How IT giant LTIMindtree is looking to overcome its current challenges

More than a year after the merger of L&T Infotech and Mindtree created a formidable player in the highly competitive Indian IT space, LTIMindtree—the combined entity—has emerged as the fifth-largest IT services firm in India by market capitalisation in the BT500 study this year. Overall, it has secured the 38th position in the BT500 list. But despite breaking into the top rungs, the company has big plans to grow larger. Debashis Chatterjee, the company’s CEO and MD, says LTIMindtree (LTIM) plans to become a $10-billion enterprise over a period of time. “When we came together as LTIMindtree, we had to set certain goals… where we laid out an aspiration to become a $10-billion enterprise over a period of time,” he said at the Q2FY24 earnings call with analysts.

But although LTIM is now one of the largest IT services companies in the country, to realise its true potential, it must contend with external challenges, such as the slowdown in most international markets, along with internal factors like the big-ticket exits the company has witnessed in recent times, and its client concentration in the BFSI sector. But Chatterjee is confident about the company’s ability to execute its growth plans. “We [had] also set two other goals. One is synergy in revenues, as well as improvement of margin over a period of time. We also said the revenue synergy should be more front-ended as we go over the next three to four years. And the synergies in terms of margin, which we called out as 200 basis points, will be more back-ended,” he said during the earnings call.

And the results are already visible. Post its merger—completed in November 2022—LTIM has outperformed its large-cap peers in terms of revenue growth on a yearly basis, with total income growing 25.5 per cent during the study period, although on a smaller base compared to its peers. The company has also achieved 2x growth in terms of client accounts worth over $10 million. Also, LTIM posted strong sales growth for the quarter ended September, with revenues up 43.62 per cent from the year ago period. Its operating income has also increased in the September quarter, growing 29.10 per cent from the year ago period.

Even analysts tracking the company are bullish about the company. For instance, US-based investment solutions provider MarketGrader, in a research note, states, “Its (LTIM’s) long-term results have been much better, with trailing 12-month sales and operating income jumping by triple digits in the last three years. More specifically, the company’s total sales and operating profit more than doubled in the 12 months ended last quarter (ended September) from three years ago.”

Incidentally, HDFC Securities, which tracks, expects this growth to continue in the coming quarters. “Since the merger a year ago and with the integration process complete, LTIMindtree is set for sustainable growth outperformance,” it stated in a research note. This growth is expected on the back of a robust and growing deal pipeline, along with strong traction in high-growth services compared to larger IT peers. Moreover, the merger—which brought L&T Infotech’s engineering prowess and Mindtree’s customer-centric approach together—has presented LTIM with a large cross-selling opportunity, analysts note. The report from HDFC Securities states that out of the nine service lines LTIM currently offers its clients, it can potentially increase its metric of around four service lines per client to around five to six service lines, based on its strong client mining prowess. On the cross-selling opportunity, Chatterjee said, “When we came together, [on] November 14 last year, we were more focussed on the integration. I think we did the integration in record time. We also ensured that all the solutions that we want to take to the market, the training, our go-to-market, workforce, all those things have been done so that we can do the cross-selling and the up-selling properly.”

With LTIM actively working to improve its margins per client, Nachiket Deshpande, its Chief Operating Officer, says the company has started seeing the results of its efforts. “With the confidence that the margin optimisation initiatives are delivering the savings, we feel that despite higher furloughs, we should be able to recoup [margins] as we go into Q3 and Q4.”

The company has also optimised its bench strength to improve employee utilisation, and reduce the need for fresh hirings to improve margins. LTIMindtree’s headcount had dipped by nearly 3,500 in Q2FY24, from the year ago quarter. Additionally, the company’s utilisation has also improved by 310 basis points. During an interaction with Business Today after reporting its second quarter results, Deshpande had said that the company was able to follow through on its plans to utilise its bench better, and had improved visibility of talent availability post-merger, by efficiently deploying resources. “You see that reflected in our utilisation improvement from last year. We have now improved our bench utilisation, and we will see a net headcount addition going forward in line with our business goals,” he had said then. Consequently, the IT major has dialled back on aggressive hiring and net headcount addition, as attrition has also moderated. The lower attrition has further reduced the need to back-fill, making it easier for the company to ramp up projects. “As far as our freshers hiring is concerned, I think we have on-boarded 1,400-odd freshers in this quarter. Now, for the rest of the year, we are on track with hiring plans for FY24,” says Deshpande.

Yet, despite a strong deal pipeline and active efforts to improve margins, challenges in the company’s growth story persist. Primary among them is the marked slowdown in revenue growth at the company, which was at 5.2 per cent in Q2FY24, down from 19.1 per cent in Q2FY23, the HDFC Securities report notes. Deshpande attributes this slowdown in revenue growth to decreasing discretionary spending by clients. “While new deal wins are strong, with the cautious environment, there’s a significant drop in discretionary spending by clients. That means, some of our existing programmes, as they come to a close, may not see renewal. Or, you may see a reduction in spending in some of these transformational programmes by customers,” he says.

It is worth noting here that the weak demand environment is not unique to LTIMindtree, as it has also impacted other Indian IT players, equally.

I n addition to the external demand factor potentially impacting the company’s growth prospects, there are some internal issues as well that could impact the company. Since the merger, nine top executives—ranging from board members and C-suite leaders to heads of various verticals—have left the company in the past 10 months. Aditya Narayan Mishra, MD and CEO of talent solutions provider CIEL HR, says the exits from the top ranks of the company—which could be indicative of internal issues at the company post-merger—can trickle down to clients parting ways with it as well. “It is critical to give a clear path to senior members [of the management] on both sides post the merger about the possibilities of their career trajectories in the new combined organisation,” Mishra notes, adding that in the absence of this clarity, anxieties and uncertainties take over. As a result, there could be a loss of key people, partners, suppliers and even clients.

The HDFC Securities report also cites LTIM’s high exposure to the BFSI sector as a challenge due to the reduced IT spending by the banking and financial services (BFS) clients.

But Deshpande notes that orders from the insurance sector is helping the company balance its BFSI momentum. “Within BFSI, we’ll need to look at BFS and insurance separately. Because even in this quarter (ended September), our insurance growth was robust, and I think we will see a similar trend in the next two quarters as well,” he says.

He adds that even though banks are looking at a significant cost reduction, the company has had a few deal wins in the BFS space as well. “So it’ll sort of compensate for each other,” he says.

Despite the near-term challenges, LTIMindtree seems to have all the ingredients required to achieve its long-term goal of becoming a $10-billion enterprise, the slowdown in the external markets and internal issues notwithstanding.

Chatterjee said the management has already met to roll out the overall exercise for the larger strategy, which is the avowed aim of getting to the $10-billion mark over a period of four to five years. “That is kind of underway as we speak… We have a short-to-medium as well as a longer-term plan. And we are working towards each of those activities as we go along,” he said.

But the obstacles to the company’s larger goal are the same external challenges that persist for the whole IT industry, says CIEL’s Mishra. “The whole IT industry is dealing with global headwinds and facing challenges in utilising their existing workforce to the maximum extent possible in the delivery of client projects,” he explains. In the case of LTIM, he says, “With synergies unleashed, the integration strengthens the company’s employer brand and market position. These could eventually increase their margins and the market value of the company”.

All the more reason for the company to company to keep its foot on the pedal and its focus on growth.

@aakancvedi

The full BT500 List can be accessed here