L&T Technology Services Ltd (LTTS) Q4 FY23 Earnings Concall Transcript

L&T Technology Services Ltd (NSE:LTTS) Q4 FY23 Earnings Concall dated Apr. 26, 2023.

Corporate Participants:

Pinku Pappan — Head of Investor Relations

Amit Chadha — Chief Executive Officer & Managing Director

Rajeev Gupta — Chief Financial Officer

Analysts:

Bhavik Mehta — JP Morgan — Analyst

Akshay Ramnani — Axis Capital — Analyst

Vibhor Singhal — Nuvama Equities — Analyst

Rajiv Berlia — Citi — Analyst

Abhishek Shindadkar — InCred Capital — Analyst

Apurva Prasad — HDFC Securities — Analyst

Nitin Padmanabhan — Investec — Analyst

Mihir Manohar — Carnelian Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to L&T Technology Services Limited Q4 FY ’23 Earnings Conference Call. [Operator Instructions]

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

Hello, everyone, and welcome to the earnings call of L&T Technology Services for the fourth quarter and full year FY ’23. I am Pinku, Head of Investor Relations. Our financial results, investor release and press release have been filed on the stock exchanges, and is also available on our website www.ltts.com. I hope you’ve 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.

With that, let me introduce the leadership team present on this call. We have Amit Chadha, CEO and MD, Abhishek, COO and Executive Director, Alind Saxena, President, Sales and Executive Director, 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

Thank you, Pinku. I hope I am audible.

Pinku Pappan — Head of Investor Relations

Yes sir, you are audible.

Amit Chadha — Chief Executive Officer & Managing Director

Excellent. So thank you, Pinku, and thank you all for joining us on this call today. I’m just in hope all of us are doing well. I would like to start by welcoming my colleague with more than 12 years at LTTS, Alind Saxena, for the Board of LTTS. He was elevated earlier today to present Sales and Executive Director. Alind is a graduate from IIT Kanpur he has lived in the U.S. and Europe for more than two decades, been with LTTS since 2009. And a member of the executive leadership team for the past few years. Prior to this appointment. He was the Chief Sales Officer, responsible for North America and Asia.

With that, let me provide the key highlights of our Q4 performance. In USD terms, we had a sequential revenue growth of 2.8% with four verticals, medical, plant, telecom and hi-tech and industrial products, growing in excess of 4% sequentially. We sustained the EBIT margin at 18.7% as we continue to strengthen the operating model to make it sustainable.

Our large deal engine continues to fire with a $40 million win in this quarter, and three additional deals of $10 million TCV plus each. Overall, when we look at FY ’23 as a whole, we’re quite happy with our performance and the milestones we’ve achieved. A, growth, we crossed $1 billion on a run rate basis and grew by 16% in constant currency during the year. Three of our five verticals grew in double digits, transportation at an industry-leading organic 22%. Plant and industrial products more than 10%. When we look at a geo split, all three goes U.S., Europe and ROW grew in double-digits.

Second, large deals, in FY 23, we closed a total of 18 deals greater than $10 million TCV which include these, in the $40 million to $60 million range, and three, in the $15 million range. Third, from a technology quotient standpoint, we continue to file patents in the rate of about 50 per quarter, taking the total to 222 for FY23. Cumulatively, we have now filed 1,090 patents as of FY ’23, of which 363 are our own and 720 on behalf of the customers.

Patents showcase the innovation culture that we have in the company, and how our engineers are helping customers leverage advanced technologies for their products and services.

Operating model. Our FY ’23 EBIT margin was the highest ever at 18.5% on the back of consistent focus on strengthening the operational playbook. PAT For the year crossed INR1,000 crore mark at INR1,170 crores, another milestone. We also have grown PAT at an 18% CAGR over the last five years, demonstrating consistency in operations, et cetera.

M&A, we acquired SWC, which is the largest acquisition for us yet, the combined offerings of LTTS and SWC give us scale and end-to-end portfolio coverage. We are gaining momentum in building a large pipeline here. We’ve already closed three deals, which includes one 5G deal that we’ve announced to the press. And one — another one, which is a telecom infra OEM, leveraging SWC capabilities we have closed in the current quarter, as reported in our results.

With that, let me now provide the segmental performance and outlook. Starting with transportation. We continue to invest in transportation capabilities. The current investments are in the software-defined vehicle space, setting up higher wattage EV labs for auto, trucks and off-highway equipment and electrification. There is a good pipeline of opportunities for connected vehicles and V2X solution development. In transportation, we have filed 27 patents for ourselves in the last two years, which is nearly 50% of the overall patents that we have filed in this domain, giving you a clear indication that our pace of innovation has picked up in this sector.

Leveraging SWC, we are entering conversations to set up data centers, soft operations for autonomous and connected vehicles. In Q4, we had a flat quarter as we had ramped up some deals in Q3 and stabilized in quarter four. During the quarter, we have signed a $40 million plus deal with the U.S. transportation major, for a complete transformation of their tech stack cutting across design, development, analytics, et cetera.

Additionally, we have signed two $10 million plus deals in transportation, which puts us in a good position for growth in Q1 and beyond. Overall transportation had a stellar year. We grew 22% in FY ’23 organically. And this is now a $350 million annualized business. We continue to see strong growth prospects in this business.

Second, plant engineering, demand in O&G and chemicals is driven by digital twin and asset reliability where digital technologies are being leveraged in a big way. We are leveraging our own asset healthcare solutions, which is in digital manufacturing, AI framework, that will proactively address asset and plant shutdowns. In CPG as well as in oil and gas and chemicals, the broad trend is towards localization, capacity expansion, and setting up engineering value centers.

As we had indicated in previous quarters, we saw a good bounceback in quarter four with a 6% growth sequentially, which was broad-based across the three subsectors. We have won multiple sub $10 million deals with MNCs to setup their newer plants in countries including India.

Plant Engineering grew at an impressive 16% this year and we’re optimistic on the growth momentum continuing.

Third Industrial Products, digital demand is increasing with customer spending on manufacturing, new product and application development. We are seeing strong traction in digital products and services, as well as in AI and digital manufacturing. IT as a segment has always been very innovative and we have filed 131 patents for our customers in the last two years alone.

We are investing in capabilities that help companies transition towards green energy, like battery energy storage and containerization. As part of our sustainability big bet, we’ve executed projects in electrolyzer design for green hydrogen and see more opportunities coming up. Ethan, one of our longstanding customers is engaged LTTS to work on projects related to sustainability, where we will leverage SWC capabilities around smart and sustainable spaces, again a press release has been issued to this effect.

In Q4 we had a 4% sequential growth, led by machinery and building automation. For the year, Industrial Products grew at 10%, we see a good pipeline of opportunities in the digital space and expect growth to being strong in the current fiscal going forward as well. In Telecom and Hi-Tech, we are in conversations with customers, wanting to make their supply chains more resilient, as well as optimizing cost and efficiencies.

With SWC we won a deal with a telecom infra company to set up a complete 5G network to validate their next-gen 5G product. We’ve also won a deal with the North American rail operator for 5G private network deployment. Cyber security expertise is another area that we’re leveraging SWC capabilities, are partnering with cyber security providers, to build products for OT security.

There were ramp downs in the semicon space. However, we were able to offset that with growth in the other sub segments, like, telecom OEM, service providers, media and entertainment. So overall, we’ve had a good 4% growth in Q4, despite an overall challenging environment, and puts us in line to continue to grow as we go forward into next year.

Additionally, SWC capability will give us a bigger play in 5G, north and south, globally. There are a few deals in place that we expect to close in the quarter. Lastly in Medical, again a very innovative segment. We filed 32 patents of our own, over the last years, which is a majority of the patents we have filed in this segment. As I had indicated earlier, the pace of filings have increased over the last two years, and these solutions are World-class. We are investing in digital healthcare solutions and AI enabled solutions for quarter. We’ve been diversifying our growth in Medical with more contributions coming in from Europe and ROW. Overall, we had a strong quarter with 7% growth led by ramp up on deals which we’ve won recently. We are seeing a good pipeline of deals. However, they take a little bit longer, as you’re aware in Medical to [indecipherable] 50 patents.

Medical growth for the year was in single-digits, though the rebound in quarter four has created a good momentum, the deal pipeline gives me confidence to confirm this will grow faster in FY ’24.

Let’s now get onto outlook. Even as the global GDP normalizes to pre-COVID levels, there are three clear areas that will attract ER&D investments and increase the total addressable market pie for people in our segment. These three are around energy, transition and electrification, digital new age technologies for a variety of use cases that cover user experience, automation and communication, business transformation to optimize cost and increase returns and thereby increasing outsourcing and offshoring.

There is some data points for you to take. Digital transformation spends continue, and as per latest market reports will grow from $800 billion currently to $1.4 trillion in 2026, led by cyber security, AI, hyper automation, enhanced speeds of connectivity, better and higher computation, and cloud adoption. The global AI market itself is expected to grow from $400 billion to $900 million in FY 2026, with spends towards hardware, software and services. Industry-specific models will be needed to be created, which will create a great amount of opportunity for us. All these indicators dovetail with our bets, around EACV, med-tech, next-gen communication with digital, manufacturing and products and AI.

We do believe, U.S., Europe and Japan will continue to fire at similar levels of spend on innovation, technology as they have, while parts of Middle East and India will also see an uptick. Our large deal traction continues to scale up across U.S., Europe and Japan. We are starting to make some inroads into Middle East, and to be played out. We see large deal opportunities across five segments, both in digital and Next-Gen product development, as well as cost optimization-related initiatives.

We had — we’ve made some good progress with SWC with full integration to the people and leaders so far. Rajeev will talk a lot more about this because he is leading that effort from the executive leadership team. We believe the executive — the joint offerings across next-gen comps, smart and sustainable world with cyber security, have been taken to customers and we’ve seen a good pipeline for that. Till-date like I said, we’ve won three deals across this yet to announce more shortly.

Looking ahead, we see another strong year of growth. For FY ’24 our guidance in USD constant-currency terms is 20% plus. Within this organic growth will be 10% plus, while the rest will come from SWC. I would also like to reconfirm our aspiration to hit a $1.5 billion run rate in FY ’25.

With that said, wishing you all the best and great health. I will hand over to Rajeev, we’ll then stay on for questions.

Rajeev Gupta — Chief Financial Officer

Thank you, Amit. Good evening to all of you and I hope you’re keeping safe and healthy. As you may have seen from the results filing, FY ’23 has been a landmark year for us, crossing the milestone on $1 billion in revenue run rate, with growth across segments, achieving consistency in operating margins, through the quarters to touch 18.5% for the year, which is the highest we have reported. And PAT for the year crossing the INR1,000 crore mark.

We’re also happy about the consistency in free cash flows, which has helped year-end cash, nearly INR3,000 crores. We also did our largest acquisition till date, which will be effective from 1st April, 2023. I shall now take you through the details of our quarter four FY ’23 and full year financials, starting with the P&L.

For the quarter, our revenue was at INR2,096 crores, a growth of 2.3% on sequential basis. Our double-digit year-on-year growth trajectory continues with Q4 revenue up 19% on year-on-year basis. We sustained EBIT margin at 18.7%, coming flat when compared to quarter three. We absorbed higher employee-related costs through operational efficiency and G&A improvements.

For the year, our revenue was INR8,014 crores, a growth of 22% over FY ’22, our second consecutive year of growth 20% plus. Performance was led by Transportation, Plant Engineering and Industrial Products segments. EBIT margin for the year was 18.5%, an improvement of 20 basis points over FY ’22.

Now moving to below EBIT. Other income for the quarter was at INR39 crores, slightly lower on sequential basis, due to lower forex gains. Effective tax rate for quarter four was 28%, and for FY ’23 at 28.6%, slightly higher than expectation for the year. This was due to conclusion of certain past year assessments in quarter three, we expect this to stabilize in the 27.5% range going forward.

Net income for the quarter stood at INR310 crores, which is 14.8% of revenue, up 2% on sequential basis, driven primarily by higher revenues. For FY ’23, net income was INR1,170 crores, 14.6% of revenue, up 22% in line with revenue growth.

Moving to balance sheet, let me highlight the key line items. DSO was 75 days at the end of quarter four, compared to 77 days in quarter three, while unbilled days reduced to 15 days in quarter four, a two day improvement over quarter three. The combined DSO including unbilled stood at 90 days, which is well within our target range of less than 95 days, and this is also the lowest level over the last few years.

Let me now talk about cash flows. In FY ’23 free cash flow was INR1,132 crores, a healthy 97% of net income. Our cash and investments rose to INR2,974 crores by end of quarter four FY ’23, an increase of nearly 40% versus end of FY ’22. On capital return, the Board today recommended a final dividend of INR30 per share, taking the total dividend for FY ’23 to INR45 per share, this translates to a dividend payout of 41% for FY ’23 and the highest payout so far. Our return on equity stands at 26% for FY ’23 versus 25% last year. Again, higher on account of increase in net profits to INR1,170 crores in FY ’23 versus INR957 crores in FY ’22.

Moving to revenue metrics. On a sequential basis, dollar revenue growth was 2.8% in reported terms and 2.2 on constant currency basis, led by Medical Devices and Plant Engineering segments. Segment margin performance for the quarter was better in two out of five segments on a sequential basis. Transportation margins were lower in this quarter due to costs related to initial ramp up of certain deals, and certain one time investments made in capabilities on new-age technologies.

Segmental margin performance for the year was better in four out of five segments, led by Plant Engineering and Medical Devices. Now, let me comment on operational metrics. The onsite-offshore mix came in line with our expectations. Offshore percentage now stands at 57% for the quarter. Our aspiration is to improve this ratio to 60% levels in the medium term. The T&M revenue mix increased to 71% in Q4 and is likely to maintain at these levels.

On client profile which indicates number of million-dollar plus accounts has shown a sequential improvement in the $5 million and $1 million plus category. The client profile numbers have seen an improvement over the past few quarters. This trend will continue in the coming quarters. A key highlight that I would like to share here is that our top accounts crossed the $40 million mark in FY ’23. Client contribution to revenues, all three categories, top five, top 10 and top 20 continues to be in the same range as quarter three.

Headcount increased sequentially by 584 employees, while attrition moved down 22.2%. Our aspiration is to get below 20% levels of attrition. This will be achieved through various employee engagement measures. Realized rupee for quarter four was around INR82.2 to the US dollar an appreciation of 0.5% versus quarter three.

Let me now provide an update on our SWC acquisition. We have successfully closed the transaction, effective 1st April, 2023 and integrated around 800 employees of SWC into LTTS. An integration Office was setup to focus on day one readiness, and operating model, which helped us manage the transition smoothly.

We continue to run the synergy program over the next 180 days and we’ll focus across three tracks. First, revenue, priority is being internationalization of customer base, expansion of services portfolio, and creating large deals opportunities. As Amit mentioned, we are seeing a good pipeline of opportunities with three international deal wins so far, leveraging the SWC offerings.

Second, on margins. Expanding margins through internationalization, business mix, and G&A optimization. Third on DSO and working capital, which is to improve collections and transform into a solutions and services play to get into more asset-light deals.

Before I conclude, let me give some visibility on the margin trajectory going forward. Our EBIT margin stands at 18.7% for quarter four and 18.5% for FY ’23. With the addition of SWC, we aspire for EBIT margin to be in the range of 17% in FY ’24 on a consolidated basis. With the transformational levers that we’ve identified and started to execute, we maintain our aspiration to get back to 18% EBIT levels by H1 of FY ’26.

Summing up, we had a good performance across parameters in FY ’23, and are excited about our future growth prospects. Thank you. And now, I hand it over to the moderator for Q&A session.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Bhavik Mehta from JP Morgan. Please go ahead.

Bhavik Mehta — JP Morgan — Analyst

Thank you. A couple of questions, firstly on the guidance, if I look at the organic guidance at 10%, seems a bit weak given the momentum we are seeing in four of your five verticals in the 4Q numbers. So can you just throw some more light on what kind of headwinds are you expecting going into FY ’24 which has led you to come up with a weak guidance at 10% on an organic basis.

Secondly, on SWC, it seems like the revenues were just $100 million in FY ’22, while the FY ’22 numbers what you had shared it led to revenues of around INR140 million, INR150 million, so has SWC revenues contracts over the last year a clarification on that?

And lastly, can you just talk about this DOJ settlement what you’ve made up around $10 million, more color on that in terms of was it related to some one or two clients or was it across multiple clients in the U.S.? And what has been the reaction from the clients because of this settlement done by you?

Amit Chadha — Chief Executive Officer & Managing Director

Yeah, hi. Thank you so much. So number one, I believe that what we’ve guided is 20% plus, with the focus on the word plus, right? And we’re just starting the year. We’re not declaring FY ’24 results yet. So I do believe and I have a lot of optimism as I enter the year. If you look at it, there are three clear areas where we’re seeing money is being spent, energy transition, electrification, digital, which is included cyber, AI, automation, the connectivity computation and cloud adoption, and finally, a lot more outsourcing and offshoring.

So at this stage, given the — given where the world is right now, I do believe that we’re very confident to this 10% plus across segments. The two areas which are a little bit of a concern to provide a balanced view here, are semicon and hyperscalers, our exposure to hyperscalers is very limited. And in fact the areas we’re working with them on are seeing expansion.

Semicon of course, we had a decline in the current quarter, but we overcame that and in spite of that Telecom and Hi-Tech grew 4%, so that’s where we are on that. With regards to the — and I will hand over to Rajeev on the Smart World part.

But on the DOJ part, as we had outlined in the press release that we did, this was settlement without admission of guilt or liability, and this was for some stock that was — that came to our notice with the past. It is behind us. We have put in very strong controls, including, having a General Counsel appointed in the U.S. away, and a strong team and processes to back this up. Our clients have been very supportive to us. And if anything what we have taken away is that they have appreciated our transparency, our strong processes, and the way we have been working with them and conducting ourselves over the last few years.

Rajeev, with that said, if you would like to add color on Smart World please?

Rajeev Gupta — Chief Financial Officer

Thanks, Amit. Bhavesh, let me address the question on the SWC revenues. So in respect of SWC revenues, the portfolio of contracts that we’ve taken over from L&T aggregate to INR800 crores in revenue for FY ’23. We will consider this to be the baseline. These are also contracts that are strategic in nature and will result in better performance for LTTS combined in future.

I would also like to confirm that the DOJ settlement has had absolutely no impact on any of our customers or any deals or conversations. Move to the next question.

Operator

Thank you. So the next question is from the line of Akshay Ramnani from Axis Capital. Please go ahead.

Akshay Ramnani — Axis Capital — Analyst

Hi, thanks for taking my question. So, first question was SWC. So you mentioned about getting into asset-light deals, would you expect that process to be a headwind on revenues as we transition? And if it’s yes, how do you expect the transition period to continue? And also you had earlier mentioned that some of these government contracts will come up for renewal over the next 18 months, in most likelihood you may not go ahead with renewing those contracts. So are we on track, and what percentage of revenues can those contracts to be?

Amit Chadha — Chief Executive Officer & Managing Director

Okay. So thank you so much, Akshay. so number one, as we’ve said, Smart World is three parts, right? There is telecoms which now we have integrated completely into our comms, and we’re calling it next-gen comms. In fact you’d see our website may have either been changed or will get changed from 5G to next-gen comms, right? And there we are seeing three areas of spend. One, we are seeing a lot more 5G trials going on. And therefore, our business in that area has picked up with a couple of old telecom operators that were our customers in North America.

Number two is that, there are customers that are coming out with devices that can get rolled out into tunnels, into large expansions of campuses, et cetera, and they are asking us to test those devices, look at the hardware, look at the firmware, look at the software layer, et cetera. And we are again leveraging that and that is the second — sub part of what’s happening in Telecom and Hi-Tech.

So these are asset-light deals that we’re talking about. These are pure-play services that we’re getting involved in globally. Like I said, we announced one with a 5G, we announced today one, with masking the customers’ name. And as I go forward, you will see a lot more exciting wins in this area because the pipeline is great,

Second is cyber security, and cyber security was very small for Smart World, it was a bigger part for LTTS. However, they had an asset called SOC which is a security operations center in Chennai, a physical asset which we’ve taken over, which is basically a building with computers, et cetera, et cetera, and algorithms and blah, blah. Now, the advantage of all that is, that we’ve already got two wins in that area. We’re very close to actually getting to a third and fourth win in that area, and signing up go-to-market partnerships with customers, with providers that will differentiate us. So that is again asset-light, a lot more to do with services.

The third part is smart cities and there we are trying to diversify from smart cities to spaces, that will include airport, will include campuses, will include buildings, et cetera and we were doing buildings already. Again, the whole goal is to move to a master software systems integrator. Right? So these will be deals that will have a bigger technology portion if I may. And that’s how we see this coming out and coming together. And we’re very pleased with the progress we’ve made in the last two months.

Now the other thing on the government contracts is that, the government contracts are all time bound use, they do a project, you get an extension, you get the next bid et cetera, and we are working through those as we progress.

Rajeev Gupta — Chief Financial Officer

I can add to that, Akshay. So most of these government contracts, right, and in the current business, the entire revenue is on government contracts. Now these contracts had a high capex element to start off with, and now we’re entering into the opex for the services part on these contracts. So when you talk about renewals, it is not that we will turn down the renewals, we will still do renewals more on the services part of it on the opex part of it. So it should actually be a plus factor as we move ahead.

Akshay Ramnani — Axis Capital — Analyst

Okay, got it. If you can also touch upon, will this transition period have a revenue impact? And my follow up question is to Rajeev, you mentioned about getting to 17% margins in FY ’24, you had earlier talked about that 180 to 200 basis point impact in Q1. Also Q2 is a typical wage hike quarter for LTTS. So does that heavy lifting happen in H2? Or how are you thinking about the quarterly progression of margins?

Amit Chadha — Chief Executive Officer & Managing Director

Number one, we have taken into account transition et cetera, and account — the contracts that are ending, new contracts coming, pipeline internationalization of the pipeline. In fact, the sales team for the entire Smart World related businesses have already been hired. They were brought on board right after we announced the results, the acquisition in January, and then we hired them in anticipation of closure. So we’re already on board and already productive. Right?

So we’ve taken all that into account when we’ve given you this 20% plus guidance. And as we go through the quarters, and as things change, we’ll continue to update you as we have always updated you.

Rajeev Gupta — Chief Financial Officer

Yeah. Akshay, as far as margins in the previous quarter we did guide that, we’ll see an impact of about 180 basis points, 200 basis points on EBIT levels. I’m glad to share that it is now more narrow towards 180 basis points. I already talked about that our aspiration for FY ’24 is to be in that 17% range. Of course, internally, we will continue to push for higher achievement. At this point in time I’m just setting out what is the more realistic part, but we’ll continue to play as it goes around.

Second part of it is, the increment happened in quarter two. So when I have shared this aspiration it factors in the increment that would be rolled out in quarter two.

Operator

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

Vibhor Singhal — Nuvama Equities — Analyst

Yeah, hi. Thank you for taking my questions, and congrats on a very good and strong growth on a broad base level. So, sir, I think — Amit I think we touched upon this I think after many quarters we have achieved such a broad based growth almost across all the segments. You spoke about — a bit about the transport vertical. So maybe a bit more on that if you can just maybe give some light as to the reason that we had quarter-on-quarter dip in this quarter. And do you think basically, this could reverse in the coming quarters or the weakness might continue for a couple of them?

And a broader, larger level question would be, how are you seeing the overall demand environment? We’ve always basically considered the ER&D spend as more discretionary in nature given the overall slowdown in the U.S. and European economies, are we seeing any impact on the deal flow or our conversations with the clients or in terms of the pipeline that we are looking at we see in the near future?

Amit Chadha — Chief Executive Officer & Managing Director

Thank you so much, Vibhor. Number one, Vibhor I’d like to confirm, we don’t provide guidance quarter-on-quarter, but I always think of the investors community as part of the family and employee community of the company. So I’m going to dispel this figure and tell you that, our growth in quarter one as projected today, for transportation is above 4% sequentially.

So I wanted to just dispel that notion that there was a problem. What happened was that we had a jump in quarter three because some of our contracts started, and we requested our clients and they agreed that they wanted some work to be done quickly, so we ramped up extra there. And therefore, we were — we stabilized I would say in quarter four is how I see it.

The good news is that, we’ve seen the deal wins that we’ve had in the current quarter, they’ve all got operational. And I am confirming to you that growth is back in quarter one in transportation for sure, right? That’s — I think, we are already into quarter one, right? That’s A. B, if I look at demand. Vibhor, electrification is a big spend area across U.S., Europe and Japan for auto, and not just auto for trucks and off highway as well and the new design cycle for aerospace is starting up for hybrid aircraft. So that bodes well for that sector.

Second, if I was to go industrial, people are asking the question two times when they place the order for sure, but we are seeing digital demand continuing to grow in that area as we see it today. So I’m confident that this will continue into FY ’24 as well. Third, I’ll tell you where the issues are as well. So Hi-Tech, semicon, there is a little bit of stress in the system for sure. We’ve seen it in the current quarter, we see it in the Q1 also. But it’s been overshadowed by spends coming out in the operator and the Telecom OEM segment and M&D segment. In fact there is a couple of interesting deals going on, let’s see when it gets closed. But these will help us in growth in revenues in quarter one and beyond. Plant of course continues to chug along CTV lot more smaller plants coming up.

In fact you’ll be surprised number of building if you go and just get the data from the government on the number of building permits and factory permit being pulled by MNCs for India. It’s just — I mean flowing off the wall. And that is giving us — we’ve already won significant amount of MNC-based contracts to build engineering — do engineering for their plants that they’re building in India and Southeast Asia. And that again is a very positive sign.

Oil and gas, with the oil prices where they are continues to spend on digital transformation. And medical is the only area, where we didn’t do well, right, in FY in the last year. But given where we are in quarter four, and the fact that now Europe and Japan where we invested in these geos for medical has opened up, I’m fairly comfortable. So net-net, I’m a little worried about semicon and hyperscalers, but our exposure to hyperscalers is not too much there. So I believe that brick-and-mortar will prevail as we always say top line vanity, bottom line sanity, cash reality, you will see a lot of these companies doing well and coming to our rescue in this current year of FY ’24.

Operator

Thank you. The next question is from the line of Rajiv Berlia from Citi. Please go ahead.

Rajiv Berlia — Citi — Analyst

Thank you for the opportunity. I just want to understand what happened in other segments, we see a good drop in the other segment line item around 190 basis point quarter-on-quarter.

Rajeev Gupta — Chief Financial Officer

Rajiv, could you clarify your question, what do you mean by other segments?

Rajiv Berlia — Citi — Analyst

Other expenses. So in the other segment — other expenses segment, if I see in the line item other expenses, I see a 190 basis point drop on a sequential basis.

Rajeev Gupta — Chief Financial Officer

So I think Rajiv, what you’re referring to are really the common costs that get allocated across segments. So there were certainly drop in terms of those common costs and largely this is because, we had strong collections in the quarter, which led to lower provision for doubtful debts. So that’s what you see Rajeev.

Rajiv Berlia — Citi — Analyst

Okay. And similarly in the employee cost also if I see, I see — sorry, so in the employee cost I see a 180 basis point kind of a drop and in the other expenses, I see 190 basis point of an increase. So I just wanted to understand, so other expenses — so it’s just that there is an increase of 190 basis point, and the employee cost if I see there is a drop of 180 basis point.

Rajeev Gupta — Chief Financial Officer

So two things on this Rajiv, one, as far as the other expenses, this is to service some of the projects we do increase third-party contractors. And also you could have some software costs related to those projects, right, that leads to the increase in other expenses. As far as the employee cost, we continue to optimize on pyramid, and a large part of that we’ve been able to achieve quarter-on-quarter through induction of freshers and those freshers go through training that are — and those freshers of course are then deployed onto projects, right? That leads to the reduction on the employee benefits cost.

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, thanks for the opportunity. I might want to revisit that employee benefit expense again. So, if I reconcile the expense line item and the cost of sales in your presentation, it appears, which you also alluded that there was a higher subcon expense. So could you just elaborate one, was it for any particular if you can?

And the second is a more broader question for Amit. So historically, one of the key strengths of LTTS was to kind of mine accounts and transition them from the lower buckets to higher buckets. If I see the recent presentation, it seems that we only have one $30 million account versus two at the end of Q4 last year. While the $20 million has seen an improvement, it could also be that one has come off to the other bucket. Any changes that we need to do in terms of sales, re-sales, mining which can help us go back to the two or three year ago period where we had a couple of $30 million plus accounts. Thank you for taking my question.

Rajeev Gupta — Chief Financial Officer

Abhishek, let me address your first question. And I already talked about the fact that look on employee cost continue to optimize pyramid. And the other expenses, it is as a result of increase in third-party contractors and software costs related to projects. We can certainly take this offline Abhishek, so that we can provide more color in details,and to whoever else would like to understand, we can certainly talk about it offline.

With that, I’ll hand it over to Amit to clarify on the top accounts.

Amit Chadha — Chief Executive Officer & Managing Director

Yes. So Abhishek, thank you so much for asking that question. Like, I think, Rajeev said in his commentary, I would like to confirm. See, we don’t look at and I’ve shared this with a lot of you earlier in the past, but I don’t look at trailing 12 months. I actually look at annualized run rate for the quarter, and the past quarter to see as to where I’m heading with my accounts, right? So I would like to confirm to you that we have one account that is now safely sitting above a $40 million run rate, right?

We also have a couple of other — so there is three other accounts that are clearly safely above the $30 million run rate. And then you see the accounts that are in $20 million to $30 million and then they’re $10 mm to $20 million and $5 million to $10 million. So I clearly see that. If you wait for next quarter, you will start seeing some of that impact coming up in a positive way in the reporting as we do it. And if you look at year-on-year, actually, as we have reported, you can see the $20 million plus has gone from $6 million to $9 million, $10 million

Plus has gone to $20 million to $24 million. So there is gradation improvement there.

We continue to focus on account mining. We continue to focus on winning strategic new accounts. Clearly, the company is being run from a sales standpoint in account mining and account sales as two separate parts. And next time when we meet, we will definitely have Alind meet you as well, and spend more time on this subject.

Operator

Thank you. The next question is from the line of Apurva Prasad from HDFC Securities. Please go ahead.

Apurva Prasad — HDFC Securities — Analyst

Yeah, thanks for taking my question. I hope I’m audible?

Operator

Yes sir, you are audible.

Apurva Prasad — HDFC Securities — Analyst

Okay. So Amit sir, first question is on the $10 million plus TCV wins, given sort of from a full year point, it looks a lot lower versus where it was for this year. So is it any past within the strategic bet or big spend areas as you highlighted earlier, which you don’t see playing out as envisaged?

Amit Chadha — Chief Executive Officer & Managing Director

So Apurva, thank you so much for that. See, if you look at it, the last year, when we, say if I compare the FY ’22 to I compare FY ’23, I can confirm to you that the total TCV that the company has generated is at similar levels or slightly higher, because the base is higher to slightly higher than FY ’22. Having said that you’re absolutely right that the number of $10 million plus these are double-digit deals as we call them, is a tad bit lower, right? So I admit it, but the $5 million plus deals and the number of $2 million plus deals et cetera that we’ve had, where there is a greater amount of ACV impact rather than TCV impact have been higher for us, and that’s how we’ve chugged along if you ask me quarter-on-quarter consistently at 3% plus but — approximately 3% but for quarter three which was a — shall I say, it was a quarter that we had the perfect storm of furloughs et cetera, et cetera that came together.

So I would not be worried. We are currently going through the process of making sure that, as we come back to you next quarter, we continue to give you the guidance. But I can also tell you that some education has been needed on our part that $9 million is not $10 million and $8 million is not $10 million. So we’re working through that right now.

Apurva Prasad — HDFC Securities — Analyst

Sure. And I’ve another question for Rajeev. Rajeev just on the segmental margin again, Telecom and Hi-Tech which is historically always lagged. So what would be your medium term view out here in terms of convergence closer to company average post SWC integration.

And the second part is on your outlook for the overall DSO consolidated for next year and the OCF which was at about INR1,300 crores, so OCF EBITDA which is 76%, how do you see that for next year?

Rajeev Gupta — Chief Financial Officer

So, Apurva, let me take the telecom margins first, and then I’ll clarify the other questions. So on telecom margin we’ve been at that 12.4% range around that mark. Now, we may have clarified this in the past, lot of our investments are stacked in the telecom segment. The acquisition that we made of Orchestra Technology, we still continue to record cost on earn-outs in this segment. That should taper down in FY ’24, which will help the margins go up. Having said that, with the SWC acquisition, we will likely see a reduction in margins, right? And that’s again more as an impact of consolidation than anything else. We believe this is going to be a segment that will flow business into the other segment. So you should take it to be where we do a lot of our investments in telecom, which finally can evolve either in a transportation segment or it could evolve in a medical segment or for that matter telecom itself, right? So it’s like it’ll remain within this 10% plus range with SWC acquisition.

Second, on the DSO, combined DSO our aspiration for FY ’24 will be to come at a range of between 115 to 125 days, right? And we will continue to optimize like we’ve done in case of LTTS, 90 days combined both billed and unbilled has been by far the lowest in the last few years, and we will look at optimizing for SWC as well. So the range will be between 115, 125 days.

Apurva, sorry, I lost your third question, could you repeat that please?

Apurva Prasad — HDFC Securities — Analyst

Yes, that was on the OCF, OCF for next year [indecipherable]

Rajeev Gupta — Chief Financial Officer

So on the free cash flows, like I said earlier for FY ’23 we came in at 97% free cash flows over PAT. Our endeavor will be to continue to optimize. We can come back to you on this, we have still not modeled it. But if I were to split between LTTS, I think our endeavor will be to continue to look at right above the 80% plus threshold in terms of FCF to PAT. As far as SWC with the improvement in DSO, we feel the FCF should improve, but we will model this and come back to you in quarter one.

Amit Chadha — Chief Executive Officer & Managing Director

[Speech Overlap] I’d like to just say one more thing. We just want to be sure about this and we had mentioned this in January when we announced SWC acquisition as well. And I think Rajeev alluded to it today as well, so there is a team that’s been put in place, it’s working full time on making sure that the processes of both SWC and LTTS are harmonized and bring together. Plus as we have shown you over the last three years that we have consistently improved margins and DSO over — and free cash flow over the year, and that same process is being implemented for Smart World, and they’re very readily agreed to it and we’re working together as one team. So we do think that we’ll be in a much better position as we move forward.

Operator

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. So my question was around SWC. I think you mentioned that well,, the capex kind of revenue comes off there’ll be continuity on the opex kind of revenue. Well, one would sort of imagine that this would mean that the revenue drops a bit, but margins do improve. Could you shed a little light on that dynamic please? So that’s the first one.

And the second one, in terms of the — how do we think about the globalization of these contracts, internationalization rather. So for that typically what would be the margins of the international contract versus the 8% to 10% kind of EBITDA that we have for SWC? And typically what would be the size of these contracts roughly just so that we’re able to sort of understand on an ongoing basis how this sort of evolves over a period. Thank you.

Amit Chadha — Chief Executive Officer & Managing Director

Yeah. Hi, thank you so much, Nitin. Good evening. So Nitin number one, as capex contracts we look at very hard and seriously, and only pick up ones that are adding value to our technology quotient in journey. We are taking that all into account as we have given you the guidance for next year. So we have taken all that as what will ramp down what will ramp up. We have done that math, and that’s how we’ve provided the guidance, right? Number one.

Number two is that, the opex spends, that are there, those contracts are at our constant margins. So not to be worried. Now in terms of globalization, so we had written to about 100 customers that I talked about last time, right after we did the acquisition announced it, we’ve got very positive response. We actually have hired the entire team that we needed to augment and hire. And we are averaging a good number of meetings on a weekly basis in terms of the interest areas, not just from telecom operators, M&E and infra company, telecom infra, but our traditional customers, because people are getting up and saying, we want to implement 5G to go after cyber security, et cetera, so we’re definitely seeing that.

In fact Ethan coming out and making our announcement they worked with on Smart World itself is an indication of that. So therefore, I’m fairly comfortable in sharing that as we move forward in the quarter, some of these guys will be working on pure product development R&D, they may not want us to do a share of a news article or whatever, but we’ll do our best to share as much as we can. But I do believe that there is a clear path like Rajeev has defined a path on profit optimization, DSO optimization, there is a clear global taking world — taking into the global world a path that Alind is leading himself, along with the smart CDOs that we’ve hired in that area to take it forward.

The skills that they’ve got. So I had said this earlier, we’ve bought out of the 800 odd people that we’ve taken over from Smart, the Smart World family has come together, that’s how we put it. About 600 odd people are — have got industry experience from the hi-tech sector and they will approach that were admitted into the SWC family. So I do believe there is a right kind of talent that can work towards offshore contracts, et cetera. Now, what is the typical size of these contracts, the typical size of these contracts for telecom infra and operators will be the same range as what we generate between that $5 million to $15 million, $20 million, $25 million. If you’re lucky even signing a multi-year $50 million contract, $40 million contract, right, so right in that range.

Cyber security contracts will be slightly smaller. They may be in the range of ACV being between $2 million to $6 million, but there is a lot more clients that will take advantage of that, and therefore the revenue can pick up very, very quickly, right? So that’s where we see that going in terms of things. So we’re fairly comfortable with the trajectory of growth as we go forward.

Operator

Thank you. The next question is from the line of Mihir from Carnelian Capital. Please go ahead.

Mihir Manohar — Carnelian Capital — Analyst

Yeah, hi. Thanks for giving the opportunity and congratulation for the great set of growth. I think largely, I wanted to understand on the offshoring side of it. I mean, you made an initial comment that you are seeing more offshoring happening in the coming years. So if you can throw some examples what is giving you the confidence that there is increase in offshoring happening? So that was my first question.

My second question was on the $40 million contract that we have won, so, if you could throw some more light as to what is this contract exactly, and when would ramp up happen for this particular contract?

And a third question was on the SWC. Now you said when we see SWC currently it’s a full government business as you said, having DSO of more than 400 days, and there could be some ramp downs also. So just wanted to understand what could be the dropout from the current business which could be there from SWC, given the fact that we are looking at some dropouts happening that the renewals would come. So just wanted to have an understanding around that.

Amit Chadha — Chief Executive Officer & Managing Director

So Rajeev I will cover the offshoring then I’ll take the next one.

Pinku Pappan — Head of Investor Relations

Yeah, so on the offshoring front like Rajeev had mentioned in his commentary, our mid term aspiration is to go to about 60%, we are currently at 57%. Do we have the confidence, we definitely are taking steps internally with our delivery leaders as well as sales leaders putting more processes in place, and engaging the customers to increase this, we believe that this is definitely possible given the where the world has moved from a hybrid perspective. Amit you please.

Amit Chadha — Chief Executive Officer & Managing Director

Yes, sure, so in terms of — I’ll address SWC and then I will go to the $40 million contracts. So the SWC — look as far as we are concerned, SWC will bring in that additional about 10% that we’re talking about for next year in terms of growth. And we have taken into account all these contracts that are ending new contracts that are starting, et cetera, and we’ve done the entire math and I’ve guided on that one and we’re fairly comfortable with SWC growth bringing in right, profitable growth, sustainable growth to us. I mean, that’s our mantra, right?

Now in terms of $40 million contracts, this is over, five years like we have announced, and actually is to help product development and enhancement of this transportation major that we have signed. And this we believe will be a long-term relationship for us as we go on. It is a new customer that has been added to LTTS. And the exciting part is there is work on autonomous, there is work on electrification, there is work to be done on AI. In fact there is a certain part of working on large language models. And I believe that this will truly do more than the — that has much more potential than the $40 million that we have announced.

Again, you have known us for a long time. We want to be able to commit what we can deliver and deliver what we commit. So that’s why we have gone with this $40 million number, otherwise the potential is a lot higher in this space. I would also like to confirm that this deal is already in execution as of quarter one with billing happening for the company. Right? So that’s where that is. Thank you so much.

Rajeev Gupta — Chief Financial Officer

I just want to add one point, to address the DSO on SWC, like I mentioned, we are running a synergy track right and DSO on working capital is one of the stream. So, at least wanted to convey to everyone they are mindful of the DSO of the current business. We already have added areas both from a process improvement standpoint and second from a mix of deals that have been either catered to within SWC or that likely will win in the near future to be able to see that DSO coming down. So hopefully that should help you understand how we will address the DSO of this business going forward.

Mihir Manohar — Carnelian Capital — Analyst

Sure, sir. Just one last clarification, I mean if you can throw some light as to what is the revenue dropout rate that you’re considering for next year from SWC?

Rajeev Gupta — Chief Financial Officer

So to give more color to what Amit talked, all of this has been factored in the 20% plus guidance that we provided. Amit mentioned, about 10% plus coming from organic and the remaining coming from SWC, all of this has been factored. So again we’d like to give the assurance that beyond this, we did not see anything that is going to be detrimental to the business that we’ve acquired.

Operator

Ladies and gentlemen, we will take that as a last question. I would now like to hand the conference over to Mr. Pinku Pappan, for closing comments. Thank you and over to you sir.

Pinku Pappan — Head of Investor Relations

Thank you everyone for being with us on this call today. We hope we have been able to answer most of your questions. If there are follow ups, happy to engage with you through the course of this quarter. With that on behalf of the entire management team here at LTTS, we would like to wish you a very good day, and hope to see you soon. Thank you so much. Bye, bye. [Operator Closing Remarks]