LTM Limited (LTM) Earnings Call Transcript & Summary

Ladies gentlemen, good day, and welcome to Q1 FY '22 Earnings Conference Call of LTI. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Sunila Martis, Head, Investor Relations, LTI. Thank you, and over to you, Ms. Martis.

Thank you, Margaret. Hello, everyone, and thank you all for joining us today to discuss LTI's Q1 FY '22 earnings. The financial statements, press release and quarterly fact sheet are all available in our filings with the stock exchanges and on the investors section of our website. On the call, we have with us today Mr. Sanjay Jalona, CEO and Managing Director; Mr. Sudhir Chaturvedi, President, Sales; Mr. Nachiket Deshpande, Chief Operating Officer; and Mr. Anil Rander, Chief Financial Officer. Sanjay and Anil will give you a brief overview of the company's performance during the quarter, which will be followed by the Q&A session. As a policy, LTI does not provide specific revenue or earnings guidance. And anything said on this call, which reflects our outlook for the future or which can be construed as a forward-looking statement, must be reviewed in conjunction with the risk that the company faces. Let me now invite Sanjay to talk to you about the results. Over to you, Sanjay.

All right. Thank you, Sunila. Hello, everyone. Hope all are doing well. This is an exciting time to be in the tech industry, and it's really wonderful to speak to you again. This quarter marks the completion of 5 years since our listing. We went public in an IPO that valued us at a P/E ratio of about 12 to 13x. The company had just FY '16 with an annual revenue of $887 million and a net profit of INR 8,365 million. Since then, we have delivered a revenue at a CAGR of 13.5%. Our net profit has more than doubled. And on the P/E front, all of you would be tracking it much more than I am. LTI has gone through a transformation in these years, creating its own unique brand and identity, built one of the strongest teams and applied focus on building capabilities and partnerships. Today, we compete and win against the world's best companies. My team and I are filled with deep gratitude for all the support, faith and trust our stakeholders have put in us. We will continue to do our best in the years ahead. Our Board has declared a special dividend of INR 10 per share to commemorate the completion of this 5-year [indiscernible]. During our call last quarter, we talked about the public health crisis and its impact, especially in India. At LTI, we have vaccinated over 14,500 employees and their family members through vaccination drives at our offices. We have and will continue to fight the pandemic with our grit and resilience. Coming to our results. We are pleased with our broad-based performance in Q1 that once again brings to fore the resilience and well-diversified growth engine that we have built over the years. We posted our best-ever Q1 with revenues of $470.2 million, growing 5.1% quarter-on-quarter and 20.4% year-on-year basis. The holistic nature of our growth stands out, whichever way you slice our performance. All verticals, service lines, client buckets and geographies have grown well. All our verticals have grown this quarter. But our largest vertical, BFS, grew an astounding 39.4% year-on-year. We had 2 more verticals, High-Tech, Media & Entertainment; and the Others, which include some of our marquee public sector wins, also grew in excess of 30% year-on-year. We also see assets move in the right direction on Insurance and Energy & Utilities, which have been a little soft in the past. On the service line front, we had superlative performance from cloud infrastructure services growing at 32% year-on-year, with the rest of service line also growing double digits on a year-on-year basis. We added 23 new logos during the quarter. And we are also excited to note that this strong performance is powered by growth across our 5, 6 to 10, 11 to 20 client buckets as well. This is also reflected in addition of 1 client -- 1 more client to our 15 million bucket and 3 each to our 10 million and 5 million buckets. Let me now give you some color on the nature of demand that we see today. During the pandemic, we have seen signals -- we have seen digital adoption pick up strongly. We see this trend continuing and accelerating. During last quarter, we introduced this era as the great restructuring because we see restructuring around workforce, workplace, future and work -- future of work and every industry who need to operate in the new normal and restructure themselves. When I reflect across our customer base, we are seeing a secular demand around their digitization efforts across each of our 400-plus customers. Frankly, I have not seen this kind of opportunity in the last 10 years. The nature of demand and expectations around execution are also changing. We see discretionary spend increasing, with demand for projects to be executed in an offshore-based agile parts to shorter-deal cycles on just small, self-sufficient agile team, ranging from 4 to 8 members responsible for a single task, scope or requirement. Work packets that got predominantly executed from on-site before the pandemic are now mostly executed from offshore as everyone is remote anyways. This manner of execution ensures speed to market, which is very much the need of the hour for our customers today. We are also scaling up supply like we have never done this -- never done before. We are looking at hiring 4,500 freshers for the year, which is much higher than what we have done in any year in the past. We added net of 2,000 people last quarter and net of 2,300-plus people in Q1 as well. We remain focused on building and scaling differentiated capabilities to cater to this accelerated demand. Digital engineering is a significant market opportunity. And I'm happy to announce the acquisition of Cuelogic Technologies, a digital engineering and outsourced product development company. We welcome Cuelogic to the LTI family. This marks the seventh acquisition by LTI since we listed. Strong capabilities and a bias for strong vertical orientation are the only way we can be better partners for our customers. Q1 is incredible as we got some of the most sought-after recognitions in the marketplace, be it LTI Syncordis getting recognized as a Partner of the Year by Temenos. LTI did not operate -- you'll remember, LTI did not operate in the core banking space till a couple of years back. We are now the second-largest partner for Temenos ecosystem. Snowflake also recognized LTI as a Global Innovation Partner of the Year. It's a global recognition. Snowflake, the data cloud company, is one of the hottest technologies. And this recognition represents a key milestone which will strengthen collaboration between the companies. Our data products continue to see strong market validation and recognition from the analyst community during the quarter. One of our products, Leni, was featured in Gartner's Market Guide for Augmented Analytics Products as well as in the Forrester Q2 Tech Tide report for Customer Insights Method. Let me provide you with color on the performance of our verticals. BFS, very strong. We saw a 9.6% growth here. This was driven by our existing clients as well as our large deal win announced last quarter, which involved the digital banking transformation for a large Islamic bank using Temenos T24 platform. Moving to Insurance. We saw 5.3% quarter-on-quarter growth here. This is due to some of our recently added logos, ramp-up of our large deals announced last quarter as well as our existing clients. We are seeing positive traction here with our refined insurance strategy, ongoing growth of our partnership ecosystem and new leadership driving opportunities in the marketplace. Manufacturing declined 6.6% quarter-on-quarter. Please note that our services revenue grew this quarter, and this decline is in quarterly revenues only because we had pass-through revenues in Q4. The absence of this pass-through revenue is also reflected in the sequential decline in the Enterprise Solutions service line as well as the India revenues. Demand environment remains healthy in manufacturing with continued momentum and opening up of discretionary spend. Energy & Utility, we saw -- we grew 4.7% here, largely driven by good growth in the utility space. Over the past few quarters, we have seen -- we have been sharing our expectations on how spends in oil and gas would continue to be volatile. Our large deals announced -- a large deal announced in Q3 FY '21 with a global Fortune 500 energy company is going to -- going as per schedule. And we expect to see further ramp-up in the deal in the coming quarters. CPG, Retail & Pharma grew 4.4% quarter-on-quarter on the back of some of our large deal wins announced in the previous years as well as our existing logos. High-Tech & Media grew 13.1% quarter-on-quarter. Our large deal win with Injazat continues to progress well here. Others, which include professional service -- professional services, Government of India Ministries and other global enterprises and public services, registered 0.5% growth quarter-on-quarter. Let me now move to the outlook. After delivering a near-double-digit U.S. dollar growth in FY '21, we have had a very strong start to FY '22. Our pipeline remains healthy. Our client mining engine is working well. And our conversations with our customers continue to give us the confidence to deliver yet another year of strong growth, positioning us to be in the leaders' quadrant in FY '22 as well. With that, let me now hand it over to Anil Rander.

Thank you, Sanjay. Hello, everyone. It is great to be back with you all with another quarter earnings, and I wish you all safe and healthy days ahead. Let me take you through the financial highlights for the first quarter of FY '22, starting with the revenue numbers. In the first quarter of FY '22, our revenue number stood at USD 470.2 million, up 5.1% sequentially and 20.4% on a year-on-year basis. The corresponding constant currency growth was 4.8% quarter-on-quarter and 17.8% year-on-year. Reported INR revenues of 34,625 million was up 5.9% quarter-on-quarter and 17.4% year-on-year. Now coming to profitability. EBIT for the quarter was INR 5,682 million, translating into an operating margin of 16.4% as compared with 19.4% in the previous quarter. The margin work is as follows: wage hike, 340 basis points; absence of PDD provisions write-back, 120 basis points; investment in S&M for business development and marketing, 60 basis points. This was offset by 140 basis points benefit from productivity improvements and 80 basis points benefit from ForEx and absence of pass-through in Q1. Our SG&A is back at about 12% of the revenue, as guided earlier in the last quarter. Reported profit after tax was INR 4,968 million this quarter, which translated into a PAT margin of 14.3% compared with 16.7% in quarter 4. Other income pertaining to Q4 FY '21, including a -- included a write-back of certain earn-outs payable towards an earlier acquisition amounting to INR 571 million. As guided earlier, our PAT margins will be in the narrow band of 14% to 15% for FY '22. Moving on to employee metrics. On the people front, utilization without trainees was 84.1% as compared to 82.2% last quarter, and utilization including trainees was at 83.7% versus 80.8% in quarter 4. We continue to strengthen our workforce. And during Q1, we added 2,307 people on a net basis. The total manpower stood at 38,298, of which our production associates were 95.1%. In this quarter, attrition is at 15.2% versus 12.3% last quarter on LTM basis. On ForEx and hedge books. Our cash flow hedge book stood at USD 1,403 million as at 30th June 2021 versus USD 1,354 million as at 31st March 2021, while the on-balance sheet hedges stood at USD 77 million versus USD 65 million last quarter. Our DSO, working capital and cash flow. Moving on to the DSO in Q1. The billed DSO improved by 1 day and stood at 60 days, as compared to 61 days last quarter. The DSO, including unbilled revenue, was at 98 days, increasing by 4 days quarter-on-quarter. For the quarter, the net cash flow from operations was INR 943 million, which was 19% conversion of the net income. This was impacted by 3 factors: First, payout of our annual incentive; second, increase in DSO, including unbilled revenue; third, the pass-through license revenue that we booked in H2. We had negotiated favorable payment terms, as the cash outflow to the license vendor was booked in Q1. If we look on an LTM basis, OCF-to-PAT conversion remains healthy at 92.1%. At the end of the quarter, cash and liquid investments stood at INR 43,314 million as compared to INR 43,877 million last quarter. The effective tax rate for the quarter was 26.1%. On EPS and dividend, the Board of Directors at the meeting held yesterday have declared a special dividend of INR 10 per equity share to commemorate fifth anniversary of LTI's IPO. Earnings per share for the quarter stood at INR 28.4, and diluted earnings per share was INR 28.27. Before I end my presentation, I wanted to highlight that we have published and have made an integrated annual report for the year FY '21. We have so far been publishing a comprehensive sustainability report on our key nonfinancial pillars, such as our people and our impact on the planet since our listing. We have embraced an elevated level of reporting and disclosure with publication of an integrated report to meet the evolving expectation of our stakeholders. Other than our financials, the report will provide in-depth insights on our environmental, social and governance performance. For example, we are committed to becoming carbon neutral for our India operations by 2030. Embarking on the integrated reporting journey, we hope to amplify the value we create for our stakeholders. With that, I would like to open the floor for questions.

[Operator Instructions] The first question is from the line of Sudheer Guntupalli from ICICI Securities.

Sanjay, my first question is on data products. Can you kindly throw some color on how the go-to-market and monetization work here? Are we selling them as stand-alone products? Or are these cross-sold along with the services that they are offering to customers? Secondly, we have noticed these 4, 5 products like Leni, et cetera, on marketplaces like Microsoft AppSource. So how does the monetization work on these platforms?

Yes. Can I request Sudhir and Nachiket to comment? Sudhir, your lead. Sudhir, you're on mute.

Sorry, yes. Thanks, Sanjay. So the Leni -- in fact, the data products, Mosaic and Leni, they have -- there is a separate sales team for this at the country level. We also have a separate presales and solution team. So it has an independent go-to-market. And it works along with obviously the LTI sales organization but various other channel stakeholders, as you've noticed, along with our hyperscaler channel stakeholders to go to market. So the pipeline is built independently, as this is a product which has seen the selection process is against products of a similar nature. This is where Sanjay has also highlighted the Gartner mentioned that we've got, et cetera. This all plays a part into this. So the sales and marketing engine for this is separate but works together with the LTI accounting as well.

And how is the -- yes, yes. And just a follow-up, how is the initial traction, given that, historically, we have not been very active into the product side? How has been the initial traction? And how are we seeing, like say, if at all, there is any scope or some synergies between our services account management teams and the new go-to-market team for products?

Yes. In fact, the synergies that we are currently seeing is that the sales -- the current licensed customers as well as the customers that we have in our pipeline currently are with our existing clients. And we have some good traction underway in this space. Clients see the benefit. Essentially, this is augmented analytics for data when talking about Leni. Mosaic has a very comprehensive data ecosystem. So depending on clients, the data needs are constantly evolving, as you know. There is deep -- along with cloud, the biggest area of investment and spend for clients. So we are seeing this as part of both, where clients are looking to select products for data-related activities as well as where they're looking for solutions where we can bundle our products along with our service.

And sir, the last question. Given that we are religiously spending or investing on these data products this year, so let's say by FY '23, do you have some target in mind as to, let's say, some percentage of our revenue should be coming from this segment or some share of growth should be contributed from these data products kind of a business line?

Sudheer, I think -- obviously, there is something in mind which is definitely going to stay in mind. But the important thing to note here is that we are in the business of reducing the cycle of our customers' journey from data to decisions, right? And typically, when you look at product vendors, this -- they tend to be just a products company, right, a horizontal company. Our entire business and thesis is built on. We have the capability of a product. But we can actually shrink the time and create a fit to -- for purpose analytics for different businesses because we know the verticals that we operate. So a lot of growth that you see is also driven based on using our products to actually do this. So yes, we will continue this journey of investing great traction in the marketplace. Still early days, but you -- we are seeing some incredible conversations that we were not having in our previous lives that we see in data products right now.

And Anil, one last question, if I may. You mentioned that wage hikes had an impact of 340 basis points. So between direct costs and SG&A expenses line item, how is this 340 basis points wage hike accounted for?

I think this will be roughly in the range of 320 basis points and 20 basis points.

320 in direct costs and 20 in SG&A?

Right, right.

The next question is from the line of Sandip Agarwal from Edelweiss.

Sanjay and team, I wish you good health and congratulations on excellent strategy. I have a very simple question and I -- can you hear me? Hello?

Yes, yes, yes. These simple questions are the most dangerous one but go ahead.

Please don't dodge the question by saying that I will keep it in mind, but please try to answer. So 2 years back, Sanjay, you took very bold decisions and sacrificed near-term gains to get your business future-ready. And it reflects in your outstanding performance of business in the last 2 years. Now when I study your business in detail, I think in last 2 quarters, again, you have taken very bold calls: One, you have pulled all the best resources from different business units to build your cloud unit. And you have brought in good resources as well. And this quarter, I'm surprised and very happy to see that you have not got carried away of -- by managing growth margin and everything like most of the other companies have done. You have, in fact, taken another bold decision of allowing your margins to slide down to retain your key talent. The question which I want to understand is how were you able to convince, first of all, your team then your Board, your management to take such a bold decision? And if you are able to take this decision, how much of this decision is data-driven, hunch-driven or client-interaction driven? Or it is a combination of all? And will it be fair to assume that these bold decisions that you are taking and which are showing a little bit of pain on your financials right now are getting you future ready for next 2 to 3 years, again, the way you did in the last 2 years? Is it a fair reading? That's all from my side. Best of luck for next quarter.

Wow, this is -- I should ask "how much time do you have" kind of a question. But let me try to answer it as simple as I can. We always have to be honest to who we are. We have to be honest to our customers and keep talking to them, keep ideating with them, keep discussing with them on how their spend patterns are. Where are they spending? What is their need? Where is -- what is hurting them? And that's what leads to the strategies that we deploy. I have always maintained, you would have heard me many times, revenue is actually a lagging indicator. The leading indicators are how you invest in the conversations and the right conversations with the customers and how do you build capabilities. The salary hikes, if I reflect back, it seems a little bit at times that you give 2 salary hikes in 2 subsequent quarters. But it is also a reflection of what we saw in the marketplace. We saw the marketplace hitting up. We saw attrition climbing up for everyone. And we, having gone through COVID and performing well, it felt like the right thing to do. That's why we do this. L&T, as a predominant shareholder, has been very supportive in everything. Otherwise, it would have been very difficult. So in summary, if I were to reflect back, these are never easy decisions, but we do this as a unit together. The entire leadership gets on our call, and we don't agree. We fight like crazy, but we have a simple purpose. When you put clients in the middle, when you put employees in the middle, you will never go wrong. And I think that's what is working. I hope in times to come, this will work as well. This is the purpose and an existential question for an organization to exist. And that's what we hope that we are doing right moves, and it's probably reflecting on that. Sandip, I hope I have answered this question.

Well, that's 75% of my question, but I will leave it at that.

Okay. Never happy.

The next question is from the line of Abhishek Bhandari from Macquarie.

Sanjay, this question is for you. In the past, you've indicated your revenue growth depends on new client addition, mining your existing clients and large deals. So while the first 2 are doing well, somehow we -- the momentum on large deals seems to have slowed down for us in last 2 quarters. And you've also said in the past that, that might have to do with the close time lines, which are getting longer because of virtual methods. But if you could share to you some thoughts over there, how do you see the pipeline, how do you see the conversions happening? Because that is one of the key parameters on which your premise of doing better than industry growth rate for the quarter 1 depends on.

Why don't I request Sudhir to give you the details. Sudhir, please unmute.

Yes. Thanks, Sanjay. So overall, we have a strong pipeline, including a strong large deal pipeline. We are seeing demand across all verticals, all geos. And this mix is actually reflected in our large deal pipeline as well. So we're very confident about the large deals that we are currently working on. We are very comfortable as to where we are on those deals at this point in time from a large deal perspective. I think another element that I also want to draw your attention to is that as we see the strong all-round growth, this growth is coming across all deals of all types and all sizes. And what we are seeing is also a model change in the industry to a pod-based -- pod team-based delivery model. And this is where -- I think the way -- the best way to understand this is to see how this is reflected in our overall growth as well as in our people addition. So we've hired 2,300 people net this quarter. We are adding, as Sanjay already mentioned, 4,500 freshers in the coming quarter. So when we look at all verticals, all geos, all -- in fact, all categories of clients in the pyramid, whether it's 1 to 10, 10 to 20, 20 to 50, 50 to 100, 100 and beyond, all have actually grown. So we are seeing all-around growth. We've got a very strong order book. We've got strong open positions, strong large deal pipeline. So I think we're very confident as to where we are at this stage regarding the business.

Sure.

Just to summarize, the 4 drivers of growth continue to be important. We are confident on large deals. Just to clarify, 4,500 is for the year, not for the next quarter, freshers for the year, okay, which is 1.5x what we did last year, by the way.

Got it. Sanjay, my second question is, I think in the Analyst Day sometime in December, you mentioned your ambition to touch $1 billion revenue on your cloud and data products in next 3 to 4 years' time. Can you share some markets over there? How are you progressing on that number? And how is your competitive positioning in that particular segment given that it's a growth driver for the entire industry? And most of the deals seem to be predicated on cloud for everyone.

I think cloud is all pervasive. And as I keep saying, cloud is -- don't look at cloud as just moving from on-premise to something on the cloud. It's a business transformation on steroids as we call it. And frankly, what you got -- and it's everywhere. It's all pervasive. As Sudhir keeps telling us and reminding us, if we were to do an organization restructure today, you predominantly will have actually 3 units only. You will have a data unit, you will have cloud infrastructure support unit and you probably will have digital engineers. There's nothing else that you would have. And that is the change that is actually happening in the marketplace. And that's why we have structured. And that's why we are investing like this. And it's getting as difficult to call out the cloud revenue as it used to be in digital as well because it becomes all pervasive. But it's moving very, very fast. In every discussion, no discussion either starts or finishes without discussions on how do we use cloud to help the customer drive the business transformation that they are doing.

The next question is from the line of Sandeep Shah from Equirus Securities.

Congrats on solid growth in terms of the revenue despite the pass-through sales decline in annual growth. Sanjay, the question is in terms of last 3 quarters, the revenue growth momentum has been really great. But if you look at the core earnings at EBIT or EBITDA level, there is a decline. So it shows the incremental revenue is not coming at a good margin as a whole. So here, if you look at utilization, it's at all-time high for you. Your offshoring revenue is also at an all-time high. Also, if you look at going forward, if the lockdown are being removed, then there could be adjustment, and discretionary spend may come back. So at this scenario, you believe pricing is the requirement where you can maintain or improve your margin? Or do you believe you have enough levers for you to pull out your margins going forward? So some color on this will help.

Sandeep, good to speak to you again. Folks, please look at us as a growth company, right, with stable margins. The big picture takeaway from this quarter's financial performance is that despite headwinds from 2 successive wage hikes, we have delivered a PAT of 14.3%. In a normal year, we get a few quarters to absorb the impact of wage hikes, which, of course, is not the case in FY '22 for us right now. I don't think there is any other element but the timing and transient nature of how will hikes take time to get absorbed in P&L. Our margin performance is in line with our expectations and what we have shared in our -- with you on last quarter. Look at us again. Again, I reiterate, look at us as a growth company with stable margins. We are determined to be industry growth leaders with a PAT margin on a stable band of 14% to 15%. That's the only guidance that we give. And we are determined to make sure that we definitely meet or beat that.

Yes. But Sanjay, any discussion with the clients where they are slightly open for pricing renegotiations?

All kinds of discussions are happening. But frankly, Sandeep, the discussions are more -- as supply and demand varies, supply is in short and demand is very high, the pricing pressure is always -- you can always go back and increase. But the conversation is more. Bulk of the conversation is why does it take 10 people? Why can't you do with 4 people using technology, AI, ML ops and all the good stuff that we keep talking about, all the investments that we have made? Pricing has not been affected with pro and con for a while now. It's how do you use technology, how do you execute it well in these times. So I'm confident, where we stand today, that we will be able to do 14% to 15% net margin in this year as well.

Okay. Okay. And just the last question. It's good to see that despite no major large deal wins, our growth is not getting impacted. That implies that we are participating in getting growth through small- and medium-sized deals as well. But chasing so many small or medium-sized deals, Sanjay, you believe that the spend and the feet on the ground has to be higher, which may lead to sales and marketing spend may be slightly higher going forward?

I'll let Sudhir give more details on what he feels. I think we will continue and not shy away from making investments in order to do the right thing. Revenues will come if you make investments, if you have the right conversations. We are very comfortable with where we are. We'll keep doing the right things and confident on the only guidance that we get. Sudhir, if you want to add anything.

Yes. I think the only thing I'll add, Sandeep, is we're seeing deals of all sizes, right? There isn't an or of between smaller deal sizes and large deals. It's an and. So we're seeing deals of all sizes across the spectrum, including large deals. And as Sanjay said, we are very confident about where we are on deals of all sizes.

Okay. Okay. And Sudhir, just lastly, on the Analyst Day you said the large deal pipeline is robust. But the decision making is slightly postponed to second half of this calendar year. So we have entered the second half of this calendar year. So you believe the decisions are now started happening? Or you still believe clients are taking longer time to make decisions on the larger deals?

So there are 2 parts to this. There is traction in the market where clients are looking to -- specifically from a transformation perspective, right? So when we are seeing, from a transformative deals perspective, there is -- a lot of our clients are going through a fundamental business model transformation, right, which is where the whole digital transformation in the cloud, which is all on the cloud, so the journey to cloud transformation. We are also beginning to now see decent traction from an ERP perspective also beginning to pick up. So these are the drivers of spend. Now what -- some of the paperwork elements are taking a little longer because getting contracts and legal work, et cetera, signed does take longer. But I think the cycle of demand is actually accelerated. It's -- so as I -- I will reiterate again, right, we are seeing deals of all sizes, including large deals. And we are very comfortable as to where we are and how they will all contribute to our growth in the coming quarters.

The next question is from the line of Vibhor Singhal from PhillipCapital.

So the 2 questions from my side. One, Sanjay, I just wanted to get your perspective on the India business -- in the India business for this quarter. I don't know if you've already always spoken about this. I'm sorry if you [indiscernible] have. I think a couple of other players also...

Sorry, sorry.

[indiscernible] the same kind of weakness in the India business in this quarter. So was it kind of like led by the second year of COVID? And is it just a postponement of revenue that has happened because of this? Or is it some revenue loss, which you obviously do not see coming back up in the coming quarters [indiscernible].

Vibhor, your line is very bad.

I'm so sorry.

You're asking about India but -- you're asking about India business. Is that -- am I repeating it right?

Yes. I'll just repeat the question. I hope the audio is better now. The audio is better now?

No, it's okay. It's much, much -- 100x better. I think India business -- so I will answer this. This is absolutely because of COVID. You have seen government, and rightfully so, has been investing in making sure that the country moves forward, vaccination, oxygen and so on and so forth. Not -- so all the funding is diverted towards that. In due course of time, this will come up. We have a good business going there. We execute some really critical programs. We also finished a few programs and these tanks. It's nothing else. As the government spend starts to open up more, we will see -- I'm not worried about India at all. We are just being selective as always. We'll continue to be selective on the kinds of programs. We'll typically do only data and ERP-led programs there. It's just the pipeline on government expenditures which is not there, which is reflected in the business. And you had another question, Vibhor.

So the next question is actually, again, I think we [indiscernible] on the supply side...

Also -- Vibhor, I forgot one more thing, which I should say. I suddenly remembered it's also absence of the pass-through that we typically had. As I mentioned in my speech, Manufacturing, Enterprise Solutions and India, all 3 cuts are impacted by absence of license revenue in Q1 for us every year. So that is why also India is shown as down, okay?

Yes. Sure. Great, Sanjay. The next question that I wanted to ask upon is, again, on the supply side issues. So just wanted to get your perspective on how good or bad the supply side is at this point of time. I mean we've heard competitors giving tremendous salary hikes. I mean the energy competitors in India. We have given 2 consecutive quarters of salary hike. I mean I know LTI is a very employee-friendly country. But this move looks to be more like driven out of the need to retain talent. And even then, we had attrition of around 15% in this quarter. So as of now, post the salary hike that we have given, how do you see the supply side issues playing out? I mean do you think that this transfer of talent is going to continue? And not just us but the industry will have to probably come to terms with higher incentives and salaries overall for the industry? Or do you think it is made a passing phase? And as basically the supply comes through, how you -- we could ease it out? I mean I'm not necessarily asking you for a margin impact. I'm just asking you from an industry perspective, where are we heading in that -- in those terms?

Sure. Nachiket, you would like to take this?

Sure, sure. So what we are doing -- I think attrition is definitely -- has gone up and is a cause of concern for everybody in the industry. But how we are trying to manage from a supply side perspective is I think it's important for the talent creation engine also to kick in for all of us and not just LTI but across the industry. And that is where I think we are also investing. Sanjay talked about us significantly increasing our fresh graduate intake. We are also running the programs where we are hiring people between 1 to 2 years' experience and upskilling them on cloud data and digital. We will hire close to about 1,500 through that channel as well. So from a medium- to long-term perspective, I think investing in creating the talent supply is the only way to solve for this. And we are -- I think all the companies are investing in that. And that's how we would -- we feel confident that we should be able to manage. And in the short term, we have enough measures taken as well as the supply side created for us to be able to also deal with our demand situation in the short term.

Right. If I were to just maybe summarize that or extrapolate that, would it be correct to say that in the short term, there would still be supply hike challenges, not just for us for the entire industry?

Yes. In the short term, there will be challenges, of course. But we are ensuring that we do enough so that it does not affect our demand pipeline.

The next question is from the line of Mohit Jain from Anand Rathi.

This question is for Anil specifically. I was looking at the cash flow, and you spoke about the incentives, et cetera, being paid out in first quarter. So this is from a Y-o-Y comparison perspective. The cash flow appeared particularly weaker and also on account of working capital. So what has some change in payment terms or any other place where this would have resulted into lower cash flow for the quarter? Or do you think it is pretty normal from a Y-o-Y perspective?

Thanks, Mohit. So I think the lower cash flow doesn't worry us. And this is basically pertaining to this particular quarter only. And this is not there from a trajectory perspective. So I think 3 events have happened in this quarter. There has been an annual incentive payout, which has happened in this quarter. Then there are pass-through revenues, which actually we booked in H2, which were booked in last year H2. And we negotiated favorable terms where we have to make the payment to the vendor in the Q1 this year. So that has taken an outlook. And there is an element of DSO increase by 4 days. And obviously, going forward, this will improve. And this has been higher on account of COVID challenges as we were not able to open one of our branch offices. And as Sudhir mentioned, I mean, the demand is quite robust. And there is a paperwork which we are on the course of completion, which has actually resulted in that increase in case. So these are the 3 factors which are more pertinent from a -- this quarter perspective.

Okay. And the second one was for Sudhir. Did I hear it right that you are saying deal sizes in general have become smaller over the last few quarters? Or are you saying that large deals you think will continue to be the way it was FY '20 was here? Because we saw some lack of activity in '21.

Yes, I. Think what I said was we are seeing deals of all sizes. While what we -- what I think we'll reiterate is -- and folks, again, on the large deal front, we have a strong pipeline, stronger than it was a couple of quarters ago. So very confident about that. But the nature of the demand is also changing. These broad-based models are -- of deployment of people for transformation programs. Digital program essentially are run in these 3 months, 6 months -- I mean, 3 months print cycles, right? So each of these print cycles has pod teams of 8 to 10 members, multiple pods. So essentially, that is the nature of the demand. And we are very keen that this demand is something that we capture significantly. That's why I said deals of all sizes across all verticals and across all regions, including large deals. So it's an and. It's not or.

Okay. And anything that you can share on the...

I want to -- look, I want to just maybe summarize and maybe reiterate something. We are confident on all the 4 levers that we talk of for our growth, right? So there is -- we see more and more everywhere. But please understand when we speak about an era of rate restructuring, there is fundamental change that -- and restructuring that we are seeing across with every vertical, where -- and this is why I'm speaking and I reiterated that across 400-plus customers, we see secular demand across in their digitization efforts for them to deal with you and I working from home and not how we worked all our lives. That's leading to a lot of demand of different kind that also needs to be captured, which comes in all shapes and sizes, some small, some large, some medium and so on and so forth. So we are confident of that. And at this point, I think Nachiket has done a fantastic job. And his people supply team has done a fantastic job of hiring the talent that we've been able to have. If we could find some good quality fresh passers, we will hire them even more. And we can put that in the number. And we are not worried about the demand right now, right? Very, very strong demand all across, including large deals.

Understood, Sanjay. That was clear. Anything that you can share on total TCV growth or something that we can look at from a 1Q versus 1Q perspective?

In December 2021.

The next question is from the line of Mayur Patel from IIFL AMC.

Sanjay and the team, congratulations for a very good set of numbers. So first of all, compliments for taking a bold step in these times when everyone expecting a very strong demand outlook. So it's a real entrepreneur kind of approach by growth company. So I appreciate that. Just a one simple question. You have defined the current demand outlook as area of reconstruction, right, restructuring.

Restructuring.

Yes. So Sanjay, how long do you think EBITDA, short-term trend or 6 months, a very strong demand momentum or a year? Or is it going to be a couple of years kind of secular era of this restructuring? Any comments more directionally?

Mayur, I'm not the one to cast a guess. There are more people who do that. But given what we have been seeing for the last many years and where we stand today, the conversations we are having, I don't think this is going to subside at least for 4 to 5 years, right? It's a bold statement to make because spend patterns are very different than what were there for the last 30 years. But the demand is so high and the change that is required in the marketplace is so big that we expect it to be there for a while.

The next question is from the line of Manik Taneja from JM Financial.

Sanjay, basically, I just wanted to get your thoughts around the fact that over the last 3 years, we have seen significant changes around our revenue productivity metrics. And from an offshore standpoint, FY '21 marked the first year that we saw an increase there. If you could help us understand what's driven that and how should we be thinking about this from a go-forward standpoint.

I lost the question in the middle. Anil, did you -- so did you understand the question? If you have...

Yes, Sanjay. So revenue productivity -- The question is related to our revenue productivity, which has gone up in FY '21, yes. These [indiscernible] gone up over the last 3 years, yes.

So I'll repeat that question for...

[indiscernible].

Yes. Go ahead, Manik.

Yes. So what I was saying was that what we've seen is that our onshore revenue productivity, that metric has seen a sharp increase over the last 3 years, while our offshore revenue productivity increased by about 3.7% in FY '21. Just wanted to understand what's driving some of those changes there. And how should we be thinking about the metrics from a go-forward standpoint? I hope I was clear this time around.

Yes, yes, yes. Sudhir, Nachiket, do you guys want to take that one?

Yes. So the first thing is if you see the mix of the business, right? The mix of the business has changed significantly. You've seen that over the last 3 years, data has been our fastest-growing business. So -- and now, we see some of the more cloud and transformation were coming up. So they -- I think yes, on-site revenue productivity has gone up because the nature of that consulting work that is done or program management work that's done on site is different. But we are -- our offshore percentages are high, right? So -- higher than our peer group. And I think then I'll hand over to Nachiket here because our offshore productivity has really been driven by a lot of tool-based automation. Nachiket, you want to add to that on the offshore?

Yes, yes. So as Sudhir said, I think offshore revenue productivity is largely a function of automation and the other productivity levers that we are applying and, of course, along with the mix of the business that we are seeing as well. So we -- and we continue to focus on that continuous improvement cycle from our overall delivery productivity on an ongoing basis.

We'll take the last question from the line of Dipesh Mehta from Emkay Global.

A couple of questions. First about the...

Sorry to interrupt you, Mr. Mehta. We cannot hear you very clearly, sir.

Is it better now?

I would just like you to speak a bit louder. It should work.

First question is about Cuelogic acquisition. Can you just help us understand the overall rationale behind the acquisition? And how big is your digital engineering impact is currently? And how you expect it to play out over, let's say, medium term? Second question is about the margin headwind. What -- if you can help us understand what are the headwind and tailwind over next 3 quarters? What you foresee from a margin perspective?

So I'll take -- on the margin. And then, Nachiket, you answer the Cuelogic question and the rationale. Look, margin, we have -- our utilization has gone up with the demand that we have seen and what we have to do now. As we articulated, we are going to pump in a significant number of talent in the subsequent quarters as well. So utilization, we will see where it ends up. But obviously, we want to bring it down a little bit by bringing the thing -- by bringing in more talent because we see growth opportunities significantly in front of us. But for the year, again, I reiterate, growth company with a stable margin of 14% to 15% net margin. That is what we target and we invest back into business as quickly as we possibly could. And Nachiket, if you could answer the Cuelogic rationale.

Sure. So as Sudhir mentioned on the nature of the demand shifting. So one of the things that we also see with most of our clients, as they look at their transformation agenda, as they look at their digitization efforts, one of the other things that they are going through a change is that instead of looking at traditional application development type of approach, they're also transforming themselves to become more productized IT approach, right, where they're looking at key platforms and develop them as products and focus on that methodology to continue to bring agility and speed to the features they bring into the market for their consumers. So as that change happened, one of the things is that your conventional IT is also transforming to more productized IT for us as well as service provider. So what Cuelogic brings to the table for us is that experience of delivering outsourced product development largely in the digital space. And we had also been going through that transformation ourselves. But what we -- what happens with Cuelogic is that we get access to 350 people, who are very well versed in delivering in that model and have delivered in that sort of team configuration for a while, which allows us to use that as a base and scale that disproportionately. So how that will play out is it will become integral part of the digital engineering transformation at LTI. And we will use this core team and their best practices along with the scale we have built to scale even further as most of our clients move to this productized IT we are delivering.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Sanjay Jalona for closing comments.

Folks, thank you for your time and following the company so closely. You -- as always, you kept us on our toes on this side of session. But frankly, this is truly an amazing time to be in the tech industry. And we are very excited that we have this opportunity to make a difference. My team and I are grateful for your generous support for LTI in the recent institutional investor survey as well. Thank you for that until we talk again, we hope that you and your loved ones stay safe and healthy. And we'll see you on the other side. Take care, guys. Good luck. God bless.

Thank you. On behalf of LTI, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.