Larsen & Toubro Infotech Ltd
NSE:LTI
Earnings Call Analysis
Q1-2024 Analysis
Larsen & Toubro Infotech Ltd
The company reported a strong revenue of USD 1.06 billion, representing an 8.1% year-over-year increase, with constant currency growth mirroring the figure at 8.2%. However, sequential growth from the previous quarter was marginal at 0.1% both in dollar terms and constant currency. The company has been rigorously managing costs, which has led to an expansion of EBIT margins to 16.7%, a slight improvement from the previous quarter's 16.4%.
Net income faced a foreign exchange (ForEx) loss of $1.5 million, but this was significantly lower compared to the $6.4 million loss in the previous quarter. There was notable investment income of INR 135 crores due to strong cash positions and rising prices across asset classes. The profit after tax (PAT) margin increased to 13.2% from 12.8%, and basic earnings per share (EPS) improved to INR 38.90 from INR 37.70. The company's effective tax rate rose to 25% from the previous quarter's 22.9%.
The company's operating cash flow to profit after tax (PAT) improved to 89.8%, up from 88.5% in the previous quarter. Cash and investment balances rose to $1.13 billion, indicating a robust liquidity position. Additionally, the company has achieved a high return on equity at 26.8% for the quarter.
Despite delays in decision-making and some hiring freezes, the management remains optimistic. They recognize a strong deal pipeline and a persistent ability to engage in cross-selling and upselling, indicating healthy sales activities across key markets.
Management anticipated some challenges due to unexpected continuance of hiring freezes and some decision-making delays. However, they still aim to achieve previous growth targets. For financial year '24, they are committed to increasing efficiencies and expect to reach EBIT margins in the range of 17% to 18%.
The company plans to continue hiring as needed and proceed with the promised wage increase in July, which will align with industry standards. They maintain that there will be no deviation from these plans, signifying confidence in their financial and operational strategy.
The company has secured a mix of efficiency and transformation deals, including a recent significant deal in the semiconductor space. While these longer-term managed services deals offer stable revenue, there is an acknowledgment that revenue realization from such deals might be more gradual. The company's order book at $1.3 billion last quarter and the $1.4 billion inflow this quarter show healthy diversity across key revenue verticals.
Clients, especially in the BFSI sector, which grew by 12% this quarter, are observing strict budgeting due to their calendar year cycle. Nonetheless, the company is witnessing avenues where clients show readiness to fund programs with clear ROI or for risk and compliance needs. The hiring freezes are being closely monitored as they may influence future revenue streams and vertical growth.
A reclassification process occurred during the merger of the two companies, harmonizing the categorization of certain functions and ultimately contributing positively to the gross margin and utilization metrics. This restructuring reflects an adaptation to industry standards and practices, supporting operational efficiency.
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Good day, and welcome to LTIMindtree Quarter 1 FY '24 Earnings Conference Call. Please note that this conference call is being recorded. Today on the call, we have with us Mr. Debashis Chatterjee, Chief Executive Officer and Managing Director; Mr. Sudhir Chaturvedi, President Markets; Mr. Nachiket Deshpande, Chief Operating Officer; and Mr. Vinit Teredesai, Chief Financial Officer. Let me outline the agenda for today's call. We will begin with a brief overview of the company's quarter 1 performance, after which we begin with a brief overview of the company's quarter 1 performance, after which we will open the floor for Q&A. During the call, we could make forward-looking statements. These statements consider the environment as we see today and carry risks and uncertainties that could cause our actual results to differ materially from those expressed in today's call. We do not undertake to update any forward-looking statements made on this call.
I will now turn the call over to DC for his opening remarks.
Thank you, Nitin. Good evening, and good morning to everyone on the call. Thank you for joining us today.
LTIMindtree is all about creating a bigger, better and bolder future for all our stakeholders. Our recent inclusion in NIFTY 50 India's leading stock market index is a testament to our unwavering commitment to shaping a brighter future for our stakeholders. We are grateful for the trust you have placed in our vision, strategy and ability to deliver exceptional results. This recognition has filled us with renewed enthusiasm and optimism for our journey ahead. We are pleased to report that our revenues came in at a healthy $1.06 billion in Q1, a growth of 8.2% in constant currency and 8.1% in dollar terms year-over-year, despite a challenging ongoing macroeconomic environment. The growth was driven by strong performance across our major industry verticals and geographies. Our sequential revenue growth in dollar terms was 0.1%. Adjusted for the seasonal pass-through that we had in Q4, our sequential revenue growth would have been 0.9%. For the quarter, our manufacturing and resources vertical has achieved strong growth, registering a 14.9% year-over-year increase in dollar terms. BFSI, our largest vertical continues to grow, up 12.1% year-over-year in dollar terms. Furthermore, I'm pleased to share that our high-tech media and entertainment vertical is at $1 billion run rate. These 3 verticals account for 75% of our revenues, and their performance gives us confidence to maintain our continued upward trend. Geographically, North America, which accounts for 73% of our revenues, registered a year-on-year growth of 10.2%, while Europe grew 7.3% year-on-year, both in dollar terms.
Our EBIT margin for the quarter came in at 16.7%, up 30 basis points sequentially, and our net margin was 13.2%, 40 basis points higher than the last quarter. We added 19 new clients in the quarter. We also increased our count of $10 million plus customers by 9 year-over-year, bringing the total to 88. Our order inflow for the quarter came in at $1.41 billion, registering a growth of 16.9% year-on-year and 4.9% sequentially. We continue to observe a growing trend in deals focusing on efficiency to allow companies to fund their ongoing transformation initiatives.
Our persistent efforts to explore cross-selling and upselling opportunities within our existing accounts have yielded positive results.
I would like to call out a few important deals that we signed this quarter. We won a large strategic 5-year deal to drive efficiency savings for our high-tech clients. This was a vendor consolidation deal and required presence in multiple locations globally, Canada, Poland and India. This deal win is a reflection of our current scale and our capabilities to service clients across multiple global locations and a wide set of capabilities. For our insurance measure, we won a large multiyear managed services engagement for cloud and infrastructure services, displacing the incumbent. This deal is a good example of our cross-sell capabilities across cloud, infrastructure and security domains. For a large existing client of LTIMindtree, we engaged with the marketing function to become the strategic transformation partner for their integrated media platform. This platform involves innovative media solutions and automated ad buying. This deal is an example of our upsell capabilities in the digital and interactive services domain. Our interactive data, cloud and enterprise apps service lines remain significant drivers of growth as clients across the industries continue to invest in these areas for their transformation and efficiency needs.
Data, one of our largest service lines is fundamental to generate A1 which we believe will become the catalyst for the next phase of the autonomous enterprise. This technology will have a significant impact on our ability to serve clients across our offerings. To this end, we are proud to have launched canvas.ai, a pioneering generating A1 platform designed to accelerate the concept to value journey for businesses. As clients across industry segments adopt our platform, canvas.ai for their use cases, we are seeing encouraging early results. Application modernization use cases have shown 40% to 60% productivity improvement in large legacy code conversions for cloud. Campaign Management Solutions has seen lead times to launch new campaigns shrink from weeks to days. And document summarization has reached first parts accuracy previously impossible to achieve in a manual process. We continue to invest in the evolving canavas.ai to be a secure and easy-to-consume generative A1 platform, leveraging several LLM solutions and enabling the creation of multiple industry-specific use cases in partnership with our clients.
With that, let me now turn to our industry verticals. Our banking financial services and insurance business grew 12.1% year-over-year. The banking and financial services vertical is showing resilience despite the ongoing macro environment due to the nature of our engagements in core systems, risks and compliance. We have also seen new DVs in this industry vertical from vendor consolidation initiatives. Some clients are continuing with their hiring freezes, and we see longer decision cycles and slower ramp-ups. Our high-tech media and entertainment business grew 1% year-over-year. With many of our large customers starting their fiscal year in the latter half of the calendar year, we anticipate increased spending. While decision-making time lines may be extended, this gives us -- this gives businesses a chance to explore new and innovative pricing models. Additionally, the need for efficiencies is creating an environment for companies to drive even more value for their customers. The media and entertainment industry is experiencing a positive shift towards AI-based products that cater to consumers' personalized needs. This trend is further worth by the need for cost reduction and vendor consolidation, enabling us to stay competitive in this space.
Our Manufacturing & Resources business showed a growth of 14.9% year-over-year. Manufacturing clients are continuing with their strategic investments in Industry 4.0 initiatives, supply chain modernization and pricing. Our strength in IoT, ERP and data position as well for these opportunities.
Energy & Utilities clients remain resilient as there is a significant investment in core systems modernization. Our strategic focus in the energy vertical lies in the SAP engagements and exploring valuable data opportunities. Our retail, CPG and travel transportation and hospitality business grew 4.6% year-over-year. In our retail and CPG vertical, we are seeing increasing commitment from clients to take on long-term programs and focus on strategic initiatives like modernizing and rolling out ERP systems. We are also pleased to see the industry shifting towards predictive analytics and composite platforms that integrate a variety of data sources and analytical tools. With our diversified offerings across ERP data and cloud, we are well positioned to help businesses address their clean objectives of experience and transformation. The travel, transport and hospitality vertical is experiencing robust demand for leisure travel, although the demand for business travel is yet to catch up.
Our Health, Life Sciences and Public Services business grew 4.7% year-over-year. In the life sciences industry, big pharma companies are prioritizing divestment of lower-margin businesses. Cost headwinds from regulatory policies mandate a focus on efficiency. The medical devices industry is seeing growing interest in as-a-service models. From a technology perspective, clients are looking at a combination of automation, data cloud and digital technologies to deliver their objectives of cost reduction, technology stack modernizations and pricing transformation. The health care industry continues to see significant investments in patient-centric programs, for example, value-based
care. We are taking a unique approach of domain centered solutions here.
In terms of geographies, America contributed 73.1%. Europe contributed 15.2% and Rest of the World contributed 11.7% of our revenue. In Europe, our customers are carefully assessing their business needs and making strategic decisions about projects, budgets and IT spend. However, there is still strong demand for application management and SAP rollout and support deals. For the quarter, our LTM attrition was 17.8%, down from 20.2% recorded last quarter. In-quarter attrition was at a similar level to that in the last quarter. And hence, we believe our attrition will continue to show a downward trend on an LTM basis. We are pleased to report that our utilization rate has shown a noteworthy improvement reaching 84.8%. This was a result of our ability to deploy resources better as systems consolidation post-merger help improve visibility of available talent.
I will now turn over the call to Vinit for Q1 financial highlights.
Thank you, DC. Good evening, and good morning to everyone on the call. We hope you had a chance to go through our first integrated annual report, which provides comprehensive nonfinancial disclosures for you to assess our business model and performance. Let me now take you through the financial highlights for Q1 FY '24. Our revenue stood at USD 1.06 billion, up 8.1% on a year-on-year basis. The corresponding constant currency growth was 8.2%. The quarter-on-quarter growth was 0.1% in dollar terms as well as in constant currency terms. EBIT margins continue to expand and came in at 16.7% compared to 16.4% in the previous quarter. We would like to call out that we had a reclassification of around 1,000 people from delivery to sales and support this quarter and this has contributed to an increase of 120 basis points in gross margin, 160 basis points in utilization and increase in sales and support headcount by around 1,000. This change is a part of the harmonization process is in line with the industry practice and was effective 1st April 2023. Our sharp focus on managing our costs helped us deliver a 30 basis point quarter-on-quarter increase in EBIT margins. The bridge is as follows: increase in gross margins by 170 basis points, of which 120 basis points is on account of reclassification. 70 basis points due to operational efficiencies led by increased utilization and offset by seasonal visa cost of 20 basis points. A corresponding increase of 120 basis points in SG&A costs due to the reclassification and 20 basis point impact on account of increased marketing spend. I would like to retaliate that the impact of reclassification as mentioned above, is EBIT neutral.
Net ForEx loss for the quarter was $1.5 million compared to a loss of $6.4 million in the previous quarter. Riding on our solid cash balances and increase in prices overall asset classes, we had an investment income of INR 135 crores this quarter. PAT margin for the quarter was 13.2% compared to 12.8% in the previous quarter. The effective tax rate for the quarter was 25% compared to 22.9% in Q4 of FY '23.
Basic EPS was INR 38.90 for the quarter compared to INR 37.70 in Q4 of FY '23. In Q1, the billed DSO remained at 60 days. The DSO, including unbilled revenue, was at 93 days compared to 91 days in the previous quarter. The operating cash flow to PAT has continued to improve to 89.8% this quarter as against 88.5% in the previous quarter.
Our cash and investment balances stood at 1.13 billion or INR 9,235 crores compared to INR 8,355 crores in Q4 of FY '23.
Return on equity for the quarter was 26.8% versus 28.6% in Q2. Our utilization, excluding trainees, in the quarter was 84.8% compared to 81.7% in the previous quarter. Also as mentioned above 160 basis points of this improvement is on account of in classification.
As of June 30, 2023, our cash flow hedges stood at $3.59 billion and hedges on the balance sheet were USD 400 million. We are pleased to announce that both CRISIL and India Ratings and Research have reaffirmed their AAA stable long-term rating for LTIMindtree.
We have ranked 30th in the financial times climate leaders, Asia Pacific 2023, amongst the 275 leaders for our best performance in the reduction of GHG emissions intensity over 2016 to 2021 related to revenue. Recognitions like these are testament to our deep and continued efforts on the ESG track.
I now hand it back to DC for the business outlook.
Thank you, Vinit.
We continue to see good sales activity and a healthy win ratio across our key markets and industry verticals, resulting in a robust deal pipeline. At the same time, we continue to see delays in decision-making and hiring phases. However, we remain confident about our value proposition, along with the prospects of cross-selling and upselling to our existing accounts. especially with dedicated efforts towards our focus 100 initially. We are already seeing multiple de conversations and means through these efforts. As an organization, we have strategically positioned ourselves to help our clients in their transformation as well as efficiency agendas. Our ability to play effectively in both these areas gives us the confidence to continue our profitable growth trajectory even in the current dynamic market situation.
Let me now open the floor for questions.
Thank you, DC. [Operator Instructions] The first question is from the line of Sandeep Shah.
The first question is, DC, how do -- the first quarter has gone as per anticipation, or is there any negative surprises versus what we anticipated in terms of growth at the start of the quarter? And if yes, will it impact our target to achieve a double-digit constant currency growth, do we still reiterate the same, if yes, don't you believe the ask rate of 4.5% in the next 3 quarters is a very high ask rate. And just wanted to know the margin target for the full year.
You've given me a question and as well an answer. So first of all, Sandeep, if you ask me how did the quarter 1 play out. I think the quarter 1 played out the way we expected. We expected Q1 to be soft. But what quarter 1 did not -- Q1 did not play out well is, we thought that some of the aspects of the delays and some of the aspects of the hiring freezes that are client set, especially in BFS, where clients had put a freeze on onboarding, so we thought that some of those things will go away by end of Q1. And that is one area where things have not improved. Things have not changed, which makes us believe that some of the planning that we had anticipated earlier, that is not going to be working the same way. And I think the reason behind it, you must have heard us say that most of the deals these days are longer-term efficiency deals. And what happens in these efficiency deals are longer tenure, but they also have a transition involved. And only after the transition, you get into the revenue cycle. So the -- it is important to close those deals sooner so that you get the benefit of those revenues for the rest of the year. So a long story short, I think given the Q1 played out the way we wanted from an overall revenue perspective, but Q1 did not play out the way we wanted in terms of the overall -- the slowness in decision-making as well as the freezers, which tend to be continuing, which is where we feel that we'll talk about the growth targets that we have said earlier, that becomes challenging. But at the same time, we will always have it as an aspiration. So that's the first part of it. And -- Sudhir, do you want to add anything?
Yes. I'll just build on one thing there, Sandeep. I think what was positive in the quarter was the increase in the pipeline. So our pipeline went up 10% quarter-on-quarter from Q4 to Q1. Our large deal pipeline also went up significantly. So as DC said in his opening remarks, the sales activity continues to be strong, notwithstanding the fact that we saw some deals move from Q1 closures to Q2, but overall activity increased during the quarter. Yes.
Vinit, do you want to take the margin?
And Sandeep on the margin target, while the growth obviously is one of the important factors to support the margin. We are still working on building out -- working on the efficiencies that need to be driven down into the organization. So our expectation, we are still confident that we should be in the 17% to 18% margin EBIT range as a part of our exit for FY '24.
The next question is from Manik Taneja.
Vinit, just wanted to understand our hiring plans for the year as well as the wage increments that we plan for this year, given what we've heard from some of your peers.
Vinit?
Yes. So let me talk about the hiring plans. I mean for the last 3 quarters, we have been very focused in terms of ensuring that the bench that we have from a combined organization standpoint, we need to leverage the bench, and that's what -- that was the priority that we put in place and the hiring was based on how we utilize the bench and what you see right now is a healthy utilization, which is a testimony to the fact that -- testament to the fact that it's working well the way we anticipated. Now as far as hiring is concerned based on the opportunities of the pipeline, it is not going to be any different. We'll continue to hire as it is required. And as far FY '24 plans are concerned from -- for hiring pressures, that also will be as per plan. So I don't think there is any change to that. But we are in a comfortable position right now. I mean I don't think we have any constraint on the supply side at this point of time. And as far as wage increase is concerned, we had planned wage increase in July, and we have enough confidence in ourselves in terms of going ahead with the wage increase. So we are going to do the wage increase in July, and we are not going to change any of our initial plans.
Okay. And if you could help us with the quantum of the wage hikes for the year?
That will be in line with the industry standard, what we are expecting. So it will be pretty much as per the plan that we had laid down at the beginning of the year.
The next question is going to be from the line of Kawaljeet Saluja.
This is Kawaljeet Saluja from Kotak Institution Equities. A couple of questions, most are related to your order book. First is -- just trying to react to your order book because [deal win ] seems to be trending, but the announcement that you have made seem to be overwhelming towards managed services, which have a longer tenure for execution. And the other aspect related to order book is that typically, there has been a seasonal bump or strength in the order book resulting from Mindtree's seasonal strength historically. Does that seasonality still remains, or it rationally becomes too large for that payout? And the second part of the question, which I'll come on later but yes, that's the first part of the question.
Hi, Kawaljeet. Let me answer the second part first, yes, I mean, what you said is right. I mean there will be -- the account that you're talking about is part of LTIMindtree still a significant account. So that seasonality will always be there. But I can only say that there is some kind of -- even if you -- initially, those deals say 3 years back, used to be renewed every year, but there is a different -- there is a more TCV factor in those renewals as well. And as far as the order book is concerned, you are right. I think we have called it out earlier as well that the order book, the deal flow is more in terms of efficiency oriented. And in some of these deals, it's a combination of efficiency and transformation. And we had announced one deal last quarter, which is on semi, which is, the clients are willing to sign up for efficiency. And at the same time, they're willing to use that -- those dollars, which can be coming out of efficiency deals over a longer period and continue the in-flight transformation as well. So we see a flavor of those kind of deals more and more. And -- the only characteristic about these deals are their longer tenure, which is good. But in terms of the revenue realization, it takes a little bit of time because it always involves a transition from a potential incumbent or -- from the client directly. So that's one thing which we need to keep in mind when we talk about these deals. Anyone want to add anything?
DC, Only build I'll do Kawaljeet is, if you look at both last quarter with $1.3 billion order book and the $1.4 billion order inflow this quarter, when you combine the 2 quarters, that's quite a healthy mix across all our verticals and regions. And in fact, the 3 verticals that contribute to 75% of our revenue, which is the BFSI high-tech, and manufacturing and resources also account for a majority of the order book. So yes, it's correct that the order book is vectored more towards longer-term managed services deals, but it is broad-based, and it's -- there is a good concentration in our 3 core verticals.
Sudhir, can you share some ACV trends because that will be useful. And the other part of the question related to your deals is that while in the high part of BFSI there were plenty of deals. It was conspicuously absent in the press release was conspicuously absent of any mention of banking deals here.
No. So I think, in fact, okay. So DC just talked about a banking deal in our prepared remarks right now, which is a good example of our cross-sell opportunities. In fact, our insurance vertical is going strong. In fact, we're seeing some good core modernization programs underway in the insurance vertical. You can also see it reflected in some of the the product companies in the insurance space, and we are benefiting from that. So insurance actually is doing well for us at an overall level.
And any sense on the ACV trends if you can just throw some light on it that would be very helpful.
So Kawaljeet, typically, as we have mentioned in the past that depending upon, obviously, the portfolio of clients and the sectors in which it happens around 60 -- whatever deals we signed in the first half, around 60% to 70% of that translates into the ACV in the next 4 quarters. So that trend continues.
We'll take the next question from the line of Sudheer Guntupalli.
This is Mohit from Anand Rathi. So my question was related to BFSI...
Yes. Go ahead, Mohit. Sorry.
Can you hear me now?
Yes.
So it was related to BFSI. Now we have seen this marginal drop this quarter, say minus 1%, and you guys have also ramped up a little bit on deals. And in your opening remarks, you spoke about some benefit or some clients at least opening up the execution part, while some continue to be in pause. Now as we enter 2Q, 3Q and some of the clients are also looking at almost half the year gone by with, let's say, 4 months in pause. So what are your expectations here? How are talks progressing from July onwards? And what should we expect specifically in this vertical?
Yes. So I'll take that. So if you look at BFSI grew 12% year-on-year for us. And I think Mohit you actually raised an important point. What we are seeing is, for most of our clients, they work on a calendar year basis, right? So for 6 months, this calendar year, their own spend has been muted. So we are seeing some signs where they're looking to see for the rest of the year, what are the programs that they continue to fund. But I think as of now, we are not seeing -- I mean I hate using the word budget flush, but there is nothing in that direction, just to give you a sense. So people are looking to programs, where the ROI -- where there is clear benefit that the business is getting or where there is a need from a risk and compliance perspective, those are the programs that are getting funded. But we are -- what we are seeing is, I think what was -- what we are seeing is that what DC talked about, the continuing hiring freezes still continue. We want to see whether the -- I think it's about the next couple of months where we'll figure out whether they will continue to stay for the rest of the year or they will start to ease off in this quarter, rest of their calendar year.
Yes. And second one was this reclassification of 1,000-odd employees. Does their job profile change? Or do they continue to do the same work. It is a change in reporting wherein these 1,000 guys are now calculated as part of SG&A?
Nachiket, do you want to, go ahead.
Yes. I think the job profile doesn't change. It was the -- as we were bringing both the companies together, each of us had sort of slightly different way of categorizing certain functions. So as we -- as part of our merger synergies looked at industry standard practices and adopted those. So what they are doing or what the functions they are part of remains the same. It's just that those functions are now reported consistently to the rest of our peer group in how they are classified.
We'll take the next question from the line of Sudheer.
Yes. Am I audible?
Yes, we can hear you Sudheer.
Yes. So first question is to DC. It looks like there is a very sharp growth recovery in the top account. Is this possibly related to any budget flush in that account given their fiscal closes in June? Or is it more sustainable and broad-based high-tech recovery given this vertical probably witnessed earliest on set up a downturn and a lot of pain related to that might already be in the base. Also any color from the topic count on how the budgets were there, new fiscal are shaping up, given it sets the tone for a lot of tech activity?
Well, Sudheer, first of all, we don't talk about any more top account because that's not fair because we have our top 5 accounts which we want to focus on. And I can only say that if you look at the top 5, there is a decent growth in terms of the top 5 accounts. And as a part of our top 100 program, we are going to stay very focused in terms of the focus 100 accounts and which will also reflect in the growth of the top 20 as well as top 40 accounts. So that's what we should be looking at. But to your specific questions, in terms of high-tech, I would say, First of all, some of the fiscal years are -- July to June. But overall, in terms of High-Tech, we can see very good momentum in High-Tech, including whatever all the accounts that is part of that portfolio.
Got it, DC. Second question to Sudhir, an extension of what I think somebody asked earlier. The divergence between the strong order booking and weak revenue booking for almost 3 quarters now. Some part of it obviously can be explained by the changing deal mix, tenure, et cetera. Some parties being attributed to the delays in ramp-ups because of the macro overhang. If I look at the 2, 3 global banks, which reported results so far, suggest tech spends continue to be healthy in June despite the banking panic. So if I -- the crux of the problem lies in ramp-ups, not keeping pace with the order booking and parallelly, there are no material budget cuts, is it fair to expect 1 or 2 lumpy quarters of ramp-ups going ahead, which may translate into sharp pent-up revenue growth, but for LTI and of course for the industry as well.
So if you look at any -- I mean, the combination of revenue that we have is a combination of what we have from an annuity or a multiyear spend perspective as well as the discretionary spend that tends to happen usually within the year, right? So as you know, I think discretionary spend generally has been under pressure across the industry. BFSI is similar. So what we are seeing is, I think we are seeing a good long-term trend in terms of us as I keep going back to not just our order book, but also our pipeline, the size of our pipeline, overall pipeline, the number of large deals that we're chasing and the value of the large deals that we are now being -- we are participating in, that sets us up for good multiyear growth -- as DC said, yes, these deals tend to have a lag in terms of -- will have a lag because they involve slightly longer closure time lines as well as transition time lines, et cetera. So at that point, it's just a question of seeing when the entire set of deals start to materialize in terms of their -- the revenue contribution that they make as well as we'd like to see some return of discretionary spending because then there is no headwind towards the growth that we get from these large sheets.
Sure, Sudhir. Just one last question. Any budget cuts that you are seeing in your broader portfolio of key clients, let's say, the top 100 clients?
Actually, what's interesting is we have reached the recent Gartner article, they have talked about a 5% growth in budgets even in this time -- this year. I think the thing is the budgets on paper exists, but the decisions are being -- a lot of these decisions are going to the board, and they are taking more cautious decisions in quarter as they wait to see what -- see, it is a paradoxical time, right? Where governments are looking to see what they can do about inflation. So central banks, whereas unemployment is lower, you know whereas other indicators suggest that demand is healthy. So I think clients are also trying to figure out this paradox and taking decisions accordingly, but I think we see a stability in interest rate regime, which we are likely to see, then I think clients will have a lot more confidence in terms of releasing the budgets that they've already actually planned for during the financial year at least as per projections that the likes of Gartner have made.
The next question is from the line of Sulabh Govila.
Yes, am I audible?
Yes, Sulabh, please go ahead.
Yes, sure. So first one is with respect to the growth that we envisage for this year, which is FY '24. So do you expect the remaining quarters to be -- the growth to be paced out equally across the quarters? Or would you say that 2H would shape up with a stronger growth momentum versus what you think about 2Q?
Well, I think as you can make out, as we have indicated that some of the concerns that we have are more in terms of the freezes in terms of onboarding that we see in some of the BFS clients as well as the delay in decision-making. Now that's something which we will hope that by Q1, it should be easing out which did not. And I don't think we can predict in terms of where it will be -- but otherwise, there is nothing for us to believe that our second half will be any different from the second half of last year, for example. So I think the only thing which we expect is -- the only thing we are hoping is some of the freezers and some of this decision-making is faster. And I think that actually help us in terms of locally to the rest of the year.
Understood. Understood. And just a quick follow-up on the -- as you mentioned on the banking side of it, so you mentioned last quarter that there were several deals which were in the final stages of closure. And given that we've seen continued caution with respect to freezers and the decision-making and based on your recent conversation, would you say that some of these deals could come through in 2Q? Or do you think they can take much longer?
Well, we are hoping -- at least I know at least a couple of those deals have already come through. we closed them in the track end of Q1. But we are hoping that some of the other deals also will come through, hopefully, if there is no further delay in terms of our decision making. But it's anybody's guess now, as Sudhir rightly pointed out, this is really a paradoxical time. I don't think any client is talking about cutting their budgets. There is a significant activity in terms of deals. It's quite healthy activity -- you have seen our order inflow, but the delays that we are experiencing in some -- in terms of some of the decision-making as well as even after closing the deal, the ramp-ups are also not happening the way we expect it's much slower than we anticipated. So these are the kind of things which are paradoxical. And we are just hoping that it will all clear up and it's something that we have never seen in the industry, to be honest.
The next question is from the line of Vibhor Singhal.
Yes. I hope I'm audible.
Yes, you are.
Yes. So sorry for that. So, DC, my question was on the 2 verticals, high-tech and the retail as well, so just wanted to delve a bit on the high-tech vertical. After 2 consecutive quarters, a very sharp sequential decline. We've seen a good recovery in this quarter. So just some color on that, do you believe this is something more of a reflective of the trend that we could see going forward as well. And we could see the high-tech vertical -- you could maybe call out that maybe the high-tech vertical has bottomed out for us, and we could see continuance of the growth that we saw in this quarter. And on the retail vertical side, just wanted to pick your brain, this was a vertical which probably saw the impact of the macro weakness of the first -- any green shoots there? Any signs of recovery there or any time conversations that would help you to gauge that, okay, this vertical could probably start recovering in the next maybe whatever time frame that you would like to call out.
Vibhor let me just for now answer the second question on the retail and then I'll request Sudhir also to provide some color. See, as far as retail is concerned, it is still a lot of apprehension over there. I guess this is one vertical, which is also connected to the overall inflationary pressures in the system. So retail still continues to be an area of -- we have to wait and watch and see. So this -- we have to -- I don't think I can see any signs of something radical happening over here in the next quarter as well. But as far as High-Tech is concerned, definitely, there are some [indiscernible] that we had in the last 2 quarters, which are resulting in terms of revenues in Q1 as well as we'll continue to show the revenue realization of transmission will happen in Q2 as well. So overall, I think the amount of deal activity in High-Tech is pretty healthy. and including some of the larger clients we have in High-Tech. So overall, I'm much more bullish in terms of high-tech at this point of time in terms of the activities that we are seeing. Sudhir, you want to add anything?
No, I think you said it DC. The activity levels in High-Tech are strong. And I think if you look at the overall market, at least from -- if you look at High-Tech stocks globally tend to be -- at least the majors are at new highs. So there's an expectation, most of them, as DC said earlier, start their financial year in July. So we'll look to see how the they pan out their spending for their financial year in the coming months.
Got it. Just one last follow-up on the retail segment in terms of the travel vertical. So as you mentioned in your opening remarks, that continues to see strong demand. So I mean, is the demand again in the travel vertical across the board? Or are we seeing the airlines and hospitality part also pick up now, which, as you had mentioned, are still not -- but still not maybe back to the pre-COVID levels a couple of quarters ago. Well, I think there is -- I would say travel and hospitality is seeing good tractions and barring the business travel is not back to the same levels, but otherwise, we can see very good traction in terms of travel as well as in the rest of the hospital, the hotels, et cetera. hotels as well as the restaurant chains, et cetera, all these things are definitely showing good traction.
The next question is from the line of Ravi Menon.
Sir, 2 questions. One is on the employee costs. So headcounts down about 2% quarter-on-quarter. But despite that, employee costs are flat to slightly up. This is even with an effort to shift slightly offshore by about 10 basis points. So I want to check if there are any one-off costs and employee costs this quarter on such as a bonus for people or some sort of wage adjustment as part of the integration.
No, Ravi, there is no one-off cost involved into it. This is partly driven by some of the policy harmonizations that we do as part of these 2 companies coming together. And also, there is a slightly increase in the on-site while the net headcount has come down, there's an increase in the on-site headcount versus the offshore headcount, which is also resulted into -- this is the new incremental headcount that comes in. So that has resulted into the cost being a little bit higher. But nothing -- no alarming, nothing to worry about that.
And second question is on this rest of the world. We usually have a seasonality with the pass through going away, but this seems a bit more than usual. So is there anything that's vertically specific client specific and rest of the world?
Yes. Rest of the world is client-specific. There is -- in fact, see for us, the biggest -- the 2 biggest markets, which contribute 90% of our revenue are Europe and the U.S. and both are U.S. is up 10% or North America up 10% year-on-year and Europe is up 7.2% year-on-year. So this is client specific. The project -- the business in this region tends to be much more project specific. So as projects get over those kind of changes. We have also been careful about some of the programs that we're entering, especially in the India market, being cautious to make sure that we choose the right projects to build.
And 1 last question on the cross-sell. Are you starting to see larger TCV deal wins in your cross-sell upsell kind of opportunity?
Yes. The answer is yes. In fact, on the -- what we are seeing with our increased scale and increased set of capabilities. In fact, one of the deals, the High-Tech deals, that we talked about during the -- in our opening remarks, required us to have now -- firstly presence in multiple countries across the world, right from North America to to Europe to Asia to provide services, not just out of India, but multiple nearshore locations for this line globally, and it required a more extensive set of capabilities across essentially the entire space, the applications and infrastructure stack. So that combination is what we are certainly seeing. We're seeing it in terms of larger deal sizes will be -- being invited to by deal advisers increasingly in terms of that. And also in terms of the ability to do structured deals, we have some of those also on the [ anvil ] that again are a reflection of the health of our balance sheet. Nachiket, do you want to add anything?
The next question is from the line of Mukul Garg.
I hope I'm audible. So DC, sorry to again net pick on your explanation for FY '24 growth. But I just wanted to get some sense on -- how we should look at it realistically, even if we aspire or build in a good growth pickup from Q2 onwards. So you seem quite far away from the double-digit growth, which you guys were earlier and looking for. Can you give us some realistic sense in case in the deals which got delayed kind of play out in Q2 or in Q3, what can be the upper or lower bands of growth aspiration for FY '24.
Well, I think, Mukul, it's very difficult to -- we are watching the space very closely and the kind, as I said, the behavior is quite unprecedented where the deals are closed, the start days are delayed or the decision-making process itself, which was supposed to close in a months time, clients are still sitting on it, and they want to delay the decision-making or closure of the deals. So I think this is not something which is difficult for us to control. But I can tell you with a reasonable confidence that we still want to look at our overall objective of profitable growth. and that's something which we have been always talking about. And I would like this profitable growth to be in the leader quadrant. And that's all I can say at this point of time. And that's something which the team is pretty confident about.
Sure. And if I may ask another question, either DC or Nachiket can answer that this is slightly longer term. If I look at your headcount for development team, it has been declining for the last 3 quarters, even adjusting for the 1,000 reclassification, the utilization levels have picked up. Now given that the deal flow and -- at times continues to be really strong. Are you at all concerned about return to high attrition in FY '25 as demand picks back up, and are there any steps we are undertaking to avoid that scenario. this is something which is not just happening for you. It is happening across the industry.
Nachiket, do you want to take it?
Yes. So I think you're right that the deal -- nature of the deal and the type of the deal is shifting, right? And I think we talked about that. So what it also does on the talent front is it actually provides us a better lead time to plan as compared to shorter tenure discretionary spend base growth that we had seen in the previous 2 years. And because that allows me to plan for skills better. It allows me to build certain skill sets instead of purely relying on hiring those from the natural market. Overall, both the lead time as well as costs for ramp-up for us, we can manage a lot better in current deal environment and which is where -- why we have been comfortable taking the utilization up because each of these deal conventions allows us to do that correct planning and higher as needed in time. Of course, the availability of the talent is also improved, so need to hire ahead of time has also gone down. As regards to its impact on attrition when the growth comes back, I mean, of course, it's very difficult to predict. But again, if you look at the nature of the demand, right, I think it's not just for us, but for everybody, it gives better time to plan talent. And as all of us with this nature of demand plan are able to plan the talent better we can operate at the attrition levels that we operated pre-pandemic, right? I think the last 2 or 3 years, I would say, is an aberration. But as an industry used to operate at a certain attrition level with a certain growth rate. And with this type of deal flow, we feel confident that we can do that for FY '24. So FY '25 hard to predict, I think it all will again be a function of nature of the deals and the kind of pipeline we get into. But based on today's visibility, I think this allows us a better talent plan.
The next question is from the line of Nitin Padmanabhan.
This is Nitin Padmanabhan from Investec. So my question was around 2 things. So one is you mentioned that sometimes, there are delays in the start. In addition, the deals that you have won, you also have a transition period and revenues will probably accrue post that. And the third was that I think the freeze on spending by some of your banking clients still continue. In that context, does it feel like Q2 would be softer than normal and one should actually anticipate a pickup in the second half and Q2 actually can actually be softer than what we originally thought, that was the first one. The second was on the margins, considering that we have wage increases, and we'll also have transition costs. Would it mean that we will see a dip in margin? And then the makeup in the second half, you also have higher pass-through revenue. So does that make it difficult to achieve the 17%, 18% exit, does that become difficult? So those are the 2 questions.
So let me answer the second question first and then get to the first question. See, as far as margin is concerned, it is not something which you can achieve just in 1 quarter. It's a program that you need to run. You have to have a margin program running across the organization. And once we started bringing the 2 organizations together as a part of our harmonization, we also rolled out the margin program, which we'll look at the various levers that we can use for margin. I mean it's not a rocket science isn't like you can only use so many levers in our industry. So we know how to do it. And based on that, we are very confident that at this point of time, the way we see the business, we should be able to improve margin over time. And in spite of taking in the wage hikes and all those things, the exit could be still 17% to 18% as we have told earlier. As far as the specifics, I think you articulated very nicely in terms of the 3 trends that we are seeing. One is the delays in onboarding. The second is even after the delays in terms of ramp-ups the revenue profile will be also different for some of these deals and then the freeze that we had in some of the BFS accounts. So given all these scenarios, I think we have to again watch this space. But if the delays continue for too long, which we don't know, it's not something that we have a good visibility into it. But if the delays continue for too long, then obviously, we can't -- we have to look at how these delays impact Q2. But otherwise, on the other hand, and this is what we mean by paradoxical things. On the other hand, the amount of activities we have in terms of deals is also quite significant. So we have to just wait and watch and see. But obviously, our hope is that we should definitely have a better Q2 compared to the current Q1 and we have to just leave it there for the time being. Sudhir, do you want to add anything?
No, I think DC you've covered it. I think we are well positioned because with the new scale, I think our market positioning of being having the capabilities which are similar to the larger peers and having the speed and the agility and nimbleness that was there in the DNA to -- propose the organization would still exist. I think that combination suits us well to continue to be a challenger to the larger peers as well as to be a leader amongst the pack when it comes to some of the other deals which involve some of our smaller peers.
Perfect. Very helpful. Just 1 last one. Would it be possible to call out what proportion of the deals were new this quarter?
We don't give a color of that, Nitin.
That was the final question. I'll hand the floor to DC for the closing remarks.
Thank you, everybody, for joining the call. I have one more announcement to make. I would like to take a moment to welcome in Vinay Kalingara as the Head of Investor Relations for LTIMindtree. Vinay is taking out from Nitin Mohta, who has decided to pursue opportunities outside the company. On behalf of LTIMindtree, I thank Nitin for his contribution to the company and wish him all the best. This concludes today's call. Thank you for joining, and I look forward to speaking with you all next quarter. Thank you.