L&T Technology Services Limited (LTTS) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q2 and FI27 earning conference call of L&T Technology Services Limited. As a reminder, all participant line will be in the listen only more, and there will be an opportunity for you to ask questions after the presentation conclude. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sandesh Nai, Head of Investor Relations. Thank you, and over to you, Mr. Sandesh.

Thank you, Dhanesh. Good evening. Wishing you and your family a happy festive season. I am Sandesh and welcome you all to the earnings call of L&T Technology Services for the second quarter of FY27. Our financial results, investor release, and press release have been filed on the stock exchanges and are also available on our website www.ltts.com. I hope you've had a chance to go through this. This call is for 60 minutes. We will try to wrap up the management remarks in 20 minutes and then open up for Q&A. The audio recording of this call will be available On the website, approximately one hour after the call ends. With that, let me introduce the leadership team present on this call. We have with us Amit Chada, CEO and MD, Alin Saxena, Executive Director and President, Rajiv Gupta, Executive Director and CFO, and Munjay Singh, Chief Operating Officer. We will begin with Amit providing an overview of the company performance Good evening, everyone.

I thank you all for joining the call on this last day of Navratri and wish you and your families a very happy Navratri and Dashera. With our investments in EI and diversified portfolio, we are addressing a broader market with our customers, resulting in accelerated sequential growth across revenue, profitability, large deals, and AI revenue. Large deal wins from earlier quarters are converting into revenue, and we are continuing to have a robust pipeline of the same. Let me move to key highlights of quarter two. Revenue was $317.1 million, up 2.7% sequentially and 4.8% year-on-year in constant currency on a continued operations basis. EBIT margins improved 60 BIPs quarter-on-quarter to 16.3, delivering ahead of timeline on our aspiration for mid-16% EBIT levels. Large-deal TCB was at 203 million across segments, with over 50% of them being AI-led wins. Both order backlog and pipeline are up year-on-year. Sustainability continued to grow and delivered It's strongest growth in the last six quarters. Mobility sustained its growth momentum, and tech remained steady, with gross margins improving across all segments. We completed a divestment of our SWC business on schedule, giving us a sharper and more focused portfolio. We would like to recognize our SWC employees for their amazing work and wish them all the best in their journey. Moving on to EI, which is the center part of our strategy. EI has an annualized-led revenue of $120 million for us in this quarter. Our deep domain expertise, proprietary AI toolkits, and a growing ecosystem of academia and industry partnerships are expanding our addressable market and creating new revenue opportunities. LTTS's EI strategy spans across three areas, EI for engineering, EI for products, and EI for manufacturing and operations. We made progress across all these three areas in the last couple of quarters. EI for engineering, as the V model moves to a W model, we are embedding EI across the engineering lifecycle through a human plus agent delivery model. In one of our major engagements, we are helping clients accelerate time to market by 50% with 40% of the code being generated by AI. To date, we have upskilled more than 16,000 engineers, about 67% of our workforce in AI. EI for products. EI1 is our platform of 100-plus EI solutions, is gaining client traction. Our AI patent filing crossed 253 this quarter, taking total patent count across the company to 1808. EI for manufacturing and operations, we launched a new EI lab in partnership with NVIDIA to build and deliver next-gen physical AI native applications across manufacturing, robotics, and supply chain. We conducted multiple AI readiness workshops for clients in collaboration with MIT Media Labs and expanded our partnership ecosystem to include Cognite, Anthropic, NVIDIA, and Databricks. Innovation remains central to our long-term agenda with a focus on frontier-applied research and emerging technologies to address evolving market needs. Looking ahead, our farm program will connect deep tech startups with clients to accelerate innovation and bring in new technologies to the market. The LTTS Distinguished Fellows Program recognizes and empowers technical leaders who drive innovation, create business impact, and represent LTTS as global industry leaders across the forums. Moving on to segmental performance. Mobility. Mobility has delivered a phase of steady growth with revenues up 2.3% sequentially. Growth came from auto North America, aero and rail, and trucks and off highway. Auto Europe remained muted, but we believe it should bounce back next year, and we continue to see significant large deals in the pipeline in Europe. We are working on building capabilities in system engineering and diversifying with new-age mobility providers to work on advanced transportation platforms and digital microservices. Aerospace continues to grow strongly as clients continue to expand production, modernize supply chains, leveraging digital transformation. Rail as a sub-segment is growing for us, supported by freight rail, rolling stock, modernization, and digitalization. In Trucks and Off Highway, we added four new logos across global OEMs led by EI with wind-spanning autonomy, AI, embedded software, and digital programs. In a strategic deal, a leading automotive technology provider renewed and scaled their engagement with us for AI-powered engineering across product and digital engineering. In summary, mobility is showing sustained growth and we expect strong momentum ahead driven by a robust pipeline across geos and ramp-ups of large deals. Moving on to sustainability, sustainability continued to be a strong growth engine, up 13.4% year-on-year and 4.9% quarter-on-quarter as we execute multiple large deals, one over the past six quarters. Nearly half of our Q2 large deal wins were in this segment. Industrial products growth is led by data centers, energy transition, motion and robotics, and AI-enabled automation, with electrification and smart manufacturing driving a robust pipeline. A leading cleaning equipment manufacturer selected entities to design and develop robotic machines. In plant engineering, demand continued steadily across oil and gas and chemicals, supported by LNG, Upstream, and Non-Conventional Energy Projects. In CPG, we partnered with a leading food and beverage company to scale its Industry 4.0 framework, enabling IT-OT convergence and enterprise-wide AI readiness across its global manufacturing operations. The sustainability segment is on track to deliver another double-digit growth year. Finally, on tech. Tech was stable this quarter. The demand was driven by client investments in agentic AI, AI infrastructure, cloud native, modernization, data center software, advanced connectivity, and semiconductors. Tech Infra and Semcon delivered another strong quarter, while media maintained steady. We have set up a dedicated data center, engineering business line, servicing, AI infrastructure, servers, storage ecosystem, ODMs, and OEMs. We expect it to become an important growth area as customers redesign infrastructure for AI workloads. As filed earlier, we won a large AI-led engagement with a global telecom equipment provider to design end-to-end systems spanning AI in data centers. This program started ramping up in the current quarter. In mid-tech, we are expanding in pharma and life sciences while demand remains healthy across digital health, diagnostics, and connected devices. In the current quarter, a specific program ramped down per schedule, and the next phase will kick in only in H2. In software and platforms, pipeline quality is improving. Pure play software world is impacted with the adopted of new H2s, AI tools. We see demand for AI-led software development across existing and new logos in retail, fintech, and platform companies. Providing you two more inputs, one on business landscape, and then we will summarize. On business landscape across our client interactions this quarter, the common theme is that clients are doubling down on growth. This makes us cautiously optimistic about their investment plans. Technology spending is shifting towards AI infrastructure, silicon, cloud platforms, data centers, and time to market. We have aligned our portfolio per our Lakshya 31 strategy to these priorities, And our EI capabilities help clients improve productivity in current programs and free up investments for next-gen technologies. To summarize, Q2 was a good quarter. I'd like to thank our clients, our employees, our stakeholders for that, with improved growth, margins ahead of plan, and our strategic investments gaining traction. With our order backlog and pipeline both improving year-on-year and several large deals in play, we expect revenue momentum to further strengthen in H2 while sustaining healthy EBIT margins. Growing demand for our EI solutions, diversified portfolio, dedicated large deal engine, and improving regional opportunities gives us confidence in our medium and long-term trajectory. This progress supports our long-term aspiration of 13-15% revenue CAGR with EBIT margins in the 16-17% range over the next 3-5 years. With that said, I am going to stay back for questions. I would like to request Rajiv to provide his comments.

Thank you, Amit. Greetings to everyone. Wishing you and your family happy Navratri and happy Dashera in advance. Let's start by sharing key highlights for the quarter. Q2 F5-27 was a strong quarter across all key parameters. Large deal wins of $203 million, sequential revenue growth of 2.7% in constant currency terms, grid margins of 16.3% with margin expansion across all segments. Pleased to share that we have been able to achieve our committed mid-16% margin aspiration ahead of time by a couple of quarters. Disciplined capital allocation towards building scalable business and profitable growth is yielding results. Sustainability, our most profitable segment grew double-digit year-on-year basis at 13.4% and now contributes to 38% of our revenues. Our quarter to FI27 annualized EPS came in at 143.12 INR, which is an increase of 23.5% over FI26 EPS. We successfully concluded this investment of SWC business in this quarter. This resulted in a one-time gain of 165 crores in quarter to FI27. With that, I will move to Q2 financials starting with the P&L. Revenue for the quarter was Rs. 3,040 crores representing growth of 3.4% sequentially and 12.1% year-on-year. EBIT margin for the quarter stood at 16.3%, improvement of 60 basis points sequentially, and 220 basis points year on year. Effective tax rate for the quarter was 26%. Going ahead, we expect ETR to remain in the range of 26 to 26.5%. Net income for the quarter was 548 crores, up 53.7 sequentially, and 66.8% year-on-year. This represents 18% of revenue. This includes a one-time gain of Rs.165 crores from disinvestment of Smart World Business. EPS from continuing operations was Rs.35.78 for the quarter, translating into analyzed EPS of Rs.143.12 and compared to reported FI26 EPS of Rs.115.89, an increase of 23.5%. This improvement reflects our disciplined capital allocation towards sustainable, profitable growth, and investments in new technologies aligned with our long-term strategy. Other income was 17 crores for the quarter, higher compared with the previous quarter, while absorbing forex volatility and currency movements. Moving to balance sheet and cash flow, let me highlight the key line items. Q2 F527 overall DSO came in at 78 days. This is split as bill DSO of 60 days and unbilled DSO of 18 days, which remains stable versus 77 days in Q1 F527, well below our guided range of 80 to 85 days. With disinvestment of smart world business now complete, henceforth we will report overall DSO. Our year-to-date free cash flow was Rs. 790 crores, a healthy 108% of net income. Our cash and investment stood at Rs. 4,197 crores end of quarter 2 FI27 compared with Rs. 3,394 crores at the end of quarter 1 FI27. The board has approved an interim dividend of Rs. 20 per share reflecting our focus on creating value for our stakeholders. On revenue metrics, revenue in dollar terms was USD 317.1 million compared with USD 309.9 million in quarter one, FI27, which is a constant currency sequential growth of 2.7% and year-on-year growth of 4.8%. On segment margin performance, we saw margin expansion across all the segments. Mobility margins in Q2 improved to 16.9%, up 130 basis points sequentially, resulting from quality of growth and operational efficiencies. Sustainability margins saw improvement to 29.5%, up 40 basis points sequentially, supported by execution of large deals and strong growth in this segment. Tech segment margins improved to 12%, up 50 basis points sequentially. Ramp-up of a recently won AI-led engagement with a global telecom equipment provider also aided in margin improvement. On the operational metrics for quarter 2, FI27, our offshore mix improved to 55.9% in the quarter, reflecting our continued efforts in improving offshore mix. Fixed price mix improved to 35.6% in Q2, progressing towards higher value fixed price and outcome-based engagements. Client profile remained stable on a sequential basis, reflecting the strength of our customer relationships. Client contribution to revenue remained broadly similar compared with Q1FI27 across categories. Headcount marginally increased from 23,845 in Q1 to 24,035 in Q2. Attrition remained largely range-bound at 14.7% during the quarter. Realized rupee for quarter 2 FI27 was 95.9 to the dollar. Depreciation of 1.09% compared to Q1 FI27. Now, before concluding, I will share a bit around the margin outlook. We achieved our margin aspiration of mid-16% EBIT levels ahead of time by a few quarters and aspire to maintain this margin range in the near future. Our margin levers mainly will be revenue growth and healthy segment mix, operational efficiency including AI-led productivity gains across delivery and functions, and discipline SG&A management. We remain confident of our growth trajectory supported by a healthy pipeline, deal ramp-ups, student capital allocation, engineering intelligence-led execution, and continued operational discipline. We expect these factors to draw stronger revenue growth for us while sustaining our margin performance and recreate our aspiration of 13-15% CAGR over the next 5 years with margins in the range of 16-17%. I take this opportunity to thank our investors, analysts, and stakeholders for their continued trust and support, and the entire LTTS team for their dedication and resilience. I will now hand over the call to the moderator for questions.

Thank you.

Ladies and gentlemen, we will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touchstone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will now begin.

Ladies and gentlemen, we will wait for a moment while the question queue assembles.

First question comes from the line of Ravi Menon with Axis Capital. Please go ahead.

Thank you. That's some really good performance. You know, in the past, we've seen that the sustainability segment, you know, was a bit volatile. I think you were trying to move towards more annuity deals, and the way you've now shown really good growth in the last couple of years, does that have you moved successfully? Can you talk a bit about, you know, how much of the revenue of long-term programs and, you know, how you managed to bring down the volatility in this?

Hi, good evening. So the question is, how did we bring down volatility and sustainability, right? Okay. See, over the last two years, if I look at it, there are two or three things that have thematically changed, right? Number one, when we look at sustainability, we have now got that business split up into four broad categories, if I may. And the four categories that we have broken up that business on is oil and gas chemicals is part one, FMCG is part two, energy automation is part three, and industrial machinery and building technologies is part four, right? So, one, we've basically homed in in these four areas. We've defined, redefined our offerings, and the offerings are broken up into, you know, almost like service industry into mod 1, mod 2, mod 3, or gen 1, gen 2, gen 3, and we have doubled down on it. If I look at the oil and gas chemicals business that we've got, we've been able to win some large term relationships that are trust with our clients. Those are continuous work volumes that continues to stay steady, increase over a period of time, and they're almost like you're moving from supporting one refinery to do some design to a second one to a third one, but across the landscape of that client type. The second part is that we have invested in creating solutions for digital twin in this area, and not just that, we are leveraging AI, so it's not single variable and single dimension, but multiple dimension, multiple variable solutions, right? Right? And that is helping reduce downtime for our customers, helping them on planned shutdowns, etc. So that's the second part. I'm going to give you one example. There are various solutions we have created. The third part is that as the six-layer AI cake has unfolded, there is work happening across the six layers, and the layer starts with energy. Right? So we are seeing work coming in that area on a continuous basis. Finally, you know, given work that we have done and solutions, this has always been a moat for the company for the longest period ever. And with the double focus that we've had, we've been able to win large deals in this area. In fact, one of the questions earlier used to be that you have won large deals, you're not growing. So a lot of those large deals that we got last year in sustainability have actually moved to revenue and execution right now. And current quarter also, more than 50% of the deals are in sustainability. As I look forward in the future, we are actually bringing in a lot more AI content into this part as well. And we believe that this will be the next wave to help us to sustain the growth that we've had.

Thank you so much for that detailed answer. And on the mobility side, you know, the German OEMs are still, you know, I think in restructuring mode. But do you expect that that segment to come back or, you know, are you more diversified beyond that? What can drive growth in the segment?

So, there is a, so number one, see, we look at our mobility, we've got auto US, we've got auto Europe, we've got TNOH, and we've got aero and rail, right? Those are the four broad components. And we've said in the past that auto contributes to about 50% of our mobility revenues. So, we're not overtly dependent on auto Europe, right? So, what we have seen happening in the last two quarters for us, and we had shared this earlier as well, that auto US has a clear strategy and they are in execution mode. And we are seeing that benefit. TNOH execution mode, seeing that benefit. Aero and rail in execution mode, seeing that benefit. Auto Europe has been in a problem. In fact, current quarter also we face some headwinds from Auto Europe. But we do believe that Auto Europe should come back sometime next year. In fact, we are working on a lot of solutions on AI-defined mobility. We are working on OEM software, sovereign entity that we are working on. And we believe that this will, along with the alternate energy part or EV, BEV part, will create the next phase of cycle of growth. Again, you know, early days, working through it, you've seen growth in the last two quarters in mobility should continue.

Thank you very much. One last question for me, you know, aerospace, let us talk about a new single aisle aircraft program that Airbus might start. Any ideas on, you know, when that could be and if that could benefit us?

On a lighter note, I've been waiting to fly in such a plane for the last five years. So on a serious note, I think a little more to be done in that area. So we'll see.

Okay, thanks so much for selecting.

Thank you. Our next question comes from the line of Vivo Single with Novama Equities. Please go ahead.

Yeah, hi. Thanks for taking my question, and congrats to the LPTS team for a solid performance. A couple of questions from my side. Just digging a bit deep into the verticals. In the sustainability verticals, you mentioned both plant engineering and industrial. kind of contributed to the growth. So, in the oil and gas vertical specifically, are we seeing any challenges due to the Middle East situation at this point of time? And not just in that vertical, on the overall business also, any challenges which we saw in this quarter or you foresee in the coming quarters? Second question on the mobility vertical, you just mentioned that you expect the European auto part to basically come back next year. So is that comment just for our portfolio in terms of the means that we are seeing? Or do you believe European auto companies themselves might be able to turn around next year in terms of their CAPEX spend and could be positive for the industry as a whole? Just two questions and then probably have one more follow.

Sure. So, we're going on oil and gas. I want to say that most of the work that we're doing for oil and gas companies, chemical companies, LNG companies is largely focused right now on the US and Europe. We have very little business going on in the Middle East, right? We're trying to build that out, very little business going on in the Middle East. So, the impact is not there. We are seeing a lot of these medium-sized projects getting kicked off in oil and gas in the U.S., in Europe, and digital projects and AI projects coming. We are seeing that as a positive. But at least overall, it is a very small part of our portfolio. Our heart goes out for whatever is happening there, but the impact, we don't have any significant business impact from that yet. Having said that, as these things drag on, God knows what will happen, but right now we are not worried about this at this stage. Now when we come to Europe Auto, so Europe Auto, there are two things happening. See, like US Auto, what they had done last year was that they had gone ahead and done some write-offs clearly from the technology, and they had moved very sure-footedly towards, you know, hybrid vehicles, right? And therefore they started SDV, they started AI Native Solutions, all that, and they are seeing the positivity of that. So, Europe Auto, at some point, will have to step back and potentially do whatever they have to do in terms of write-offs, etc., and re-baseline themselves. I believe that time will happen. A lot of companies are talking about it. Some are doing it. So, I do believe that should clear up in the next 6, 9, 12 months, if you look at it. Number two, what's happening is there's a number of local European service providers that, you know, still continue to work on old ways of working and models. So those are getting getting replaced by augmented by India Inc. And that's the second one that we believe will happen. You know, with our investments in Munich, with our EI center that we have set up and others, I do believe that we do get a fair chance and share to be able to win.

Got it, got it. Now, that was really helpful. Just one question now for you one more, and then I have one follow-up for basically on the financials part. So, basically, on the high-tech vertical, I think the numbers were, of course, a bit almost off the side. You alluded to that in the opening remarks as well. I think the telecom piece for us is doing well. It's the media and the remaining business, which is probably not firing as the other segments are. So, any cover on that, and when do you think that Vertical should also start supporting the growth of the overall business?

Sure. So, if I look at, so there are four parts in high-tech. There is the med-tech piece, right, where we had this one program, significant program that ramped down, and the follow-on program didn't start, right? So, that's been that piece. Outside of that, we have been having a fair degree of smaller wins in the med-tech space. The second area is SEMCON that continues to grow for us and is differentiated for us. The third is the tech infraspace where we have won this program, AI-led program for communication. And the fourth is the media piece, right? And the fifth actually is the systems and platform which we bought with IntelliSwift. So the systems and platform piece has actually improved in margins for us sequentially as well as year on year. And we do believe that that growth trajectory will accelerate sometime in quarter four and beyond. Media will be steady. I don't expect anything great from media. Tech Infra will show growth because of the deal that we have won. Semcon will continue to grow. Medical, I would like to say quarter three, but I'm going to be careful and say quarter four because I want to give a little time to our teams as they regroup, rebuild, and take things forward. So, overall tech for you will be muted in quarter three, but beyond that, we do see growth coming back.

Got it, got it, sir. Sir, that's really helpful. Just one last question for Rajiv. Rajiv, you mentioned our DSO days now is at around 78, including build and unveil. These are the numbers that we are comfortable with, or do you think post-devestment of SWC being complete, there could be further scope of maybe improving it from these terms?

Hi, Vibor. So, I will say at this point, we are comfortable. The range that I have provided is between 80 to 85. I think we are operating well, you know, under that range. So, fairly comfortable. This is where we likely operate.

Got it. Great. Thank you so much for taking my questions and with you all.

Thank you. Our next question comes from the line of Jyoti Singh with Hightong Securities. Please go ahead.

Thank you for the opportunity, and sir, congratulations on the good execution. So, my question largely on the bookkeeping side on SWC exit parameter. So, this discontinue number, we cannot expect in this, in upcoming quarter, and like operational line is around 36 million. So, now we can expect zero from next quarter.

So, yes, I have. So, Jyoti, thank you for this question. I did highlight this is a one-time gain in quarter two. The one-time gain is 165 crores. And now this is, you know, completely a business that has been disinvested. So, what you will see going forward, quarter three will be only the continued part of the business while we have reported it as part of whatever the accounting principles separately for continued and separately for discontinued. Going forward, we will only report continued business.

Okay, thank you, sir. And a follow-up question on the Europe side. So, like we continue to see downside in Europe and fell around 4% year on year. So, are we seeing any changes in the ER&E budget side from your top clients? Or still, it's flat or shrinking?

Ashir, Europe grew for us quarter on quarter and year on year. Maybe there's something to do with the currency billing that we had. But we've got Alain Diyar who runs growth markets and large deals. Alain, would you like to talk about the momentum in Europe?

Thank you. So, look, Amit has already covered the auto, so I will not spend time on that. But if we look at the other sectors, so pretty much the AI infrastructure, let's spend, which is there in Europe, is there. So we are seeing the effects of that and what you see in sustainability growth, part of that is coming from Europe as well. Plus, we are fairly gung-ho on the plant side of the business as well. So, both of them, industrial and plant, will continue to grow in Europe. We are opening up a few more areas in tech based on some of the recent wins that we have. Europe will stay cautious, as I said, on automotive, but otherwise we see a fair amount of growth happening, and I would suggest that if we look at maybe a quarter down the road, the consolidation deals that we have been talking about, they can also contribute to the growth that we see in Europe, and we remain pretty gang-go about what can happen over there.

Sure. Thank you, sir. And so, just two more questions from me. One is on the furlough side, how we are expecting in Q3? And are we seeing this momentum to hold? And another, just 28, how is the deal we are shaping up?

Okay, so two answers here. One, in terms of we are not providing quarter on quarter on annual guidance. What I am confirming is that H2 will be better than H1. We expect regular furloughs to happen. So that's the lay there of the land. Now in terms of deal wins, look, this quarter we've done 203 million. I still owe you all 100 million dollars from last quarter. I haven't forgotten that. And I'm looking at my colleague here as I answer this. So, we will make sure that we get you the extra 100 million in Q3 and Q4 because we want to keep to that 200 million pace. Lastly, ma'am, your question around next year, it also, as you have seen, right, sustainability we had these last quarter, last year, and now this quarter as well. So, it's coming to revenue. So, similarly, you will see these coming to revenue. That's the focus that we have got. Our pipeline is up more than 25% year-on-year. Order bookings are up. So, knock on wood. Let's see where it goes.

Okay, great, sir.

Thank you. Our next question comes from the line of Bhavik Mehta with J.P. Morgan. Please go ahead.

So, a couple of questions. Firstly, if I look at our daily TCB over the last few quarters, it was very strong, right? The question was the ad bar converting into a premium, which seems to be playing out right now. So, if that is what is playing out in the environment and, you know, can you just help what has changed at the clients and, you know, why are they spending now, you know, given the macro series remains uncertain, you know, what has changed from a client perspective, which is driving this conversion to the venues and, you know, helping the growth. And the second question is on margins, you know, good to see, you know, you're hitting that mid-16% band this time. But in the near term, how can we think about, you know, sustainable margins going forward? I mean, will there be a case for a growth margin rate of where the margins remain around 16.5 before you think about expanding margins? Because, you know, you're just trying to understand what to be the exit margin by full-time because that will set the pace for next year margins.

Bhavik, thank you so much. So, Bhavik, if I look at what's changed in the last few quarters, see client conversations actually, I'll tell you, have been very positive with the AI CapEx spends Across chips, across software, across industrial electrical companies, across telco infra, it is powering up a lot of companies and a lot of spend. So that's a positive that we are seeing. Second, when I go talk to our clients or our executive team is going and talking to clients, they are largely focused on growing their businesses in spite of the unstable environment rather than cost cutting. So that's a big second that we are seeing as a shift. Third is, everybody wants to get some help on AI and say, how can I make myself more resilient and productive? So our AI one strategy, etc., is playing out, if you ask me, in our favor in that area to take things forward. Also, I believe that we are about 9 to 12 months ahead of competition and peer group in this area. So, we are actually gaining market share as opposed to competition. So, all those three put together, I remain cautiously optimistic, you know, in terms of the fact that, you know, growth has accelerated actually across the three quarters. And let's see where it goes. So, that's where that is. Do you want to talk about?

Let me take that. Bhavik, thank you for bringing up the margin. I did clarify in my commentary, but let me add to it. So, in terms of margin, we, in quarter two, came in at 16.3%. Like we said earlier, this has been two quarters ahead of time. Near time, you should take it to be at these levels, around the mid-16% EBIT levels. A few things what has helped us in terms of getting to these margin levels. One, of course, the segment mix has improved. I did talk about sustainability revenues now almost contributing 38% of overall revenues. Second, the AI revenues now have clocked $120 million on an analyzed basis. The third, quality of revenue is improving across segments. So, in fact, mobility as well, right? We talked about auto US and all of this is adding. There are still levers, but we believe some of that we will continue to double down on growth while maintaining margins at these mid-16% levels.

Okay, got it. Thank you. Thank you.

Our next question comes from the line of Ankur Pant with IFL Capital. Please go ahead.

Hi, thank you for taking my question. Just wanted to understand your view on wage hikes for this year. How are you looking at that? That's my first question. I'll follow up with this.

Why don't you give us a second question also, then you'll answer it together, brother.

My second question is, I'm sorry if I missed this, but it was around your comment on 2H and strengthening the momentum from here. So, how does that translate in terms of numbers, given that 2Q growth has been 2.7? So, when you say strengthening momentum from here, does that mean better growth from 2.7 as a benchmark, or how are you looking at that comment?

Excellent. So, second question first, and first question second, in terms of where we see growth, I talked about H. So, if I look at our H1 performance, right, you can make your math on year-on-year and quarter-on-quarter. What I am confirming to you is that H2 will be better year-on-year and quarter-on-quarter than H1, sequentially as well as year-on-year, right? So, that's number one. I'm not getting into the quarter on purpose because, you know, we are getting into this muted quarter. We'll see where it goes. But again, I'm not, look at the end of it, I would like to deliver profitable growth. That's why we're here, right? So that's one. Second, wage hike is conformed to all the employees. We will be doing wage hikes in quarter three. And we have released a note to that effect to our employees. And the margins are, you know, remaining in the mid-16% levels is after considering all of this.

Sure. Thank you. All the best.

Thank you. Next question comes from the line of Sandeep Shah with Equus Securities. Please go ahead.

Yeah. Thanks. Thanks for the opportunity and congratulations on a great set of numbers. Most of the question has been answered. Within your opening remarks, you also said that clients are accelerating AI-led engineering and the spend. So, what is driving this for you as well as for the industry? Is it clients are shifting spend from cloud, hyperscaler, and GPU-based subscription to the system integrators more on the engineering side, or that trend is too early to call out?

So, I want to request Munjay to add to what I'm going to say here. So, number one, look what we are seeing definitely is that AI is a board question that's coming to all our CXO community. What are you doing to leverage AI? Are you leveraging it enough? Etc. So that is creating a push top-down on using AI, number one. Number two is, in all our daily lives, we have started to use AI, whether it be ChatGPT, whether it be Anthropic, whatever, whatever, in a significant manner. So your work, work, work, work, people that are there, right? Your teams, they are using it and are very familiar with it as well. So now this is the confluence of both of those, where the demand is there. Now, the legacy spends are going down. No two questions about it. And that is why that move, money is shifting, if I may, to AI, number one. Number two is, the overall budget is also increasing in line with respective companies' growth. So somebody is growing at 5%, their budgets are expanding as well. All right? So, one, that's happening. Second, there's a shift within. And that is why we've invested early on, about a year ago, we've been talking about this. Now, the data center offering, we started two quarters ago. We didn't talk to you about it because we wanted to get some wins. We've got a win in that area. So, part of that is what we are going and overall addressable time is going up for us. Would you like to address, Munji, on what we are doing on AI specifically?

Thanks. So, let me give a little color on what the shift is. A, people have stopped using this POCs, and they are looking at a broader process which can deliver a P&L impact. So, that's a big change which has happened in the market. All of our customers are looking at that. Secondly, what they are trying to do now using AI is to do things faster. So speed is very important. Because they can do it faster, they are looking at their ability to accomplish a process change or a migration from A to B in a quicker time frame. Three, what has happened, and that is very relevant to us, is the, as you know, in the market, the context for training these AI agents is very, very important. And we bring that to the fore. So our ability to bring the context is one of the biggest modes that we have when we have to shift the narrative when we discuss the client. So if you look at the combination of all three, we are seeing large, complex programs which can shift some P&L of the client is being considered for execution, and we are getting a lot of that. So, I think that's what Amit is alluding in terms of expansion of the market. Because we are able to do, we are playing into a segment or a deal that was not available to us earlier, and we are able to execute that.

Yeah, thanks. Thanks, and all the will.

Thank you. Next question comes from the line of Dibesh Mehta with MK Global Financial Service Limited. Please go ahead.

Yeah, thanks for the opportunity. Two questions. First of all, just want to understand how we define this EI-led revenue. Can you help us understand? And is it 100% new, which let's say we're not there part of our revenue two, three years back? And what kind of profitability it operates? Because one of the reasons for margin expense indicated is mixed change. So if you can give some sense around it. So that is question one. And second question is on the wage I. You indicated effective quarter 3. Can you give some sense about the likely impact from VEJAIC?

Okay. So, why don't we request Rajiv to take the VEJAIC? On the AI revenue, I want to request Munjay to talk about how does he qualify AI revenue. Margins we are not going to give out on service lines. You are not doing that right now. But needless to say, I want to tell you that we do charge a premium. If you have a project, you can give it to us. We will charge you a premium. You will realize how much we are charging. Here we go to you, Munjay.

And that's how we are tracking, and the number that you see around 9.5% for the quarter, which is like 120 million odd. Profitability, I'll let Rajiv handle that.

So, thank you, Dabesh, for the few questions that you put up. Let me take the wage hike first. So, I think we did mention that we have already announced the wage hike in quarter three. The impact likely will be in the range of, I would say, 50 to 80 BIPs. We are still working out the modalities, but we will clarify as we come and talk around the quarter three commentary. On the AI-led profitability, Dipesh, at this stage, we will not like to quantify it. I think what you will see is the implication and the impact of it on the overall LTTS profitability. So, like you're seeing, and I did talk about it earlier, the AI-led revenue is, in fact, a lever for margin improvement and will continue to be so. So, I hope that answers your questions, Dipesh.

Thank you.

Thank you.

Our next question comes from the line of Karan Upal with Philippe Capital India. Please go ahead.

Yeah, thanks for the opportunity. Two questions from my side. Firstly, with the AI-infused deals in the mix and a lot of platform offerings across verticals, any change you are seeing in the tenure of deals versus, let's say, two years back? That's the first question. Just want to understand if the average tenure are increasing, decreasing, or staying stable. Second question, Amit, is on the AI data center build-out. Can you elaborate what role LTTS is playing in it? What are the kind of deals that LTTS is pitching in and the deal sizes and deal tenures? Sure.

See, average tenures have actually increased a little as opposed to reduced. And our focus always is to try and bring more ACV than TCV. But it is what it is, right? Clients in engineering take a little time to start. So, tenures are expanding, staying the same. There's no significant change that I can call out, right? See, with the 100 million deal, it will be 5-7 years. If it's a 50 million deal, it will be 4-5 years. If it is a 25 million deal, it will normally be about 3 years. A 10 million deal will be between 2-3 years. So, these are norms that are there, right? That's number one. Number two, when we look at data centers specifically, if I look at, there are about approximately multiple layers here, right? So for the physical infrastructure, we work through the OEMs, the electrical companies, the HVAC companies, all these, and that revenue for us is showing up in sustainability. The GPU bring up infrastructure validation work as well as building cluster, baselining, etc. is something that we are seeing in the tech vertical that you got. Then there is the control plane, there is token metering software to be done, like, you know, usage token ingestion, automated invoicing, anomaly card raise, all that kind of stuff. And then observability, autonomous AI ops, and finally agents on top. So there's about six, seven layers here, and we are a service provider. So we can work with anybody who's setting up a data center and running a data center on a new cloud to be able to help them. Now, our first business that we've actually done a lot of work on is a physical infrastructure piece with the electrical OEMs and the HVAC companies. And we are starting to do work with the other layers as well. As you go forward, you will see more and more of that happening. In fact, the deal that we won with the tech infra major is for them to service a data center on communication.

Got it, got it. Thanks for the elaborate question. Just one more question on the European auto. So, is the business stabilized or it can further drag the mobility vertical from here on? And if you can also quantify how much is the European auto for you in the overall?

So, currently, we don't qualify exact numbers on European Auto, but Alain, if you want to give an answer on European Auto. Right, right, right.

So, look, I mean, you've been reading what's there in European Auto in general. So, our feeling is that it's going to be steady for now, for the next about six to nine months. We don't foresee further decline happening in European Autos. But the growth that we have been talking about, that we see, should start coming back in the next 9 to 12 months. Now, if you read about auto in general, the North American companies or the OEMs which were there, they have very clearly articulated their strategy about what kind of cars they are going to bring out and what kind of technology will go in their cars, right? So, once that is done, now it gets to execution, which is why you see North American auto revenue go up. Similarly, if you look at Japan, they have recently declared on their positioning on the car models and so on over the next few years. And we all talk about three, four years in future. European auto is still to do that. And that is what we believe will happen as we look at early next quarter or so. And once that happens, then again, they will get back to execution and it should go back to the ramp up that we're expecting or 9 to 12.

Great. Thanks, Annalise. Thank you. Our next question comes from the line of Chandan Kumar with Narnolia Financial Service Limited.

My question is, you have disclosed Annalise Engineering Intelligence-led revenue of $120 million. And the AI-related deals are accounted for over 50% in Q2 of large deals TVV. Could you clarify how much of $120 million annualized revenue translate into the actual revenue recognized during this quarter?

So this quarter, Chandan, the revenue is $120 million annualized. So you can divide by 4 and check it out. Now, if I look at the AI deals that we have won with more than 50%, they will go into operation, right? So some of that, in fact, last quarter we had AI revenue, we tracked was a lot lower, it's expanded. So you will see this expansion as you go forward from these deals that you've got. A significant part of those deals have not operationalized, if I may, or very marginally operationalized in the current quarter. Sure.

And maybe to add to Amit Chandan, so we will continue to quantify this every quarter, right? So you will see that the AI-led revenues improving quarter-on-quarter. I think to be able to say that, look, 50% of that overall deal win, what does it translate for AI revenues? I mean, these are over, you know, 10 years, right? So you will not be able to break it down, but we will certainly quantify on quarterly basis how is the trend in terms of AI-led revenues.

Okay. Thank you.

Thank you so much. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for the closing remarks. Thank you and over to you, Tim.

Thank you. Thank you all for joining us on the call today. We hope we were able to answer your queries. If there are any follow-ups, we'll be happy to address them. With that, we are signing off for the day and look forward to interacting with you through the process. Wish you all a very happy dasera and a good day. Thank you.

Thank you so much, sir. Ladies and gentlemen, on behalf of L&T Technology Service Limited, that concludes today's call. Thank you for joining us, and you may now disconnect your line.