Given the very sharp decline in India business and Tech vertical, would a major part of this restructure be in the SWC business?
No, I would not land that case. A lot of it is POs that were being routed to India on Tech labs that we have taken out. Plus Middle East and Europe. We don't want to take in empty calories. SWC had Telco-Infra and Cyber parts - Cyber has won three new contracts (less than $10 Mn), and Tech-Infra in US is growing on connectivity. Middle East appears promising. We expect to finish all of this by March. We wanted to be transparent that by Q4 end the floor will be middle digits, with potential for slight upside. This is the right time to make this pivot on margins and get to the 16.5% EBIT range.
Once rationalization is over, can we assume SWC seasonality leading to volatile growth will no longer be valid starting next year? And to CFO - we are cutting low-profit portfolios but margin milestone has not been changed. Could it be better than 16.5%?
We seem to be in love with Mobility on some calls and SWC on some calls but don't like Sustainability which is the highest profit margin in the Company. We are looking at our portfolio very seriously. Please allow us till April when we come back with that kind of clarity.
Follow-up on margins - should we have seen probably an acceleration in EBIT improvement?
Rightly acknowledged. At this point, there is a little bit of prudence that is baked in. I probably will come back in Q4 to clarify. Our intent is definitely to deliver earlier than what I am guiding for. But at this point, it is more prudence that I have maintained that time period.
On the on-site shift - when do you expect this to move offshore? Is this a strictly temporary issue?
We have hovered around offshore ratio between 56% to 58%. I would not at this stage guide for where it stands to be in Q3. You will see a few quarters and this will come back to that range.
What is the nature of this restructuring exercise? Are some clients/divisions being shut down? Looking at the breakup, the major restructuring appears in Tech segment and India business - is the large part predominantly the SWC business that we acquired, also leading to margin improvement?
Huge capex spends are happening in Data center build-up and Energy build-up area in the US, creating follow-up opportunities in Hyperscalers, Tech Infra, Semcon, and IP. We are also seeing re-industrialization of the US. People are moving from AI for enterprise to physical, digital plus industrial - what we call Engineering Intelligence. So we narrowed our focus into specific areas that will give us extraordinary growth. We don't want to play in a commoditized business. With our board's guidance, we have closed parts of Tech segment in Israel; small Mobility/Tech business in Europe with old technology; couple of US clients on older technology where we were counting revenue from India because PO was from India - shut down the lab and returned equipment to customer; and did not accept new orders in some Indian customer areas that were not adding value.
Is the restructuring exercise done or could we see more steps being taken in Q4 or coming quarters?
If I had only assumed Q3, I would have given higher single. I have taken everything into account and telling you the floor is mid-single and you will be done. Maybe a little bit here or there, we will just play.
Going forward, do you expect more margin expansion from this restructuring exercise or have we plucked most of the fruits? Does this also benefit DSOs in coming future and help getting them down?
Margin improvement will continue - that's why I provided guidance of mid 16% levels between Q4 FY27 and Q1 FY28. Three factors: Intelliswift acquisition integration plan continues to show margin improvement sequentially; recalibration exercise largely lands in Q3, solidifies our ability to grow in futuristic profit pools; Sustainability double-digit YoY growth and large deal wins continue. Mobility green shoots - YoY EBITDA from ~19-20% has come down to ~15% but will turn around from Q4 onwards. We aspire for that mid 16% range. On DSO, we will continue to improve - I have given a range of 110-115 days, our aspiration is to improve even beyond that.
Project Lakshya was in place for more than 2-3 years at a group level. Why suddenly this exercise versus three months ago we were not thinking about the same? There have been more than 2-3 restructuring exercises in last 3-4 years, but somehow organic growth is not picking up. What will change in terms of organic growth?
Lakshya is not a 2-3-year program. It's a 5-year program. First Lakshya was 2010-11 to 2015-16, then 2021 to 2026, and now we will do 2026 to 2031. Next 5-year program starts April 1, 2026. We have restructured into segments and have six sales teams in North America, four regional teams outside, total 10 teams - this gives us $200 Mn TCV for five straight quarters. Sustainability wins are playing out, Mobility turning around, Tech if I include the dropped stuff would have grown double-digit. We have two choices: stay in commoditized business that becomes dilutive, or pivot before getting commoditized. The market is pivoting to AI - physical, digital, industrial combined. This is our first restructuring in this space. Our teams have done well in identifying and taking decisive action within the same quarter.
Some context around margins - support for customer has come off, currency benefit, businesses cut down but headcount still flattish. Is the margin benefit from cut down likely to accrue more in next quarter and beyond, or already factored in this quarter? When are you giving salary increases? Deal wins consistently strong - when should we expect that to start showing up in higher growth?
Margin improvement came from three areas: improved quality of revenue and operational efficiencies (Sustainability grew, selective choice of portfolio); discontinuation of strategic support; rupee depreciation. Going forward, margin improvement will come from 3-4 areas: sharper capital allocation towards higher margin segments (EI), selective choice of portfolio and geography, operational efficiency with AI-led delivery (Munjay our new COO is championing AI), and Intelliswift integration over 6-8 quarters.
On wage hikes and deal wins question
We will provide wage hikes to all our employees worldwide in Q4. We have baked that in into our estimates. On deal wins - Sustainability and Plant subsegment as well as Industrial Products have ramped up. The Mobility win in Q4 has not ramped up as expected and is still going small. Smaller wins (sub $10 Mn) in Mobility have helped. The biggest hit on furlough quarter is in Mobility, mostly US/Europe. Despite that, Mobility sequentially grew. Mobility has bottomed out. In Tech, deals ramping up other than that one deal called out earlier - if I keep the business I walked away from, would have shown double-digit growth and sequential growth.
As we get into next quarter with wage increases, any puts and takes on margins? Will we be able to offset the wage increase?
Wage increases in Q4 could likely have an impact of about a percent. But we will continue to see improvement in margin because we factored this. Like Q3 200 bps gross margin improvement, that will somewhat pan out, not to that extent, in Q4 between gross margin or SG&A. About a percent of increment impact will get absorbed.
Clarity on Tech vertical margins - last year Q3 EBITDA basis was higher. With restructuring, what is sustainable EBITDA in Tech a year or so down the line?
Q3 FY25 we had EBITDA of 11.5%. We have come in at 10.6% in Q3 FY26. We would aspire for between 12% to 13% EBITDA range in Tech sector. Work left and we will continue to see this over a period.
On the deal won with luxury OEM covering infotainment systems - is that purely project-oriented work or is there a bit of IP also bundled?
There is a little bit of IP bundled in that, and part of that is renewal, being completely transparent, and part is new. We have bundled the IP we created including our AI solution for improving productivity for the client.
On the Australian Enterprise high-value engineering center deal - which segment would that fall under?
That is LNG. LNGs will come in Plant Engineering. Most of the work will be offshore.
When SWC acquisition was announced 3 years back, analysts expressed the same concern. Three years out, what has changed for us to claim this is a great strategic trade going to the level of saying many of these businesses may become obsolete?
The business we have rationalized is not strategic for the future. 15 years ago we were on mechanical engineering with Tier 1s; 5 years ago we decided to move to OEMs and EV/Software - today 80% of Mobility comes from OEMs. Things change. On SWC specifically - the part we rationalized is Middle East/Europe Tech, plus US Tech with old technology that would be commoditized in 18 months (returned equipment), plus Indian customers we did not accept new business from. Smart World cybersecurity and Telco Infra found foothold in US/Europe; data centers in US/Middle East. Please give us more time to come back to you.
Given this is a 3-year-old acquisition, what is the incremental discovery here that led to this rationalization? And is this entire restructuring happening entirely out of SWC or other parts also?
Number one, parts of Tech serviced through Israel have been shut down. Two, parts of Tech we were supporting from India on INR billing showing up as offshore for India revenue have been shut down. Three, very small parts of old Mobility stack work in Europe shut down. Four, Indian clients where we did not accept order at lower margins. FusionWorld.ai continues. Smart World cybersecurity continues overseas, smart world delivery continues in India. The premise that all rationalization is smart world is incorrect. We will come back within Q4 on what else steps. Markets we operate are US, Europe, Japan, Middle East and profitable parts of India.
Is the $200 Mn deal intake 5-quarter average sufficient for aspirational organic growth considering rationalization and mix change? Can you quantify impact of restructuring? On SWC seasonality in Q4 - whether usual seasonality will be seen in residual SWC?
We aspire to move from $200 Mn clip to $300 Mn, then $400 Mn, $500 Mn. To accelerate growth we should move to $300 Mn clip. On SWC restructuring impact - had we not let it go, you would have had double-digit growth. Now you will have mid-single digit growth. So you can do the calculation of the impact. I have taken that into account and given that as a floor. New deals coming in could change Q4 picture - we will keep you updated, will be as transparent as we can be.
Considering the restructuring exercise to make organization future ready, any impact on FY27 growth trajectory or will exercise end by year end?
We should end the exercise. Our current plan is that the exercise will end by March 31, 2026 and we will be able to go forward from there. That is the current plan.
Follow-up on restructuring impact and large deal win sufficiency
Large part of restructuring exercise has already been done in Q3. Impact that flows into Q4 is baked into mid-single digit growth - no more coming in Q4. On $200 Mn deal wins, that is not the only barometer for revenue growth. We operate through our order book which gives definite view in terms of revenue growth, plus large deal wins accelerate revenue growth. So large deal wins are not the only way.
On Mobility - couple of quarters ago you mentioned US Auto companies confused between EV or ICE (Ford's recent step is testimony) and Europe facing competition from Chinese. What gives you confidence that Mobility could be at the cusp of a turnaround? On Sustainability - is Plant Engineering doing well and will it continue given tariff uncertainty?
Mobility for us is three different verticals: Auto, Trucks & Off Highway, and Aero & Rail. We see deliberateness coming in Auto. Wins done earlier are ramping up leading to growth. SDV solutions we built are beginning to bear fruit. On electrification - some write-offs by US automakers but momentum on SDV remains. T&OH is a little soft for now but Aero & Rail (especially engine manufacturer and rail companies) remains positive. We remain very positive about this sector.
Follow-up on Mobility/Sustainability/CPG
US bottomed out, we expect growth from here on - deals have started ramping back up organically and on sub $10 Mn small deal wins. On Europe - they are taking out higher cost suppliers and moving work to India Inc, so India industry will benefit. Sustainability growth coming from IP and PE both. PE is getting more work in industrial AI and digital and physical AI. Plant getting work because of build-out in LNG, Oil and Gas, CPG. Both areas expanding for us. Right now between CPG and Oil & Gas, CPG some project got over and another going to start. Oil and Gas chugging along. Diversifying into LNG - next play in Middle East and Australia. The Australia win in LNG is good for credentials.