specific models will be needed to be created, which will create a great amount of opportunity for us. All these indicators dovetail with our bets around ACV, medtech, next-gen communication with digital manufacturing and product and AI. We do believe U.S., Europe and Japan will continue to fire at similar levels of spend on innovation technology as they have, while parts of Middle East and India will also see an uptick.Our large deal traction continues to scale up across U.S., Europe and Japan. We are starting to make some inroads into Middle East and to be played out. We see large deal opportunities across 5 segments, both in digital and next-gen product development as well as cost optimization and related initiatives. We've made some good progress in SWC with full integration of the people and leaders so far. Rajiv will talk a lot more about this because he's leading that effort from the executive leadership team. We believe the executive -- the joint offerings across next-gen comms, smart and sustainable world in cybersecurity have been taken to customers, and we've seen a good pipeline for that.Till date, like I said, we have won 3 deals across this and do expect to announce more shortly. Looking ahead, we see another strong year of growth. For FY '24 our guidance in USD constant currency terms is 20% plus. Within this, organic growth will be 10% plus, while the rest will come from SWC. I would also like to reconfirm our aspiration to hit the $1.5 billion run rate in FY '25. With that said, wishing you all the best and great health. I will hand over to Rajiv and then stay on for questions.

[Rajeev Gupta, executive]

Thank you, Amit. Good evening to all of you, and I hope you're keeping safe and healthy. As you may have seen from the results filing, FY '23 has been a landmark year for us. crossing the milestone on $1 billion in revenue run rate with growth across segments, achieving consistency in operating margins through the quarter stood at 18.5% for the year, which is the highest we have reported. And PAT for the year crossing the INR 1,000 crore mark. We are also happy about the consistency in free cash flows, which has helped year-end cash nearly INR 3,000 crores. We also did our largest acquisition till date, which will be effective from 1st April 2023.I shall now take you through the details of our quarter 4 FY '23 and full year financials, starting with the P&L. For the quarter, our revenue was at INR 2,096 crores, a growth of 2.3% on sequential basis. Our double-digit year-on-year growth trajectory continues with Q4 revenue up 19% on year-on-year basis. We sustained EBIT margin at 18.7%, coming flat when compared to quarter 3. We absorbed higher employee-related costs through operational efficiency and G&A improvements.For the year, our revenue was INR 8,014 crores, a growth of 22% over FY '22, our second consecutive year of growth 20% plus. Performance was led by transportation, plant engineering and industrial product segments. EBIT margin for the year was 18.5%, an improvement of 20 basis points over FY '22.Now moving to below EBIT. Other income for the quarter was at INR 39 crores, slightly lower on a sequential basis due to lower ForEx gains. Effective tax rate for quarter 4 was 28% and for FY '23 at 28.6%, slightly higher than expectations for the year. This was due to conclusion of certain past year assessments in quarter 3. We expect this to stabilize in the 27.5% range going forward. Net income for the quarter stood at INR 310 crores, which is 14.8% of revenue, up 2% on a sequential basis, driven primarily by higher revenues. For FY '23, net income was INR 1,170 crores, 14.6% of revenue, up 22% in line with revenue growth.Moving to balance sheet. Let me highlight the key line items. DSO was 75 days at the end of quarter 4 compared to 77 days in quarter 3, while unbilled days reduced to 15 days in quarter 4, a 2-day improvement over quarter 3. The combined DSO, including unbilled, stood at 90 days, which is well within our target range of less than 95 days. And this is also the lowest level over the last few years.Let me now talk about cash flows. In FY '23, free cash flow was INR 1,132 crores, a healthy 97% of net income. Our cash and investments rose to INR 2,974 crores by end of quarter 4 FY '23, an increase of nearly 40% versus end of FY '22. On capital return, the Board today recommended a final dividend of INR 30 per share, taking the total dividend for FY '23 to INR 45 per share. This translates to a dividend payout of 41% for FY '23 and the highest payout so far. Our return on equity stands at 26% for FY '23 versus 25% last year, again higher on account of increase in net profit to INR 1,170 crores in FY '23 versus INR 957 crores in FY '22.Moving to revenue metrics. On a sequential basis, dollar revenue growth was 2.8% in reported terms and 2.2% on a constant currency basis, led by medical devices and plant engineering segments. Segment margin performance for the quarter was better in 2 out of 5 segments on a sequential basis. Transportation margins were lower in this quarter due to costs related to initial ramp-up of certain deals and certain onetime investments made in capabilities on new edge technologies. Segmental margin performance for the year was better in 4 out of 5 segments, led by plant engineering and medical devices.Now let me comment on operational metrics. The onsite offshore mix came in line with our expectations. Offshore percentage now stands at 57% for the quarter. Our aspiration is to improve this ratio to 60% levels in the medium term. The T&M revenue mix increased to 71% in Q4 and is likely to maintain at these levels. On 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. A key highlight that I would like to share here is that our top account crossed the 440 million mark in FY '23.Client contribution to revenues. All 3 categories, top 5, top 10 and top 20 continues to be in the same range as quarter 3. Headcount increased sequentially by 584 employees, while attrition moved down 22.2%. Our aspiration is to get below 20% levels of attrition. This will be achieved through various employee engagement measures. Realized rupee for quarter 4 was around INR 82.2 to the U.S. dollar, an appreciation of 0.5% versus quarter 3.Let me now provide an update on our SWC acquisition. We have successfully closed the transaction effective 1st April 2023, and integrated around 800 employees of SWC into LTTS. An integration office was set up to focus on day 1 readiness and operating model, which helped us manage the transition smoothly. We continue to run the synergy program over the next 180 days, and we'll focus across 3 tracks. First, revenue. Priority is being internationalization of customer base, expansion of services portfolio and creating large deals opportunities. As Amit mentioned, we are seeing a good pipeline of opportunities with 3 international deal wins so far leveraging the SWC offerings.Second, on margins, expanding margins through internationalization, business mix and G&A optimization. Third, on DSO and working capital, which is to improve collections and transform into a solutions and services play to get into more asset-light deals. Before I conclude, let me give some visibility on the margin trajectory going forward. Our EBIT margin stands at 18.7% for quarter 4 and 18.5% for FY '23. With the addition of SWC, we aspire for EBIT margin to be in the range of 17% in FY '24 on a consolidated basis. With the transformational levers that we've identified and started to execute, we maintain our aspiration to get back to 18% EBIT levels by H1 of FY '26.Summing up, we had a good performance across parameters in FY '23 and are excited about our future growth prospects.Thank you. And now I hand it over to the moderator for Q&A session.

[Operator]

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

[Bhavik Mehta, analyst]

A couple of questions. Firstly on the guidance. If I look at organic guidance at 10%, seems a bit weak, given the momentum we have seen in 4 of the 5 verticals into the 4Q numbers. So can you just throw some more light on what kind of headwinds are you expecting in 2024, which has led you to come up with a weak guidance at 10% on an organic basis? Secondly, on SWC, it seems like the revenues were just $100 million in FY '23, while the FY '22 number, what you had shared, it led to revenues of around $140 million, $150 million orders. So has SWC seen sort of any contracts over the last year? Just a clarification on that. And lastly, can you just talk about this DOJ settlement, what you paid of around $10 million, more color on that in terms of what is it related to some 1 or 2 clients or was it across multiple clients in the U.S.? And what has been the reaction from the clients because of the settlement of [indiscernible].

[Amit Chadha, executive]

Yes, thank you so much. So number one, I believe that what we've guided is 20% plus with the focus on the word plus, right? And we are just starting the year. We are not declaring FY '24 results yet. So I do believe and I have a lot of optimism as I enter the year. If you look at it, there are 3 clear areas where we're seeing money is being spent, energy transition, electrification, digital, which includes cyber, AI, automation, with the connectivity computation and cloud adoption. And finally, a lot more outsourcing and offshoring. So at this stage, given where the world is right now, I do believe that we're very confident in this 10% plus across segments. The 2 areas which are a little bit of a concern to provide a balanced view here or Semcon and hyperscalers. Our exposure to hyperscalers is very limited. And in fact, the areas we're working with them on are king expansion. Semcon, of course we had a decline in the current quarter, but we overcame that. And in spite of that, Telecom and IT grew 4%. So that's where we are on that. With regards to the -- and I will hand over to Rajiv on the SmartWorld part. But on the DOJ part, as we had outlined in the press release that we did, this was a settlement without admission of guilt or liability. And this was for some stuff that was -- that came to our notice for the past. It is behind us. We have put in very strong controls, including having a general counsel appointed in the U.S. of A and a strong team and processes to back this up. Our clients have been very supportive to us. And if anything, what we have taken away is that they have appreciated our transparency, our strong processes and the way we have been working with them and conducting ourselves over the last few years. Rajiv, with that said, if you would like to add color on SmartWorld, please.

[Rajeev Gupta, executive]

Thanks, Amit. Bhavik, let me address the question on the SWC revenues. So in respect of SWC revenues, the portfolio of contracts that we've taken over from L&T aggregate to INR 800 crores in revenue for FY '23. We will consider this to be the baseline. These are also contracts that are strategic in nature and will result in better performance for LTTS combined in future.

[Amit Chadha, executive]

I would also like to confirm that the DOJ settlement has had absolutely no impact on any of our customers or any deals or conversations. Move to the next question.

[Operator]

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

[Akshay Ramnani, analyst]

So first question was on SWC. So you mentioned about getting into asset-light deals. Would you expect that process to be a headwind on revenues as we transition? And if yes, how long do you expect the transition period to continue? And also you had earlier mentioned that some of these government contracts have come up for renewal over the next 18 months and in most likelihood you may not go ahead with renewing those contracts. So are we on track? And what percentage of revenues can those contracts be?

[Amit Chadha, executive]

Okay. So thank you so much, Akshay. So number one, as we have said, SmartWorld is 3 parts, right? There is telecoms which now we have integrated completely into our comms, and we are calling it next-gen comms. In fact, you see our website, may have either been changed or will get changed from 5G to next-gen comms, right? And there, we are seeing 3 areas of spend. One, we are seeing a lot more 5G trials going on. And therefore, our business in that area has picked up with a couple of old telecom operators that were our customers in North America. Number two is that there are customers that are coming out with devices that can get rolled out into tunnels, into large expanses or campuses, et cetera. And they are asking us to test those devices, look at the hardware, look at the firmware, look at the software layer, et cetera. And we are again leveraging that. And that is a second subpart of what's happening in telecom hitech. So these are the asset-light deals that we're talking about with our pure play services that we're getting involved in globally. Like I said, we announced one with 5G. We announced today one with masking the customer's name. And as I go forward, you will see a lot more exciting wins in this area because the pipeline is great. Second is cybersecurity. And cybersecurity was very small for SmartWorld. It was a bigger part for LTTS. However, they had an asset called SOC, which is a security operation center in Chennai, a physical asset which we have taken over, which is basically a building with computers, et cetera, et cetera, and algorithm and blah, blah. Now the advantage of all that is that we've already got 2 wins in that area. We are very close to actually getting to a third and fourth win in that area and signing up go-to-market partnerships with customers, with providers that will differentiate us. So that is, again, asset-light, a lot more to do with services. The third part is smart cities. And there we are trying to diversify from smart cities to spaces. That will include airports, will include campuses, will include buildings, et cetera, and we were doing buildings already. Again, the whole goal is to move to a master software systems integrator, right? So these will be deals that will have a bigger technology quotient, if I may. And that's how we see this coming out and coming together. And we're very pleased with the progress we've made in the last 2 months. Now the other thing on the government contracts is that the government contracts are all time-bound. You do a project, you get an extension, you get the next bid, et cetera. And we are working through those as we progress.

[Rajeev Gupta, executive]

I can add to that. Akshay, so most of these government contracts, right? And in the current business, the entire revenue is on government contracts. Now these contracts had a high CapEx element to start off with. And now we are entering into the OpEx for the services part on these contracts. So when you talk about renewals, it is not that we will turn down the renewals. We will still do renewals more on the services part of it or the OpEx part of it. So it should actually be a plus factor as we move ahead.

[Akshay Ramnani, analyst]

Okay. Got it. If you can also touch upon will this transition period have a revenue impact? And my follow-up question is, so to Rajiv, you mentioned about getting to 17% margins in FY '24. You had earlier talked about that 182, 200 basis point impact in Q1. Also Q2 is a typical wage hike quarter for LTTS. So does that heavy lifting happen in H2? Or how are you thinking about the quarterly progression of margins?

[Amit Chadha, executive]

Number one, we have taken into account transition, et cetera, and account, our contracts that are ending, new contracts coming, pipeline, internationalization of the pipeline. In fact, the sales team for the entire SmartWorld-related businesses have already been hired. They were brought on board right after we announced the results, the acquisition in January, and then we hired them in anticipation of closure. So they're already on board and already productive, right? So we've taken all that into account when we've given you this 20%-plus guidance. And as we go through the quarters and as things change, we'll continue to update you as we have always updated you.

[Rajeev Gupta, executive]

Yes, I [indiscernible] Akshay, as far as margins, in the previous quarter, I did guide that we'll see an impact of about 180 basis points, 200 basis points on EBIT levels. I'm glad to share that it is now more narrow towards 180 basis points. I already talked about that our aspiration for FY '24 is to be in that 17% range. Of course, internally, we will continue to push for higher achievement. At this point in time, I'm just setting out what is the more realistic part, but we'll continue to play as it goes around. Second part of it is the increments happened in quarter 2. So when I have shared this aspiration, it factors in the increment that will be rolled out in quarter 2.

[Operator]

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

[Vibhor Singhal, analyst]

And congrats, sir, on a very good strong growth on a broad-based level. So sir, I think, Amit, I think I would just maybe touch upon this. I think after many quarters, we have seen such a broad-based growth almost across all the segments. You spoke about, a bit about the transport vertical. So maybe a bit more on that, if you can just maybe give some light as to the reasons that we had quarter-on-quarter dip in this quarter? And do you think basically this could reverse in the coming quarters or the weakness might continue for a couple of them? And a broader, larger-level question would be how are you seeing the overall demand environment? We've always basically considered the ER&D spend as more distretionary in nature, given the overall weaker slowdown in the U.S. and European economies. Are we seeing any impact on the deal flow or conversations with the clients or in terms of the pipeline that we are looking at [indiscernible] near future?

[Amit Chadha, executive]

So thank you so much, Vibhor. Number one, Vibhor, I'd like to confirm, we don't provide guidance quarter-on-quarter, but I always think of the investor community as part of the family and employee community of the company. So I'm going to discuss this here and tell you that our growth in quarter 1 as projected today for transportation is above 4% sequentially. So I want to just discuss that notion that there was a problem. What happened was that we had a jump in quarter 3 because some of our contracts started and we requested our clients, and they agreed that they wanted some work to be done quickly. So we ramped up extra there. And therefore, we stabilized, I would say, in quarter 4 is how I see it. The good news is that you've seen the deal wins that we've had in the current quarter, they've all got operational. And I am confirming to you that growth is back in quarter 1 in transportation for sure, right? That's -- and we are already into quarter 1, right? That's A. B, if I look at demand, Vibhor, electrification is a big spend area across U.S., Europe and Japan for auto, and not just auto for trucks [indiscernible] highway as well. And the new design cycle for aerospace is starting up for hybrid aircraft. So that bodes well for that sector. Second, if I were to go to industrial, people are asking the question 2 times when they place the order for sure, but we are seeing digital demand continuing to grow in that area as we see it today. So I'm confident that this will continue into FY '24 as well. Third, I'll tell you where the issues are as well. So high tech, Semcon, there's a little bit of stress in the system for sure. We've seen it in the current quarter. We see it in the Q1 also, but it's being overshadowed by spends coming out in the operator and the telecom OEM segment and M&D segment. In fact, there's a couple of interesting deals going on. Let's see when it gets closed. But this will help us in growth in revenues in quarter 1 and beyond. Plant, of course, continues to chug along. CPG a lot more smaller plants coming up. In fact, you will be surprised a number of building, if you go and just get the data from the government on the number of building permits and factory points that are being pulled by MNCs for India, it's just, I mean, flowing off the wall. And that is giving us -- we've already won significant amount of MNC-based contract to build engineering, do engineering for their plants that they are building in India and Southeast Asia. And that again is a very positive sign. Oil and gas, with oil prices where they are, continues to spend on digital transformation. And medical is the only area where we didn't do well, right, in FY -- in the last year. But given where we are in quarter 4 and the fact that now Europe and Japan, where we invested in these geos for medical has opened up, I'm fairly comfortable. So net-net, I'm a little worried about Semcon and hyperscalers. But our exposure to hyperscale is not too much there. So I believe that brick-and-mortar will prevail. As we always say, top line vanity, bottom line sanity cash reality, you will see a lot of these companies doing well and coming to rescue in this current year of FY '24.

[Operator]

Next question is from the line of Rajiv Berlia from Citi.

[Rajiv Berlia, analyst]

I just want to understand what happened in other segments. We see a good drop in the other segment line item around 190 basis points quarter-on-quarter.

[Rajeev Gupta, executive]

Rajiv, could you clarify your question, what do you mean by other segments?

[Rajiv Berlia, analyst]

Other expenses. So in the other expenses segment, if I see in the line item other expenses, I see a 190 basis point drop on a sequential basis.

[Rajeev Gupta, executive]

So I think, Rajiv, what you're referring to are really the common costs that get allocated across segments. So there was certainly a drop in terms of those common costs. And largely, this is because we had strong collections in the quarter which led to lower provision for doubtful debts. So that's what you see, Rajiv.

[Rajiv Berlia, analyst]

Okay. And similarly, in the employee cost also if I see, I see -- sorry. So in the employee cost, I see a 180 basis point kind of a drop. And in the other expenses, I see 190 basis points of an increase. So I just wanted to understand. So other expenses -- so it's just that there is an increase of 190 basis points. And employee cost, if I see, there is a drop of 180 basis points.

[Rajeev Gupta, executive]

So 2 things on this, Rajiv. One, as far as the other expenses, this is -- to service some of the projects, we do increase third-party contractors. And also you could have some software costs related to those projects, right? That leads to the increase in other expenses. As far as the employee cost, we continue to optimize on pyramid. And a large part of that we've been able to achieve quarter-on-quarter through induction of freshers and those freshers go through training that are eventual and those freshers of course are then deployed onto projects, right? That leads to the reduction on the employee benefits cost.

[Operator]

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

[Abhishek Shindadkar, analyst]

I might want to revisit that employee benefit expense again. So if I reconcile the expense line item and the cost of sales in your presentation, it appears, which you also alluded, that there was a higher subcon expense. So could you just elaborate, one, was it for any particular vertical, if you can? And the second is a more broader question for Amit. So historically, one of the key strengths of LTTS was to kind of mine accounts and transition them from the lower buckets to higher buckets. If I see the recent presentation, it seems that we only have one $30 million account versus 2 at the end of Q4 last year. While the $20 million has seen an improvement. It could also be that one has come off to the other bucket. Any changes that we need to do in terms of sales, presales, mining, which can help us kind of go back to the 2- or 3-year-ago period where we had a couple of $30 million-plus accounts.

[Rajeev Gupta, executive]

Abhishek, let me address your first question. And I already talked about the fact that, look, on employee cost, we continue to optimize pyramid. And the other expenses, this is as a result of increase in third-party contractors and software costs related to projects. We can certainly take this offline, Abhishek, so that we can provide more color and details. And to whoever else would like to understand, we can certainly talk about it offline. With that, I'll hand it over to Amit to clarify on the top account.

[Amit Chadha, executive]

Yes. So Abhishek, thank you so much for asking that question. Like I think Rajiv said in his commentary, I would like to confirm. See, we don't look at -- and I've shared this with a lot of you earlier in the past that I don't look at trailing 12 months, I actually look at annualized run rate for the quarter and the past quarter to see as to where I'm heading with my accounts, right? So I would like to confirm to you that we have one account that is now safely sitting above a $40 million run rate, right? We also have a couple of other -- so there's 3 other accounts that are clearly safely above the $30 million run rate. And then you see the accounts that are in $20 million to $30 million and then the $10 million to $20 million and the $5 million to $10 million. So I clearly see that. If you wait for next quarter, you will start seeing some of that impact coming up in a positive way in the reporting as we do it. And if you look at year-on-year, actually, as we have reported, you can see the $20 million plus has gone from $6 million to $9 million, 10 million-plus has gone to $20 million to $24 million. So there is a gradation improvement there. We continue to focus on account mining. We continue to focus on winning strategic new accounts. Clearly, the company is being run from a sales standpoint. And account mining and account sales is 2 separate parts. And next time when we meet, we will definitely have Alind meet you as well and spend more time on this subject.

[Operator]

The next question is from the line of Apurva Prasad from HDFC Securities.

[Apurva Prasad, analyst]

So, Amit Sir, first question is on the $10 million-plus TCV wins, even sort of from a full year point, it looks a lot lower versus where it was the previous year. So is it any part within the strategic bet or big spend areas as you highlighted earlier, which you don't see playing out as envisaged.

[Amit Chadha, executive]

So, Apurva, thank you so much for that. See, if you look at it, the last year, when we -- so if I compare FY '22 to I compare FY '23, I can confirm to you that the total TCV that the company has generated is at similar levels or slightly higher because the base is higher, so slightly higher than FY '22. Having said that, you are absolutely right that the number of $10 million plus deals or double-digit deals as we call them, is a tad bit lower, right? So admitted. But the number of $5 million-plus deals and the number of $2 million-plus deals, et cetera, that we have had, where there's a greater amount of ACV impact rather than TCV impact have been higher for us. And that's how we've chugged along, if you ask me, quarter-on-quarter consistently at 3% plus, but approximately 3%. But for quarter 3, which was of, shall I say it was a quarter that had the perfect storm of furloughs, et cetera, et cetera, that came together. So I would not be worried. We are currently going through the process of making sure that as we come back to you next quarter, we continue to give you the guidance, but I can also tell you that some education has been needed on our part, that $9 million is not $10 million and $8 million is not $10 million. So we're working through that right now.

[Apurva Prasad, analyst]

Sure. And I have another question for Rajiv. Rajiv, on the segmental margin again telecom and high tech, which has historically always lagged. So what would be your medium-term view out here in terms of convergence closer to company average post-SWC integration? And the second part is on your outlook for the overall DSO consolidated for next year and the OCF which is at about INR 1,300 crores, so OCF-to-EBITDA to 76%. How do you see that for next year?

[Rajeev Gupta, executive]

So Apurva, let me take the telecom margins first, and then I'll clarify the other questions. So on telecom margin, we've been at that 12.4% range, around that mark. Now we may have clarified this in the past, a lot of our investments are stacked in the telecom segment. The acquisition that we made of Orchestra Technology, we still continue to record cost on earn-outs in this segment. That should taper down in FY '24, which will help the margins go up. Having said that, with the SWC acquisition, we will likely see a reduction in margins, right? And that's again more as an impact of consolidation than anything else. We believe this is going to be a segment that will flow business into the other segments. So you should take it to be where we do a lot of our investments in telecom, which finally can evolve either in a transportation segment or it could evolve in a medical segment or for that matter, telecom itself, right? So it's like it will remain between this 10% plus range with SWC acquisition. Second, on the DSO, combined DSO, our aspiration for FY '24 will be to come at a range of between 115 to 125 days, right? And we will continue to optimize like we've done in case of LTTS. 90 days combined, both billed and unbilled has been by far the lowest in the last few years. And we will look at optimizing for SWC as well. So the range will be between 115 to 125 days. Apurva, sorry, I lost your third question. Could you repeat that, please?

[Apurva Prasad, analyst]

That was on the OCF, OCF for next year [indiscernible].

[Rajeev Gupta, executive]

So on the free cash flows, like I said earlier, for FY '23, we came in at 97% free cash flows over PAT. Our endeavourer will be to continue to optimize. We can come back to you on this. We have still not modeled it. But if I were to split between LTTS, I think our endeavor will be to continue to look at, right, above the 80% plus threshold in terms of FCF to PAT. As far as SWC, with the improvement in DSO, we feel the FCF should improve. But we will model this and come back to you in quarter 1.

[Amit Chadha, executive]

I would just say one more thing. We just want to be sure about this, and we had mentioned this in January when we announced the SWC acquisition as well. And I think Rajiv alluded to it today as well. So there is a team that's been put in place. It's working full time on making sure that the processes of both SWC and LTTS are harmonized- and bring together. Plus, as we have shown you over the last 3 years, that we have consistently improved margins and DSO and free cash flow over the year. And that same process is being implemented for SmartWorld. And they have very readily agreed to it and we're working together as one team. So we do think that we'll be in a much better position as we move forward.

[Operator]

The next question is from the line of Nitin Padmanabhan from Investec.

[Nitin Padmanabhan, analyst]

So my question was around SWC. I think you mentioned that while the CapEx kind of revenue comes off, there will be continuity on the OpEx kind of revenue. Where one would sort of sort of imagine that this would mean that the revenue is off a bit, but margins do improve. Could you shed a little light on that dynamic, please? So that's the first one. And the second one, in terms of the 3, how do we think about the globalization of these contracts, internationalization rather. So for that, typically, what would be the margins of the international contracts versus the 8% to 10% kind of EBITDA that we have for SWC. And typically, what would be the size of these contracts roughly, just so that we're able to sort of understand on an ongoing basis how this sort of evolves over the period?

[Amit Chadha, executive]

Yes, hi. Thank you so much, Nithin. So Nithin, number one, as CapEx contracts, we look at very hard and seriously and only pick up ones that are adding value to our technology quotient and journey. We are taking that all into account as we have given you the guidance for next year. So we have taken all that, as what will ramp down, what will ramp up. We have done that math, and that's how we've provided the guidance, right? Number one. Number two is that the OpEx spend that are there, those contracts are at our constant margins. So not to be worried. Now in terms of globalization, see, I had written to about 100 customers. I had talked about it last time, right, after we did the acquisition, announced it. We got a very positive response. We actually have hired the entire team that we needed to augment and hire. And we are averaging a good number of meetings on a weekly basis in terms of the interest areas, not just from telecom operators, M&D and infra companies, telecom infra, but our traditional customers because people are getting up and saying we want to implement 5G, go after cybersecurity, et cetera. So we are definitely seeing that. In fact, Eaton coming out and making an announcement, they will work with on SmartWorld itself is an indication of that. So therefore, I'm fairly comfortable in sharing that as we move forward in the quarter, some of these guys that we are working on pure product development, R&D, they may not want us to do a share of a news article or whatever, but we'll do our best to share as much as we can. But I do believe that there's a clear path, like Rajiv has defined, a path on profit optimization, DSO optimization, there's a clear global taking world -- taking into the global world, a path that Alind is leading himself along with the smart CBOs that we have hired in that area to take it forward. The skills that they've got. So I had shared this earlier, see about out of the 800-odd people that we have taken over from SmartWorld, the SmartWorld family has come together, that's how we'll put it. About 600-odd people are -- have got industry experience from the high-tech sector. And they were laterals that were admitted into the [ SMBC ] family. So I do believe there's the right kind of talent that can work towards offshore contracts, et cetera. Now what is the typical size of these contracts? The typical size of these contracts for telecom infra and operators will be in the same range as what we generate, between that $5 million to $15 million, $20 million, $25 million. If you are lucky, even signing a multiyear $50 million contract, 40 million contract, right? So right in that range. Cybersecurity contracts will be slightly smaller. They maybe in the range of ACV being between $2 million to $6 million. But then there's a lot more clients that will take advantage of that. And therefore, the revenue can pick up very, very quickly, right? So that's where we see that going in terms of things. So we are very comfortable with the trajectory of growth as we go forward.

[Operator]

The next question is from the line of [indiscernible] Capital.

[Unknown Analyst]

And congratulations for the broad set of growth. I mean, largely I wanted to understand on the offshoring side of these. I mean you made an initial comment that you are seeing more offshoring happening in the coming years. So if you can throw some examples, what is giving you the confidence, then there is increase in offshoring happening. So that was my first question. My second question was on the $40 million contract that we have won. So if you could throw some more light as to what is the contract exactly? And when would the ramp-up happen for this particular contract? And the third question was on the SWC. [indiscernible] having DSO of more than 400 days and there could be some ramp downs also. So just wanted to understand what could be the dropout rate from the current business which could be there from SWC given the fact that we are looking at some dropouts happening when the renewals would come. So I just wanted to have an understanding around that.

[Amit Chadha, executive]

So you have to cover the offshoring, then I'll take the next one.

[Unknown Executive]

Yes. So on the offshoring front, like Rajeev had mentioned in his commentary, our midterm aspiration is to go to about 60%. We are currently at 57%. Do we have the confidence? We definitely are taking steps internally with our delivery leaders as well sales leaders, putting more processes in place and engaging the customers to increase this. We believe that this is definitely possible given the -- where the world has moved from a hybrid perspective. Amit, you have --

[Amit Chadha, executive]

Yes, sure. So in terms of -- I'll address SWC and then I will go to the $40 million contract. So the SWC, look, as far as we are concerned, SWC will bring in that additional about 10% that we're talking about for next year in terms of growth. And we have taken into account all these contracts that are ending, new contracts that are starting, et cetera. And we've done the entire math and awarded them on that one, and we're fairly comfortable with SWC growing, bringing in right profitable growth, sustainable growth to us, I mean that's our mantra, right? Now in terms of $40 million contract, this is over 5 years like we have announced. And actually is to help product development and enhancement of this transportation major that we have signed. And this we believe will be a long-term relationship for us as we go on. It is a new customer that has been added to LTTS. And the exciting part is there is work on autonomous, there is work on electrification, there is work to be done on AI. In fact, there is a certain part of working on large language models. And I believe that this will truly do more than the -- has much more potential than the $40 million that we have announced. Again, you've known us for a long time. We want to be able to commit what we can deliver and deliver what we commit. So that's why we have gone with this $40 million number. Otherwise, the potential is a lot higher in this space. I would also like to confirm that this deal is already in execution as of quarter 1 with billing happening for the company, right? So that's where that is.

[Rajeev Gupta, executive]

I just want to add to one point, to address the DSO on SWC. Like I mentioned, we are running a synergy track, right? And DSO and working capital is one of the stream. So at least I wanted to convey to everyone we are mindful of the DSO of the current business. We already have identified areas, both from a process improvement standpoint. And second, from a mix of deals that have been either catered to within SWC or that likely we'll win in the near future to be able to see that DSO coming down. So hopefully, that should help you understand how we will address the DSO of this business going forward.

[Nitin Padmanabhan, analyst]

Sure, sure. Just one last clarification. I mean, if you can throw some light as to what is the revenue dropout rate that you are considering for next year from SWC.

[Rajeev Gupta, executive]

So to give more color to what Amit talked about, all of this has been factored in the 20%-plus guidance that we provided. Amit mentioned about 10% plus coming from organic and the remaining coming from SWC. All of this has been factored. So again, I would like to give the assurance that beyond this, we do not see anything that is going to be detrimental to the business that we have acquired.

[Operator]

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

[Pinku Pappan, executive]

Thank you, everyone, for being with us on this call today. We hope we have been able to answer most of your questions. If there are follow-ups, happy to engage with you through the course of this quarter. With that, on behalf of the entire management team here at LTTS, we would like to wish you a very good day, and hope to see you soon. Thank you so much. Bye-bye.

[Operator]

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