Client Budgets Remain Cautious, No Anticipated Uptick In Near Term: LTIMindtree COO

What were the primary drivers behind the USD 1.5 billion order inflow in Q3 FY24 for LTIMindtree. Is this order flow sustainable?

We have observed a consistent increase in order inflows over the past three quarters, leading to our current strong performance. The trend continues with three to four deals in the final stages of closure for Q4 and the upcoming months. The sustained momentum in deal closures, similar to the previous quarters, gives us confidence in the continuous improvement of order intake. Our pipeline predominantly comprises cost optimisation and vendor consolidation deals, aligning with our sustainable growth strategy. While transformation and innovation deals are present, the majority are driven by cost efficiency and vendor consolidation deals.

Can you tell us about the challenges affecting EBIT margins and the initiatives in place to optimise them?

In Q3, two unforeseen factors impacted our margins. Firstly, we experienced wider and deeper furloughs with short notice, significantly affecting both revenue and direct margins. Secondly, we had a higher pass-through compared to the same quarter last year, benefiting revenue but imposing a substantial margin drag. While Q3 is traditionally a weak quarter, these impacts were more significant than anticipated. 

While Q3 is traditionally a weak quarter, the margin impact exceeded our expectations. Looking ahead to Q4 and our exit aspiration of 17 per cent to 18 per cent, we aim to align with a robust order inflow and active deal pipeline. To support this, we plan to modestly lower utilisation, proactively investing in building a bench to ensure resource readiness for upcoming deals. As resources lead revenue in our business, this strategic investment is essential to achieving our exit aspiration, prompting the decision to extend the timeline.

BFSI sector has dipped for you, is there a chance of revival in FY25? Also, what signs are you observing regarding changes in client budgets?

In terms of BFS, this quarter's impact was primarily due to seasonal lows in that industry segment. However, regarding the anticipated revival in FY25, based on our current clients, we have not observed decisive signs of it. Budget-wise, there is a lack of commitments for higher spending from our clients; instead, we are noticing similar or reduced budget expectations. This aligns with the industry trend, as evidenced by the cost-cutting initiatives reported by our largest financial services client in the news. Currently, we do not foresee any significant uptick in client budgets.

Given that the US significantly contributes to your revenue, I am interested in understanding the current demand environment in the US. How does it compare to Europe and the Rest of the World (ROW) in terms of demand?

In terms of demand in the US, there is a consistent trend where customers are not committing to discretionary or transformational spending. The prevailing mindset is focused on cost reductions, with a continued emphasis on scrutinising the return on investment for any transformation initiatives. This behaviour remains unchanged as we enter calendar year 2024. Even recent comments from the Fed do not provide added certainty for our US customers regarding their business outlook. As far as Europe and ROW is concerned, to be honest, in Europe, our portfolio is much smaller. But in Europe, despite the impact of BFS furloughs this quarter, we observe decent activity and promising growth, accompanied by a positive deal momentum. Our business size has not experienced a significant impact or change. In the Rest of the World (ROW), primarily comprising India and the Middle East, our business is project-oriented, particularly in transformation programs. As such, we regularly experience ups and downs in these portfolios on a quarter-to-quarter basis. Therefore, it is challenging to pinpoint a specific trend in these markets for us.