LTIMindtree Is Seen As Best Alternative To Tier-I IT Firms, Says President

LTIMindtree Ltd. is seen as the best alternative to India’s top-tier IT services firms, its president said, after the Bengaluru-based outsourcer emerged as an outlier among peers in retaining its growth expectations for the ongoing fiscal.

A lot of it is to do with synergies emanating from the merger of L&T Infotech and Mindtree.

“What has happened after the merger is that our deal invites have gone up significantly. We have several deal advisors who are now reaching out to us on an almost weekly basis,” Sudhir Chaturvedi, president and executive board member at LTIMindtree, told BQ Prime’s Tamanna Inamdar during a post-earnings chat on Thursday. “I think that’s because we are seen as the best alternative to the Tier-I players.”

“I think we are (a) breath of fresh air, frankly,” he said.

The merger of L&T Infotech and Mindtree came into effect on Nov. 14, 2022—more than three years after Larsen & Toubro Ltd. completed a hostile takeover of the Bengaluru-based IT firm.

The merged entity started trading as LTIMindtree Ltd. on Dec. 5, 2022. The stock entered the NSE Nifty 50 on July 13 this year, making it the sixth software services firm in the benchmark. The other five being Tata Consultancy Services Ltd., Infosys Ltd., Wipro Ltd., HCL Technologies Ltd. and Tech Mahindra Ltd.—the so-called Tier-I IT companies.

“As the two companies have merged, there’s excitement within the organisation,” Chaturvedi said. “We are close to 90,000 people now. We have the capabilities to handle large contracts now…”

The merger, according to Chaturvedi, hasn’t diluted the core strengths of the company.

“We focus on a certain set of verticals (for dealmaking), and have maintained that focus post merger,” he said. “In those verticals, we have the capabilities of any of those large players… I think we bring the best of both worlds to the clients.”

Chaturvedi’s comments came a day after LTIMindtree’s second-quarter earnings. The IT firm has maintained its revenue growth guidance at 13%-16% for the fiscal ending March 2024, amid a slew of paredowns by larger peers Infosys, HCLTech and Wipro. TCS doesn’t provide guidance but has warned of single-digit growth in FY24. Tech Mahindra is yet to report its second-quarter earnings.

“Our H2 will be better than H1,” Chaturvedi said, delivering a contrarian outlook—for Indian IT firms, the second half of a fiscal is traditionally weaker than the first half. “And the reason we believe so is due to the order book we’ve had over the past two quarters—$1.4 billion in Q1 and $1.3 billion in Q2. Q1 saw renewal of a large contract, Q2 was all-new deal wins.”

“The combination of those deal wins as well as the nature of the contracts gives us the confidence we will continue to grow in Q3 and Q4.”

But deals are converting into revenue with a significant lag—something that most software services companies have complained about. LTIMindtree, however, believes that’s par for the course.

“I think it’s an expected efficiency cycle,” Chaturvedi said.

According to him, clients are looking to rejig their technology budget, after three years of unabated spending during the pandemic. More than 75% of the deals are cost takeout or efficiency deals. “We are seeing a robust pipeline. The conversations we are having with clients are at record high. The value of the large deals we have in our portfolio are also at a record high,” he said.

Chaturvedi admitted that discretionary spending has come down.

“What we had as discretionary spending has now been replaced by these new deal wins. And with the quantum of new deal wins increasing, we will start seeing their cumulative effect in Q3 and Q4.”

India’s $245-billion-plus IT services industry is bracing for a slowdown, if not a total washout, in the fiscal ending March 2024 as enterprises in the U.S. and beyond cut back on technology spending to cope with high interest rates and inflation. The banking, financial services and insurance vertical—the sector’s breadwinner, accounting for more than a third of overall revenue—is naturally under pressure.

LTIMindtree, however, saw its BFSI revenue grow 5% sequentially in Q2.

According to Chaturvedi, the insurance practice has been “quite robust”, growing at 10% over the year earlier. That’s because clients have continued to invest in modernising their technology stack. Their investment cycle is still intact.

“Banking is where we have seen caution in spending. There have been freezes in hiring … That will continue in Q3 as well,” he said. “In Q3, we are also expecting furloughs to be higher. Post-pandemic, we saw furloughs reduced. Now, the furloughs are going back to where they used to be (pre-pandemic).”

“Overall, in BFSI, we are still confident that it will continue to grow, even in the second half of the year. But what we are really looking forward to is broad-based growth across verticals … Our consumer practice is seeing a strong uptick given the deal wins we’ve had.”

The October-December period is a budgeting quarter for most of LTIMindtree’s clients in the U.S., Chaturvedi said. The events of the past two weeks notwithstanding, such as the Israel-Hamas conflict, there will be some caution in spending even into the new fiscal that starts on Jan. 1, 2024.

Essentially, what clients are focused on is efficiency-led deals, where LTIMindtree excels.

“I keep telling my team that I’m very happy to be in the cost reduction business. It’s something we are extremely good at,” Chaturvedi told BQ Prime. “It’s not like it takes away opportunities for growth, but what it does is reduce the opportunities for growth through discretionary spending.”

“Then, we need to shift our emphasis to within the existing spend areas, essentially to take away market share from others.”

Does the cost-reduction approach impact deal sizes?

These are usually longer term deals, whose total contract value are higher. It’s a competitive space with significant pricing pressure—clients are always looking to make the most bang for the least amount of buck.

“This is actually good news for us because we get secular revenue over a longer period of time,” Chaturvedi said. “These programs also have a ramp-up time—so you can plan and execute much better, you can also ensure that the team size and composition is appropriate to these kinds of deals.”

Compare that to discretionary deals, which are always “just in time” and seek skillset that are at times scarce. It is a different business altogether.

“We ideally like a combination of the two, but today’s scenario is much more about savings-led deals and pipeline,” Chaturvedi said. “We are happy with that, as long as we continue to win.”