What is the most important takeaway from your earnings?
Delays in decision-making among clients continue. This is impacting our ability to predict upcoming quarterly businesses, to some extent. It’s not just us—the entire industry is facing that. There are also deeper, wider furloughs in the December quarter. There are furloughs in industries which never used to have, such as oil and gas, and manufacturing. In fact, slowdowns are not just in these verticals—they’re broad-based.
Also, given that we’ve signed many end-to-end, managed services and cost-takeout deals, there is pass-through income from them that came into account. We traditionally have some pass-through in December and March quarters, but the proportion we had this December quarter was significantly higher than normal. This has impacted our Ebit (earnings before interest and taxes) to some extent.
Would you revise your margin target, given this situation?
In our five-year plan post-merger, we spoke of 17% Ebit at the end of Q4FY24. This was part of a long-term plan we made based on expected revenue for December and March quarters in this financial year. Given that revenue has been affected due to various factors, we feel it is appropriate to push the margin goal. Our Q4 will be similar to Q3; so, you’ll get a margin estimate from there. We’re definitely not chasing a 17% Ebit exit rate for Q4, and this is deferred by a few quarters.
Are unexpected furloughs affecting hiring plans, too?
We continue to invest in hiring. Our utilization is at 87% as of the December quarter. Given this high utilization, and that we’ve already closed quite a few deals including some that have been deferred to the March quarter, we still need to invest on hiring people. Doing so lets us capture growth opportunities rather than just chase the target margin. There is no choice but to increase headcount in the coming quarters, as the deals ramp up. We also added 500 freshers in the December quarter.
Do you favour restrictive non-compete employee contracts?
Look at it this way: I want to retain the right talent within my organization, and just focus on doing that. As long as we’re getting that right, I’m not worried about the other things. Talent churn is something that happens in the industry naturally, and I don’t think we can stop that. My job is to ensure that I can focus on the right talent for my organization.
Has the slowdown made it more difficult to optimize the LTIMindtree merger?
I wouldn’t say business has been difficult. Through the merger, we had a good go-to-market strategy, unified across capabilities of both the organizations. Please also remember that when we decided to merge, the decision was not taken based on how the markets will be. It was on the individual performance of the two companies.
But, what we’ve seen in the past five quarters is quite unprecedented. For instance, Q3s and Q4s every year see a lot of budget flushes from clients, who want to exhaust their spending budgets. But this financial year, we haven’t even seen a single budget flush, and clients are refusing to spend. This could be a raw shift in market trend, weighing in because of various macroeconomic factors.
So, is your $10-billion revenue target still on track?
That’s a long-term plan, and there is a strategic exercise towards it as we speak. But, as we do this, there’s only so much you can control about the macroeconomic conditions. At the same time, if you play your cards right, you’ll find ways to recover faster and also catch existing growth. For example, for LTIMindtree, most projects were around discretionary spends—delivering the significant part of our revenue. But now, the market has changed, and we’ve switched to cost efficiency, long-term opportunities. We’re directly competing with rivals, and outbidding them. We’re adapting, and this has been done well on time. This gives us confidence that we’ll capture the market as it opens up. But, we don’t have control over unprecedented behaviours and sentiments.
Global cloud majors are also experiencing softness in growth. How is this affecting you?
During the pandemic, there was a significant amount of spend in terms of cloud adoption. As interest rates and inflation started going up, clients became cautious. The question that was raised was on whether clients were seeing returns on investments that they made on cloud, and that slowed down some of their cloud journey. This also affected the hyperscalers.
Also, today, it’s all about how generative AI will drive cloud consumption. We’ll have to see how generative AI plays out, which everyone is looking to adopt. We too are training our employees, and have trained 10,000 associates. We have over 30 ongoing projects where we’re incorporating generative AI in clients’ solutions.
One specific area, therefore, that sees focus is data. This is still growing, even though the cloud is seeing tepid demand now. But, we don’t need to be too concerned at the moment.
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Published: 18 Jan 2024, 11:37 PM IST