Larsen & Toubro Infotech Limited (LTI) Q2 FY23 Earnings Concall Transcript

Larsen & Toubro Infotech Limited (NSE: LTI) Q2 FY23 Earnings Concall dated Oct. 15, 2022

Corporate Participants:

Sunila Martis — Head, Investor Relations

Sudhir Chaturvedi — President, Sales

Nachiket Deshpande — Chief Operating Officer

Anil Rander — Chief Financial Officer

Analysts:

Sandip Agarwal — Edelweiss Securities — Analyst

Ashwin Mehta — Ambit Capital — Analyst

Mohit Jain — AnandRathi Institutional Equities — Analyst

Vibhor Singhal — PhillipCapital — Analyst

Mukul Garg — Motilal Oswal Financial Services — Analyst

Sandeep Shah — Equirus Securities — Analyst

Dipesh Mehta — Emkay Global Financial Services — Analyst

Manik Taneja — JM Financial Services — Analyst

Rahul Jain — Dolat Capital — Analyst

Apurva Prasad — HDFC Securities — Analyst

Abhishek Shindadkar — InCred Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the LTI Q2 FY ’23 Earnings Conference Call. [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.

Sunila Martis — Head, Investor Relations

Thanks, Aman. Hi, everyone, and thank you all for joining us today to discuss LTI’s Q2 FY ’23 earnings. The financial statements, press release and quarterly fact sheet are all available in our filings with the stock exchanges, as well as on the Investors section of our website.

Today on the call, we have with us Mr. Sudhir Chaturvedi, President, Sales; Mr. Nachiket Deshpande, Chief Operating Officer; and Mr. Anil Rander, Chief Financial Officer. Management will give you a brief overview of the Company’s performance during the quarter, post which we will do a Q&A session.

As a policy, LTI does not provide any specific revenue or earnings guidance and anything said on this call, which reflects our outlook for the future or can be construed as a forward-looking statement must be reviewed in conjunction with the risk the Company faces.

Over to you, Sudhir.

Sudhir Chaturvedi — President, Sales

Thanks, Sunila. Hello, everyone. Thank you all for dialing in, especially on a Saturday to discuss our Q2 results. We truly appreciate your time with us today. I know it’s been a hectic week for all of you because of the earnings season, and I hope you have a restful Sunday.

So let me start with our headline numbers. We are happy to report 4.6% Q-on-Q and 21.6% Y-o-Y revenue growth in constant currency. This translates to growth of 3.6% Q-o-Q and 18.1% Y-o-Y in USD terms. We’re also happy to continue our large deals trajectory and have closed four large deals with a net new TCV of over $80 million during the quarter. Three of these are with existing logos and one is with a Global Fortune 500 client, and one of these is a new logo. Similar to previous quarters, these deal wins are broad-based and are spread across our portfolio, i.e., insurance, hi-tech, manufacturing, and services. Both these wins, our large deal pipeline remains similar to our previous quarter. That’s approximately $2 billion, and we look forward to sharing more such wins with you in the second half of the year.

On the new logo front, we added 22 new logos with the highest number of new logo additions coming in our BFS vertical. We also had double-digit Y-o-Y growth across all our top client buckets and also added one client to our $50 million bucket.

Let me give you some color on demand. We continue to see some challenging economic indicators as marked by high inflation and geopolitical issues. We’ve seen both the pace of decision-making, as well as the nature of demand change, frankly, since the pandemic. During the first year of the pandemic, organizations needed to re-imagine their operating models and to embrace digital technologies in order to ensure that they continue to do business. So decision-making cycles were accelerated, driven by the need for survival. As we progressed into the second year, we saw the pace of digital transformation accelerate. The nature of demand and expectations around execution also changed. Discretionary spends picked up as clients invested in modernization and broadening of revenue-generating streams and undertook transformation journeys in order to enable this. Speed was the biggest differentiator here and hence, the key driver for these journeys. Now that we are in the third year, we are seeing a little more regular decision-making cycles, although even this is still faster than what we used to see pre-pandemic.

So with that backdrop, it is reasonable to assume that the overall macroeconomic environment and the anticipation of recessionary trends that we are seeing will have some impact on client spending, especially as we enter the new calendar year, CY ’23. While we at LTI have not seen any outright cancellations, there are signs that there are clients are looking to spread out their investments in technology. Customers more importantly want to bring control to their run spend. They have made significant investments in cloud, data, and digital and this new stack over the last two years, and many of these implementations were done at high price points because speed was of TSN. There is now a need for organizations to go back and meet the planned business cases for all these programs. And therefore, there will be an efficiency play on the new stack. During this time, at LTI, we are staying close to our clients to understand their needs. Business-driven transformations are still a priority with clients. So we continue to see that dollars that are allocated to business growth will continue. But when we look at what we will seek to do with the new growth stack, we will see that they will programmatically run value realization programs to help them meet their business case and also use those monies to fund the strategic transformation initiative.

Moving to the performance of our industry verticals, geographies, and service lines during the quarter, our BFSI portfolio now accounts for 48% of our total portfolio. BFS grew 29.1% in constant currencies and overall budgets in our clients continue to grow in GRC, Payments, and Commercial Banking. We have a strong pipeline across our key clients, mostly due to our presence in these programs, which are going ahead as planned.

Insurance, we saw 15.8% Y-o-Y growth in constant currency. You all know that our growth numbers in this vertical have seen improvements over the last few quarters, led by both large clients and several new logos that we have added in this sector since we added new leadership to take on — run our insurance business in the US.

Manufacturing grew 11.9% Y-o-Y in CC terms, and we are seeing some caution in the environment here. With rising inflation, customers are looking to reduce their spend on discretionary items. Hence, the Excellence Manager is going to be critical, and there will be a focus on operational efficiency and outsourcing. Our pipeline is building up in these areas, and we feel that we are well positioned both on strategic discretionary spend, as well as the imperatives that they have in the efficiency space.

Energy & Utilities grew 29.9% Y-o-Y in CC terms. Demand environment continues to be strong here. We see large-scale ERP data and cloud projects underway or kicking off and clients are not revisiting these decisions.

CPG, Retail & Pharma grew 21.8% in CC terms, driven by the growth in our large accounts and our large deals announced last year.

Hi-Tech and Media was flat Y-o-Y or slight negative. This was on account of one of our large engagements transitioning from a fully on-site mode to offshore moving to a global delivery model as part of the original deal structure.

Others had a strong Y-o-Y CC growth of 48% as our marquee services customer continues to ramp up sequentially. This account is on track to be a $50 million account for us.

On our geographies, again, we saw broad-based growth. North America and European markets continue to be key drivers, expanding by over 21% and about 30%, respectively, Y-o-Y on a constant currency basis. Excluding impact of currency, both of these will continue to grow well for us. In Europe, a large part of our growth is driven by continued large deal traction and new logo wins. We see strong demand for our key capabilities around ERP and data and cloud. And we are monitoring the situation going into Q3, we’ll continue to remain close to our clients and see how spend patterns emerge.

With this demand outlook, I now request Nachiket to talk about our service lines and supply side. Over to you, Nachiket.

Nachiket Deshpande — Chief Operating Officer

Thank you, Sudhir. On our service lines, both analytics, AI, Cognitive and Enterprise Integration & Mobility have grown well at about 44% and 38% Y-o-Y, respectively, in constant currency terms. These reflect the strengths of our data and digital engineering subservice lines with revenues from both of these practices doubling over the last three years. Performance of these service lines also ties into what Sudhir said earlier, on demand, where we see several clients reviewing their business case for their cloud migration and data journeys. We talked about this opportunity last quarter, where we are trying to solve for an efficiency expectations of our clients in these large investment areas that they have made in new digital stack. Our proven expertise in the efficiency play with our deep-seated and premium partnership with hyperscalers is helping us see continued traction in this space. LTI remains well poised to capture this opportunity. Post the merger with Mindtree, this will further strengthen, along with their expertise in customer success and digital transformation.

To further build on this momentum, we continue to make investments along with our strategic partners. We opened our joint insurance innovation lab with AWS in Hartford, Connecticut. We already delivered on joint solution from this center between AWS and LTI. We were also named a launch partner for Salesforce Automotive Cloud, which is a new product offering from Salesforce unveiled at the recently concluded Dreamforce event.

Now moving to supply side. We are proud to have crossed 50,000 headcount mark this quarter. Our hiring engine continues to work well, and we are not planning for any moderation in our hiring plans in Q2 — Q3. Our net headcount addition at over 2,100 people in Q2 has been in line with our earlier quarters, and we continue to build momentum for demand and growth going forward. On the attrition side, we are seeing some softness in hiring premiums and cool-off and resignation numbers. We are likely to see some moderation in attrition numbers in H2, but for certain hot and niche skills, supply/demand mismatch will continue and will take several quarters to be breached.

Before we look at business outlook, I want to talk about the progress on our merger with Mindtree. We’re happy to be on the last leg of required regulatory approvals and should be able to combine forces by end of calendar year ’22. As we have explained earlier, the merger rationale is essentially a revenue synergy-based rationale. The business case is around fast-growing companies coming together to grow even faster. As this merger offers an exciting and broader growth platform to all of our employees, we also see a lot of excitement amongst our workforce. We have been working to ensure speedy and seamless integration through our steering and integration committees, focusing on interoperability in the first quarter and then accelerated consolidation of key systems and operating models is our primary focus. The majority of integration activities are expected to be concluded by Q4 FY ’23.

Now moving to outlook on Q3 and FY ’23. While macroeconomic indicators point to a near-term softness in market volatility, we see these challenges also as an opportunity. We remain close to our clients across all levels to understand and align our investment plans. We continue to execute well and deliver in a challenging and changing environment as demonstrated in the past. We expect our Q3 performance to be as strong, if not better than our Q2 as it has historically been. We will continue to be in the leaders quadrant for growth with a stable PAT within the guided band for FY ’23. In the near term, while we are not immune to an impact of global economic events, we feel we are much better positioned than earlier to address any future shifts. Both LTI and Mindtree are growth leaders. And post-merger as a combined entity, we will leverage our scale to move from being the best challenger to Tier 1s to setting the foundation for the leadership.

With that, let me hand over to Anil.

Anil Rander — Chief Financial Officer

Thanks, Nachiket. Hello, everyone. It is great to be back with you all with another quarterly earnings.

Let me take you through the financial highlights for Q2 FY ’23, starting with the revenue numbers. In the second quarter FY ’23, our revenue stood at $601 million, up 3.6% sequentially and 18.1% on a year-on-year — Y-o-Y basis. The corresponding constant currency growth was 4.6% quarter-on-quarter and 21.6% year-on-year. Reported INR revenue of INR48,367 million was up 6.9% quarter-on-quarter and 28.4% year-on-year. We are very happy to have crossed the $600 million revenue milestone.

Now, coming to profitability. EBIT for the quarter was INR7,809 million, translating into an operating margin of 16.1% as compared with 16% in the previous quarter. Increase in employee costs and moderation and utilization was offset by currency benefit and a working day impact.

Reported profit after tax was INR6,798 million, which has translated into a PAT margin of 14.1% compared with 14% in Q1. We remain comfortable with our guided PAT margin of 14% to 15% for FY ’23.

Moving on to people front. Utilization without trainees was 82.1% as compared to 81.8% last quarter and utilization including trainees, was 80.3% versus 81.3% in Q1. We continue to strengthen our workforce. And during Q2, we added 2,215 people on a net basis. The total manpower stood at 50,981, of which our production associates were 95.5%. In this quarter, attrition was at 24.3% versus 23.8% last quarter on LTM basis.

Our cash flow hedge book stood at $1,938 million as of 30th September ’22 versus $1,795 million as of 30th June 2022. While the on-balance sheet hedges stood at $140 million versus $108 million last quarter.

Moving on to the DSO. In Q2, the billed DSO stood at 62 days as compared to 61 days in last quarter. The DSO, including unbilled, was at 99 days as compared to 100 days in last quarter.

For the quarter, the net cash flow from operations was $3,608 million, which was a 53.1% conversion of net income. At the end of the quarter, cash and liquid investments stood at INR32,636 million as compared to INR38,824 million in the last quarter.

Earnings per share for the quarter stood at INR38.75 as compared to INR36.13 in Q1. Diluted earnings per share was INR38.7 versus INR36.08 in the last quarter.

On the ESG front, we remain steadfast at reducing our environmental footprint and becoming a carbon- and water-neutral Company by 2030. In Q2, LTI has been certified as a water-positive company based on third-party audit. With a positive index was 1.87, LTI is one of the top water savers.

With that, I would like to open the floor for questions.

Sudhir Chaturvedi — President, Sales

Before we take questions, I just wanted to say that this is likely to be our last call with you as stand-alone, LTI. It has been a fascinating journey since our IPO to now being an established player in the industry. So we are thankful for the constant support that we get from the L&T Group, AMN, SNS and RSR, who are actively involved in enabling every part of our growth journey.

I want to thank the L&T Board for their mentorship. And I want to take this opportunity to also thank Sanjay Jalona and Ashok Sonthalia, who are an integral part of this journey. We would like to thank our employees who’ve always gone the extra mile as our employee numbers went up from 19,000 when we IPO-ed to over 50,000 today. And as always, we want to thank our clients for the faith they have placed in us at all times, there have been some difficult times and otherwise, to deliver their most difficult programs and drive their growth agenda. We look forward to building on all of this together as LTI Mindtree and seek your support and advise in the exciting journey ahead.

Now, we can open the floor for questions. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.

Sandip Agarwal — Edelweiss Securities — Analyst

Yeah. Hi. Good evening. Congrats on a very good set of numbers and also best wishes for the festive season and also best wishes for the integrated company going ahead. I have only one question that, when I hear your commentary, it looks a little measured in the sense that on one front, you are highlighting the risk of the macro, which you are probably also seeing the way the whole world is seeing. And at the same time, you are also acknowledging the fact that if risk to economies or the macro environment worsens from here, then the need to optimize cost will accelerate, which obviously implies that people will use the cheapest possible option to achieve their goals, which is obviously outsourcing in the technology stack. So I am trying to understand a little more clearly whether you are more inclined towards the macro uncertainty, how you see today? Or you are more inclined towards the opportunity which it will show up in the sense — I’m obviously inclined will be towards the opportunity. But what I’m trying to understand is, today, as you see which side you are seeing tilting — the whole environment tilting?

Sudhir Chaturvedi — President, Sales

Yeah. No. So I think if I step back and look at the conversations that we’re having with clients, right? So clients are spending money, where they’re either enabling business growth, right, where there’s revenue growth, those programs — those are — in many cases, multiyear programs, that spend is continuing as planned. The efficiency is coming in places where some — frankly, some of the money was spent perhaps not as judiciously because it was spent for speed, right, in enabling cloud, data and digital journeys. And those consumption costs have risen those as-a-service costs that they have gone up. So they’re seeking to rationalize their spend to get back to the business case. So I think those are the two trends that we are clearly seeing, and we feel well-positioned to do both. See, if you see our large deal track record, right, most of our large deals have actually been in the outsourcing space. So we are actually well poised for that spend pattern to shift. It’s really a question about chasing the right dollars, chasing the right digital growth dollars, and chasing the right outsourcing dollars. And we think we’re in a good position to do both. Frankly, volatility, I know we are seeing some now, but nothing compares to the volatility that we saw in March 2020, right? If we could deal with that and grow 9.5% even in a pandemic year, where frankly, everything was up, right? Compared to that, this is an environment where we can actually — we have runway to actually have discussions with clients and change — as they change their — if they need to change their spend patterns, we will make sure that our strategy is in line with where the dollars are being spent. We had bigger prices. We are very confident about this one also.

Sandip Agarwal — Edelweiss Securities — Analyst

Thank you. Thank you so much for that answer and wish you best of luck for the current quarter. Thank you.

Sudhir Chaturvedi — President, Sales

Thank you.

Operator

Thank you. The next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.

Ashwin Mehta — Ambit Capital — Analyst

Hi. Thanks for the opportunity. So want to get a sense on why our cash generation is so weak? And what is the outlook on the same? Because our FCF to PAT is just 14% in the first half. Our CFO to EBITDA is just about 34%. And even in the last year the FCF to PAT was weak at around 34%. Just wanted to get a sense in terms of why our earnings growth numbers are very strong if I look at it over a two-year duration. If you look at your FCF over a two-year duration on an LTM basis, there’s a 40% CAGR decline. So I just wanted to get my head around to why the cash generation is so weak?

Anil Rander — Chief Financial Officer

Yeah. Thanks, Ashwin. I think there are a few key reasons why — and these are more, I would say, transient here. I think that this quarter, we had — last quarter, we did have an incentive payment on which there was a tedious liability. Obviously, this was paid during the current quarter. And obviously, in terms of the advance PAT, the overall quantum is higher as compared to the last quarter. So that is also another reason. And on — actually, there is a premium payment for one of our insurance policy, which actually fell due on the last day of the quarter. And that is also a key reason why this cash generation has been lower. So it’s been higher than Q1, but we are confident that we’ll pull it back in street in terms of Q3.

Ashwin Mehta — Ambit Capital — Analyst

Okay. Okay. And just the second clarification was, we did talk about that Q3 could be similar or better. So do we expect that typical seasonality wherein our second half is generally better?

Anil Rander — Chief Financial Officer

Yes.

Sudhir Chaturvedi — President, Sales

Yeah.

Anil Rander — Chief Financial Officer

Yeah.

Sudhir Chaturvedi — President, Sales

Q3 will be better than Q2 and second half will be stronger that H1.

Ashwin Mehta — Ambit Capital — Analyst

Sure. Thanks a lot and all the best.

Anil Rander — Chief Financial Officer

Ashwin, just on FCF also you had raised the question. Obviously, there is an investment which we are making into our own premises in Mahape. And that investment is also going in and that’s the reason why FCF is low.

Ashwin Mehta — Ambit Capital — Analyst

So, Anil, what is the kind of capacity increase that we are doing in Mahape?

Nachiket Deshpande — Chief Operating Officer

It’s about 8,000 seats, Ashwin.

Ashwin Mehta — Ambit Capital — Analyst

Okay. Okay. And this is happening over the last year and this year because our capex last year was also elevated. So is it…

Nachiket Deshpande — Chief Operating Officer

Yes, yes. So we’ve just actually inaugurated that facility last week, and it would be ready to occupy from January onwards.

Ashwin Mehta — Ambit Capital — Analyst

Okay, okay. Thanks, Nachiket. Thanks for the clarification.

Operator

Thank you. The next question is from the line of Mohit Jain from AnandRathi. Please go ahead.

Mohit Jain — AnandRathi Institutional Equities — Analyst

Hi, sir, one question on margins. So how should we look at margins? Because that is one metric where we are relatively lower or at par compared to pre-pandemic. So how do you guys see this going forward in the second half?

And second related question, but should we consider some merger-related expenses in second half of FY ’23?

Sudhir Chaturvedi — President, Sales

Yeah. If you look, Mohit, we’ve always guided that our margin will be between the band of 14% to 15%, and we are sticking to that. I think the important thing for us is that, we are seeing, as you can see, a broad-based growth environment, right? You see our growth across verticals even this quarter, high tech, which we had a client-specific reason, every other vertical has grown. We’ve grown in North America, we’ve grown in Europe. So our focus is making sure that we exploit the growth opportunity that is there. So if you see our net employee addition continues to be strong, you see even our operating expenses, things like our travel, etc., has gone up because we want to focus on making sure that the growth that is there in the market is achieved. And we think that that is the right strategy in this environment to adopt because ultimately, we — together with Mindtree, we’ll offer even more scale benefits. So the — I think the margins over a period of time as we scale will improve, but we have to ensure that the best way to do that is to ensure that our growth momentum continues to be penetrate. So we’ll always invest for growth.

Nachiket Deshpande — Chief Operating Officer

And on — in Q3 and Q4, there would be some one-time expenses that could come up because of integration because, as I said, we are looking at a very speedy integration in all our systems and processes will be consolidated by end of financial year. So these two quarters, you might see some one-times coming in for the integration costs.

Mohit Jain — AnandRathi Institutional Equities — Analyst

So any quantification there? How big or small could that be?

Nachiket Deshpande — Chief Operating Officer

We’re still in the process. I think once we get all the regulatory approvals, we’ll have the clarity on exact timelines, then we can quantify.

Sudhir Chaturvedi — President, Sales

Yeah.

Mohit Jain — AnandRathi Institutional Equities — Analyst

And the last thing, sir, one follow-up on hi-tech. If you adjust for that one client shift that you spoke about, what kind of growth rate and outlook do you have for hi-tech vertical?

Sudhir Chaturvedi — President, Sales

See, hi-tech consistently, if you look at the last two years, right, hi-tech on average, is a 20-plus Y-o-Y business for us. And we continue to see that. In fact, one of the large deals we announced with a Global Fortune 500 company is also hi-tech player. So it’s really one client, one quarter, everything else…

Mohit Jain — AnandRathi Institutional Equities — Analyst

So from your perspective, the outlook has not changed in hi-tech vertical?

Sudhir Chaturvedi — President, Sales

No, no, not at all. In fact, we are seeing some good growth there. See, remember, as I said, the combination of service lines because we’re also selling the number of deals that we’re doing together with Mindtree has also gone up significantly. So now we’re able to bring full — a much wider array of service lines to clients, and that is also something that we are leveraging in this vertical.

Mohit Jain — AnandRathi Institutional Equities — Analyst

Sure. Thank you, sir. That’s all and all the best.

Operator

Thank you. The next question is from the line of Vibhor Singhal from PhillipCapital. Please go ahead.

Vibhor Singhal — PhillipCapital — Analyst

Yeah, hi. Good evening. Thanks for taking my question and congrats on a solid performance. So, Sudhir, just two questions. One is, as you mentioned in your opening remarks about the macro headwinds that we are facing at — that clients are kind of facing at multiple levels. So just wanted to basically dig a little bit more into it. Any specific pockets in terms of verticals that we are seeing more, let’s say, concern or more pushback on some of the verticals? So [Indecipherable] that B2C companies had to feel the heat of these drilling demand and economic downturn or recession earlier than the B2B companies. So maybe retail or FSS. So are we seeing that trend also here? And any color that — you could provide on that?

And secondly, on the margins, of course, as you’ve just mentioned that — I mean, we will definitely look at it. But — I mean, our margins have definitely fallen much below over the last couple of years, even if I reduce — remove the travel benefit that we have in the — during the pandemic time. Pre-pandemic also our margins are basically down from those levels. So now that I believe the multiple wage hikes that we had to give is behind us. Attrition also, as mentioned in the opening remarks is expected to pull down. Do we expand — expect margins to expand significantly in the coming quarters? I mean, I know we [Indecipherable] our stand-alone business we expect the margins to expand significantly, or just the — for the ones, of course, that you pointed out.

Sudhir Chaturvedi — President, Sales

Vibhor, okay. Let me answer the question that you had related to macro and demand. See, in terms of macro, right, what we are seeing in BFSI, which is 48% of our business, actually, we are not seeing — in fact, the areas we are in, compliance, commercial banking, wealth management. Actually, we are not seeing any change here. Perhaps our exposure to retail banking being low, potentially helps us. Mortgages, we are not present. Payments is something we are very strong and which is actually one of the fastest-growing areas. So we — in BFSI, we grew, I think, 33% last year. This quarter also we’re growing 29%. So you can see the momentum we already have in this sector. So BFSI, if anything will continue to actually be our growth driver, exactly the reverse of what I think people are expecting. We don’t have much exposure to retail and consumer. It’s a smaller part of our business. We’re seeing a little bit in some of our manufacturing where clients are just — they’re being — they’re spreading out their investments over a longer period of time, but that’s what we are seeing in manufacturing. But I think, as I said, right, all the indicators that — I mean, the places that we thought will have an impact, for example, Europe or BFSI or some other sort of service lines, we’re actually not seeing that pan out. We’re growing in Europe as well, 29% Y-o-Y.

So I think we’ve — if I — when I look at why are we confident about Q3 being stronger than Q2, it’s because we’ve got our top 20 growing. We’ve got large deals that we’ve done over the last three quarters. I think we’ve done 13 over the last — 12 over the last three quarters. We’ve got — our largest vertical is growing. Europe is also holding up in terms of growth, showing good growth. And finally, our employee additions are strong. So we’re in a good position to exploit all that for growth in the coming quarter.

With that, I’ll hand over to Nachiket for the margins.

Nachiket Deshpande — Chief Operating Officer

So on the margin, as you said, right, if you look at last couple of years across the industry, and H2 for LTI as well, large part of the pressure came with the replacement cost being higher for attrition. It wasn’t driven by the usual wage hikes, but it was driven largely by the replacement cost for attrition backfill being higher. Attrition is starting to come down, but it is still very high. It’s still much higher than what we would like, and it’s much higher than what industry had operated in the past. So that pressure is starting to ease a little bit, but I would say that it’s still not gone away fully.

And as Anil said, we’ll continue to remain in our guided range of 14% to 15% pack. We’ll pull different levers as we see the situation improves. And as Sudhir also said, our focus will continue to reinvest back into our growth as we have always done. So for us, yes, there are some parameters which are improving. So we’ll pull different levers to stay within our guided PAT margin and continue to seek the leaders’ quadrant growth.

Vibhor Singhal — PhillipCapital — Analyst

Got it. But can I just maybe drill a bit more, just one quick thing. So given the wage hikes are behind, adjusting for the one-off that you mentioned, would we expect H2 EBIT margins to be better than H1 EBIT margin?

Nachiket Deshpande — Chief Operating Officer

We don’t guide for EBIT. We always guide for PAT to be in 14% to 15%, and we continue to maintain that guidance.

Vibhor Singhal — PhillipCapital — Analyst

Sure, Nachiket. Thank you so much. Thanks for taking my questions and wish you all the best.

Operator

Thank you. The next question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Thank you. Sudhir, I just wanted to kind of get a bit deeper into a comment which you just made about number of deals of Mindtree have gone up as you guys are able to bring in an area of capabilities. While I know you guys probably will talk a lot more about it next quarter, but is it possible to get an early glimpse into what really is happening in areas where both LTI and Mindtree has presence? And what you are bringing to the table and what they are bringing to the table to kind of accelerate the opportunities?

Sudhir Chaturvedi — President, Sales

Yeah. Thanks, Mukul. And we — so as you have heard from us before, the service line synergies, especially between the two companies are extremely strong. So LTI traditionally strong in ERP, data and cloud, Mindtree is traditionally strong in customer success, which is customer experience, digital marketing, e-commerce, that entire suite of offerings is very, very strong there. And that’s where the cross-sell momentum is there. So today, between the two companies, there are 80-plus pursuits that are underway, where both companies are jointly pursuing deals. So you can see there has been a significant increase since we announced in May. And that momentum is also — it’s one of the best ways of integrating as well, right? So because you’re doing joint deals together, both teams are already working together to pursue this. So which is why we feel that we have planned the integration well and we can hit the ground running on day one itself as well obviously complete all the merger systems and processes things. But from a business perspective, our momentum should continue to only go up, and that’s something we’ll continue to do together.

Mukul Garg — Motilal Oswal Financial Services — Analyst

So, Sudhir, is it possible to share an example of a big deal where you bought something to the table and they bought something and you guys were able to put together an opportunity for a much larger offering to the client?

Sudhir Chaturvedi — President, Sales

So last quarter, we talked to you about a client in the travel technology space. So in this quarter, there is a significant large deal that is happening in the consumer space, where we have — this is a client that is putting up their entire tech spend up for rebid. This is not an existing client of — I mean, it is a small existing plant of us. But what we are doing is that, they are looking to — actually, this is a consumer goods company that’s investing very significantly in their e-commerce channel as they go direct to customer. So this program is actually right from all the things that they need for omnichannel commerce, all the things they need from digital marketing right down to the supply chain, right down to finance and data, right? The entire chain is what they’re talking to us for. So that’s the conversation that we are having jointly. In the past, we would have had the conversation from — on finance and supply chain, they would have had other conversation on e-commerce. Now we are able to put all this together and bit together. So that’s on the transformation side.

On the — if I look at the cost reduction side of the house, right, we also seeing, so there’s another client of us, it’s in the hi-tech space, which is looking to reduce their tech spend in the areas. And that’s where we’re getting together, again with a combination of technologies that we both are good — strong at. So there, we are bringing our strengths in ERP and data. They’re bringing their strength in a lot of the consumer-facing technologies that are there. So our ability to cover the entire technology spectrum for them is very strong. And that’s the other deal. These are both very significantly sized deals for us. So that’s just to give you some example.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Really helpful and excited to see the combined company from next quarter onwards.

Sudhir Chaturvedi — President, Sales

Yeah. Thank you.

Operator

Thank you. The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.

Sandeep Shah — Equirus Securities — Analyst

Yeah. Thanks for the opportunity. The first question is, Sudhir, I think consistently we are doing large deals…

Operator

Sandeep, your voice is not very clear, request you to come closer or use the handset.

Sandeep Shah — Equirus Securities — Analyst

Is it better? Hello?

Operator

Yes, better now.

Sandeep Shah — Equirus Securities — Analyst

Yeah. So the question is in terms of the large deals. We are consistently winning last three quarters [Technical Issues]. So is there any pattern change because of the…

Operator

Sorry, Sandeep, again, your voice is…

Sandeep Shah — Equirus Securities — Analyst

[Technical Issues] start of the domains and ramp up of the domains and [Technical Issues] just wanted to understand [Technical Issues]

Operator

Sandeep, you are not audible. Can you hear me, Sandeep, this is the operator? Sandeep, sorry to interrupt you, but your voice is not very clear. Please use the handset.

Sudhir Chaturvedi — President, Sales

Sandeep, sorry, maybe I got part of your question, but help me understand if that’s okay to answer that you’re looking — you’re asking us if we are seeing a change in pattern in our large deals. Is that right?

Sandeep Shah — Equirus Securities — Analyst

Yeah. After winning the large deal, is there any change in pattern in ramp-up because of the challenging macro?

Sudhir Chaturvedi — President, Sales

No, actually, no. So no change in ramp-up. So the deal cycles are — large deal cycles I think, consistent with what typical large deal cycles have been. In some cases, these deals — in fact, now that we’ve learned how to do transitions also remotely — completely remotely in the pandemic, etc. So actually, what used to — there used to be some time for ramp-up of resources and placement resource, in fact, that’s also gone now. So you can start these ramp-ups fairly quickly, where I think clients are — if I look at the nature of the deals that are there in our $2 billion pipeline, I think what we are seeing is, what Nachiket was referring to, right, it’s — the traditional technology, if I call it, legacy in today’s world, that has already gone through multiple rounds of outsourcing and very heavy offshoring. So there isn’t much to save there. The savings are really on the cloud, data, digital, DSaaS, all that stack. So that is where we are seeing the changing nature. They are asking us to save the money on this spend and because this spend is metered spend, right, it only goes up every month. As their consumption goes up on technology, they spend more and more every month. So it’s not a one-time control. It’s a — you basically re-architect their entire run operations on a continuous basis. So it’s a different type of outsourcing to what we have done in the past. It has to be bared with tools rather than people. And that is what we are able to show to clients as we are capable of doing that, and that’s why we feel confident about those deals in that space.

Sandeep Shah — Equirus Securities — Analyst

Okay. Thanks. And just a follow-up. Sudhir, how to read some of the bond digital software companies like Salesforce, Pega, being downgrading guidances, growth outlook for slowing decision-making, DuckCreek is also concerned? While LTI also gets almost 28%, 29% revenue from ERP, as well as Mindtree also getting a material portion of revenue from Salesforce. So in this scenario, does that make us slightly upset?

Sudhir Chaturvedi — President, Sales

Yeah. So I’ll separate this. If you look at — if I look at, for example, SAP or even if I look at Salesforce or ServiceNow, see, if you — I think the one key thing to see in their numbers is how much has moved from what used to be license sales, which got recognized immediately as revenue to what is now as-a-service, right, where they only can recognize revenue as the software gets consumed. The amount of consumption of the software actually determines their revenue. So the change in business model will have an impact in terms of their revenue cycle because — now if they’re bond [Phonetic] SaaS companies like Aflac [Phonetic], etc., where you’ll see that that trajectory is continuing to do, even they are actually focusing on consumption.

So now if you want to drive consumption of software that has been sold, frankly, you cannot do it without services companies. Because services companies will implement those industry use case or other business use cases, which lead to the consumption and technology. That’s why if you see — Nachiket gave you the example of AWS insurance industry, right, the innovation lab that we have set up together and the deal that we have sold together is that, if that was an existing AWS client, it was an AWS setup was already available to them, but we are driving consumption through our solutions. So if you see the partnerships are actually, in fact, I think we are having partner conversations almost every day and at the highest levels. This is at the CEO levels because they’re working with us together to say, you build the industry cases for us to drive consumption because that’s what will drive our revenue. So, Sandeep, I think that’s a big shift, right, we call it disruptive SaaS. Disruptive SaaS is all about consumption, and that is all about industry benefits. How do you provide — essentially and if the benefits are on the revenue side of the house, we get immediate traction.

Sandeep Shah — Equirus Securities — Analyst

Okay. Okay. And the last one I can squeeze. Sudhir, just wanted to understand the growth demand perspective, anything materially changed versus Europe, versus US for LTI or even Mindtree if you can comment on a merged entity basis, whether our exposure to some of the European industries will make us slightly weaker in terms of the growth ramp up going forward?

Sudhir Chaturvedi — President, Sales

See, Europe, frankly, we can’t do much about the currency, obviously, but if I look — as I said, Sandeep, before also, right, we are growing at 29% and we’ll continue — we’re continuing to do well. We see a decent business in Europe. We’ve got, I think, resilient clients also in that space. So not concerned. We know the outlook for Q3 very closely. So that’s why we can confidently talk about it. I think Q4, we’ll see new budgets come in. But as I said, right, we know how to chase the right dollars. That’s the one thing LTI knows extremely well. So even as the market changes, where it changes, we will make sure that we’re in the right conversations for that.

Sandeep Shah — Equirus Securities — Analyst

Okay. Okay. And just last bookkeeping on the depreciation side. Is there an acceleration in this quarter? And will that go back to normalized level in the coming quarter, even after the Mahape capitalization from Q4, will it increase?

Anil Rander — Chief Financial Officer

So if you go back to the normal level, and anyway Mahape is likely to come only in Q4 or next Q1.

Sandeep Shah — Equirus Securities — Analyst

Okay. Okay.

Sudhir Chaturvedi — President, Sales

Sandeep, any more last questions?

Sandeep Shah — Equirus Securities — Analyst

No. Thanks. Sorry for this.

Sudhir Chaturvedi — President, Sales

No, no, no, always a pleasure to talk to you, my friend. Thank you.

Sandeep Shah — Equirus Securities — Analyst

Thanks.

Operator

Thank you. The next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.

Dipesh Mehta — Emkay Global Financial Services — Analyst

Thanks for the opportunity. Two questions from my side. First of all, just want to understand hi-tech vertical. Now, this quarter [Indecipherable] partly alluded to offshore one of the large accounts. But if I look at your margin profile, margin is remaining under pressure typically, during offshore generally benefiting at margin level. So that is one thing about why it is not getting reflected in margin performance. And second, even if I look one client kind of outsource it, Y-o-Y growth rate is also fairly weak compared to Company average. So if you can give some perspective what is playing out in hi-tech vertical?

Second question is about manufacturing. You indicated some kind of portion [Phonetic]. So if you can help us understand subsegments where demand remain resilient and where do you see more weakness? Particularly when Q3, you see seasonality, suddenly manufacturing growth accelerate. Considering that thing in mind, if you can help us understand how you expect that play out this year?

Second question is about SG&A expenses. Now, debt remains fairly low, and we are not seeing any uptick even though work from office kind of expenses started inching up in some of your peers financing. So if you can throw us some perspective? Thanks.

Nachiket Deshpande — Chief Operating Officer

Those are four questions by the way, Dipesh. So I’ll answer the first one, then I’ll hand over to Sudhir. So on the hi-tech count, where the delivery model sort of moved from onsite-only to global delivery and offshore. So you’re right, the margin profile should improve on that. But as you can imagine, this is a transitionary quarter, right, when we move from onsite to offshore, in any quarter when the transition happens, you see some bubble increase. So that’s why the margin is not reflective in the P&L directly there. And also, many of these deals are structured. So you can see a relatively flatter margin profile that is there across the quarters when the deal was structured as well.

And now, I’ll let…

Sudhir Chaturvedi — President, Sales

So actually, hi-tech growth, Dipesh, last four quarter average growth is 21.2%. And as I said, we have a good pipeline, some decent large deals. So no concerns on hi-tech growth.

[Technical Issues] manufacturing. So manufacturing, as I said, again, if I look at our average four-quarter growth in manufacturing, that also has been 21% by the way. But in manufacturing, I think the environment on our customers spreading out their investments over a longer period is something that we are seeing. So we — I think even now, we’re growing what — this quarter, we grew 12%. So it’s still more than double digits. So we’ll continue to focus on this. There are some large deals in the manufacturing portfolio as well. So if that picks up, we’ll start to see growth back. But I think across all our verticals, right, we are only seeing current sort of slightly lower growth than in our Company average, only in manufacturing. And if you saw insurance is already on the way up in terms of growth. So we’re confident about that, which is why I keep saying, we have broad-based growth. So we’re not worried that much about any particular vertical or region. Our — the focus is really on the deals that are currently underway at LTI, all the 80 pursuits that we were doing plus pursuits that we’re doing together with Mindtree and the large deals of the pipeline that we already have. So all the things that we can already see.

Anil Rander — Chief Financial Officer

On the SG&A, Dipesh, you mentioned that, though, it appears to be flat, but if you see, there is an increase in the absolute amount. And also, we are getting in some G&A efficiency, due to which that number appears to be.

Nachiket Deshpande — Chief Operating Officer

And with the return to office, Dipesh, all of our offices in India are now open, and we are seeing a hybrid model that we’ve adopted. So people are coming in for two to three days a week as we expect. So office-wise, I think all of our offices in India are now open for people.

Operator

Thank you, Mr. Mehta. Request you to join the queue for any follow-ups, as there are participants waiting for their turn. Thank you.

We have the next question from the line of Manik Taneja from JM Financial. [Operator Instructions]

Manik Taneja — JM Financial Services — Analyst

Thank you for the opportunity. I had a quick couple of questions. One was wanted to understand you — like you also indicated about [Indecipherable] plus in financial services for this year and also commented that this [Technical Issues] trend will remain good in Q3 ’23. Does our commentary and our conversations with clients still suggest the same? That’s question number one.

And the second was a quick bookkeeping [Technical Issues] with regards to the fresher hiring, if you could help us understand how many freshers have we added in second quarter and first half? And does the plan to hire 6,500 freshers for the year [Speech Overlap]? Thank you.

Operator

Manik, sorry to interrupt, you were not clearly audible. Maybe please request…

Sudhir Chaturvedi — President, Sales

I think…

Sunila Martis — Head, Investor Relations

Manik.

Sudhir Chaturvedi — President, Sales

Manik, I think we got your question. Sorry, your line isn’t great, but I think we got it. So you had a question on fresher hiring and your earlier question was on BFSI, right? Do you see sustained momentum even in Q3? The answer is yes. Yeah. Absolutely.

Nachiket Deshpande — Chief Operating Officer

And on the fresher hiring, we are on track with whatever our hiring guidance of 6,500 which we will hire this year which is, of course, for the FY ’24. As well as the fresher onboarding is concerned, we onboarded about 1,600 freshers in Q2 as against about 1,000 in Q1. And again, we are on track to onboard whatever we have offered from a FY ’23 perspective.

Manik Taneja — JM Financial Services — Analyst

Sure. Thank you and all the best for the future.

Operator

Thank you. The next question is from the line of Rahul Jain from Dolat Capital. Please go ahead.

Rahul Jain — Dolat Capital — Analyst

Yeah, hi. Thanks for the opportunity. Basically as this merger announcement has been made for six months now and you might be interacting with your clients already on this thing. So is there any change good or bad that you could highlight both, A, from external point of view in terms of client, tech partners? And internally, how do you think it changes in terms of nimbleness, approval, reporting workflows for your team?

Sudhir Chaturvedi — President, Sales

Right. Actually, from a client perspective, they’re wondering why it’s taking six months, they’re really — I mean, they can see the benefits we’ve also communicated very, very regularly to them so they can see the benefits of the combined LTI Mindtree instead of offering, especially to each across verticals, across regions, across service lines. So I think there’s a, as Nachiket said in his commentaries also, there is the excitement about this both in our employees and our clients as well, and we hope that this will happen soon.

In terms of…

Nachiket Deshpande — Chief Operating Officer

So it’s a rough process and nimbleness, see, today still because of the regulatory approvals are still in the last leg, we are operating as independent companies, separately listed, right, and accountable to separate state of stakeholders. So that part hasn’t changed. LTI is operating the way LTI has been and Mindtree is operating the way Mindtree has been. Our plan for integration, the endeavor is that, as we said in this commentary that we would not want to lose growth momentum, that’s the fundamental premise of this integration is that, we want to grow faster together than we are growing individually. So the endeavor is that, anything that enables that growth we will not want to disrupt and all of our operating model, processes, as well as organization structure is designed in such a way that will enable that high-growth as we go forward. But today, as it stands, we are operating as individual companies as we were before.

Rahul Jain — Dolat Capital — Analyst

Right, right. So that means we may not be very, very closely integrated but leveraging the best of the [Technical Issues] but more acting like a sister concern in near future rather than acting as one?

Nachiket Deshpande — Chief Operating Officer

No.

Sudhir Chaturvedi — President, Sales

No. I think see you have to think of this as additive organization, right, because we’ve got not much overlap, so therefore, you have to create an additive organization that actually has wide scale, right? So we — so our whole thing is to maximize coverage and maximize scale. So you’ll see on the sales side the whole endeavor is to maximize coverage. On the delivery side, it should maximize scale benefit. So that is how we are designing it.

Nachiket Deshpande — Chief Operating Officer

But at the same time, we will move to a single set of systems and single set of a process by the end of Q4. So we are actually doing a very accelerated integration so you would actually see us operate like one company much sooner than you typically expect when this two size of the companies come together. But the part is that — so the common processes where scale will help like hiring, like bench, we would operate as one. The areas where individual expertise needs to be preserved because that’s the cross-sell and upsell promise to our customers will continue to preserve those differences as we go to the market and that’s where as Sudhir said, the organization will be more additive.

Rahul Jain — Dolat Capital — Analyst

Yeah. Sorry to stretch a point a little bit more. So my question — just to give you one example is like, today if you’re chasing a certain size of a deal as a large deal because you’re a certain size business but tomorrow you are a much larger business. So what you call as your large deal by logically should look like a much bigger deal and that’s why the team that they think and the deal you change in the market changes technically if you are changing it as a $5 billion organization versus a $3 billion organization or whatever. So that — from that perspective is what I was trying to understand.

Sudhir Chaturvedi — President, Sales

Yeah. You’re right, and we have already — yeah. This — yeah, you’re right. The definition will change and we’ve already talked about [Technical Issues]. No as I said, right, when I mentioned the 80 plus sort of joint pursuits that we have, we are obviously looking at multiyear larger deal sizes jointly.

Operator

Thank you, Mr. Jain. Request you to join the queue for any follow-up. The next question is from the line of Apurva Prasad from HDFC Securities. Please go ahead.

Apurva Prasad — HDFC Securities — Analyst

Thanks for taking my question. I’m trying to reconcile some of the earlier comments with –. So is the move to efficiency likely to increase deal durations and therefore, do you see a large deal pipeline inching higher from $2 billion been fairly static there and that’s despite the joint deal pursuits? Or should we see this as durations that remain fairly static and macros are slowing down the deal velocity?

Sudhir Chaturvedi — President, Sales

Yeah. So — no. So first thing, yes, as people look to do more efficiency those tend to be longer duration deals, absolutely. So if you look at the deal pipeline and TCV, also remember the wins also contribute to part of this, sometimes the entire TCV is not awarded to us, it’s awarded to multiple parties so that also has a bit of an impact on the TCV. But overall, as I mentioned, I think the spread of this $2 billion that we have today is quite interesting and the number of deals that we’re already seeing in the final stages is what gives us that confidence. So that we are — we have a good balance between, as I said, the business growth kind of deals, as well as the efficiency kind of deals and the efficiency in the new areas, which is where that investment will sustain over a period of time.

Apurva Prasad — HDFC Securities — Analyst

Got it. Thank you. Best wishes.

Operator

Thank you. Next question is from the line of Abhishek Shindadkar from InCred Capital. Please go ahead.

Abhishek Shindadkar — InCred Capital — Analyst

Thank you for accommodating me and congrats on a good quarter. Just one question, Sudhir. In your prepared comments you mentioned about an uptick in the large-scale ERP programs, if I heard that correctly. Any color in terms of what is driving it now? And is it happening across the large, mid, small market from an opportunity standpoint? Thank you for taking my question.

Sudhir Chaturvedi — President, Sales

Yeah. So, Abhishek, so thank you for that. So when we look at ERP, right, so we’ve got three things sort of going for us, one is, there is a move to cloud on ERP, so where they’re moving from existing on-prem to going forward. The second is journeys like S4 or OC Oracle Cloud applications, where they’re looking for essentially modernization, consolidation and simplification of the landscape, that programs are also underway and those tend to be multiyear programs, so that’s why the programs don’t stop. And the third is, we are seeing an uplift because that’s naturally something that we bring to all Mindtree customers so those joint pursuits that I mentioned, that’s another area where we are saying that Mindtree clients are now being exposed to our ERP expertise. So there are other areas like supply chain visibility, etc., which were key during the pandemic, etc., which also require ERP interventions. So ERP is — I think we’re seeing the shift towards the projects being in the transformation side of the house, that’s where we are seeing the spend in the ERP — on the ERP front [Phonetic].

Operator

Thank you. Ladies and gentlemen, that would be our last question for today. I now have the conference over to Mr. Sudhir Chaturvedi for closing comments. Thank you, and over to you, sir.

Sudhir Chaturvedi — President, Sales

Thank you, folks. Thank you very much for your time today. Again, thank you for bearing with us on a Saturday. Once again wish you all a very Happy Diwali. And we look forward to our continued interactions. And as we will keep you informed, at all times as our merger discussions progress and hopefully we will be able to close that in Q3 and meet together as one in the next quarter. Thanks.

Operator

[Operator Closing Remarks]