Larsen & Toubro Ltd (LT) FY23 Earnings Concall Transcript

Larsen & Toubro Ltd (NSE:LT) FY23 Earnings Concall dated Jul. 15, 2022

Corporate Participants:

Pinku Pappan — Head of Investor Relations.

Amit Chadha — CEO

Rajeev Gupta — CFO

Analysts:

Mukul Garg — Motilal Oswal Financial Services — Analyst

Vibhor Singhal — Phillip Capital — Analyst

Nitin Padmanabhan — Investec — Analyst

Sandeep Shah — Equirus — Analyst

Abhishek Sinha — Chief Operating Officer

Abhishek Shindadkar — InCred Capital — Analyst

Mihir Manohar — Carnelian Asset Management — Analyst

Bharat Sheth — Quest Investment Investment Advisors Private Limited — Analyst

Presentation:

Operator

Ladies and gentlemen. Good day and welcome to L&T Technology Services Limited 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 Mr. Pinku Pappan, Head of Investor Relations. Thank you, and over to you, sir.

Pinku Pappan — Head of Investor Relations.

Thank you, Alan. Hello, everyone, and welcome to the First Quarter FY ’23 Earnings Conference Call of L&T Technology Services. I am Pinku, Head of Investor Relations. To those of you who have joined from India thank you for participating at this late hour. Our financial results, investor release, and press release have been filed on the stock exchanges and are also available on our website www.ltts.com. I hope you have had a chance to go through them. This call is for 60 minutes. We will try to wrap the management remarks in 20 minutes and then open up for Q&A.

The audio recording of this call will be available on our website approximately one hour after the call ends. Let me now introduce the leadership team present on this call. We have Amit Chadha, CEO; Abhishek, COO; and Rajeev Gupta, CFO. We will begin with Amit providing an overview of the company performance and commentary on the outlook followed by Rajeev who will walk you through the financial performance. Let me now turn the call over to Amit.

Amit Chadha — CEO

Thank you Pinku. And I hope I’m audible. Ladies and gentlemen, thank you so much for joining us on the call today. I know this is at a very late hour, 8:00 PM India time and that too on a Friday. We normally host these calls earlier but because of the Board meeting and then the AGM being held today we got delayed. So, thank you so much for taking the time and joining I hope all of you’re healthy and safe. With that, let me start with the key highlights of our quarter one performance.

In USD terms we had a sequential revenue growth of 4.7% in constant currency, with plant, engineering and industrial products, leading the growth. Operational efficiencies helped us to deliver an EBIT margin of 18.3% even as we invest for future growth and capability building. We had bookings TCV at similar levels as Q4, which was our highest ever. Our large deal engine fired well with one $50 million deal plus four $15 million deals and two other deals that were $10 plus million of TCV. Let me now provide segment wise performance and outlook. Starting with Transportation we had a good quarter with sequential growth of nearly 3% and about 5% in constant currency.

This was broad based across sub-segments of auto, T&OH, and aero. In auto and Trucks & Off Highway demand continues to be good in the ESME[phonetic] space with programs on design of Highpower motors and inverters, Tesla development, digital cockpit and analytics. We are extremely happy to be investing incrementally in Connected Solutions to take advantage of the rising spends in the connected part of the ESME[Phonetic] space. There are few connected and electric large deals that we are pursuing in Europe at this stage. Two quarters ago we talked about our growing pipeline of opportunities in aero and rail.

Q1 marks a second consecutive quarter of a large deal win in aero and rail, with the $50 million deal in the rail space, which is on the back of $100 million deal that we got in the [indecipherable] space last quarter. The new deal is in the rail signaling space where we will work on next-gen connectivity-based solutions. Recently, we have also been empanelled with an European aerospace major to build on that relationship and other OEMs, aero OEMs in Europe, we have opened an engineering design center in Toulouse which will cater to new age digital requirements of aerospace. Overall for transportation, we see a healthy demand environment, driven by the medium to long-term trends of ESAV[Phonetic] and we expect our growth trajectory to sustain.

In plant Engineering, we had a strong 7.5 sequential growth quarter broad based across FMCG, ONG, and chemicals. We are benefiting from a secular — secular trend across the sub-segments towards capacity expansion, plan to modernization, automation using smart technologies. Our clients are investing in expanding capabilities and capacities across product lines. And that means new plants or and/or ramp up retrofit of existing facilities. These are, there are also investments being made in the digital side especially automation, analytics, and Industry 4.0. In O&G we are seeing engineering value center opportunities for customers with plants[phonetic] globally, which means we could start to work from a US or Europe side and then go vice versa leveraging India as a low cost location for delivery.

Summing up, we are positive on outlook of plant engineering and expect the growth momentum to continue. At Industrial products we had a strong growth of 4.4%[Phonetic] in the quarter, which was led by electrical followed by building automation. As more new factories get opened up, it is pouring demand for equipment across machinery and electric value chain. We are seeing demand being driven by digital engineering with higher adoption of IoT and robotics as customers build[Phonetic] factories of the future. There is also an increasing focus on electrification and sustainability with a conscious shift to renewable energy, which leads to design and development of new types of equipment.

Overall for industrial products we are seeing demand continue in new product development, digital connected products, and platform development. In telecom and IT, we had good quarter in terms of deal wins. Two deals in the semi space. One, where we will be expanding our R&D lab setup and the other where we are developing chips to the auto industry leveraging both our VLSI design and auto functional safety expertise. Demand is likely to be there in the specialized chip space as newer capabilities like 5G and AI get added. Our investments in the 5G labs are paying off well with repeat deals from customers.

In Hi-tech we are seeing a good pipeline of deals with some of the largest technology companies where we were empanelled recently as vendors or partners. The large deal pipeline in telecom Hi-tech looks promising. We are choosy in the kinds of deals we pick up. We prefer new technology that will help us scale and be profitable. Our pace of growth is likely to improve as some of these large deals close over the next quarter or so. Lastly in medical, we picked up pace versus last quarter with growth of 2.6% in Q1. Demand is being driven largely by spends in [indecipherable] and digital. There is a rising trend of using software for enhancing existing devices, for example using medical image engine to diagnose and detect diseases faster.

We are also working with chipset companies to develop chips for image processing. To expand the addressable market, we are investing in solutions like software as a medical device that will enable us to increase mindshare with clients and we made good inroads recently acquiring new customers where we expect growth to come in going forward. There is some tightening of budgets and caution among some of our customers in Medical on account of inflationary cost pressures. However, we are trying to offset the softness with broad digital play and targeted large deals. Now a few highlights on digital engineering and technology.

On the innovation front, our engineers continue to innovate and filed 25 patents in Q1. We’ve been able to maintain this pace of 25 patents for a few quarters now. In fact patent for customers were at 20 as well in the past quarter. Our offerings are consistently rated high by industry analysts, happy to share that ISG and the recent ranking has rated us as leaders across design and development of products, services and experience connected and intelligent operations are discrete industry, connected intelligent operations of process industry across US and Europe.

Let me now discuss the outlook. The current macro environment is more challenged compared to the previous quarter with headwinds like inflation supply chain disruptions, rising cost of talent and capital. We had seen some of this when we spoke to you last quarter. While we do see signs of caution emerge in some pockets like new age start-ups and newer business lines of clients. Broadly wherever there is a paying end client, our customers are proceeding with the transformational programs with digital being an area of priority and spend. We believe our focus and capability investments are aligned with the multi-year strategic spend across ER&D globally and will help us drive further growth.

I’m happy to share the results you’ve taken toward greater employee connect and engagement yielded results, LT has been recognized as a great place to work in India but it’s employer friendly best practices is a testament to our standing as a preferred company for passionate engineers. Attrition like we indicated previously has risen but we are seeing signs of it stabilizing and we are working inclusively across our employee base. Finally, we reaffirm our FY 23 guidance of $13.5 to $15.5 in US dollar terms, the current volatility in Q1 has impacted our reported revenue in Q1 and would have an impact on the full year.

On a constant currency basis, our revenue guidance translates to $14.5 to $16.5 using Q4 currency rates as a baseline. With that said, I will be around for questions. I wish you well, good health. I am going to hand over to my colleague Rajeev now to provide further commentary.

Rajeev Gupta — CFO

Thanks, Amit. Good evening to all of you. I hope you’re keeping safe and healthy. I’m pleased to share our Q1 FY 23 performance. It has been another quarter of good results with revenue growth and operational execution. Now let me walk you through Q1 FY 23 financials. Starting with the P&L, our revenue for the quarter was INR1874[phonetic] crores, a growth of 6.7% on sequential basis. Our double-digit year-on-year growth trajectory continues with Q1 revenue up 23.4% on-Y-on-Y basis. EBIT margin is at 18.3% compared to 18.6% in Q4 FY 22 continues to be about our 18% aspiration level. During the quarter we had gains from currency depreciation, which were offset by higher employee benefit costs.

Moving to below EBIT other income was at INR34 crores slightly higher on a sequential basis due to higher income from investments. Effective tax rate for Q1 was 27.1% compared to our target range of 26.5% to 27%. Net income for the quarter stood at INR274 crores, which is 14.6% of revenue, up 4.7% on sequential basis and 26.8% on-Y-o-Y basis. Driven primarily by revenue growth and operational execution. Moving to balance sheet, let me highlight the key line items. DSO improved to 80 days at the end of quarter one FY 23 compared to 87 days in the previous quarter. While unbilled revenues came at 22 days in Q1 compared to 15 days in quarter four.

The combined DSO, including unbilled remained flat from previous quarter. Our target range for combined DSO is less than 95 days. Now let me talk about cash flows. Our free cash flows were INR91 crores, 33% of net income. This will improve as quarters go by. Our cash and investments rose to INR2,241 crores end of Q1 FY 23. Moving to revenue metrics on a sequential basis dollar revenue growth was 3.2% in reported terms and 4.7% on constant currency basis. Mainly led by plant engineering, industrial products, and transportation segments.

The segment — segmental margin performance improved in three out of five segments on a sequential basis. Now commenting on operational metrics. The onsite offshore mix shifted towards offshore, offshore percentage now stands at 56.2%. We expect this to be around 57% to 58% range going forward. The T&M revenue mix increased to 73.1% in Q1, reflects the wins in digital and leading-edge space. Client profile which indicates number of million dollar plus accounts shows a sequential improvement in $20 million, $10 million, $5 million and $1 million plus range. The client profile numbers have seen an improvement over the past few quarters and this trend will continue in the coming quarters.

Client contribution to revenue all three categories, top five, top 10, and top 20 showed a slight decline compared to Q4. This is at some of our next 20 customers have been growing at a faster clip, which is also visible in the improvement in our 10 million plus customers. Headcount increased sequentially by 572 employees, while attrition moved up to 23.2%. We continued to invest in talent for future growth and believe the attrition trend will likely soften in the coming quarters as we take various engagement measures. Realized rupee for Q1 was $78.2 a depreciation over 3% compared to Q4.

Before I conclude let me give some visibility on EBIT margin trajectory going forward. In Q2 we will have headwinds from wage hikes that are effective July 22 which we will try to offset through a combination of growth and operational efficiencies. As indicated in the prior quarter our aspiration is to maintain EBIT margin at 18% levels in the medium term with levers such as growth, better quality of revenue, and operational efficiency gains. I thank all the investors and analysts for their continued patronage and with that I now hand it over to the moderator for Q&A session.

Questions and Answers:

 

Operator

Thank you very much. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference please limit your question to two per participant. We will wait for a moment, while the question queue assembles. The first question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Thanks. Hi, Amit, good evening. So first question was on the growth side, later it was good to see that you’re regularly now winning $50 to $100 million deals on a standalone basis. You also mentioned that the de-booking in Q1 like Q4 was your highest ever. I’m just trying to put that in context. Can you just share your views on this segmental impact which has baked[phonetic] into your guidance from the macro weakness, which we are seeing. You mentioned medical devices. But given that the large deals are coming in. How do you see the impact of client spending slowdown will flow into different verticals.

Amit Chadha — CEO

Mukul I thank you so much. Mukul, first of all, we do believe that our guidance that we provided and if I take the constant currency rate of 14.5 to 16.5 that takes into account the wins that we’ve had, not just in the current quarter, it takes time to start. But what we have been having in the last two or three quarters as a trend what we’ve seen is that deals in transportation, plant, and industrial are there, and we’ve been winning consistently and Hi-tech we’ve seen deals in specific areas. While medical has been slightly smaller ticket sizes, if I may. Right. But that is not to say we don’t want incremental revenue. We only want exponential revenue. I’m happy to take incremental because every client in segment is different. Where we are seeing and I did mention in my commentary Mukul is that there are areas where there is no paying customer for a project, six months ago everybody was saying, even if there is no paying customer that will come. Let’s go ahead and do the product development or deployment, et cetera.

I have seen in the last quarter that’s why when we gave you the quarter one — when we gave you guidance at the end of quarter four we had baked some of that in because we were starting to see customers telling us that customers will buy like one CFO turned around and said my customers will buy, they may just trade down to a lower version of the same device. Right, in other case client came back and said that I am doing a rationalization of what skills do I have in house to what I will give you externally and maybe I may have over hired in a certain area, so therefore I will look at you to help me in ABC space. There is clients coming back.

The good thing I’m seeing is client coming I can see you are an extension of my space. So if you are investing in 5G lab, you are investing in sensor lab, you are investing in a device test lab. I will not do it. I will leverage your space. So I do see that as a positive more than a negative. I hope I’ve answered your question.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Right. So, sorry just to clarify, except for medical devices there is no clear-cut trend which is developing till now in terms of impact. And second part, obviously, have you already started seeing clients kind of looking at cost rationalization through giving more work to LTTS.

Amit Chadha — CEO

Yeah, so in some areas, we are seeing people leverage. So we are definitely seeing people leverage our speed to market. Right. But there is clear customers coming to us with cost to market as well. All right. And those inquiries, those deal closures are happening. We do see, like you said like I said in the new reconfirmed medical and certain pockets of Telecom Hi-Tech, where we do see a little bit of a pause, like I said, there is a paying customer profitable paying customer those projects are going forward. Those areas are going forward. In fact, some of our large deals that we’ve had, there are some deals that we are shaping up in telecom, which basically are going to be worked on the fact that we’ll be able to do it in our India centers cheaper, better, faster.

Operator

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

Vibhor Singhal — Phillip Capital — Analyst

Yeah, hi, good evening, sir. Thanks for taking my question and congrats on a great performance in our current rather gloomy environment. So Amit, sir. I just wanted to ask you basically one broader level question. Given that you’ve been in industry for such a long period of time, and I’m sure you’ve seen ups and downs in the industry from the client side and everything. So just wanted to basically pick up into the product. It’s typically when we I mean, right now we are all looking at maybe a possible recession somewhere two or three quarters down the line [indecipherable] typically when such an economic downturn or a recession happens how do clients tend to basically react in terms of their budget cuts and with specific set of clients tend to basically cut more or cut cost, then the other ones. And if I can push into that, does this capital form our large part of the ER&D ecosystem across the world. Does an economic downturn like this actually made these companies do less work in their captives to save cost and outsource more or is there any trend like done that, that we can probably adhere to. Just if you could provide on the couple of those points.

Amit Chadha — CEO

Sure. There is a — there is a recent report that’s come out from [indecipherable] they actually talk about the fact that, and I see that the report was released in May or early June basically said that by 2025 so they said ER&D spend is about $1.6 trillion in 2021 and they expect is 1.6 by conservative estimates to go to $2.2 trillion by 2025 and optimistic estimates go to $2.3 trillion. Now there are two parts when we really look at the report, and then I’ll correlate to what I’m seeing.

Legacy engineering or traditional engineering ER&D they are saying will go from the current $982 odd billion in 2021 to potentially $995 billion to a $1 trillion by 2025. So not a lot of difference. The growth will come in digital which will go from what $650 billion to between $1.2 to $1.3 trillion. Now therefore what we are seeing is, so what I’ve seen is right in times like this wherever a customer can see here is the positives. Right. In spite of recessionary talks et cetera. Right. People are still going on vacations, airports are full jampacked, hotels are not available. Staff is less, people are more, A. B, staffing challenges and pressures will not go away and therefore people are turning to automation. Third people will pay for the experience at this point of time. Even in a business hotel they want — they want to be able to check in fast, and check out fast and therefore there will be an a digital system that we may put in place.

Truck rolls are becoming expensive. Nobody wants to sit in a truck and go and attend to maintenance issues. So there is definitive spend that people have to do, if they want to stay relevant in predictive maintenance and and reactive maintenance, et cetera, et cetera by automating more. So automation spends, digital spends are there and will continue to expand. The one thing that is definitely happening is clients are turning around and saying, so when is payback. Is payback in 12 months, is it 24 months, is it 36 months. So there is definitive conversations that are happening. Second. I had shared this when we won the $100 million deal as well with you larger deals take a little bit longer, right. Nobody is flying in to write a cheque and leave. So that behavior has not changed.

The area where I have seen people coming back and saying let’s hold off and discuss is where they don’t have a paying customer. There is a new product launch. They don’t know who the customer is for sure. Their payback period is seven years. Their payback period is eight years. We are discussing it, right. But at the same time, oil and gas and CPG is spending like there’s no tomorrow. Right. So that is a positive that you’re seeing. So I do not want to paint the picture that it’s going to be as bad, it’s going to come as bad as COVID that is impossible. That is a black swan moment in my view, but what we are seeing is specific[phonetic] pockets people are asking the question we are having to re-confirm that this is still make sense, still possible for their consumers, and that’s what we’re doing right now and that’s where we see the market heading as you move forward. On our own town as well we are working on — continuously work on improving utilization et cetera that we’re doing and re-scaling et cetera.

Vibhor Singhal — Phillip Capital — Analyst

Got it, got it. And on the captive site, I mean, there is a trend generally in recessionary times that come from our clients tend to outsource more and give less to their own captives or nothing like that.

Amit Chadha — CEO

So it is different for — different for different segments. See I’ll tell you one thing I am seeing. I am not seeing segmental problems. I am seeing specific company issues. There could be a client that has been in a problem because they were depending on a product line that’s gone away. So they are in a problem. That I’m seeing. But overall segment standpoint, I still see ER&D cautiously optimistic if I mean. Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Nitin Padmanabhan — Investec — Analyst

Yeah, hi, good evening. I had two questions. The first is, you had mentioned that you’re seeing some challenges or caution in your business lines and clients and startups. So if you think about the business, what proportion of — is this is a significant proportion of the overall business as a percentage?

Amit Chadha — CEO

No, it is not. Please read my comments more as that I was providing a generic commentary that see when there is a start-up again like I just said, number of payback time et cetera is a challenge. So, if I may say it in another way, the era of free money is over, right. We have a paying customer I have money for you. You don’t have a paying customer or you have an idea please wait in line, that’s broadly what we are seeing.

Nitin Padmanabhan — Investec — Analyst

Okay. And in the same context let’s assume broadly global growth does slow down quite a bit and then you contrast that with the sharp kind of scenario that we have seen during COVID or GFC, in growth that slowed down and there is no shock, then how would you think about growth, do you think that’s more beneficial versus the shock relatively.

Amit Chadha — CEO

See it’s all segmental. If you look at it, it varies, it depends, even if growth slows down, even if oil prices come down to $80 a barrel. I do believe that oil and gas CPG will continue to spend. They have longer cycle times, paybacks periods, et cetera. We will continue to spend. Chemicals will continue to refresh their businesses. People are continuing — are looking at alternative energy very seriously. Right. So anything to do with electric will continue to grow which has impact on auto-IP et cetera. That’s the part of sustainability, if you may. Third, autonomous is going to grow whether it be autonomous Roberts, Autonomous what do you call that, in a warehouse, Warehouse retrieving systems, you look at baggage handling systems, et cetera, because reality is that there is a labor shortage, right. So these three things plus telemedicine and governance around medical. These are areas that we will grow. Aircraft traffic is back. That is not going anywhere. That will continue to grow. New design cycles will start, but there will be areas where there will be a pause. There will be a refresh, there will be a re-calibration and we are seeing that on the ground and then we had talked to you last quarter when we gave you the guidance, and we reconfirm today. We do see those continuing on that is there.

Operator

Thanks. The next question is from the line of Sandeep Shah from Equirus. Please go ahead.

Sandeep Shah — Equirus — Analyst

Yeah, thanks for the opportunity and congrats on a good execution. Just the first question relates to the top clients. So this is second quarter in a row where growth within top 10 clients being lower than the Company average. Amit, just to reconfirm, relate to your comment you are saying the issue is more client specific rather than the industry specific or segment-specific. So, are we seeing any client specific issue in any of our top end clients.

Amit Chadha — CEO

So Sandeep, I would like to confirm to you that in fact lower than looking at revenue from top five or top 10, right. I would request you actually to look at my client profile and compare that. Quarter one last year there was no $30 million account. I’ve got two. And this is LTM, by the way, so if I we do not share the picture of run rate in the current quarter. But we go LTM but my run rate in the current quarter picture is a better picture than this picture on LTM, right. My 20 million plus clients have improved by one sequentially and two year on year. Look at my 10 million plus client three added 10 million in four quarters and single quarter one, 5 million plus added, so I would not worry about top five yet. I’ve always said, we are not a quarter on quarter business. We are more longer-term business, medium term business. Kindly please look at it next quarter. You will see some of this refresh. I would not worry about it, but I do understand where you’re coming from, but I’m reconfirming to you and telling you I do not have any client situation or issues.

We did have one in quarter three. We did have one project with a significant project to the customer that we dropped in quarter four. We had told you about it at the end of quarter three and that’s done and dusted. Beyond that we don’t have any challenges.

Sandeep Shah — Equirus — Analyst

Okay. Okay. And just in this quarter the employee cost as a percentage to revenue has gone up by 300 basis points. So what will be offsetting in tailwinds, which led to just 30 bps kind of a margin decline as a whole. So I missed the margin work. I got disconnected. Sorry for this [indecipherable]

Rajeev Gupta — CFO

So Sandeep, this is Rajeev. I’ll take that question. So yes, we did see the employee cost go up 300 basis points in this quarter and that’s the back of the investing in talent that continues. Right. And this is a quarter where we see the full impact of the hiring that we’ve done in the previous quarters as well. The freshers that we’ve been talking around. We believe that some of this will start to yield benefit going into quarter two. And also, that’s an area where we think it’s going to be one of the levers that will turn out to be more positive. In addition, we invest on certain account, right, and these have been recent wins, where we’re building capability so that we’re able to have these resources, trained ahead of time, so that we are able to deliver on to these new wins and accounts that we’ve recently won.

Abhishek Sinha — Chief Operating Officer

Yeah, I’ll just add on to our Rajeev was mentioning, Abhishek here. There are one or two deals that we have won in the last quarter which needs a reasonable amount of investment before they start billing, I can’t share the numbers with you. So the upskilling and training that we’re doing for these resources will start generating revenue from mid July to early August and that is the other reason why we had to invest in the talent and same way the percentage has been impacted to some degree. Also this quarter we have — you would have seen, we have not taken pressures, so our net headcount increase is more to do with laterals that we have hired unlike the last few quarters. Because this is not the quarter where industry takes pressure anyway.

Operator

Thank you. [Operator Instructions] The next question is from the line of Abhishek Shindadkar from InCred Capital. Please go ahead.

Abhishek Shindadkar — InCred Capital — Analyst

Hi, sir. Thanks for the opportunity and congrats on a good quarter. My first question is regarding your comments about challenges in Telecom Hi-Tech, can you just elaborate which pieces of Telecom are under pressure and also on hybrid piece, is it because of the [indecipherable] disruption or is it the product companies are witnessing slower growth for them, which is driving their spending challenges. The second is on just a clarification on the guidance per se. So the last quarter guidance we gave should we take that as a CC number and then assume what you gave, which is the current guidance, which is an increase over the previous quarter and the third question is on the — again on the employee number now as per the filings on [indecipherable] employee cost is up roughly 12.5% while as per the presentation it is up roughly 7%. So the disconnect is largely because of the subcontracting or how should we read that data. Thank you for taking my questions.

Amit Chadha — CEO

Sure. So we will Abhishek [indecipherable] so if I look at Hi-Tech I’ll divide that up into six sub-segments. There is consumer electronics. There is semiconductor. There is telecom operators. There is media entertainment. There is telecom infra and there is I want to call it platform companies or ISC companies. Now as far as telecom[phonetic] is concerned, going well, gangbusters no projects — no project pauses, design cycles intact. As far as consumer electronics is concerned there is a little bit of a pause start, pause start because China supply was not coming, people know what do they design, unless they’re able to get the product out et cetera. There has been a little bit of question being asked again in that sea area and not cancellations, but just delays in decision making et cetera.

In Media Entertainment, no pauses, no stops. We are seeing continuous project after project, program after program. If I take telecom operators and telecom infra I will lump it together and I wouldn’t say that areas where 5G has been approved things are going forward where 5G has not been approved or people are trying to find paying customers et cetera. There is questions. This is also the area where we bought orchestra and we seem to be doing fine and expanding and building out accounts that could be a 10 million[Phonetic] range, et cetera in this space. Platforms is where we are seeing free money stop and you have seen the news, as well as I have and we’ve seen it in our projects, et cetera, but people are clearly questioning that will advertizing come, and should I invest in this particular sub product or package. So that’s where so, consumer electronics and platforms the sub-segments is where there are questions and if you ask me, telecom operators and infra was delayed in 5G and we continue to see some pause, some stop, et cetera.

Certain areas we are seeing 5G decisions. So, therefore, it’s starting to pick up. So that’s your answer on Hi-tech. Again, I am not seeing doom and gloom, I’m just saying there is a question asked. Is there a paying customer who’s paying for this in the room, right, that’s coming up. Also, a lot of these companies had over-hired their own staff, not our work. So they are pausing to see whether they want to do it or not. Yesterday, one company came out and said, one of the Gamma companies came out and said that I will fire 1500 people, but I will hire in a different technology area. So technology refresh, technology reassessment is happening. That is question number one.

Question three on employee cost I think Rajeev will answer. What was the second one, guidance. So guidance, I want to say it unequivocally. Our guidance in reported currency is at 13.5% to 15.5% if I was to take USD — not USD, currency at quarter four FY ’22 then please read our guidance as %14.5 to %16.5. I will pause. Rajeev, over to you on employee cost.

Rajeev Gupta — CFO

Let me take the question on the employee cost and I will guide you to look at the investor release. When you compare between the investor release and of course the financials that have been shared on the CBD[phonetic] side, this is really on account of the ESOP cost that have been issued to the senior management in the investor release we classify ESOP cost under SG&A. So that’s the primary reason why you’re seeing the difference. I hope that clarifies Abhishek.

Abhishek Shindadkar — InCred Capital — Analyst

Absolutely sir. Thank you for taking my questions and best wishes [technical issue].

Operator

Thank you. Next question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.

Mihir Manohar — Carnelian Asset Management — Analyst

Yeah, hi, thanks for giving the opportunity. I had a question, I mean in the opening remarks, you mentioned you are having some conversations with the clients particularly to the next year, I mean you know clients are getting [indecipherable] questions. I mean, if you could throw some more light as to what exactly are these conversations that would be helpful and second thing was on the automotive side of the things, I mean how are you seeing spends, particularly on the automotive side of the things, specifically on the EV and [indecipherable] global spends still continuing or should there be question over there.

Amit Chadha — CEO

Sure, so let me give you some EXOPs of conversation that has been happening with our clients. So no names, but I will tell you some of the EXOP, so you can get an idea. Number one COVID 19 is there but not prominent anymore. We know it’s there, but let’s — we have learned to live with it. Multiple [indecipherable]. Second the great resignation era looks to be easing and we are relocate — relooking at our talent mix. This is from the CXO of ITEC customer. Third, this is from VP engineering of a big three auto company. The chip situation will improve throughout 2022 and hopefully stabilize in 2023.

Fourth this is from the CFO of a medical company, large medical company. Our customers continue to buy but we’ll start trading down. Next one is from an industrial company CEO. Product life cycle is getting shorter going digital is good for us. We have discovered new markets and we’ll continue to expand leveraging digital technologies. This is from an tier one CEO. So, not an OEM but Tier one CEO. We are optimizing capex, need to prioritize where we invest and where we can wait. Electric and experience will be the key differentiators for car buyers of the future. Finally, it is about telecom infra customer CEO. Everybody needs faster reliable networks, but we need paying customers. So this is some of the verbatim, right. LINGO that we are hearing and language. I told somebody earlier today I don’t track the number of meetings our senior management does with our customers or the number of clients visiting us. I can assure you, year-on-year, that number of clients visiting us and our CXO level meetings has gone up more than 150% year-on-year.

Last year people were anyway not traveling. Quarter-on-quarter we are up by about 35% to 40% in terms of meetings or interactions. So I want to confirm that there are interactions. I want to confirm there are conversations. I want to confirm there is ideation, idea generation, et cetera. Now, in automotive, right and again, you know our net-net, summary as a whole thing I would say proceed with caution. That’s the net-net message I’m getting. But proceed, surely proceed. Now, let me go to automotive. Automotive, there are four areas that are seeing spend areas. One is, electric, and that is not fully electric, hybrid electric et cetera is happening. Second is autonomous and parts of Autonomous.

I do not believe there will be a complete high way where only autonomous cars and we are reading newspapers. I think it’s a little farfetched. Third connected there is definitive conversations. In fact, one more thing happening is people are talking about V2X, that is will the vehicle generate as it runs and pass back electricity back to the grid. And will that help in terms of paying for the cost of the car. The last thing we have seen definitely which was not there two quarters ago is people are pulling us in and talking about cyber security and cyber attacks on the car. There is a certain customer I have he has actually pulled us in and expanded and these are not huge schemes that you expanded with. But there are high-caliber people that are working with one of our clients on a certain model here and model of sedans, European customer who says that I feel that this of set of sedans will get hacked and somebody will come in and create problems on the GPS system, please come in and see what can we do to tighten it. So cyber security is a fourth area that is getting a lot of traction in this space.

So that’s broadly I hope I’ve answered. People are talking about electric in off-highway, backhoe loaders, skid steer loaders, et cetera. People are talking about electric or boards, partly electric, [indecipherable].

Mihir Manohar — Carnelian Asset Management — Analyst

Sure. Yeah, that’s it. Yeah, and just one last extension to it. [indecipherable] that we had a $4.5 billion by FY ’25 does confidence remain on that out or would we turn out to be cautious given the evolving situation. Just the last extension.

Amit Chadha — CEO

I would like to confirm. Thank you so much for asking that. I missed it. One, I am reconfirming billion dollar run rate either in Q2 or Q3 of FY ’23. Second I am reconfirming our aspiration. We had $1.5 billion run rate by FY 25. Any one of those quarters.

Operator

Thank you. The next question is from the line of Bharat Sheth from Quest Investment Investment Advisors Private Limited. Please go ahead.

Bharat Sheth — Quest Investment Investment Advisors Private Limited — Analyst

Hi, sir. Thanks for the opportunity. And sir, on, can you share, give a little more detail on our hiring plan and how are we finding it difficult to hire [indecipherable] and the way which is required for our company.

Amit Chadha — CEO

So we continue to hire. I wanted to — one more point I wanted to make here and before that, I think Sandeep or Mithun had made a point, the six bet areas that we had taken SUV, 5G, Digital products AI, Medtech, digitial manufacturing sustainability. We are seeing continued traction in that space. In fact, one that report I talked about that has come out that actually talks to it with a digital going up and the way we’re seeing it go we believe that these are very relevant. We are actually really fortunate that our teams and I would complement our engineers, our leaders that came together to create these bets[phonetic], they were not bought top down. They were bottoms-up. In fact, happy to share a senior customer from one of our top 10 clients came to talk to a bunch of us in Chicago two months ago and four of the six bytes that we have aligned with his bets[phonetic]. So our sales team turned around and said that we are so pleased that we have heard our customers and my response was we heard our customers, we heard you and we called it bottoms-up.

So I did want to share that it was a good moment for me personally, professionally, I wanted to share it. Now your question was, I think so, see our hiring continues to happen now. Please remember that we took 3000 freshers last year. We will take a similar number of fresher’s this year. 2500 offers are already out, but we will do a mix of laterals and freshers as we move forward. We are looking at inclusive growth. So that will happen. Abi would like to add.

Abhishek Sinha — Chief Operating Officer

Yeah, and just to add to that our fresher strategy of course will continue, but also our upskilling, reskilling strategy on which our entire talent upgradation is built on, will also continue because that is what we think is a core. I mean the solution is not to keep hiring people from outside at the cost of people inside. So we will continue to invest in the people in our company in a very focused manner.

Amit Chadha — CEO

In fact, I know I mean [technical issue] but I will I don’t listen to Pinku often so yesterday ET has given us an award the Gold Award for our Global Training Academy Engineering Academy. It’s a very proud moment and our Head of Global Engineering has been awarded the Silver Award for the work done. I would complement our leaders, I would complement Abhishek for believing in it and bringing it. As he came on as CEO that is one of the first things that he institutionalized. So I do believe that this retraining, upskilling, sites[phonetic] skilling is there to stay and I’m really truly grateful to the work that’s been done in this area.

Bharat Sheth — Quest Investment Investment Advisors Private Limited — Analyst

Sir, I’m taking now this question on the offshoring how much — how big is the offshoring opportunity. The way our business keeps on maturing, our deliverable capability improving.

Rajeev Gupta — CFO

So let me take this one. See, I’m going back a few quarters, right. And this was during the COVID times where of course the working model dramatically changed. We believe some of that model is getting reset now. And with that, we believe the offshoring at least from our perspective would be in the range of 57% to 58%. We are at about 56% I believe there is an opportunity to improve by another 200 basis points and that’s at the back of the fact that a lot of large deal wins, new wins the initial part of that project gets kick-started onshore and then moves into offshore over a periodic basis and hence, I believe that it will be more in the range of 57%-58% going forward for off shore.

Operator

Thank you. We will take the next question is a follow-up question from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Yeah, thanks for taking me again. Rajeev just wanted a clarification, you mentioned three of your verticals have seen profitability improvement. If you look at just the segmental level profitability. It’s — it’s at all-time high. But you had a meaningful increase in unallocable expenses this quarter, leading to a margin impact. Can you just help us make some sense of it because there was a sharp jump versus last quarter and it is among the highest in last many years. How should we look at it going forward. And is that something which can improve kind of give you some buffer for next quarter.

Rajeev Gupta — CFO

Thank you so much Mukul for putting up this question, I should have highlighted it earlier. So really when you see that unallocable expenses and that sharp increase briefly mentioned, but I’d like to clarify, I mean this is essentially the ESOP cost to the senior management and that as I said, we tend to classify under SG&A and when you look at the segmental margin, it is under unallocated expenses, so that sharp increase you can attribute to the ESOP cost especially issued to the senior management.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Right. So will this recur or this is a one-time.

Rajeev Gupta — CFO

So this will recur. This is something that you see from Q1 onwards and it will continue going forward as well.

Operator

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

Sandeep Shah — Equirus — Analyst

Yeah, I think, just a follow-up in terms of Q2, the wage hikes will be due and you said it would be compensated to the growth and the operational efficiency. So, are we expecting we can compensate the total headwind of wage hikes through these tailwinds.

Amit Chadha — CEO

So Sandeep again appreciate the question. So again it’s something that we see every year, think the wage hikes are in Q2. Now, we believe that these wage hikes come into being in Q2 we will have levers like growth, quality of revenue, of course we’ve seen productivity improvement, operational efficiencies and economies of scale. So we will do in terms of the same counterbalancing. But the fact is that there may be a possibility that not entirely gets absorbed and that’s one to see in terms of how we see the quality of revenues panning out in Q2.

Operator

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

Pinku Pappan — Head of Investor Relations.

Thank you all for joining us on the call today. We hope we were able to answer most of your questions. If you have any follow-ups please feel free to reach out to me. Well, with that it is a wrap. I wish you all safe times and have a great day. Bye bye

Operator

[Operator Closing Remarks]