Datamatics Global Services Limited (DATAMATICS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Datamatics Global Services Q1 FY '21 Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Asha Gupta from Christensen IR. Thank you, and over to you, ma'am.

Thank you, Aman. It gives me great pleasure to invite all of you for the Q1 FY '21 earnings call for Datamatics Global Services Limited. The results and the investor presentation have been mailed to you and is also available on our website, www.datamatics.com. In case, anyone does not have a copy of press release, please do write to us, we'll be happy to send the press release and presentation to you all. To take us through the results today and to answer your questions, we have with us top management of the company represented by Rahul Kanodia, Vice Chairman and CEO; Sandeep Mantri, CFO; and Mitul Mehta, Senior VP and Head Marketing & Communications. We will start the call with a brief overview of the quarter given by Rahul, which will be then followed by financials given by Sandeep. We will then take the Q&A session. The normal safe harbor clause applies. With that said, I now hand over the call to Rahul. Over to you, sir.

Thank you, Asha. Welcome, and thank you, everyone, for joining our quarter 1 2021 earnings call. This is our second earnings call, and we are glad to have all of you on the call today. I hope that all of you and your families are safe in these challenging times. The world has changed significantly since we last spoke. We pray for everyone who has been impacted by the COVID, either they've lost a few loved ones or they've lost a livelihood. While the pandemic is posing significant medical and economic challenges, it is making the world united as well. We should be forever grateful to the medical professions, which is delivering very well under the current crisis situation. Most of the economies are not doing well. India has contracted almost 24% in Q1 and likely to contract more than 10% this year. The U.S. has also contracted about 29% in Q1 and is likely to contract significantly for the full financial year. Almost all major and minor economies in the world are facing this problem, except China, which, however, for obvious reasons, we cannot rely on their published data. During this time, our key priorities remain at Datamatics, ensuring the safety and well-being of our employees, majority of our employees are working from home; retaining and servicing customers, having more meaningful engagement with clients during this difficult time; cybersecurity and data privacy for our customers; and maintaining sufficient liquidity, focus on cash flows and cost reduction wherever possible. I would like to assure you that every Datamatician is working relentlessly to deliver our services and commitments to all our stakeholders. As a socially responsible corporate, it has been -- always been an endeavor to associate with causes that benefit the community. As part of this philosophy, we helped the BMC manage the migrant worker crisis, setting up an emergency digital call center and collaborated with NGOs to provide food and supplies to over 6.5 lakh citizens. Additionally, we set up a data analytics cell that gave real-time insights and updates on the ground situation to the BMC officials. We also adopted a slum in Andheri, Mumbai and -- that catered to the needs of almost 1,000 families. We announced our Q1 FY '21 results on September 10, detailing out our operational performance. For those of you who have joined the earning calls for the first time, I would like to brief you as to what we do as a company before we go into the financial results. We are a global information technology, business process management and digital solutions company, building intelligent solutions for data-driven businesses to increase productivity and enhance customer experience. The 2 key areas for our focus are IT services and BPM services. IT services constitute 56% of our revenues. And with that, we have -- within that, we have application management, enterprise document management and digital solutions, which, of course, includes robotics, enterprise mobility and cloud. Under the cloud, we help customers migrate their businesses from legacy environments to the cloud. Here, we have partnered with Amazon Web Services, and have also hosted several of our products, such as TruFare, TruBot, TruBI on the cloud. Under mobility, we have built several applications for leading e-commerce companies and aggregator, artificial intelligence, which is focused on deploying AI within our projects. Intelligent automation and robotics is growing at about 57% per annum globally. And this is a very important focus area for Datamatics. We have recently launched TruBot 4.0, which is our own robotics product. And we have built into this TruCap+, which is an integrated cognitive capture module. We are getting very good response from the market since the launch of this product, and we will continue to invest in building our robotics product. One major focus area under IT services is Automated Fare Collection. We are the only Indian company with a very strong footprint in this space and have been in the space for the last 20 years. Here, we have our own product called TruFare that has given us significant advantage in the market. To date, we have done over 27 projects, AFC projects globally, and 2 projects are currently ongoing. Now switching to another focus area, which is business process management, which accounts for 44% of our revenue. Here, we focus on content management and publishing, financial transaction processing, and customer management. We do content management for publishing and e-commerce companies. And the next large area for us is the back office of banks and insurance companies, where we do a fair amount of data processing for these organizations. In terms of our geographical footprint, the U.S. comprises 54% of our business, Europe is 18% and India is about 20%, and the rest of the world is another 8%. In terms of the industry footprint, the largest segment for us is BFSI, which comprises 29% of our revenue; publishing and e-retail, which comprises 25% of our revenue; and technology and consulting, which is 22%; manufacturing advice and all the others put together are the balance 19%. Our client concentration remains healthy, with the top 5 clients contributing 25% of our revenue, the top 10 contributing to 35% and the top 20 contributing to 48% of our revenue. This is more or less similar to last year. So we've not seen any major shift. The pandemic continues to add considerable uncertainty and headwind. However, our goal is to manage what is within our control, continue to invest and not lose sight on the long-term opportunities in digital automation. And I'm delighted of the Datamatician's response to these difficult times and their commitment towards work. Our employees have come together to innovate and address global business opportunities and scenarios that we've never really experienced before. Each area in which we operate is grappling with structural changes brought owing to the advancement in technology, changes in consumer preferences, macroeconomic factors created due to the pandemic. We have built strong customer relationships and a solid foundation of the years. I believe that the -- that this provides us a competitive leverage to focus on customers, understand their business priorities, align strategies as per their business requirements and help them navigate through the current situation. We have extended free use of 3 bots under the COVID-19 Enterprise Support Program until September 30, 2020. I believe that pandemic will serve as a catalyst for growth for outsourcing businesses as the need for the cost reduction will be felt far more than ever before. We remain confident that the market will provide us opportunities, for digital companies like us, for exponential growth. With that, I will now hand over the call to our CFO, Sandeep Mantri. Sandeep, over to you.

Thank you, Rahul, for the business update. Good evening to everybody on the call today, and I thank you for joining our Q1 '21 earnings call, and hope you are healthy and safe at your places. Let me start with the key financial numbers for the quarter ended on June 30, 2020. So our net revenue came in at INR 277 crores, which is 4.5% drop from last year same quarter. The reason for the drop was twofold. One is, we have a subsidiary, which we have divested in last quarter. So about 1.8% drop in revenue was because of this subsidiary. And the second one was the impact of COVID on our quarter 1 revenue, which is approximately 7% on the top line. When we compare with the last quarter, which is March quarter, we are -- we have a decline of -- declined by 10.7% compared to last quarter. But last quarter, being -- the last quarter, we have a seasonal revenue of tax processing, which is about 5%. So in reality, we have declined by about 5.7%. Out of 5.7%, again, 1.8% is because of this divestment in the last quarter and remaining 7% is because of COVID on the top line. So this is all about revenue. Our revenue segment is basically from IT services revenue, we have INR 156 crores. And from BPM segment revenue, we have INR 121 crores in this quarter. As far as our EBITDA margin is concerned, we are at 10.3% as compared to 9.1% in the last quarter and as compared to 12.2% in the same quarter of last year, previous year quarter. So despite of the decrease in the revenue, we were able to deliver a good EBITDA due to strict cost control measures. We have taken many measures to contain our costs, which we will -- which I will come later on. Our adjusted profit before tax for the quarter was INR 19.6 crores as compared to INR 27.4 crores in the same quarter of previous year and INR 25.8 crores in the last quarter. Our effective tax rate remains at 28.2% as compared to 23.6% in the last year quarter and 24% in the last quarter on adjusted profits. Our diluted earnings for the quarter were INR 2.29 per share in this quarter versus INR 3.26 in the last year quarter and INR 1.96 in the last quarter. As of June 30, 2020, our liquid position -- our total cash and liquid investment stood at INR 232.8 crores, and we have a debt of around INR 58.8 crores. So this result into a net cash of INR 174 crores as compared to INR 124 crores in the last quarter. This shows a significant increase of INR 50 crores over the last -- over March quarter. So in this quarter, we have repaid a debt of about INR 38 crores during the quarter. And looking at our healthy liquidity now, we plan to repay most of our borrowing before the end of this month -- end of September '20, and we will be largely a debt-free company. As far as our receivables are concerned, we -- in March '20, we were at 83 days in terms of DSO. In this quarter, we have significantly brought down the receivable aging and now we are 76 days DSO for -- as at June 30, 2020. So we have a marked improvement in our days sales outstanding. So as mentioned by Rahul, from a financial perspective, we have 3 key priorities: one is liquidity, another is cash flow and third one is cost control. And all these are remaining our of priorities. So if you see our cash flow from operations continues to be healthy. As against EBITDA of INR 28.6 crores for the quarter, we have generated operational cash of INR 51.2 crores during the quarter, and that has resulted into a net significant increase in our liquidity position. As far as cost controls are concerned, we have taken many measures. We have re-leased, in fact, 2 offices in India and 1 office in Philippines in the last few months. The effect of those will be seen after Q2 once the notice period gets over for those offices. We are investing more on IT capabilities, which enable us to execute efficient work-from-home wherever feasible and practical. I'm pleased to inform you that we have added 10 new channel partners during the quarter for our product business. So there is a -- now we have 125 partners in total as compared to 115 partners as at the end of March quarter. And we will continue to strengthen our channel partner ecosystem as our long-term growth strategy. As mentioned by Rahul, the pandemic continues to create uncertainty. And thus, we have decided not to give any annual guidance for the fiscal 2021. I will now pass on the call to operator to open the floor for questions. I thank you very much for your patience, and appreciate your continued interest in Datamatics. Operator, you can open the forum for questions, please. Thank you.

[Operator Instructions] The first question is from the line of [ Mahesh Chandra Gupta ] as an individual investor.

Chandra Gupta.

Yes, sir.

Sir. Hello?

Hello. Yes, we can hear you.

We are the investors. Our family is the investors in Datamatics since IPO days, sir. We have a high respect towards Kanodias and their -- Mr. Kanodia's family and their expertise in the sales territory. But sir, we have a small regret. Since IPO days, the shareholders doesn't -- didn't have any return.

Sorry, can you say that again?

Shareholders didn't get any proper return at all. Our employee strength has grown up 4x. The sales have gone up several times. Everything is fine, sir. But the return for the shareholders is a bit disappointing. And last con-call, you have promised us to tell us about the buyback you will consider.

So we did discuss the options of buyback, and then we decided that in the current situation, it is very critical for the organization to contain and maintain its cash reserves; otherwise, it would put stress in the company. And therefore, we decided not to do a buyback. The buyback in itself is a fairly complicated process, and it will take several months. And with the uncertainties that presented itself, the Board decided that it may not be the wisest move to do from the point of view of maintaining sufficient liquidity in the organization. Because to compete in the market, we need to be fairly comfortable.

Because, sir, as you said during the last con-call, taxation problem can be sorted out with buyback. And another thing is the value -- I mean, the numbers will improve, right, sir? I'm not saying for the full amount of liquidity and, all. Of course, you, management, will be having a vision. I don't say no. However, our request is to consider this.

Sure.

And secondly, sir, recently, China applications were banned in India, like TikTok, Zoom. These kind of applications, can we expect anything from -- I mean, are you planning anything from Datamatics, sir?

No. We are not planning anything from Datamatics because these are very consumer-heavy applications, and Datamatics focuses on business-to-business kind of applications. And for consumer-heavy applications, the spend on marketing has to be very extremely high. And Datamatics has not serviced that segment. So I don't think, as a company, we understand consumer marketing. And we'd rather go to large corporates, where each transaction is a few crores of rupees versus going to a masked consumer where each transaction may be a few dollars. And also then for us to build such applications, it will take at least a year or 2. By the time, the market has moved. So we don't plan to focus on very consumer-centric market.

Understand. And one more question, sir, regarding the awareness of investors and shareholders. Sir, there was a report -- detailed report against of Datamatics by one Mr. -- Dr. Vijay Malik. I have gone through the report. Particularly there I have noticed one point that is regarding the purchase of Datamatics Staffing Services Limited, which was bought at a valuation of INR 15 crores, 51% and -- which made hardly a profit of INR 7 lakhs last year.

So -- sorry, go ahead. Please complete your question, sir.

Yes, sir. And this was bought from the -- I mean, management's family-owned business and this is what my concern. And such kind of reports when they're being circulated, Datamatics to coming with any positive points about Datamatics because they -- finally the company has to attract the investors right, sir?

Yes.

I'm sure you -- that you too must be knowing about Dr. Vijay Malik's report.

No, I'm not familiar with the report that you're referring to. Nevertheless, I shall try to get my hands on it and read it. Having said that, Datamatics Staffing Services does IT, what is called body shopping of professional services, and that's the focus area. And they've got some good marquee customers. The reason the valuation was so high is that -- and if you noticed, in the same report, I'm assuming the report would have done an analysis, we have not acquired the entire company. We only acquired about 50% of the company. The reason is that the company has some surplus real estate, which is not required. So as the real estate gets divested from the company, the balance money would be paid out. So our intent was to acquire the business and not the real estate. And therefore, we did not acquire the entire company.

That is fine, sir. My question was about the valuation and profitability, sir?

The valuation of this equity -- this is Sandeep. The Valuation of this equity comprises of 2 parts. One is business valuation and other one is the property this company owns, right? So there is some portion of value which goes into this real estate, which Rahul is referring. And there is some portion of valuation, which goes into the business. Having said that, during this unfortunate times and after March, the businesses are down because of COVID. So this may be one of the reasons your -- whatever report you're referring maybe highlighting this. Otherwise, we have taken the valuation from a registered valuer and then only did the transaction. So the valuation is in line with the valuation requirement and is in line with the -- we have taken a proper valuation for the company and then only did the transaction because this pertains to related party as well. So we have taken enough care.

We have the next question from the line of [ Amar Mourya ] from [ Alfa Alternatives ].

This is [ Amar Mourya ] from [ AlfAccurate Advisors ].

Hello, your voice is low.

Is it clear now?

Yes.