Cyient Limited (532175) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Cyient Limited Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Krishna Bodanapu, MD and CEO, Cyient Limited. Thank you. And over to you, sir.

Thank you very much, and good evening, everybody. Welcome to the Cyient Limited's Earnings Call for the First Quarter of Financial Year 2020 (sic) [ 2022 ]. I'm Krishna Bodanapu, Managing Director and CEO of Cyient. Present with me on this call are Mr. Ajay Aggarwal, Executive Director and Chief Financial Officer; and Mr. Karthik Natarajan, Executive Director and Chief Operating Officer. Before we begin, I would like to mention that some of the statements made in today's discussion 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 website. The call will be accomplished -- 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 first quarter. In U.S. dollar terms, we posted revenue of $143.5 million, which is a growth of 9.9% year-on-year and a degrowth of 4.2% on a quarter-on-quarter basis and 4.3% in constant currency. In rupee terms, we posted quarterly revenue of INR 1,058.2 crore or INR 10,582 million. This signifies a growth of 6.7% year-on-year and a degrowth of 3.2% on a quarter-on-quarter basis. Services revenue stood at $119.3 million, which signifies a growth of 6.3% Y-on-Y, and essentially flat on a Q-on-Q basis. Group EBIT margin stood at 13.1% for the quarter, which was up by 797 basis points compared to the last year and 48 basis points quarter-on-quarter. I'd like to highlight that this is the highest we have seen EBIT in the last 6 years. Free cash flow generated stood at INR 184 million (sic) [ INR 848 million ] or INR 84.8 crores, a conversion of 43.6% on EBITDA or 73.7% on PAT. PAT stood at INR 1,150 million or INR 115 crores for the quarter. This was a growth of 41.3% year-on-year and 4% quarter-on-quarter. Coming to the other highlights for the quarter, and I'll just hit upon them very quickly. On John Deere, we were given a partner-level status in achieving supplier excellence. This is the first -- sorry, for 2020, this is the company's highest supplier rating. And John Deere is an important customer that we believe holds tremendous growth potential for us this year and beyond and, therefore, is a very important recognition for us. We signed and announced a large deal with HMLR, which is Her Majesty's Land Records (sic) [ Her Majesty's Land Registry ], which is the nodal agency for managing land information in the United Kingdom. And we have been given a long-term contract to manage these -- manage this data. And we have partnered with Esri and Xerox on this project for software and system integration work. We're also proud that on the NASSCOM R&D showcase for 2021, we won 4 awards, and we won the awards across a spectrum of opportunities. We won for social impact. We won for engineered in India product of the year, and we also won for service delivery excellence of the year. So it's a great reflection of the quality of delivery that we've built and the competence of the organization that we've created which I'm also happy to say is translating into good opportunities and into a good customer engagement. To continue on and to highlight some of the digital type of investments that we've made, which are quite significant this quarter. We launched the CyientifIQ, our innovation platform. This is a platform that focuses on IP-driven solutions between an ecosystem and the company, and it's also a way forward to rise in the innovation quotient index and attract top talent, especially for new technologies, including digital kind of technologies. We also launched CyiOPS, which is the Cyient Outage Planning and Scheduling solution. Again, a great example of the type of work that we're doing in the digital sphere in helping our clients manage their assets. In this case, utility companies manage their assets better, especially through outage planning, scheduling and so on and so forth. And this is also a platform that is gaining significant amount of traction with our utility clients, which is a key growth area for this year and the year ahead. We launched the first sustainability report, including the sustainability goals for 2025. Obviously, sustainability is a very important aspect that Cyient is quite committed to, our clients are equally committed to. And therefore, we're very proud that we're one of the first companies that have done the sustainability report, i.e., where we stand, but also have laid out some audacious goals in terms of where we want to be with sustainability, including being carbon neutral by 2025. Lastly, we also have a new gender-neutral parental leave policy. Again, a very important element of engaging better with our associates. Again, the implication of this, we believe, has long-term benefits and also will position Cyient very attractively to the younger workforce, much of whom will go into some of the newer technologies into the areas of solutions, digital and so on, so forth. And it becomes quite appealing for people to come and join Cyient. And we're -- honestly, we're one of the first companies in the world to do something like this. We believe there is a fairly significant commitment, both financially and also operationally. But we've evaluated the risk/reward, and we are very proud that we've launched this last week. With this, I will now hand over the call to Ajay, who will take you through the detailed financial performance for the quarter. Ajay, over to you.

Thank you, Krishna. Good evening, and greetings to all of you. In terms of the revenue, as Krishna said, our revenue has been $143.5 million. In terms of services, we are at 6.3%. What I would like to highlight here is that while overall the aerospace continues to be -- looking at what is happening in the world around us, continues to have some challenges. If you look at our growth over 6%, it's close to 15% for the non-aero divisions. And DLM has grown by 31.7%. Whatever is the revenue for the quarter is in line with our internal estimates where we were expecting that this quarter is going to be a bit seasonal for it, and the group growth has stood at about 9.9%. I would say, when you look at quarter-on-quarter numbers, services is flat. We were looking at internally a little bit better. But after COVID, we did get a little bit impact on our services growth because of the availability of people. But we tied over that. And June, we have really [ clouded ] something better than normal kind of revenue when you show it, we will see that going forward. Also, I'm saying that if you look at our year-on-year numbers and some of the trajectory from that, you will see that most of them are growing in double digits. So I think that's what we are looking at as a trajectory for this particular business -- portfolio of businesses that we have. In terms of the income statement, I would like to call upon in terms of the margin that we have done, and let me spend a few minutes on that. This margin, as Krishna said, for quite some time is one of the highest, and we are getting very close to the restoration of about 15% margin in services in the short and medium term. So we are very close to that. And overall, for the group, we are at 13.1%. And in DLM, we have generated about 6%. There you will see there is a scope for improvement in the coming quarter. Just to give you color around it. We have -- given the wage hikes during this particular period, [ we have saved it out ], as we said in the earlier earnings call between quarter 1 and quarter 2, but almost 2/3 of the wage hike has already been taken care in quarter 1. And the total impact, I think we have seen is, what, mitigated by good improvement in the operational efficiency also in terms of our SG&A as well as the adoption there has been a benefit. On the profit after tax, I would say that we have really got a nice margin of about 10.9% net profit margin, which is again, I think, is moving very nicely. And we feel that we can sustain these kind of levels. And year-on-year, you can see, we also had in quarter 1 of previous years about INR 51 crores of export-related incentives. So if I take that out, because that's a one-off in the current -- the way things are looking on some of the incentives for the services, our growth on PAT is almost like 70% year-on-year. And if you look at our operating profit growth also, I think that's also almost 170% year-on-year. So I think on the profit side, I think we are really doing well. Good improvement in margin, good increase in -- both from the operating profit as well as EBIT perspective as well as from the profit after tax perspective. I'll comment about other income and hedging later. But in terms of the tax also, you will see there is a marginal increase, but we are in line with whatever outlook we had given for the full year. And we had anticipated that some of the [ SUVs ], which are coming into the different tax bracket they will bring, quarter-on-quarter, the tax down. But overall for the year, we will be within those tax norms. Just to give you a sense of this bridge, 13.6% is for the services, which has gone to 14.6%. 176 bps is the merit increase impact and operational improvements as well as the SG&A spend has been the driver for this particular margin improvement. And we are confident as we further grow during the year and as we move, we will continue to sustain these operational parameters and this level of the cost structure. However, going forward, we will also continue to make certain investments as we continue to get some benefit from the currency as well as from the growth of the margin in books. Yes. Can we go to the next one? In terms of cash generation, we have generated, you would see, cash of -- cash generation total at a conversion rate of about 50% for the services. And we are on track to deliver the overall 65% to 70% cash generation. And this INR 863 crores, while it is lower quarter-on-quarter and quarter 1 of last year, we'll get -- there is few cases of collections, which have right shifted. And you will see both for H1 and for the full year, we will be ensuring that whatever is the cash conversion we have committed is achieved. This quarter, we did have a little bit of flat or marginally negative free cash flow in DLM. You will see the collections coming back and that will also be a fairly positive number in line with the expectations, and we are looking at, at least, 50% cash conversion in DLM. With this, I would like to hand over to Karthik and if any questions on this, I will look forward to the Q&A session.

Sure. Thanks, Ajay. Good evening, everyone. I hope all of you are safe and healthy. And I just want to give a little more color on the BU performance. And if you look at the left-hand side top chart, the rightmost column, which is on the year-on-year. The aerospace continues to have challenges. We talked about we have hit the bottom a couple of quarters ago. But the growth is not coming in a hurry. And as we stated earlier, we are seeing a U-shape recovery and not a V-shape recovery. And the good news is we have seen a growth of 2% in Q1 as compared to Q4 of financial year '21. But the year-on-year still continues to be a challenge with about negative growth of 11.5%. And as far as the communications and utilities are concerned and communication has set a new benchmark in terms of the revenue for Q1. This is the highest ever that we have done from the communications side. This continues to grow for the last 3 quarters, and we see this continuing for the rest of the year as well. And the Utilities business, which had some challenges in the previous 2 quarters has come back to see a growth, and we expect this to continue for the rest of the year as well. And the portfolio of business where 2 out of the 6 sectors have had some one-off issues, and we hope this will be behind us by the time we start getting into Q2. And the good news is the transportation, which is essentially impacted by aerospace, and the rail has grown by 17%. Overall, we showed a degrowth of minus 3.6%. Communications and utilities at 16.8% and the portfolio at 9.6% and with a cumulative number of 6.3% for the services part. And at the group level, we have shown a slight short of 10% for the year-on-year. And the key thing I also want to highlight is we won about 4 large deals in the Q1 of fiscal '22. And the interesting one is 3 from services and 1 from DLM. I'll provide more color on it as we go through the next set of slides. The order intake, which is the orders that we received in the last quarter is up by 20% as compared to Q1 of fiscal '21. And this gives us confidence that the demand is robust, and we hope to achieve on our commitments that we made in the last quarter. We go to a little more deep dive on each of the segments and to start off with communication and utilities, and this has delivered the 2% sequential growth. What is driving the growth is essentially the broadband, the fixed wireless, 5G, private LTE, I think this demand is still robust across and also led by technology transformation, whether there’s increase in network design, or the network transformation. I think these are the ones which are driving growth for us. We continue to see this growing at double digit for this financial year too. And the Green Networks, which is some of the interesting concept, a few of our customers are trying to venture out is essentially creating the network which are sustainable and environment-friendly. And that's going to be something that we see that as a common theme across many of the operators that we work with. And 5G, which contributes about 10% of our revenue portfolio, continue to see a robust growth across North America as well as the Asia Pacific [ region ]. Utilities has seen a growth of 4.4%, and we expect this growth momentum to continue for the rest of the year. And we do see that this will grow double digits as compared to last year. And some of the projects that we executed as part of a major transformation program and essentially deploying a cloud native next-generation special information system and a system integration project. I think this gives us confidence that the technology-led growth in utilities will drive sustained growth for a few more quarters. Come to transportation, and this has seen 0.5% growth as compared to the last quarter, but the challenge that we talked about is still continuing. And the key thing I want to highlight is the rail part of the transportation will see a growth in this year and due to the increased spend in infrastructure projects. As for the commercial aerospace is concerned, the domestic travel has come back to about 65%, 70% of 2019. The international traffic is only at 40% of 2019. So that continues to be a challenge. And the interesting one is about the spend coming back on the aftermarket and MRO, which is driving the growth in aerospace. We want to see how fast it can come back to the previous levels, but we are still hopeful that this will recover in the next 4 to 6 quarters. We're also looking and focused on embedded and aftermarket digital services. And as the segment is recovering, and we see that this is likely to see a demand for the next 4 to 6 quarters before the overall growth for the aerospace industry coming back to the previous levels. DLM, which has seen a one-off dip, and we still continue to hold on to what we committed earlier about 20% year-on-year growth for the full year, and this is backed by a strong order pipeline and backlog that we carried today. And this is also compounded with some of the opportunities we see for customers wanting to look at the supply chains being derisked and not just for cost, but for risk, and that is creating newer opportunities for us and along with what we call it as “Make in India”. Moving on to portfolio of services, and we expected this to be the growth sector for us across many of the segments that we are operating in. And Medical, which continues to grow in double digits, and we are confident that this will continue the momentum for rest of the year. We have announced a large deal about 2 quarters ago, and that's ramping up, and we continue to see momentum across embedded, digital services and our pipeline continues to be robust on digital transformation and design-led manufacturing services in medical. Automotive and off highway, we are also conscious of some of the engagements and nonprofitable projects, and we have taken some action on them in the last 2 quarters. So this has resulted in some dip, but we expect some of the growth to come back for the second half of this year. And this is driven essentially by supplier consolidation activities as well as the digitalization part of it. Semiconductors, which has again seen a degrowth as compared to last quarter. And this, again, we believe it's one-off, and we also had a good Q4 as we talked about it earlier. And the solution business, which is on the [ ASIC ] side continue to see a significant recovery post-pandemic. And we expect this segment to do a double-digit growth for this year. And we also have launched a lighthouse project along with IIT Hyderabad in terms of creating a 5G system on chip design. This is probably first of its kind from any Indian company, which has taken end-to-end responsibility for a silicon design. The energy and industrial plant engineering, and this continues to see robust growth, and we expect it to be grown by the top accounts as part of the sector. And we also have announced large deals in the last 2 quarters, and we expect this to again grow by double digit for this year. Mining and natural resources, this witnessed a degrowth in Q1, which is, again, we believe it's a one-off, which is to do with Australia's COVID lockdowns that has happened. And Australia have been going into the lockdown and out of lockdown for the last 12 months on an alternating basis. And we continue to see some challenges during Q1, and we hope that is behind us, we'll see a recovery in Q2 and with also a number of new logos that we've won in this segment, about 4 of them in the last 6 months, I think that will continue to help us to grow this segment. Geospatial, where we announced a large deal last quarter and the Q1 degrowth more of a seasonality, and we expect the demand to come back. And we are also trying to bring in geospatial as an horizontal offering that we can take into many of the verticals like mining, communication and utilities and mostly using them as an horizontal service line to drive growth on applications as well as on the analytics area. With that, I'll hand over to Krishna for outlook for fiscal '22. Thank you.

Thank you, Karthik. If I may just summarize, I want to say that I will reiterate the commitment that we had made for the year. We continue to expect that we will grow in double digit in FY '22 in services. And I'll say we continue to be confident that we will grow in double digits in FY '22 in services. From Q2 onwards, we will see some good growth coming in. We have the order backlog and also the early signs of ramp-ups and so on, so forth are already starting to happen, which means that the Q2 is going to be a good quarter as we look at it. But also, more importantly, these are sustainable projects that we're doing right now. So it will also continue into the rest of the year. DLM will grow about 20% as we had indicated at the beginning of the year. We also maintained that for the full year, we will improve margins by at least 200 basis points and probably a tad better than that given that even Q1 we’ve done a fairly decent job of improving the operating margins -- excuse me, and as a result, the PAT also. DLM will also improve at least 200 basis points. We also don't expect any export incentives this year. We also don't or we also expect that the tax rate will be about 25%, 26%, which is not very different from the previous years. So in summary, I would say that it's been an expected start of the year. I think from a revenue perspective, like Ajay had mentioned, internally, these were the numbers. Maybe there's a small gap, but that's because we also had some fairly significant COVID challenges in April and May, which are quite specific to our type of business given some of the security issues, access to labs and so on and so forth. Therefore, we had a little bit of a challenge in April, May. We've completely overcome that, June was the best month that we could have had. And even we were surprised on how well things have recovered and also recovered in a sustainable manner. So I can say with confidence that Q2 onwards we'll come back on revenue. And obviously, on the operating profit, we have done what we need to do. We have made some changes structurally. And I also want to say that much of the salary increase was already factored into Q1. Over the last couple of years, we've done a phased salary increase and not all salary increases happen at the same time. But given that the majority of the population does have salary increases in Q1, much of it is also factored in. There will be some more in Q2, but that's part of the plan. So with that, I will pause here, and we will turn it over for any questions that we are able to answer.

[Operator Instructions] The first question is from the line of Sandip Agarwal from Edelweiss Financial Service.

Congrats on good execution. Krishna, I have one question. Given your very strong capability in this space and you are doing a great business in all the areas of aerospace, medical, high-tech for quite some time, and there is an immense amount of demand in that area. The lower growth in this quarter doesn't look to be led by demand challenge. It looks more like a supply side challenge because -- and it is not anything wrong because coal industry currently had taken -- has done a miscalculation last year when they started running very [ thin ventures ] on the assumption that the global economy will trend and all those things [ will move over ]. No one anticipated actually that you will deliver this sharp recovery. And because of that, those things, [ ventures ] are now coming to hunt because suddenly, there is a huge spike in demand and there is no supply, and particularly the piece of business you deal with also has a longer training period and has specific skill set kind of requirement, which is not exactly comparable to IT services or normal software services. So I wanted to know when do you see -- if my understanding is right, this growth is more because of supply side challenge rather than demand? And if that is right, then when do you see this challenge getting over because what I'm seeing today is that everyone -- unfortunately, the industry has got into the race of pushing people from one another. And this problem can actually [ be so because ] there is abundant supply of manpower. And that will only happen...

Sandip, sorry to interrupt you. But Sandip, may I request you talk to the handset, sometimes you voice is not clear.

Yes. Sure. Is it clear now? Please. I was using handset.

Much better.

Yes, sir, this is much better.

Yes. So my question, Krishna is actually that unfortunately, the industry has got into now pushing talent from one another. And this problem will -- the actual solution to this problem lies when the workforce is trained in abundant number to pull down this attrition and all these challenges. So where do you see things improving going forward and how much time it will take? Because I don't see concern on growth, but I definitely see a concern on growth led by supply side, number one. And if -- even if you are able to execute it may hurt your margins in near term for 2, 3 quarters. So what is the solution in your view? And how do you see the situation? And that's all from my side.

Thanks, Sandip. I think that's a very relevant question and a very pertinent set of observations. You're right. I think the challenge that we face is more the supply side challenge than the demand side challenge at the moment. And also in much of our businesses, we do need to increase -- or we do need to train people. We need to get them ready and so on and so forth. So it has been a supply side challenge. The demand is there. The demand also, if you look at it, we've also been quite aggressive about how we manage bench and the utilization. And of course, we don't have the scale of some of the larger companies where even a 2% slack for them turns out to be many thousands of people whereas for us, 2% is not a very large number, and then you start getting into skills, et cetera, it becomes a challenge. So one is, the demand is there, and we are also facing a fairly significant demand. So we've had to make some choices on what demand we will service and what we don't given the capacity and the capability that we have. Now so that's one part. So that's why I say with confidence that from Q2 onwards, things will look much stronger for a couple of reasons. First is, I think, just getting people on board and getting people into the company and getting them ready, et cetera, we've done a lot of work in Q1. And again, because of what happened in April and May, we got derailed a little bit at the beginning of the quarter, given that all the resources, including HR leadership, were focused on the COVID-related issues. Almost 10% of our staff had COVID at some point. And we've dealt with it. Right now, we're -- touch wood and thank God we're less than a few people with COVID, which I'm sure we’ll get that resolved. So one is we've onboarded and we've been quite prudent at onboarding people, which is now helping address the demand. The second thing is the supply -- the freshers, right? I mean that's a big part of the supply base. That's a big part of what is available in India. And if you look at it now, also what has happened is the supply base got delayed given that exams got postponed and all that has been happening, the supply base got a little bit delayed. So what we're seeing is we've onboarded a number of freshers. I think we've onboarded almost 600 freshers in June. It will take a month or 2 to get them prepared. Again, they won't be useful for all the demand, but at least for much of the demand that we have, they can be trained over a month or 2 to at least start to get productive. So that's the second part of this equation is between last year and this year, given that freshers are available essentially in May, June time frame. That demand has come. In our case, 600 people. We'll onboard another, I think, 500 or 600 in this coming quarter in Q2. But overall, as a country, 0.5 million people are available, which will also help address the supply side challenge. So it's a combination of these 2 things. I think from a lateral hiring, we are much better prepared. We've been able to onboard the resources they're getting productive. And like I said, June was a very, very strong month, which will continue. And the freshers will now become available in the next couple of months, which will also go a long way in addressing the supply side challenge. But I'll say, I think thank you for pointing out that -- the demand is there. That's not the problem. It's really the supply that we need to be aware of -- address.

Krishna, if you allow me to ask one more question, I would like to ask another question on the same line. So is there a way we can analyze that and, let's say, if we would have continued with our nominal way in which we generally maintain assuming that this pandemic -- taking a risk that we would be over stacked for some time. And today, the challenge which we have taken a hit, which we are going to take on the acquisition or not taking the order, what would have been the trade-off between them? Or in an indirect way that if you would have the resources right now, ready resources, you have -- how much of market share gain you would have made? Have we done such kind of exercise? The objective of asking this question is not that we have done something wrong because the whole -- it was completely unpredictable for all the companies and everyone has run [ thin ventures ] in last 12 months. But the objective of asking this question is primarily to know that is there a real loss of revenue which has happened to this whole industry because of this panic that global economy will collapse and IT will or the software services will also collapse. When the world was able to see that the only thing which was running the world was technology. So that is what I want to know.

So I think I'll let Karthik add to it. But I'll say [ primarily ], there was about $3 million of revenue that we've lost just because of supply side constraints. Some of it in DLM, some of it in services in various reasons. So the $3 million -- actually, the $3 million was -- even with the current capacity, without having that additional bench, right? That is -- this was lost because people had COVID or we couldn't get parts or whatever that reason was. So as I said bench -- baseline there was $3 million that I can think of. Karthik, do you think there would have been more if we had a bench?

No, I don't think so, Krishna. I think the reasons were 2 things, right? One, what we had supplied last year was more on the aerospace. What we are seeing the demand is on the non-aerospace. The second element also is more demand is coming on the digital side and where we really need to build up a lot of the skills. And due to the pandemic, I think if at all there is anything that has happened, the digital transformation has really accelerated probably at least by 20% year-on-year, if not more. And how do you think we are able to really match up with the demand that is happening on the digital, whether it is about RPA, intelligent automation or Internet of Things or trying to integrate with cloud automation. I think a lot of things that we are really talking about, the skill set, full stack engineers, a lot of them that are required in demand today were not there 1 year ago. So this is something where the demand definitely picked up in the last 4 months, and we are seeing the brunt of it. And anticipating that is the reason why we added about 400-plus net addition head count in Q1. And we are continuing to look for both lateral as well as higher train and deployment model. And how do you think we are able to really use both of them to help in meeting the demand.

[Operator Instructions] The next question is from the line of Sandeep Shah from Equirus Securities.

It's good to understand the impact because of the supply side issue. But curious to know that some of your peers in the engineering R&D sector has actually been growing anywhere between 3% to 6%, while we have a flattish kind of a services revenue growth because $3 million kind of an impact, which could be split between service and DLM. So I just wanted to understand what nature of demand which we tap, which has impacted us despite work from home versus the other peers has not seen a bigger impact as a whole?

Karthik?

Sure. Thanks, Sandeep, for the question. I think we are -- as I mentioned in the previous question. I think we are seeing the demand across the board. We definitely have a significant demand coming on the digital. And digital is about 3, 4 key areas, whether it is about asset management, Industry 4.0, mobile workforce management, how do you think we can do some system integration projects. I think these are the ones which are required as part of the digital. The second one is about embedded software and applications. I think this is another one which definitely has highest demand and followed by semiconductors. And probably this segment would see continued growth for the next 2, 3 years driven by 5G, artificial intelligence and some of the new silicon that need to be designed for edge compute. I think all of them would require a significant amount of R&D spend, and that is what is coming to us. But again, the semiconductors also have a supply challenge because there are limited population available in India. So this need to be created or you really need to have a mechanism to look at onboarding from other geographies beyond India, including Eastern Europe or Southeast Asia. So you need to really look at alternate options to explore how do you think we can meet the growing demand on the semiconductor side and followed by the network side where we definitely see a solid demand on the network side and both on the intelligent network design as well as on the network technology transformation side. And that is something we are fairly comfortable about what we have done in the last 1 year. So we are prepared for it, we know how to really address that. But the real issues are about the digital and the semiconductor side, how do we think we are able to address the demand that is coming on in those 2 areas -- 2 skill sets.

If I may just add, Sandeep, I would say that whatever we said is more specific to the one-offs in the quarter 1. When we are saying that we are confident of a double-digit growth, we have also done extensive exercise to look at both the demand and the supply side and at the end of it. And that has been the learning, right? So far, we would not spend so much time. And if you look at our pipeline, one is on the demand side, I think Krishna already spoke about it Karthik mentioned in his presentation, even on the supply side, our pipeline is the best ever. I think that's what it is. So I would say quarter 1 has been a one-off. And going forward, you would see whatever is needed for that double-digit growth will come to fulfill the demand as well as we will overcome those supply challenges. If at all, I think other things could be upside to it, right? So I just wanted to add to what Karthik said.

So is it fair to assume that it was not because of the employee infection which impacted the growth, it was actually the scarcity of the talent on the digital side, which impacted your growth. And if we believe that this revenue is not a loss, it will come back, and that said you are not changing your whole year growth guidance. What gives you confidence that what you have faced in 1Q will not be a challenge in 2Q, 3Q and 4Q as a whole?

See, first, Sandeep, I think the quarter 1 is more or less in line with what we had anticipated, right? If you were looking at very strong growth, it was in quarter 2, quarter 3, quarter 4. But our $3 million loss that I talked about. I think we definitely had a higher number of employees that were infected. Good thing is I think all of them have recovered. And as June, we are absolutely back to normal. We had some challenges on the pipeline of the manpower. And we also had some issues on the past. But I think all that wave 2 impact has [ risen ] completely. And I would say we are back to business as usual in June itself. And that's how we are saying that some of it was already built in. Even if you add $3 million to our quarter 1 growth, still we are looking at a flatter [ result ]. This is the portfolio of the businesses that we have. And based on that, this is how we plan. Krishna?

Yes. No. I'll just add to it that take the $3 million as a base case that was anticipated. That was more the reason why we lost the $3 million was because people were not available, et cetera. But okay, that $3 million is still a small number, right? And we are anticipating, if you look at the -- if we're holding the forecast for the rest of the year, the growth will have to be much more than that. And that's because, to Karthik's earlier point, what was earlier skill sets in areas like mechanical engineering for aerospace, are now becoming more in the digital skills of semiconductor and making that switch has taken a little bit of time and has taken a -- just has taken a little bit of time. I mean if -- honestly, if all the growth has come back in aerospace in the same manner that we had faced last year, things would have looked very different. And also, I want to say that, look -- if you look at the way that we're looking at the business, all the commentary is still based on aerospace remaining a U-shaped recovery and that we're still at the bottom of the U at least to most of the rest of the year, right? I mean we're seeing some slow growth like Karthik said, 2%, 3%, but nothing significant. So we are able to recover reasonably well in spite of aerospace, which has been the biggest business still being at the bottom. And -- but to leave the mathematics aside, the bigger challenges, the skills that we have in aerospace were quite specialized. So we've rebuilt the business. And the reason why we're saying that, okay, the $3 million was based on what was there, but what could be is because we've built the newer skills, and that's why there is also a lot of demand.

Okay. Fair enough. And just follow-up question. If I look at 10% growth in services, we compounded Q-on-Q ask rate would be close to 4% for the next 3 quarters. And generally, December quarter is seasonally soft for engineering R&D so that means we may have to do a heavy lifting in the second quarter where growth could be close to high single digits. So is it a fair way of directionally one you can model and you believe that is possible where 1Q postponement of growth plus the 2Q growth will help you to post better number, strong number in 2Q itself?

Yes, absolutely. I think that is fair. And also, but I'll say the other thing is, see that hypothesis that Q3 was soft was when the on-site business was much larger and also where things like work from home weren't really working, right? Because if you look at it, our offshoring has again increased this quarter. And actually, the offshoring part because in India, Q3 is not that bad. Of course, we have the share as Diwali holidays and New Year's, et cetera, but it's not so bad. The challenge used to be when a large portion of our aerospace business was also U.S.-centric for various reasons that's when it became a big challenge. So -- but both -- one is -- Q3 is a little bit of a less of a challenge as we see it this year because of these reasons, more offshoring and so on and so forth. At the same time, your hypothesis or your assumption is right that a lot of the heavy lifting has to happen in Q4 and a bit in -- sorry, in Q2 and a bit in Q4 because Q3 we still don't know. That's at least the -- last year, we had a better -- last Q3 was better than Q2, but of course, it was an extraordinary year.

Okay. And just the last question, Krishna. I think it's good to see that third consecutive quarter of good large deal. But if you look at last 2 quarters, the TCV has been $70 million to $90 million, while in this quarter it is close to be of $50 million, with number of deals are also being lower. So it's more to do where decision making also got postponed from the client side on the deal closures because of the COVID? Or it's more aberration and may actually come back or going forward as well?

Sandeep, I would say that I think we kind of even guided earlier, we are just building the large deal factory. And how do you think we are able to compete and win more higher or larger size deals than what we have participated in the past. I think this is good to see some up and down as we start building it up. And we said this will take about 4 to 6 quarters for us to build a factory. That's the concept that we laid out in terms of how do we make a large deal to be built as a factory, which can generate probably 5 to 7 deals every quarter. I think this is going to be a journey that we are into. And probably we'll start building that up over the next 2, 3 quarters, and we'll keep you posted on how we make progress on it. I would say, in the last 2, 3 quarters has been good for us, and we are continuing to build momentum with our customers, the top 30 customers. And also with the sales training, sales transformation has been undergoing. We also brought on few advisers that will help us to connect with CXOs. And we also launched some of the technology solutions and that would really help us to drive. And we also looked at 5 pillars as a growth theme for us and whether it is digital, embedded software, semiconductors and networks and geospatial. We said these are the 5 pillars that we are going to bet on as our growth engines. So by putting all of them together, and we believe that we have a great story and differentiated story that can help us to drive this growth in the next 2, 3 quarters.

[Operator Instructions] The next question is from the line of Mohit Jain from Anand Rathi Share and Stock.

One is on the order intake. Like even if -- so if you see the split between DLM and services, DLM clearly shows the kind of uptick we have seen in revenues and the kind of commentary you guys are guiding for in terms of 20% growth. But services over a longer horizon, like even if you take 12 months period and then move it over last 2 years, there is no uptick which is visible on the order intake. Even excluding the large deal sectors, the total order intake. So what is happening there? And when should you -- or when should we expect this order intake to start reflecting the kind of trends we are seeing in the industry?

I would say it takes about 1 to 2 quarters for it to start showing up, Mohit. And to give an example, we announced a large deal on HMLR, and this is starting to ramp up in this quarter. And in some cases, it may happen in one quarter. In some, it may take 2 to 3 quarters. And the key thing that we are really highlighting here is as compared to the last year, I think the way we are seeing that is the order intake plus order backlog that gives us the confidence for the rest of the year. And the second element is converting that into revenue where you go through a supply transition and then into revenue. So how do you think you are able to transit into the revenue is where it takes some time. And sometimes, it is customer driven, where customer have aligned us to be the winner to execute the project, but they may have some budget constraints as they may start up 1 or 2 quarters down the line. So that may have some delays. But otherwise, we expect probably 70% to 80% of the order intake should get executed within this financial year.

Order backlog is something which we don't get, right? Or can you share some numbers there?

No, we don't share order backlog numbers. I see -- if you look at compared to last year, where the services order intake has increased to 20% plus or actually 21%. And also, yes, I mean, compared to Q4, it's down, but that's because Q4 is always a difficult quarter for us and so on. So I would say that the backlog is there. Intake has been reasonably good. I think because also what has happened with some of these order intake numbers is the aerospace backlog would have also gotten canceled, right? So it has to -- this is the net order intake that we're reporting, which means that if you look at aerospace, where we've lost almost what is it, $80 million or so of revenue this year. A lot of that order was in place because aerospace orders would have also come in, in Q4 of the previous year for last year. So this is a little bit subdued because this is the net number. This is not a gross number. And we also take into account the cancellations. And therefore, I want to assure you that intake is good. I mean to support the numbers that we are talking about there is enough order intake and order backlog as a result.

So when you say net, if there is an order in Q1 '21 and you accounted for it, let's say, $100 million back then, and it gets canceled, so you actually report that today's number, $120 million is net of that calculation?

Yes, it is net of that calculation.

Because it will not [ restate ] the past numbers, right? This is order intake for the quarter.

Yes, yes, exactly. So it's like a P&L rather than a balance sheet.

Understood. And second was, there is this head count growth, which I think, of course, is an anticipation of a strong second half. But attrition is also slightly uncomfortable at 23%, 24%. So -- and you guys are saying that wage hikes are already done with for the year? Or are you looking at one more round maybe in the second half or something? Is there something which is planned because it was called merit-based? Or is it not a normal wage hike? Or is it the wage hike, it is done for the year?

No, we call it merit based. It's the normal wage hike, but we're building enough flexibility if we have to make further corrections in the -- during the course of the year, we will. We're not going to announce that because we'll only do it as and when required. And also for certain skills because I think the reality of our business is also there's some pretty high-end skills, so we have to look at the skill and the demand in the market, et cetera. So I'd say we have enough buffer built in where if we have to do another wage hike, we will be able to absorb that. Now the second thing is, yes, attrition is a little bit higher, and I think it is something that we also struggle with because there are -- there's some elements of our business where, obviously, it's high skills. It is also quite unique work that we do where we can keep attrition under control. But there's also a fairly commoditized part of our business where attrition is quite high. So we're working on it. I mean we’ve seen that it's come down a little bit at least in June. And we think that it will come closer to 20% in Q2. That's the number that we can still manage with at least in the short term. So we're working on it. You're right. It is a little bit uncomfortable to put it charitably, but we will work on it. I think we have a -- one is we just have to deal with it. And the second thing is we have a plan to continue to reduce it.

Krishna, I would like to add. I think a lot of our salary increases are spread over quarter 1 and quarter 2. As I said earlier, that about 2/3 of it is already done, and you will see 50 bps to 70 bps impact in quarter 2 as well. So total, it will be about 240 bps, 250 bps for the year. I just wanted to put the clarification on that.

Ajay, one last question on Cyient design-led manufacturing metrics, in terms of direct salaries and the gross profit, it appears that some cost is sort of missed out in the presentation. What is the direct EBITDA or gross profit number for DLM? I'm on Slide 20 of the annexure.

So I can just clarify the numbers, and we can do the reconciliation offline. Basically, our -- overall it's about 6% margin for this particular quarter at an EBIT level, as I said in my presentation, 5.6%. And as far as the gross margin is concerned, that's around 14%, 15%. So this is definitely is a -- yes, yes, Mohit.

EBITDA is $106 million, correct?

Yes. Yes.

[Operator Instructions] The next question is from the line of Mukul Garg from Motilal Oswal.

I think, Krishna, this was something which was discussed last quarter as well. You guys have done a tremendous job on the margin side, especially on the services, the margin this quarter definitely was quite good. But if you look at your guidance, it continues to remain the same of about 200 basis points Y-o-Y improvement in FY '22. While you just also mentioned that you have kept some buffer in case you need to do some adjustment in terms of workforce. But even after that, given especially the kind of impact you have seen in your overall margin profile in Q1 during a normal wage hike cycle. It still leaves a lot of gap in between what you can deliver over the next 3 quarters in both services and DLM which are, obviously, coming off a low base and profitability point of view. And your guidance of about 200 basis point improvement. If you can just help us understand why this continued conservatism last quarter? Obviously, the wave 2 impact was there and everyone -- there was a lack of clarity, but things seems to be much better right now. And it seems like you are the only one who is kind of keeping of potential wave 3 on the sidelines as a risk sector. If you can just help us understand and kind of reconcile this?

So okay, fair point. But I'd say next quarter, we also have some additional costs that are coming in. For example, the ESOP scheme that was announced. We'll start accounting for it. There's about 50 basis points impact that we will have next quarter because of the new ESOP scheme. So I'd say just being -- again, I wouldn't say conservative yet, I would say, a bit prudent because obviously, there is still a lot of uncertainty. One is there's these known costs. ESOP will hit us by 50 bps. There’s again a salary increase we'll have to make up, et cetera. Again, we were quite confident that the margin won't dip. That we'll see actually a little bit of growth in Q2 also. But I think it's good to be prudent at this point. I mean third wave is one potential thing. But there's also -- I still feel there are enough unknowns because until we really get back to the growth -- because it's a trade-off between growth and margin. I would be a lot more comfortable when we start to get back to the growth of Q4 and Q3 of last year when we were 3%, 4% quarter-on-quarter. Once we start to get back to that maintain this margin, I think it’ll be more prudent to say that the margin will be more than 200 basis points better this year. Yes, there are -- empirically, the evidence would suggest that we should do better than that. But I would just add on the side of prudence before committing to it just because of ESOP, there's still uncertainty. Third wave or not is debatable, but it's not just the third wave, it's various elements. So I would say, taking a combination of those before I put my sort of credibility out and say it will be much more than 200. I would still stick to that for one more quarter before hopefully having a better understanding.

Right. No, that's -- a different way to kind of look at this is also that would you be comfortable in investing or kind of letting go of some profitability in case you get a large order? Your guidance already implies a very meaningful pickup over the next 3 quarters. Is that something which is baking in some impact in terms of deal specific margin set? Or can there be something which can really help you beat this meaningfully if you just take a little bit more flexibility on profitability?

So I'd say on deal specific, I wouldn't go as far as saying we would trade-off margin for revenue on any deal because it does -- recovering from that is a very, very difficult situation and something that we faced over the last couple of years where we had to go through season pure and stop working with some of the accounts and so on and so forth. Where we do have a fairly aggressive investment plan. This is proactive investments. These are things like technology, these are things like more salespeople, et cetera. I would say -- I'm quite sort of bullish on investing in those areas as investments rather than saying that we will take a -- we will trade off the margin for revenue because that's a one-way street. You'll never be able to recover the margin. And sometime in the next x number of years, we'll just have to see the pure conversation again. So yes, we do have a fairly aggressive investment plan that we will also follow. And therefore, I'd say the margins are not going to get that much better because we are going to do -- we are going to invest ESOPs and so on and so forth.

If I may just add, if you remember our [ fleet ], the quarter 4 guidance, we had talked about these investments, what Krishna said. And quarter 1, not much of it has fructified. So definitely, we are looking at somewhere between 100 to 200 basis points of these investments depending on how the progress happens and linking to some of the benefits [ on quarter 3 ].

As there are no further questions, I will now hand the conference over to Mr. Krishna Bodanapu for closing comments.

Thank you very much. I will again, once again say thank you for the support, and thank you for the confidence in Cyient. We anticipated what was going to happen, obviously, on revenue, it’s a little bit slower than what we would have liked. But of course, that was part of, as I explained it, there’s a good reason for it and an anticipated reason for it. On margin, we're doing well. That gives us a lot of pride that we are -- and again, I don't want to say we are at the end state. We are -- it's a journey, and I think we're making good progress in the journey. And we'll continue to make that margin progress, and that's very important because all the growth now will come on much better cost structure. We will continue to make investments, of course, prudent investments on technology, on sales, on client-facing aspects. So all that will continue. And I just want to say that the road ahead looks much better than the road behind, especially if you take into account what had to happen in the same quarter last year. So if we take all that into account, I think we are very, very well positioned to have some good growth on a very good pace with some good metrics along with that. And lastly, I'd say, to complement the Cyient team, especially on the BCP, the business continuity teams and the HR teams. They did a phenomenal job when the going was tough, which gives me a lot of pride to say that, look, if we've got tough -- we have gone through tough situations, both business situations in the last 2 years, and of course, the COVID situation last year and then again this quarter. And we've come out very, very strongly, which gives me confidence to say fundamentally, there is a lot of pride. There's a lot of confidence in the business, and we're well set up to overcome anything that comes our way. So thank you once again for the support, and I'll hand it back to the moderator.

Thank you very much. On behalf of Cyient Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.