Mindtree Ltd (MINDTREE) Q1 FY23 Earnings Concall Transcript

Mindtree Limited  (NSE:MINDTREE) Q1 FY23 Earnings Concall dated Jul. 13, 2022

Corporate Participants:

Vinay Kalingara — Head of Investor Relations

Debashis Chatterjee — Chief Executive Officer and Managing Director

Vinit Teredesai — Chief Financial Officer

Venu Lambu — Executive Director and President, Global Markets

Analysts:

Mukul Garg — Motilal Oswal — Analyst

Vibhor Singhal — Phillip Capital — Analyst

Sulabh Govila — Morgan Stanley — Analyst

Mohit Jain — Anand Rathi Research — Analyst

Sandeep Shah — Equirus Securities — Analyst

Dipesh Mehta — Emkay Global Financial Services — Analyst

Manik Taneja — JM Financial — Analyst

Sameer Dosani — ICICI Prudential AMC Ltd — Analyst

Abhishek Shindadkar — ICICI Securities — Analyst

Presentation:

Vinay Kalingara — Head of Investor Relations

Ladies and gentlemen, good day and welcome to the Mindtree Quarter One FY’23 Earnings Conference Call. [Operator Instructions] Today on the call we have with us Mr. Debashis Chatterjee, Chief Executive Officer and Managing Director; Mr. Venu Lambu, Executive Director and President, Global Markets; and Mr. Vinit Teredesai, Chief Financial Officer.

We will begin with a brief overview of the company’s Q1 FY’23 performance, after which we will open the floor for Q&A. During the call, we could make forward-looking statements. These statements are considering the environment we see as of today and carry risks and uncertainties that could cause our actual results to differ materially from those in such forward-looking statements. We do not undertake to update any forward-looking statements made on this call.

I now pass it on to DC for his opening remarks.

Debashis Chatterjee — Chief Executive Officer and Managing Director

Thank you, Vinay. Good evening and good morning to everyone on the call. We are excited to report yet another quarter of robust performance and a solid start to FY’23. Thanks to the confidence placed in us by our clients and the dedication of our teams. Our industry-leading performance yet again speaks to the growing relevance of our value proposition, strong demand of our capabilities and disciplined execution.

For the quarter, our revenues were US$399.3 million, up 5.5% sequentially in constant currency, making it our sixth consecutive quarter of more than 5% growth in constant currency, even in the face of rapid business and technology shifts. Our EBITDA margin, a measure of our growth potential and profitability came in at a healthy 21.1%, while we continue to invest aggressively in our people and partnerships. Our order book comprising a healthy mix of annuity and transformational deals stood at US$570 million, up 13.1% year-over-year. I’m pleased to note that this marks the highest ever TCV in our history.

The pandemic and its aftermath have further reinforced belief in the long-term potential of digital transformation. Organizations across sectors have had first-hand experience of its value in separating the winners from the rest. It is clear by now that digital transformation is an ongoing business imperative. It is neither a one-off project nor a short-term quick fix. Against this backdrop, what has continued to give us an edge is our ability to service clients through all phases of the digital transformation journeys. Digitalizing processes for better efficiencies, reimagining processes for greater effectiveness, redefining business models to maximize growth and market share and harnessing digital technologies to become future ready and future relevant.

This positions us well as a partner of choice to clients pursuing digital transformation to improve revenue streams as well as realize cost efficiencies. This dual objective underpins every transformation initiatives, but tends to be more immediate and pronounced during macroeconomic shifts. Let me cite an example. We began our relationship with a leading US insurance provider as a full stack partner for digital, data, cloud and infrastructure transformation. Through our end-to-end integration capabilities, we are also now helping the insurer modernize its systems through a cloud migration factory with automated migration management and infrastructure build. The goal is to enable the insurer to drive engaging customer experiences and innovative services while optimizing cost, scalability, efficiency and agility.

Likewise, an Australian Wealth Management Group has selected us as a partner of choice for its core modernization as well as digital transformation program. In our mission to help business is not just keep pace with change, but actually get ahead of it, what we call getting to the future faster. Our strategic call to focus on full stack engagements, hyperscaler partnerships, product centric models, edge-to-experience solutions, industry convergence and next-generation delivery capabilities is delivering solid results. For example, a leading US-based airline chose us as a digital product development partner to transform its value chain to our next-generation product centric operating model. We are leveraging our next-generation delivery capabilities to help a healthcare technology provider enhance its claims system and decision-making, while also transitioning to a product centric model and creating integrated solutions across the value chain.

Through our strong hyperscaler ecosystem partnerships, we are helping a global professional services firm, build a data management platform for a multi-year co-transformation journey. With technology increasingly at the center of both enterprise transformation as well as value maximization, we continue to consolidate our leadership position in delivering superior outcomes and differentiated experiences by using emerging technologies. For example, for a pharmaceutical company, we are using blockchain capabilities to create smart digital contracts to track drugs through their supply chain from raw material to distribution. We are helping an insurance provider build a custom into an insurance platform in partnership with a low-code development platform as a service.

We are very pleased with our progress on our growth levers, resulted in our rapidly growing portfolio and capabilities across industries, markets and technologies to help clients unlock greater value from digital transformation at scale. We are also helping a growing roster of clients drive transformation at scale while also optimizing their technology footprint. During the quarter, for example, we won a number of multi-year managed services deals in areas such as cloud, application development, infrastructure operations, production support and security with a diverse set of clients ranging from a global travel company and a specialty insurer to a leading hyperscaler and a leading audio technology company.

With that, let me turn to our industry groups, where we continue to grow focus accounts and scale strategic new logos through our end-to-end integrated offerings. Our communications, media and technology business grew 5.9% sequentially and 24.7% year-over-year. We supported at scale transformation of some of the leading technology enterprises with our product engineering, digital marketing, e-commerce, enterprise IT platform development and cybersecurity services.

Our retail CPG and manufacturing business was down 8.7% sequentially, but grew 15.6% year-over-year. The sequential decrease was because of a continuing ramp down in a retail account as well as deferred spends by a few clients in consumer facing segments. The reported growth was also impacted by a significant cross currency headwind. While we see continued demand for solutions to reimagine and enhance customer intimacy, customers are also looking to modernize their data ecosystem and generate real-time insights to improve decision making.

Our banking financial services and insurance business grew 6.5% sequentially and 31.7% year-over-year with our strategy to expand full stack capabilities across our focus accounts and recent Tier-1 wins as well as strength of our partner ecosystem continuing to deliver results. Our wins validated our success as a transformation at the scale partner with clients increasingly seeing us at the right as the right partners for their future state.

Our travel, transportation and hospitality business grew 11.2% sequentially and 48.9% year-over-year. Our diversification strategy continues to deliver results with our wins in the newer subsectors scaling up well and contributing to the growth. With the recovery and rebound in our core subsectors of airlines and hospitality, clients continue to focus on customer experience, data intelligence and lean operations to drive efficiency.

Our youngest industry group health continued its strong growth trajectory with a 43.5% sequential and 170.4% year-on-year growth. We see good traction with the investment we’ve made in COPE Health and it is helping us play at the intersection of health and technology. We are seeing good client traction in the areas of value based care, clinical workforce management and population health management.

In terms of geographies, North America contributed 76.8%; Continental Europe, UK and Ireland contributed 14.6% and APAC and Middle East contributed 8.6% of our revenue during the quarter. Among our service lines, customer success contributed 40.8%; data and intelligence contributed 15.9%; cloud contributed 19.5% and Enterprise IT contributed 23.8% of our revenue for the quarter. Our commitment to the highest levels of quality and excellence earned us the British Standards Institution or BSI certification for seven ISO standards across 18 locations, including five new ones added this year, in the US, the UK, Poland and India.

We owe our consistent growth to our passionate and talented Mindtree Minds. Through the quarter, we continue to sharpen our employee value proposition by building upon our highly engaged people-centric culture through more creative, agile and personalized approaches to employee care and development. We were recently certified as a Great Place to Work in India for ’22-’23. This is the second consecutive year, we have received the certification from the Great Place to Work Institute considered the gold standard for workplace excellence.

During the quarter, we on-boarded more than 4,700 Mindtree Minds, including more than 1,500 fresh graduates. We closed the quarter with global headcount of more than 37,400. For the quarter, our LTM attrition was 24.5%, consistent with our earlier view that it will take a few more quarters for the situation to stabilize. Our program aimed at identifying and grooming critical talent on an ongoing basis continues to produce good results. It revolves around a framework underpinning our one-size-fits-one employee engagement and career enablement strategy focused on monetary as well as non-monetary elements such as role rotations, upskilling and workplace flexibility. These are facilitated through a number of initiatives such as intelligent staffing application for more efficient internal job search and fulfilment and opportunities for Mindtree Minds to acquire skills and certifications aligned with both organizational needs and individual aspirations.

As a part of our revamped training program to prepare early career talent for client projects, more than 2,500 candidates studying in the last semester of their engineering degree program are being trained in various technology tracks and will be ready to be built within days of joining us. We continue to work towards expanding our offshore and near-shore delivery footprint. Within India, we are in the process of setting up full-fledged offices in Coimbatore and Noida and satellite offices in Bangalore. All Mindtree offices are now operational. Over the last couple of months, the footfall at our facilities has steadily increased with the fully vaccinated minds working from our office on at least two days to three days a week in a COVID appropriate manner.

I will now turn over the call to Vinit for Q1 financial highlights. Vinit?

Vinit Teredesai — Chief Financial Officer

Thank you, DC. Good evening and good morning to everyone on the call. We are pleased with a strong start to the new fiscal with yet another quarter of profitable growth. Our sequential revenue growth was 5.5% and constant currency. This is the sixth consecutive quarter of 5% plus revenue growth in constant currency terms. Our sequential revenue growth in dollar terms was 4%.

We reported strong EBITDA margin of 21.1%, compared to 21% in Q4 of FY’22. Excluding a one-time impact of merger-related expenses, our EBITDA margin was 21.7%. Reported EBITDA margins this quarter had an impact of 50 basis point from the visa, 60 basis point from merger-related expenses. This was offset by 50 basis point of operational efficiencies and 70 basis points from ForEx benefits. Our reported EBIT margin for the quarter was 19.2% compared to 18.9% in the preceding quarter. Excluding a one-time impact of merger-related expenses, our EBIT margin was 19.7%.

Net ForEx gain for the quarter was US$0.6 million compared to US$6.2 million in the previous quarter. PAT margin for the quarter was 15.1%, compared to 16.3% in Q4 of FY’22. The gap between the EBITDA and PAT increased primarily due to the lower ForEx gain on our hedges and lower investment income due to the spike in yields. The effective tax rate for the quarter was 24.6% compared to 24.5% in Q4 of FY’22. Earnings per share was INR28.60 for the quarter as compared to INR28.70 in Q4 of FY’22. Excluding the merger-related expenses the earning per share was INR29.70.

Our DSO for the quarter significantly improved and stood at 50 days. Our robust cash management led to cash and investment balances at an all-time high of US$500 million. For the quarter, operating cash flow to EBITDA was at 67.2% versus 92.2% in the previous quarter. Free cash flow to EBITDA was 60.7% versus 82.7% in the previous quarter. Annualized return on capital employed for the quarter was 41.3%. Return on equity for the quarter was 33.6%. Our utilization in the quarter was 81.2% compared to 83.1% in Q4. As of June 30th, 2022, our cash flow hedges were at US$1.7 billion. Hedges from the balance sheet were US$147 million and options of US$3 million.

We continue to sharpen our focus on sustainability with an ESG vision for 2030 built around bolder goals and clearer timelines. We are proud to share that we have been accorded the leadership position in CRISIL’s Sustainability Yearbook 2022 based on an evaluation of more than 575 companies in India across 53 sectors. Mindtree won the prestigious Golden Peacock Award for Risk Management in 2021 for its commitments to business excellence and maturity in the enterprise risk management. This is a strong recognition of our effort — ongoing efforts in the direction of establishing a robust, resilient and responsible business.

And I’ll hand it back to DC for an update on the Mindtree LTI merger and our business outlook.

Debashis Chatterjee — Chief Executive Officer and Managing Director

Thank you, Vinit. As you will recall, on 6th of May, Mindtree and LTI announced a merger that we’ll see the two companies join strengths to create an efficient and scaled up IT services provider exiting US$3.5 billion. The merged entity proposed to be named LTI Mindtree will combine the complementary strengths of both companies to better serve customers by unlocking scale benefits, a stronger portfolio of offerings across verticals, enhanced customer engagement and streamlined delivery processes. This will boost the ability of the two companies to participate in large deals, strengthen partnerships with ecosystem players, and create a more distinctive employee value proposition.

The stock exchanges provided their observations letter and no objection on June 16th, 2022. The merger is now awaiting other regulatory approvals. A steering committee has also been set up and is meeting regularly to oversee the integration plan. Both Mindtree and LTI have delivered market leading financial performance and created value for their shareholders. Synergies between the two companies are already producing results. A case in point is a large deal. We recently won in partnership with LTI to manage end-to-end development and support for the customer services applications of a Europe-based global travel technology company. The deal is driven by a differentiated value proposition combining Mindtree’s extensive travel and transportation domain experience with LTI’s deep expertise in code modernization. It exemplifies how the two organizations plan to unlock their full potential by becoming a combined at scale player to gain from recent industry shifts around large deals and end-to-end offerings.

Organizations across industries continue to accelerate digital transformation for innovative outcomes, continuous differentiation and sustainable growth. Technology is embedded ever deeper into competitive strategies around market relevance and business resilience. Digital transformation is not necessarily constrained by market cycles. While they may momentarily affect the pace of decision-making, that too in certain sectors, they are unlikely to reverse or stall the larger wave of business critical technology modernization that is increasingly becoming key to survival. Our experience shows that technology and technology-led innovation are often the antidotes to macroeconomic challenges. In fact, economic headwinds are known to spur organizations to free up dollars from pockets of inefficiency and redeploy them on initiatives with assured ROI.

A robust first quarter performance has reinforced our confidence in our ability to continue our growth momentum through the foreseeable future. While there are no indications yet of any significant change in client behavior, we are closely watching near-term macroeconomic developments and continue to be cautiously optimistic about the opportunities created by the need to balance cost and digital imperatives with an eye on the future.

With that, let me now open the floor for questions.

Questions and Answers:

Operator

Thank you, DC. [Operator Instructions] We’ll take the first question from the line of Mukul Garg from Motilal Oswal.

Mukul Garg — Motilal Oswal — Analyst

Thank you and good evening. I hope I’m audible.

Debashis Chatterjee — Chief Executive Officer and Managing Director

Yes, Mukul.

Mukul Garg — Motilal Oswal — Analyst

Great. DC, a really good quarter. But obviously, given the things on the concerns on macro, would be great if you can share what you are viewing in different verticals from clients on their spending over next three quarter to four quarter? And especially, you highlighted that you are seeing deferment and a ramp down in RCM. If you can give some color on was that something which was regional or segmented in nature? Or was more company specific given that there are concerns on budget cuts in the vertical?

Debashis Chatterjee — Chief Executive Officer and Managing Director

So thanks, Mukul. So let me take a step back in terms of how we do our planning. I mean we work with our clients. We try to understand their priorities. And obviously, our growth — our plan depends on the portfolio of clients that we have. Now we have always been saying that the first half of FY ’23, we are extremely confident about our ability to deliver growth or rather profitable growth. And we had built a nice pipeline, so on and so forth. Now when we are talking to our clients across the industries, barring RCM, and that too within RCM-only specific clients where they are impacted in a certain way, and I’ll come to that in a while, most of my clients are not really changing their big plans, whatever the plans they have made for the full year. They are not really changing their plans. We are continuously in touch with them because if they change their plans, our plans also change. So at an overall level, I don’t think we have come across a scenario where clients are changing their plans drastically for the full year, but they are also cautiously optimistic watching the micro situation. And if they change their plans, our plans will change, and we’ll definitely come back to you when we get to know that.

But there are a couple of scenarios in a couple of clients in — in the retail and consumer packaging goods where we have seen that the clients have got impacted from their market standpoint. The market — they had markets in Russia as well as in Ukraine. And even on the supply chain side, they were reliant on China and the fresh set of lockdowns that China had impacted their supply chain as well. So in those scenarios, we have seen some deferments. And as I articulated, in my commentary, every client is in some phase of digital transformation. And this is something that they are doing consciously so that it can be a revenue enhancement for themselves. So in that scenario, I think it’s very difficult to stop all these initiatives because that will take us back again. So I don’t think they are going to do that, but there is maybe a temporary slowdown in certain areas. So what we are talking about is a few cases where we have seen those conversations where there’s a bit of deferment and probably a little bit of slowdown in terms of the projects they had committed earlier. But at this point of time, at a higher — at a broad level, we have not seen any significant changes.

Venu, do you want to add anything?

Venu Lambu — Executive Director and President, Global Markets

No, I think I’ll probably just add an additional commentary is that when you look at the digital transformation to the point that when DC spoke about deferment from the hold, digital transformation happens in sprints, right? So you have an option to defer a certain sprint, which is supposed to deliver a set of functionality or an outcome. So what we are seeing is a very selective clientele base that some of the sprints are either slowing down or getting deferred. But that’s really in a few pockets. It’s — I don’t think we can generalize it as an industry or a sectoral trend. That’s something which I just wanted to add over and above what DC said.

Mukul Garg — Motilal Oswal — Analyst

Sure. Thanks for the very detailed answer. If I may just add a bit on the TCV side, would be — this was a really big quarter in terms of TCV deal wins. If you — how are you seeing the mix of annuity versus project business here? And — because these six examples you have given in the presentation, they are all multiyear in nature. So is there a big portion, which is annuity or there are some near-term projects which are also picking up? And just wanted to clarify, is it fair to assume that your top client would not be very different from a contribution perspective to TCV compared to the revenues?

Debashis Chatterjee — Chief Executive Officer and Managing Director

Want to take it? I’ll start. So as far as TCV is concerned, if you just look at the pattern. There is — there are certain renewals that happen during the — during this time of the year, and that’s something which helps us in terms of the TCV for this quarter. But having said that, it’s significantly higher than it was around about $500 million same time same quarter last year. So it’s almost like a 13% [Phonetic] improvement in terms of year-over-year in terms of TCV. And your observation is right. I think — though I may not have the right numbers in terms of the percentage, but it has been our endeavor to look at some of the TCV, which can be more multiyear rather than just within the particular year. So from that perspective, yes, there is some component of this TCV, which will actually carry over to the following year with a multiyear opportunity. So that will always be there.

And I think if I understood your second question in terms of the TCV as a percentage of — I mean as a share of the overall this thing, I think fairly in line with the overall revenues as well in terms of the top client.

Mukul Garg — Motilal Oswal — Analyst

Great. Thanks for taking my question. I’ll get back into the queue.

Operator

The next question is from the line of Vibhor Singhal.

Vibhor Singhal — Phillip Capital — Analyst

Hello?

Debashis Chatterjee — Chief Executive Officer and Managing Director

Yes, Vibhor.

Vibhor Singhal — Phillip Capital — Analyst

Am I audible?

Debashis Chatterjee — Chief Executive Officer and Managing Director

Yes.

Vibhor Singhal — Phillip Capital — Analyst

Yeah. Hi, DC. Hi, Mindtree team. Thanks so much for taking my questions and congrats on a great performance yet again. Just a couple of questions from my side. One thing that I wanted to ask you DC is that our top client has shown very strong growth yet again in this quarter. But what we see globally is that our top clients — our top client and of course, similar other companies, the hyperscaler, the global tech companies, they’re all sounding words of caution. They’re all resorting to basically employee firing. And they’re basically raising concerns on their growth trajectory over the next couple of years, especially driven by the inflationary and recessionary concerns. In that environment, how do you think that top client will behave for us? Does that mean that okay the top client is facing recession and basically input cost pressures? Would that mean that it could lead to better growth for us? Or do you think it could actually slow down for us also in terms of growth on the top client?

Debashis Chatterjee — Chief Executive Officer and Managing Director

So Vibhor, great question. And probably you will hear the same answer from me what you have heard before is that our strategy is to grow the top client. Our strategy is never to slow down the top client. And our strategy is to make sure that the rest of the organization or at least the top 20 clients or two to 20 can grow faster than the top client and faster than the overall company.

And the other thing is that we will never — I think I have explained this earlier, that our top client is nothing but multiple LOBs within the top client, which itself is like a pretty large client. So whenever the client is going through various changes, it is very unusual that, you know, every LOB is going to be behaving in the same way. So I think from that perspective, you know, we keep an eye in terms of what’s happening. But overall, you know, invariably one or two LOBs always fire and they kind of give us the opportunity for the overall growth for the top client.

Venu, do you want to add anything?

Venu Lambu — Executive Director and President, Global Markets

Yeah, probably I’ll just add extra comment with regard to the hyperscaler, the sort of a commentary or what hyperscalers would expect. Look, you look at it, the cloud penetration in the global market is still probably at an early stages. So there is still a significant headroom for the hyperscalers to grow. So in general, we shouldn’t read any quarterly trend with regard to the hyperscaler growth. I mean, there’s — the most of the hyperscalers are sitting on billions dollars’ worth of backlog of orders that has been booked over the years. So there’s a huge amount of heavy lifting to be done on digital transformation and actually realizing those book orders into the revenue, right. So we are — we continue to be bullish about the opportunity that is there with regard to the cloud and all the hyperscalers that we — that we do business with. You know, I thought I’ll just call out how do we sort of look at the hyperscaler trend with regard to some of these market headwinds.

Vibhor Singhal — Phillip Capital — Analyst

Got it. Got it. My just — next question is on my favorite vertical, the travel vertical, which has again seen very strong growth. So DC, as you mentioned that we have diversified actively in this vertical, and we have seen that playing out over the past few quarters as well. If I were to ask you that the core part of our travel vertical pre-pandemic, which was airlines and hospitality, how far are we from the pre-pandemic level of business from those parts? I mean, I’m not asking you for an exact number, but in terms of, let’s say, a directional number as to, let’s say, we are not yet at the potential that they were giving us business pre-pandemic or they’re already there or some discount to that. I mean just to gauge the kind of room that we have to grow in the vertical, especially from this core set of travel companies?

Debashis Chatterjee — Chief Executive Officer and Managing Director

No, that’s a great question, Vibhor. I think the simple answer is we have actually exceeded the pre-pandemic revenues within this vertical. And even that will broadly cover the — most of the clients in the pre-pandemic where we have managed to cross the revenues that we used to have. Now having said that, as a strategy, you must have seen that we have been very focused in terms of account mining. I mean, even for this quarter, the top the focus 100 accounts that we have in the company that contributes to almost 90% of our revenues. So given that scenario and that is happening because we are able to do a lot of cross-selling and upselling and creating the full stack capabilities or full stack accounts, as we call them, where we can sell all our capabilities and services across the board.

So from that perspective, we feel that there is still significant headroom in terms of most of the clients that we have, and that’s why we call it focus 100 clients where we can — we can create them more and more full stack accounts from our perspective. So definitely we have crossed the pre-pandemic levels. Still the headroom is there because our strategy is to go and mining those accounts. And of course with the — the futuristic capabilities that we will be acquiring through the merged entity, that will only give us a stronger positioning.

Again, Venu, you want to add anything?

Venu Lambu — Executive Director and President, Global Markets

No, DC. You have covered most of the things.

Vibhor Singhal — Phillip Capital — Analyst

Great, DC. Great, Venu [Phonetic]. Thanks a lot for taking my questions and wish you all the best.

Debashis Chatterjee — Chief Executive Officer and Managing Director

Thank you.

Operator

The next question is from the line of Sulabh Govila.

Sulabh Govila — Morgan Stanley — Analyst

Hi. Thanks for taking my question. Am I audible?

Debashis Chatterjee — Chief Executive Officer and Managing Director

Yes.

Sulabh Govila — Morgan Stanley — Analyst

And congrats on a great execution. So with respect to the deal wins that we’ve announced this quarter, while the booking number has grown by 13% y-o-y, the trailing 12-month book-to-bill ratio is sort of continued to come down. And given that we have now mix of — more mix of annuity business that we have been trying to increase in the whole pile [Phonetic] of things. Does that change our near-term growth trajectory versus what would we have anticipated at the beginning of the quarter or beginning of the year? Or is it in line with your expectations? I mean, if you could say any color on that?

Venu Lambu — Executive Director and President, Global Markets

All right. So let me take that question, right? And Sulabh you know, the book-to-bill ratio, if you actually look at it, we’ve always been sort of floating around 1.2 kind of book-to-bill ratio. And that’s been always been a trend for us. And the fact that we have delivered six consecutive quarters of 5% plus growth, that means it actually shows that our — the time lag that is there from book-to-bill, you know, that has actually fundamentally has not changed, right. And so given that context I don’t think you should read it anything more than that, because within a year there is going to be one quarter or two quarters, which may be a bit seasonally weak quarter from an order booking point of view.

So, you know, it all depends on when you look at the last trailing 12 months, right? So if you look at it from Q4 onwards, you would have got a different picture. If you look at from Q1, you sort of account to the Q3 of last year, which is seasonally a weak quarter even from an order booking point of view. So you might get a different narrative. But if you look at from the whole year-on-year perspective, you know, the order booking is — we’re confident that it will continue to increase. We’ve already shown that sequentially from Q4 to Q1. And the fact that it is getting translated into 5% Q-on-Q revenue, I don’t think materially there is any change on book-to-bill ratio.

Sulabh Govila — Morgan Stanley — Analyst

Got it. Got it. And then the next bit is on the employee costs. So over the past three quarters, four quarters, our employee cost per capita has come down quite a bit. So just trying to understand that it’s purely a function of a number of freshers being added to the system and increase in offshoring or is something else also played out here? And given that offshoring is already at record levels, would you say that there’s more room left here for us to improve?

Vinit Teredesai — Chief Financial Officer

Yeah, Sulabh, the — you rightly highlighted one of the reasons why it’s happening is mainly because we have been increasing our fresher intake. As you can see, we have been telling that this is probably our fourth quarter whereby we added around 1,500 freshers in a quarter. And now if you add that all of that up, the rough math sort of indicates now 20% of our overall population is now in that fresher category. So we are doing very, very extremely hard efforts to balance our pyramid and keep our overall employee cost at minimal.

Sulabh Govila — Morgan Stanley — Analyst

Sure. Thank you. I’ll get back into the queue.

Vinay Kalingara — Head of Investor Relations

The next question — I will read out the next question from Abhishek of Nomura. The question goes congratulations on a good quarter. Can you please talk about your margin outlook for FY’23 and Q2 in particular when you have your salary increases? That’s the first part. The second part is, with strong growth, do you think our margins are structurally headed towards 20% EBIT margin in the medium term? And the margin work for Q1.

Debashis Chatterjee — Chief Executive Officer and Managing Director

Okay. Vinit?

Vinit Teredesai — Chief Financial Officer

Yeah. So we don’t give any typical guidance about our forward-looking margin outlook. But we have constantly been saying that 20% plus seems to be a good place, whereby we think our business — we would like to place our business. Anything excess, we would like to invest back into business. And it does not mean that every quarter it will be 20%. Some quarters, it might be low. Some quarters, it might be up, but our endeavor is to sustain this 20% margin. Yes, there are headwinds, but we are also on the other hand side, continuously ensuring that our cost discipline is very well managed and we are able to leverage some of these benefits in our favor.

In terms of your — in terms of the wage inflation and the impact it can, again, if you look at our Q1 margins right now, we — the reported margins are at 21.1%. And if you take out the one-off expenses on merger, it is around 21.7% EBITDA level. So we have a sufficient number of — a sufficient gap available to absorb the wage inflation. We have mentioned this in the past also that our wage inflation may not necessarily have an impact on all the employees because one of the positive side of attrition, you may want to call, that there’s a good amount of population that has also joined us in the last 12 months, which may not necessarily need the same amount of correction as what probably some of the people — tenured people may need. So we do feel that while the little bit of an inflation pressure is there, but at a overall level, we should be able to sustain and absorb that impact and should still be able to sustain our margins in the 20% plus range.

Vinay Kalingara — Head of Investor Relations

The next question is from the line of Mohit Jain.

Mohit Jain — Anand Rathi Research — Analyst

Sir, just a follow-up on the same. So you are saying with the wage hikes for the second quarter, your margin outlook basically remains the same, and you should be able to absorb given the growth that you are seeing?

Vinit Teredesai — Chief Financial Officer

Mohit, as I said, that it’s not an outlook. It’s our endeavor to —

Mohit Jain — Anand Rathi Research — Analyst

Correct.

Vinit Teredesai — Chief Financial Officer

— our profitable growth story, and 20% seems to be the place where I would like to also study.

Mohit Jain — Anand Rathi Research — Analyst

Right. And sir second thing was on this fresher intake. I think you’ve shared some numbers in your opening remark. Can you repeat those numbers in the margin walk for fresher hiring?

Vinit Teredesai — Chief Financial Officer

No, no. So fresher, we have been — this is the fourth quarter, whereby we are adding around — we have added around close to 1,500 freshers per quarter. And if you just total them up and look at our overall population, it sort of represents around 20% of our population, which basically is in line with our flattening the pyramid strategy that we have adopted. We would like to continue with this. And our outlook of adding more and more freshers in the coming quarters still continues to remain the same.

Mohit Jain — Anand Rathi Research — Analyst

Right. And this merger cost is the one-time in nature? So I’m assuming the 60 basis point is done and dusted, and we should not see a repeat of it in the coming quarters. Is that fair? Or do you think something may come up in 2Q as well?

Vinit Teredesai — Chief Financial Officer

No. It is all with relation to the merger-specific expenses. There will be some integration and other expenses that may come in, but those may not necessarily come in the next quarter or the quarter after, it will be typically after the effective date and after both the companies come together. So the impact of that may not necessarily be felt only on Mindtree. It may be felt more on the combined entity.

Mohit Jain — Anand Rathi Research — Analyst

So this may come up, but you will split it accordingly. Right now it is — the 60 basis points that you referred is more —

Vinit Teredesai — Chief Financial Officer

It will be a part and parcel of the combined entity.

Mohit Jain — Anand Rathi Research — Analyst

I’m sorry, sir. Part and parcel meaning will it like —

Vinit Teredesai — Chief Financial Officer

It will get [Speech Overlap]. No, no. So what I’m saying is that the merger expenses, the one-time merger expenses are already done.

Mohit Jain — Anand Rathi Research — Analyst

Okay.

Vinit Teredesai — Chief Financial Officer

As the company — the merger becomes effective, right, there will be integration expenses that will get incurred, but the impact of that will not be felt only on Mindtree P&L, if will be felt on the combined entity P&L. Those expenses —

Mohit Jain — Anand Rathi Research — Analyst

So as a percentage, the numbers may look lower?

Vinit Teredesai — Chief Financial Officer

Yes. That’s right.

Mohit Jain — Anand Rathi Research — Analyst

All right. Perfect sir. Thank you very much and all the best.

Vinay Kalingara — Head of Investor Relations

The next question is from the line of Sandeep.

Sandeep Shah — Equirus Securities — Analyst

Yeah, hi. Can you hear me?

Debashis Chatterjee — Chief Executive Officer and Managing Director

Yes, Sandeep.

Sandeep Shah — Equirus Securities — Analyst

Good evening and congrats on an excellent execution. So DC, I have two questions, right. One, when we got into the pandemic, right, it came as a shock to everyone, and there was not much information about how things will play out. So obviously, there was a big shift from offline to online, which led to a very high amount of awareness or recognition that the enterprises needs to spend big money to make up their infrastructure in a way where they can handle the sudden spurt in transactions. And probably the world will move much faster towards online in future, so they need to ready up their infrastructure, which earlier was a gradual move and got expedited. Now when you see now people returning back to office, people going back to the old means of doing business to some extent, and it will not go to pre-pandemic level ever because there is a change in behavior. But still some normalcy will return.

So are you seeing that kind of urgency in the mind of the enterprises, which they — it was a panic situation, right, during the pandemic that they wanted to — they just wanted technology at any cost and immediately. Are you seeing same kind of urgency today or at least you are seeing that they have learned a lesson and they will probably now this time not delay postponed and they will build their tech infrastructure, they will build their omnichannel and all those things or do you think there is still probably things are — the recognition is fading away with time. What is your sense on that? The reason I’m asking this is that if the macro versus the way the global economist are predicting, then will it give some discretion to postpone or delay the spends or this will be the last thing to get cut because of the tough inflation, which pandemic has brought the enterprises. So if you can help me on this, will be great.

Debashis Chatterjee — Chief Executive Officer and Managing Director

Let me take a stab. I think it’s a great question, but I probably have to give you a very long answer. See, we need to understand what happened in the pandemic. The pandemic was unexpected. Nobody knew that this will come and stay for so long. And initially, when the pandemic hit, people thought it’s a one month, two months, three months phenomenon, but nobody realized that is a two-year phenomenon. And as a result of which everybody, every client they try to reimagine their business models. They were looking at opportunities by which they can do their businesses in different ways. And that is how you have the contactless, you have the direct-to-consumer, you have the omnichannel, all these things started flourishing. And in order to get all those things executed, you obviously had to have a good backbone and the backbone was nothing but cloud. Cloud has kind of completely changed the way we deliver and the partner — that’s why the hyperscalers become very important.

So keeping all these things in mind, I think every client was in a hurry to transform their ecosystem and get into the cloud, they accelerated their journey to the cloud. And the purpose of accelerating their journey to the cloud was they can continue to do the transformation at the front end, so that they can also change their business model. They can reimagine their business models. So in that scenario, every client is at a different phase of their transformation. I mean just to give you an example, there may be a particular hotel chain may have — maybe doing contactless implementation across their suite of — or the number of hotels, which could be running into thousands, but they may have done it only say 500 as of now, but they not stop that. They need to go on because each of these transformations need to be taken into completion. So that is where I feel that, today, that is something which we have to acknowledge that our view is, and this — our view is basically working with the clients that we have in our portfolio is everybody has had a very different phase of transformation, and they will continue their transformation. There can be some temporary slowdown, but they cannot derail their transformation from the journey they have embarked on.

And the only thing that can happen is, in some situations, maybe they will have to find those dollars also in some way. And that is where the opportunities of cost optimization also come in. And that’s what we talk about in terms of dual behaviors where you want to take cost out of the system, create more efficiencies and divert the same dollars into fueling the transformation, which has to be completed, which has been embarked on. I think that’s what is going on right now, and that’s what we anticipate will be the behavior for some time. But at a broad level, what we have seen in the last two years during the pandemic is a lot of discretionary spend, which is kind of — which was never seen before. Probably that discretionary spend — and again, it can relate to the transformation. That will probably, in specific cases, slow down a little. But in those cases, there should be some way to finding those dollars to continue those engagements on the transformation.

Venu, do you want to add anything?

Venu Lambu — Executive Director and President, Global Markets

No, DC, you’ve covered it very well. It’s just that I want to sort of clarify that the technology was not bought at any cost at any point of time. And I think there is always the right value that was created. So I just wanted to clarify that.

Debashis Chatterjee — Chief Executive Officer and Managing Director

Technology is inevitable.

Sandeep Shah — Equirus Securities — Analyst

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

Debashis Chatterjee — Chief Executive Officer and Managing Director

Thank you.

Operator

The next question is from the line of Dipesh Mehta.

Dipesh Mehta — Emkay Global Financial Services — Analyst

Thanks for the opportunity. A couple of questions. First of all, I think earlier, you indicated about top 100 [Phonetic] client contributing 90% in revenue. And you have now process in this. So can you help us understand how, let’s say —

Vinay Kalingara — Head of Investor Relations

Can you repeat the —

Debashis Chatterjee — Chief Executive Officer and Managing Director

Dipesh — your line is not very clear, Dipesh.

Dipesh Mehta — Emkay Global Financial Services — Analyst

Is it better now? Can you hear me?

Debashis Chatterjee — Chief Executive Officer and Managing Director

Yes, we can hear you.

Dipesh Mehta — Emkay Global Financial Services — Analyst

Yeah. So I just want to understand about, let’s say, top 100 account. What changes we made at account level planning perspective in terms of empowering account manager, whatever you can, let’s say, share with us. What changes we made in let’s say last two years, three years to drive better client intimacy, drive better client finding? And how it is playing out for us? And what changes — what tweaking you made? That is question one.

Second question is about deal pipeline. Let’s say we have now record deal closure. For last few quarters, deal closure remain healthy. How the deal pipeline is shaping up? Whether we are seeing, let’s say, deal pipeline is getting some kind of declining trend or maybe stabilizing trend rather than growth trends. If you can provide some sense about how deal pipeline is shaping up? And to some extent, related question is about pricing trend. If you can help us understand how the pricing is shaping? Thanks.

Debashis Chatterjee — Chief Executive Officer and Managing Director

So let me just start off with the — what we have done, what we mean by — first of all, we don’t specifically call out top 100. We just said focus 100. At any point of time, we feel these are the 100 accounts where we need to focus, and we need to cross-sell and upsell into those accounts, leveraging the service line sales capabilities that we have built over the last two years, three years. And we feel that there’s significant headroom in terms of going and cross-selling and upselling and creating the stickiness with those clients. And that’s what we have been doing, and that’s how the sales teams have been incentivized. And parallelly, what we are also doing is — and if you have been following us for the last three years, our number of clients that we have been supporting has been coming down. And one of the reason is that we have also been doing a long tail rationalization at the same time.

And just to share with you the number of clients we had when the management change happened was in the range of around 360 plus. And almost 50% of that — 50% of those accounts belonging to the long tail have been rationalized. But at the same time, we have been adding a lot of strategic logos instead of that. So at this point of time, it’s around 260 plus active clients. So the strategy has been rationalize the long tail over a period of time. We don’t need to kind of set a timeline and do it, because when we rationalize a long tail, we’re also quite considered that clients should not get impacted because we have been supporting them. Take those efforts and move those efforts into mining the focus 100 clients, focus 100 accounts. And that’s why you see that the focus 100 accounts are able to contribute to almost 90% of the revenues. That’s the way we have been doing. It’s a very simple strategy, and it’s in a disciplined execution by the sales and the account teams, and I think that is working out well.

Venu, do you want to add anything? And if you can just get into the deal questions.

Venu Lambu — Executive Director and President, Global Markets

Yeah. Probably I’ll just comment on the pipeline part of the question as well. Just one additional commentary to the point that DC said is that, look, the clients wants to buy solutions, right? And if clients want to buy solutions, your go-to-market team should be equipped actually to connect the dots to create solutions, and that’s where the point of what DC mentioned about having a vertical sales team, which focuses on industry context and bringing the industry solutions and you have the service line or the horizontal sales team, which comes together and they go together to the customer with comfortable [Phonetic] skill sets therefore, they’re able to connect the dots and also deliver the business context. And that’s really been our biggest secret sauce, if I have to say, to actually cross-sell and upsell and grow these 100 accounts.

With regard to the pipeline, we’re actually seeing an increased traction in demand. Overall at an aggregate level, if I look at it, while there may be pockets of softness to the point that DC mentioned in the opening commentary as well. But at overall level, the demand still is positive.

Debashis Chatterjee — Chief Executive Officer and Managing Director

Some question on pricing?

Venu Lambu — Executive Director and President, Global Markets

Oh, sorry. Okay. Look, the pricing, as we mentioned in Q4 as well, for the niche skills in fact, whole of last year for the niche skills, we were actually able to get some price change, the positive price change or increase on certain skill sets and appetite to actually pay a premium price for the niche skills, it’s still there. But I think for most of the customers we covered it in the last year. But we don’t see any significant downward pressure on the price as such at the moment. But the cost saving mandate is always there, right? It was there during pandemic also. It just that it didn’t come out much in the front. But now because of the inflation and potential recession people are talking about, there’s always that cost-saving mandate is sort of coming at the top of the agenda. But that doesn’t necessarily mean that it’s going to put pressure on the price. You address the cost saving through more than one way. Productivity, automation, bringing solutions, we can actually modernize the legacy technology, moving to cloud. All those things will actually help you to get the cost savings to the customer.

Dipesh Mehta — Emkay Global Financial Services — Analyst

Understood. Thanks. If I can squeeze one question. What would be the effective tax rate? If Vinit can help us for us.

Vinit Teredesai — Chief Financial Officer

Yeah. So our effective tax rate should be in the range of 25% to 25.5% going forward.

Operator

The next question is from the line of Manik Taneja.

Manik Taneja — JM Financial — Analyst

Hi. Good evening. I hope I’m audible?

Debashis Chatterjee — Chief Executive Officer and Managing Director

Yes.

Manik Taneja — JM Financial — Analyst

Yeah. Thank you for the opportunity. DC, I just wanted to pick your brains about the fact that while we’ve continued to hire a significant number of freshers through the last five quarters to six quarters, our utilization rates continue to be fairly sticky. And despite the fact that across the industry and including for us, we’ve seen this shift towards more offshore delivery. So just wanted to get your thoughts as to what’s driving this phenomena, our ability to essentially keep utilization rates high despite hiring a large number of freshers? And because for peers, we are seeing some cool off in terms of utilization because of the fresher bench, but we do not see something similar happening for us.

And the second question was for Vinit. Just wanted to understand how should we be thinking about our DSOs going forward? You’ve done a fairly good job in terms of cash collections in the current quarter. Should this be the new level that we should probably think about? Thank you.

Debashis Chatterjee — Chief Executive Officer and Managing Director

Look, Manik, I think it’s all about how do you plan and execute. So if there is something that we have done well as a team, is our ability to plan and execute to the plan. And even on the fresher standpoint, I think, the — first of all, we have a very clear view in terms of how many freshers we can train and absorb in a particular quarter. And when you train and absorb, we are also able to manage the skills in such a way that we can get them deployed in the right way, in the right engagement. I think that’s all we are doing. And it’s not to say that we will always — there could be some issues in some quarters. But at a broad level, I would say, that the team is doing a phenomenal job in terms of staying focused. And it’s just a disciplined execution in terms of how we are — first of all, we did not have a very robust freshers intake program. We have done a lot of work. We have a new CPO who has come on board, who has been helping us in terms of the entire fresher strategy. And once the plan has been in place, we are also putting the skilling and the skilling program in place, the training program in place, so that we can absorb them into the projects in the most effective way. That’s all we are doing. I don’t think there is anything different that we should be — we are doing. And that’s — if we can continue doing that, we’ll get the same results as we go forward. Vinit?

Vinit Teredesai — Chief Financial Officer

Yeah. And DSO, yeah, our cash collection, machinery is working absolutely to its best, I would say this is a good benchmark for us. Our India role will be to at least sustain this if we can’t meet this. But honestly, if I had to make an assessment even if we are able to sustain our DSO below 60 days, I think so that will be a good outlook to consider going forward.

Manik Taneja — JM Financial — Analyst

Sure. Thank you. And one last clarification. So in your annual report, it’s just in that you’ll be looking to add 30% more freshers in FY’23. So does that mean we’ll be probably looking at closer to 7,500 to 8,000 odd freshers for FY’23?

Vinit Teredesai — Chief Financial Officer

Yes, that’s the right now expectation.

Manik Taneja — JM Financial — Analyst

Thank you and all the best for the future.

Operator

The next question is from the line of Sameer Dosani.

Sameer Dosani — ICICI Prudential AMC Ltd — Analyst

Yeah. Hi, DC. Thanks for taking my questions. Just a question on utilization. Utilization has normalized during the present [Phonetic] levels. How do you see this going back to focus 10 [Phonetic] levels, what we have there in the past? And also offshore mix — our offshore mix has significantly improved in last few quarters. Do you see this normalization happening as we go forward into the next few quarters?

Debashis Chatterjee — Chief Executive Officer and Managing Director

Did you follow that question?

Vinit Teredesai — Chief Financial Officer

Yeah. So see I would say utilization at this point of time, given that our — given the way our fresher program is working, whereby we are able to get people trained and getting deployed into the project and getting them built. We do believe that utilization, we should be able to sustain around the 80%, 81% level. At this point of time, in the next short run, I don’t anticipate it will drop down. And from your offshore mix perspective, again, at this point of time, we are not seeing any freshers from the customers saying, have your people returned back on site in a big way? There is a very pocketed sort of demand that is coming whereby people have to travel back to the on-site locations and work from there. But at this point of time, it’s likely to remain within the same range in the short run.

Sameer Dosani — ICICI Prudential AMC Ltd — Analyst

Lastly, one thing we spoke about this last quarter that we have a very good visibility over the next two quarters, that is in FY’23. Now at the end of Q1, next two quarters, how you look at it? Do you see similar robustness in terms of your performance and the demand that you will be able to execute? Thank you.

Debashis Chatterjee — Chief Executive Officer and Managing Director

Venu?

Venu Lambu — Executive Director and President, Global Markets

Yeah. So look, guys, I think that DC mentioned in the opening commentary that in the near term and we use that when we spoke in Q4 as well that in the near term, which is essentially the first half, we have done the part of our stock, if I must say. We are confident of continuing the same growth. But things are sort of changing so dynamically in the macroeconomic level. So we have to look at it in terms of how these things will come into impacting our clients for the second half. I would probably say for the second half, it’s best to take a perspective of being cautiously optimistic. But in the near term, in the first half, we maintained the same commentary as that we mentioned in Q4.

Sameer Dosani — ICICI Prudential AMC Ltd — Analyst

Thanks. That’s it from my side. Good luck.

Vinay Kalingara — Head of Investor Relations

We’ll take a final question from the line of Abhishek Shindadkar.

Abhishek Shindadkar — ICICI Securities — Analyst

Hi, am I audible?

Debashis Chatterjee — Chief Executive Officer and Managing Director

Yes.

Abhishek Shindadkar — ICICI Securities — Analyst

Okay. Thanks for the opportunity and congrats on a good quarter. Two questions. Venu, you had a comment about pieces of digital transformation could be deferred if required. Can you just elaborate that from the perspective of service lines to get us a context of what can be deferred and what remains critical? And the second question is on the visibility of the retail vertical growth in the second quarter in the context that retailers have to be ready for the holiday season. So what is the visibility there from that perspective. Thank you for taking my questions.

Venu Lambu — Executive Director and President, Global Markets

Thank you. Great question. Firstly, with regard to talking about parts of digital, I use the word sprints because I’ll probably take an example to explain that. Look, if a client is doing what I call as an omnichannel platform implementation, right? It’s a platform implementation to enable the e-commerce whether it’s for manufacturing, retail or for any customer for that matter. You start developing functionalities on the platform on an ongoing basis. You develop new features, you develop new experience zones on the platform and so on and so things. So there comes a point where either because of the revenue pressure or because of some of the macroeconomic aspects that we spoke of, you have an option of deferring certain features to be deployed at much later part of the year. That’s what I mean differing set of aspects of digital, spend in the later part. If that is not really business critical, you can actually look at, okay, can I do it two months later? Can I do it three months later? So when we spoke about softness in certain areas, this is exactly what’s happening. You can think of deferring certain things, but you don’t stop it. You just think of doing it at the later stage.

The second is, with regard to the retail aspects of it. Look, absolutely. That’s why I don’t do. If you remember, I made a comment saying that the softness is not a sectorial trend that we want to talk about. It’s happening in a few pockets. It depends on which business you are in. If you’re in a retail business of electronics retail, the way you’re going to get prepared for your peak seasons, whether it’s Black Friday or Thanksgiving and then to the Christmas is going to be completely different. But if you’re in, let’s say, in an apparel [Phonetic] retail business, you prepare yourself differently. So I think within the retail sectors, you have a different attributes on how these things gets done.

And second thing is that it also depends on where the clients’ markets are. If the client has a market dependency, let’s say, in Russia, as an example, or do they have a supply chain dependency to a larger extent in China, then those are the aspects as well that will impact the particular client. But if a certain client doesn’t have an impact either in the Russian market or even the supply chain dependence in China, they seems to be ready. They seems to be in a better shape to actually cater into the peak season or already a peak [Phonetic] season demand. So it depends on the sub-segment within retail. And second is how their value chain or supply chain is sort of built as well.

Abhishek Shindadkar — ICICI Securities — Analyst

Thanks. That is helpful. And if I can just ask a follow-up to your answer. So based on our retail client portfolio, how much percentage of them, if you can just help us understand, are more aligned to the troubled geography and the supply? Obviously, supply chain would be largely China, but from a geography perspective, any color if you can give. Thank you.

Venu Lambu — Executive Director and President, Global Markets

Look, it’s — I don’t remember the percentage off the hand. But I would put it slightly differently, right? If you look at the year-on-year growth that we have had in the retail, right, the quarter-on-quarter sequential has been a different narrative. But if you actually look at year-on-year kind of growth in the retail segment. So I think at an aggregate level, we should still be able to deliver good value for that sector. But I don’t think I have a handy in terms of exact percentage of customers who have China dependency or Russian dependency. But I’ll give you an example in terms of types of retailers who have that dependency. So I can’t give you an exact percentage on that.

Abhishek Shindadkar — ICICI Securities — Analyst

Great. Thank you for taking my question and that is it for the year.

Vinay Kalingara — Head of Investor Relations

That was the final question for today. On behalf of the management, thank you all for joining this call and for your continued support. You may now disconnect your lines. Thank you.

Debashis Chatterjee — Chief Executive Officer and Managing Director

Thank you.

Vinit Teredesai — Chief Financial Officer

Thank you.

Venu Lambu — Executive Director and President, Global Markets

Thank you.