L&T Technology Services Ltd (NSE:LTTS) Q2 FY22 Earnings Concall dated Oct. 19, 2021
Corporate Participants:
Abhishek — Chief Operating Officer & Whole Time Director
Pinku Pappan — Head of Investor Relations
Amit Chadha — Chief Executive Officer & Managing Director
Rajeev Gupta — Chief Financial Officer
Analysts:
Mukul Garg — Motilal Oswal — Analyst
Pankaj Kapoor — CLSA — Analyst
Vibhor Singhal — PhillipCapital — Analyst
Abhishek Shindadkar — InCred Capital — Analyst
Vimal — Union AMC — Analyst
Sudheer Guntupalli — ICICI Securities — Analyst
Nitin Padmanabhan — Investec — Analyst
Presentation:
Operator
Ladies and gentlemen, good day and welcome to the L&T Technology Services Q2 FY22 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]
I now hand the conference over to Mr. Pinku Pappan, Head of Investor Relations LTTS. Thank you, and over to you, sir.
Pinku Pappan — Head of Investor Relations
Thank you, Faisel. Hello, everyone, and welcome to the second quarter FY22 earnings conference call of LTTS. I am Pinku, heading 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 this 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 outlook, followed by Rajeev, who will walk you through the financial performance.
Let me now turn the call over to Amit.
Amit Chadha — Chief Executive Officer & Managing Director
Sure. Thank you, Pinku. And thank you all for joining us today on the call. We hope all of you are safe and healthy and things are improving. In fact, I’m in our offices in Mumbai visiting our centers later this week in India and next week. I do believe this is a sign of returning back to normalcy whatever normalcy is now defined as. As you may be aware, on September 23, 2021, we completed five years as a publicly listed company. I, and the management team of LTTS, would like to acknowledge and thank you for your continued confidence in us.
During Q2, we held our Investor and Analyst Day where we outlined our vision and steps and strategy to get there. We also talked about our six big bets in the areas of electric autonomous connected vehicles, 5G, medtech, digital products and AI, digital manufacturing and sustainability. I’m happy to share with you that we are progressing well in terms of deal traction, pipeline and solutions in these areas.
The key highlights of our Q2 performance are: in USD terms, we had a sequential revenue growth of 6% quarter-on-quarter in constant currency terms, driven by healthy traction in digital across all our five segments. This was the highest quarterly growth we’ve notched up in the last three years period. Our broad-based growth was accompanied by a rise in EBIT margin, which at 18.4% is the highest we have reported. The large deal pipeline and conversions remain healthy. In Q2, we won nine deals across all segments, out of which five deals were $10 million plus, and two deals, $25 million plus.
Let me now provide the segmental performance and outlook to you starting with transportation. We had a sequential growth of 6.2% led by good demand across all three subsegments, auto, trucks, off-highway and aero. Auto companies are going through rapid transformation and we are partnering with them in the areas of electrification and connected vehicles. We are ramping up with the traditional OEMs and Tier 1, but also deepening our engagements with some of the new wage names on the EV side. In trucks and off-highway too, we are seeing customers modernize at a high speed, and we are winning deals in electrification programs across product categories like trucks, RVs, off-roaders, etc. Our EV lab based in Bangalore, backed by end-to-end domain expertise is generating a lot of interest with customers and is helping us win larger deals. In Q2, we won $25 million plus deal to expand an auto customer’s design center in India and create a dedicated technology hub to work on EV and power electronics.
Switching to auto, we are seeing signs of a recovery with the deal pipeline steadily improving as customers invest in connected solutions and data analytics to provide and improve operational efficiency. Summing up, we expect the growth momentum to continue in transportation across all three subsegments.
In plant engineering, we had a good quarter with 4% Q-on-Q growth driven by O&G and FMCG, followed by chemicals. In O&G, we continue to win new engagements with major O&G customers as their global partner for site sustenance and digital engineering. In FMCG, the traction continues with wins for us in the areas of automation, line expansion and sustainability. In chemicals, we are seeing EPCM services opportunities as the capex outlook improves. Overall for plant engineering, we continue to see a good set of opportunities that will drive growth in the coming quarters.
On industrial products, we had a second consecutive quarter with 8% or more in Q-on-Q growth with all three subsegments showing good growth, electric, machinery and building automation. The trend for platformization, solutization continues as customers invest in software platforms to improve their own products and to extent better features to their end-to-end — end customers. We are seeing broad-based demand for collaborative and intuitive products, leading to digital initiatives like digital twin analytics and AI-led decision-making. Customers are open — opening up to engage partners like us, leading to continuous wins in deal flow. We expect IP to be one of the fastest growing segments this fiscal.
In telecom and hi-tech, growth was a bit muted with semi — semicon. And telecom infra growing well, although there were some softness in media due to delays in project renewals and ramp ups. In semi, lab as a service continues to expand as we ramped up some of the recently won engagements. As 5G deployments happen, investments are being made by companies across multiple segments, computing, communications, consumer electronics, satellite, pay streaming providers, semicon, etc., to build newer products and platforms.
In media, we won $25 million plus deal to build a software platform for a new customer that partnered with us to accelerate time to market. Overall, we are seeing a demand and expect growth traction to improve in the coming quarters.
Lastly in medical, medical has shown a strong bounce back in Q2, with nearly 10% sequential growth. And I’m happy and proud to share with you that our youngest baby at vertical has crossed $100 million annualized revenue run rate milestone. This is a testament to our deep domain knowledge, our differentiated solutions, our amazing leadership and teams that have helped us gain market share and become strategic partners to our customers.
In terms of demand, we are participating in building software platform, the digital health, robotic surgery and patient monitoring as well as quality assurance and compliance. With supply chain issues in chip and electronic parts affecting our customers’ ability to meet demand, we are also helping them resolve the problem of designing alternative components. Overall, we do see a good pipeline of opportunities in medical that will help continue the traction.
Now a few highlights on digital engineering and technology progress. Our digital engineering revenues were 55% in Q2 versus 54% in Q1. We see this trend continue. On the innovation front, our engineers continue to innovate and filed 25 patents in Q2. Our patent filings have been largely in the collaborative and intuitive spaces in digital. This past quarter also saw us being ranked by ISG as a leader in IoT consulting and services, and the Zinnov, as leader in autonomous connected electric and shared mobility automotive engineering.
Related to our overall talent scale up, we have substantially increased the fresher intake which, in addition to optimizing the pyramid, will help us tackle attrition. Leveraging the global engineering academy that was set up by our COO earlier last year, we have tied up with top universities to source and proactively train talent so that they can be productive faster. There will be a bump up in headcount growth in Q3 and Q4 as these freshers are inducted in the Company.
Let me now discuss the outlook. The demand outlook in US and Europe continues to be strong, while RoW and India are seeing signs of recovery. In our conversations and recent face-to-face meeting with customers, we are getting positive signals on CY22 budgets, as CTOs, COOs, Heads of Engineering, etc. want to partner with us as we invest in growth and transformation. There are worries, however, about the current supply chain issues, labor shortage, and cost inflation. At this point of time, it is not clear these worries are temporary or they could stretch for a longer period, but it is something to be watchful about and that we are monitoring closely. Q3 has some seasonality on account of furloughs and shutdowns. We believe broad-based growth is likely to continue, and any furloughs beyond normal are likely to be specific to certain customers rather than across the entire segment. As we crossed the fiscal half year mark and the benefit of better line of sight, I am happy to raise our revenue growth guidance for FY22 in USD terms to be between 19% and 20%.
Finally, to celebrate the five-year listing milestone, the Company has declared a special dividend of INR10 per share.
I wish you all and your families a very happy Diwali in advance, and would like to now hand over to our CFO, Rajeev. Rajeev, over to you.
Rajeev Gupta — Chief Financial Officer
Thank you, Amit. Greetings to all of you. I hope you and your families are keeping safe and healthy. I’m pleased to share a strong Q2 performance with healthy improvement across all parameters, revenue, EBIT margin, PAT, and free cash flows. With that, let me take you through the Q2 FY22 financials, starting with the P&L.
Our revenue for the quarter was INR1,608 crores, a growth of 5.9% on sequential basis. Our double-digit year-on-year growth trajectory continues with Q2 revenue up 22% on Y-on-Y basis. We touched a new high on EBIT margin at 18.4%, making it the fifth consecutive quarter of operating margin improvement. The 110 basis points sequential improvement in EBIT margin to 18.4% was driven by operational efficiency measures, including productivity improvement and cost optimization that helped to observe mid to senior-level wage hike impact. Second, scale benefits realized from account mining driven growth, and thirdly, favorable depreciation and amortization as a percentage of revenue.
Moving to below EBIT. Other income was lower on a sequential basis due to reversal of SEIS accrued income taken in FY21. As you may be aware, the Government of India recently notified FY20 SEIS incentives, which have now been capped at INR5 crores. FY20 SEIS incentives were accrued in FY21 as per the then prevailing incentive rate of 7%. Hence, the need for reversal. However, we could partly offset the SEIS reversal with higher forex gains, resulting from appreciation of rupee against dollar, which moved in a range of INR73 to INR75 during the quarter. Going forward, income from SEIS incentives will not be material for LTTS anymore.
Our effective tax rate for Q2 was 26.6%, flat on a sequential basis, and in line with our full-year ETR expectation of between 26.5% to 27%.
Net income for the quarter stood at INR230 crores, which is 14.3% of revenue, up 6.4% on sequential basis driven primarily by higher revenue and operating margin.
Now moving to the balance sheet, let me highlight key line items. DSO was 85 days, end of quarter two, remaining flat versus Q1, while unbilled days improved to 15 days in Q2 compared to 27 days in Q1. The combined DSO, including unbilled, stood at 100 days, which is an improvement versus Q1, but slightly above our target range of less than 95 days. We expect further improvement in the coming quarters.
Talking about cash flows, because of the improved DSO in Q2, our free cash flow also improved to INR423 crores for year-to-date, a healthy 95% of net income. Our cash and investments rose to INR1,958 crores end of quarter two FY22. Amit already talked about the dividend. I’m once again pleased to share that the Board has declared a special dividend of INR10 to celebrate five years of LTTS listing on the stock exchanges.
Moving to revenue metrics. On a sequential basis, dollar revenue growth was 5.7% in reported terms, and 6% on constant currency basis with all five segments growing as highlighted by Amit. Growth was led by industrial products and transportation segments. The segmental margin performance was better in three out of the five segments on a sequential basis with transportation and telecom and hi-tech continuing the path of improvement for the past five quarters consecutively.
Now, let me comment on operational metrics. Utilization reduced slightly to 78.1% because of strong hiring undertaken to fulfill demand and to improve pyramid. We target to maintain utilization within the 78% to 80% band. The onsite, offshore mix continues to improve favorably towards offshore at 59.2% versus 58.1% in Q1. The T&M revenue mix increased to 70% in Q2, and it’s likely to stabilize around these levels. Client profile, which is the number of million dollar plus accounts, showed a sequential improvement in all categories, 1 million plus to 30 million plus. As we indicated in the past, owing to the LTM nature the client profile numbers have started improving from Q2. This trend will continue in the coming quarters.
Moving to client contribution as a percentage of revenue, here again, on a LTM basis, the improvement is visible in Top 5 and Top 10 clients. Headcount increased by 1,011 employees sequentially, while attrition moved up to 16.5%, which is now an industry-wide trend. We are proactively taking various employee engagement measures to contain attrition. Our realized rupee for Q2 was around INR74 to the US dollar, a depreciation of 0.2% versus Q1.
Before I end, let me give some color on the EBIT margin trajectory we see going forward. During our Investor and Analyst Day, held in September 2021, we shared our aspiration to reach a $1.5 billion revenue run rate, and 18% EBIT by FY25. While we have achieved EBIT of 18% plus in Q2, there are a few headwinds that we will have to manage. First, with improving economic recovery, we anticipate that temporary savings from travel and facilities related spend could gradually begin [Phonetic] in the coming quarters. Second, the current demand environment may lead to slightly higher than normal headwinds from attrition and wage hikes. Finally, we plan for organic and inorganic investments to support growth. Therefore, the margin trajectory is not going to be a straight line.
Having said that, our aspiration is to move towards a sustainable 18% EBIT margin level by FY25, and we see a path to reach there. We will continue to work on improving operating margins using levers like growth, quality of revenue, and productivity improvement.
As I conclude, I would like to thank you all for your continued believe in us — belief in us, and wish you all a happy festive season ahead. Moderator, we can now take the questions.
Questions and Answers:
Operator
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Mukul Garg from Motilal Oswal. Please go ahead.
Mukul Garg — Motilal Oswal — Analyst
Hey, thanks. Good quarter, guys. Amit, two — just two quick ones from my side. First, on the attrition side, your attrition performance this quarter clearly was much better than what other Indian IT companies have reported over the last few days. But have you seen any cancellation or loss or probably push out of some of the business to third quarter, which is giving you the confidence in your growth trajectory, despite the furloughs which are coming up in the December quarter?
Amit Chadha — Chief Executive Officer & Managing Director
Sure. You said two questions. So is there a second one?
Mukul Garg — Motilal Oswal — Analyst
Yeah. So second one was on the margin side. 18.4% is a fairly sharp pickup. Do you expect to continue to benefit from operating leverage in Q3, Q4 also? Or do you think — your hiring plans over next two quarters will kind of bring it down from current levels?
Amit Chadha — Chief Executive Officer & Managing Director
Okay. So let me address the first one, and will request Rajeev to take the second one. So on the first one, on attrition, I do want to acknowledge Mukul, that it’s been a tough time for us, right? One — on one side, we’ve had deal wins and the curated vision that we had created for ourselves around six dimension and six bets has got traction and we’ve seen deal wins happening therefore, right, and solutions being there. At the same time, there has been attrition, right. I want to compliment the work done by our middle management across delivery, organization — sales organization to manage some of this. And I can share with you proudly, and I believe that we haven’t had client cancellations because we lost people, right. That hasn’t happened. But yes, I mean, could we have done — could things have been more had we had lesser attrition, we would really able to hire faster, there is always that plus and minus that continues to happen, right. We would be mindful. We don’t want to hire in advance to demand so much that we get into a problem. So there should be a balanced view to find, and we’ve worked in that balance. Right, that’s number one. Number two is, from a hiring standpoint, I want to confirm that we have got on board 1,200 freshers in the last two quarters, and we are going to be taking another 2,000 freshers in Q3 and Q4 loaded largely towards Q3. So you will see Q3 headcount going up from a freshers standpoint. If you remember, Mukul, we had set up a global engineering academy or training academy, which was done by our COO last year, that has come into good use. On one side, our CSR was doing an amazing job in widening the net to colleges that he has been able to get, and people he has been continue to get for us, and ramp-up of lateral hiring engine in the US, in Europe and in India, right, and Japan. And on the second side, the head of training academy as well as all the business units heads have really taken advantage of this global engineering academy to take people in, keep open minds, and then starting to deploy them. So all of that, if you ask me, is going to help us as we move forward into the year. Again, do I have all the answers? No. But we continue to work around our access to see how we get there. Margins, Rajeev you do comment.
Rajeev Gupta — Chief Financial Officer
Sure. Mukul, in terms of margin, I think your question was, will we continue to see such a sharp spike going forward? So…
Mukul Garg — Motilal Oswal — Analyst
Rajeev, it was about like whether Q3, Q4 should see a moderation versus Q2 because of the new hires coming into the system?
Rajeev Gupta — Chief Financial Officer
Sure. So I would call out, of course, the tailwinds and the headwind side, which is of course where we’ve got to balance it out. So, one in terms of growth in the quality of revenue is going to be a major lever in terms of improvement on margin, also that will lead to economies of scale like we’ve seen in Q2. The second is if you look at productivity improvement, and that’s been one of our consistent ways of improving margins, that’s another area that we’ll continue to look at. The third is around the segment mix. We talked about improving margins on transportation segment and telecom and hi-tech segment. Transportation, we are now in the range of 19% plus margins, telecom and hi-tech has also started to show improvement. We believe we’ve got further headroom around telecom and hi-tech and that will show improvement in the coming quarters. So these are some of the tailwinds that we have. In terms of the headwinds, like I said in my opening commentary, there are going to be of course challenges to deal around attrition, and there could be wage hikes that we will have to deal with in the coming quarters and that’s going to be a balance to strike. The second is there could likely be inorganic investments that we make to support growth. And finally, we may see travel come back in the coming quarters, not in entirety, but it will gradually start to show up. So that’s where it is. We will balance this out to be able to see how best to manage this operating margin trajectory.
Operator
Thank you. The next question is from the line of Pankaj Kapoor from CLSA. Please go ahead.
Pankaj Kapoor — CLSA — Analyst
Yeah, hi, thanks for the opportunity. Amit, my first question to you on the longer-term outlook for the growth. Near term, we have a very strong visibility and that’s the reason why you have taken the guidance also up. But if I just try to extend it further, what other typical markers one should look at? Your deal win is good, but it is broadly in line with what we have been doing. So anything else which I should be looking at to take a view on how the revenue growth could we see on ’23, ’24 onwards?
Amit Chadha — Chief Executive Officer & Managing Director
Sure. So Pankaj, longer-term rate, our business is built on [Technical Issues] it’s built on the products are consumed, if products are manufactured, we are in business, right. And that’s what is the basis or we are — one. Second when the demand pattern shift or there is flux, if I may call it in the market, or in the demand, it is good for us, it will create opportunity. Right. So as I see it today, I’ll share the tailwinds that I’m seeing, right. And then I also share the headwinds very honestly. So the tailwinds I’m seeing right now are around in transportation. There’s demand in electrification, in auto and trucks, as well as connected vehicles. And I’m starting to see electrification conversations in aerospace, right. So that’s one. Second, in medical, I’m starting to see people talking about homecare, miniaturization devices, bringing things making it easier for a patient to do a lot of self diagnostics etc., telemedicine. So that’s a second that I’m seeing as a tailwind. Third, industrial products, I — we continue to see demand for digital products, digital services, digital engineering, if I may, and digital manufacturing. Right. So there are three clear areas.
And now let me come to the not so, or for us, right, and others could be different. In plant, people are starting to talk about new capex, while companies talking about upgrading stuff, etc.. But then money has yet to hit the market, right. So one. People talk about sustainability across, but that money is still to hit the market. Third on telecom, 5G has been a buzzword for a very long time, but money is still has to start flowing like it’s flowing in transportation today. Right. So — that’s where it is. Digital manufacturing, digital products, we continue to see around connected collaborative intuitive, you’ve talked about it. I won’t spend more time. But it’s moving towards intuitive and collaborative. Finally, the headwinds I called it out in my remarks as well is that today if you look at CEOs of large companies and our customers that I’ve been meeting in the last few weeks and talking to an Chief Operating Officers, their mind space is clouded, and they are thinking about supply chain a lot more than they used to. So that’s one thing I don’t know how it will play out. So longer term, I am reiterating what I had said in our IAD Pankaj that we are confident to get to $1.5 billion in FY25 is the run rate, so that still stays. And we will continue to update you, we’ll continue to talk on how things go forward.
Pankaj Kapoor — CLSA — Analyst
Thanks for this, Amit. That’s very helpful. Just one clarification. Do you sense that there was some pent-up demand this year, which of course, while structurally things all remain good may probably normalize next year?
Amit Chadha — Chief Executive Officer & Managing Director
So again, it will depend. So Pankaj very clearly, we have been looking at quarter-on-quarter growth rather than annual because last year was a very low base. We all know, we did a — we didn’t have a — we had a bad year, right. So we’re looking at sequential growth as how I — we charge our teams internally on. Though they look at long-term for solutions, which is a two-year to three-year period, service offerings are like annual and then performance and execution is quarterly. So I would be fairly comfortable at this stage to say that maybe there was a little bit of pent up, it was there earlier. But I do see this demand to be there for some time.
Pankaj Kapoor — CLSA — Analyst
Thank you. That’s very helpful. Just one small bit. How many of your employees are now back in office?
Amit Chadha — Chief Executive Officer & Managing Director
Thank you for asking that. We’ve got about 26% of our employees that are back in office. There is no formal mandate or dictate to come back. Our HR, our delivery teams have worked and function teams have worked very carefully to make sure that we make it a safe working place. And we are nudging people back to come back. I do believe longer-term, because before you ask that. So the way we are modeling this is, I do believe that once we are past these waves and all that, I do believe that you will get back to about 80%, 90% back to office. But that’s where we will be. Smaller city like Baroda, Mysore will go to maybe 90%, bigger cities like Bangalore, Mumbai, will go to 80%. That’s where it will be. I don’t see 100% coming back, but we are at 26% right now, and we are — we have — so our focus is not to get people back in office. Our focus is to make sure people are safe, people are vaccinated. And once you get them completely vaccinated, we will start prodding people to come back further. Just last point, we lead from the front. So I’m going to be in India. I’m in India already. Our offices in Mumbai this week and Bangalore, Mysore, and there are leaders that have traveled overseas, plus the leaders that live here, they’re traveling to other locations. So we are trying to lead from the front and create this effect that it’s safe to come back and we are here, you can come back as well. We are not making big calls, claims, nor do we want to make any press releases about this. We will work it in our way. But we will get it done.
Operator
Thank you. The next question is from the line of Vibhor Singhal from PhillipCapital. Please go ahead.
Vibhor Singhal — PhillipCapital — Analyst
Yeah. Good evening, sir. Thanks for taking my question, and congrats on a great performance, yet again. Amit, two questions from my side. One is, just wanted to pick your brains on the auto segment. I know you’ve already talked about it at length. But yeah — yeah, sorry, so just wanted to check basically on the auto segment. Has there been a difference in the kind of engagements, or in the kind of demand that we have seen pre-pandemic and post-pandemic, I mean, in the kind of nature of work, or let’s say a more shift towards the electric vehicle part of [Indecipherable] part. So any changes that you might have seen in the auto segment, which is potentially different from pre-pandemic levels? And my second question was on an interesting number that I just wanted to pick up [Indecipherable] fixed price contract share of our revenues. So, that number has actually been coming down over the past few quarters. And at the same time, of course, our digital share of revenue has also been increasing. So is this just a coordination or opposition here that is leading to a higher T&M in terms of our [Indecipherable] revenues. And if not that, any specific given that you have [Indecipherable], any fixed price contracts coming down?
Amit Chadha — Chief Executive Officer & Managing Director
Sure. So let me address this question in three ways, Vibhor. One, I’m going to talk about the overall pre, post on auto. I will, request my colleague Abhishek, who is here to talk about some of the solutions that we’re building that is helping us in that journey, and then Rajeev will pick up the FP and T&M. So auto segment pre, post, I’ll tell you one thing that happened was, and immediately need the moment the pandemic hit which was April — March, April, May, I was talking to the head of engineering, the head of — one close friend was head of engineering and supply chain. Right. And he was saying, I don’t see loss coming back for the next three years. I don’t see that. And immediately the stalled, they stopped these engineering development programs or delayed it, right. And that’s where we got hit. And this is, we don’t know whether we sell or not. That was pre-pandemic, or time to make, in time to make. Pre-pandemic, there were projects. We always, as you are aware, the design cycle is only about, so if they want something in three years, they do the engineering now, then it goes through whatever. And we get engaged in that three-year prior period to what you see coming out, right, two years, three years.
So pre-pandemic is continuing. Also, the amount of discussion on electrification, and autonomous there was discussion. Infotainment, there was a lot of discussion, but electric as well as autonomous there was conversation, but it’s not a huge one conversation. Come post pandemic, or we are not even post pandemic, I’m saying post April, May, June, the moment they realize that people are not stopping from buying cars actually people buy more cars because now they wanted their own ride. They didn’t want to sit in bus. They didn’t want to sit in the train. Right. So they saw that happening, immediately the conversation shifted to how soon can you start getting stuff done, A. B, the amount of conversations and the amount of work that we are getting now in electric and connected area is there is a huge demand that we are seeing right. Everybody wants it like yesterday. Right. There is an idea that we use in consulting language, it says, hurry up and wait. So it has been the other way around, where we’ve had to, it’s all of a sudden, right. And we are working towards it, and that’s part of the training, etc. we’re doing. Second part of it that we have seen is solutions that we’ve built on, especially EV. I would request Abhi to spend a couple of minutes about it, and then he will hand over to Rajeev on FP and T&M. Abhi?
Abhishek — Chief Operating Officer & Whole Time Director
Yeah, thanks, Amit. So what we’ve done on the automotive sector, especially with regards to investments over the last, I would say, 1.5 years is paying off very well. We did investments in two segments, one is internally we have structured ourselves by practices, powertrain practice connected, autonomous body engineering vehicle electronics. And each of these practices are very clear, detailed plans on investment areas. I’ll just touch upon the EV front, which is something which is giving us great returns over the last few quarters. So we have a EV lab, which we have spoken off in the earlier quarters. In between, we used [Phonetic] quite a bit of money too, during the COVID times to set up this lab. What we have also done now is we have a complete, I would say, electric car we have developed. Now, when we say electric car developed, it’s not about getting into the car segment, but to demonstrate our capabilities on every element of what goes into electric car. The battery management system is our technology, the cable wire harnessing that has been done is ours, the vehicle control unit, power distribution unit. Every company that you can think of in the electric car is something that our engineers have developed in-house. And we continue to enhance this. In fact, in the connective — connected part of the car where we have Alexa integration in the car and Alexa takes commands to starts, stop, the various elements of the car unit is that something engineers have done. So I think the way we’re going about it is we are keeping ourselves ready to demonstrate capabilities to our customers. And Amit spoke about from business front 6% growth quarter-on-quarter, and I think this journey will continue. We are seeing extremely good traction.
Rajeev Gupta — Chief Financial Officer
Vibhor to answer to your question around the T&M mix. I think I’ve already touched upon it in my opening commentary. I mean, we are seeing the incremental signing happen on the T&M side. And this is more so because when there is a greater share of, let’s say, new technology or a generational leap in product or processes that customer is undertaking, we are seeing more of T&M kind of contracts being signed. For example, use of scrum methodology. Our take is that we will be in this range going forward as well Vibhor.
Operator
Thank you. 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 congratulations on a great execution. My question is generally the perception was R&D firms have to have employees in office. But if I look at the offshoring niche, we are almost now at 60%. So, is this a structural shift in terms of clients engaging the R&D firms and that offshoring can increase further, that’s first question. And the second question is on the margins. What could be the key reason for lower than Company average margins for telecom and hi-tech? Is it that it is more on-site driven business, because we are not yet anywhere close to the peak margins. And how much of that is a lever in the margins going ahead?
Amit Chadha — Chief Executive Officer & Managing Director
Okay. So Abhishek the way we are seeing this is that all our customers, right, so, I’m not talking about ones that are ready to do very small business, but our top 30 our next 20 customers, they have almost treated our employees as their employees. There is a new thing called and well up of health safety and HSE envelope. What HSE envelope means is Abhishek that whatever they do to their employees they want it done two hours, that’s how they want to operate. This is the principal. See, if they don’t have their employees coming, they don’t want our employees coming to office. Right. And they have gone through great lengths, and I thank our customers and our partners that having done that, where they are enabling this work from home. Right. So they’ve been — thankful to them for having enabled to that. So having said that, short-term you’ve seen offshoring improve, you also know that countries are shut down their visas, etc., etc. We were not able to fly people in, recruiting locally, blah, blah. I do believe that a little bit more offshoring could happen, I mean that’s to be seen, how things develop because the point is a lot of behaviors have changed over a period of time. Let’s say, all of a sudden, one day COVID goes away. Right. Then how will people behave, I don’t have that answer. But I do believe that whatever offshoring has been achieved is something that is sustainable and we want to see as to how this can further go in a direction, etc., right, A. B, what we have done in terms of this is to make sure that we’ve been able to do, so you again said engineering can’t be done remotely, that’s not correct because, yes, there are some mechanical pieces of work, there is some embedded work. There are some plant engineering work that needs machines, that needs people in offices. But there is other stuff that can be done remotely, which is being managed. Again, do I have a golden bulleted answer for this? The answer is, no. We will continue to work on this. On lower telecom margins, again, I’ll hand over to Rajeev.
Rajeev Gupta — Chief Financial Officer
So Abhishek, in terms of the lower margin on telecom, hi-tech, I think this is something that we’ve called out in our earlier earnings calls as well. There were two segment that we are consciously working in terms of improving margins. One was transportation, second telecom/hi-tech. Transportation, as you may have noted over the last two quarters, consistently, we are able to see improvement in margin, and largely that is driven by growth and also optimization measures. As far as telecom/hi-tech, we made conscious investments in telecom/hi-tech. And that also follows from the fact that we did the Orchestra Technology acquisition Q3 of last year. Right. So some of these investments have been deliberate. I may also call about investments in 5G. What we believe I think those investments will now start to yield benefit. So the margin trajectory for telecom has started to move on the positive side. We believe in the coming quarters it will be even better than what we see.
Operator
Thank you. The next question is from the line of Vimal from Union AMC. Please go ahead.
Vimal — Union AMC — Analyst
Yeah, thank you for the opportunity. Amit my question is, I just wanted to pick your brains on that industry growth for ER&D especially. Over the past one year, you’ve seen this industry take [Technical Issues] we come up from Q1 FY21 [Indecipherable]. In this 1.5 years, have you changed the rule or have you increased? We’ve clearly seen growth increased for LTTS. But do you see this for that industry as well? Or the growth rate for this industry has that is pretty much remain where they were expected to be over the longer period. And you expect LTTS to sort of ultimately gain market shares and that is where the increased growth productivity [Phonetic] is coming from?
Amit Chadha — Chief Executive Officer & Managing Director
So there are two things Vimal, one, and I’ll refer to data from people like Zinnov and IDC and market analysis they’ve done. So they’re talking about that — the engineering industry in 2020, well, they’re about $1.5 trillion right. Broadly what a trillion dollars in legacy engineering about $0.5 trillion or $500 million — $500 billion in digital. Right. Now, if I look at view on say 2026, right, so I know that one of you also talked about a longer-term view. So if I look at that the expectation is that this $1.5 trillion will go to $2.6 trillion, right. The legacy will only grow at about 2% but the digital will grow at about 19% CAGR. Now all of this cannot come to people like us, it will go to captive centers, it will go to people like us. There may be Eastern Europe, it may go to etc. But broadly, there is a increase in engineering spend that is seen that we expect to come out. Second part, this is also going to come out in different verticals. So be it transportation, be it industrial products, be it medical and healthcare, telecom/hi-tech, so each of these will have their own trajectories of growth in engineering spend via digital, be it legacy. And some — digital may also start getting core legacy tomorrow. The second part is, on the digital part itself, we expect that — so you briefly — broadly breakup, if I may digital into connected collaborative intuitive, right. three quarters. And where today 60% of the digital spend is getting into connected, people are still correcting stuff and intuitive may only be 5%. If you look at $1.5 trillion when it gets to, we would expect connected to only be it about 30% with the majority of the spend going into collaborative and intuitive. So I do think that that there is avenues of growth that is there from a spend standpoint. From LTTS standpoint, there are five segments that we’ve agreed to work on, and there are four horizontal areas that we work on that we’ve talked to you about. And we believe that as long as we can continue to build solutions, as long as we can continue to remain agile, think long term, medium term, execute short term. I can — I do believe we’ll continue to gain market share in the market and specific areas.
Vimal — Union AMC — Analyst
Fair enough. Thanks a lot and all the very best for the rest of the year.
Amit Chadha — Chief Executive Officer & Managing Director
Thank you.
Operator
Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead. Nitin Padmanabhan, your line is in talk mode. Please go ahead with your question. As there is no response from the current participant, I have muted the line. The next question is from the line of Sudheer Guntupalli from ICICI Securities. Please go ahead.
Sudheer Guntupalli — ICICI Securities — Analyst
Thanks, gentlemen, for giving me the opportunity. Amit, just a starting hypothesis for most of us, analysts and investors is that our growth rates in ER&D tend to be higher than in IT services. But if we look at the FY21 performance and FY22 performance — expected performance are there of LTTS and kind of benchmark it with some of our services, IT services companies, couple of our sister concerns, so on and so forth. Clearly, the growth differential seems to be very wide for FY22. Now this is despite the fact that the FY21 has not been a very bad year for some of them like it is for us. So on a two-year CAGR basis if I look at, we are running close to around 8% FY21 and FY22, and this comes on top of FY20 which is also — which was also a weak year. So just trying to understand your perspective around, is anything changing in this cycle in terms of the expectation around whether ER&D growth rates can be higher than that of IT, or will be lower than that of IT? That’s my first question.
Amit Chadha — Chief Executive Officer & Managing Director
And what’s your second question?
Sudheer Guntupalli — ICICI Securities — Analyst
Related to this — related to the same. Again, we are running at around 8.5% sort of CAGR for the last two years despite FY20 being very weak. And I think referring to one of the earlier questions is from Pankaj, there would have been some pent-up, which would have come into the system this year. Even after that we are talking about around 20% sort of growth. Going ahead, when this pent up kind of presence out, our guidance is sort of hinting at around 17%, 18% overall growth, in which I am assuming an organic growth rate of at least around 14%, 15%. So how do you think about achievability of those organic growth rates?
Amit Chadha — Chief Executive Officer & Managing Director
Okay. So Sudheer, if I may, I would request don’t look at — don’t take a base year of FY21, right. In fact, if you remember, if you’ve been with us for some time, you would see. So after we went IPO we had — we did have a bad year at that point of time, which where we had a certain, there was issues. The client beyond that we ran two years at successive growth rates that were above 20%, right, organic. And then we have in the year where we had two client situations not in our control. Had those not been there, or if I was remove those two client situations, we would have still been at that 20% clip. Right. So not right. Last year was an aberration. Look at us as a three-year, five-year CAGR. I would not look at it as a one-year, two-year, if I may please. And having said that, engineering and technology industry is different from IT, right. And therefore I would look at us differently. And I do believe that each one has their own trajectory, each has their own nuances. We are — we work out of a profit center. They — IT is largely a cost center play, and not a cost play, but a cost center play. Right. We are more on our innovation model, that’s — there is differences. So I would not do that. That’s what I would say one. Second, how do you see — the ’19 to ’20 is that good, is that bad, is something we will see. We continue to work on our numbers, we continue to see where the opportunity is. We are focused right now more than our trajectory. We are focused on basic principles. I’m sorry, Sudheer, we are all engineers. We are focused on getting to technology, making sure we are competitive, making sure we are giving our clients their competitive advantage. And with the shifts in technology we are seeing, we do believe that we are not at the top of the S-curve in terms of that it’s done and we are — the days are over. I do believe we are in a part of S-curve that we’ll see further client.
Operator
Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Nitin Padmanabhan — Investec — Analyst
Yeah, thanks for taking my question. Am I audible now?
Amit Chadha — Chief Executive Officer & Managing Director
Yes, sir.
Nitin Padmanabhan — Investec — Analyst
Yeah, apologies. So just a couple. So one is, if I look at the attrition, I think the attrition numbers are something that we aren’t used to. If I look at history, it is clearly at the top end. And my first question is, do you think the attrition is peaked or you see this going up further? Two, are you seeing attrition more on the domain side or on the horizontal side of things, or is it just experience based attrition that you are witnessing at this point? Third, you spoke about wage increases. Just wanted your thoughts on — you expect that to happen in the second half of the year. And so that was the third one. And finally, in terms of acquisitions, just wanted your thoughts on the areas of focus, and do you just expect tuck-ins like history or do you expect a larger one? Those were the questions. Thank you.
Amit Chadha — Chief Executive Officer & Managing Director
Okay. So, if I may, I got 16.5%, not good. Has it peaked, or will it be more? Third was wage hike, are you planning wage hike? What was the second question, can you repeat that please? Sorry, I didn’t catch that.
Nitin Padmanabhan — Investec — Analyst
Yeah, so the attrition was higher than history, and will it go higher? Is it more domain specific or horizontal specific, or just experience wise of three years to five years, or one year to five years. So those are the questions on attrition. And obviously wage increase in the second half, do you expect it to have a meaningful impact. So those are all on the attrition and wage. Maybe I’ll ask the last question after that. Yeah.
Amit Chadha — Chief Executive Officer & Managing Director
No, no. M&A, we got. So I would request Rajeev to talk about M&A, but I will cover — let me cover the attrition part for you. And then if I miss out something, my colleague Abhishek can add to it. So number one, we are not proud of 16.5%. I want to be very honest with you, it personally hurts my heart when I see an employee go. Because at some point, I think, is he does not — does he not believe in our dream? Does he not believe in our six dimensions? Does he or she not believe in our bets? But reality is, I cannot match dollar to dollar. This can’t happen, right. Don’t have an open wallet, don’t have an open checkbook. Number one. Number two, the opportunity in India and US and Europe has expanded. We had somebody talking to us. In fact, we had Satya Nadella talk to us on our subject, and he said the number of changes we see on LinkedIn, he has never like seen so many people changing jobs. And they, of course, have access to data that even I don’t. And maybe you do, I don’t. Right. So I do believe that attrition — so again, do we think it’s peak? We are working various measures. And let me take some of those. Number one, we had a very bad year last year. We didn’t give increments. But this year we divided it up. Juniors got increments in April, seniors got increments in July. The reason that was done was, we wanted to make sure people understand that leaders don’t eat first, they eat last. Second, we have done corrections where we have not been able to do enough etc. But like I said, limited dollars, limited checkbooks on these things, so we have done what we could there. Having said that, we are trying to provide a holistic experience. We are running a program within the Company called Project Rendezvous [Phonetic], that is focused on trying to enhance, improve employee experience. Two weeks ago when we closed the quarter, the CSRO, the COO, the CFO, myself, the CTO, and the business unit heads and some other select sales head sat down and there are 130 people involved in the Company that came in newer suggestions on what do you need to do in price specific areas around project rendezvous. And we’ve given approvals to implement some of those. The others will get done over the next three months. To be able to, we’ll do a pulse check again on our employees in quarter four of this year. So we are doing that to provide a holistic experience. Third, while COVID is going on, we continued the process of CEO club, youth league. We created a leaders league, on and on to make sure that we are not just talking about dollar to dollar, but what are we doing beyond. Third technical training was established, and that continues to enrich our employees as they move further. Now are we going to do any further corrections? May be. We are working. We are studying the situation, and we will see what we have to do in specific areas, and we will make that intervention happen if it needs to be done. Lastly on domain, it’s been broadly broad-based in terms of attrition that we’ve had. I have — I mean, we don’t give out data on city-wise, but we have gone down to city attrition, gone down to business unit wise attrition, and we are taking various steps to try and stem it. I, again, want to say, in spite of the attrition we’ve had, I’m proud to say that I lead a team that has made sure they can make things happen. It is nerve-wracking, but people are doing it. And we will take various measures to try and improve it. Abhi, anything you would like to add before we hand on to — hand over to Rajeev?
Abhishek — Chief Operating Officer & Whole Time Director
No, I think you covered it all. Yeah, I think just one point which, at least we are getting very good feedback from our employees is the broad-based training programs that we have done. More than 75% of our employees have been touched by at least one of the training programs globally. I’m not just saying India, globally in the last six months. And that, I think, is we are getting very good feedback on that from employees that we’re continue to invest in them.
Amit Chadha — Chief Executive Officer & Managing Director
And I mean, having said that, I do want to say that our plan to address attrition is there. We’ve got backup plans, and we are working towards it. We hiring freshers. We’re training people. We’re hiring laterally. So all that is happening. I’d given out numbers earlier to one of the questions as well. So we believe that we will work this out. This is an industry thing, not just in India thing. It’s a India, US, Europe combined thing. We’ll work towards it. Rajeev, would you like to take M&A question?
Rajeev Gupta — Chief Financial Officer
Sure. So Nitin, I believe your question was, are we looking at more like tuck-in acquisitions? So let me clarify, and we’ve said this earlier as well in our IAD. So we are looking to do acquisitions to really build capability in the white spaces. And the space is really is one on the auto new tech, the medtech, and ISV. The second is, while in the past we’ve done acquisitions more in the range of $20 million to $25 million, we are now open to do even larger acquisitions that could be in the range, say $50 million to $75 million range. And for that range we believe that there could be capabilities that could expand beyond the three spaces that I talked about, right. So it is not necessary that is only going to be a tuck-in acquisition, but we are not close. Right. I mean what we’re looking to do essentially is to build capability in the white spaces and that’s the lens we’re looking at.
Operator
Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Pinku Pappan for closing comments.
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. I am available on e-mail, so please write to me if you have additional queries. Look forward as always to connecting with you, and we wish you all safe times and a great evening. Thank you.
Operator
[Operator Closing Remarks]