Cyient Limited (532175) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q1 FY '21 Cyient Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Krishna Bodanapu. Thank you, and over to you, sir.

Thank you very much. Good evening, ladies and gentlemen. And firstly, my apologies for having this call this late in the evening. As you know, given the current situation, logistics are becoming quite a bit of a challenge. So our Board meeting only closed about an hour ago. So this was the best time that we could do. And I really appreciate you taking the time to be on this call today evening. Welcome to the Cyient Limited's Earnings Call for the First quarter of Financial Year 2021. I am Krishna Bodanapu, Managing Director and Chief Executive Officer of Cyient. Present with me on this call are our Executive Chairman, Dr. B.V.R. Mohan Reddy; President and Chief Financial Officer, Mr. Ajay Aggarwal; and President and Chief Operating Officer, Mr. Karthik Natarajan. Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in our investor update, which has been e-mailed to you and is also posted on our corporate website. This call will be accompanied with an earnings call presentation. Details of the same have already been shared with you. With this, let me take you through the highlights for the quarter. We posted quarterly revenue of INR 9,917 million. This signifies a de-growth of 7.6% on a Q-on-Q basis. In U.S. dollar terms, we posted revenue of $130.6 million, which is a de-growth of 12.5% on a Q-on-Q basis and 11.6% in constant currency terms. Services revenue stood at $112.2 million, which signifies a de-growth of 15.2% on a Q-o-Q basis and 14.3% in constant currency. EBIT margin stood at 5.2% for the quarter, lower by 328 bps on a Q-on-Q basis. Services EBIT, however, was at 6.7% for the quarter, which is lower Q-on-Q by 283 bps, primarily because of lower volume. DLM revenue for the quarter stood at USD 18.4 million, which was up 8.5% on a sequential basis. DLM EBIT stood at minus 4.6% for the quarter. Net profit for the quarter stood at INR 814 million or INR 81.4 crores, which was a growth of 8% on a Q-on-Q basis. Free cash flow for the quarter stood at INR 2,163 million or INR 216.3 crores. Free cash flow to EBITDA conversion for this quarter stood at 138.1%, and Ajay will explain the details a lot more in his presentation. Now coming to the business highlights for the quarter. I think we had a very good quarter in terms of some of the deals that we have signed. One that we achieved was a deal that we signed with Hitachi Rail, where we signed an agreement to deliver a series of engineering service projects to support and accelerate evolution of their signaling technology. And we will operate a Central Delivery Centre for them in India and a Regional Delivery Centre for them in the U.S. You would have seen a press release to this effect a few months ago. In addition to Hitachi, there were 2 other new deals that we signed, which are multiyear, multimillion-dollar deals. And what I would like to report on that is that in spite of all the challenges that we face, I think our sales pipeline is doing very well, and we are being able to drive momentum into the sales process and into closures in spite of the challenges that we face with not necessarily being able to travel. We also signed a collaboration agreement with Microsoft for we have an IoT Edge Gateway, the 5400. It is a very unique solution in the sense that it combines hardware and software together. And it's been a very interesting solution. And now that it is certified by Microsoft to be Azure compatible, it can go into a lot of applications where the data also has to go into the cloud. We also commissioned the Hyderabad DLM factory. This is one of the most advanced electronics manufacturing facilities in India, and it is underpinned by the latest technology in factory automation, Industry 4.0 and supply chain management. It gives us a very good advantage because it's located close to our design centers. And also, it gives us the advantage of being able to showcase some of the services technologies that we are implementing for our customers in terms of automation factory -- sorry, in terms of automation, Industry 4.0 and so on and so forth. I'll also say that we have added 25 new customers -- sorry, what you see in front of you are some pictures from the facility. It has been commissioned. We are now doing qualification runs. And serial production will start from August 2020. We have added 25 new customers in addition -- or I guess, including the 3 that I talked about, which are strategic long-term deals. On top of that, we've added another 22 new customers in Q1 FY '21, which is, again, a good reflection of the fact that closures are continuing. We are cognizant of our dependence on the top 5 customers, and we're looking at de-risking this concentration in the long run. Of course, this is easier said than done. But growing the next set of customers is a strategic goal, and what you will see over the next few quarters is we are making some very rigid focus on that. In terms of -- also -- sorry, also I want to reiterate that we are very confident in the long-term future of the organization. And in that context, we've also made 3 very senior hires. Felice Gray-Kemp joined us in the U.S., but she will be the Senior Vice President and Global General Counsel, so she has a global responsibility. And she comes with a significant amount of experience in the number of general counsel areas such as legal, compliance, risk management and so on and so forth. We also added Meenu Bagla as Vice President and Chief Marketing Officer. Meenu also comes with about 20 years of experience in marketing. And the mandate to her is really to strengthen the -- both the outward facing marketing and also the communication that we do internally because while the Cyient brand is very strong, probably we could do a little bit more in terms of communicating more forcefully and effectively. Lastly, we also added Richard Palm as the Vice President of Supply Chain for DLM. As we had talked about previously in many instances, the key to the success of the DLM business and the key to competitiveness of the DLM business is a strong supply chain. We believe that -- Rick actually comes with 25-plus years in this area, having managed multibillion-dollar electronic supply chains for people like Jabil. And he will be -- he's based in the U.S., but he will be responsible for our global supply chain as we procure a number of components from a number of places that can ultimately be manufactured in India or elsewhere. So my -- what I would like to reiterate on this is that we continue to be very confident about the business. And therefore, we're bringing in some very, very competent individuals, both to -- both into some new roles that have been created, but also into roles where we can show significant amount of difference to our business and really participate in the growth that is going to happen going forward, which we will talk about. I also want to quickly highlight the fact that we have been a very good corporate citizen in these rather difficult times. The first priority or the first and foremost priority has been associate health and associate safety. We've done a number of things to make sure that both physically associates are safe, but also this is a unique situation where people are not able to go about their daily routines, which means that mental health also becomes quite important. And therefore, we've done a number of things over there. We have worked with the government in deploying technology for effective management of COVID-related -- or COVID-related issues. For example, we worked with the Telangana government in deploying drones to help them manage the areas that are affected or potentially affected by COVID a lot more effectively. For one of our key customers, Molbio , we have significantly ramped up manufacturing for them to produce COVID testing devices, and that's something that we've done very quickly. And we continue to double down on our existing commitments, though as many of you know, primary education and child education is an important aspect for us. Though that has come down because a number of schools are closed, we continue to do a number of things in supporting communities that we work in, both India -- both in India and outside of India. So that is where the -- our commitment to our corporate responsibility continues. And as things return to normal, we will continue that commitment. With this, I would like to hand this over to Ajay, who will take you through detailed financial performance for the quarter and the year. Thank you. Ajay, over to you.

Thank you, Krishna, and greetings to all of you. And again, thank you so much for taking this call a little late, especially for the people from India. So I'll present to you the financial update. Let's go to the revenue slide, please? First, I would say that this quarter, I think, internally has been very satisfying. It has been in -- we have delivered in-line results in terms of what we were expecting. The predictability for us to plan our revenues and cost has improved during the quarter. And we had initiated, and we had talked in the last earnings call our focus on cost optimization and cash conservation. And you would see that some of that is showing up in the results. So let me start with revenue. As Krishna already spoke about, these are some of the numbers in terms of the revenue, $130.6 million, quarter-on-quarter change of minus 12.5% in constant currency. That's is a little better year-on-year, about minus 16.6%. At services level, it is minus 15%, and for DLM, it is 8.5%. In terms of geographies in line, only thing I have to report is in terms of APAC we are seeing significant upside, and the traction in communications in APAC is really coming back. And Karthik will talk more about the segments. In terms of the profitability, I would say that we had a lot of focus in this quarter in terms of cost optimization. And we worked both on revenue and cost to the plan. And that's reflected in some of the numbers that you have seen. If you see our reported margin for the quarter is 5.2% in terms of EBIT and in terms of the EBITDA that is reported as INR 511 million. And if you look at this margin, let me give you some sense of it, that from the perspective, and we've provided annexure on the details of the margin movement, which you can read. The gist of it is that there have been headwinds and tailwinds, and there have been one-offs, and some of those one-offs will not be there in the next quarter. So if you look at -- we have worked on the cost optimization that involves restructuring cost. We definitely had some headwinds on the absorption with a decline of 12%, 13%. We also had onetime adverse revenue mix, which is not expected in next quarter. And then in absolute terms, there has been significant reduction in SG&A. We have improvement on the operational metrics, and obviously, we got some benefit from the FX also. So that's why, if you look at a services level, we have 6.7%. My sense is if you take off some of the one-offs because these comparisons are to the Q4. If I look ahead to next quarter, I think the 6.7% could go to 9.5% for services, plus/minus 0.5%. That's what it means in terms of the one-offs because some of the restructuring costs and other elements will not be there in next quarter. And for the group, I would say that some of the gap, which is there in DLM is a one-off. We had some write-off of inventory. Also, we had more mix of low-margin jobs in this particular quarter. We expect that gap to go down. And at least we expect us -- for the group to go around about 8.5%, plus/minus 0.5%. So I think we will be back -- as we had said in the last time, we will be back to the quarter 4 level of margins in quarter 2 with these initiatives. Yes. Just go back to the earlier slide, please. In terms of profit after tax, I think it has been a good quarter for us. We have also got some export incentives. We have disclosed the amount of that, that's about INR 510 million. We have disclosed that as part of the other income, and that's showing up both in profitability and cash. But I think in these tough times, we've focused on various recoveries both from the government as well as from the customers, and that focus has helped us both on P&L as well as on the cash flow. ETR, I would say, quite normal, a little bit higher because of the tax on the export incentives that is there. And I would say that's what is reflective of tax rate. Quickly, I'll go to the cash flow. I think we have generated during the quarter one of the historical high cash flows for a quarter, INR 2,163 million or INR 216.3 crores and the conversion is 138.1%. I already talked about FDIs that has -- the export incentives that has helped us. This is an annual incentive, which is there. So this will not be there in the rest of the year. And also some of it is also when you have the decline, the potential to recover on the working capital is high. So these are 2 things which have helped us. But in terms of the cash conservation, we have really applied ourselves on various incentives, be it collections from government, collections from the customers. We have looked at various incentives, either from the government side or any other incentives. We also looked at working capital management. There is a significant drop in inventory. Our papers based, we are trying to improve. So there's a lot of focus, and that's how both in terms of our cash position and cash flow generation we are doing fine. And I can assure you that both for H1 as well as for the year, this focus will continue, and we will generate a cash flow at higher rates than what we have generated in the last year and last couple of years. I just want to also mention here that some of you had a problem in reconciling the free cash flow with the SEBI format of results. So we have aligned that, and now you will find that our free cash flow is aligned to the SEBI format. We have stated all the numbers in the same line. But again, I would say, because of the restatements, the impact for the current period is about INR 7 crores. For any of the periods in the earlier also is not more than INR 10 crores, and it works both the sides. So I just -- this recap is just to make sure that we follow and don't have any confusion as per your request. But in terms of the numbers, it's very, very -- it's not going in one side or the other side. So if you have any questions, more than happy to explain that. But the cash flow is INR 2,163 million. Had we continued with the earlier method, the change would not have been more than INR 10 crores. I just want to say one more thing in terms of some of the details like other income and hedge book. We have moved them to the next year so that we can spend more time on the questions and answers. In terms of hedge book, we continue with the same policy. And the trends are similar to what we discussed in the last quarter, nothing to worry, and other income are already -- details are provided in the annexure. So there's no reduction in the disclosures. Just we have moved them to the backup so that we get more time to talk to you. With that, I hand over to Karthik to give the insights into the business side.

Sure. Thanks, Ajay, and good day, everyone. Hope all you are safe, and your loved and near ones are all safe and secure. And I would like to take a quick deep dive into the vertical details. And as you can see from what Ajay talked about, the overall services revenue at $112.2 million and DLM revenue at $18.4 million and overall revenue at $130.6 million, which is about 11.6% drop in Q-o-Q in constant currency, and in dollar terms, it's 12.5% de-growth. And the key thing that I would like to highlight is about what we are seeing on Aerospace & Defense, which has seen the maximum impact as we can expect it to be so. And due to significant amount of ramp-downs in terms of the customer programs are delayed, and they were really impacted heavily on the commercial aviation side while the defense continued to be robust. And we have seen that the travel had dropped to the extent of 90% in April, while it has recovered to less than 40% by June. But we are continuing to see this challenge in the near-term as well. And coming to the other verticals, whether it is communications and E&U, and both have seen moderate de-growth. And we expect them to start getting to the growth path as we move forward in Q2. Coming to transportation, and we have seen an impact with one of the customers. And we see that this is likely to get to the growth trajectory from Q2 onwards. And from portfolio, semiconductor and medical technologies, and medical technologies, the pipeline is looking robust, and we expect the growth to continue in Q2 and Q3 as well. And portfolio in semiconductor would be muted as the demand is completely uncertain how things are going to really pan out. And in summary, what we would like to call out is communications and utilities and medical technologies are likely to see a robust pipeline and growth for Q2, Q3 and Q4. And the rest of the verticals would probably be muted. And A&D would be impacted even in Q2 to some extent. And I would also like to highlight some of the key trends that we are looking at and what we are really hearing from customers across each of the verticals. And Aerospace & Defense continue to see a challenge even in Q2 due to the passengers travel demand reduction. And we are actively working with customers on digital, defense and DLM. I think these are the 3 strong propositions we are taking to the customers. And coming to the communications part, we are seeing the network upgrade and fixed wireline to wireless and the technology upgrades from customers. And there is this natural tendency of network expansion by 15% in terms of demand and that need to be addressed by our telecom operators. And they need to really invest on upgrading their network. And we are excited to participate in some of the investments in 5G rollouts. And we are also looking at the expansion in fiberization across Europe and other geographies. And we're also looking at investments in technology areas within communication vertical, whether it is on SD-WAN or loT and some of the inventory management areas. Can we go to the next slide. So moving along, transportation, we continue to see a positive traction. And as Krishna talked about, we are able to enter 2 new customers during this crisis. And we are seeing momentum in Q2, and we hope to continue for rest of the year. And most of the customers don't see a shift in right in terms of project execution. They are wanting to really keep the projects on schedule, which is a good news. And Energy and Utilities, and we have seen strong momentum in utilities and especially on the RFPs, which are stuck for a while in Q1. I think they started getting back to normal mode of execution, and we hope some of the pipeline will get converted in Q2 and Q3. And medical technologies, I talked about this earlier, and we are definitely seeing momentum in both the DLM as well as on the services business. And we are already supporting one of the medical device customer in terms of expanding on the manufacturing requirements on the COVID-related diagnostic equipment. Yes. Semiconductors has been mixed in terms of what we have seen, and some products are medical devices related ASIC design had seen momentum, and digital ASIC designs have seen a momentum. At the same time, some of the verticals like automotive and industrials are seeing muted demand. And so we are seeing a mixed reaction from customers on the semiconductor domain. And design-led manufacturing, and there is a robust opportunity that we see, and -- both in terms of demand as well as improving our operational efficiency. What I would really like to highlight, the focus for the next 1 to 2 quarters, is to bring our cost of operations, the inventory reduction, and ensuring that we are able to increase the cash flow generation for this business. That's a key priority that we have for the DLM business. And -- net-net, overall, what I would like to summarize is the pipeline is robust, and the sales and customer engagements have been happening at a higher engagement levels than what we have seen before. And operational and delivery rigors is gaining momentum, and we are confident that you will probably look at Q1, Q2 as our bottom and expect to really start getting back to growth. And except for A&D, we are confident on all other verticals to see a momentum in Q2. And maybe A&D will start getting back to the normalcy by Q2, and we hope the growth coming back to the levels that we've seen before from Q3 onwards. So that's a quick summary on the business outlooks. And I really wish to request all of you to continue to be safe and -- wherever you are. And we'll be happy to answer any of the questions.

Thank you very much. We will now begin the question...

If I may just add one more comment before we go to the questions. And I just want to give a quick color on the outlook for Q2 and FY '21. As you saw, the revenue for Q1 was better than what we had expected. We had originally said we were looking at potentially between a 15% and 20% de-growth. That really came at 11.6% in constant currency. We are seeing growth coming back in all industries in Q2, except in Aerospace and Defense, which will de-grow in Q2. And overall, this will be a tough year for Aerospace & Defense. And taking all that into account and also the fact that while there will be growth in most other industries, like I said, we still expect a double-digit de-growth in revenue for the year. In terms of EBIT margin, most of the onetime cost actions are done in Q1. There are a few things in Q2, but most of them are done in Q1. But as we mentioned in the last call, we still hold that, that is in Q2, we will be back to at least our Q4 FY '20 levels, which was about 8.6% or so, and we will be back to the first half of FY '20, which was in the closer to 10% range in the second half of this year. Q2 PAT will not have the benefit of export incentives, which we received in Q1. And taxes will also, therefore, be marginally lower in Q1. So this is the outlook for the rest of the year.

Sir, should we open the floor for questions?

Yes, please. Thank you.

[Operator Instructions] First question is from the line of Urmil Shah from IDBI Capital Markets.

Thanks for sharing the segment-wise outlook, especially for the second quarter. Krishna, my first question is regarding the same. While we understand as regards Aerospace & Defense could be weak, but would any of the verticals see strong growth to the extent that they can overcome the cut, which was visible in Q1?

So Urmil, I think what we're seeing is that Aerospace & Defense will have a fairly significant cut. So I don't think any of the verticals can make up for that, at least through the year. Now some of the verticals will make up for the cut that is there in Q1. So which means that net-net for the year that they will still have a growth. So we're still working on that. And we believe that some of the verticals have a line of sight towards that. Karthik, do you want to add anything to that?

No, I agree, Krishna, what we are seeing is it would still not be possible to cover all the gaps. But our intent is to really get as close to the -- as close to the gap as possible that we can mitigate. And the way that we are really looking at is Q3 being a soft quarter and we expect the growth to really get back to the normal levels by Q4, and by the time it will be a little too late for the first 9 months of de-growth to be covered. So that's the concern that we have at this point of time. But we are definitely seeing the pipeline across all the areas and especially around the digital, and whether it is helping the customers on digital asset management or track and trace, or Industry 4.0 or grid modernization. And I think a lot of interesting areas that we are seeing opportunities coming up from various customer segments, which is definitely giving us positive momentum into Q2. And we're also seeing that the decisions, which were passed somewhere in middle of Q1, have started getting back to the normal mode end of Q1 and early Q2. And we hope the momentum to continue. And we are also concerned about some of the changes that were happening in terms of the COVID Wave 2 or Wave 3, whichever way you may call it as, the lockdowns in various cities in India. And we are absolutely keeping a close tab in ensuring that our people are safe, and we are able to really operate at a very lean percentage of people operating from office. And we still continue to have more than 90% working from home. And we thought we can probably get to about 10%, 15% by early Q2, but we are deferring that decision because we are able to operate them at more than 90% productivity levels. So keeping that in mind, we are able to continue the way in which we were doing earlier. And we are keeping a close tab on changes that are happening around us. And we hope some of the field-related issues that we have seen in the early part of Q1 don't occur in Q2. And that's another part that we are keeping a close tab on.

And given this outlook, as regards the double-digit decline for the full year, are we talking about mid-teens kind of decline or lower than that?

No. See it won't be mid-teens. It will be lower than that, i.e., closer to 10%. It won't be mid-teens, but it will be closer to -- we don't know where exactly, but it won't be in a sort of a mid-teens kind of a number.

Got that. And you related an interesting point as regards focusing on the non-top 5 clients. It would be good if you could share which would be the key verticals to be looked at? Because if I'm not wrong, it's not only about de-risking top 5 concentration, but also de-risking the A&D dependency.

Karthik, do you want to address that?

Yes. No, I think you're absolutely right, Krishna. I think what we are definitely looking at is to double down on some of the verticals like communications, utilities and med tech. I think we definitely have about 2 dozen customers in those segments, which can probably be mined better. I think that's definitely what we are looking at. And Krishna said, we want to really look at the customer concentration. I think we have a gold standard customer base with many of the verticals. And the intent is to really bring in more mining within these customers and bring more digital deals, engage the customers more positively with proactive ideas and making them to realize how we can really co-develop some of the products and solutions. I think those are the areas we are really focusing on in terms of expanding our growth from the top 30 accounts. We are looking at how do you really grow from the 6 to 30 accounts higher than what we can do from the top 5 accounts. I think that's what Krishna meant.

My last question, if I can pitch in. Krishna, as regards to capital deployment, more on the point of view of M&A. How should we look at it FY '21? Or you would want it to be more of a year of stabilization as regards to the organic growth?

So Urmil, the way that we're looking at it is, obviously, right now, all hands are on deck for the organic growth. So we are continuing to be very focused on that. Going forward, though, we understand that there will be some good assets that are available at a reasonable price. So we're making sure that we're doing the pre-work that is required to be ready when the opportunity arises. So I would say at this -- in the immediate term, we are backing off a little bit because I think the -- some of the assets need to be evaluated in their new construct. We can't just assume it's the old construct. But the idea is that we're using this time to really scan the market, understand the market, while we focus on the core operations. But my view is sometime towards the end of the year, we will start to see a lot more activity on that.

Next question is from the line of Madhu Babu from Centrum Broking Limited.

So on one of our large verticals will have any way the structural issues for some time. So in terms of communication when we are saying a growth, so could we tell them in which geography, like in the large Australian client, what are the new opportunities we are pursuing? Or what are the typical deal sizes, which we can expect from the large Australian client as well as the large U.S. clients in communication vertical?

Krishna, do you want me to take it?

Yes.

We are definitely seeing growth all around as far as the communication is concerned. I think we have definitely seen a momentum from APAC, which is what Ajay also talked about. And what we are seeing is the 5G rollout, and we have been able to secure about 60 sites. And we expect if we are able to do this, we can probably grow multifold. And we have seen something similar across North America as well. And as I talked about, the expansion that we are looking at is what can we do on the wire line and fixed line. And also expanding into wireless and technology areas. And we are seeing growth momentum across all the 3 segments. And from Europe side, we are really trying to get a right level of partnership that we are looking for to ensure we can expand on the European geography as the fiber density in Europe is likely to grow by 5x in the next 6 to 8 years. And how do you think we can expand on our existing offering on network planning and design that can be expanded in that geography. So we are looking at this vertical as a growth engine for this financial year and also for fiscal '22.

And sir, whom would we encounter in competition? Would we see the typical Indian IT service providers in these deals because it is not completely engineering side, it's not? So when network and all, maybe companies like Tech Mahindra or typical other IT vendors or -- so who would be the competitors in this deal? And how would we need to expand the delivery team to allow in to tap these opportunities? Because relatively we have been more on the -- not much into this space?

Yes, that's a fair question, Madhu. I think we have been internally debating about how do we get ourselves prepared for. And we are definitely looking at build partners as an approach that we are looking at for expansion. And especially on the partnership, we are looking at IT and platform-based growth, and that would really give us significant headway into right to win. And we would come across some of the larger sites. And what we are trying to expand is from our existing base to adjacencies. And that's where we see a growth that is coming in, whether it is from network planning and design to asset management and expanding into the inventory management, how do we think we can really expand on the service fulfillment, service assurance. And those are the areas that we are seeing as natural adjacencies and trying to expand on the technology side.

Okay. And one last question on the semiconductor, which typically is a large vertical and with large deal opportunity. So last time we have done one acquisition AnSem, and after that -- so I mean, would we require further acquisitions to bolster this -- scale of this vertical? And so how do we see, I mean, probability of winning more large deals in this vertical? Because it's a sizable vertical. Yes.

Yes, that's a fair question, Madhu. And what I would really answer is we want to really make some of the investment that we made, how do you think we can really make that to grow significantly for us. And we want to really take the capabilities, which are very unique and niche and much differentiated as compared to any of the Indian missile. I think we really want to take those capabilities and expand our presence in medical devices and defense electronics and industrial side of the business. I think that's where we'll see a growth coming in, though we talked about semiconductor, and these are the ASIC custom design for customers who need to design their own chipsets because of the need that they see that they want to create a secret sauce of their IP to be embedded, and that's where we come into picture. And we are really seeing that the opportunity we want to expand our cross-sell even into verticals like aerospace and defense and automotive, industrial and medical technology areas.

[Operator Instructions] Next question is from the line of Sandip Agarwal from Edelweiss Securities.

Yes. So Krishna, I have -- and Karthik, I have one question, particularly on the outlook, which we're talking about. So it is looking like we are going to have a significant event over the next 3 quarters on a quarter-on-quarter basis because what you are saying is that 10% decline is [indiscernible] kind of 5%, 5.5% [indiscernible] is still expected to decline. It looks like there is significant deal pipeline which you will see quickly materialize or there is something else which is giving so much of confidence. So if you can put some light on that will be helpful. Secondly, on the margin front, we have achieved quite a bit of restructuring. So I would like to know, Ajay, will this not structurally improve our margins by Q3 and Q4 to that extent because probably we would have achieved the right fit number of employees with this restructuring effort? Or you think that some costs which are unpredictable right now?

So, Ajay, why don't you start off with the second part and then we can come to the first part.

Thank you, Krishna. Sandip, you're absolutely right. I think what kind of cost structure that we have created gives us a lot of confidence about a good margin for H2. And that's why Krishna also said that in the outlook that H2, I think we can get back to the levels of 9%, moving towards 10% kind of a margin. And this is assuming the not extraordinary growth because the growth also has an impact. So I think it could be a little better than this depending on some of the growth, which is a little uncertain right now in terms of saying what will be that [indiscernible] but I leave Krishna and Karthik to take that. So your observation is right on the margin.

So Sandip, I will just quickly answer it. It's not going to be just 10%. It won't be 15%. It will be somewhere in the middle. So we really need to -- we're still working through to see how the numbers will pan out for the year. So I will say that first. And the second thing I'll say is, look, we do see a fairly decent pipeline. We see a fair amount of opportunities that are still there. Obviously, we also have to be very careful because the macro situation can still change. So we do need to be careful that we're not just going whole hog in and making some large investments. So we are treading it cautiously. But I want to say that the growth will be in double digits, which means it will be greater than 10%, perhaps not quite 15%, but somewhere in the middle. And we do see a fair deal above pipeline and opportunities to be able to get there. Because aerospace, fine, we will have a challenge. I think we just -- we have to brace for that. But like Karthik said, there are other verticals such as communications, medical, et cetera, where the opportunities are also there. Karthik, do you want to add anything to that?

No, I think you covered it, Krishna. I think it's true. What we are seeing is a good momentum. The decision-making will depend on multiple other parameters from customers. And customers are also bracing for their cash position and their readiness to continue the investment. So it is definitely not just what we can do with them, it is also their readiness to make decisions. So there are decisions that are getting delayed. There are decisions that are getting pulled up, and we are seeing a mixed response from various customers. So on the medical devices side, we are working on 2 deals where we are in the last leg, and we hope some decision will come through in Q2. And similarly, we are looking at a couple of deals in utilities and couple of deals in communication. And we are expecting the decision cycle to improve in Q2 if macro situation remain stable as we are seeing today.

Next question is from the line of Sudheer Guntupalli from Motilal Oswal Financial Service.

Krishna, our revenue dropped almost 15% over the last couple of quarters since COVID situation started. If you have to dissect this decline further, what part of it would have been supply-led and what part of it is demand-led?

Krishna, I'll answer this question.

Yes, please.

What we have seen is Sudheer the early part of Q1 between April first to April third week, there were issues related to the supply side at both on the DLM as well as on the services part. But I think most of the services-related disruption have been recovered through the quarter, and the team has done a phenomenal job in pulling things up in May and June. And to that extent, I think we do not have much of issues on the supply side. We still have 1 or 2 odd cities where we are not able to have the field-related activities, which is affecting us slightly, but we don't see that as a major issue on the supply side. And what we have seen, the issue on the second part of Q1, is on the demand side of the challenges. And that's the reason why we have seen a drop in the revenues.

Okay. But it looks like work-from-home in case of engineering services is not being as convenient as in the case of IT services. So with the entire medical situation still remaining fragile and possibility of reimposition of lockdowns. So do you think supply side will not be a big bottleneck going forward? I think you're confident that supply side will not be a big bottleneck going forward?

Yes. I would answer it slightly different. The way that we have looked at it is you could have asked us around late March, do you think you can get to 92% work-from-home, like 95% productivity levels, their answer would have been maybe. But I think we are confident to say that now that we've been able to bring in all the processes in place and ensuring that people are able to work productively and be able to manage their working hours, and we have been able to clearly overcome most of the challenges that we have seen in the early part of Q1. Having said that, when we talk about supply side, I would also look at our ability to hire locally, especially in U.S., and we have close to 80% plus people that we have in North America who are hired locally. So we have a strong resourcing engine that can help in hiring people locally. And the travel part could probably pose some issues in the H2, since we are not able to really get people to move from one place to other place. That's where the local resourcing engine will come into picture. So to that extent, we hope whatever visibility that we have for Q2, Q3, we don't see the supply side to come in for any challenge.

Sure, sir, between DLM and services, how would your annual outlook be spread, whatever, 10% to 15% in between. You're talking about, let's say, 12%, 13%, sort of a decline for the full year, so any individual color on these 2 segments, separate color on these 2 segments, services and DLM.

Krishna, you want to take it?

See, I'd say it's a little bit early on that. I think we're seeing opportunities in both cases. I think DLM looks a little bit better. But I think at this point, we -- considering how volatile the situation is, I would say, let's look at it quarter-by-quarter. And I would say, overall, it's quite well balanced.

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

Yes. Just wanted to understand, Krishna, under your and the joint leadership with Mr. Karthik, is there any major restructuring, which we are planning to do in some of the department to improve the predictability of the revenues and also the revised strategy may also target focusing more on the large deals because at a scale that may be required. So can you throw some light, which will help us as a long-term strategy?

Yes absolutely. So I'll say a couple of things on that. I think we have done a lot of work, and especially Ajay and the finance team more than anybody else have done a lot of work on bringing predictability based on some clear metrics, right, be it order book or pipeline and so on and so forth. And Karthik has really used that very effectively to make sure that we're having reviews and cadences, which gives us a much better visibility into what is going on. So one is I'd say we've already done a lot of work in terms of making sure that we are -- we have a scientific way. And obviously, we are not finished yet. We still need to do some more work, but we'll continue on that. And we -- I think that was one of the big challenges that we had, especially in the last 4 quarters or so. The second thing is we're also looking at a few options of how we can get large deals going effectively. Again, restructuring can come in with many formats. I wouldn't venture on that. But I'll say that we are looking at ways in which we can bring focus to large deals. And I think even over the last quarter or so, both Karthik and also but the BU heads have put in a lot more effort on bringing those kind of deals into focus, which we perhaps didn't do in the last 4, 6 quarters, which I think is happening. So we understand a couple of things both in terms of where we should focus on and the outcomes, which are areas of focus, and we're working on how we can support those areas of focus.

Okay. Fair enough. And just to clarify, if I'm not wrong, are we seeing in the services business in 2Q, the decline in Aerospace & Defense would be higher, which will not be compensated by the growth in the other areas? And also in 3Q because of furlough, services business may be tapered. So it may be largely the services business may see a recovery only in 4Q. Is it a right way of looking at it?

No, no. I would say in Q2 -- what I said, that was for the year. I'll say Q2 is looking better than Q1 as things stand. But for the year, what I said is there.

But services business will see a positive growth in 2Q as well?

Yes, yes.

Okay. Okay. And Krishna, just last thing, as even at a midpoint, at 12.5%, the consolidated, compounded Q-on-Q growth comes out to be close to 3% in the 2Q to 4Q. So this is -- the services part, you believe may be slightly lower than that and this may be more dependent on the DLM part?

Not necessarily, I think, again, like I said, it's too early. I think both groups are looking very similar right now. Yes, we do see more opportunities in DLM, but services also is looking reasonable. But I'd say DLM might be slightly higher, but not -- I mean it's not all DLM-led rebound.

Okay. Okay. And congratulations on the good execution.

Next question is from the line of Mohit Jain from Anand Rathi Shares and Stock Brokers.

2 questions. One is on your order intake. So this number includes Hitachi for the quarter? Or will it come -- or where will you book it will come in the next quarter?

No. See, the way that we do order intake is Hitachi is not one large PO. Our order intake that we report is only on committed purchase orders. So Hitachi is not one large PO. So it will happen over a period of time. It's not a onetime. So for example, we only take -- even when we sign multiyear deals, we only take what's actually committed from the customer as a PO.

So that is already included in the quarter's intake number, is it?

No, no. Only what is committed, which is typical of us.

Only for what -- only what is committed and signed is already part of it, is it?