Margins to improve by 200-250 bps next quarter: LTIMindtree CEO

In a Q&A, Debashis Chatterjee also dwells on the impact of the economic slowdown on his firm's demand outlook

LTIMindtree recorded a 4.7 per cent dip in the net profits in Q3FY23, the first quarter after the merger of erstwhile IT services majors L&T Infotech and Mindtree. Debashis Chatterjee, the CEO and MD of LTIMindtree in an interview with Sourabh Lele says the margins may improve by 200-250 basis points in the next quarter, as integrations will complete.

How would you summarise the quarter? What are the key takeaways from Q3FY23?

It was a historic quarter as two organisations are operationally merging. The process started on November 14, so we had only six weeks in this quarter. Despite all the merger activities, I am very proud of the leadership and the team that they did not lose focus on the business. We saw a very robust growth of 2.4 per cent quarter on quarter (QoQ) and 16.3 per cent year on year (YoY) in contract terms of constant currency. I feel very confident that as we go into the next quarter and beyond, we should be able to put behind all the activities regarding the merger and FY 24, we should be able to start with our journey of profitable growth, which was the desire of both the erstwhile entities before the merger. We should get back to the same philosophy as we go along.

What is the impact of the economic slowdown on your demand outlook?

From the portfolio of clients that we support, there is a bit of caution in terms of some isolated clients where some projects they had decided to start are getting deferred, and some of the decision-making is a bit slow. We can see a delayed start or decision-making, etc. But the good news is that we have not come across any situation where clients have cancelled any of the programs that they have been already embarking on.

A lot of conversations have shifted to more cost take-outs and efficiency-based conversations. Unlike earlier scenarios of recession, this is a very peculiar scenario where clients have embarked on a solution over the last two years and they cannot stop the transformation. So, they need to find ways of funding this transformation. This is a very good opportunity for people like us because we can help the client or we are helping the client in the discretionary, transformation, discretionary spend or transformation.

There was good topline growth in Q3, but Ebitda dropped 16 per cent QoQ. What are the factors behind this?  

I would summarise it in three ways. Firstly, there was a significant portion which was due to the furloughs and lesser number of working days in this quarter. Number two, there was a certain amount of one-time integration costs that we have taken in Q3. And the third thing is that we needed to create a lot of talent synergies. We had to invest in the marketplace. We also had to issue some employee stock ownership plans (ESOPs) for some of the key leaders.

There were some 130 basis points of impact on margins in terms of some of these aspects. All these things, the bulk of the furloughs will be neutralised in Q4 and the bulk of the integration costs also will not be there in Q4. So, our desire or hypothesis is that you will see an uplift of 200-250 basis points in Q4.

Is there any shift in the priorities of your client’s IT budgets?

By this time, you should have got a very good view of your client’s budgets for the next year. But I don’t think that is formalised as yet. Clients are also slightly cautious in terms of formalising their budgets for the next year. Hopefully, by the end of Q4, we should get better clarity about their budget. I do get a sense that clients are also looking at quarter-to-quarter rather than doing a yearly budget. That is the general caution I see. The cost ticket agenda is getting a lot more prominent compared to the discretionary spending data.

What are your targets moving to the next quarter and beyond?

As we get into the next financial year, we should be able to go back into our overall profitable growth story. So whatever you saw in Q2, as the overall EBIT for the merged entity, we should be able to get to that level or even better that as far as I could be for instance.

The operational side of the integration, the finance integration, the systems integration, all these things, the bulk of it should be done by March 31. That is the aspiration.  This is a very, very ambitious aspiration. But I am very proud of the team, and the way they have rallied around and doing this without losing focus on the business.