Larsen & Toubro Infotech Limited (LTI) Q1 FY23 Earnings Concall Transcript

Larsen & Toubro Infotech Limited (NSE: LTI) Q1 FY23 Earnings Conference Call dated Jul. 14, 2022

Corporate Participants:

Sunila Martis — Head, Investor Relations

Sudhir Chaturvedi — President-Sales

Nachiket Deshpande — Chief Operating Officer

Anil Rander — Chief Financial Officer

Analysts:

Sudheer Guntupalli — Kotak Mahindra Asset Management Companies Limited — Analyst

Vikas Ahuja — Antique Stockbroking Limited — Analyst

Sandeep Agarwal — Edelweiss Financial Services Limited — Analyst

Nitin Padmanabhan — Investec India — Analyst

Sandeep Shah — Equirus Securities Private Limited — Analyst

Mohit Jain — AnandRathi Institutional Equity Research — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to LTI Q1 FY ’23 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [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, ma’am.

Sunila Martis — Head, Investor Relations

Thank you. Aman. Hi, everyone and thank you all for joining us today to discuss LTI’s Q1 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 the Investor 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, which will be followed by 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, can be construed as a forward-looking statement and must be reviewed in conjunction with the risks the company faces.

I now hand over to Sudhir to start.

Sudhir Chaturvedi — President-Sales

Thank you, Sunila. Hello everyone. Thank you for dialing in to our Q1 results. Let me start with our headline numbers. We are happy to report 2.9% Q-o-Q and 26.6% Y-o-Y revenue growth in constant currency. This translates to a growth of 1.7% Q-o-Q and 23.4% Y-o-Y in USD terms. Adjusted for the seasonal pass-through that we have in Q4, our revenue growth in Q1 would have been higher by 2% — by about 2%. We’re also happy to have — to announce that we have closed four large deals with a net new TCV of $79 million this quarter. Two of these are with Global Fortune 500 clients. These deals are spread across our portfolio; there’s BFS, High-Tech, Energy & Utilities, and our Others vertical. The scope of work is primarily in the space of cloud and data. And as I mentioned, two of these are with net new logos. I’m also pleased to report one additional large deal in partnership with Mindtree. We’re selected by a global travel technology company based in Europe to manage and support their applications portfolio.

The deal is a playbook example of how we will continue to leverage our joint capabilities to drive growth considering Mindtree’s experience in the travel vertical, their expertise in customer success, and our expertise in core modernization. When we last spoke to you in Q4, our large deal pipeline was about $2 billion. Our current large deal pipeline despite these wins continues to be at the same level and we remain positive as we expect to close and share some more large deal wins with you in Q2 as well. On the new logo front, we added 29 new logos across all our verticals during the quarter. This is the highest that we’ve added in the past nine quarters. I’m also happy to state that we added four new Global Fortune 500 logos to our list of clients taking the Global Fortune 500 customer list now to 77. This is one of the highest additions of the Fortune 500 list that we’ve had in the past four years in a single quarter.

Now let me give you some color on demand. We currently continue to see strong demand and technology budgets across all our markets and the business book for CY ’22 continues to look good. Whilst we are seeing no impact from macros in terms of project cancellations or deferments, we have been spending a lot of client time with clients in person and we are seeing a slight level of caution in the client environment especially due to rising input costs, supply chain matters, and the continuing geopolitical issues. In a slightly strange way, this is actually causing some short-term acceleration in demand as most clients want to follow through with their transformation agendas with the budgets that they are currently allocated. So, this augurs well for our Q2.

Moving to the performance of our industry verticals, geographies, and service lines during the quarter. So, BFSI together now accounts for 47% of our total portfolio and this portfolio has grown at a CAGR of 19% in the past three years. So, BFS grew 31% Y-o-Y. We continue to see holistic growth here across all geos and service lines. In fact one of our largest deal wins is from this vertical and we remain optimistic about our sustained growth momentum here. Insurance, we saw a growth of over 16% Y-o-Y. As you must have noted over the past few quarters, this vertical is on its way to returning to sustained growth. Our pipeline continues to build in this vertical. Our traction on new logos with two of our Fortune 500 logos coming from this vertical will help us grow in FY ’23. Manufacturing declined Q-o-Q and increased by 18% Y-o-Y. Please note that this quarterly decline in revenues is only because of our seasonal pass-through in Q4.

The absence of this pass-through revenue in Q1 is also reflected in the sequential decline in our Enterprise Solution service line as well as our India revenue. Manufacturing clients have a strong order backlog and although they are watching trends for CY ’23, we see continuing growth in the business book for CY ’22. Energy & Utilities grew at over 19% Y-o-Y. As is perhaps obvious because of oil prices being where they are and utilities being in the business that they are in, we are not seeing any impact of macros on this vertical. Most energy clients are continuing with investing in digital transformations; mostly focus on adopting cloud, modern data platforms, and next generation ERP platforms. There is also a strong ESG imperative in this vertical so we continue to see the trend of investment in this vertical in the coming — in the near future. CPG, Retail & Pharma grew by over 17% Y-o-Y driven by growth in large accounts and the large deal announced last year.

High-tech grew 13% Y-o-Y, but we have to keep in mind that this vertical grew at 37% Y-o-Y in FY ’22 and this has seen some pause in Q-o-Q, but we are confident of our prospects going forward. Others had a strong growth in Y-o-Y by over 50% primarily on account of one of our global marquee services clients growing — ramping up sequentially very, very significantly. On geographies Northern Europe — Northern America, sorry, and European markets continue to be key growth drivers for our growth. North America grew by over 25% Y-o-Y and Europe by 31% Y-o-Y on a constant currency basis. Excluding the impact of currency, both will continue to grow well for us. On service lines, data continues to be our largest service line. As part of our Analytics, AI & Cognitive bucket, you see this in our fact sheet, revenues from our data services have doubled in the past three years and has reflected in large deal wins recently and we expect revenues from data to continue to grow strongly.

So with this outlook on demand, I would now request Nachiket to talk to you about the supply side and our outlook going forward.

Nachiket Deshpande — Chief Operating Officer

Thank you, Sudhir. For the past three, four years, what you would see is significant investments have been made in technology to build completely new digital stack from our customers from infrastructure to front-end experiences. It was only accelerated during pandemic. During this period we have seen unprecedented cloud adoption, significant spends on data, and UA SaaS solutions disrupting traditional trends. Disproportionate increase in the spend on cybersecurity also was observed. Our latest customer satisfaction survey indicates that the modernization of technology landscape continues to be the Number 1 strategic initiatives, but the promised business case for many of these initiatives is yet to be achieved. For example, around 30% of cloud spend is estimated to be wasted through the analyst survey data, which when put in the context of 600 billion annual spend on public cloud gives you a sense of inefficiencies in light.

As organizations start operating on this new stack, many are facing higher run cost as compared to the legacy stack that they migrated from. So while we see digital transformation spends continue, there is also heightened focus on driving efficiency in this new stack and realizing accelerated business value. Given macro environment, this ask is only getting louder. Given LTI’s strength in key areas of this new stack data cloud and digital, we are working with our clients to help unlock efficiencies on this recently developed growth stack. We also programmatically run value realization program that can continue to fund these strategic initiatives. However, we do acknowledge that there are lot of moving parts in the external environment. We are keeping a close watch on these trends and trajectory and we continue to stay close to our clients across all levels to understand and align our investment plans.

Moving on to supply side. Our hiring engine continues to work well. Net headcount addition of 2,100 people in Q1 has been in line with the earlier quarters as we continue to build for a strong Q2. We also remain on track with our fresher hiring plan to hire at least 6,500 freshers in FY ’23. Our onsite volumes have picked up very well in this quarter. Last quarter we had talked about high onsite attrition resulting into near flat onsite volumes. On an attrition front, we expect this number to start to cool off considering incoming supply and slowdown in the hiring — on hiring pace of startups. We still think that we have few quarters to go before attrition comes down materially. We also like to call out the key recognition we received this quarter. LTI has been named GSI Global Delivery Platform Partner of the Year by Snowflake. This award demonstrates LTI’s execution expertise across strategy migration and modernization journeys on the Snowflake Data Cloud.

Last year we were recognized as the Global Innovation Partner of the Year by Snowflake. Going forward, we will continue to break new grounds in our partnership with Snowflake. Now let’s turn to our business outlook. We are building for a strong Q2 based on acceleration in demand we see across our client base. We have closed four large deals in the current quarter and our pipeline remains healthy. We are positive about closing some large deals in Q2 as well. As explained earlier, we remain well poised to benefit from growth via both efficiency and growth stack. Our continued proven ability to execute in challenging and changing environment gives us confidence that we will be in the leaders quadrant for growth in FY ’23 and we continue to guide stable PAT margins in the range of 14% to 15% band.

With that, let me hand it 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 Q1 FY ’23 starting with the revenue numbers. In the first quarter FY ’23, our revenues stood that USD580.2 million, up 1.7% sequentially and 23.4% on a year-on-year basis. The corresponding constant currency growth was 2.9% Q-on-Q and 26.6% year-on-year. Reported INR revenue of INR45,228 million was up 5.1% Q-on-Q and 30.6% Y-o-Y. Now coming to profitability. EBIT for the quarter was INR7,243 million translating into an operating margin of 16% as compared to 17.3% in the previous quarter. The margin walk is as follows. Negative 300 basis points due to higher employee cost post wage hikes, negative 70 basis points due to increased travel and visa cost; offset by benefit of 240 basis points coming from productivity benefits, INR depreciations, and absence of pass-through license revenue.

Reported profit after tax was INR6,344 million, which translated into a PAT margin of 14% compared with 14.8% in Q4 FY ’22. We remain comfortable with our guided PAT margin band of 14% to 15% for FY ’23. Moving on to the people front. Utilization without trainees was at 81.8% as compared to 81.5% last quarter and utilization including trainees was at 81.3% versus 80.1% in Q4. We continue to strengthen our workforce and during Q1, we added 2,118 people. The total manpower stood at 48,766, of which our production associates were 95.5%. In this quarter, attrition is 23.8% versus 24% last quarter on LTM basis. Our cash flow hedge book stood at USD1,795 million as of June 30, 2022 versus USD1,715 million as at March 31, ’22 while on-balance sheet hedges stood at USD108 million versus USD112 million last quarter. Moving on to the DSO. In Q1 the billed DSO stood at 61 days as compared to 65 days in the last quarter. The DSO including unbilled revenue was at 100 days compared to 99 days in last quarter.

For the quarter the net cash flow from operations was INR2,256 million, which was at 35.6% conversion of the net income. Like every year, this was impacted by our payout of annual incentive. At the end of quarter, cash and liquid investments stood at INR38,824 million as compared to INR39,139 million last quarter. The effective tax rate for the quarter was 25.5%. Earning per share for the quarter stood at INR36.13 as compared to INR36.34 in Q4. Diluted earnings per share was INR36.08 versus INR36.27 last quarter. While we have taken you through all the Q1 numbers on the growth and profitability, I want to speak about our ESG goals at LTI. Ensuring community welfare and uplift forms an integral part of our long-term strategy. We are cognizant of the fact that with the growth and expansion of business, the utilization of natural resources on our part is bound to escalate and accordingly, we remain steadfast at reducing our environmental footprint and becoming a carbon and water neutral company by 2030.

We have published roadmap in place with specific targets on these goals as well as other ESG related goals and track our progress against each of these regularly. Our recently published Integrated Annual Report for FY ’22 has all the details on this and is available on our website. I also wanted to update you on the progress of the amalgamation. As you must be aware, on May 6 the Boards of LTI and Mindtree approved a composite scheme of amalgamation. The transaction is subject to shareholder and regulatory approval. We reached out to all our key shareholders post — stakeholders post this announcement and the overall feedback has been positive. So [Technical Issues] to communicate the strategic rationale for this merger. We also organized a virtual meet for all our employees to discuss and provide any clarifications required. Our employees are very excited about our next phase of growth and look forward to being a part of a larger entity with increased opportunities.

As Sudhir mentioned, we are already seeing the benefits of combining our complementary strength to win in the marketplace. A steering committee has also been set up, which is meeting regularly to oversee the integration plan. Our regulatory process, it remains on track. We have received approvals from the stock exchange and filed with NCLT. Our shareholders and creditors meeting has accordingly been scheduled on August 10. Before I end my presentation, my team and I are very grateful for your generous support for LTI in the recently concluded institutional investor survey. Thank you for that.

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

Questions and Answers:

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Sudheer Guntupalli from Kotak Mahindra AMC. Please go ahead.

Sudheer Guntupalli — Kotak Mahindra Asset Management Companies Limited — Analyst

Good evening, gentlemen. Thanks for the immense opportunity. My question is around employee incentives. It has been around two months since we announced a corporate action and Anil mentioned that you have done multiple townhalls to take employees into confidence about the merger. How are you seeing the employee morale within the company in general? What are the key anxieties that some of the critical or key employees would have brought up in their conversations with you and how are you going to take care of those anxieties and nervousness at this point in time, which is general for a large scale corporate action like this? And any employee sweeteners or incentives that you plan to kind of use as a retention technique at this point in time? We understand that I think your current ESOP plan itself has a lot of unallocated ESOPs. So, any plans to kind of reward employees to use them as effective retention sweeteners at this point in time?

Sudhir Chaturvedi — President-Sales

So, always good to talk to another Sudhir. So, what we did in the townhalls? Let me just give you some color of what Anil and Nachiket and I were doing along with Manoj, who’s our HR Head, in these townhalls. So in these townhalls, we actually presented to them the same presentation that we made to the Board. So, we explained the merger rationale with exactly the same slide that we used so — and the merger rationale that we presented to both companies was essentially the revenue synergy post merger rationale. The entire business case is around the two companies getting together to jointly grow faster in the market. And what we were able to show is clearly where we see the market opportunity, what do we see as the — essentially what is going to be a large cross-sell up-sell opportunity between the two companies. Between the two companies, we have 700 clients and now we have both companies have the ability to take many more service lines to these clients.

And that gives it — the benefit of that is that almost every person in the organization will have an opportunity to explore new service lines or new verticals or new geographies in their future career path. So, the key thing was to explain — that we shared with them was how do we plan to actually realize these revenue synergies and that’s where a lot of the planning had gone on pre-deciding before we decided to proceed with the merger. Therefore, as Anil also mentioned in his remarks, there is a lot of excitement around how we can do things together. This is reflected even in the deals that we are working on currently. So, we announced one deal win jointly and we are working on several deals currently. There’s also an integration effort that are underway between the organizations that are being led by L&T Corporate. So frankly, we’re not spending that much time on it, but we have seen that there’s good collaboration happening between the teams on that front as well as we again the synergy benefits between them.

Nachiket Deshpande — Chief Operating Officer

If I add — Sudheer, one of the other things that as we look at the merger between LTI and Mindtree and look at the complementary nature of both the organizations, I mean you would have seen the merger deck on our website as well. You’ll see whether it looks at industry segment, whether you look at geographies, or whether you look at service lines; there is a significant complementarity between the two. And 700 customers that Sudhir talked about, there’s hardly single-digit customers where we both have meaningful presence, which means that for most of the organization, the resultant org is going to be an additive org. There is no redundancy in their role. They’ll continue to serve the client. They’ll continue to be the Delivery Manager, Project Manager, Account Manager that they are doing today. And on top of that, they actually get additional opportunities to work for different segments, different geographies, and different service lines. So actually based on that explanation, we don’t see any anxiety with our employees. We actually see excitement because they are now seeing that there is no redundancy, there is no risk on their role. But in future they have much better opportunities to grow together in the bigger organization.

Sudhir Chaturvedi — President-Sales

And as far as incentives are concerned, I think you also answered the question. There is ample headroom in both the ESOP schemes of both companies and that’s — so in LTI as you’re aware that we’ve had an ESOP scheme running. So we’ve had a 2016 ESOP scheme that is currently valid, which people have been part of. So, we will continue with the same five year or the multi-year ESOP project plans that we continue to have for our leadership teams. That’s something that we will continue to have in the future as well.

Sudheer Guntupalli — Kotak Mahindra Asset Management Companies Limited — Analyst

Thanks, Sudhir. My second question, of late we have been seeing a lot of negative news flow from some of the large US banks and our top client also happens to be in that particular segment. Any feedback or any concerns that you have been receiving from our top client at this point in time about this whole macro issue because they typically operate in a segment which is quite quicker compared to other verticals?

Sudhir Chaturvedi — President-Sales

I mean BFS for us is growing at 31.5%. I think the good thing about US BFS is that we — I mean the BFS globally for us is that we actually have BFS clients now in every geography that we operate in. So, it’s a broad-based BFS growth that we see. Now what we see — including the client that you were referring to, what we are seeing is that they are in multi-year technology modernization cycle and the stage that they’re at, there is actually no going back on that. They have to complete the modernization of the technology stack. So if anything, they are looking to accelerate some of that as they have budgets available in this calendar year.

So that is why we are talking about perhaps even if anything, we’ll see a slight uptick in demand in the coming quarter. So BFS, actually we are very confident about and we are also pleased to see that insurance has actually bounced back in terms of growth terms and we are seeing both on the back off our existing logos as well as some very exciting new logos especially Fortune 500 logos that we’ve signed that we plan to scale up. So on BFSI, we actually see — in fact even if I were to look into the conversations we’ve been having with our clients even if we look into calendar year ’23, we see that there is a good growth prospect even in the coming quarters.

Sudheer Guntupalli — Kotak Mahindra Asset Management Companies Limited — Analyst

Thanks, Sudhir. Thanks, Nachiket. That’s very helpful. All the very best.

Operator

Thank you. The next question is from the line of Vikas Ahuja from Antique Stock Broking. Please go ahead.

Vikas Ahuja — Antique Stockbroking Limited — Analyst

Yeah, hi. Thank you for the opportunity. My first question is — I’m sorry to harp on a macro question again. I understand in the opening comments you alluded to not witnessing any macro headwinds so far. But do you sense any change in client decision making pattern if clients are preparing for recession on their end? Maybe some early indication like tending to negotiate on pricing? Any color around that would be would be great.

Sudhir Chaturvedi — President-Sales

As I said, the first thing we watch out for is there are going project cancellations or project deferments or delays in decision making on programs that are currently underway or sort of proposals that are currently underway. So, we are not seeing any — in fact no cancellations, no deferments. On project delay, again — decisions, again nothing material from that one. But in our conversations, do we sense that clients are a bit hesitant about what the macro — the continuing macro environment and the impact that it will have going forward? Yes, that is the case, which is why we are saying that in calendar year ’23 we might begin to see that clients are a bit more — I think the way they look at extending might be a bit different. But having said that, that’s the point that Nachiket was talking about. Even if clients are looking to gain more efficiencies from their technology spend, there are actually several areas where especially in cloud, data, BSaaS; these are the areas where there has been significant spend in the last three or four years and a lot of the spend has happened with global majors. So, this area of spend is actually ripe for efficiency programs.

So for us, we are working, as Nachiket talked about, a completely new solution to — offering to actually provide efficiency on the stack and that’s something that we — if we reflect on our large deal performance to-date, we’ve had what 35 and actually plus four so 39 large deal wins. A majority of these large deal wins have come from what we call our operate to transform service offering for large deals and that’s essentially around how do we bring more efficiency to a stack as well as modernize it at the same time. And we think that that muscle is quite strong, we are good at that business, and we were able to bring that to bear even if the environment turns to one where clients are looking to cut costs for more efficiency led programs. And in terms — just to answer the question in terms of pricing and cuts, we’re not seeing any conversations on that. In fact right now, just to cover the point on pricing, we are still able to get some pricing increase in pockets because there is still a gap between demand and supply especially on new technology talent and clients are open to increases for hot skills.

Vikas Ahuja — Antique Stockbroking Limited — Analyst

This is very helpful. I just have one more question. This is regarding cloud infra and security service line. Barring few Asian companies, the growth outlook there remains very strong, but we have been seeing some weakness here. So, what is the disconnect there? That will be all. Thank you.

Nachiket Deshpande — Chief Operating Officer

So Vikas, for us in Q1 the softness in CIS you see was largely because we had few large SI deals that had a larger kind of spend that got over in Q4 and that’s really why — and these are India-based large deals — end to end SI deals that we really participate into. So it’s more of that seasonality is why you see from Q4 to Q1, but we continue to see good pipeline. As Sudhir said, some of the large deals are in that space and we feel confident that we’ll be able to sustain growth momentum in cloud and infra. And also if you see, this is — this only includes infra part of the cloud, right. As you can imagine, cloud is there in every service line so we don’t separately report holistically cloud revenue because it’s all pervasive. This is only data center exit type deals on infrastructure and cloud together.

Vikas Ahuja — Antique Stockbroking Limited — Analyst

Sure, sir. Thanks a lot.

Operator

Thank you. The next question is from the line of Sandeep Agarwal from Edelweiss. Please go ahead.

Sandeep Agarwal — Edelweiss Financial Services Limited — Analyst

Yeah. Good evening and congratulations on a decent execution. Sir, I have one simple question that the way we are seeing the gap between demand and supply and it reflects in the attrition number also. So hypothetically if for a moment we assume that there will be a deep recession or a very strong recession in the US which will lead to budget cuts by clients and all, then in that case, will it be fair to assume that then our attrition numbers will also fall sharply the way we are seeing startup recruiting less now or pressure from startup going down? Similarly, recruitment from banks and other companies which indirectly hurt us will also go down and resultantly we will see lower pressure on subcontracting cost and lower attrition related costs. So in a way that if demand really falls, then there will be at least a positive impact on the margins. Is it a fair assumption or do you think the operating leverage will always overwhelm on the overall cost? What is your sense on that?

Nachiket Deshpande — Chief Operating Officer

So there are two, three components to your questions, Sandeep. Number one, I mean as Sudhir alluded, I think we’re not seeing sharp drop in demand as yet, right. Because as we said that the technology transformation spends will continue even when the customers go into the recessionary period because some of this is going to be needed for them to continue their core modernization program, of course a different kind of spend in a different muscle from our perspective will get engaged. So, we don’t see demand kind of falling off the cliff at least where we sit today. Second, the issues that are — if you look at skill set gap especially around newer areas of technology around data, digital, and cloud; I think it will still take a few years before that gap is genuinely bridged between the skill set availability and skill set needed because every business today around the world is technology business. And that gap in terms of the demand of those skill sets versus what’s available across the globe, I think there is still we believe there’s at least a year or two before that supply-demand gap is filled.

Now of course the attrition rates are a function of a lot of things, supply-demand gap is one aspect. But what we see is that with the start-up ecosystem challenges that they are going through right now, we would see that the inflation around the replacement cost that we typically get into because of attrition, that tends to cool off a little and that is the first sign where the impact is felt. Will it translate into an overall attrition rate going down, I think remains to be seen. As I said in my remarks, we have seen two quarters where it has stabilized. Based on what we see from a Q2 perspective, we believe it will also remain in the same stable range. So if this trend continues, then yes, we’ll see the downward trend on attrition. But I think two quarters is too little a data point to call it a trend. So I would not venture into guessing on that, but there are multiple facets that you need to look at.

Sudhir Chaturvedi — President-Sales

See folks, this is very fundamentally different from the GFC, right, where we actually saw a very different behavior from our clients. Today they are watching the space to see what happens because ultimately they will react based on the localized how they individually get affected, right. So, just to give you an example. Our industrial manufacturing clients are actually dealing with record order backlog, right. For example one of our clients is in the HVAC business and they have the highest order backlog they’ve ever had in their history because buildings of all types all over the world are looking to modernize their HVAC systems partly driven by COVID; but also now looking at healthy buildings, the ESG initiatives, all of that.

So that cycle of modernization of the product stack, which essentially by the way is a tech modernization. It is not modernization — as much a modernization of parts and equipment, but it’s actually about software being put into an HVAC so that it operates optimally in a hybrid work environment, right. For two days a week if you don’t have people, then it should operate differently than when people are there for three days a week. So these kind of operational — the way people are looking to deploy technology in all aspects of their business irrespective to the vertical they’re in, that’s a fundamentally different construct that we see today versus what we saw back in 2008.

Sandeep Agarwal — Edelweiss Financial Services Limited — Analyst

Thanks. That’s very helpful. Thank you and best of luck for the current quarter.

Operator

Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Nitin Padmanabhan — Investec India — Analyst

Yeah, hi. Good evening. Sudhir, the question was for you. So you mentioned that you’re seeing a slight level of caution with clients and this is causing some short-term acceleration. One, if you could throw some color on what exactly are clients saying? Are they suggesting that they believe that budgets could get constrained in the latter half of the year or next year and thereby this is more like a budget flush wherein they can sort of try and complete as much work as possible before they clamp down. So, that’s the first question. And the second is where all are you seeing this behavior? Is it just BFSI of BFS or is it across the board? So if you can just give some color across verticals, is it broad based or how things are? So, these are the two questions.

Sudhir Chaturvedi — President-Sales

So, I think I wouldn’t call it a budget flush. I would say that what we are seeing is calendar year ’22 budgets are available to them. So, they know that these budgets are available and what they’re looking to do is to ensure that they optimally utilize these budgets. Now partly because of the resourcing challenges that the entire industry has faced, they have found these programs that they’re looking to accelerate because they want to complete this. So what they’re looking — asking us is I’ve got milestones that I need to achieve, can I accelerate those milestones. Again just to give — I’ll answer this question in two ways. See 47% of our business is the BFSI and frankly, as I said, they in a secular technology modernization cycle. I actually don’t see that decreasing even in calendar year ’23 because if they don’t modernize their tech stack, they actually will not have a business to run in the areas given the kind of competitive environment that they face not just from Fintechs, but also from other banks all over the world.

Every banking business now essentially calls itself a technology business and I think that is that. Insurance if you see what the pandemic did is if you look at the direct distribution of insurance or the way — the straight through processing in insurance, it’s at a scale that has never been seen before. So, it’s leading to very significant investments in the insurance stack as well. And the third area is our energy business, right. Our Energy & Utilities business, which is 11% of our business, they are seeing record oil prices. So they are actually again continuing to invest in technology, more focused on ESG. And 14% of our business is industrial manufacturing so that’s — which I have mentioned has a record order backlog. They are actually dealing more with supply chain challenges and chip shortages and those kind of things rather than the macro environment because they have to fulfill the backlog and they are not seeing any reduction in terms of the backlog going away.

So, we see 72% of our business being — I think perhaps we are — If I look at our strength, we are more of a B2B business than many of our competitors in the space who may have a slightly different mix in terms of their clients. So therefore when we talk to these clients, that’s why we are saying these clients are looking to accelerate programs and utilize budgets that are currently available to them. Now frankly what — the boardrooms are reading the same news articles that everybody is. So even if they’re not physically seeing a reduction in demand, they are going to react to the noise in the system because nobody wants to be caught out in case things turns sour dramatically. So I think if — I just spent 2.5 weeks in the US, there is a little bit of a disconnect between Main Street and Wall Street in terms of what you see. Everything is at record prices. Try flying in the US or try getting a service in the US, I’ve never been more for anything ever.

But yet it’s the — I would say actually the supply side crisis or the lack of resources and the other supply side challenges are a bigger challenge for our client today than perhaps the macro as I speak today. But I guess if inflation continues to be high for a longer period, if interest rates continue to rise; then it’s natural that consumer spending will come under pressure that will eventually have an impact on B2B clients as well. But as we said, we are in the cost cutting business as well. We will re-pivot to making sure that there is other service lines that we can deploy to actually help clients with that side of the house as well. So, we are well poised. Whether clients invest in the growth stack or the efficiency stack, I think we have something good to offer to them on both areas.

Nitin Padmanabhan — Investec India — Analyst

Sure, Sudhir. That’s very helpful. Just one last question if I may is how is attrition at the senior levels within LTI? Is there any increase or it’s still at whatever levels you have seen historically?

Nachiket Deshpande — Chief Operating Officer

No increase in the attrition actually. Absolutely no impact on the attrition at senior levels at LTI.

Sudhir Chaturvedi — President-Sales

See, the senior levels in LTI also are aware of what is going to happen post merger and they see that all of us will have a larger playing field. In fact folks, I said this during some of our analyst interactions that we will actually need more leadership bandwidth as we go ahead. You can imagine two companies growing at the pace that we are currently and with the ambitions of growing even faster in the future, we’re actually going to need more talent as we go forward. And I think that — see, it’s an exciting platform, right. If you think of together we are $3.5 billion as of last financial year, you can only imagine what we’ll be by the time we get together if that business can grow at industry-leading growth rates for the next few years. That kind of platform is — there are not many companies that can provide that kind of platform for growth in the industry. And then we are nice people to work with, we’re a fun organization. So, I think people are looking forward to it.

Nitin Padmanabhan — Investec India — Analyst

Sure. Thanks, Sudhir, and all the best.

Operator

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

Sandeep Shah — Equirus Securities Private Limited — Analyst

Thanks for the opportunity and congrats on a good execution. Sudhir, just had a question. As you guys are not witnessing any impact of the macro on demand as a whole, but is it the picture similar within Europe? Because in Europe we are well spread out outside UK as well and your commentary also suggests that the supply side challenges is impacting the clients more than the macro challenges, which is actually more intense in Europe as a whole.

Sudhir Chaturvedi — President-Sales

Sandeep, so we grew 31% year-on-year in Europe and my European Chief Business Officer is telling. I think their biggest impact is on the currency side of the house. But again if you look at our business in Europe, it is also predicated under our core verticals. BFSI, Manufacturing, Energy & Utility; they continue to be the strongest parts of our European business as well. Actually in Europe the other advantage we’ve had is our alliance-led deals especially in data. Our deals with our partners — our product partners in the data space, we’ve done some very significant number of deals together with them in that space together and so that’s really helping us. And Europe still is a strong ERP footprint so that ERP footprint is modernizing. So if we put that together, we are in the right verticals, data is a good growth driver, and ERP continues to be a strong service line across the board for us.

That’s sort of holding Europe in good stead for us. So our market there, as you know, we are strong — mostly strong in France and Nordics; but now UK and Germany and of course our Luxembourg market with our Syncordis business unit; they are all also showing good signs of growth. So, that’s why we are announcing multi-geo growth in the region. I just do want to [Speech Overlap] I don’t want to give a picture that we — I keep talking about calendar year ’22 because that’s what we can see, that’s what we are having conversations about as we speak to clients. Are clients going to be cautious about calendar year ’23? Yes, the answer is yes. So, we will see what materializes as we’ll probably come to know more of that in Q3 and Q4. But as we said, we are in sectors where we think that there will be a good level of demand even in the next calendar year.

Sandeep Shah — Equirus Securities Private Limited — Analyst

Okay. This is helpful. Just a question in terms of margins. With wage inflation largely behind and supply side challenges though it’s not coming down, but it’s not going up as well on the attrition side, is it fair to say that growth likely to be stronger in 2Q and 3Q, 4Q seasonally better? For us the margin at EBIT level will also have an upward bias from 2Q to 4Q?

Nachiket Deshpande — Chief Operating Officer

Traditionally, yes. As margins quarter-on-quarter as the year progresses, we will definitely recover some bit of our wage hikes related costs. And hence with the growth momentum that we have seen, we are confident to stay in our PAT guidance of 14% to 15%.

Sandeep Shah — Equirus Securities Private Limited — Analyst

Okay. And just last two questions for the CFO. Generally in a rupee depreciation scenario, our ForEx gain and the other income as the percentage to the revenue comes down. This time it’s slightly different. So, is there any change in our ForEx hedge policy? And second, in terms of your annual report if I look at, the FY ’22 cash balances is actually higher than INR378 crores versus what you mentioned. So, that INR378 crores is a non-current cash equivalent. So, I think you are not counting that when you give the figure for the cash and cash equivalent.

Anil Rander — Chief Financial Officer

No. I think when you’re talking about ForEx gain, this also includes not only gains due to hedges, but also your debtors revaluation and all. Obviously it will cover all INR depreciation against dollar and dollar appreciation against other currencies. So, that will be the net of the amount which has gone in gains due to foreign exchange. There is no change in the policy. I think we have been consistent in terms of reporting and in terms of the policy for what we have for the purpose of ForEx. Also in terms of classification of cash, so we will come back to you because I think technically we need to just understand the numbers where you’re quoting from.

Sandeep Shah — Equirus Securities Private Limited — Analyst

Okay. Because I was talking about the corporate deposit and the corporate bonds, which were there in the FY ’22 Annual Report and you have not counted as a part of cash equivalent?

Anil Rander — Chief Financial Officer

We will revert to you.

Sudhir Chaturvedi — President-Sales

Sandeep, Sunila will come back to you shortly.

Sandeep Shah — Equirus Securities Private Limited — Analyst

Okay. Thanks and all the best.

Operator

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

Mohit Jain — AnandRathi Institutional Equity Research — Analyst

Sir, two things. One was related to the deal pipeline. So when you have accelerated over the last three quarters in terms of large deal wins, so how is the impact on pipeline at your end? That was one. And the second, if you could give some color on the deals won during the quarter? This 80 million like which region, which country has it come from?

Sudhir Chaturvedi — President-Sales

Right. So I think they came across verticals actually these four large deal wins; BFS, High-Tech, Energy & Utilities, and Others. And in terms of regions; there are two from the US, one from Europe, and one from our emerging markets regions. So, it’s a good spread across verticals and across regions. In terms of deal pipeline, actually looking quite good. We hope to announce — we have some deals currently in their final stages so we will announce them in due course. So, next quarter expect some more deal announcements from us. As we said, in fact if I look at the overall pipeline and though we don’t sort of share order intake numbers, but all of those indicators looking quite strong for us right now.

Mohit Jain — AnandRathi Institutional Equity Research — Analyst

And the other one was on wage hike like are we completely done with it or is there some spillover which may happen in 2Q from wage hike perspective?

Nachiket Deshpande — Chief Operating Officer

So, almost 80% of our organization — actually 85% of our organization gets covered in our April cycle. Only senior level listing, which is less than 10% or 12%, gets covered in July. But if you look at from an impact perspective, almost all the impact is now come in already into this quarter.

Mohit Jain — AnandRathi Institutional Equity Research — Analyst

Okay. So from 2Q onwards, we can sort of assume steady improvement because wage hike is behind as you mentioned and some of the revenue ramp up happens?

Anil Rander — Chief Financial Officer

Yeah. So, that impact would not be material. I think it would be somewhere around about 10 basis points.

Nachiket Deshpande — Chief Operating Officer

Yeah. And from a positive perspective, as Sudhir said, we tend to recover our wage hike related dilution over the three quarters through productivity and pyramid rationalization. So, that program continues. So, it will go on from there.

Mohit Jain — AnandRathi Institutional Equity Research — Analyst

Perfect, sir. Thank you. That’s all from my side.

Operator

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

Sudhir Chaturvedi — President-Sales

So, thank you very much for taking the time to join us today. I know it’s a little late, but I love Bombay in the rain so I hope you’re enjoying it safely. Once again thank you very much for your time and look forward to interacting with you next quarter where we’ve got a lot of good prospects ahead of us. So, we look forward to our interaction in the coming — in the next quarter. Meanwhile, if there is any other questions or any other information that you need, please do not hesitate to reach out to us at any time. Thanks once again.

Operator

[Operator Closing Remarks]