• Revenue: INR 2,573 crores, a growth of 4.5% sequentially and 7.8% year-on-year.

• EBIT Margin: 15.1%, slightly lower compared to Q1 FY25.

• Net Income: INR 320 crores, 12.4% of revenues, up 1.3% year-on-year.

• Free Cash Flow: INR 417 crores for Q2, year-to-date free cash flows at INR 328 crores.

• Cash and Investments: INR 2,849 crores at the end of Q2.

• Dividend: Interim dividend of INR 17 per share approved.

• Dollar Revenue Growth: 3.9% in reported terms, 3.4% on constant currency basis.

• DSO: 99 days in Q2, improved from 102 days in Q1.

• Headcount: 23,698 in Q2, up from 23,575 in Q1.

• Warning! GuruFocus has detected 2 Warning Sign with BOM:540115.

Release Date: October 16, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• L&T Technology Services Ltd (BOM:540115) reported a strong quarter with a sequential revenue growth of 3.9%, driven by broad-based growth across regions and segments.

• The company secured significant deals, including two USD20 million plus deals and four USD10 million plus deals, indicating robust customer engagement and pipeline.

• The sustainability segment led the growth with a 6.5% increase, followed by mobility at 5%, showcasing the company's strategic focus on these areas.

• The company has made focused investments in mobility, sustainability, and tech, which are beginning to show results in terms of pipeline and deal wins.

• L&T Technology Services Ltd (BOM:540115) reaffirmed its FY25 guidance of 8% to 10% revenue growth in constant currency and aims for 16% EBIT margin levels, demonstrating confidence in its growth trajectory.

Negative Points

• The EBIT margin for the quarter was slightly lower at 15.1% compared to Q1, impacted by investments in sales and technology.

• The company anticipates a slightly soft Q3 for the mobility segment due to seasonality and furloughs, which could affect short-term growth.

• Despite a strong pipeline, some large deals expected to close in Q2 were delayed due to elections and macroeconomic factors, impacting immediate revenue realization.

• The tech segment experienced flat growth in Q2, with some projects concluding and performance in comms and media being soft.

• The company faces challenges in maintaining margins amidst wage hikes planned for Q3, which could impact profitability in the short term.

Q & A Highlights

Q: Given the increased ask rate for the next two quarters, how confident are you in achieving the lower end of the guidance, especially considering the seasonality in Q3? A: Amit Chadha, CEO, stated that they are reiterating and holding their guidance. Despite the ask rate, they are comfortable with their current position due to the pipeline and order conversion. They are not specifying whether they will hit the top or bottom end of the guidance but are confident in their current trajectory.

Q: Why did margins decline in Q2 despite no wage hikes, and how should we view the margin trajectory moving forward? A: Rajeev Gupta, CFO, explained that EBIT margins are expected to improve from Q3 onwards. Wage hikes are planned for Q3, effective from November, with an anticipated impact of 100 to 125 basis points. However, they aim to absorb this increment and aspire to reach 16% EBIT levels.

Q: Why was the tech segment flat this quarter despite expectations of growth? A: Amit Chadha, CEO, noted that while hyperscalers performed well, some projects concluded, affecting growth. However, Q3 is expected to be strong for tech and sustainability due to visibility and upcoming collaborations, particularly in AI.

Q: Can you provide insights into the deal wins and when we might see an increase in reported deal wins? A: Amit Chadha, CEO, mentioned that the total contract value of deal wins in Q2 was higher than in Q1. They have several large deals in the pipeline, including $50 million and $100 million deals, which they aim to close in Q3. A Chief Business Officer for Strategic Initiatives and Large Deals has been appointed to drive these efforts.

Q: What is the outlook for the mobility segment, particularly in Europe, given the current market conditions? A: Amit Chadha, CEO, stated that while there is a slowdown, particularly with Tier 1 suppliers, OEMs continue to work with them. They are focusing on strategic solutions like SDV and leveraging their capabilities to help Tier 1s overcome challenges. The pipeline remains strong, and they expect growth to rebound.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.