Chennai Jul 19, 2019 (Thomson StreetEvents) — Edited Transcript of Larsen & Toubro Infotech Ltd earnings conference call or presentation Friday, July 19, 2019 at 5:30:00am GMT

* Dr. Rahul Salvi

Elara Securities (India) Private Limited, Research Division – VP of IT Services & Internet and Analyst

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

Ladies and gentlemen, good day and welcome to the LTI Q1 FY ’20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Nitin Mohta, Head of Investor Relations. Thank you, and over to you, sir.

Thank you, Raven. Hello, everyone. Thanks for joining us today to discuss LTI’s financial results for the first quarter of fiscal ’20. The financial statements, press release and quarterly fact sheet are available in our filings with the stock exchanges and at the Investor’s section of our website.

On the call, we have Mr. Sanjay Jalona, CEO and Managing Director; Mr. Sudhir Chaturvedi, President, Sales; Mr. Nachiket Deshpande, COO; and Mr. Ashok Sonthalia, CFO. Sanjay and Ashok will give you a brief overview of the company’s performance, which will be followed by a Q&A session.

As a policy, we do not provide specific revenue and earnings guidance. And anything said on this call, which reflects our outlook for the future or which could be constituted as a forward-looking statements must be reviewed in conjunction with the rest of the company statement.

Let me now invite Sanjay to talk about the results. Over to you Sanjay.

Thank you, Nitin. Hello, everyone, and welcome to LTI’s earning call for the first quarter FY ’20. Let me start the call with welcoming the latest addition to LTI family. Earlier this week, we announced the acquisition of Lymbyc. It’s a specialist AI and machine learning and advanced analytics company. For those of you tracking us since our IPO, you would have noticed that our analytics service line has grown at 32% CAGR amply demonstrating our thought leadership and strengthen in this digital offering. This recent acquisition further strengthens LTI’s Mosaic platform and keeps us at the frontier of the cutting edge work happening in this space.

In addition to the acquisitions, forging strategic partners — partnership is another key standard of our strategy to power revenue growth. To this end, we are pleased to share with you 2 updates: #1, Guidewire, a leading insurance industry software platform recognized LTI as a new consulting alliance partner. And the second one is with Deutsche Telekom or DT has recently chosen LTI as a strategic partner for setting up and learning Microsoft Cloud Acceleration Centre for it’s customer in Central and Eastern Europe.

Our momentum in the large deal space continues and we opened a new insurance logo this — in Q1 with a TCV of $44 million. This was intensely competitive deal adviser-led deal. We were selected as the partner due to our unique combination of insurance domain expertise and cloud-led infrastructure transformation.

We are also delighted to share with you the news of LTI’s addition to the FTSE4Good Index Series. Created by global index provider FTSE Russell, the FTSE4Good Index Series is designed to measure the performance of companies demonstrating strong Environmental, Social and Governance practices.

Let me give you the headline numbers for the quarter. Our Q1 revenues came in at $356.5 million, up 0.48% (sic) [0.8%] quarter-on-quarter and 11.5% year-on-year. Constant currency, these numbers translate into sequential growth of 1 percentage point and a 12.9% year-on-year growth. Digital is 39% of our revenues, up 27.5% year-on-year.

Before I get into vertical specific color on Q1, let me share with you my assessment of some challenges, some known and some new that have emerged. You will recall that we saw tightness in spend and systemic budget cashed out our top account on the last call. While we think the tightness has bottomed out, we are yet to see growth pickup in this account. Additionally, one of our top 10 accounts, which was a large banking customer in Africa region, we were the lead partners for their separation program for their — from their parent. It’s a moment of pride for us to have successfully executed the separation of core systems, including core banking, channels, cards et cetera of these 2 entities. The separation process is now complete and further training program of this account will take time to fructify. We expect to see a decline in the account in Q2.

There have been some client-specific ramp-downs, which were not known last time as we spoke as well. But despite all these challenges, we are confident of positive sequential growth in Q2. Based on the reservatory of the ramp-up in large deals announced earlier and current large deals as well as a pipeline that we have of the deals currently, we expect the revenue momentum to pickup in Q3.

Now let me provide you color on the quarterly performance by verticals. In BFS, we grew 0.9% quarter-on-quarter. This is despite the challenge that we had called out in the largest account. We think the vertical is close to bottoming out and our large deal ramp-ups are on track to contribute from Q3. We are also optimistic about the traction that we have received in the wealth management space in BFS. We announced 2 large deals — 2 deals within this subsegment with our Q1 results. The first is a win with a leading investment management company using AI and automation to drive digital transformation journey. And the second win is a global bank, where LTI is selected for a multiyear cloud-based digital transformation of their wealth technology stand. This is an end-to-end Greenfield buildout on Microsoft Azure for all the bank’s core wealth applications supporting client engagement as well as their operation and bespoke wealth portfolio creation.

Insurance vertical, at 2.5% sequentially in Q1. As PMC Insurance customers, local partner with nimble service providers to modernize their core and leverage the bar of digital technologies, LTI is emerging as a natural choice. As I had mentioned earlier, this is the second consecutive quarter of a large deal win in this vertical, most of which are net new logos.

Manufacturing declined 7.8% quarter-on-quarter. The decline in this vertical is due to absence of the pass-through revenues in Q1, which were there in the earlier quarter. Sequential decline in the enterprise solutions and in their revenue cuts is also due to the same reason. We expect the growth momentum in this vertical together seen from H2 as a contribution for the large deal announced in our Q4 results kick in.

CPG retail and Pharma, the growth momentum in this vertical continues on a basis with 6.2% quarter-on-quarter performance. We are especially pleased with the broad-based nature of growth here across both consumer and life sciences segments. In Q1, we opened a new logo in life sciences space, a medical products company that chose LTI as it’s sole strategic partner to make it landscape lean, cloud first and digital raise. As part of the deal, LTI will manage over 100-plus client applications in more than 40 countries, running multiple business functions like supply chain manufacturing, commerce, customers experience and aftersales.

High-tech and media vertical reopened — reported 1.6% sequential growth after a very strong 11%-plus quarter-on-quarter delivered in Q4. These industries are embracing the technology destructions head on, while leveraging digital technologies. Other verticals, which include defense, professional service and travel and logistics rebounded sharply at 19% quarter-on-quarter. The small base and certain India-specific programs were the key reasons behind this volatile Q-on-Q trajectory.

Before I close and hand over to Ashok, let me give you an outlook on FY ’20. As mentioned in my opening remarks, given the account-specific scenarios, the FY ’20 is a bit challenging. We have consistently won large deals in each of the past 6 quarters and our deal pipeline is healthy and we feel optimistic about our growth from Q3. On the margin front, as I’ve always guided, you have to continue seeing us as a growth-centric company with a stable net income margin in the band of 14% to 15%.

With that, let me hand over to Ashok to give you the financial details.

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR 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 ’20 starting with the revenue numbers. In quarter 1 FY ’20, our revenues at USD 356.5 million, grew 0.8% sequentially and 11.5% Y-o-Y. The corresponding constant currency growth was 1% on a quarter-on-quarter basis and 12.9% on a year-on-year basis. Reported revenue in INR stood at INR 24,849 million, which grew 15.3% year-on-year.

Moving on to the margin numbers. EBIT for the quarter was INR 3,968 million, which translates into an operating margin of 16% versus 17.7% last quarter. The key moving parts for the margin decline are 100 basis point going to increase visa cost given the high number of visas we have applied in FY ’20, 100 basis points due to sales and marketing investment and 20 basis points due to the currency movement.

In addition to these 2 factors, our employee cost also eased up in Q1. The pressure on margin from these factors were partially offset by higher working days and transition to Ind AS 116. For a like to like comparison, please not that transition to Ind AS 116 helped Q1 reported EBIT margins to the tune of 25 basis point.

Reported profit after tax was INR 3,557 million, the PAT margin stood at 14.3% in quarter 1 compared to 15.2% last quarter. The impact of Ind AS 116 pulled the PAT margin down by 26 basis point. Our hedging gains have partially offset the drop in operating margin.

Moving on to the people front, utilization without training stood at 81.3% as compared to 81.1% in quarter 4 and utilization, including training was at 80.5% versus 80.1% last quarter. We continue to add talent and during quarter 1, we added 1,178 people on a net basis. The total manpower stood at 29,347, of which our production associates have been at 94.3%. In this quarter, attrition slightly rose from 17.5% in Q4 to 18.3%.

Our cash flow hedge book as at 30th June, 2019, stood at 1.24 — USD 1.25 billion versus USD 1.19 billion as at 31st March, 2019. While the on balance hedges stood at USD 147 million versus USD 154 million last quarter. We continue to execute our hedging strategy consistently, which has helped company’s PAT margin to be resilient and stable.

Now moving on to DSO and cash flow. The billed and unbilled DSO stood at 70 and 34 days, respectively, for the quarter. Net cash flow from operation was INR 3,335 million at 93.8% conversion of the net income. At the end of the quarter, gas and liquid investment stood at INR 23,796 million. The effective tax rate for the quarter was 25.6%. Earnings per share for the quarter stood at INR 20.51 per equity share as compared to INR 21.86 in quarter 4. Diluted EPS was INR 20.29 per equity share versus INR 21.60 last quarter.

With that, I would like to open the floor for questions.

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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 Sandip Agarwal from Edelweiss.

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Sandip Kumar Agarwal, Edelweiss Securities Ltd., Research Division – VP [2]

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Quite a good execution in spite of challenges. So Sanjay as you mentioned, 2, 3 questions I would like to — and get an answer to. 1, we already know the.

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

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Sandip? Sandip, are you still there?

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Operator [4]

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The line of Sandip has dropped. We’ll move to the next question in the meantime. The next question is from the line of Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division – Analyst [5]

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So I just wanted your thoughts on the broader client challenges. So from what you’re saying, it looks like is very client-specific, but sitting out what we see is that as the interest rate cycle is sort of coming off and basically banks are under margin pressures, and so on, and so forth. So how do you see this broadly? Do see this as a continuing sort of pain longer-term or slowing down of spends? The second thing is, are you seeing anything in terms of delays in deal closures? Anything specific by geography, any vertical? If you could throw some color will be helpful.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [6]

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Seriously we had nothing to do with Sandip actually going away. So hopefully he’ll come back and ask all his complex questions. Jokes apart. To your question, Nitin, these uncertainties in the market rates have been there for 4, 5 years but you never heard me or my team actually talk about any of those. Those will play in certain ways or forms and they’ll continue to impact positively or negatively. But if you have a story to tell, we have always managed — maintain that if you have a story to tell and the value proposition, there is ways that customer always finds money.

Coming to your specific problem, question on BFS, if you really look at, I think my view is that we have specific problems, right, the largest account we talked about, then we talked about the Africa separation today. These are very specific things. Other challenges continue to happen, but barring these 2, we are still seeing growth. You have seen growth in Q1. You have seen growth in — and you would probably see growth in Q2 as well. But barring these 2, I don’t see there is any specific thing for us to call out.

Also 1 reason is that we announced a deal I think last quarter or a quarter before in Europe on BFS area, which is also kicking in, which is also help keep the pace going for us. In terms of your other question, are we seeing delays? And I’m assuming that’s broad-based more than BFS. I don’t think there’s anything specific to call out. Are we seeing any challenges with respect to geographies? I don’t think there is anything to call out as well.

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Nitin Padmanabhan, Investec Bank plc, Research Division – Analyst [7]

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Sure. Just 1 last one, if I may. On — historically, I think, this is something we have always asked you that in the top 20 accounts, are you confident on growth with each one of them when you had specifically highlighted pain points in 2 of them. There is nothing else that you would foresee within the client base, is one? And the second question was within — as far as growth is concerned, do you think Q2 will be similar to this quarter? Or it should be — there should be some acceleration, we should begin to see from Q2?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [8]

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Let me write down the 2 questions. Top 10, top 20 and the

(technical difficulty)

I think, the growth ramp-up, I’ll take the second question first. Growth ramp-up, we are positive out from Q3, but there will be an incremental growth in Q2 as well. So despite all the challenges, we are positive on incremental growth. In terms of the views, account-specific views are on the couple of accounts that we talked about. There will be some — there have been some left-ons I also talked about, which might also — because there are some India-based programs, which are project-based. They come out as top 10, top 20 accounts as well. There would be ramp-down because those projects are going into steady phase as well. But nothing specific on accounts that we have talked.

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Operator [9]

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The next question is from the line of Princy Bhansali from Anand Rathi.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division – Analyst, Technology [10]

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Sir, this is Mohit from Anand Rathi. Just one thing on pricing, it looked like your 1Q pricing was little lower given that we had volume growth but on constant currency basis, growth was on the lower side. So is this the new pricing number we should assume? Or was there any one-offs in 1Q?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [11]

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Are you talking about pricing or currency? Pricing?

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division – Analyst, Technology [12]

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No, I’m saying your volume growth and constant currency growth, so if I look at your volume growth Q-o-Q versus constant currency growth Q-o-Q.

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [13]

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So some of the large deals, which you see that they’re under transition. They, of course, impact in the rate realization the way you see, and that will obviously I would say reason for this drop which you have seen in Q-o-Q.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division – Analyst, Technology [14]

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So once this — so what should we assume for the rest of the year, like this is the new pricing, which we have seen in 1Q or you’re saying transition will get over in — from 2Q, there is some incremental billing, which can happen on both verticals?

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

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Well, I’m hoping that we’ll continue to do lots of transition, right, so that we’ll keep you excited about more large deals.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division – Analyst, Technology [16]

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Okay. I got it. And second on the wage hike cycle, like, is there any impact or how much impact could we see for the rest of the year, gross level?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [17]

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Yes. Our cycle, you would know that it starts from 1st July and we are going ahead with that. And you can expect about 170 basis point impact because of that. But at the same time, you should also note that some of the headwinds, which we had in quarter was — will disappear like visa 100 basis points, a little bit reviews S&M investment, et cetera so we do believe that large parts of it, we can recoup.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division – Analyst, Technology [18]

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Sir, did you say reduced S&M expense for second quarter?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [19]

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Reduced investment I’m talking about. The investment in quarter 1 was quite significant, so that will be slightly reduced. So that will be — reduced not in the term of the reducing the S&M cost, but absence of that investment getting repeated in quarter 2 with the same vendor.

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

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In Q1, we had in excess of 50 basis points for our client event alone.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division – Analyst, Technology [21]

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Okay. So that will not recur in second quarter?

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

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That is correct.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division – Analyst, Technology [23]

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Okay. You said 1 5, right? 15 basis points?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [24]

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That’s 5 0.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [25]

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5 0.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division – Analyst, Technology [26]

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5 0, 50 basis points. So do you still thing can basically offset the wage hikes, which you’re looking at into?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [27]

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Yes, yes, largely.

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Operator [28]

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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 [29]

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Just 2 questions from my side. Hello, am I audible?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [30]

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Yes, yes, you are.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division – VP & Lead Analyst of Infrastructure and IT Services [31]

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So first of all, I just wanted to, Sanjay, take your view on basically you mentioned about the city — you mentioned about the top 1 account about how it’s playing out and everything, so just wanted to get your idea on some of the other key accounts in the — in other verticals and specifically one of the accounts about, which we’ve been hearing a lot about in the high-tech space. So what is the kind of scenario that we are seeing playing out there? And how do you think that might impact our overall growth scenario for FY ’20?

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

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So FY growth can be — hello, can you hear me?

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division – VP & Lead Analyst of Infrastructure and IT Services [33]

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Hello? Yes.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [34]

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Yes. So there was an echo back. So FY ’20, guys, I just gave the FY ’20 outlook in my opening address, so I’m going to repeat the same thing. Given the account specific FY ’20 will be a little bit challenging, but we have consistently won large deals and our deal pipeline is healthy so we feel optimistic that the growth will come back from Q3 onwards.

Now in terms of the largest account, as I said, it’s near bottoming out. We don’t see whoever changes over there but if you analyze — since it’s in public domain, if you analyze their reports and the results, you will see they have continued to spend less on their technology spend. So what we wanting to say — see there is that what I can guarantee is that we are not losing wallet share. It’s just that the nature of the spend and we continue to — we are a bit optimistic that it will grow up. Obviously, it has not grown up, so that one to be a called out.

With respect to the accounts, we will not — you should know that we do not comment if a company is a client or not and we do not comment on client matters due to confidentiality obligations. The Media and High-Tech account ramp-down has 1% impact on our FY ’20 revenues and it was mutually agreed and let me give up.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division – VP & Lead Analyst of Infrastructure and IT Services [35]

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Fair enough. So — and 1% would probably be the — the impact only limited to 1% is what you mentioned?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [36]

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Yes.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division – VP & Lead Analyst of Infrastructure and IT Services [37]

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Sure. And we are not calling out the TCV number for this quarter, right? Last quarter, we mentioned our TCV was around $100 million?

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

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$44 million we talked about large deal, no?

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division – VP & Lead Analyst of Infrastructure and IT Services [39]

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Okay. So that’s the total large deals — so that net new deals that we have won in this quarter?

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

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One large new account opening large deal in insurance vertical.

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [41]

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It is just 1 large deal, right?

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

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Not all large deals, but 1 large deal.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division – VP & Lead Analyst of Infrastructure and IT Services [43]

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Of course, 1 large deal of $44 million.

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

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We only give large deal data.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division – VP & Lead Analyst of Infrastructure and IT Services [45]

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Yes, exactly. I mean, so just comparing it on a Q-on-Q basis that we had in the last quarter. Sir, lastly, just 1 question from Ashok if I could get. So 100 basis point of visa impact seems pretty much on the higher side as compared to, I mean, our historical numbers as well and the industry benchmarks also. So does that mean that we were very aggressive in hiring — I mean, in terms of — sorry, in terms of visa application in this quarter? And also, at this point of time, what would be our share of localization in key geography like U.S.?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [46]

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So, of course, yes, this year we have filed a lot many more new applications and that is what’s reflecting in 200 basis points. We have also talked in the past, we have — that we have been filling up a lot of growth through the local people. Exact percentage we have never called out and we will right now also not call out, but that has been increasing quarter after quarter, our local population.

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Operator [47]

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The next question is from the line of Sudheer G from AMBIT Capital.

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Sudheer Guntupalli, AMBIT Capital Private Limited, Research Division – Associate of Technology [48]

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My first question is that we have added 20 new clients during the quarter, but the net client additions and buckets greater than $1 million size is just 3. And this is a significant deviation if we benchmark these trends against those in the previous quarters. For instance, we added 14 new clients in March ’19, of those, at least 50% were reflected as net additions in buckets greater than $1 million. So how do we beat the ship in the mix of new client additions?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [49]

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Good question. I don’t — we will get back and look at it, but I don’t read too much. Sometimes you open accounts — ideally, we want to open like those large deal that we did with $44 million. But I don’t read too much into some these accounts have not turned into $1 million opening deals, they will. We want to open our — our opening — our new account opening or NAO philosophy is to open accounts from our target account list. These are larger customers where we believe we want to be there for the next 10, 15 years. But I won’t read too much, but we’ll look back and analyze if there’s anything from there.

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Sudheer Guntupalli, AMBIT Capital Private Limited, Research Division – Associate of Technology [50]

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Sure, sir. And my second question is there is a sharp fall in the EBIT income from High-Tech Media & Entertainment during the quarter. So almost 46% decline compared to March 19 run rate. Is there some reclassification or one-off impact that I’m missing out here?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [51]

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So there is no reclassification. There has been projects cost overrun in this vertical and some of the utilization-related challenges, which is yet to just drop. Nothing more to add.

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Operator [52]

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The next question is from the line of Ravi Menon from Elara Capital.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division – VP of IT Services & Internet and Analyst [53]

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It’s a small check about the past 2 costs here. The…

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

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Ravi, your line is very bad. Can you just speak on speaker?

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Ravi Menon, Elara Securities (India) Private Limited, Research Division – VP of IT Services & Internet and Analyst [55]

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Hello, is this better?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [56]

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Yes, yes, much better.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division – VP of IT Services & Internet and Analyst [57]

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All right. So just checking, you said that there was no pass-through revenue in this quarter. But we haven’t really seen a big impact on the cost side. So direct costs haven’t really come off as sharply as revenue has. So I would have expected to see that you takeaway some pass-through. So what’s the reason for that?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [58]

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Are you saying that our pass-through costs have come down because that’s the case like our pass-through costs have also come down.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division – VP of IT Services & Internet and Analyst [59]

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So that’s — your direct costs have inched up Q-o-Q, right? So what else — and wage hikes come in only in the next quarters. So what as the additional cost be this quarter in direct cost that’s really be such a big contributor?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [60]

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So I think, we called out, there are specific — you can say quarter-specific costs, which is the visa cost, which is the sales event we talked about, a little bit more investment in the sales and marketing. So these are the specific things, which are quarter-specific. So even if you have some positivity because of the low pass-through or we called out by the higher working days, some of these costs, they are large enough to reduce — pull down the margin a bit at the operating level.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division – VP of IT Services & Internet and Analyst [61]

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And secondly, you said that manufacturing — you had this the vertical client issue also in manufacturing, we expect to see that rebound. What’s the status on the deal that you have — in the energy utility side, you had a large deal where you collaborated with your sister company to create a platform, is there something of that nature in manufacturing as well?

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

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See, Ravi, we are — your line is very poor. So I think, I will request Sudhir to just answer. I think we heard the full year question, if we have not, you please repeat after that.

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

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Yes. So Ravi, this is regarding — I mean question that you had on the energy and utilities vertical. So you inquire about the — I think you inquire about the project that we have won with our sister company, that project is proceeding as per plan. And if you — this is — it’s a data digitization project across in data, which is in multiple formats. It’s a very tiring project. We’re using the image recognition engine that we have created specifically for this project and that’s something that we see repeatable — that’s something that’s repeatable in this sector. So that’s also in progress. From an E&U specifically for this quarter perspective, it’s actually we have a license revenue impact in Q4 in E&U which is not there in Q1, that’s the reason why reserve is required.

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Operator [64]

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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 [65]

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Congrats on a good execution, despite challenges. Sanjay, just 1 broad question. I think, we have extremely done well in terms of compensating client-specific issue by adding the large deal wins on a Q-on-Q basis. But this year, it looks like slightly like an aberration where we are struggling to compensate the large client-specific issue. So you believe is there a refresh required in terms of growth outside the top 10 clients? Or our hunting organization has to accelerate more? Just your thought process so that we can avoid this situation on future years if it comes.

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

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Sandeep, I think the fundamentals of our IT services is — are very simple. They have not changed for the last 40 years and they’re not going to change for the next 50 years as well, right? I don’t know why I said 40, why not 50, but yes, they’re not going to — I think they are the same before and they will remain the same after. And the fundamental principles are 4: You’re going to focus on large accounts; you have to open new accounts, which will become invest accounts. We need to focus on invest accounts; and we need to focus on large deals. So 4 things, large accounts, you need to continue to grow. You have to continue to put an ordinary amount of bandwidth on the invest accounts so that they become large accounts. You need to open new accounts so that they become invest accounts and you need to push for large deals regularly to change the trajectory of the business. And you need to do the resilience across the verticals, across enough customers in our vertical and across geographies, and so on and so forth. But despite all the best efforts, right, once in a while, you will have a situation that we find ourselves in.

Some of these cases are known like say bank on the top account whereby we’re not losing you. As far as you are confident, we are not losing wallet shares, and it’ll come back (inaudible). All the African bank where you know you’re the lead partner for them, separation is known as well, some things will happen. You always hope that some of these 4 will continue to fill the bucket. Most of the time, it should not happen. I don’t think we need to change the trajectory, but given where we find ourselves, we need to put our head down, focus, again, on the fundamental premises, whether it’s Minecraft to take care of the top 50 accounts, whether our philosophy of [TAN] and opening new logos whether it’s an ordinary bandwidth on invest accounts because the growth — while our top accounts might have slowed down here and there, something has always filled in the gap. We find ourselves a little bit more challenge in FY ’20 and I’m very confident that we want you guys to see us — continue to see us as a growth company.

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Sandeep Shah, CIMB Research – VP [67]

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No. No. I think this is fair enough. Just a follow-up Sanjay, in closing of the large deals because of the macro volatility, are you looking in terms of change in decision-making process of the client maybe now versus 2, 3 months before or maybe 6, 9 months before? Or do you believe no that is not at all an issue and the large deal traction may continue on an ongoing basis?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [68]

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Yes. I think they’ll continue, but Sandeep, I’m sure, you have something specific. So if you say what you think is changing in your mind, I can probably answer it more clearly, as well as I can think, Sudhir can add more. I don’t see anything specifically different than what happened in the past or what we see in the future.

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Sandeep Shah, CIMB Research – VP [69]

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Well, what I meant is the — some of the large peers apart from BFS, they have also called out manufacturing as an issue, especially in the Europe. And maybe what I meant to say macro volatility is more to do with the global tariff war, which is impacting growths of many countries and some manufacturing in spatial.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [70]

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I know — I don’t think so. We’ve always maintained, it doesn’t matter if — I think, large deals are happening. We are getting invited to a lot more than we did in the past. Obviously, look at ISG as one of the parameters. This is I think, the last week or before. Obviously, there is a slow down on large deal pipeline, but frankly, from where we sit, we continue to have a good pipeline of large deals.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [71]

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Just to clarify what Sanjay meant is from a ISG perspective, ISG are seeing fewer large deals, but that’s in line with the combination of peoples try and move into projects, which the new-age technology project, which tend to have a different deal size. But from our perspective specific to LTI, the large deal pipeline is very healthy. And we’re not seeing any delayed enclosure of those large deals.

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Operator [72]

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(Operator Instructions) The next question is from the line of Rishi Jhunjhunwala from IIFL.

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Rishi Jhunjhunwala, IIFL Research – VP [73]

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So a couple of questions. One is, Sanjay, you’ve talked about how Europe would be an opportunity for the past couple of years. We have done investments hiring and everything, but what we see in for the past 5, 6 quarter is growth has not really picked up. What do you think are the challenges? Because some of the peers continue to do well in Europe despite all the macro uncertainty. Is there problem in terms of client penetration? Or what do you think are the issues there?

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

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Sudhir, can I request you?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [75]

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Sure. So as you know, our European business is actually — and we’ve mentioned this before is mostly a — in fact, almost all of it is the Continental European business. But we are very strong in the French and Nordic markets. Those markets are going through a bit of — both those markets we’re seeing reduction in spend. It’s also a Nordic business is quite BFSI heavy, which is — there is some impact. But as Sanjay said, there is a large deal in the Nordics, which we are currently going through transition on, which we had announced earlier. And you will start to see that impact kick in from Q3 onwards. On Europe, if your wider point is that should we be sort of expanding our presence more proactively in Europe, that process is already underway. And I expect that even market like the U.K., which are more market for us will start to grow from Q3 onwards.

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Rishi Jhunjhunwala, IIFL Research – VP [76]

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Okay. The other question is, I mean, so basically, there has been — I just wanted to understand if there is any update in terms of how things can transpire on the Mindtree front? I know that right now there is no connection at this point of time and L&T has said about that. But clearly, there has been a significant attrition at the top level and beyond that in that company. Have you been involved in any kind of discussions in terms of getting involved in any way in managing that?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [77]

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Rishi, you’re 2 days too late to the party. Mr. Subramaniam has very clearly called out that there is no plan to merge the IT businesses of the group in the near future. As far as we go, me and my team, we are fully committed and business as usual for us at LTI. We will continue to remain focused on delivering amplified outcomes to our clients and focus on building capabilities both organically and inorganically. So very clearly, focus all hands on deck on LTI itself.

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Rishi Jhunjhunwala, IIFL Research – VP [78]

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Understood. Yes, I mean, so, of course, I was not referring to merger but more about collaboration in any way, which could help stabilize things there.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [79]

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Me and my team, have a singular focus on LTI.

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Rishi Jhunjhunwala, IIFL Research – VP [80]

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Fair enough. And lastly, just if you can — Ashok, if you can just give the hedge number once again, this quarter?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [81]

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Okay. So the hedge book was $1.25 billion and balance sheet hedges were $147 million.

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Operator [82]

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The next question is from the line of Shashi Bhusan from Axis Capital.

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Shashi Bhusan, Axis Capital Limited, Research Division – Executive Director of IT and Telecom [83]

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If I look at the commentary from you and some of your peers, both larger and smaller 1, disappointment on growth is common across the Board in terms of the vertical or another when everyone has their own specific problem. So what exactly could be the reason or the sense you’re getting from your clients? Is it that clients are turning cost savers due to uncertain macro outlook? Or are they seeing pressure on their business hence cutting on the spend? Or maybe the gestation of some of the digital investment they’ve made earlier they want to see success of some of those investment? And how deep and widespread is the slowing spend problem is?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [84]

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Shashi, I — we cannot comment on others. We have — in my speech, we have clearly called out the issues that we see for ourselves. I don’t think they are cyclical. I don’t think they are across the verticals. I don’t think they are across any geographies. They are very specific problems, which are related to us, right, and the challenges and that we need to put our head down and find solution set. We don’t know — and I don’t think, they are deep, again, I’ll say if there are value propositions, customers will find ways of funding those projects and programs.

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Shashi Bhusan, Axis Capital Limited, Research Division – Executive Director of IT and Telecom [85]

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This is not — because the clients are different for different companies, obviously we can’t comment on others but the problem is pretty evident in many of our coverage universe. So I was just asking that is it possible that it could spread even further to some other clients in terms of cutting down on their spend or turning cost savers? Or you are not seeing that at all?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [86]

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That is correct.

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Operator [87]

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The next question is from the line of Manik Taneja from Emkay Global.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division – Research Analyst [88]

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Just trying to prod you further on one of the questions from a participant earlier. You mentioned about a deal transition happening in Nordics, but just wanted to get your thoughts as to how you are reading the demand environment in the continent there and some of the — with some of the M&A action that’s happened recently and given the spending momentum that has been in general very good over the last couple of years?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [89]

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Well, you’ve gone all over the place, I’m going to go 1 by 1 on your questions. The first question I think you’re asking is what do we think of Europe, any further color? I think, as Sudhir mentioned, we are not so strong in the U.K. And U.K. is one of the largest outsourcing specs, right? Our 2 large customers is — large geography base in Europe are Nordics and French markets, which typically will not be the largest by any means for most of the other IT services company, right? So our story there, hence sometimes tends to be a little contrary to the rest of the industry peers, okay? So that is one thing, which I want to leave it. The large deal that we had announced in the Nordics area is growing well and we continue to be positive and excited about that. French market continues to be challenging, but we have grown well, and we — and I think we need to keep working on growing the European market overall. Our entire investments on Temenos ecosystem also continues to create newer kinds of pipeline that does not exist for us as a company 1.5 year back.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division – Research Analyst [90]

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So I was actually looking to understand from you how do you see the market evolving especially with the merger that one is seeing in the Nordics market amongst 2 local players. And given the general spending uptick in the Nordics market in the last few years because when one is looking at the financials of some of those local players, what one has seen essentially is an improvement in pricing and revenue productivity in general across the sector.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [91]

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You’re talking about (inaudible) and every…?

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division – Research Analyst [92]

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Yes.

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [93]

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Oh, okay. That’s call it out. I was wondering what acquisition and things you’re calling — talking about. Okay. No, I don’t see any changes to our opportunities or our pipeline in effect from them. Opportunities might actually come up, right, but I don’t see any threat. There will be opportunities, which will clearly come.

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Operator [94]

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The next question is from the line of Abhishek Bhandari from Macquarie.

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Abhishek Bhandari, Macquarie Research – Analyst [95]

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Sanjay, I had 2 questions. 1, you have already called out for a soft 1Q issues already there in numbers and possibly a similar number in 2Q. With those in mind, do we still think our ambition of being in the top quadrant of growth from the industry perspective still remains for FY ’20 at least?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [96]

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Obviously, top quartile depends on what everyone else has performed. Again I — you have not heard me say that this quarter, but I simply continue to say and ask all of you guys to consider — keep considering that as a growth company with a focus on stable markets. This is — FY ’20 has become a little more challenging that we thought 2 quarters back. But we’re very confident on the fundamentals of our business, which is reflected in the pipeline, which is reflected in continued winning of deals and the confidence that we are not losing wallet shares in the accounts that have seen some known and unknown challenges. So we are — you’ll see us as a growth company, right?

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Abhishek Bhandari, Macquarie Research – Analyst [97]

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Okay. Sanjay, the second question is we have probably one of the finest offshore effort mix in the industry. But we’ve also started applying for more number of visa. So should we start thinking that we are probably maxed out on the number out here? Or do you think we can still remain in that 77, 78 band at least for a medium term perspective?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [98]

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No changes expected on the onsite-offshore ratios.

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Operator [99]

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

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Madhu Babu, Centrum Broking Limited, Research Division – Research Analyst [100]

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So in the second half, do we see a strong sequential momentum, again, picking up? I think 2Q will be soft. I think — after that, can we expect a 3%, 4% kind of quarter-on-quarter growth in 3Q and 4Q?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [101]

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You can expect positive growth from Q3. Never given numbers, we’ll not give numbers.

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Madhu Babu, Centrum Broking Limited, Research Division – Research Analyst [102]

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Okay. And second sir, in terms of the offshore realizations, given on a directional basis, there have been a gradual moderation. Is there some pricing pressure in the top accounts or get transition of some of the large deals?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited – CFO & Chief IR Officer [103]

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Mostly, transition of the large deal, I would attribute it to. And of course, maybe I think could have…

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Madhu Babu, Centrum Broking Limited, Research Division – Research Analyst [104]

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Okay. And last one, recently your mid-cap has bought a sizable acquisition on the digital side and Hexaware has bought Mobiquity. So any similar kind of large ticket acquisition would — is in our mind?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [105]

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Yes. Large or small, it doesn’t really matter as far as there are capabilities that we want to acquire and build on, right? 5 acquisitions in 3 years is a testimony to that. And as we think — I would just reflect back on these 5 guys, right? So first one was AugmentIQ, what — today, what you see in the strength of our analytics platform Mosaic is based predominantly on that capability in a strong way.

If this will be augmented and add-on to — add-on for the consumption layer with Lymbyc, right? Now Lymbyc, you’re going to see there is a Google for data whereby you can write in English what was the sales for LTI in October of 2011 in Nordics, right? And when you write in English, you are using that consumption layer, using the power of the Mosaic, which we’ve got through AugmentIQ, it will give you data and we’ll keep learning through artificial intelligence and keep creating models. So it strengthens the ability that we take to our customers. This reflects actually at the end of it in the 32% CAGR, when we do on the analytics growth, right? That is how — that — these are the power of acquisitions that we want to bring. 2 years back when you reflected, we had no core banking capability as a company. Today, we are one of the top partners for Temenos globally. And that has happened through acquisitions of Syncordis and N+ P. Size really does not matter. And I’m not saying this was — the larger ones cannot happen. I’m just simply saying, our focus is obviously on filling gap and positioning for our customers. What is really important for us where we spend a lot of time, acquisitions are like marriages, right?. (foreign language). So you’ve got to focus on what you can integrate well? What you can make a success of and provide a great value to your customers? So long answer, yes, it can be large, it can be small, but the focus is on in all means capabilities that we can bring to our customers.

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Operator [106]

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The next question is from the line of from [Kedar B from Composite BMS].

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Unidentified Analyst, [107]

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This is my first time participating on the conference call. So I had a question that’s very specific to your new customer acquisition engine. So just keen to hear your thoughts in terms of how much of lever is currently being given to, let’s say, the sales manager on the ground to be able to take those practical call from say either pricing or in terms of the engagement model itself so that you can continue to be a growth company that you current are. So just keen to hear your views on that, please?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [108]

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[Kedar], again, yes, just refer to my big (foreign language) on those 4 fundamental philosophies to run our services company. NAO, our new account opening is very important in that. What is really important are 2 things in new account opening: #1, you need to incentivize and tell your people to go after accounts that matter to you. So that’s where the concept of TAL or target account list that comes into play. That is managed and monitored very closely by Mr. Chaturvedi, saying these are the logos that we really want to add because these are the customers that we want our successors to enjoy working with in 10, 15 years down the line.

Once that is there, the par that is really required is for our sales guys who have to be trusted advisers who need to co-create with the customers today. The nature of selling has changed dramatically. And that is where we need to empower them in a different way within the ground rules of engagement. So the ground rules of the engagement on what they can agree, what are absolutely net — no room for the business are very clearly defined and we are in part of the front line to make those decisions very elegantly.

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Unidentified Analyst, [109]

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Okay. Okay. So when it comes to say the deal approval metrics that you have, do you have a centralized team which kind of, let’s say, either settled it or takes a call? Or is the power distributed among say most of the chief business officers that you have, specific to particular regions or specific to particular businesses?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [110]

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As you talked about, there are metrices, large deals, there is a separate large deal team, which works on it. But there are business finance guys who are associated and legal side, which are associated. But the decision-making is totally with the CBOs or with Sudhir.

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Unidentified Analyst, [111]

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Okay. Okay. And at what scale of business do you think you would probably consider changing this? Do have some sort of a number in mind, let’s say, once you hit a revenue of say USD 2.5 billion? Or how do you think about this?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [112]

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Yes, today I’m not thinking of changing anything.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited – President of Sales & Whole-Time Director [113]

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So I think just to add what Sanjay said, see what our fundamental premise is that our growth organizations have had — we have a high — we have a good team. So we have a high degree of trust in the decisions that they take on the ground because they are the closest to the customers. They’re in the best position to do that. Our job is to actually enable them to do — the real thing that we want to do to retain is slightly provide them more support, enable them to take the entire set of offerings, all the solutions, everything that we’re building in the organization. So that’s the support. Frankly, the financial decisions, they tend to be — you’ll take 1 decision on a deal cycle on that, right, so it’s a small part of the overall support they need. And at that, we — as you say, most of the things that we do, we operate at speed. I think our clients also remark on our responsiveness, et cetera. So things are done in a similar fashion at that end also, but it’s not just one variable that have feet on the ground as multiples hits the gap.

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Operator [114]

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The next question is from the line of Rahul Salvi from IIFL.

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Dr. Rahul Salvi, [115]

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Sanjay, I had just 1 question. Am I audible? Hello? Yes. So basically, the issue which we had with the High-Tech client, which led to complete loss of revenue, which we had called out a 1% loss, so in our introspection of internal accounts, did we see similar issues with more accounts on our side?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [116]

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Not at all. There is no issue at all.

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Dr. Rahul Salvi, [117]

——————————————————————————–

So this was then just a one-off?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [118]

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Look, you can ask me 10 ways, absolutely nothing to be reported on that at all.

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Dr. Rahul Salvi, [119]

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And Sanjay, if you could just throw more light on what exactly the issue was from our side, if it is possible? If that’s…

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [120]

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There is absolutely nothing to comment anymore. We have clearly articulated in our filing to the stock exchanges. There’s nothing more to add.

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Operator [121]

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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 [122]

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Sanjay, just a broader question, again, in terms of the digital investments of the client in terms of majority go. Do you believe it’s now moved from early stage to a mid-stage and the ramp-ups for some of the other technologies? Because what we’re reading is CX, SaaS, cloud, social mobility become a new normal and clients may be now looking for newer investment in I/O, TCI, AR/VR. So in that scenario, again, there could be a pause and ramp-ups and investments in terms of larger deals may be slightly taking a longer time, is it right? Or do you still believe most of the stuff is still at a early stage of investments?

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Sanjay Jalona, Larsen & Toubro Infotech Limited – CEO, MD & Director [123]

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Yes. Very simply, there are 4 things that customers are trying to do. And there will be newer technologies. Every day they will keep coming up. So there is smart, whether there is AR/VR, 3D printing, et cetera and will keep coming in. The 4 fundamental things that the customers are trying to do are operate to transform how do I actually — I spend a ton of money on maintenance, how do I actually derive better value from that using newer technologies? How do I transform my businesses? I have — second thing, which they’re trying to do is how do I use data, which is coming from many, many, many more sources than it did in the past? How do I (inaudible) data-driven organization? Third thing is how do customer is the king, they want to be — I have technologies today available to connect with the customers directly even if I have — I don’t sell to the customers directly. Our case in point is the CPG customers, we don’t buy from a CPG customer, we buy from a retailer but there are technologies how do I understand those customers as well? And the fourth, how do I digitize my product — digitize my core, sorry? How do I digitize my core to effectively and efficiently drive transformation to launch products in a faster way. Now in the past, there were some technologies and in the newer technologies that are coming in there. And there will be no newer technologies that’ll keep coming. So I don’t think there is a fundamental change. Customers are still trying to drive higher revenue, get into adjacencies of the businesses and drive higher revenue growth — margin growth.

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Operator [124]

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That was the last question in queue. 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 [125]

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Thank you, everyone. Look forward to seeing you next time. God bless. Take care.

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Operator [126]

——————————————————————————–

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



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