L&T Technology Services Limited (LTTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 FY '25 Earnings Conference Call of L&T Technology Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pinku Pappan. Thank you, and over to you, Mr. Pappan.

Thanks, Sanju. Hello, everyone, and welcome to the earnings call of L&T Technology Services for the third quarter of FY '25. I'm Pinku. Our financial results, investor release and press release have been filed on their stock exchanges and are 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 up 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 the call ends. With that, let me introduce the leadership team present on this call. We have Amit Chadha, CEO and MD; Abhishek, Executive Director and President; Alind Saxena, Executive Director and President; and Rajeev Gupta, CFO. We will begin with Amit providing an overview of the company performance and outlook, followed by Rajeev who will walk you through the financial performance. Let me now turn the call over to Amit.

Thank you, Pinku. Let me start by wishing all of you and your families an amazing 2025 filled with happiness, prosperity and health. The last quarter, Q3 has been a strong one. Let me share key highlights of our performance. Revenue grew by 3.1% in constant currency, led by our tech and sustainability segments where the demand outlook has been steadily improving. Tech led the growth with 11.1% followed by sustainability with 4% in constant currency. Our Go Deeper to Scale strategy under which we had made focused investments in the first half of the current fiscal has started yielding early results, visible in our deal bookings, growth and margins. In Q3, we are the highest ever large deal bookings aided by 8 deals across segments, one $50 million, two $35 million plus deals; two $25 million plus deals; and three $10 million plus deals. We continue to see a robust edition to the large deal pipeline on the back of engagements and customers on both new age product and platform development and business transformation. In line with our aspiration, EBIT margin in Q3 has improved by 110 basis points to 16.2% excluding nonoperational expenses on account of M&A. Additionally, Intelliswift acquisition was completed earlier this month. My compliments to Rajeev and the entire M&A team and Intelliswift leadership. Intelliswift will help us enhance our AI, digital and software product engineering capabilities and expand the addressable market for us, thereby offering us a higher growth trajectory in the future. Over the years, we have been building a platform to recognize and celebrate engineering innovation being done by our customers. In December, we held the third addition of the digital engineering awards jointly hosted with ISG and CNBC-TV18. I am happy that this time the event witnessed a record 230-plus nominations, showcasing groundbreaking contributions. This prestigious platform underscores our commitment to innovation while fostering deeper client intimacy and vital industry collaboration. Now let me take you through our segments starting with mobility. First, the positives. We continue to see a growing deal pipeline in the key growth areas of SDV and hybridization. There are a good number of consolidation deals in auto and commercial vehicles across all geos, U.S., Europe and Japan. We won 2 large deals in Q3, one vendor consolidation deal with global Tier 1 and another with a new age OEM for EV product design. Aero and rail are also seeing a gradual upswing with more deals in pipe. We are in discussion, leveraging our AI-based solutions that address operational efficiency requirements of airline and train operators. Now let me address the challenges, which are in addition to the furloughs that impacted us in Q3. Select OEMs and Tier 1s are going through challenges, and that is leading to pause in some projects and spending. There is weak demand in agriculture and construction sector due to uncertainty around potential changes in tariffs. Therefore, we declined by 5.2% in constant currency in Q3, with some parts of the portfolio doing well, while others got impacted. We are, however, not slowing down on technology investments, the cutting-edge solutions we have developed for SDV like LTTSiDrive, which is our proprietary framework accelerating SDV implementation are helping us win new engagements and expand our presence. Overall, for mobility, we see a good number of large deals in the pipeline, including our Tier 1s and OEMs, where vendor consolidation is giving us gains. We expect mobility to show muted growth in Q4, but grow for sure, and then pick up from Q1 onwards on the back of deals and new end programs that we are likely to start in the current quarter. So this segment will grow in the current and next fiscal. In sustainability, we had another strong quarter with 4% growth in both Process and Industrial firing well. At Industrial, we're seeing large deals in the pipeline in the 20 million plus and upward ranges. These are proactively created deals that are getting seeded by aligning with the customer's business transformation linked priorities. For example, we signed a large deal with a U.S.-based machinery company with oil and gas sector that help them on design and development of software and connected platforms. Within Industrial, the energy subsegment is seeing an upswing in spends, especially in electric controls and microgrids. In Process segment, we continue to see strong demand across O&G and FMCG, in project engineering and plant modernization, key clients continue to ramp up with us. We won a large deal to set up an integrated operations center for a European O&G major. In addition to plant engineering expertise, we will cross polli-innovate our SWC capabilities or as it involves setting up an integrated command center of plant -- for the plants. We expect to win more of such deals cross-leveraging segmental capabilities across our O&G customer base. In another large deal, we expanded our engagement with an O&G major to enhance their operational processes by leveraging our offshore engineering centers. Within FMCG, we see strong demand for plant modernization, digitization as customers want to improve operational predictability. Overall, for the Sustainability segment, we see an increased large deal pipeline, both at Process and Industrial and expect the growth momentum to sustain. In Tech, we had a strong rebound with 11.1% growth led by comps, ISV, media and medtech subsegments. In comps, demand is strong in the areas of network performance management, network monetization and AI-driven automation. We signed a $50 million deal with a global network provider, again leveraging our SWC capabilities to provide product integration services and to leverage AI frameworks to drive automation. In the Media subsegment, we see product development and sustenance large-deal opportunities. With a European media and entertainment company, we won a large deal to design, develop and deploy next-gen entertainment and broadband products worldwide. In the medtech subsegment, demand is being driven by QARA and digital manufacturing, where we are leveraging our factory of the future framework. We won a large deal with a global health care OEM to support them in complaints handling, remediation and supply chain optimization. Our software-defined endoscopy solution in collaboration with NVIDIA is finding good traction with OEMs and health care providers. In SWC, we are building a pipeline in the Middle East where we see opportunities in smart city safety and security and smart operations. We are quite optimistic on the ISV segment, which is getting rolled up under the new subsegment called software and platforms, as customers are spending heavily on new platforms and technologies. This will allow us to immediately have 3 hyperscaler accounts, which are $20 million-plus each with a wider footprint. Equally importantly, we will now be able to address a service-led sector, namely retail, fintech and health care, which are new and promising markets for us. For example, the ER&D spend in fintech totals about $143 billion, of which $8 billion is only addressed for service providers. Similarly, in retail, there is a total spend of $47 billion, out of which $4 billion is addressed. And in health care, a total of $400 billion is there, of which only $14 billion is addressed. These new markets will add tailwinds to our growth as we look at FY '26 and beyond. Overall, we see a good number of deals in play in the Tech segment and expect growth to continue. Now a few update on our technology innovation charter. Our engineers added a total of 54 patents in Q3, and our cumulative stands at about 1,448 now. In AI, GenAI, specifically, we have filed 174 patents cumulatively. Second, one highlight in our AI progress, we inaugurated NVIDIA AI experience zone at our Bangalore design hub aimed at enhancing AI capabilities for our clients in mobility and tech. We have started internal R&D programs on Agentic AI, an autonomous system that enables automation, autonomous operations and will improve decision-making. With that, let me now provide color and discuss our outlook for the future. We are encouraged with the deal pipeline and a good number of large deals in the '25 to $100 million plus range that we are closely tracking. These deals are across segments and have been seeded as a result of focused investments we have made at the start of the year into new age technologies and leadership. We expect all 3 segments to grow in Q4 '25 and beyond. For FY '25, including Intelliswift, our revenue guidance is for near 10% growth, while organically we'll be near 8%, and we continue to aspire for near 16% EBIT margin levels for FY '25 organically. I want to reaffirm our ambition of building $3 billion segments and getting to a revenue of $2 billion with 17% to 18% EBIT margin in the medium term. With that, I now hand over to Rajeev. Thank you, and look forward to taking your questions later.

Thank you, Amit. Good evening to all of you. I would like to start by wishing everyone a very happy New Year. We had a strong performance this quarter across all parameters, deal wins, revenues, margins and cash flows. Deal wins like Amit talked about have been the highest ever margins, in line with FY '25 aspiration. We've seen improvement in DSO and free cash flows for the quarter have come in at record levels and all of this despite the seasonality of quarter 3 and after absorbing annual salary increments. Additionally, we concluded the acquisition of Intelliswift which positions us well for the future growth with hyperscalers and open avenues for providing services in 3 new markets in the services-led sector, namely retail, fintech and health care. With that, let me now take you through quarter 3 FY '25 financials, starting with P&L. Our revenue for the quarter was INR 2,653 crores, a growth of 3.1% on sequential basis. Our year-on-year growth for quarter 3 FY '25 came in at 9.5%. Gross margin came in at 29% after absorbing wage hikes and SG&A for the quarter came in at 10.3% of revenues, which is slightly lower than our expected range of 10.5% to 11% of revenues. Overall, we were able to improve the EBIT margin by 110 bps to 16.2% after excluding onetime nonoperational M&A expense. This is in line with our commentary in quarter 1 and quarter 2, that H2 EBIT margin will be better than H1 on organic book of business. Moving to below EBIT. Talking about other income. Other income was INR 18 crores lower on a sequential basis due to losses on hedge contracts resulting from USD appreciation. Effective tax rate for quarter 3 was 27.4% in the same range as our expectations of 27.5%. Net income for the quarter was up 0.9% sequentially and came in at INR 322 crores, which is 12.2% of revenue. If we exclude onetime nonoperational M&A expense, net income came in at INR 328 crores for the quarter. Now moving to the balance sheet to highlight a few key line items. Our Q3 combined DSO, including unbilled, came in at 112 days compared to 116 days in quarter 2, an improvement of 4 days. Unbilled days were 18 in quarter 3 compared to 17 days in quarter 2. We continue to improve this metric as we've mentioned in the past and now aspire for a target range of 110 to 115 days going forward. Now let me talk about cash flows. As a result of the improvement in DSO, our quarter 3 free cash flows came in at a record level of INR 638 crores, leading to year-to-date free cash flows of INR 965 crores, which is at 101% of net income. Our cash and investments stood at INR 3,290 crores at the end of quarter 3 versus INR 2,849 crores end of quarter 2. Now moving to revenue metrics. On a sequential basis, dollar revenue growth was 1.7% in reported terms and 3.1% on a constant currency basis. Growth was majorly led by Tech and Sustainability segments. Now let me comment on operational metrics. The onsite/offshore mix was similar ranges compared to quarter 2. Offshore percent now stands at 58.6%. We continue to work on measures to improve to our aspiration of 60% for onshore/offshore ratio. Client profile greater than $1 million showed a sequential improvement in $10 million, $5 million and $1 million category. The client profile will continue to improve in the coming quarters as well. Client contribution to revenue also showed an improvement in the top 5 and top 10 categories compared to quarter 2. We expect revenue from top customers to improve going forward as we run targeted programs on client mining. Our headcount for quarter 3 was 23,465 compared to 23,698 in quarter 2, while attrition remained stable at 14.4% levels. Realized rupee for quarter 3 were around INR 85.06 to the dollar, a depreciation of around 1.4% compared to quarter 2. With that, let me provide an update on our recent acquisition, Intelliswift. We completed the Intelliswift acquisition on January 3 of this year. I take the opportunity to thank my entire M&A team, the promoters and leadership of Intelliswift and of course, the LTTS leadership team to have seen the conclusion of this acquisition in a record time. To provide a recap on Intelliswift, this is a company based in California with about 1,500 employees. Intelliswift serves 4 of the top 5 hyperscalers and caters over 25 Fortune 500 Companies, including 5 of the top 10 R&D spenders in software and technology. Starting November, we kicked off an integration management program that will run for the next 12 months to identify and realize synergies on revenue and margins. Over the last 2 months of integration planning, we've already taken steps that have started to show fruition. One, to rightsize the organization; second, to augment leadership team with senior members from LTTS; third, by launching initiatives to improve margins and combined ISV business of LTTS and Intelliswift to create a new subsegment software and platforms to supercharge growth. Intelliswift as a business has annualized revenues of $100 million plus and EBITDA margin in the range of 7% to 8%. This is post taking steps that I just outlined there. We still see potential to further improve the margin to double digit as we accelerate revenue growth and reduce SG&A cost by leveraging synergies with LTTS. Now let me give you some visibility on EBIT margin trajectory going forward. During H1 FY '25, we prioritized investments towards building leadership, technology solutions and capabilities ahead of this curve with the objective of capturing additional market share, accelerating growth and improving quality of revenues. This was in line with our strategy of going deeper to scale to pivot on revenue growth. Like I mentioned earlier, our H2 EBIT margins will be better than H1, and we continue to aspire for near 16% levels for FY '25 for the organic book of business. Starting quarter 4, we will consolidate Intelliswift financials and expect an impact of around 150 bps on the EBIT margin. For Q4 FY '25, at consolidated level, we aspire for EBIT margin to be near 15% levels and will improve to mid-16% levels between quarter 4 FY '27 and quarter 1 FY '28. Before I conclude, I'd like to announce a change in our Investor Relations function. Pinku, as you all know, in addition to heading M&A for the company will assume a full-time strategic role of leading the integration management office of Intelliswift as we build our software and platforms business. We would like to thank Pinku for steering the investor relations functions for the last 8 years and building relationship with the investor and analyst community. I would also like to welcome Sandesh Naik who now assumes the role of Head Investor Relations for LTTS. He will be connecting with the investor and analyst community starting this quarter. Sandesh joined us from a repeated industry house in the country with 20-plus years of experience in investor relations and treasury functions. With that, I thank everyone, and I now hand it over to the moderator for questions.

[Operator Instructions] The first question comes from the line of Sulabh Govila with Morgan Stanley.

Congrats on the good deal wins that we reported. And the question that I had is whether we should think of this level of deal wins as sustainable going forward? And given the pipeline that you had right now? And if you could also highlight what would be the average tenure of these deals versus, let's say, what we would have won last quarter?

Sulabh, thank you. So this is Amit Chadha. So the deal wins we've got this quarter, we report 10 million-plus wins. So it's been very robust, like we said, the best so far. Do we expect this to continue? We do expect quarter 4 to come in at similar levels because there is some deals in the pipeline that are expected to close in the very near future as you go forward. Second, the average tenure of these deals is about 3 years. One color I want to provide additionally is that 3 of these deals that we have won are based on our AI, GenAI widgets and solutions as well as proprietary framework that we've established and launched in the last 6 months. Also, the pipeline as we stand today is bulkier and better than it was same time last year, last quarter, and we continue to operate. In fact, I had mentioned last time that we had reinstitutionalized and organized our large deal engine. We have appointed a senior Chief Business Officer based in Dallas to run this function, beef it up as well as provided extra hands and feet and people by segment in each of the segments that we've got to tailor make some of these deals and proposition that we take to our customers. And we are seeing a fairly good regard of uptick from our clients in this area.

Understood. My second question is on the automotive vertical. The outlook that we have provided for Q4 and beyond. So just wanted to understand what's driving that confidence given that a lot of peers have seen ramp-ups being delayed by clients on the deals which have been won very recently as well. And then in some cases, there have been project cancellations. So I just wanted to get your thoughts on the outlook that you have provided here.

Sure. So for us, we actually track mobility, which is automotive, number one. Number two is trucks off-highway as well as the agriculture segment. And third is aero and rail. Now what we saw in quarter 3 happen was that there were furloughs that came in in automotive as well as the trucks and off highway, not in aero and rail, right? We did win a couple of deals like I talked about. Now going forward into quarter 4, though automotive will be something that will continue to be in a little bit of a stress in my view for the next couple of quarters, not just 1 quarter. But because we work in aero and rail and because we work in trucks and off-highway, we will see the trucks part as well as the aero and rail part expand. So I'm confirming that you will see growth coming back in quarter 4 in mobility. It will be there, and then next year, it will continue. Plus there is a number of large deals. There are consolidation opportunities as well as transformation deals in the pipeline that will help us. Alind, my colleague on the board can add a little bit of color on what we are doing in mobility, Alind?

Sure. Thanks, Amit. So in addition to what Amit has said, we have invested earlier in stack, which we called LTTSiDrive, which is primarily around the SDV stack that we are developing. We are seeing increased traction and acceptance of that stack by our customers. In fact, a couple of wins that we have had have been around the solution that we have created. We recently also participated in CES where we had over the last 4 days close to 120 customers come across and visit back. And we have achieved a good acceptance of what we are doing. We remain fairly confident that the traction will continue. Aero and rail, just a minute on that, both the rail and aero, there is an increased engagement, particularly in the areas of testing and automation around some of the solutions that we have developed on AI that's gaining traction. We continue to accept that to continue over the next few quarters and fill up the gap that we would have otherwise.

Understood. Last is just a clarification. The benefit that we were supposed to have on the Maharashtra Cyber deal in terms of the milestone revenue booking, has that completely happened in this quarter? Or there is some bit of remaining in next quarter as well?

So it is for the program that we had on Maha Cyber that has been under execution under normal as we go forward. And next quarter also, we will see ongoing revenues coming from Maha Cyber.

Next question comes from the line of Abhishek Bhandari with Nomura.

My question is more on financials. So if I look at your segmental margins for the segment this quarter there was a substantial improvement in the high margins. And also, you also it could explain -- yes, I mean, which would explain why this Hi-tech margin has jumped up almost 300 basis points on a sequential basis.

Sure, Abhishek. This is Rajeev here. I'll take that one. So see, in case of our Tech portfolio, I mean, we did see that the EBITDA margins have been lower over the last few quarters, and there was a focused effort in terms of improving margins in this particular segment, which led to operational improvement. In addition to that, within Tech segment, we've seen in our medical segment to be relatively higher, which has resulted in what you see almost about 300 bps of incremental margin sequentially in Q3 over Q2.

Got it. And is it also a reason why your fixed price contribution went up from 37% to 41%?

So see, I think we've talked about it earlier. We don't generally see benefits on account of a fixed price or a T&M. I mean they are fairly concentrated across portfolio. So I would not give color saying that if fixed price increases, it will lead to additional margin.

Got it. My second question, Amit, is to you. While you're reconfirming 10%, including Intelliswift and organic to be around 8%, the Q4 numbers, if my math is correct, is upwards of 6% growth. So is that confidence coming on back of only residual revenue from cyber projects of Maharashtra and some immediate ramp-up of new projects and the pipeline? Or is there anything beyond that?

So there's a little bit of background noise. But if I understand your question, it was, where will the growth come from? So number one, we expect all the 3 segments and all subsegments to grow, right, number one. Number two, we are aware of the ask rate of Q4, and we are comfortable at this stage in confirming that we will be able to meet that. Number three is that the deal wins that we've had in the last couple of quarters are giving us that confidence that we'll be able to go forward with it. So that's where we are, plus there's a little bit of seasonality that will come in or smart work that came in last year as well, but that's good for us. And as you can see, the margins have improved. We'll be able to take that forward as we move forward. In addition to that, there's an inorganic part of Intelliswift that will get accounted in our books from January 3. And that will give us that upper end of the guidance, that 10% number that we talked about.

[Operator Instructions] Next question comes from the line of Vibhor Singhal with Nuvama Equities.

Congrats on a very solid performance and a strong deal win. So Amit, I have one question for you and 2 after that for Rajeev, maybe. So I think the strong deal win, as you have mentioned in the pipeline also appears to be quite strong. Any color on the conversations that you're having with the clients in terms of their excitement or apprehension either ways with the new government had to take charge in U.S. I mean the macroeconomic data also has been kind of robust. So do you -- are the client conversations happening around incremental spends in the R&D new pockets being opened up? Or is it still a tale of caution as we had seen in the last quarter, the pre-election caution and will be some time before we are over that?

Yes. So there are certain areas that are cutting across, if I may, or that we are seeing growth trends in. So AI, GenAI, we continue to see increased traction work going on. In fact, we are ourselves investing now in Agentic AI. And when I come back in April, I'll give you a little more color on that as we move forward. Second, software-defined everything and next-gen software is something that people are continuing to invest and do projects in. Third, industrial automation is attracting with digital twin, digital thread is attracting spend and budgets for this year. The re-rigging of supply chain continues, and therefore, plant as well as oil and gas continue to see that demand. There's another area we're starting to see green shoots is compute and embedded hardware, and I will start quantifying these as we go forward in some of the project wins that we do in the subsequent quarters. And finally, there is consolidation and transformation deals that are there in the pipeline. Now when I look at the commentary that people are making right now, see -- and I'll go segment by segment. If I take the Tech segment, barring a couple of semcon majors, which are publicly known to have issues, we see growth to continue in that area in the Tech segment and medtech as well as well as the com media tech area. If I move to sustainability, other than certain parts of industrial machinery that we believe are a little bit slower, but oil and gas, chemicals, electrical power, data center power, et cetera, continue to spend. When I look at mobility, automotive is under stress, and I'm acknowledging that. However, trucks and fleets and aero and rail continue to invest as we go forward. And then there are subareas, et cetera. So I'm fairly confident and comfortable in saying that FY '26 will be a better year than FY '25.

Got it. Got it. And just to recheck, you don't see any geopolitical impact at least on the verticals that you mentioned and you expect the momentum to continue in those verticals?

See, we are a glocal company, globally and local. See, the Intelliswift acquisition has given us another 500 employees just in the U.S., mostly local citizens. We continue to provide local offers and continue to work on that, providing local offers in the U.S., in Europe, in Japan. We've got recruitment engines that are sitting there that do that. And I'm fairly comfortable at this stage unless something comes along tomorrow that I haven't thought of. At this stage, we are fairly comfortable where we are sitting for CY '25 and FY '26.

Perfect. So glad to hear that. I just have 2 follow-up questions for Rajeev. So Rajeev, on the margins front, a very strong performance in this quarter. Just wanted to pick your brain a bit more. I mean this quarter, we had growth driven by ROW and India, which we would typically associate with maybe not as high-margin projects as maybe U.S. and Europe. And this quarter also had the wage hike impact. And despite that, we have not just been able to expand our overall margins but also gross margin. So could you just provide some color on that? And how should we look at it going forward as well on the organic basis?

So Vibhor, to address, right, I mean, we did mention in our Q1 and Q2 commentary that our H2 margin will be better than H1, right? We had prioritized investments in H1, both in Q1, Q2. Some of these investments have yielded results, both in terms of revenue and margin as well, right? And we continue to see the deal wins that Amit articulated. Now if I were to really look at summarizing the entire year, I have shared the aspiration that we will want FY '25 to come in at near 16% EBIT levels. We continue to work upon that. That remains our aspiration. Now if I look at as a combined business, right, and just to clarify the overall question because we are going to consolidate Intelliswift, I've also highlighted that we will come at that near 15% levels. Now if you look at the breakdown, gross margin came in at about 29%, right, which had probably about 100 basis points of wage hike impact, we were able to absorb a large part of that. And hence, you saw gross margin come down by about 30 bps. I think there's still possibility of improving. We still have avenues around quality of revenue, improvement in pyramid, operational efficiency. On the SG&A side, you would have already seen it come at about 10.3%. Our aspiration is to maintain between that 10.5% to slightly over those levels. So there are, of course, opportunities that we still continue to work towards to see the aspiration realized for FY '25 on the organic part of the business to come closer to or at about 16% level.

Next question comes from the line of Ruchi Mukhija with ICICI Securities.

My questions were answered, but picking your brain up, can you give us puts and takes now which went to this quarter's margin?

So I would highlight 2 to 3 things. One, of course, the growth in revenue. I mean growth -- quality of revenue always helps us to be able to continue to improve margins, that was one. Second, we had mentioned Q1, Q2 that we are going to make investments, those are planned investments, in terms of building leadership in terms of building solutions and capability. Some of those investments have certainly yielded results, and we are not seeing those levels of investment in quarter 3, of course, which leads to improvement. The third is, if you look at the increment that we had planned, close to about 100 bps was the impact of the increments. The increments are rolled out effective November 1. So it was not an impact for a full quarter. And I think given the fact that there were a lot of operational improvements, I talked about specifically in terms of the tech business, all of these 3 put together certainly helped us in terms of improving the margin.

Next quarter, do we see the ramp-up of the large deals wins, adding some cost burden?

See, we've been seeing large deal wins in the previous quarters also. So I think the blend of the existing business as well as a new business, I think that's working quite well. So we don't see an impact because of large deals ramp up in the coming quarters.

And then last bit, in our mobility vertical, could you specify how much is the automotive exposure of ballpark would also do to distinguish how much now good growth of portfolio versus an area where we are facing challenges?

So we don't normally provide the breakout between auto, TNOH and Aero. I know what you're trying to do, ma'am, you're trying to figure out as to what will be the percentages. So let me assure you that mobility will grow on the back of some of the deal wins that we have had plus aero and rail, ma'am. And Q1 onwards, I do believe that auto with the wins we are having will grow again. That's where we are. So it will be lower growth in mobility. I mean we, again, working on the quantum, the quarter has not done yet,, just started, but quarter 1 onwards will be regular growth, but I'm confirming that there will be growth in mobility in quarter 4, ma'am.

Next question comes from the line of Nitin Padmanabhan with Investec.

Two questions actually. So one is on the margins. So to achieve the 16% organically, basically, you need at least 80 bps margin expansion next quarter. But I think you'd have a 50 bps headwind from wage hikes as well. And if that's uniform. And obviously, there's a SWC pickup, which is also a headwind to margins. So just wanted your thoughts on what will drive this in Q4?

All right. Sure, Nitin. So let me clarify. I think what you said in terms of the seasonality of the SWC business is correct. I mean we tend to see SWC business to be higher in H2 relative to H1. And yes, I think there's been a conscious effort in terms of improving margins on the SWC business as well. So it's not going to be as much of a headwind compared to what we saw in the previous year. Having said that, there are a lot of tailwinds that we continue to operate with. One, of course, the growth, I talked about the quality of revenues that will be a positive factor in quarter 4 as well. The second is, I think levers like optimization of pyramid, offshoring, operational efficiencies. These are all areas that we look at in terms of seeing the margins that we aspire for. I think the -- I mean the math part that you talked of, maybe I'll request you if you can talk off-line to Pinku and Sandesh because we don't believe that will require us to see the margin uptick to that level, but you can certainly take it off-line. Like I said, we continue to aspire to come near to 16% level, and we believe it's got a fair bit of comfort level around it.

Right. A clarification on -- earlier, you mentioned EBIT margins will be near 15% levels and improved to mid-16% between Q4 FY '27 and Q1 FY '28. Did I get that right?

Okay. Thanks, Nitin, to bring it up. Let me clarify, right? The aspiration for FY '25 on the organic book of business is near 16% EBIT levels, that's one. Second, we are going to consolidate Intelliswift business beginning quarter 4. The acquisition concluded on January 3. As a result of that acquisition, we will see an impact of 150 bps on account of that business. That business is a $100 million annualized business with an EBIT margin range of 7% to 8%. And we aspire for quarter 4 as a combined financial to come near 15% level, right? So that's the second one. In terms of the integration plan that we put, over the next 8 quarters, we see the overall consolidated financials to improve to mid-16% levels between quarter 4 FY '27 to quarter 1 FY '28. So I hope that's clear, Nitin. I just wanted to break down. There are 3 steps to it.

Yes, yes. It is absolutely clear. Just one last one is on the automotive side, it would be great to have your views on how you're seeing customer behavior across the 3 regions, which is the U.S., Europe and Asia. How are you seeing relative demand across those 3 regions? And how do you see recovery between those regions?

So Nitin, thank you. Nitin, 2 things here, I will address automotive, but my friends and colleagues in sustainability and tech are starting to feel very ignored and bad, so I'll address that as well for you from a demand standpoint. So automotive, look, if you look at it from a spend standpoint, I do expect that Tier 1s are in a clear challenge and a challenging environment globally across the regions. And no one region is better than another, and you've seen this play out with various results, et cetera. Now if you look at OEMs, I do see the West Coast OEMs continuing to spend and the Detroit majors also making room in terms of expansion. There are a couple of European OEMs that are continuing to spend in the software-defined vehicle area, right? Let's be clear. And Japan seems to be a little resilient as well. So do I expect automotive to come back to rebound very quickly? No. If I was looking at our crystal ball, I think that it will be quarter 2 of next financial year. When you see that something meaningfully coming back in that area. Having said that, Industrial is growing. The supply chain region, the new plants coming up, the industrial automation is actually fueling a lot of opportunity growth and pick up in the sustainability sector that we call it, which is discrete and process manufacturing. We also see the tech spends coming back and are back already. So medtech as well as comms media, semiconductor, consumer tech, hyperscalers are actually spending very well. Barring a couple of semcon majors, semcon also is spending. So I would request when you build a model to keep that in view because that -- our world of 3 segments and trying to build $1 billion in each is what I would focus on, given that we are cross polli-innovated across and therefore, we'll be able to weather a storm of automotive, which is a small part of our entire portfolio in a much better manner.

Next question comes from the line of Vikas with Antique.

I have 2 questions. First, following the acquisition of Intelliswift, we were confident of achieving an organic growth of 8% to 10%. What factors have led to this revise in outlook that now we are expecting our organic growth to be closer to lower range, that is around 8%. And my second question is, in the previous quarter, you mentioned election-led uncertainty and macro led to -- that has had some impact on deal booking. Now that Q4 deal bookings are similar to Q3 is what you believe will happen. Is that primarily due to catch-up from the first half their closures were weak as previously indicated? Or this is more structural?

I'll answer the second question first. So deal wins, yes, in H2 are stronger than H1. And see, we made some investments in H1 and that have helped us and build the differentiators further that is helping us with the wins in H2. And given where the pipeline is right now, I do expect current levels or similar levels going forward to stay. So that is point number one, plus the structural changes we have made in terms of creating more pipeline, et cetera. On the first part, look, when we came to you at the beginning of the year, we had told you clearly we are at between 8% and 10%. And we have also stated that we will have to sell in the year to be able to get to that 8% to 10%. Now some deals get delayed at times and automotive slowdown was not anticipated at the level that the automotive slowdown has happened, right? But every year, you go through something will fall off, something will fall on, this happens. And that's why there is a range. So I am actually pleased that we are within that range that we are coming in at. In addition to that, if you remember, we had an aspiration to get to that $1.5 billion run rate, which is organic plus inorganic. And we are pivoting on growth. I actually would like to call out, and I'm surprised I didn't see any questions coming in that area. But see, we had been missing, if you ask me, in the tech-led, the service-led ER&D, which some peer group companies have been leveraging fairly significantly. The service-led ER&D, which is in fintech, retail and health care, is actually another area that will show expansion and promise. Now it will take a little bit of time. And that's why I said that as I look at FY '26, I look at FY '27, our own models were right up to FY '31. We do see that becoming a contributing factor of growth as we move forward. And that is an additional channel your company has opened with the Intelliswift acquisition.

Next question comes from the line of Manik Taneja with Axis Capital.

Congratulations for the steady performance. Just wanted to prod you further with regards to an aspect that you've highlighted with regards to a factor that aided your margin performance in terms of the quality of revenue, what would that imply? Is there some element of milestone-based revenue recognition, given what we see from your geographical breakup of revenue? Is that the way to essentially understand that? And the second question was with regards to SG&A expenses. We went through significant investments in first half. How should we be thinking about this cost on a go-forward basis over the next 4 to 6 quarters?

So Manik, let me take your question on SG&A first, right? See, we've talked about a range. And in quarter 1, quarter 2, we were ranging more towards 11.5% of revenue for our SG&A cost, right? That has now come down to almost 10.3% levels. What I would guide is to factor a range of between 10.5% to 11% for our SG&A cost because we will continue to look at opportunities, right? So it's always going to be a continuous effort. Now coming to the margin part, right? I think I articulated the factors that helped us in terms of improvement in margin. One, the fact that, look, there has been growth, a decent growth that we saw in quarter 3, which, by the way, is a seasonal quarter, right? If you were to ever compare previous years, I mean, Q3 is a tough quarter to navigate, but we have indeed seen growth coming in this quarter. And of course, when I talk about quality of revenue, it essentially means that these investments that we called out in H1 have yielded benefit, right? A lot of these projects are -- basis new technologies that we've been able to take to the customer and offer them as solutions and capabilities, right, which has led to higher deal wins. And of course, growth in segments such as sustainability and tech. And within that, particularly industrial and medical, which are our high-growth segments have started to show improvement. I think we called out in addition to plant engineering, Industrial is showing promise and that indeed is happening. Similarly, in the Tech segment, medical is continuing to show promise from year on, and those are a few factors that have aided in the margin, right? To me, again, bunching it all together, this is what I really call about the quality of revenue, which helped us on the margin side. Going forward also, much like what Amit talked about in terms of the growth aspiration to be between 8% to 10%, that should aid us in quarter 4 in addition to a lot of the operational efforts to improve margins.

Sure. And second question was with regards to the way we are seeing our headcount metric trend. We've been -- while you've been talking about a higher pressure intake through the course of the year, when I look at your headcount, addition has been very muted through the course of FY '25 year to date. How should we be thinking about this metric going forward given the strong deal activity and your expectations of growth pickup across almost all the segments?

If you ask me, there are a couple of things that have fundamentally changed in the industry over the last couple, 3 quarters, maybe 6 quarters, et cetera. See if I -- I'm going to tell you that our headcount has been flat year-on-year, we have still delivered year-on-year 8.7% in constant currency terms, right? Now where do we go from here? I can tell you that the way we are right now, we've been able to -- so it's not just improving our utilization. It is, a, improving our utilization; b, there's a lot more automation AI that is being leveraged for operations. Third, there are widgets, et cetera, that we are being able to use, right? So that -- therefore, if you look at it, we stopped providing utilization at some point because we said it's no longer a relevant metric. I'll be honest with you, I don't think that adding headcount in our industry is going to be a lead indicator of growth anymore. If anything, lead indicator of growth is going to be TCV intake as you go forward. Also, companies that continue to invest in technology will continue to survive and thrive because the old business is going away. So if I look at next year, right, and I say that I'm going to do better than current year, please don't expect headcount to get added drastically, though there will be headcount addition. There is a non-linearity that is coming in in the revenue growth aspect, given automation, given all these aspects. And you will continue to see that play out not just with LTTS but the industry in general. Having said that, we are reiterating our commitment to add 2,000 plus freshers in FY '26. Work is already underway. That, like Rajeev said, will help us in the pyramid further, and we will continue to work on various other optimization measures, including increasing offshoring, increasing managed projects, leveraging our widgets, et cetera, to improve the margin and unlock further value for customers and then for ourselves as well. And some of you that were there in IAD would have seen some of the tools that we showcased around AI. In medical, we showcased tools in software-defined life cycle that is allowing us to be able to execute and testing. That is allowing us to execute projects with lesser headcount.

The last question comes from the line of Karan Uppal with PhillipCapital (India).

Amit, just wanted to check the outlook on oil and gas subsegment. The incoming U.S. president is quite vocal of increasing the crude oil production levels, which ideally should be beneficial for this vertical in terms of brownfield and greenfield investments. So how are you thinking about this from next year perspective?

So Karan, I did mention during my commentary as well that oil and gas, chemicals will continue to grow. They're not just that they are doing more drilling or any of that, but there is the output is changing. The chemicals that are coming out of these refineries now as an output is different than it was 5 years ago, 7 years ago. So there is upgrade of plants happening. The whole supply chain is being changed there, and that is, again, creating work for ourselves. We are very actively -- in spite of headcount being flat, we are very actively hiring in the plant engineering segment. We are also seeing a lot more digital thread, digital twin industrial automation work coming out in the oil and gas chemical area. And I expect this to continue through calendar year '25 and beyond, and I see an upside there.

Okay. Secondly, on auto vertical. So SDV was believed to be a big growth driver for ER&D players. So do you believe that this SDV opportunity, the large deals in SDV is pushed back by a few quarters due to the stress in OEMs?

No. What's happening is, see the SDV spends are there. But like my colleague talked about, Alind talked about that some of these model years that were being developed, they have decided to push the model. So whatever features they were thinking they will develop for model year, let's say, '27 or '28, they're pushing it out to model year '30. So if they push it out for model year '30, that means that they will take another 2 years, so they're not going to be able to spend that money. That is one, right? Second, there was a lot more focus on electric hybrid that was happening, and that has sort of paused right now because given the change in direction potentially that may come in U.S., Europe -- if U.S. and Europe relaxes the conversion in the rules, right, by a few more, let's say, 3 more years, so they get 3 more years to do that. Third, nobody is talking about it, but we're seeing early projects coming out in range extenders. So earlier, you would have -- hybrid means you've got an ICE engine, and then you're going to have an electric motor with it. Think about the other way around where you actually have an electric stack up, and you've got a fuel engine or a gas engine, that's a range extender that allows you to buy the vehicle and then drive it not just in a suburban area but also in the rural area. So a lot of that discussion going on. See, I was -- we were at CES, like my colleague said, there's a lot of new advancements, but then you need paying customers. And I believe that give it a couple, 3 quarters, a lot of excitement in new models, but will take a little bit of time is how we see it. But having said that, a lot of that what is happening and those that were at CES or saw the commentary will realize where last year, CES was largely automotive. This year, CES was balanced around automotive, around off-highway, around consumer electronics, around health care as well as industrial and AI, of course. So it was a very balanced experience. I would actually recommend that you do get some notes on CES. We'll be happy to talk more about it. But we will give you the color and complexion of how the world will grow beyond automotive and in spite of automotive.

Thank you. Ladies and gentlemen, due to time constraints, we have reached the end of question-and-answer session. I would now like to hand the conference over to Mr. Pinku Pappan for closing comments.

Thank you all for joining us on the call today. We hope we were able to answer your queries. If there are any follow-ups, we'll be happy to address them. With that, we are signing off for today and look forward to interacting with you through the quarter. And I wish all of you a very good evening and a good day. Thank you. Bye-bye.

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