Alldigi Tech Limited (ALLDIGI) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '21 earnings conference call of Allsec Technologies Limited hosted by IIFL Capital Limited. We have with us today from the management Mr. Ashish Johri, CEO; and Mr. Raghunath Parthasarathy, CFO. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ashish Johri for his opening remarks. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining our earnings call today. In these unprecedented and tough times, I hope each of you continues to stay healthy and safe. Coming to the agenda for today, the results and presentation have already been uploaded on our website. Anything we say which refers to our outlook for the future is a forward-looking statement and must be read in conjunction with the risks that the company faces. These uncertainties and risks are included, but not limited, to what we have already mentioned in the annual report. I will now start with a brief overview of the financial performance, followed by key business updates, post which we will be happy to take your questions. Starting with my financial update, we have achieved a revenue of INR 73.5 crores during the quarter, a growth of around 2% over Q3 and INR 20.8 crore in operating margin, which is a growth of 4% quarter-on-quarter and 17% higher year-on-year. Our net profit was up INR 13.7 crores, which is also a 55% growth over the previous quarter. For the full year, we have achieved revenue of INR 276.7 crores, 6% lower than previous year, primarily due to COVID impacts in the DBS business in quarter 1 of FY '21. Our operating margin for the year was down 4% as opposed to the 6% revenue impact. It was down 4% at INR 75.4 crores against INR 76.3 crores in FY '20. This is a result of strong operational efficiency that we have garnered and achieved over this year. On business updates, I will kick things off by summarizing each key things and events for Allsec. Number one, improving top line growth in DBS North America continues to be a focus. In this challenging environment, we continue to focus on growing our top line in DBS North America. The international business had shown positive signs of growth with multiple customer wins in North American market in Q4 and a stronger pipeline going into Q1 FY '22. In FY '21, we also had around INR 10 crores of ACV wins that came in late FY '21 that helped offset other COVID-related volume degrowth for the existing customers. These wins in the coming financial year should also start providing a full year impact and boost our FY '22 numbers. Number two, HRO [ details ]. Our HRO pipeline and win rates are at historical highs, positioning us an industry leader in the large enterprise HRO market in FY '21. In spite of COVID, our revenue grew at 7%. This is in an environment where same customer employee headcount had shrunk by 3% to 4% by Q3. In a normal year, you tend to see 6% to 7% growth. So not only that growth did not materialize, instead, we saw a 3% to 4% shrinkage in employee headcount by Q3. And in spite of that -- this environment, we grew our revenues by 7%. Number three, increased wins and stronger pipeline in DBS North America is driven not only by a stronger sales fee, but also a stronger suite of offerings driven by alliances for digital solutions that we have worked hard at over the last 4 to 5 months and also leveraging the solutions that Quess and Quess group has across the board, digital solutions across the board. We have also ramped up our marketing and branding spend in North America and are seeing good traction in terms of a stronger pipeline. Number four, our cross-sell initiatives are also seeing traction. We've added around INR 2.5 crores in ACV cross-selling to our existing HRO compliance customers and Quess customers. And we continue to pursue this channel more vigorously in the coming quarters. Number five, HRO platform enhancement and SaaS products. We had announced investments into several landmark initiatives in the HRO business. We are making significant strategic investments in modernizing our existing enterprise platforms. We have also launched an exciting initiative to create a market-leading SME product that will help the company grow quicker in the coming years. This product is now in beta testing over the last 15, 20 days. This is in beta testing with friendly customers, and we can expect to continue expanding the beta program over the next 6 months, culminating in a market release by the end of this calendar year. Number six, our cash positions and collections have improved substantially. Our historical DSOs have always been robust. And yes, we have improved upon them further. Our current DSO is better than pre-COVID level DSOs, down at 51 days compared to the 56 days in March 2020. Cash flow from operations stood at INR 25 crores for the quarter and INR 70 crores for the full year, representing strong cash generation in a very volatile year. EBITDA to OCF was at 106% for the year as compared to 82% in FY '20, once again reiterating the strong collection focus and the working capital management done by the company. Number seven, cost optimization. This is an area of utmost importance for us. And we constantly look for opportunities to reduce costs where relevant while we invest in our growth. We have reduced our indirect costs by 11% over Q1, which translates to savings of around 80 to 90 lakhs per quarter. We have also expanded our HRO EBIT margins by almost 590 bps, driven by our digital innovation and automation. Finally, number eight, we declared a dividend of INR 15 per share for FY '21 in April and after the Q4 FY '21 financials were published. Total cash outflow for this was around INR 22.86 crores. This creation of dividend was driven by a review of our cash position, the cash needs over the coming year and keeping our shareholder commitments in mind. I'll move on to the more detailed business segment performance now. I will start with the HRO business. The HRO business continues to perform well to end the quarter at revenues of INR 26.4 crores, which is a growth of 9% over the previous quarter. We added 27 new customers and more than 85,000 payslips during the quarter. Our EBIT in this segment has grown by 6% almost over the last year. We continue to invest significantly in digital innovation in this business, which is driving both revenues and margin improvements. We find a lot of our HRMS and lead time attendance solutions are beginning to grow very, very quickly. This business currently has a high pipeline and our win rates are also at historical highs. We believe our growth rate, which was lower due to COVID, will not only be back to pre-COVID levels, but we should be comfortably over. I would also like to provide some update on a couple of key initiatives on this business taken by us. First, the platform modernization that we had, the payroll platform modernization program. It is progressing as per schedule. We intend to upgrade the platform to the latest technology to bring down the cost of ownership and provide a best-in-class user experience and also open up different lines of revenues for us with our customers. Key milestones have been achieved, and we expect to start onboarding new customers into this platform by the end of this year. The program remains on track, both on schedule and on budget. We also are making good progress on building a SaaS-based HRMS platform for the SME segment. The product is ready and, currently, we are testing with friendly customers. And we aim to perfect the product market fit over the next 6 months, with the market launch tentatively by the end of this calendar year. I will now move on to the Digital Business Services. The DBS business was the most affected by the COVID pandemic in FY '21, with our revenues in Q1 dropping by 14% over Q4 FY '20, primarily from the domestic business, which dropped by 39%. However, as you may have seen in the performance of this business over the last 3 quarters, we have not only bounced back but we have ended the year almost on par with pre-COVID levels of Q3 and Q4 FY '20. Our DBS domestic business, which is -- amounts to almost 22% of overall Allsec revenue, had experienced a sharp 39% drop a year ago due to COVID lockdown but, over the year, has recovered handsomely, and we've ended Q4 strongly. Our workforce rose to the occasion through the last 12 months and we deployed several cloud solutions, dialers, CRMs and cloud desktop to ensure continuity of service and also to drive new wins to client [ repros ]. This business, however, continues to be subject to the pandemic situation in the country and is likely to see some drops in volume in Q1 that we expect to recover quickly in Q2. On the North America business, which is 43% of overall Allsec revenue, I'm happy to state that we had 2 key wins in this geography, amounting to almost $400,000 in ACV towards the end of Q4 FY '21. And we have a larger pipeline of accounts as we head into FY '22. We also expect volumes in our North America DBS with our existing BFSI customers to start coming back to pre-COVID levels in Q2 FY '22. Our Manila site as well has reacted well to the situation, where we have 100% of our workforce operational either from office or working from home within a month of the lockdown a year ago. Our cloud solutions that we deployed in the international business have been instrumental not only in maintaining this business but have also yielded tough wins for us in this year. And we are building a strong pipeline of growth over some of these solutions. I would like to close now by thanking all of you for your support and also for being here today. We are open to taking questions now. Thank you.

[Operator Instructions] The first question is from the line of Jayesh Shah from OHM Portfolio Equi Research.

Congrats for a good set of numbers and the recovery that you have shown in such time. Can you give some idea as to what is the sustainable run rate in both the businesses and the outlook going forward? And the second question is while we are happy to see the dividend, I thought we'll be looking to preserve cash to do acquisition through this entity. So any change in plans here?

Okay. I'll take first part of the question and then also direct it to Raghu to add any comments. See, over Q3 and Q4 of last financial year, we've already hit steady state, especially Q4. I think all the pandemic-related impacts that we saw early in the year, they have been reversed and we've hit steady run rate, as steady as it can be imagined. These are very, very uncertain times. So it is very difficult to say -- to define what normal looks like. But Q4 clearly defines what can be called steady. From here on, the growth engines in each of the businesses and DBS and HRO should start kicking in and start taking us to new levels. But by and large, all our efforts have normalized and coming back to normal levels. Q4, I would say, is a steady run rate. In terms of the cash position, so we continue to be on the lookout for acquisitions as and when they come up. And I see -- if something attractive comes up, I don't see any change in our ability to execute those transactions. Raghu, do you want to add any comments?

No, I think that's fine, Ashish. And Jayesh, thanks for that question. I think the dividend that we declared was taken into account in terms of available cash and cash generated during the year. So we closed the year almost at INR 200 crores. So with that in mind and with the targets that we were looking at, we thought we should also reward the shareholders. So that's [indiscernible].

So do I understand that -- I thought -- sometimes, I think in the previous calls, you had mentioned about some active dialogue going on with the acquisition. So now do I understand that there is nothing on the table as of now? You are obviously open to opportunities, but there are no active discussions going on.

Jayesh, thanks for that question. There are active conversations, very early stage conversations that are happening. I'm not sure where -- what direction they will take, but we do have active opportunities that we are considering. And over the last year, there have been more than one opportunity that we have looked and then declined because it simply didn't fit our strategic vision.

Okay. Just a follow-up on your earlier reply, I thought that both the businesses you have for payroll and digital -- DBS are essentially regular recurring annuity kind of business. So just wanted to understand, how is it that you end up losing a customer or something? Or how does these things happen? Is it purely because of pandemic? Or there would be some element of such occurrences, which should be considered as natural or normal?

Jayesh, so most of the impact last year was not us losing customers, although there are small customers that have retracted. But most of the impact is business volumes going down with existing customers. So in North America, for instance, similar to India, there is a moratorium on collections. And over the last year, their telemarketing business has come to a stop. So obviously, those aspects of the business will come down, volumes will come down, whereas some of your other area, volumes may go up. So that's really the issue here. It's not about customer lost.

I see. So will they bounce back to the pre-COVID level?

Yes, yes. So through this year, we've already seen that in domestic, where volumes where all the customers came back, until, of course, a couple of months ago when this current situation happened. North America, in some pockets, volumes have started to come back. The moratorium on collection still continues in North America. It is rumored to be lifted by August. So our customers are -- given that indications of the same that starting August, those volumes should start coming back.

Okay. And how much is the collections business for us that is impacted because of this moratorium?

I don't have a specific number for you. Our DBS North America business is around 43% of the revenue, and the collections bit probably is under 10% of that.

Okay. Okay. And okay, so going forward, what is the normal growth rate that we should be looking at from here on, considering that we have looked at -- we have achieved some kind of stability?

Very difficult to predict what is normal in this given that the pandemic situation continues. But I expect the DBS business to have nothing short of 15% year-on-year and the HRO business to be north of 25% -- 20%, 25%. That would be a normal-ish year, in my opinion.

I would request Mr. Shah to rejoin the queue. [Operator Instructions] The next question is from the line of Shrey Loonker from Motilal Oswal Asset Management.

Just if you can help us understand the HRO business a little bit more deeply. Maybe you can start with what is the lay of the land? And how are market share trends trending? Given that this sector is so new to us, some education would be very helpful.

Shrey, so thank you for that question. Look, we -- Allsec is in -- the legacy is, of course -- and I'll keep my answer short. So free to discuss more at length with you through a more formal conversation that we can set. But I'll keep my comments a little brief. Look, Allsec's market has always been large enterprise and the legacy has been stable. Over the last couple of years, we have provided end-to-end HRM solutions, hire to retire, including compliance, and compliance is a business that we inherited from Quess. What that -- this market largely tends to be -- the large enterprises tend to be anything over 2,000-odd FTEs. That's really the market we have played in historically, although we are now making efforts to go down and serve other segments as well. This current market space tends to be more managed service, given the complexity of the organization. And Allsec continues to dominate this market, both in terms of win rates and the solutions that we have. Win rates are very, very healthy. We feel we are -- we can compete with anyone in the industry on this, purely on a merit perspective. Our win rates have been very, very healthy over the last year and pipeline of large deals also looks very, very reasonable. Based on what we know in the industry, we think our market share has grown consistently over the last 3 years. And again, based on -- this industry is not very good at publishing a lot of data on its size. But based on what we know, we think we are in the top 2, 3 players in the country on size at this point.

And Ashish, just a follow-up on that one. What differentiates the players above what from where we are in terms of offerings and in terms of -- maybe in terms of qualitative and quantitative, if you can help us [indiscernible] that?

Look, the difference between us and the largest is not very much at this point. The investment has shrunk. ADP is probably the largest in this large enterprise market. The difference between them and us is they have a global presence, right? So they are -- they started from North America, but they have a global presence. So hence, there's North America customers, there is similarity and there's brand awareness for ADP. That's the presence. Where they lose out compared to us is -- and we won deals against ADP, large deals against ADP, I think they are a good competitor, and I don't want to denigrate them, but I think we have better localized India and our country solutions. They are a little deeper and functionally richer.

Sure. That's helpful. The second question was, I mean, today, your -- almost 70% of your EBIT comes from HRO on a run rate basis and 30% from DBS. If you could just give me a sense that over the next 3, 5 years, how should this mix shift?

Shrey, I lost you for the early part of your question. You'll have to repeat, I'm sorry.

No problem. I was just wondering that today your -- 70% of your EBIT comes from HRO and 30% comes from DBS. I'm talking about the EBIT mix. So if you could just help us understand the way your vision stacks up today. How do you think this mix will kind of trend towards over a longer range? I'm not looking for absolute numbers, I'm just looking for a direction towards the mix shift.

Right. Right. In the -- I think, first off, Shrey, the 70-30 is not entirely correct. I think it is more like 50 -- or 55-45, I think it's more in that range. But that said, the HRO business is a higher-growth business. So the mix will continue to shift towards HRO. And HRO is also the higher EBITDA business. So the mix will continue to shift towards HRO for the -- at least for the next couple of years.

That's helpful. And just the last one before I fall back in the queue, is given that now, I mean the [indiscernible] question, we've kind of gone through a very tough phase remarkably well. And given the cash position, do you think it's probably an appropriate time to have a dividend policy in place?

Yes. So I'll take that, yes. I'll take that, Shrey. So we are working on a dividend policy, and that will be up pretty soon, yes. So that's something that we can look forward in the next quarter.

[Operator Instructions] The next question is from the line of Saurabh Ginodia from Stewart & Mackertich Wealth Management.

Sir, I have a couple of questions. In your opening remarks, you mentioned that we have [ unsunk ] business by cross-selling to Quess customers, I think, which was in the tune of roughly INR 2.5 crores. So just wanted to get some thoughts, are we getting any kind of help from the side of Quess with respect to marketing in U.S.? And if so, what are the other areas where Quess can help us?

Sure. So I'll answer the question for North America, and then I'll also come with broader areas of collaboration. In North America, we actually have a joint go-to-market plan with CTS, which is Quess' technology division. Their business, GTS business, in North America is largely insurance oriented. And for insurance customers, both Allsec and MSX and GTS, we have a joint go-to-market strategy, selling to insurance customers. It's a joint proposition that's taken. We also share -- we have a few common sales focus as well that we leverage. And both sides, both Allsec and GTS organizations know each other's offering relatively well. Training has happened, et cetera, et cetera. And there is almost a daily conversation flow that happens between the sales organizations on both sides in terms of deals, opportunities, solutions, et cetera. So that's on -- and we've also jointly created solutions specifically for the insurance customers. So that's on the North America side. Similar is the story on the domestic HRO side as well, where we share work actively with the Quess group on cross-sell initiatives. There is a very formal team and function house in Quess, which drives the cross-sell activities, and we collaborate on almost on a daily basis, sharing new leads, solutions, customer insights, et cetera, sharing leads across both sides of the table. And there have been wins as well. So on the HR side as well, there is a lot of activity. Beyond just sales, there are other areas of collaboration as well. So Conneqt, which is the domestic BPO business of Quess, we work very actively with them to shore up our offerings and a lot of our digital solutions are built with Conneqt expertise. So a lot of our wins now coming in North America have leveraged Conneqt's expertise and digital solutions. We also, on a lot of the IT work that I spoke about, our investments in our platform modernization, we also use and leverage Quess's [ IP wing ] and IT technology capabilities in a lot of those investments. All -- most of our heavy IT projects, both the payroll platform and the SME platform, we are leveraging Quess' IT capabilities very strongly. So that's a much broader collaboration -- view of the collaboration that we have with Quess.

Okay. Sir, my second question is with respect to mergers with Conneqt. So Mr. Ajit in the last AGM said -- has been on record on the AGM by saying that Board will be coming out with some kind of a clarity with respect to merger with Conneqt before 31st March. So sir, what is the like development on that side?

So we continue -- so Allsec, we're not aware of any development on this merger plan. Any developments in this regard, as and when they happen, we'll, of course, keep the analysts and the shareholders informed. But so far, no developments yet.

Sir, where I'm coming from is that because this has been an overhang on the stock valuation for quite some time. So any clarity on this side will be quite useful and it would create value for the minority shareholders.

No, no, I understand, and that's exactly what I'm telling you. There is no development. There is no further progress on this or developments on this concept so far at this point.

Okay. And sir, third and the last question from my side is that we have been hearing from the management for quite some time regarding this M&A. So any time line which you can share? I heard you saying that we are looking and we are in active dialogue with 2 people for the inorganic opportunity. But any time line that you can share, it would be quite helpful for us.

Look, we continue to look actively for the right opportunity. And over the last, I won't say 1 year because of the pandemic, even North America, M&A market had stalled early last financial year. So over the last 6 months, there are multiple opportunities that we have looked at and gone into deeper management conversations with targets. But none of those have -- and there is one that we are doing right now. But none of those stand out simply because we couldn't see a fit. And we walked away, we chose to walk away from those opportunities. At this point, it is tough to put a time line. I hope we find something soon and within the next month, we can announce something. But [indiscernible]. So look, it's tough to give a time line, but we actively are looking at offerings or targets, especially in the insurance space.

Okay. And any size which you have in mind for this acquisition?

No. Right now, that -- for the right opportunity, we will see. We don't have any constraints like that. Right now, I can't comment on that any further.

[Operator Instructions] The next question is a follow-up from the line of Jayesh Shah from OHM Portfolio Equi Research.

Ashish, just a follow-up on the EBITDA margin. When I looked at the presentation, I see that in the fourth quarter, EBITDA has moved up by 400 bps, but the EBIT for both the segment business remains the same. So I was unable to reconcile that.

Yes, I'll take it. That's because in Q4, we had FX gain, while in the previous quarter, it was FX loss. So the FX gain improved the EBITDA margin for Q4. But for the business uses, we don't take that into account. So that's why you see that delta.

So FX gain, you consider at a company level rather than for a specific business.

Correct, correct, correct. Because most of the FX is coming from my cash balance which is [indiscernible] mark-to-market.

Okay, okay, okay. And overall, the current cost base is one we should say the normal cost base? Or it can still go up as and when you see this normal fee from COVID?

So what will happen, Jayesh, is that we will see some costs going up as we get back to work. But most of that cost will also get knocked out because we have some additional costs incurred for COVID. So the current cost base should be more or less there, and we'll continue to work on improving on cost save opportunities.

Right, right. And when I look at the HRO business and when I look at the quarterly numbers and the growth that we have seen, the EBIT has remained kind of in the same percentage level. So is there no operating leverage? Or am I missing something?

So the EBIT's kind of moving up, but it comes in chunks so we had a clear movement from last quarter -- last year to current year. So as we work on more and more projects, you'll see that movement coming in.

Okay, okay. And my last question is, again, a follow-up based on the previous question on the Conneqt merger. Whilst I know you can't tell us what the time line or whatever, but is there any synergy or benefit by merging with Conneqt? You all work together.

Yes, yes. So Jayesh, look, I'm not going to comment on the merger because there is no such information. From an operating and synergies, we work very actively with them, leveraging their offerings and also winning capability, sharing capabilities from both sides. So there is very active conversation that happens. In fact, we have created offerings for their customers and likewise.

Okay. So within the overall Quess portfolio, the connection that you have is actually just to the Conneqt organization, is it?

No, no. We have Conneqt with pretty much the entire group of companies in Quess. So on the Conneqt side, I just mentioned, on the GTS side, North America, I spoke about that earlier. On the staffing business, et cetera, and the workforce management business, we actually share opportunities. There is constant dialogue that happens, almost on a daily basis, sharing customer insights, sharing leads, et cetera. There is a very formal structure in place both in Quess and Allsec to meet that very seamless. So there is a very formal structure enabling that collaboration.

So as an outsider, what I can't furthermore understand is, is there a natural synergy or a benefit that if at all the merger happens that it has to be through Conneqt? Because I thought it should happen through with Quess, which is another listed entity. And I'm not asking you to give me a specific answer, just the thought process in terms of understanding as to how you work with Quess.

Jay, I think that's a great point of conversation. I'm not sure I can comment on this. But it's a great point of conversation as we get together with Quess on this.

The next question is from the line of [ SA Narayan ] from [ Capricorn ] Research.

At Allsec, we seem to be having a glass ceiling. We seem to be stuck under it. We seem to be stuck in a sub-INR-300 crore revenues for a few years now. The last time you crossed INR 300 crore was in March '17 and in March '18. What is our strategy to grow and reach a critical figure like, say, INR 1,000 crores? In fact, if I look down the figures, I see our PAT seems to be stuck at some INR 60 crores. What is our medium-term plan? What do we have to really, really grow?

So I think I have addressed components of the strategy, but I'll recap a few. First, the big levers in this growth, and when you start talking INR 1,000 crores number as a benchmark, the biggest lever has to be on the DBS side of the business. The DBS North America strategy has to start clicking. The sales engine has to start clicking. And even on that, larger deals, which are more consultative rather than reactive and get shapes which are not RFP-driven, it has to be deals like that. And we continue to work at getting to that point. That requires your -- one, of course, you need to have strong capability, but it also requires connects with a different level of organizations. You need to have connects with the analyst community in North America. You need to have connects with the VCP firms who drive a lot of that kind of work. You need to have connects with digital solutions companies, alliances with digital solutions so that you can do joint GTM. So all of that ecosystem, we are working on. A lot of our alliances, digital alliances, are falling -- beginning to fall into place, and we are already beginning to see wins come as a result. Our analysts and VCP connects are beginning to happen. We had meetings and the volume of meetings should start going up over the next quarter or so. So that's on the North America and international DBS. On the HRO side, there are a few different levers. One is your international growth. So Middle East and Manila for us, those are focused geographies, those are levers for growth. In India, the SME segment, and that's a much longer term, that's not going to happen in the next 2 years or so, we are talking longer than that. That is another growth lever from a revenue perspective. And then just a pure -- the bread-and-butter HRO business. There, we are already set up for larger numbers and outsized growth. I think the only thing we need to start doing more of is alliances with other folks from a channel partnership perspective and joint GTM, et cetera. That's the thing we're going to focus on this year from an HRO perspective. But the other, from an offering perspective, the ingredients are already there in the Indian business.

Any other question, Mr. Narayan?

Can you hear me? I'm sorry, can you hear me?

We can hear you now, yes.

I'm just -- so a follow-up on that. Can you give me a kind of time frame, a ballpark time frame, when are we likely to reach these? Someone like me has been waiting for over a decade to see this company grow. I just want to know what's happening. I mean, we seem to be stuck making efforts, but what is the time lines that one can think of?

Mr. Narayan, unfortunately, I can't comment on the time line, I can't commit to time line. And your point is very fair. It takes in and misunderstood that we need to break out of this [indiscernible]. And we continue -- the way we're working, the way -- the things that we are doing and the way this business is working is markedly different from how it was run earlier. There is a lot more emphasis on reaching out and market spacing, alliances, joint GTMs, et cetera, right? So the right actions are happening. On the time lines, unfortunately, I will not be able to comment.

As there are no further questions from the participants, I now hand the conference over to Mr. Ashish Johri for closing comments.

I'd like to thank everyone for being here today. It is a great Q&A session. I look forward to the questions. They give us a sense for -- they not only validate our strategy but give us a lot of insight into where we could do things differently. So thank you so much for those questions and insights. I hope all of you continue to stay healthy and safe. Thank you so much. Until next time.

Thank you. On behalf of IIFL Capital Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.