Edited Transcript of LTI.NSE earnings conference call or presentation 16-Jul-20 12:00pm GMT

In a quarter marked by a challenging environment, we have been able to limit our quarter-on-quarter degrowth. We delivered revenues of $390.3 million, a decrease of 4.8% quarter-on-quarter and growth of 9.5% year-on-year. In constant currency, these translate to 4.7% quarter-on-quarter and a growth of 10.6% year-on-year basis. We remain focused on our strategy to deal with the impact of pandemic. As discussed during our last earning calls, we have developed a 3×3 strategy to ensure we respond to this crisis in a holistic manner. Our strategy covers these 3 aspects: customer-first thinking; resilience in operations; and protecting our P&L. In each of these 3 areas, as I had talked last quarter, we have defined act now plan now goals; developed defense and offense playbooks; and set up war rooms as well as win rooms for programmatic execution of our strategy.

Let me run you through some steps we have taken in each of these 3 areas. In today’s difficult times, grit is a quality that defines new leaders, those resilient enough to keep going and emerge stronger, more determined, focused, inspired and energized. In our customer-first thinking, we have positioned ourselves around the Grit Alliance, framework with a strong focus on growth, increasing resilience, innovation and team work. At the core of this framework is our ability to work closely with clients to drive the cross-functional paradigm shift needed to help them achieve their new goals quickly and seamlessly operate in the new normal.

With this in mind, I would like to highlight an initiative we have recently developed and launched. Known as LTI Canvas, this initiative brings to life our xFH or Everything from Home framework. As discussed last quarter, xFH is LTI’s approach to working from home. It outlines our journey, not only simply being operational from home, but growing from home. LTI Canvas is an integrated platform in partnership with Microsoft and drives technology and business outcomes at a time when teams are operating in a very distributed environment. LTI Canvas streamlines processes like software development, support transition, information security, knowledge and infrastructure management and provides for the same to be delivered and executed remotely. It consolidates capabilities across cloud, agile, DevOps and design thinking, leveraging AI/ML and analytics.

Talking about increasing resilience in operations, our xFH model has been very effective, and we have seen productivity improvements as we have learned and adapted to the new normal. We are planning to gradual — planning a gradual and calibrated approach towards a hybrid model of return to office for our staff around the globe. We are currently 99% enabled to work from home. As we return to office in future, keeping social distancing in mind, we are expecting that we’ll update our facilities with maximum 30% to 50% occupancy based on individual facility design in the medium term. All locations will be prepared to shut down or reduce occupancy at short notices as well.

While there is no fixed time line on return to office state as the situation is changing and evolving every day, we are preparing for this eventuality. We have launched LTI SafeRadius, a GDPR-compliant return-to-work app. This enables organizations to analyze information across locations on LTI’s self-serve analytics platform, Mosaic Lens. Key features include high-risk profiling, seating allocations, staggering work shift schedules, transport management, real-time alerts on accidental congregation, highlighting hotspots and contact tracing. Currently, several of our employees are using this app, and we have also launched this externally for our clients.

On protecting our P&L, we have acted swiftly as demonstrated by delivery of stable operation margins sequentially. We have provided some of our customers with specific time-bound commercial concessions that will enable them to continue their IT programs with us. These are largely onetime discounts, which will enable us to revert to the earlier commercials once things settle down. We’ll continue to focus on driving operational efficiencies in the coming quarters as well.

Let me now cover business highlights for the quarter. Despite some delays and deferrals in our pipeline, our large deal team and win rooms continue to be busy. We added 16 new logos across all verticals during the quarter and won a large deal with a BFS logo in U.K. The multiyear deal with a net new TCV of $20 million is with a wealth management firm to provide remote infrastructure support, cybersecurity services and migration to IBM Power Cloud from their legacy wealth management platform.

In a quarter marked by a challenging environment, I’m happy to state that we also added a new global Fortune 500 logo to our list of clients, taking the total Fortune 500 customers to 67. We remain positive as we expect to close and share with you some large deal wins in Q2 as well. I also want to share with you that LTI has been recognized as one of the top 5 IT brands in India as well as top 100 brands in the country as per India 100 2020 report by Brand Finance. I’m happy that brand LTI has secured a place amongst India’s most valuable and strongest brands.

Let me now provide you with a color on performance of our respective verticals. In BFS, we grew 9.5% year-on-year and declined 4.2% sequentially. While our top line continues to grow, Q1 performance in this vertical had an impact on delays in securing work from home approval from a key customer and also onetime COVID related commercial discounts, both in Europe. Given the magnitude of this global pandemic, we expect banks to invest in their risk and liquidity management systems. Given our strength in finance risk and compliance space, we expect to partner with our BFS customers in this area. Largely even in the U.K. market also belongs to this vertical.

In insurance, we registered a 3.9% year-on-year growth and declined 2.7% sequentially. With increased exposure, lowest ever interest rates and slowdown in economic conditions, insurance companies are facing significant economic challenges. Many of them have had to deal with the challenging sales environment and also resort to activities like refunding part of the paid premium for P&C to retain customers and higher medical costs for health insurers.

Manufacturing was our hardest hit vertical, which declined 16.5% quarter-on-quarter, but grew 13.9% year-on-year basis. Sequentially, this vertical was also impacted due to absence of pass-through revenues in Q1. This vertical has performed in line with our expectations as many manufacturing facilities were shut during the — due to COVID-19 and hence IT was a distant thought for these factories. We are seeing some activity here as there is broad-based realization for the need to accelerate digital adoption. We have capitalized on the opportunity to help customers with strategic cost reduction, while gaining market share during the quarter. Global Fortune 500 client, which we have added, also belongs to manufacturing vertical.

Energy & Utility vertical saw a decline of 10% sequentially and a 9.6% increase year-on-year basis. As guided last quarter, this vertical was impacted due to a combination of COVID-19 and commodity prices falling as well. CPG, Retail & Pharma saw a marginal sequential decline and a growth of 13.4% on a year-on-year basis. Slight decline in this otherwise resilient vertical was driven by reprioritization of work and resultant delay in discretionary projects from specific customers.

High-Tech and Media was flat sequentially and grew by 1.6% year-on-year basis. The Others vertical, which include defense and professional services, registered a 29.6% growth quarter-on-quarter and 29.1% growth year-on-year. A small base and certain India-specific programs were the key reason for the growth of this vertical. Our large deal win announced with a key government ministry in Q4 FY ’20 falls under this vertical and is ramping up well.

Talking about outlook, let me now turn and give you a description of that. Our Q1 performance was driven by the resilience of our diversified portfolio. This was supplemented by the fact that LTI has near-zero exposure to travel, hospitality and a limited footprint in retail. We continue to win large deals, add new logos and work with global Fortune 500 customers. We have not seen material delay in any of our ramp-ups, and we continue to meet client expectations. Cloud acceleration has been a common theme across all of our verticals.

Both new and old age — age-old companies are adopting digital ways of working, and that unlocks a world of opportunities for us. However, we also need to acknowledge that there are lots of moving parts and many unknowns today, given the unprecedented and extraordinary situation caused by the pandemic. The number of people impacted with the virus continue to spike in several key geographies as we speak. A further spike or second wave infections could cause both governments and corporates to act very rapidly, and we may see further lockdowns affecting business adversely for the industry.

Having said that, based on what we know of our customer situations, pipeline and large deal momentum, we believe that Q1 was the trough for us and Q2 would be flat with a positive bias. What I can say for certain today is that we remain committed to lead with our expertise and create a niche for ourselves as a leading global organization that is powering the breakaway enterprises across industries. I have no doubt that LTI would be in the industry leadership quadrants for growth in FY ’21 as well.

Let me now hand over to Ashok to give you the financial details.

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief Investor Relation Officer [4]

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Thank you, Sanjay. Hello, everyone. Let me take you through the financial highlights for the first quarter of FY ’21, starting with the revenue numbers. Our revenues stood at USD 390.3 million, declining by 4.8% sequentially and was up 9.5% on a year-on-year basis. The corresponding constant currency decline was 4.7% quarter-on-quarter and growth of 10.6% year-on-year. Reported INR revenue of INR 29,492 million was down 2.1% quarter-on-quarter and up 18.7% Y-o-Y.

Now coming to profitability. EBIT for the quarter was INR 5,139 million, translating into an operating margin of 17.4% as compared with 16.7% in the previous quarter. Pressure on margin due to revenue decline was more than offset by tight cost control in SG&A, currency movement and lower product cost. Reported profit after tax was INR 4,164 million, which translated into a PAT margin of 14.1% this quarter compared with 14.2% in quarter 4. Lower foreign exchange gain and higher income tax expenses than the last quarter has offset increase in treasury income, resulting in minor drop in PAT margin, even though there was an increase in operating margin.

Moving on to the people front. Utilization without trainees was at 79.6% as compared to 80.6% last quarter. And utilization including trainees was at 79.4% versus 79.3% in quarter 4. Our net additions to manpower in the quarter was 40, the total manpower stood at 31,477, of which our production associates were 94.4%. In this quarter, attrition has improved to 15.2% versus 16.5% last quarter on LTM basis.

Now moving on to our hedge position. Our cash flow hedge book stood at USD 1,098 million as at 30th June, 2020, versus USD 1,251 million as at 31st March, 2020, while the on-balance sheet hedges stood at USD 111 million versus USD 91 million last quarter. We have been consistent in executing our hedging strategy in a measured manner, keeping market uncertainty in mind.

Now talking about DSO, working capital and cash flow. It was second consecutive robust quarter for cash collection and DSO improvement. In quarter 1, the billed DSO stood at 70 days compared to 77 days last quarter. The DSO, including unbilled revenue, was at 99 days, an improvement of 7 days over quarter 4. The net working capital has improved by 2.5% to 13.8% of revenue as on 30th June, 2020, over the last quarter.

For the quarter, the net cash flow from operations was strong at INR 6,347 million, which was at 152.4% conversion of the net income. At the end of the quarter, cash and liquid investments stood at INR 34,256 million, adding INR 6,818 million to our liquidity during the quarter. The effective tax rate for the quarter was 25.5%. Earnings per share for the quarter stood at INR 23.9 per equity share as compared to INR 24.5 in quarter 4. Diluted EPS was INR 23.7 per equity share versus INR 24.3 last quarter. On LTM basis, diluted EPS was INR 90.1 per equity share versus INR 86.6 in quarter 4.

With that, I would like to open the floor for questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Sudheer Guntupalli from Motilal Oswal Financial Services.

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Sudheer Guntupalli, Motilal Oswal Securities Limited, Research Division – Research Analyst [2]

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Sanjay, we understand that you do subscribe to the thought process that scale will not be a meaningful differentiator as long as you have a very strong value proposition. But in the current context, are you seeing any early changes in the industry structure, be it consolidation in favor of large companies versus mid-sized players? How do you see LTI position on this front versus both our largest players and even the smaller ones?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [3]

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Sudheer, hope everybody at home is safe and sound. I continue to believe in that very strongly. If you have value proposition, you will have — your story will be heard and you would continue to grow. Obviously, in these times, logical thinking says that the consolidation would happen. But as I have been telling you guys for the last 4, 5 years since we have started talking that where LTI plays, we play in the mature market. Our technical customer base is of the large companies. We also don’t believe that there are Tier 1 partners and Tier 2 partners. So we fundamentally strongly believe our size today allows us to bid for the largest deals because also the deal size has shrunk in a meaningful way. So we continue to believe in that. We have already been disrupted — disrupting the market. We have — we like to be in a position of being the underdogs, and we strongly believe that we’ll continue to gain share.

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Sudheer Guntupalli, Motilal Oswal Securities Limited, Research Division – Research Analyst [4]

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Sure. And the large deal win this quarter seems to be much lower than the typical run rate. Of course, we do understand that these may be the deal wins over a truncated period of 2 months and not the entire 90 days. But how comfortable are you with the large deal win numbers this quarter and the current deal pipeline?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [5]

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Deal pipeline, Sudheer, is — continues to be strong. As I said in my initial commentary, the win rooms continue to be extremely busy. And we do hope to give you some news on some of the large deals in Q2 as well. So lots of activities, obviously, as you can expect. Some amount of whole activity has also happened. But by and large, what we see is there is continued activity on large deals and customers are continuing to go on that path.

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Sudheer Guntupalli, Motilal Oswal Securities Limited, Research Division – Research Analyst [6]

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Sure, Sanjay. One last question to Ashok. So you managed margins quite well in a quarter which is heavily disrupted. So does that leave you with a good headroom to roll out salary revisions and bonuses in the near future? And given that now you may be having a better visibility on revenue trajectory and cost structure, what is your thought process on margins for the full year?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief Investor Relation Officer [7]

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So Sudheer, we are definitely able to protect P&L in Q1 through tight cost control in SG&A and operational efficiency and, of course, INR depreciation also help. But where we stand today and as Sanjay spoke about quarter 2 flat to some positive bias and if situation remains normal growth will start — should start returning from there. And with that, we also believe some of the things which were helping us in terms of saving expenses, particularly travels, et cetera, some amount of that will start coming back. As far as your first part of question, salary increase is concerned, we deferred 1st July cycle, and we are going to take only after our quarter 2 performance and some more visibility around how the market is looking like, how the growth trajectory is looking like. And that would then definitely — whenever that is announced, the future quarters will slightly get impacted with that. So having said all these things, I believe we will operate for full FY ’21 in a very, very narrow band where we have delivered quarter 1. But there are many uncertainties, many unknowns, and we will have to watch very, very carefully. But we continue to be very focused on each cost element, which LTI incur and question everything. But at the same time, keep ourselves in a position that when growth returns, we are not regretting that we tightened our costs so much that we have to now wait to capture those opportunities. So it’s a good balance being kind of implemented.

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Operator [8]

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The next question is from the line of Sandip Agarwal from Edelweiss.

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Sandip Kumar Agarwal, Edelweiss Securities Ltd., Research Division – VP [9]

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First of all, I wish very good heath to the whole management team and all LTI people. So to start with, I have 2 questions. One, I will have from Sudhir — I will want Sudhir to answer and 1 from Sanjay. So first question, Sanjay, to you. What is your view on these 3 things, which most of the global players we are seeing are seeing a huge upsurge in demand? One is the cloud part where the capacities has been exhausted. Secondly, this transformation, what is your thought on that? I think — and I believe based on data that the core has not been transformed or not been invested for quite some time in a big way. So there is a big lag — a big leg up of spend, which should be there in the transform of the core. And finally, the digital transformation journey. I think it will accelerate much more with the online activity. So what is your sense on this jump in online activity, assuming that some part of this activity will recede in future? So that is number one. And to Sudhir. Sudhir, what is your stance on the future of marketing and sales? What is your sense that will the pattern how we do marketing and sales change permanently? Or you think once the lockdown opens up probably people will get back to the open ways? Or you thing the new way of going through some of the internal softwares or Teams or Zoom would do wonders for marketing and sales as well?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [10]

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Sanjay?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [11]

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Sorry. I was speaking in mute guys. Sorry. I was saying, Sandip, good questions. And actually, Sudhir is well-qualified to answer both. But let me just — since you have asked specifically for me, let me just try to answer the first part. As I said in my initial brief, cloud is seeing huge adoption across what the world over people have realized. Anybody who had — who was totally on-premise have struggled to go and operate — any large corporation has struggled to go and operate and work from home model. But obviously, this usage of cloud also leads to a lot of waste going in places. So where we have COVID-specific offerings for customers to rationalize and help them operate in a hybrid cloud model and rationalize their expenditure as well.

With regards to transformations and core transformation, if you — I think, Sandip, you attended our Analyst Day in December. We strongly believe there are 4 themes that are playing in the marketplace. Operate to transform. How do you use operations as a lever not to just do maintenance, but basically to create a backbone for transformation. Second is data-driven organization, right? How do you use data to actually do meaningful decision-making. Thirdly, digitizing the core and fourth is experience. Digitizing the core is very important because you need to simplify things to a level whereby you can launch product platforms in a meaningful way. So yes, transformations will continue. We are seeing transformations continue even at these times. But obviously, depending on the vertical, depending on a company’s situation, some of the discretionary works will continue to get halted or go slow, but these journeys will continue. I’ll let Sudhir answer the question on sales and marketing.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [12]

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Yes. Thanks, Sandip. As Sanjay mentioned, that it’s been a busy period for us across the organization, especially from he mentioned the concept of win rooms that we have in place for deals that are underway. So if you ask me how does sales and marketing change in the environment that we are? And whether this change will continue to be the way we work in the future? If that’s your question, I think the key theme is that there are certain aspects that have improved. So for example, Sanjay, Nachiket, me, we are on multiple calls with clients almost everyday. In fact, even today, I had 2 calls with the clients this morning before getting onto this call. So I think the first 2 years, we are able to stay close to our exiting — especially our existing clients and have multiple conversations with them. That’s happening across the board. But it is harder to connect with new clients. Having said this, we had a good new logo win this quarter. But I think go — on an ongoing basis, that is something — face to face meetings, in-person discussions are important when you are forging new relationships and building on those.

The second thing is that, we’ve got a very healthy large deal pipeline. I think going forward, right, what we’ll see is that the big decisions on large deals do require some level of interaction. So there are — so I think there are some natural limitations with this way of working. So we will work — I don’t think we’ll go back to the way we used to work. I’m sure that all of us will have an opportunity to travel a little less and still connect with clients as effectively. But I think we are moving towards a hybrid model. But I still believe that in our business, that face-to-face interaction, especially to build and sustain relationships, is something that cannot be underestimated and cannot be done as effectively on remote channels.

Having said this, right, what we have also done — and this is to your previous question on has COVID accelerated cloud and digital, which it definitely has. It gives the opportunity for a significant amount of training and enablement of the entire sales force — sales organization in cloud and digital. And I’m sure when you ask about how we are executing on these trends and Nachiket will answer, but LTI Canvas has been a fantastic way of us delivering to clients. So how we do work is also a key part that say, that’s not only what we do. It’s about how we do it. And we are able to demonstrate to clients that we are able to do transitions remotely. For example, the large deal that we spoke about with the transition we carried out remotely. As well as we’re able to do implementations. We actually talked about an SAP warehouse management implementation that we did with a client. So a significant amount of — there is a change in what we sell and how we convince clients that we will continue to be able to deliver even in the new normal that we see. So let me pause here and see if there’s any follow-on questions.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [13]

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If I may add 1 small thing. I think we need to keep good habits from COVID and not go back to old ways of doing things completely. And there are many good things. Sudhir said, we are talking — I think I’m having more customer discussions than I normally did. I used to also travel 140 days on the road, right? Today in the discussions, there are no status quo. There is no holy cow. You can question the customer on any and every decision, every past theory that they have — one has ever had. If you have a story to tell, I think they will listen. The situation also allows us to bring the best of the company to bear. In the past, you will typically have a few people traveling to a customer orals. Now we have had situations where we have 60, 70, 80 people being on a oral. So you can build the best of the company to bear in these times. So I just hope we will continue to — but you also need a social fabric when you do business development or even actually software development. So we take those good things, bring back those good things, but also not use the opportunity of higher productivity in these times and not go back to some of the old habits that we have had.

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Sandip Kumar Agarwal, Edelweiss Securities Ltd., Research Division – VP [14]

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Extremely helpful. And I’m sure that you save a lot of carbon print also by traveling less.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [15]

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Absolutely.

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Operator [16]

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The next question is from the line of Sandeep Shah from CGS-CIMB.

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Sandeep Shah, CIMB Research – VP [17]

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Sanjay, just wanted to understand that we really appreciate your industry-leading growth even continuing in this bad year of FY ’21. But the way I think your surmise of better growth versus industry is also dependent on a consistent large deal wins. And we do understand pandemic is leading to some amount of delay in the decision making as we are seeing in the pipeline. So with large deals may not be very healthy in this year, are you worried about the growth entering into FY ’22? This is slightly longer-term question, but is it gives you a bit of a discomfort if you think beyond FY ’21?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [18]

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Sandeep, I hope your family is doing well. I — obviously, we announced 1 deal, albeit a little small size. But as I said, we will hopefully announce a few deals in Q2. Deal pipeline looks healthy. But we have to see how the next few quarters — next 3 to 6 months hold up. In our business, what we are doing today, right, the pipeline and discussions we do today help us in 2 or 3 quarters down the line, when the deals close and the ramp-up happen. Today, where we are, we are very, very busy. I don’t think it will impact anything significantly in FY ’22. This year, obviously, is going to be tough because customers are spending in a very measured way. But we will see. There are so many unknowns. It’s very difficult to quantify. I think next 3 to 6 months will define what happens in FY ’22. But irrespective of what happens, we want to continue focus on capabilities. We want to continue focus on building our A plus scheme. So we can continue to partner with customers and create opportunities for our businesses.

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Sandeep Shah, CIMB Research – VP [19]

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Yes. And second, Sanjay, last time, you were the first one to call out that there could be some demand headwinds in the banking, financial service, insurance in the second half of this financial year. Can you update in terms of a demand outlook in that segment as a whole because some of the large peers are showing deal wins in that segment? And incrementally, they are not sounding that much cautious.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [20]

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So it’s a good question again. And frankly, where we are, we are also not seeing anything so far. But what I did say, not to get misinterpreted in any way, we were thinking that there could be some pressures coming in from defaults, et cetera. We have not seen any of it. Top line continues to grow. It grow in Q1. We seem to have a healthy pipeline. But again things are changing on a daily basis, Sandeep, right. So we have yet to see how things pan up. We will see. But today, where we stand, I also don’t see any problem like that.

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Sandeep Shah, CIMB Research – VP [21]

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Okay. Okay. Just bookkeeping question to Mr. Ashok. Treasury income has gone up significantly. Is it more to do with the notional gain, fair valuation of some of your debt securities? And do you expect that may lead to some amount of Q-on-Q dip in the coming quarters? Or this is actually an increase in the yield because of the cash increase, which is happening?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [22]

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Ashok was — got dropped off. Let’s see if he’s back yet. Sunila?

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Sunila Martis, Larsen & Toubro Infotech Limited – Head of IR [23]

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Yes. We’re just trying to get him reconnected.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [24]

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Sunila — Sandeep, we’ll come back to this.

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Operator [25]

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Next question is from the line of Nikhil (sic) [Nitin] Padmanabhan from Investec.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [26]

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Nitin got dropped. Is it?

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Operator [27]

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The next question is from Vimal Gohil from Union Mutual Fund.

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Vimal Gohil, Union Asset Management Company Private Limited – Research Analyst [28]

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Sir, my question is regarding — my question was actually to Ashok. I hope he is back on call.

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Operator [29]

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We’re still trying to connect Mr. Sonthalia.

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Vimal Gohil, Union Asset Management Company Private Limited – Research Analyst [30]

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Right. But anyways, I’ll just complete my question then. There were 2 questions. I just wanted to understand the cost savings. You’ve had a good amount of cost saving this particular quarter. Just wanted to understand how much of your — because I do also — I do believe that there will be some costs like travel costs, et cetera, that could come back once things normalize. So how much of your cost savings are probably — will return when growth returns? And how much of your savings you’ll be able to hold on as and when things normalizes what I wanted to understand? The second thing is you’ve also shown improvement on your working capital. Should we continue to assume this level of working capital as a percentage of sales going forward as well? Yes. These are my two questions.

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief Investor Relation Officer [31]

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So sorry, I was dropped and the first question partly I heard. But I will tell you that if we allow all the costs to come back, then it means we would have [wasted] this crisis. So all of us are thinking that how do we ensure that whatever pain got created because of crisis, at least we create some of the structural changes, so that we can retain some of the things. Of course, some of the situational savings, which have happened within, get back, and we will see how does it work out in the future. As far as your working capital is concerned, this quarter has been very good because largely we collected for the quarter 4. Whatever we did, we collected that in this quarter. And so going forward, our focus would be to maintain this level because I see some pressure when we talk about commercial concessions. In some of the cases, there are payment from accommodation for a temporary period, and those may play out going forward for the next 1 or 2 quarters. But our whole focus is that how do we in spite of giving certain concessions we can maintain at this level.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [32]

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Ashok, there was a question from Sandeep Shah before. And his question was will the treasury gains and investment income likely to reverse in future quarter?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief Investor Relation Officer [33]

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No, so treasury income gain mostly are very much realized gains also. And there is hardly — there is a small amount of MTM. Quite a bit is realized. So we don’t expect them to reverse until unless you are saying that interest cycle is going to reverse in high. And we don’t see interest cycle is going to reverse in high. So I think they are realized and they are going to stay.

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Vimal Gohil, Union Asset Management Company Private Limited – Research Analyst [34]

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Right. Just continuing on that cost thing, a follow-up, yes. Yes. So just on the cost front, sir, what — which are these costs that you see that you could be able to defend and may not increase in line with revenue? If you could just highlight some bit. Maybe even qualitative comments will do.

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief Investor Relation Officer [35]

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Yes. So like this — I don’t think the way our thought process has gone, travel costs are going to come back to the same level. There will be some savings around that. I’m also sure that when we plan our capacity — future capacity, the hybrid model of work from home and work distributed — in a distributed manner will also play some part on the CapEx and then consequently on the depreciation and amortization, et cetera, et cetera. Also, I believe that some of the things which has happened, certain negotiations, which are temporary, of course, around events, et cetera, and some of the conveyance and cab thing also are going to partly stay with us. So some of these things are there, which are going to partly stay with us. Partly, as the growth comes back, are going to return.

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Operator [36]

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The next question is from the line of Nikhil (sic) [Nitin] Padmanabhan from Investec. The next question is from Manik Taneja from Emkay Global Financial Services.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division – Research Analyst [37]

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The first question was for Sanjay. Sanjay, you talked about your commentary with regards to verticals. If you could also throw some light as to how you’re seeing demand across geographies, especially given the commentary that we hear from 1 of your larger peers around Europe, [as they see] holding up much better. And also, should we expect the usual seasonality of second half being stronger than H1 hold this year as well?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [38]

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I couldn’t hear the question. So you’re saying we gave vertical commentary. What did you want us to comment on?

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division – Research Analyst [39]

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If you could also help us with your commentary from a geography…

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [40]

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Sorry to interrupt, but, sir, request you to speak closer to the mic. We can’t really hear you very well.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division – Research Analyst [41]

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Yes. Is this better?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [42]

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Yes, much better.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division – Research Analyst [43]

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Sure. So I just wanted to understand your demand commentary with regards to geographies and also should the regular pattern of H2 being stronger than H1, should that hold through for FY ’21 as well?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [44]

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Look, I’d like Sudhir to comment on — if he can comment on the demand overall. But guys, I’ve given you as much on where we stand today, that we see the trough behind us. Q2 will be flat to a positive bias. We don’t typically give a revenue guidance, but I’ve given you more. But there are many things which are changing on a everyday basis. We’re dealing with really an unprecedented problem. So things keep changing. But let Sudhir articulate clearly on the demand question for you. Sudhir, are you there?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [45]

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Yes. Yes. Thanks, Sanjay. So let me cover the pipeline and associated large deal questions. So pipeline for us, if I compare it with the same time last year, is up 19% Y-o-Y. But also, I think the good thing about the pipeline is that we — except for manufacturing, oil and gas and automotive, where I think the pipeline will start to return in the coming months, the other verticals the pipeline is holding up pretty well. We see a reasonable pipeline of growth in U.S., Europe. And in case of us, emerging markets, which is our India, Middle East and Asia Pacific business, is showing some good resilience in terms of pipeline in this market. As Sanjay mentioned, we’ve been with very busy win rooms, which essentially are for the large deal activity that we’ve seen. So there is a healthy amount of activity that Sanjay said. And we hope, as he’s mentioned, to see if we can get some closures within the next couple of months.

But what is happening is that deals are getting — they do take a little longer to close. There are some deals that are going on hold, where some clients are looking for more time to make their decisions going forward because it’s a dynamic business environment not just for us but obviously for our clients. I think one of the concerns that was there was whether new logos would be possible. As we — though we announced — we announced 16 new logos, including (inaudible) logos. But I think the key thing here is the move to cloud and digital. That acceleration is what we want to capitalize on. So this is where our partnerships with the large cloud players and the major product players in this segment has been very helpful in terms of driving that pipeline. So a multifaceted pipeline is currently what we see. Though there are certain deferrals and there’s some hold. But overall, we think there is a demand environment. But I won’t make any bold projections because as Sanjay keeps saying things are change — tend to change quite rapidly. And I think we would see that kind of scenario for a few months coming forward.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division – Research Analyst [46]

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So I have one more follow-on question. This was regards to what we’ve been hearing from the industry is that customers may also be asking for differential pricing around work from home deliveries. Just wanted to pick your brains as well on this subject.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [47]

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Sorry, say that again?

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division – Research Analyst [48]

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So we’ve been — some of what we’ve been hearing from the industry is that some customers have been asking for differential pricing for work from home deliveries. Are you seeing that play out in the market as well?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [49]

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Okay.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [50]

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Not at all.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [51]

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No, no. So are you saying differential rates for people working from home? No, certainly not. I think what we are seeing — so client asks there around — more around discounts that they are having, obviously, demand pressures that they are facing or project deferrals of certain projects being — sort of the time line being extended. But no, nothing of — no rate reductions because of where people are located.

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Operator [52]

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The next question is from the line of Vinit Manek from Karma Capital Advisors.

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Vinit Manek, Karma Capital Advisors Pvt Ltd – Research Associate & Equity Research Analyst [53]

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I had 2 questions to you. So first one is with respect to the CPG, Retail & Pharma. So within the pharma and life sciences, we have seen a large surge in the spend within the IT and the transformation that is happening. So for us, where do we stand for that segment? And my second question is in terms of our strategy with regards to the new client acquisition. So we had largely a strategy of mining the existing clients with more deals and more traction. And so with all these COVID happening around, are we seeing even the midsized companies coming to you guys for a cloud transformation or other digital platforms to be connected for the better working of their businesses?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [54]

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Okay. Vinit, let me answer CPG, Retail, Pharma. Yes, we have minimal footprint on retail. But yes, CPG and pharma, 2 important sectors, have grown really well for us. And I think they will grow above company average this year as well. Even if you look at pharma companies and CPG companies, lots of investment dollars from them and they’re actually going in actual drug discovery on the COVID right now, right? So — but we still feel very positive compared to a lot of other verticals on CPG, Retail, Pharma to be driving the growth for the company as well, above the company’s average.

Our key strategy — I think, again, I want to say, I’ve always — every call I speak and say this. There are 4 pillars to our strategy: growth accounts, these are large accounts, right, that we need to continue mining; invest accounts, which could become growth accounts for the future, so we need to continue to throw the kitchen sink at them; new account openings, which could become invest accounts and growth accounts in the future; and large deals to change the trajectory. So it will not be right for you to think that our strategy is builded only on one part. We continue to drive new account openings very similarly. We opened, as we said, 16 new logos, including 1 Fortune 500. As Sudhir pointed out, a little more difficult in these times when you’re not meeting customers face to face. But again, as I say, it will be difficult, but it’s not as if it can’t be done and which we have shown with 1 logo. We’ll hopefully close a few more in the subsequent quarters on Fortune 500 as well.

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Operator [55]

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The next question is from the line of Madhu Babu from Centrum.

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Madhu Babu, Centrum Broking Limited, Research Division – Research Analyst [56]

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Yes. So I think because of this work from home and lower travel, so, overall, the savings for the industry has been huge. I think at least for the short term, most of the companies have shown strong margin performance this quarter. But gradually, do you expect the pricing to fall because of this? Because being in a competitive industry, I mean, once the clients return back to normalcy and then do we expect the pricing erosion because of this whole change in the cost structure and obviously lower CapEx? That is the first question. And second, can the on-site/offshore mix structurally change? Because after executing so much from work from home whether clients may be more comfortable with much higher offshore?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [57]

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Both very good questions, but we don’t believe it will be — as I said in my initial commentary, you need a social fabric that binds people. I think we’ve capitalized a lot of social fabric because people knew each other for a long time, so you can easily work from home. But — and we are social animals, right? And we are in a team sport rather than an individual sport. So it’s not to say that it will be 100% or 75% offshore work from home or it will not be 100% get back to work either. It will be a hybrid model. And these hybrid models take time, energy, effort, cost to make them work, right. So I think that is there to play out. We will see how it goes. With regards to on-site/offshore ratios, you can clearly see. We are at around, what, 21% on-site. We are one of the lowest ones globally. And we have continued to keep pushing work offshore, and we’ll continue to do so. This is one good habit that can come from the pandemic, right. How can you push even more? You can reduce your dependence on immigration. You can actually work and execute things a lot better in this model. And we have proved it that everyone can do that. So yes, we will continue to see that. And hopefully, we will start to put efforts towards that. But also depends on the kind of work we are doing, right. So it will not be immediate. It will be gradual. It’s — just cannot be done overnight, but it will happen.

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Operator [58]

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The next question is from the line of Vibhor Singhal from PhillipCapital.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division – VP & Lead Analyst of Infrastructure and IT Services [59]

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So just 2 questions from my side. One is, Sanjay, if you could just basically throw some light on the energy vertical. You mentioned that this was impacted in a scale manner from the COVID as well as local prices. So have you seen any kind of, let’s say, revival in at least stocks about basically trying coming to us in terms of maybe good news or some kind of expenditure may be happening, if not immediately or maybe 1 or 2 quarters down the line? So is there some recoveries inside or will that be big for what we are to medium term future? And my second question is to Sudhir. If you can basically just — I just wanted to get a perspective on the way we’re approaching the deals right now. So if I were to basically understand, as Sanjay mentioned in his opening comments there have been onetime commercial discounts that we have given to clients. So is the pricing for new deals also a bit lower than hypothetically it would have been has it not been the current environment? So is there a feeling that we would have got a better pricing on new deals had it been 1, maybe 3 months before or 6 months down the line? Or there isn’t much of a price erosion that we are seeing in that front?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [60]

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Let Sudhir answer both of them. Sudhir, go ahead.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [61]

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Okay. So Sanjay, I was focusing on the second part.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [62]

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Okay. But I can answer the first part.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [63]

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Go ahead.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [64]

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Okay. No, no. Go ahead. Go ahead. Go ahead.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [65]

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So I think please add to the oil and gas part because it clearly involves some of the special conversations. So on oil and gas, we — so we saw, obviously, a steep decline in sort of immediate sort of reduction from a client spend perspective. But what we are seeing there is, again, it’s been — it’s — the nature of asks are changing. So it’s becoming — again, this is a vertical where from a — for example, from a cloud perspective, from a digital perspective, there is more to do, but especially from a data perspective, which is something that we think we can exploit a lot more going forward. So I think we are still in the wait and watch phase from an uptick in demand perspective in this vertical. But it will come in these new areas going forward. We’ll also see some core modernization happening here, which will also be something that will be in one of our sweet spot, I guess. Sanjay, anything you want to add on oil and gas?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [66]

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No. I think it will take some time, Vibhor. But it’s not to say that you’re not conversing. You need to keep conversing and keep having a dialogue, whether it’s related to how you can save money, how you can help them operate better in the new normal, how can you run oil fields the way they have to be, how you actually monetize the large drop of oil from the existing oil fields, et cetera. Dialogues have to continue, Vibhor.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [67]

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And your second question, I think, was on new deal pricing. So on new deal pricing, clients — I mean, this obviously is a competitive environment out there. But I’m not saying specific asks for these new deals to be priced differently. There have been asks, as I mentioned, between the March, especially between March and June regarding investing in clients in very difficult times, which we have done as true partners. But clients — as I said, most of the projects that are happening right now are based on clients looking at a combination of their consolidation efforts for cost reduction as well as transformation efforts from a digital and a cloud data perspective. So that pricing is — I don’t see a big shift in terms of where it was. But it’s similar type of pricing. But I mean, I guess I’m repeating right now, but the discounts were in the March to June period. That’s where we have a majority of the asks.

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Operator [68]

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We’ll be able to take 1 last question. We take the last question from the line of Ruchi Burde from BOB Capital.

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Ruchi Burde, BOB Capital Markets Limited, Research Division – Research Analyst [69]

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My question is to Sudhir. June quarter was very unusual quarter because of the COVID-19. So now it would be helpful if you could characterize due to the COVID how the deal pipeline has changed in terms of, I mean, the sizes, mix of new client and the existing conversation or repurposing or the change in the scope of work that you were dealing with?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [70]

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Okay. So I did talk about the pipeline earlier. I’ll just cover some of that again. So as I said, we are — the pipeline is up on a year-on-year basis. There is — from a pipeline — from a vertical perspective, manufacturing, oil and gas and automotive pipeline has been a bit soft, but we expect that to start returning in the second half of the year. Other verticals continue to be pipeline growth that we are seeing continues to be healthy. From a geography perspective, U.S. and emerging markets are doing well for us. In terms of the nature of deals, we are seeing a combination of deals, as I said, so as clients are looking for cash, either cash generation or cash savings, right. So we are seeing large deals which have — which include vendor consolidation and consolidation. We currently think that most of those deals are in our sweet spot areas without much risk to our portfolio. So we see net gain possibilities in many of these large deal — consolidation deals.

On the transformation deal side, this is continuing. In fact, if I refer to the conversations that we had just this week, we are having — we have the closure conversations because I think, as Sanjay mentioned earlier, whatever was digital, whatever was in the cloud and whatever was from a processing perspective, did not rely on manual processing, actually got done and got done very efficiently from a client perspective. So if anything, there is an acceleration in those transformation programs. And that’s where — that’s the other area of growth that we’re seeing from a pipeline perspective. So it’s a combination of the 2. I still think that some decisions may not happen in the time periods that we normally see. So we are seeing certain deals on hold, certain deferrals. So it’s a dynamic decision-making environment. But there are — I would say, from a — if I just measure the team on how busy it is, there is a lot of activity going on right now.

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Ruchi Burde, BOB Capital Markets Limited, Research Division – Research Analyst [71]

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That’s helpful. Just a small follow-up to that, Sudhir. You mentioned some deals — some conversations are deferred or put on hold. Now is there characteristic to those conversations? Are those large size deals or you see a combination of both?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [72]

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It’s a combination. It’s a client-specific thing. As clients are looking at their own demand environment or their business environment changing, it’s — there isn’t a clear pattern. But it’s a combination of both deals being held or being deferred to later decision.

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Operator [73]

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We’ll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [74]

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Folks, this is Sanjay again. Thank you all for joining us on this call. And I wish you, your families and loved ones good health and safe passage through these trying times. We’ll see you on the other side. Take care, guys.

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Operator [75]

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Thank you very much. On behalf of LTI, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect the lines.