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Edited Transcript of LTI.NSE earnings conference call or presentation 15-Jan-20 12:00pm GMT

Q3 2020 Larsen & Toubro Infotech Ltd Earnings Call

Chennai Jan 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Larsen & Toubro Infotech Ltd earnings conference call or presentation Wednesday, January 15, 2020 at 12:00:00pm 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

* 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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* Diviya Nagarajan

UBS Investment Bank, Research Division - Executive Director and Research Analyst

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Manik Taneja

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

* Mukul Garg

Haitong International Research Limited - Research Analyst

* Nitin Padmanabhan

Investec Bank plc, Research Division - Analyst

* Pankaj Kapoor

JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research

* Rahul Jain

Dolat Capital Market Pvt. Ltd., Research Division - VP of Research

* Ravi Menon;Motilal Oswal Securities Limited, Research Division

* Rishi Jhunjhunwala

IIFL Research - VP

* Ruchi Burde

BOB Capital Markets Limited, Research Division - Research Analyst

* Sandeep Shah

CIMB Research - VP

* Sandip Kumar Agarwal

Edelweiss Securities Ltd., Research Division - VP

* Sudheer Guntupalli

Motilal Oswal Securities Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to LTI Q3 FY '20 Earnings Conference Call. (Operator Instruction] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Nitin Mohta, Head of Investor Relations. Thank you, and over to you, sir.

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Nitin Mohta, Larsen & Toubro Infotech Limited - Head of IR [2]

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Thank you, Sanford. Hello, everyone. Thanks for joining us today to discuss LTI's financial results for the third quarter of fiscal '20. The financial statements, press release and quarterly fact sheet are available in our filings with 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 and earnings guidance, and anything said on this call which reflects our outlook for the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risks 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 [3]

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Thank you, Nitin. Hello, everyone, and welcome to LTI's earning call for the third quarter of FY '20. Let me take the opportunity to wish all of you a happy New Year since we are speaking for the first time in 2020. And especially for today, happy Makar Sankranti and Pongal to all of you who are celebrating that.

We had a strong Q3 with revenues of $394.4 million, up 8.4% quarter-on-quarter and 13.7% year-on-year. In constant currency, we delivered 8.3% growth quarter-on-quarter and 14.2% year-on-year basis. Digital now makes up for more than 41% of our revenues.

Friends, this has been our best organic sequential growth performance since listing. This outstanding performance reflects the dedication, hard work and perseverance of 30,000 LTIites and our complete focus on customer satisfaction. We are extremely pleased with how the quarter panned out for us.

Those of you who were at our Analyst Day last month would recall how our go-to-market strategy of powering the breakaway enterprises is resonating well with our clients. At LTI, we believe enterprises need to master 4 essential plays to be a breakaway leader, which are Digitizing the Core, Data-Driven Organization, Experience Transformation and Operate, To Transform.

Our 2 large wins this quarter reflect these plays. We won a $60 million TCV deal with a global smart energy storage solution provider. As part of this deal, LTI will transform application operations for a landscape that covers users in 15-plus countries across North America, South America, Europe and Asia Pacific, supporting 16,000-plus employees across various business functions. LTI will manage a wide variety of application platforms, including on-core [ERCs], CRM systems, CX platforms as well. Competition for this included the usual suspects, but in the end, our Operate, To Transform go-to-market strategy backed by our credentials in the proposed solution helped us displace the incumbent vendor.

Our second large win this quarter was along our Data-Driven Organization go-to-market theme. For an apex government body, LTI is creating a conceptual framework on data management, integrating and harmonizing the available datasets in various key sectors through single-window system for better governance.

Last month, I spoke to you about how we are continuously working towards strengthening this cause around these 4 plays by investing in people and sharpening our capabilities. Our firm commitment to this constant learning and development endeavor is reflected in our making -- our ranking and recognitions in the partner ecosystem.

In Q3, LTI achieved the SAP competence on AWS. You would recall, at same time last year, LTI became one of the top-16 companies in the world to be part of SAP GSSP, which is a global strategic service providers partners list. We are pleased to share that only 8 of the 16 SAP GSSPs have attained this competency on AWS certification.

Let me now provide you with vertical-wide color for Q3 performance. In BFS, we saw double-digit sequential growth of 11.3% quarter-on-quarter. On our last call, we had expressed confidence of growth momentum coming back. This performance is primarily driven by both revival at top customers and on track ramp-up of large deals announced earlier. Our investment in High-Tech solutions and accelerators have helped in positioning LTI as a strong analytics partner and continues to be a key differentiator for us in the marketplace. The same was also recognized by Everest Group that featured LTI as a major contender and star performer in its application and digital services and banking services PEAK Matrix. We remain optimistic about our future and expect this vertical to grow for us in times to come.

Insurance vertical grew at a 32.6% quarter-on-quarter. In Q3, a leading American insurance company selected LTI as a strategic partner to digitize its core by rolling out Guidewire to simplify operations across 47 states.

Manufacturing grew strongly at 15.7% quarter-on-quarter. You will recall that H2 is stronger for this vertical due to presence of a higher pass-through in one of our India engagements. The quantum of pass-through revenue has remained similar to prior years. A double-digit sequential growth, similar to our performance in BFS, is driven by assets from a large deal announced earlier. One of the 2 large wins in Q3 also falls under this vertical. While manufacturing companies have mature sourcing arrangements, new spend in digital transformation represents significant opportunities, and it's often our ticket to create a differentiated dialogue.

In Q3, as I mentioned earlier, a global leader in energy storage chose LTI's Mosaic Decision -- Mosaic data platform to drive an end-to-end enterprise-wide data transformation. LTI's ability to compete and win in such pursuits serves as a positive reinforcement for our investments in developing IT and related value propositions to our customers.

In Energy & Utilities vertical, we delivered a 1.5% sequential growth on top of a very strong 14.4% quarter-on-quarter growth that we saw in Q2. We announced 2 large deals in this vertical last quarter, and the ramp-up of those wins remains on track, giving us confidence for sequential growth to continue in Q4. CPG, Retail & Pharma, our steady performance continues in this vertical with another strong quarter of 5.8% quarter-on-quarter growth.

High-Tech and media grew strongly at 8.8% Q-on-Q. Our strong understanding of this emerging world of new media, combined with the focus of this all-digital is producing strong growth. Our focus on scaling this vertical with some of the largest companies in the sector is working well, and our Q3 performance is a testimony of that. Others, a vertical which includes Defence, professional services, and Travel & Logistics, was up 15% Q-on-Q.

If you look at FY '20 outlook, let me comment on how we see Q4. On our last earnings calls, we had promised to deliver double-digit growth for FY '20 with a superior Q3 performance. We are comfortably poised to do that. Our large deal ramp-ups are on track. Our deal partnering continues to be solid, and aggregate health of our top-20 accounts is steady.

We shall provide you more color for FY '21 when we report our full year results. At this point, let me reiterate that we want to be in the leaders quadrant if not the leaders when it comes to revenue growth. We are working towards that end, and we'll continue to make all the necessary investments to secure that growth trajectory.

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 [4]

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Thank you, Sanjay. Hello, everyone. Let me take you through the financial high points for the quarter 3 of FY '20, starting with the headline numbers. Our revenue stood at USD 394.4 million, up 8.4% sequentially and 13.7% on a year-on-year basis. The corresponding constant currency growth was 8.3% quarter-on-quarter and 14.2% year-on-year. Reported revenue stood at INR 28,111 million.

We completed acquisition of Powerup this quarter, and it became a wholly owned subsidiary, effective 1st October, 2019 and contributed USD 1.4 million in revenues. Higher pass-through revenues in Q3 contributed to about 1.5% growth. Excluding these 2 components, also, the quarter-on-quarter growth was strong at 6.4% quarter -- 6.4%.

Coming to profitability. EBIT for the quarter was INR 4,566 million, translating into an operating margin of 16.2% as compared with 15.5% in the previous quarter. The 70 basis points increase in the margin can be attributed to operating leverage in the business due to higher growth. There was marginal benefit from higher utilization and FX in Q3, which was offset by higher share of product pass-through in the revenue mix.

Reported profit after tax was INR 3,767 million, which translates into a PAT margin of 13.4% this quarter compared with 14% in quarter 2. Lower hedge gains in quarter 3 versus quarter 2 resulted in sequential drop in PAT margins despite improvement at EBIT level.

On the people front, we continue to strengthen our workforce. And during quarter 3, we added 440 people on a net basis. The total manpower stood at 31,419, of which our production associates were at 94.4% of the mix. Utilization without trainee was at 81.3% as compared to 80.6% last quarter, and utilization including trainees was at 79.2% versus 78.9% in quarter 2. Attrition this quarter was at 17.7% versus 18.4% last quarter on LTM basis.

Our cash flow hedge book stood at USD 1,249 million as at 31st December 2019 versus USD 1,219 million at 30th September. While on balance sheet, hedges stood at USD 137 million versus USD 152 million last quarter. We continue to execute our hedging strategy consistently.

Moving on to the DSO. While we improved our unbilled DSO by 6 days in quarter 3 over the last quarter, our billed DSO went up to 78 days partly due to unbilled getting billed and partly due to strong revenue growth during this quarter. As a result, our total DSO for quarter 3, including unbilled revenue, stood at 110 days versus 105 days in quarter 2. Our net working capital stood at 19.5% of LTM revenue.

Our operating cash flow for the quarter stood at INR 3,855 million, which amounts to 102.3% of net income. We closed the quarter with cash and liquid investments at INR 21,860 million. The effective tax rate for FY '20 so far remains at 24.7%.

Earnings per share for the quarter was INR 21.70 per equity share as compared to INR 20.73 in quarter 2. Diluted EPS was INR 21.50 per equity share versus INR 20.52 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 Tarun Shetty from Haitong Securities.

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Mukul Garg, Haitong International Research Limited - Research Analyst [2]

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This is Mukul Garg from Haitong. First of all, strong congratulation to the management. A very good growth during this quarter. I just wanted to understand the breakup of that growth. You have given the breakup of pass-through and the acquisition impact, but can you help us understand how much of growth came from large deal wins over the last few quarters, how much of it was on a run rate basis because, seasonally, Q3 is expected to be a weaker quarter.

And following up on this, on the BFS side there, your peers have mentioned the impact of furloughs, a weaker Q3. You don't seem to see any of that, so if you can just help us understand that as well.

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

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Mukul, I don't know that I'll be able to give you off the cusp all the answers, but I'll make an effort. As Ashok pointed out, 2% of our growth is accumulated -- is coming from basically the traditionally Q3/Q4 licenses that you typically do from India deal pass-through. And if you really look at it, the other things which have contributed to this growth is your -- the large account, where, for the last 3 quarters, there have been de-growth are absolutely frightening, has ramped up very, very strongly. Third thing, if you look at year-on-year number, you will see all verticals have chipped in very, very strongly. So it's a broad-based growth overall. So large accounts, invest accounts, new accounts, et cetera, everywhere there is growth and, on top of last 2 quarters, whatever large deals wins that we have announced. I think those have to move on from the transition phase to steady state phase. It just so happened that they -- that all of that came together in a traditionally low quarter on Q3. We also have our own furloughs and less number of days as well. But these are the 4 factors that I can account. Unfortunately, I'm not in a position right now that will give you the breakup of what has contributed from that.

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Mukul Garg, Haitong International Research Limited - Research Analyst [4]

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Understood. And on the BFS side, is there any impact of the macro -- how much of the growth in this quarter was basically a pullover or a pushover from previous quarters when your large clients basically were underspending?

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

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I don't understand what your pullover or pushover means. Whereon the customer, as we have called out, the large account had reduced their spend as we had pointed out many times that we have not lost this revenue to anyone else. As -- and we were expecting it to open up, but we were not sure when it will open up, but we're expecting it to do a little bit more in Q2, which did not happen. But Q3 has come back very, very strongly. And we continue to see good pipeline all across while we're also cognizant of all the macro issues, pricing pressure, et cetera. Some of them affect us as well. But we -- where we stand today, we're optimistic about the BFS in the coming times as well.

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Operator [6]

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The next question is from the line of Sandip Agarwal from Edelweiss.

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Sandip Kumar Agarwal, Edelweiss Securities Ltd., Research Division - VP [7]

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Congratulations on a very good execution. Sanjay, I have just one question. We have faced some kind of growth issues in last 2, 3 quarters. And if I see these numbers, extremely strong number, will it be fair to conclude that the weakness, which was there in the past few quarters, that actually resulted in a kind of pent-up compensation in this quarter? Or it would be fair to say that growth across the board from all other clients have also contributed to the significant strength in the quarter? And the clients who have suffered in the last 2, 3 quarters who have also some kind of budget issues or whatever spend issues, they are now coming back very strongly. How would you like to narrate the whole thing?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [8]

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You have mastered writing a single question into 5 questions, actually, Sandip. So let me -- to answer this question very, very simply. There is -- frankly, there is no concept of pent-up demand or something pent-up coming back. As I kept -- keep articulating, there's 4 ways to, and this is a very simple industry, which runs on 4 basic businesses, right? So you need to grow large accounts. You need to grow invest accounts. You need to open your accounts which you want to open, and you need to continuously at regular intervals keep doing large deals.

So in our case, what was happening for the last 3 quarters, we were opening new logos, which were from our target account list. We were growing invest accounts. And we were doing -- continuously doing large deals. But where we were struggling were the large BFS accounts where they have their own re-vectoring of spend, and we had a High-Tech account where we had the headwinds. And that resulted into the problem that we had in the H1. But we knew, and we had clear visibility that H2 will be strong for us. And that's why we kept saying, this year, growth for us will be driven based on what happens in H2. And that is what -- it's nothing to do with pent up. It's basically us firing on the 4 cylinders which were struggling in H1, which was the top accounts, and that is what will happen.

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Operator [9]

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The next question is from the line of Sudheer Guntupalli from Motilal Oswal Securities.

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Sudheer Guntupalli, Motilal Oswal Securities Limited, Research Division - Research Analyst [10]

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Sir, congrats on the good set of numbers. If I look at your client profile, we have been aggressively adding clients in the smaller engagement buckets. Over the last couple of years, there is almost a 50% increase in the number of small accounts which are in the $1 million-plus bucket or even in the overall number of clients. Of course, I understand that some of these additions would have come through your acquisitions. But even adjusting for that, there seems to be a strong increase in accounts at the bottom of the client pyramid. So how do we look at this trend? Can these accounts be better mined and scaled up into higher buckets going forward? Or are we running a risk of increasing the long tail, where we'll have to potentially go for some sort of a tail account rationalization going forward?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [11]

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We -- obviously, you've got it absolutely right, Sudheer. For example, Powerup, which is a very small company, brought a lot of capabilities, but they're also working in geographies with smaller customers so the number of customers suddenly increases for us. But there are a goldmine of customers where we can definitely mine as well. So we look at that as a glass that is more than half full for us to mine and create the next level -- next layer of invest accounts for us as a company.

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Sudheer Guntupalli, Motilal Oswal Securities Limited, Research Division - Research Analyst [12]

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Sure, sir. And if I look at platform-based solutions as an offering, I understand it may not be a needle-mover for the overall business. However, looking at the soft growth trends over the last few years, it appears this offering is not really -- be able to take off so far. So what are your thoughts here?

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

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Sudheer, I -- actually, we need to think off-line and maybe take your advice -- some of your guys' advice as and when we meet you. This is our Canada business, our transfer agency. This product and platform, this is a cloud-based platform, has around 65% to 70% of the Canadian market on trade finance. Now for a singular product to have that kind of a market, it's very difficult to go up beyond 60%, 65%, right? So while we're using that to grow our businesses on those customers and mine them further, but that transform payment is like that. So we need to see how we report it in future, but it's 65% of the margin -- of the market. How do you grow that beyond that.

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Operator [14]

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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 [15]

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I have a question with regard to our margin and our SG&A leverage...

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Operator [16]

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Excuse me, this is the operator. I'm sorry to interrupt, Mr. Taneja. May we request you to use your handset, please? Your voice is not...

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [17]

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Is that better now?

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Operator [18]

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Yes, thank you.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [19]

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So first of all, congratulations for the very stabilized growth in the current quarter. My question essentially was around our margin performance. So while when I've seen our growth recover very sharply, when I look at our margins, operating margins, they're still down by about 300 bps on a year-on-year basis. So just wanted to understand how should we be thinking about our operating margins going forward? That's question number one.

And associated with this, essentially in terms of the way we've seen our SG&A expenses come off as a proportion of revenue, is there more leverage there? Just wanted to understand that.

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [20]

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Okay. So thank you, Manik, for asking this question. I think you would have seen our performance in the last few quarters. Also because of the large accounts coming down or accounts closing, there were utilization issues also, which has kind of impacted us. Of course, the wage cost, which we have talked about earlier also that more localization, hiring locally and also improving the quality of intake in India, the freshers intake, all these things are putting pressure on wage. Some of the subcontracting thing also for us inched up in those last 3, 4 quarters. So when you compare Y-o-Y, yes, there is a 300 basis point drop, but after 3 quarters, growth returning and our margin taking at least directionally the right course, I would say that we bright -- brighter sider to look at in the quarter 3.

But as we said, please look at us as a growth company. And with the growth, some operating leverage still will be coming to us, where we can further optimize our G&A, and it will continue to invest in sales and marketing. So some opportunity to leverage still exists. As we go forward and improve on our other aspects of talent management, et cetera, I'm hoping that we can still be a stable consistent margin player.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [21]

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So just to prod you a little bit further on this, as you mentioned that there was some pressure with regards to our top clients and some client ramp-downs, given that some of those pressures are behind us now, should one be hoping that, all other factors remaining constant, we should essentially expect an uplift in margins next year versus this year?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [22]

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As far as the next year is concerned, I think we'll come back to you guys at the end of quarter 4 and give our commentary for FY '21. But at this point of time, the requirement of investment, apart from investment in technology, investment in talent -- and you want to operate in global markets as a global company for more localization, I would maintain that we would like to be a consistent margin player and a growth player on the manual side.

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Operator [23]

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The next question is from the line of Diviya Nagarajan from UBS.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [24]

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Congrats on the strong quarter. I think many have kind of touched on the banking issue, and you also gave a very clear explanation on what's driving your growth. Just in terms of the kind of projects that you're seeing in banking, especially with the top accounts where you have seen some stoppage of work earlier, is it basically a continuation of the same kind of work? Or has something changed in the nature of work? That's question number one.

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [25]

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Sudhir, do you want to answer that?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited - President of Sales & Whole-Time Director [26]

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Yes, sure. So in the -- specifically, if I look at the top account in banking, the key reason for the growth is actually a new project which is related to a common data platform that the bank is driving across its various functions. So that is a net new revenue growth for us in that account. Overall, in BFS, we see an increase in spending in the discretionary spend, especially in the digital areas and data areas. So both our offerings around experience transformation as well as Data-Driven Organization, that's where we're seeing the new spend in BFS.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [27]

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Okay. There was some news flow around the homeland-ish -- visa-related issue investigation that happened in December. Any updates on that, please?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [28]

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Sanjay, here. Diviya, we're committed to highest level of ethics and compliance, and we're fully cooperating with the authorities. These are legal matters and sometime takes a long time to conclude. There is nothing else to add at this point in time.

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Operator [29]

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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 [30]

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Congrats on good numbers. Sanjay, just one question. Thanks for the update on the top client. But if we just look at the press release issued by one of your competitors regarding the same, it looks like it's -- there's still some pain maybe coming for some of your competitors from that account starting from April of 2020. So for LTI, are you worried? Or you believe, for us, those pains have already been happened in FY '19, and we may not be in the queue for the same, while with the other competitors, it may be happening in FY '20?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [31]

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I don't know whether I want to talk about others and would not want to comment on what others have said. I don't know what is their project profile, their business expansion or consolidation, leads to all kinds of things, but all I can say is, we're on the positive side of consolidation. We continue to be strategic partners. Q3 revenue growth has been very, very positive. And we continue to stay positive for times to come as well.

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Sandeep Shah, CIMB Research - VP [32]

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Okay, okay. Because that press release has been mentioning as vendor consolidation. So I thought maybe all other vendors maybe also been asked to participate in this year.

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [33]

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So we're on the positive side on vendor consolidation. What else do I have to say, Sandeep?

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Sandeep Shah, CIMB Research - VP [34]

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Okay, okay. So you foresee that now most of the pain in that account is behind, and one can foresee this account as a growth account going forward?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [35]

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Where we stand today, yes.

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Operator [36]

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The next question is from the line of Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [37]

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Great set of numbers. I had a couple, actually. One is, you spoke about how a confluence of large deal ramp-ups have sort of impacted gross margins. Do you think -- and if we look at this year, and you did mention the drivers for the weaker gross margins for this year, do you think that, once these deals get into steady state, we should actually see an uplift, and what we're seeing in this particular quarter in terms of the absolute gross margins can actually be higher? Is that the way one should think about it?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [38]

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Yes. So I think the kind of flow we have established on the large-deal winning and the large-deal pipeline, which Sudhir has alluded in Analyst Day as well and Sanjay also as well. I don't think that -- we're very nicely set up for continuously hopefully winning large deals. So the cycle of one large deal coming to steady state and the other one is starting and transitioning, hopefully, we will come to -- as an LTI steady state large deal Indian company, and we are reaching there. So I don't think we made large deal to the margin issue. Gross margin, one commentary I think which need to be understood in the pass-through things because the higher pass-through also impacted quarter-on-quarter gross margin by 10 basis points.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [39]

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Sure. And from an SG&A perspective, you think the current levels that you achieved in this quarter is something that one should sort of assume as some sort of a steady state with incremental leverage over a period of time?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [40]

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Yes. In terms of percentage of revenue and a little bit of scope of operating leverage as growth continues to support that, but we need to continue to invest. Let us understand sales and marketing is an important area where we need to continue to invest.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [41]

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Sure. And the third was, if you look at all the commentary by most vendors who have reported until now, I think the general sense has been that there have been a lot of headwinds in some cases. And I think even some -- what you are saying, headwinds are over, and things are likely to improve going forward, and you have that visibility. From the client end, do you see a change in sentiment, which gives you a sense that it will be a continued sort of thing going forward through the year? Or do you think there's still some volatility that is -- that could sort of impact going into next year, considering that you have elections and all other uncertainties. Do you think...

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [42]

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Listen, listen, listen. Stop, stop, stop. I have to answer that and then you continue with the next question. Listen, look, we have always, and for the last 3 years, we have continued to say that, if you have a value proposition to help client on the revenue side or if you have a suggestion or a thought on how do we dramatically help them reduce costs, given -- using new technologies which are coming into play every single day, customers always end up finding money. The headwinds that we faced in this year were very client specific and very related to us, right? In industry, when we go and meet customers today consistently, we believe there's an opportunity to be had and create a pipeline. Pipeline is very different from what it used to be a year or 10 years, 15 years back when I was doing the same work, right? It's very different. It's new. There's a lot of imagination. There's a lot of new technologies. There's a lot of imagination and technologies coming together for every vertical to create a value proposition for that particular vertical or for that particular company. So there's enough and more to be had.

In regards to what is going to happen because of elections, when we speak to customers today, this point has not come up at all today that, yes, there will be a downward or we will probably do a little less. We will see if there's something changing, but I have not seen anything as of now.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [43]

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Sir, great. That's helpful. And lastly, just your thoughts on how we should think about the remainder of the year in terms of puts and takes on both margins and growth?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [44]

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We'll continue to grow sequentially in Q4. And we're still a growth company. Margin, there's no change in the commentary.

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Operator [45]

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The next question is from the line of Rishi Jhunjhunwala from IIFL.

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Rishi Jhunjhunwala, IIFL Research - VP [46]

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Sanjay, one question on bifurcation between volume and pricing, maybe it's not too relevant. But still, if we really look at it, a large part of your growth in the past few years has been driven by service line segments, such as analytics and enterprise integration and mobility, though others have also contributed. And I would have assumed there could have been some pricing power out there, and you can correct me if I'm wrong, but if we really look at your overall revenue growth, it is largely in line with how your volume growth has been or your hiring has been. So just wanted to understand what is the dynamic there? And do you see any kind of pricing improvement as a result of the mix change that you're witnessing, which could result in probably better nonlinearity on revenues versus employees?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [47]

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I'll ask Ashok to give in detail, but we do see on the legacy kind of business, there is pricing competitiveness. And as -- at times, that is offset by analytics and digital integration, enterprise integration is one way of saying it, but everyone is doing digital integration today. We also face some pricing pressure on the portfolio. So there will be on an off some pricing pressure on banking customers and so on and so forth. These things continue to happen. But overall, as regards to volume and pricing, why don't you, Ashok, give a color into that?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [48]

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I think just continuing what you are saying, Sanjay, when clients are squeezing, they run the -- run budget and repurposing that to (inaudible) side and [chain] side. I think same thing gets reflected on our side, where the run part or renewal part which happen, there are pricing issues, and you have to provide a lot of savings and efficiencies to the client. And then those things are getting offset by -- because you are able to grow your digital pie of the thing where -- definitely where price points are slightly higher. But at the same time, the resources which come, they also come at a higher cost most of the time. And then also, these new technologies have more investment required at this stage, where people are working on various positioning and et cetera. So on an overall basis, in a portfolio level, you don't see that difference, but there are moving parts within that portfolio which are the things which we're trying to explain. Okay?

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Rishi Jhunjhunwala, IIFL Research - VP [49]

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Understood. So just one on the hiring bid, right? So do you expect the hiring growth to continue the way it has been in the past? Or do you think you've actually built up some buffer that could probably provide some operational leverage going forward? The reason why I said that is because we have talked about operational leverage on SG&A, but that is not reflected on the employee cost side despite such strong growth.

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

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Rishi, employee growth on the core delivery part will continue, too, in times to come. And for next year, we'll come next quarter and give you some kind of indication on how many freshers we'll be adding. So that's the only number that we give.

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Operator [51]

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The next question is from the line of Pankaj Kapoor from JM Financial.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [52]

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Sanjay, you commented on a good growth outlook in BFS. So I was just curious if that is based on the market share gain that you have been making in the top clients? Or are you also seeing some ease up happening both in the amount as well as the profile of their spend by a broader set of your BFS clients? That's my first question.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited - President of Sales & Whole-Time Director [53]

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So Pankaj, this is Sudhir. Let me take that. So Yes, you're right. The top-down growth has returned, and we expect that to continue. There has been growth, so we had some couple other accounts as well in BFS, which were bottoming out in Q1, Q2, which are returning to growth. As well as there's a large deal that we have done in the Nordics in financial services, which has also contributed to BFS growth. So overall, we see BFS picking up going forward -- further from here.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [54]

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So just to persist, I mean, what I'm just trying to basically figure out that is it the view based largely on the transactions? Or is -- are you seeing that there's a general ease up, which is happening on the IT spend in BFS, something which was not there till maybe last year?

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited - President of Sales & Whole-Time Director [55]

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I'm speaking specifically about what we are seeing in the market, right? Yes. I think, overall, BFS spend -- Sanjay, do you want?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [56]

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No, no, go ahead. I think you're answering.

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Sudhir Chaturvedi, Larsen & Toubro Infotech Limited - President of Sales & Whole-Time Director [57]

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Overall, BFS spend is -- I think the comments that Ashok made a little while back, which is about how running spend has been experienced and kind of the increase in digital and change is exactly the scenario that we're seeing in BFS. And we -- given -- especially given some of our data play in BFS and increasingly, some of our play in the Operate, To Transform space also in BFS, we're seeing that there is room for growth in the accounts that we're operating.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [58]

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Got it. And the second, I mean, Mindtree, your federal company, they also have been talking of building a portfolio of managed services deals, something which you have been able to do very successfully. So I was just wondering if you are also helping them in this -- in building out this thing formally or informally?

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

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No, they're 2 independent companies. If they ask us for an advice, we will help them in any way or form as they are a good company, but they are run independently.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [60]

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Okay. And lastly, on this whole fresher intake that we have been doing. So can you share the numbers for, say, 2019? And how does it compare for -- versus the previous year?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [61]

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No, I don't have your number right now. Do we have the number right now?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [62]

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Not right now. Pankaj, if you drop us a note, we'll give you the numbers. I don't have the numbers right now. With the quarter 4 commentary, we will give you for the past year as well as the future year with the quarter 4 commentary. Wait for 3 months.

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Operator [63]

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(Operator Instructions) The next question is from the line of Ruchi Burde from Bank of Baroda Capital Markets.

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Ruchi Burde, BOB Capital Markets Limited, Research Division - Research Analyst [64]

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Congratulations to the team for the strong growth. My question is regarding some of your deal wins. So if I look at your last 2 quarters, LTI has announced 3 government body or regulatory authority deals between September and December quarter. So what I'm trying to understand here is, is this a new segment where LTI is actively looking for growth opportunity? If yes, then which geography? And what kind of engagement looks interesting to LTI? And subsequent to that, would it have some impact on profitability and receivables for the company?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [65]

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So both large deals in this quarter are net new revenues for us. This particular deal is actually in the -- again, in the -- specifically in information platform for the government body that we have under (inaudible). And this is a new project. It's a data platform that we're going to create for them. So what we are focusing on, from a government perspective, is 1 of 4 areas. There are 4 areas that we're focusing on. One is ERP. The second is digital. The third is data. And the fourth is cybersecurity. So as long as deals fall in this space, we are interested in new deals. If there are any deals outside this space, we're not bidding for those deals. So these deals tend to have a different model. And given that they are new implementations of data platforms, and what we are seeing is that we -- if your question is related to traditional profitability of government deals, that is not the case in these deals.

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Ruchi Burde, BOB Capital Markets Limited, Research Division - Research Analyst [66]

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Okay. Any specific geographies that you are looking or you see the kind of opportunity across the globe?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [67]

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Right now, we're focused on our emerging markets business.

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Operator [68]

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The next question is from the line of Ravi Menon from Motilal Oswal Asset Management.

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Ravi Menon;Motilal Oswal Securities Limited, Research Division, [69]

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Congrats on a great quarter. Sir, from the large deals that you mentioned this quarter, at least one of them, it seems like it's a very outcome-oriented deal. So these kind of -- there first -- this shows that LTI's really in Tier 1 territory like you're saying in the announcement. But I want to check. I mean, this is kind of norm for the large deals that are going out project, pricing this more as an outcome of fixed price? That's the first question.

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

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So this one is a fixed-price deal, but there are many deals that we do which are outcome driven, which are transaction-driven. All kinds of deals are happening based on -- there are multitude of factors that go on deciding in what it means. This one is a fixed-price deal.

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Ravi Menon;Motilal Oswal Securities Limited, Research Division, [71]

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Right. So can we say that there's -- we look 3 years, 5 years out, the absolute mix of these kind of deals increase, should we see some improvement in the margins? Because in a way, you'd see margin compression existing kind of around the same gain kind of part of your portfolio. That's anyway a smaller part probably for you compared to larger Tier 1 players.

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

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You're answering the questions also. Focus and look at us as a growth company. Margins questions, please refer to what Ashok just said. You can ask this in 10 different questions. We'll still always bring you back to Ashok's answer.

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Operator [73]

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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 [74]

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Yes. Just the question on margin, Ashok. If I look at the 9 months PAT margin, it is close to around 13.9% versus Q3 PAT margin is 13.4%. And we are still reiterating that 14% to 15% is a doable PAT margin. So even to achieve a lower end of 14%, the Q4 margin has to be higher than the 3Q margin. So is it the right way of looking at it?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [75]

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Okay. So yes, maths, what you are doing, I'm also doing, and we are all trying for that. And bands ask for guidance, of course. The full year has to be on the lower side of that band, and our focus and entire effort is that -- that somehow that we are in that band. But we will still be very, very close, if at all. But yes, let us see. Let quarter 4 go by. We are not changing for this year at this point of time our guidance.

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Sandeep Shah, CIMB Research - VP [76]

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Okay, okay. And just a few things on gross margin. If I look at, you do -- may have given some color earlier to the question. The gross margin on 9 months have gone down by almost 300 basis points. So apart from the headwinds, is it fair to say that incremental growth is coming at a bit of a pricing pressure? Or is it more to do with the subcontracting cost or more hiring, which are more like the investment-led kind of a margin pressure rather than a structural pricing-led margin pressure?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [77]

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Sandeep, it's a multitude of things that work in running a company and a portfolio. It is a mixture of the portfolio of programs and accounts that ramped up, which were, at times, high margin. It is also -- we have talked about, if you look -- we're all comparing it to 2019 numbers, where our margins actually shot up predominantly. And we have gone on record saying, we were probably not smart enough to invest back in the business at that time as well. But typically, again, go back to the simple thing that we want to be in that band. And all our efforts are to drive investments into -- back into the business so that we can continue the path of being relevant to our customers, being relevant to investing in the technologies that are important for the future, being relevant in acquiring companies that are going to help us be relevant in the new areas that customers are spending on and drive growth.

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Operator [78]

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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 [79]

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Sir, on the on-site billing rate, there has been a directional improvement over the last few quarters. So is it that the scarcity of resources, leading to a better pricing environment in on site?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [80]

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I think that is what we talked about, that there are different things which are happening in the portfolio. There are better prices or close to somewhere in offshore, you will compare to, more or less I -- we think our pricing has been stable throughout the 5, 6, 7 quarters, which you want to look. Quarter-on-quarter, some ups and downs can happen. But pricing on wage realization basis, it is more or less stable for the company. There are issues on the quarter. Sometimes transitions are happening. Sometimes something else is happening. But otherwise, I would not read too much into that.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [81]

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And the DSO, which has gone up by 9 days on a Y-o-Y basis, so do we see some moderation there? Because DSO including unbilled is now 110 days.

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [82]

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So this was a very, very -- in this quarter, in spite of very healthy collection, which we did, I called out 2 reasons: One is, of course, some of the unbilled thing got billed during this quarter, and they will be collected in quarter 4. And the growth spurt which comes, it always creates higher DSO for that quarter. So we expect to normalize our DSO trajectory in quarter 4. That's our endeavor at this point of time.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [83]

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And last one, sir, on the hedge gains. Can we give any guidance on that, how we should see -- I mean, what is the rate coming in for next year on the hedge position?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [84]

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So we have been giving you the book. We have been telling you that we do for 12 quarters. First 4 quarters, slightly heavier net exposure hedging actions, and it keeps on going down. Very difficult to tell you that what number would be, as we have explained. If rupee depreciates, revenue line captures and hedge gain comes down. If rupee appreciate, then revenue -- operating margin is slightly impacted, but we cover it through hedge gains. And that is why the whole philosophy of giving guidance on the profit after tax because we think our -- we have more control on that. So that is what continues. I don't want to say anything beyond that because we don't know how spot would move.

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Operator [85]

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(Operator Instructions) The next question is from the line of Rahul Jain from Dolat Capital.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [86]

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Congratulations on a strong start. Firstly, on any earnings status update, we would like to give on the pipeline growth and proposal stage and large-deal data that we shared in the Annual Day. And how many of them are still in the funnel see we have -- as we have added to our -- or it was that already accounted for when we give that data?

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Ashok Kumar Sonthalia, Larsen & Toubro Infotech Limited - CFO & Chief IR Officer [87]

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Yes, it's only one month since the time we did that. I don't know what else can I -- can we update you on that. But I think what we can, which Sanjay has alluded, we have only added to it in the last one month.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [88]

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And in terms of any outlook you want to share whether things that are changing from a macro perspective by the way you talk to clients because some of your peers are saying that deals, although they are strong from a booking as well as pipeline perspective, but they are sort of a little cautious from a macro uncertainty. Do we feel that in any manner?

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [89]

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This is the same thing which has been going on, Rahul, for the last 3 years, where all kinds of challenges have been there. But typically, we have always maintained that you have a good opportunity and pipeline in the marketplace because the transformation that is led by technology at this time is moving at a very, very fast clip as we see the world over. So -- and no, we see positive, but we're also aware that these macro challenges, protectionist environments, China trade wars, technology, reining more -- technology being reined in. All kinds of challenges are there, which affects all my peers and us as well. But where we stand, when we look at our customer base, when we look at our pipeline, where we are also optimistic that we can still continue to grow.

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Operator [90]

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

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Sanjay Jalona, Larsen & Toubro Infotech Limited - CEO, MD & Director [91]

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Thank you all. And again, wish you guys a very happy Makar Sankranti and Pongal. Look forward to speaking you next time, next quarter. Take care. God bless.

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Operator [92]

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Thank you very much, sir. Ladies and gentlemen, on behalf of LTI, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.