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Edited Transcript of LTI.NSE earnings conference call or presentation 18-Oct-19 8:30am GMT

Q2 2020 Larsen & Toubro Infotech Ltd Earnings Call

Chennai Oct 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Larsen & Toubro Infotech Ltd earnings conference call or presentation Friday, October 18, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ashok Kumar Sonthalia

Larsen & Toubro Infotech Limited - CFO & Chief IR Officer

* Nachiket Deshpande

Larsen & Toubro Infotech Limited - COO & Whole Time Director

* Nitin Mohta

Larsen & Toubro Infotech Limited - Head of IR

* Sanjay Jalona

Larsen & Toubro Infotech Limited - CEO, MD & Director

* Sudhir Chaturvedi

Larsen & Toubro Infotech Limited - President of Sales & Whole-Time Director

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Conference Call Participants

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* Abhishek Bhandari

Macquarie Research - Analyst

* Ashwin Mehta

IDFC Securities Limited, Research Division - Director

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Manik Taneja

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Manoj Bahety

Carnelian Asset Management LLP - Co-Founder

* Mukul Garg

Haitong Bank S.A., Research Division - Research Analyst

* Nitin Padmanabhan

Investec Bank plc, Research Division - Analyst

* Sandeep Shah

CIMB Research - VP

* Vibhor Singhal

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

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Presentation

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Nitin Mohta, Larsen & Toubro Infotech Limited - Head of IR [1]

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Thanks for joining us today to discuss LTI's financial results for the second quarter of fiscal '20. The financial statements, press release and quarterly fact sheet are available in our filings to the stock exchanges and at the Investors 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 or 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 risk that the company faces.

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

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [2]

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Thank you, Nitin. Hello, everyone, and welcome to LTI's Earnings Call for the Second Quarter of FY '20.

Let me start the call with exciting news of LTI's acquisition of Powerup. Powerup is a born in the cloud company with cloud consulting capabilities across all 3 leading cloud platforms, that is AWS Microsoft Azure, and Google Cloud. With this acquisition, LTI would be elevated to premier AWS consulting partner status. In addition to the best-in-class cloud consulting capabilities, Powerup also would add 2 AI-based platforms to LTI's powerful suite of offerings.

The first is CloudEnsure.io, an autonomous cloud governance platform that continuously monitors an enterprise cloud services, detects security and compliance violations in real time and recommends or executes appropriate fixes. For example, a leading e-commerce company used CloudEnsure and implemented the recommended changes on their AWS environment, tightening access controls and eventually, reducing monthly cloud spend from $250,000 to $40,000 annually. The second platform is Botzer.io, an enterprised AI platform that helps organization adopt AI faster across NLP, Natural Language Processing, image recognition, deep learning use cases and saves time spent in trial and error experimentation.

Powerup happens to be our fourth acquisition in calendar year '19 and continues to underscore our focus on building capabilities, both organically and inorganically to enhance the value to our customers.

Let me now talk to you about our performance in Q2. We delivered a steady performance with revenue of USD 363.8 million, up 2% quarter-on-quarter and 10.8% year-on-year. In constant currency, these translate to 2.4% quarter-on-quarter and 11.9% year-on-year basis. Digital now makes up for more than 40% of our revenues.

Friends, we have always maintained that fundamentals of our business are very simple. There are 4 principles that shape the destiny of a services company, which are; one, growth of momentum in large accounts; second, focusing on investor branch to move them to larger account buckets; third, opening new logos; and lastly, and importantly, winning larger deals to accelerate growth trajectory.

We are very pleased to announce 3 large deals this quarter with net-new TCV of $100 million. What makes the scene even more heartening is that all 3 are new logos, with one each in North America, Europe and Asian geography. Two of these wins are in synergy and utility space and one in BFS.

We think there could not have been a better proof point of our broad-based capabilities across verticals and geographies. The breadth and depth of our capabilities is also being recognized across leading these advisers. In 3Q '19 Global ISG Index, LTI was listed as one of the breakthrough 15 providers standouts in America, EMEA as well as globally.

Let me now provide you with some vertical colors. In BFS, we saw a decline of 0.3%, quarter-on-quarter in reported terms. In constant currency, it was flat. This performance was in line with our expectations and reflect the primary end weakness that we had called out in the last 2 quarters across 2 of our BFS accounts. On track ramp-up of earlier announced large deal, an uptick in top account underpins our confidence of sequential growth in BFS in Q3. One of the three large deals in this quarter also belongs to BFS vertical. A European financial institute chose LTI for managing its entire IT, including application support infrastructure, operations and digital transformation.

As part of the engagement, LTI would be responsible to provide end-to-end application, infrastructure and services, migration interest by leading infrastructure workload to cloud and accelerate digital transformation journey.

This engagement with a new logo would also help us diversify our BFS portfolio. Insurance vertical grew at robust 5.5%, sequentially in Q2. Driven by a ramp-up on earlier announced large deal. We expect this vertical to continue to grow steadily. Our manufacturing business had a solid quarter with double-digit sequential growth of 10%. As highlighted on the earlier earnings call, the large win we had announced with our annual FY '19 results has started contributing and is one of the key drivers of the solid performance. Our deep domain knowledge is one of the key reasons for our success in these vertical. We leverage this domain expertise in work with our ecosystem partners to sharpen our differentiation in the marketplace. For example, LTI recently, co-innovated an enduring construction and operational solution along with SAP, which is called the ECNO solution, and we won an SAP S/4 HANA implementation, HANA implementation for a leading manufacturing conglomerate on back of this solution.

Calling out Energy & Utility. This is the second vertical to register a double-digit quarter-on-quarter growth of 14.5% -- 14.4%. The growth momentum in this vertical is likely to remain strong. 2 of the 3 large events across that quarter also belong to this vertical.

The first one is with an U.S.-based utility company that chose LTI to provide cloud and infrastructure managed services. End to end -- provide end to end managed service operations across multiple infrastructure task and drive events to create modernization, automation and transformation in this space. The key differentiating element is the intense -- intensely competitive then was to -- what are operate to transform theme, leveraging power of analytics, AI, automation and experience in operations. As part of our services, in addition to lower total cost of ownership, LTI is looking to enhance and drive enhanced employee experience, robust, strong response and lower risk exposure to their critical business as a leading utility in the geographies that they operate in.

Second large win from this segment is with a power generation company. LTI would help the client with an organization-wide greenfield, SAP S/4 HANA implementation. The rollout shall facilitate integrated data collection and analytics across various functions -- functional areas, empowering the client to meet present and future business challenges.

On CPG Retail and Pharma, we had another strong quarter in this vertical with 5.5% growth quarter-on-quarter. Within this sector, we are especially pleased with our performance, in recently incubated, life sciences verticals. Our rapid progress and investments in this domain are corroborated with LTI getting recognized as a major contender and start performer by Everest Group in its Life Sciences Digital Services Peak Matrix.

High-tech and Media vertical reported a 12% quarter-on-quarter decline. This was expected and relates to an earlier announced account closure. Excluding this onetime impact, underlying growth in this vertical remains strong, and we expect it to bounce back in Q3. Other verticals, which includes Defence, professional services in trial and logistics were down 23% after a strong Q2.

As regards to -- before I hand over to Ashok, in regards to FY '20 outlook, let me summarize on how we see rest of the year panning out. Account-specific headwinds have impacted our performance in H1, but as discussed during the last quarter call, we expect our track ramp-up of earlier announcements and large new loyalties that we announced now to power our H2, translating into double-digit revenue growth for the full year FY '20.

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

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [3]

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Thank you, Sanjay. Hello, everyone. Let me take you through the financial high points for the quarter 2 of FY '20, starting with the headline numbers. Our revenue stood at USD 363.8 million, up 2% sequentially and 10.8% on a year-on-year basis. The corresponding constant currency growth was 2.4% quarter-on-quarter and 11.9% year-on-year.

Reported revenue in INR stood at INR 25,707 million. Now coming to profitability. EBIT for the quarter was INR 3,994 million translating into an operating margin of 15.5% as compared with 16% in the previous quarter. The 50 basis points decline in the margin can be attributed to the annual wage increment and the lower utilization in quarter 2. These are partially offset by lower visa cost, currency movement in this quarter and SG&A optimization.

Reported profit after tax was in INR 3,604 million, which translates into a back margin of 14% this quarter compared to 14.3% in quarter 1. On the people front, we continue to strengthen our workforce, and during quarter 2, we added 1,632 people on a net basis. The total manpower stood at 30,979, of which our production associates were 94.5%. Utilization without trainees was at 80.6% as compared to 81.3% last quarter and utilization including trainees was at 78.9% versus 80.5% in quarter 1. EBITDA this quarter was 18.4% versus 18.3% last quarter on LTM basis, on annualized basis, it came down to 17.5%. Our cash flow hedge book stood at USD 1,219 million as at September 30, 2019, versus USD 1,245 million as at June 30, 2019. While the on balance sheet hedges stood at USD 152 million versus USD 147 million last quarter.

We continue to execute our hedging strategy consistently. Now moving onto the DSO, we have seen an improvement in our DSO this quarter, and it came down to 67 days from 70 days in quarter 1, the total receivables, including unbilled DSO was 105 days this quarter. Our net working capital stood at 18.9% of last 12 months revenue. Net cash flow from operations for the 6-month period ending September 30, '19, was INR 5,248 million at a 73.3% conversion of the net income compared to H1 of last year at 72.4%. Quarter 2 is generally the quarter when we disperse the annual incentive payout. We closed the quarter with cash and liquid investments at INR 21,815 million. The effective tax rate for FY '20 so far was 24.7%. Regarding the tax rate redeem change, we have evaluated and for now we are staying with the current regime, taking the SEV benefit, primarily because of substantial MAT credit balance and our effective tax rate for India being less than 25%.

The Board of Directors, as we are meeting here yesterday, have declared an interim dividend of INR 12.5 per equity share. Earnings per share for the quarter was INR 20.73 per equity share as compared to INR 20.51 in Q1. Diluted EPS was INR 20.52 per equity share versus INR 20.29 last quarter.

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

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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 Mukul Garg from Haitong Securities.

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Mukul Garg, Haitong Bank S.A., Research Division - Research Analyst [2]

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Congrats for a good quarter. The growth was quite reassuring.

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

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Thank you, Mukul.

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Mukul Garg, Haitong Bank S.A., Research Division - Research Analyst [4]

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Let's start with -- on the two banking clients. You mentioned the top client has started recovering. But what is the status of the South African customer? Are you seeing growth coming back there as well? Or was the growth in top 5 more because of a churn in your top 5 clients list?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [5]

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Sudhir, can I request you to answer that.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited - President of Sales & Whole-Time Director [6]

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Sure. Yes, Mukul. So the client had a very large transformation program that they were undergoing for the last 12 to 18 months. Those programs have been completed. And what we are seeing is that we will -- for this year, it will continue to be at the level that it is currently.

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [7]

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On the large account, Mukul -- Sanjay here. On the large account, more or less flat in the last 2 quarters, but we do expect it to start performing a little better from Q3 onwards.

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Mukul Garg, Haitong Bank S.A., Research Division - Research Analyst [8]

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And the other question was on the jump in the million-dollar client this quarter to -- there was about 13 new million-dollar clients which got added. So is this something which you see as questionable or was this just a coincidence that so many clients, kind of, scaled up a $1 million this quarter?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [9]

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Mukul, we are trying to make these coincidences a habit. In every quarter, we want to have this coincidences.

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Mukul Garg, Haitong Bank S.A., Research Division - Research Analyst [10]

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But is this something which you think -- it's -- should happen going forward as well?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited - President of Sales & Whole-Time Director [11]

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Look, in our business, these are -- you know this business very well, right? This is a very well-researched business, and you're all experts in this. You continue to mine on the 4 -- all the 4 aspects that I talked about, large accounts, invest accounts, new accounts as well as large deals. And lots of things play out quarter-on-quarter, based on where they are in their journey, where we are in the journey, where we are doing proposal state. So this is the whole pipeline funneling, right? Which gets bucketed into different stages of the pipeline, right? So we -- I think, we feel strongly about the pipeline. And that view has done it and we feel quite good about it.

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Mukul Garg, Haitong Bank S.A., Research Division - Research Analyst [12]

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If I may squeeze in a final question. And this is more, Sanjay, for you. How do you see future growth split between new deal led wins and incremental mining of existing clients. The growth this quarter, I think, there was a healthy contribution from new deals. So how do you see the split between the two going forward?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [13]

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Mukul, there's two things, company has to be very resilient, and we take this seriously. We want to be resilient across verticals. So as you would -- as I've always maintained, we want to keep growing on all verticals. And this is what is reflected in our results because we have a broad-based growth throughout the year. Future growth will depend on all the 4 aspects that I talked about. We have to continue growing the larger accounts, some will go down, some will have budget constraints, some will have done these integrations or separation exercises and their attention will go elsewhere. Some -- where we need to throw inordinate amounts of bandwidth and create investments over there, where they grow at 30%, we have to continue to open large accounts, which are -- or the competitor opening new accounts, which are large-ish in nature, which would become the future invest accounts, and last but not the least, through relationships or -- and investments on marketing, on deal advisory relationships, et cetera, we need to have an opportunity to continue to claim more and more of large deals, so all of them go into what we do in terms of resilience.

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Mukul Garg, Haitong Bank S.A., Research Division - Research Analyst [14]

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Sanjay, let me probably word this slightly differently. This quarter, we had 3 new logos, adding up $200 million. That's quite a large deal win. Do you think that is going to be a big portion of your growth in future? The opportunity, there is a lot more than what you have at your existing accounts?

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

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No, Mukul. That is what I am saying, for a company of our size, let's just take a further example on that. These 3 large deals that I talked about, in the -- it's a TCV value of $100 million. They are not the revenue that is coming now. They'll start pumping in good amount of revenue in two quarters down the line. What you need to do at any given point of time, large accounts, invest accounts, have to continue to keep growing. These new accounts that we opened, right? Will start growing towards a substantial number in 18 months, 24 months, 36 months based on their cycles, our cycles, our investments as well. And large deals continue to change the trajectory of growth, right? So I think, we have to work on all 4 of them. So let me be very clear, the growth has not only come from only new business or only new deals. If that's what -- your answer you're looking for.

No problem, Mukul. Thank you.

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Operator [16]

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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 [17]

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This question was for Ashok. If you could help us understand how -- what was the impact of wage increments for us this current quarter? And also give us some sense on the average wage hikes that we gave out. And the second question was around our SG&A expenses. We've continued to benefit from the growth leverage here. How should one be thinking about these SG&A expenses going forward?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [18]

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Okay. So Manik, our wage hike impact in quarter 2 was 170 basis points and of course quarter 2 margin got help from some of the visa costs, et cetera, not being there. As far as SG&A expense, you see of course, over the last 2, 3 years, we have been optimizing, while we have been investing in our sales and marketing, but we have been optimizing our G&A. But I don't think there is much room going forward that we will leave them out. But definitely, we will keep a sharp eye on them that -- they are not kind of -- they are achieving growth, and that is why -- that is how providing some amount of leverage on the margin. But at this point of time, we are quite comfortable with the level where we are in the G&A.

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Operator [19]

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We will move on to the next question. That is from the line of Abhishek Bhandari from Macquarie.

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Abhishek Bhandari, Macquarie Research - Analyst [20]

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Congratulations on good execution. I had 2 questions. First, if I look at your utilization drop, I understand some of it might be related to the loss of account in High-Tech, but do you guys want to continue with the current hiring levels? In other words, are you comfortable with your current utilization levels? Do you want to inch it up back to 82% to 83%, excluding the trainees?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [21]

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So Abhishek, utilization was specifically called out as one of the concern area that we talked about when we're running at too high utilization. And when we tell you that we want to be seen as the growth company, when you run it for a company of our size, expect high utilization has to add to the growth. Especially given the disparity of the recent technologies and there is the business in requirements that come back. So it was a planned effort. Obviously, somewhat of utilization dropped because of the account that we parted with. But having said that, so we will take the utilization up to 82%, 83% level. We'll continue to keep a very sharp buy-in focus on no bad leakage. But also, if we go faster, we will invest back into the business, either through capabilities, solutions, POCs or investments in sales and marketing. And we will continue as anticipated in H2 also.

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Abhishek Bhandari, Macquarie Research - Analyst [22]

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Okay. Nice to hear that. My second question is on your Slide #13 or the cash flow statement. I mean this quarter, the cash flow from operations look pretty weak compared to our historical averages of around maybe 75% to 80% of profits. Could you explain what is the big line item of changes in working capital, which is a drag on the CFO?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [23]

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So Abhishek, I think quarter 2 has been historically weak because of our annual incentive payment happens in this quarter for the entire company. And that is why you see the number of about 53%, 54%. You look at the last quarter 2, which was very high, 90% plus, and if you recall that last quarter 1, we had called out, we had situation where our -- because of the new systems, which we completely revamped, our invoicings have got delayed. And that backlog was getting recovered in quarter 2 of last year and which gives an impression that quarter 2 -- compared to last year quarter 2, this quarter 2 is bad. I think there is nothing to really be concerned about or call out about this quarter. This quarter 2 is a normal quarter for us. But yes, H1 is about 74%. We would like to work on this and push towards 80%. That's our -- if I say, 80% to 85%, we want to take it to.

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Abhishek Bhandari, Macquarie Research - Analyst [24]

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Sure. And my last question is our balance sheet is getting bogged down with high cash, almost INR 2,200 crores of cash. And we have been very selectively and rightly so in terms of acquisition. Any plans to probably release some of this cash or use it for some other purposes in terms of acquisition or something? That will be my last question.

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [25]

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So yes, as I mentioned in my earlier conversations also INR 2,000 crores, INR 2,200 crores, even up to INR 2,500 crores cash in our size of balance sheet, I think doesn't bother us too much. We are continuously doing either dividend or investment in business through CapEx. This time, our CapEx program is slightly bigger than earlier year or acquisition. I do agree, we have not been fully using so far, but our acquisition pipeline and everything, once we have come to a conclusion that this is started hurting shareholder equity returns, at that point of time, we will definitely take a call on pushing the dividend or doing something else to reward shareholder.

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Abhishek Bhandari, Macquarie Research - Analyst [26]

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Sure, sure. And Sanjay, one last question before I forget. Many large-cap peers of yours, with some leadership changes and otherwise, also have been starting to speak about achieving growth and then working on margin. So there is a belief which is now working that the competitive intensity might be rising and hence, some of the smaller companies might be facing much more tougher times in terms of achieving deals. Do you subscribe to this view? If not, I mean, what are the things you're seeing differently compared to those guys?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [27]

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I don't know yet. There are many, many views. Many, many theories. All we focus on is when you put customer in the middle, there is something to be done. How do you actually bring the value that needs to be brought for that particular customer, and every context is different. There is no one cookie-cutter solution that works in all the scenarios, for all the companies across the globe. So we focus on ourselves and what we can actually bring in terms of the value to the customer. Focus on the tools and technology and investment in capabilities. Today, with these newer exponential digital, whatever technologies you want to call them, the need for incredible amount of focus and micro segmentation has become very important. And I think we have strong advocates on exactly that ability to say no on things which we do not do well, and focusing with even investments either organically or inorganically, in building the capabilities towards that as the ways and means to grow in the future as well. When you grow more, the margins in our business will come even higher. So see us as a growth company. If we grow at higher numbers, more margins should be there. That means we will invest back in the business to grow even further.

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Operator [28]

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The next question is the line of Sandeep Shah from CGS-CIMB.

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Sandeep Shah, CIMB Research - VP [29]

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Congrats on good execution. Just wanted to understand, Sanjay, that most of the client-specific issue which we had are largely behind, one can say that?

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

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Say let's go specifically on the two clients Sudhir already talked about, but I'll repeat. The largest client, I think, two flattish quarters. I think we are confident that in Q3, we will see -- start to see the ramp-up. The South African bank will continue to be a little soft [this system], right? But BFS overall, if you look at it, we have already -- all of the 3 large deals that we announced within the BFS area. So there are enough opportunities in BFS as well. As far as the High-Tech account is concerned that it's done invested, we have moved on. And barring that, we have grown well and we'll grow in Q3 as well.

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Sandeep Shah, CIMB Research - VP [31]

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Okay, okay. So just to connect the dots. If you look at that plus the large deals because in the first half we have done 144 million, last year, we have done 200 million, and we have another 2 quarters to go, and the exit rate based on what you are saying in H2 is likely to be better. Sanjay, one can say that we would be back in terms of leaders growth rates in terms of next year? I don't want a guidance, but is it the right way of looking at it in terms of assumptions?

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

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On day 1, from the time we went public, we have said, "See us as a growth company. We want to be in the leaders' quadrant, if not be the leader."

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Sandeep Shah, CIMB Research - VP [33]

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Okay, okay. Just a question and in terms of margins. So if I look at this quarter's gross margin is one of the lowest. So what is the reason for that? Because the investment this time is not in the SG&A, but also in the cost of revenue line. So is it more the offshore to on site, which is leading to this? Or any other investment, which is leading to a gross margin being one of the lowest in multiple quarters?

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

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So this quarter, of course, the entire wage hike is there, and I articulated 170 basis points was the impact. And also, we talked about utilization drop -- further drop in this quarter and more on-site-centric drop a little bit utilization, which has a bit more higher impact. That is what led to the gross margin drop. If you are comparing it with the Y-o-Y number, Sandeep, that last quarter 2 had a benefit of a sudden 5.5% depreciation of currency. And that is what that kind of a peak gross margin. And then, of course, many large deals are now going on at the same time in first year and either they are in transition or first year of a large deal is generally slightly low profitability by the time you stabilize and start making normal profit. So all these factors are coming together to reflect the situation. I think we are working very, very systematically on this and hope to inch up gradually from here.

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Sandeep Shah, CIMB Research - VP [35]

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Okay, okay. And just last question, Sanjay. Looking at the macro headwinds which we are hearing. Any change in terms of client decision making in terms of awarding deals or in terms of ramping up or starting the projects?

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

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There is a master contradiction in the market actually. On one side, if you -- anybody who watches IMF, and you start are working up, talking about growth, GDP growing at 3% rather than 3.8% and it'll be coming down to 2008 levels, you feel depressed. But the other contradiction is when I am short of the customers, I'm of strong belief that if you have a value proposition, if you have a solution, if you have something that can help them grow revenue or get into [existence] of business or help connect their customers or employees or shareholders better -- stakeholders better, or use new digital technologies to do things differently, they always end up finding business. So yes, I do see somewhat of nervousness because of so much noise, because of the trade war, because of all that is surrounding us today. But on the other hand, when you have something relevant to talk to them, customers always manage to find money.

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Operator [37]

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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 [38]

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Sir, the large banking deal, which we won, so who were the competitors? Is it a first-time outsourcer or have they displaced any of the Tier 1 vendor there?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [39]

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Sudhir, can you answer that? Yes. Competitors for the deal and they are the first time outsourcer.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited - President of Sales & Whole-Time Director [40]

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They're marked first time outsourcer. This is a displacement deal, but the incumbent was a European major.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [41]

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Okay. And what is the tenure of the TCV, sir, the [$100 million] TCV which we won?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited - President of Sales & Whole-Time Director [42]

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Typically, 4 or 5 years.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [43]

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Okay. And the last one is on the acquisition. So I mean, so we are trying to strengthen on the cloud side. We have the partnership with all the three, Amazon and Google and Microsoft Azure. So do we see a big opportunity in this hybrid cloud opportunity? I mean recently, IBM was doing a big acquisition on that. So would that translate to a big services business for us also on the hybrid cloud side?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited - President of Sales & Whole-Time Director [44]

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Absolutely. This is the biggest opportunity of our times, actually. Everyone's going to be multihybrid and we'll be on a hybrid cloud model as we see it. Nachiket, would you like to answer this?

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Nachiket Deshpande, Larsen & Toubro Infotech Limited - COO & Whole Time Director [45]

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Yes. As Sanjay said, I think, the hybrid cloud is a real opportunity, and we see that across all cloud providers into the marketplace. IBM RedHat is definitely accelerating that multi cloud. The Google's release of newer software on this cloud platform is also accelerating that. And so I think this is an exciting place for us to build capability on. And most of our customers are either early part of their journey or beginning their journey on the hybrid cloud, so we are very excited to partner with them on that journey.

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Operator [46]

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(Operator Instructions) The next question is from the line of Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [47]

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So I just wanted to check on the inter-revenue declining for 2 quarters in a row. Do you think that has sort of stabilized? And what sort of led to the decline there?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [48]

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I think it's India project. They are typically milestone-driven and you have implementation phase and then you go into maintenance. So two of the large programs have actually gone into that phase, nothing more to it. And as far as India businesses go, very clearly, as we have articulated previously, we focus on two kinds of businesses, with select ministries, progressive ministry, focus on ERP businesses and analytics businesses. And nothing else, but they're going into maintenance phase.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [49]

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Sure. And at least historically, we have seen sort of a good bump towards the -- in the second half of the year driven by this. I think they used to be pass-throughs so on and so forth. Now you think that trend will still prevail? Or there should be a change in what you've seen versus the past?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [50]

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I think that trend will continue.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [51]

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Sure, sure. Fair enough. And just one last thing, Sanjay, in the context of the environment that we have today, and if you compare the earlier period where we have seen very solid growth. On the face of it for external people like us, it looks like the environment isn't that supportive. But do you see clients tracking in a certain way in terms of sort of delayed decision making or putting things off in terms of ramp-ups and so on, so forth? Is that something that you're seeing on the ground? Or it's the -- I think we are just reading too much into what's around?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [52]

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No, Nitin, I think, and I was saying -- answering the previous question. There is definitely a set of contradictions and dichotomy. There's a lot of nervousness, right, whether it's IMF, whether it's the trade war, whether it's Brexit, whether it's protection as to what's going around it. The overall environment is definitely able to get easily depressed, let's just say that. And we have definitely -- we have been also in the ecosystem, so we deal with that. But barring what happened with specific accounts that led to a much muted H1 for us, we believe the opportunities have existed, will exist. So I think we believe, we are believers in that.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [53]

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Sure. So if you look at the existing book of business and the existing client set, do you see any sort of risks sort of that are building up similar to what we saw in the beginning of this year with any of those clients, that could sort of crop up going forward? Or things just look much better than what it was at the beginning of the year?

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

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Nitin, if -- I can tell you for 2 quarters at least, confidently, that's why I'm saying, if you look at our numbers for Q1 and Q2, I'm still telling you that we will do double-digit growth, right? So that in the short term, definitely, I feel things will be good. And with that advent, I can keep the momentum going, keep focusing on large accounts, keep doubling down on investor accounts, keep opening the right sets of new accounts and keep winning in the marketplace on the large deals. I think we will have a good FY '21 as well.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [55]

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Great. Just one question for Ashok. Ashok, if you look at the first half margins, and then I'm sure there were transition costs on deals and so and so forth. Do you think -- if you could just split out your thoughts on what do you think are the tailwinds on margins going into the second half? Because you did mention that SG&A may not be much of lever. So just wanted your thoughts there in terms of how we should read into the margin bit of the things.

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [56]

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So Nitin, growth, of course, helps on margin. And we have always maintained to see us as a growth company. While growth momentum slightly lacking in H1, we didn't cut back our investment. We continue to invest and that impacted our margin, which we think, hopefully, will get corrected in H2 because growth momentum is likely to come back. But we have also given only 1 guidance with Sanjay talks about, that net income at 14% to 15%. And I don't think that guidance we are changing. We will invest back, there are a lot of investment demand from businesses as we get more margin. We would invest back in the business. Okay?

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [57]

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One last one is, are pressure adds a reasonable proportion of adds in the first half?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited - President of Sales & Whole-Time Director [58]

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No. We have to work a little bit more on that.

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [59]

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Yes. So I think the pressure addition is likely to be higher in the second half. Again, this was down.

Nitin, you've asked three, one more question.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [60]

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I'm done, Sanjay.

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Operator [61]

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The next question is from the line of Manoj Bahety from Carnelian Capital.

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Manoj Bahety, Carnelian Asset Management LLP - Co-Founder [62]

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My question is actually on group level, now Mindtree being also part of group. Just wanted to understand like on various opportunities, how do you compete and cooperate, considering that they are also a significant player on the cloud side.

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [63]

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And we have articulated this in the last 2 quarters, Manoj, Mindtree and as 2 stand-alone companies. We don't have too many collision points. In terms of top accounts, in terms of verticals and so on and so forth. In terms of capabilities, also, if you look at horizontal, there is a lot of complementary to the two businesses. So the opportunities to collaborate is far higher than the competition. So this is what we are doing. But otherwise, just see us as 2 independent companies.

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Operator [64]

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The next question is from the line of the Vibhor Singhal from PhillipCapital.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Lead Analyst of Infrastructure and IT Services [65]

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Congrats on a great set of numbers yet again. So just wanted to check on the attrition side, do you feel comfortable with the -- I'm sure, I mean, of course, you would want to probably to come down. But do you see any problem with the number coming to around 80% levels that it is? And are we looking at some measures with kind of arresting that number?

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

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Nitin, can I request you to answer that?

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Nitin Mohta, Larsen & Toubro Infotech Limited - Head of IR [67]

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Sure. So the attrition that we report in the last 12-month attrition. So the higher attrition in Q1, we will continue to sort of impact that number, but what -- if you look at our Q2 attrition, it has come down materially from Q1. So whatever measures we are taking in terms of employee engagement, in terms of employee upskilling as well as the selective wage hikes and promotions that we did, seems to be working in the right direction. So we do see attrition being in controlled level where we wanted to be as the year progresses.

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

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So annualized number, Ashok mentioned, I think we have 17.5% compared to 18.4%, I think, with this LTM, last 12 months.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Lead Analyst of Infrastructure and IT Services [69]

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Sorry, was that 18.4% if I compare it to the last year, quarter 2 number, which would also have been annualized, that's up by around 300 basis points. So no concerns as of now?

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

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You've given us some good data points, but I don't know what you are referring to.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Lead Analyst of Infrastructure and IT Services [71]

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Look, I'm comparing Q2 to Q2.

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [72]

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Let me -- there is a lot more to be done. There is a lot -- okay. Let me just step back. Our attrition was a lot higher than we were feeling comfortable with. We have taken what we talked about Mission Ubuntu, nine different [facets of that], that are going in the last 2 quarterly calls, which has led to -- it takes a couple of quarters, which has led to the attrition coming down in Q2. Are we satisfied with this? No, we are not satisfied with. We don't stop doing the 9 events, continue to be there as part of Mission Ubuntu that we continue to work, okay? Lots more to be done, my friend.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Lead Analyst of Infrastructure and IT Services [73]

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Sure. That is great to hear. Just, Sanjay, just one more question, if I may. We've been delivering very strong performance. Your guidance for double-digit growth also looks really great for this year. Any headwinds that you might just want to maybe call out in terms of our specific domains in which we are operating. We know all the global -- you mentioned that there's a lot of dichotomy going around. But let's say, some specific events that you might see as potential headwinds, not just for, let's say, next 2 quarters, but for the next 4 quarters, maybe Brexit or trade war or more of in-sourcing. Anything that you believe could be a potential threat to the growth, kind of growth that we've reported, and we are continuing to report?

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

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No, I cannot specially call out anything except that sometimes these nervousness, there is a breaking point at times, and then it leads to all the irrational decisions as we have seen in the past. But right now, where we are, we see it's broad-based discussions, broad-based growth. We don't see any delays in there. There will always be pockets where customers, due to their situations, we are negotiating and renegotiating, but that's business as usual for us.

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Operator [75]

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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 [76]

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All my questions have been -- well, my question's been answered, so thanks and all the best.

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Operator [77]

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(Operator Instructions) The next question is from the line [Divan Chipansa] from Emkay Global.

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Unidentified Analyst, [78]

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Just one question from my side. So we have seen a growth pickup in Europe in this quarter after remaining stable for quite some time here. So what has led to this growth? And what is the outlook here for this geography?

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

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So we -- I think this is one of the large deals in BFS area that has ramped up. And as you can probably see from our numbers, we have to continually invest in Europe because a lot more needs to be done. Not for investments, but obviously, it will take some time to continue to grow, so it's business as usual.

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Unidentified Analyst, [80]

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So the kind of investments have largely been on the Temenos implementation side. So is that performance going to be volatile here or we can generate some stable growth from this geography?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [81]

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No, no. Stable growth, very stable. This is -- yes, it's like another horizontal service client capability that you can continue to grow.

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Operator [82]

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(Operator Instructions)

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [83]

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Thank you, folks. Sanjay, again. Look forward to speaking with you with the next time, and look forward -- looks like there's other questions, so I cannot close that. Ashwin, you want to ask the question.

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Operator [84]

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The next question is from the line of Ashwin Mehta from IDFC Securities.

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [85]

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Just want to get a sense from you, Sanjay, in terms of why is analytics, AI and cognitive growing slow for us? Is it client-specific issues or what, because ideally, it should be an area of growth given the demand traction here?

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

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Very good question, Ashwin, and glad you asked this. Obviously, as you can -- the two main aspects, the largest account and the other banking accounts, both of them used to do a lot of analytics work as you can imagine, that's one area. Please remember, this was 2 or 3 years of CAGR of 35% year-on-year growth as well. And the other thing which -- where the revenue numbers have dropped is that large projects inside that we were doing has gone into the maintenance phase after 2 years of implementation.

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [87]

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Okay, okay. Fair enough. And just one more thing, in terms of infrastructure management, would you be putting your cloud-related revenues here or that gets categorized somewhere else? Because that's also one of the segments, which seems to be underperforming. So is it more legacy drag? Or what explains the slow growth here?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [88]

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So cloud for us is kind of across all service lines that we show it and not just isolated in the infrastructure business. And if you look at our own infrastructure business as well, we have very little legacy. The time profit we started growing our infrastructure business, most are infrastructure deals, inherently, are cloud migration-related, and that is an integral part of every single deal construct that we've signed in at least in the last 2 to 3 years. So they're very little legacy units, and for us, cloud is part of cloud apps, part of ERP, cloud part of IMS as well as in the cloud native development, so it cuts across all service lines that we report.

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Operator [89]

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Thank you. Ladies and gentlemen, that is the last question. I now hand the conference over to the management for the closing comments.

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [90]

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Now this time, I can do it right. Folks, thank you, everyone, thanks for joining. We look forward to speaking with you next time. Also, I hope you will join us for our Analyst Day. You would have received -- block a day, or you will receive it shortly. And look forward to seeing you in December for that. Take care, God bless. See you next time.

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Operator [91]

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Thank you.