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

Ladies and gentlemen, good day, and welcome to Datamatics Global Services Limited Q2 FY '21 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.

Thanks, Aman. It gives me great pleasure to invite all of you for the Q2 FY '21 Earnings Call for Datamatics Global Services Limited. The results and investor presentation have already been mailed to you, and it is also available on our website, www.datamatics.com. In case anyone does not have a copy of press release and presentation, please do write to us, and we will be happy to send it out to -- send to you. To take us through the results today and to answer your questions, we have with us the top management of the company represented by Rahul Kanodia, Vice Chairman and CEO; Sandeep Mantri, the CFO; and Mitul Mehta, the Senior VP and Head, Marketing and Communications. We will be starting the call with 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. As usual, I would like to remind you that anything that is said -- has been mentioned in this call which gives any outlook for the future or which can be construed as forward-looking statement must be viewed in conjunction with risks and uncertainties that we face. These risks and uncertainties are included but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual reports, which you can find it on the website. With that said, I now hand over the call to Rahul. Over to you, sir.

Thanks, Asha. And welcome, and thank you, everyone, for joining our Q2 FY '21 earnings call. We're glad to have you all on the call today, and I would like to start by wishing you all a very happy Diwali in advance. We announced our Q2 results on November 4, detailing out our operational performance. And I will touch upon some of the key business performances, and Sandeep will update you on the financials. And post that, we can get into a Q&A. Despite the shadow of the pandemic, I'm happy to see that we are recovering from the Q1 slowdown and bouncing back to a growth path once again. At Datamatics, we are working relentlessly as a team to service our customers and have more meaningful engagement with them during these challenging times. Q2 was a good quarter for us. We reported a revenue growth of 3.1% quarter-on-quarter. However, the highlight of the quarter was our margin resilience. Our EBITDA grew by 15.3% on a quarter-on-quarter basis, which improved about 122 basis points to 11.5%, which is on the back of cost-cutting and cost optimization as well as revenue growth. On the business front, our IT services, which constitutes 55% of our revenues, witnessed a decline of 13.3% on a year-on-year basis and 1.2% on a quarter-on-quarter basis. The decline was mainly due to closures of some projects and the loss of a key customer. The loss has been partially recovered by new customers and some of the existing customers. Our BPM services, which constitutes 45% of our revenue, witnessed a growth of 10.5% on a year-on-year basis and 8.6% on a quarter-on-quarter basis. The growth was primarily driven by a rebound in banking and insurance, back-office processing and new projects in customer management services. We have signed some new deals that will enable us to see continued and healthy performance in H2 of this year. We expect about a 3% growth over H1 and 11% to 11.5% EBITDA as compared to 10.3% last year. We now are a debt-free company and have a healthy cash balance of INR 181 crores as we speak. Digital automation is an important focus for Datamatics. And in this area, too, we have won some marquee logos. We're getting very good traction from the market on the launch of our TruBot 4.0, and we will continue in investing and building our robotics product. Datamatics recently expanded the strategic alliance with Ingram Micro in the META region, which will provide Datamatics access to Ingram Micro's vast network of resellers across this META region. While the pandemic continues to create uncertainty due to the second wave, Datamatics will continue to focus on opportunities in digital automation, investment in our products and manage costs within our control. Our attention to execution, strong customer relationship and solid foundation gives us the strength and stability required for this market. We are seeing demand revival, and customers are accelerating the spend on advanced technologies. I believe the current situation is vibrant for growth for outsourcing businesses as there is a rise in demand for cost reduction and creating more opportunity for a company like us. Once again, I wish you all a very happy Diwali. And I will now hand over the call to our CFO, Sandeep Mantri. Sandeep, over to you.

Yes. Thank you, Rahul. Good afternoon to everyone on the call today, and I thank you for joining us on our quarter 2 FY '21 earning call. Let me start with the key financials for the second quarter ended on September 30. So our net revenue for the quarter was at INR 285.6 crores, a growth of about 3.1% sequentially and a 3.7% drop from last year's same quarter. In this, we have to adjust 1% impact due to divestment of one of our subsidiaries last year as we would have been down only 2.7% instead of 3.7% on a Y-o-Y basis. And also some impact of COVID on revenue is evident. The ratio of IT and BPM remains at 55-45. Our IT services revenue for the quarter were at INR 154.3 crores, a drop of 1.2% sequentially and 13.3% from last year's same quarter. BCM revenue remains at INR 131.3 crores, growth of about 8.6% sequentially and 10.5% over last year. Let me come to EBITDA margin. EBITDA margin for the quarter was 11.5% as compared to 11.3% in the same quarter of last year and 10.3% in last quarter. So in both the quarter -- compared to both the quarters, we have improved in terms of our EBITDA margin. In spite of slower revenue growth, we were able to sustain this healthy EBITDA due to cost optimization and automation primarily. Our other income for the quarter remains at INR 1.1 crores compared to INR 2.4 crores in the previous quarter. This other income is low because of reversal of exchange gain as the health -- the realized rate and the actual rates are almost the same. There is no, I mean, significant -- there is no great year compared to last year. Our profit before tax for the quarter was INR 23.1 crores as compared to INR 29.5 crores in the same quarter of last year and INR 19.6 crores in last quarter. So we have improved compared to last quarter. However, we are yet to go back to our last year same quarter performance. Our effective tax rate for the quarter was 26.5% as compared to 28.2% in the same quarter of last year and similar figure in last quarter also. So as communicated earlier also, our estimated tax rate should be in the range of 25% to 26% -- 27%. Taxes normally differ due to geographical mix of profits. We have operations in different geographies, and this results into this variation in tax rate. Our diluted earnings for the quarter was INR 2.62 per share, higher than in Q1 where we have -- we were at INR 2.29 per share. Now coming to half yearly financials, our revenue was at INR 562.7 crores, a drop of 4.1% on Y-o-Y basis. In this also, we have to adjust 1% impact due to the divestment of one of our subsidiaries last year. Otherwise, we would have been down only 3.1% instead of 4.1% on Y-o-Y basis. And some impact of COVID on revenue is also evident. Our BPM revenue were at INR 252.3 crores, a growth of 5.3% on Y-o-Y basis. IT revenue were at INR 310.5 crores, a drop of 10.6% on Y-o-Y basis. EBITDA margin H1 of this year is 10.9% as compared to 11.8% in H1 of last year. Our EBITDA margin in BPM is now 13.9% as compared to 11.3% in last year. So we have almost 260 basis point increase due to this cost optimization and revenue growth in BCM. EBITDA margin in IT remains under pressure at 8.5% compared to 12.1% last year. Major reason I would attribute to a loss of a key customer and closure of some of the projects and also budget concerns at few customers and resulted into price pressures and ultimately resulted into lower margins in IT segment. Our other income remains at INR 3.5 crores compared to INR 7.9 crores last year. Again, this is primarily due to exchange gain, which is not there in this year because we realize that actual rates are more or less same. So as a result of all of above, our profit before tax for first half is INR 42.7 crores as compared to INR 56.8 crores in last year same period. Our EPS is at INR 4.91 per share compared to INR 6.65 per share in last year's same period. Coming to balance sheet, as communicated -- as I communicated in last earning call, we have repaid all our debt. We were having INR 96.5 crores in borrowing when we started the year. Today, we are at 0, no debt borrowing in the group. There is no debt in the group as of today. As of September 30, our net cash and liquid investment stood at INR 181.5 crores compared to INR 144 crores. So this is a significant INR 58 crores addition to our free cash in last 6 months. Our DSO is at 77 days for the first half as compared to 83 days in last year. Our current ratio is also healthy at 3.38 compared to 2.37 in March '20. So there is a vast improvement in all balance sheet parameters. Our cash flow from operations continues to be healthy. As against EBITDA of INR 61.5 crores for the first half of the year, we have generated operational cash of about INR 66.3 crores during the period. Free cash flow grew significantly in H1 driven by mostly consistent focus on liquidity and the cash management at our end. As mentioned by Vice Chairman and CEO Rahul Kanodia, liquidity, cash flow and cost control continue to remain on our top priority. We manage to control costs by reducing some real estate, more offshoring of BPM work, increased automation in process and reduced travel and some other initiatives. So in terms of our geographical footprint, the U.S. comprises 54% of our business, India is 20%, U.K. 12%, Europe is 5%, and rest of the world is about 9%. In terms of industry footprint, the largest segment for us is the BFSI segment, which is 27% of our revenue, tech and consulting is 24%, education and publishing is 20%, manufacturing is 5%, retail and e-retail is 6%, and others are 18%. So our client concentration remains healthy with top 5 clients contributing about 27%, top 10 at 38% and top 20 contributing 50%. And this is more or less similar to last year. So I will now -- with this, I will now pass on the call to operator to open the floor for questions. Thank you very much for your patience. And I appreciate your continued interest in Datamatics, and wishing you a happy Diwali, everyone. Thank you. Operator, the floor is yours.

[Operator Instructions]The first question is from the line of Keshav Garg from CCIPL.

Sir, our Q2 results are encouraging, and it seems that the worst is behind the company. And the company has a cash balance of over 50% of market capitalization. And still company has chosen to be a zero dividend-paying company. So I think that is the primary reason why our stock is probably the cheapest IT stock on the stock market. So until -- and it is also encouraging that the company has started doing conference calls. But unless the company pays some dividend or does some share buyback and until the market thinks that this company, whatever money it is earning, at least something is coming to the shareholders, sir, it is very hard to see how our share will get re-rated. So what is your -- what are your thoughts on this issue?

So Datamatics has been declaring dividends every year. So we remain very consistent in our dividend declaration. It was only this year because of COVID that we pulled back on dividend. Right now, as you -- as we mentioned that our focus is going to be on conserving cash because this year is a little bit of a turbulent year. So whether we declare dividend or not for this financial year is a call that we will have to take as a management and as a Board when we come to the year-end. But as of now, we are not planning to declare any interim dividend. Otherwise, we would have done it by now because this year is -- but traditionally, we've always been declaring dividend every year.

Sir, that is true, but it was a token dividend. So basically, the payout ratio is very less, even when we use to pay dividend. And so until it is like 20%, 25% of the profits of the year, then -- if you see IT industry, all players, they -- I mean the big guys, they say over 50% payout. But I mean since we are in a growth state, so -- sir, but at least 20%, 25% payout ratio if a IT company can [ act as ] a debt-free company with cash surplus, sir, so then the market thinks that, then what is there for shareholders over here?

Sure, sure. I hear your sentiment, but I think we will certainly discuss this with the Board. And what we will do this year remains to be seen on how the second half of this year unfolds and then certainly we'll take this sentiment on board.

Okay. And sir, also wanted to understand, sir, that how -- what percentage of our total revenues are coming from digital and what percentage is the conventional IT, which is at the risk of getting [ old ]?

So it's very difficult because we don't track digital. Today, the term digital is permeating all our services. So if you look at the things, what comprises digital is mobility, analytics, artificial intelligence, robotics and things like that. So there are flavors of this coming into every service line. So it's very difficult to purely distinguish traditional IT from digital because even traditional IT is now getting flavors of either mobility or AI and things like that. So we've got digital cutting across. But this is something that we will see. Traditionally, we were tracking it, but then as it sort of permeates in every project, it becomes very difficult to distill out digital versus traditional.

Sir, basically, what I'm trying to understand is that what percentage of our revenues approximately are at the risk of getting automated and which might become redundant or we might lose that kind of business in the coming 2 years?

Sure, sure, sure. No, good point. So that impacts the BPM side the most. However, in our case, because we have our own technology, we are able to deploy it into our BPM processes, and you can see that impact on the EBITDA. And also, we are able to disrupt competition. So in that sense, our BPM business is not heavily threatened because we have our own technology, which is threatening competition. And on the IT side also, it's similar.

Sir, that is very encouraging. And sir, lastly, wanted to understand why our operating margins are on the lower side. If you compare the even small IT companies, which are even smaller than our size, they are also doing over 15% of EBITDA margin. So why is it that we are barely making double-digit EBITDA margins? And also, what are you doing to increase EBITDA margins going forward?

Yes. So we've already started taking action on that. We've automated a lot more of our processes. We've cut the fat wherever we could. There is still some more ground to cover on that. So that should help improve. Having said that, we've been investing very heavily in some technologies, and those investments are expensed out. They are not capitalized. And therefore, the margins are a little subdued because we are not capitalizing. We are expensing all the investments we are making in building products and tools.

Sure, sir. So -- and now that in Q2 results, would you think that this trend of recovery will carry on? And do you see by third quarter or fourth quarter -- when do you see year-on-year growth coming in?

Yes. So I did mention that in my address. We do expect this trend continuing. And we will observe for another quarter, but looks like H1 and H2 -- H2 should be better than H1. And last year, we ended the year at 10.3% EBITDA. This year, we should close between 11% and 11.5% EBITDA. And the revenue will also be on an upward trajectory. Q1, we were hit very hard, more so because of a loss of a customer and a few profitable projects. But as you see in Q2, we've grown 3.1%, and I expect this kind of a trajectory to continue for this year.

Okay, sir. And sir, please consider a share buyback. I think that it will lead to serious re-rating of our stock.

Sure. Thank you.

[Operator Instructions] The next question is from the line of Deepak Poddar from Sapphire Capital.

Yes. Sir, in the past, we have spoken about like the product that we have been developing in last 3, 4 years. So we expect a good growth because of that going forward. So when do you see that start hitting the P&L and we start seeing a decent trajectory in terms of growth?

Yes. I expect that to kick in, in the next financial year. So this year, we've launched it. Unfortunately, this year because of COVID, it kind of got impacted a little bit in terms of our reach out to the market. But we've been rated by Everest. And in fact, we've moved up the ladder as far as their rating is concerned. We've also got the largest repository of use cases in that segment of robotics. So I'm hopeful that next financial year, starting April, we start seeing some impact of that.

And what's the opportunity size that you're talking about here?

The opportunity size is multibillion dollar because the robotics and automation industry is very, very hot. And Gartner rated us the fastest-growing segment today. So you're talking about -- Mitul, do you have the number, any, in terms of the robotics industry?

Yes, Rahul. So typically, the robotics industry is growing at about CAGR of 50% to 60% until about last year. This year, we have to see the numbers, not yet released. So currently, I think that the software industry stands at about $3.6 million.

Okay. Okay. So when it starts kicking in, in FY '22, now we are talking about maybe 3% quarter-on-quarter or a sequential growth, right, maybe in the balance part of this year. So once this start kicking in, how do you see that trajectory 3% going up to 4%, 5% on a sequential basis?

It should. We are focusing on getting these partners. We've recently signed up with Ingram Micro in the META region. We signed them up in the EMEA region. We are in dialogue with them on the APAC region as well as Europe and the U.S. So once these relationships get stabilized and firmed up, then I expect a significant growth. So yes, to your point, yes, it could be in that range. But of course, we need to look at it once these negotiations get signed up.

And thus, you're expecting the first half of next year, like FY '22?

It should start. Some results should start coming in.

Okay. Okay, fair enough. And now you made one more point about all these costs that you have been doing, your expensing rate.

Yes.

So now is the time maybe next year when you will start getting the benefit of that?

That's correct.

So how do you see the EBITDA margin? Because EBITDA margin is depressed because of all these costs that you have been doing for last 3, 4 years.

So what will happen is that the revenue growth hopefully should pick up. On EBITDA, we will take a call because we will have to now invest heavily on sales and marketing. And particularly marketing is when you do product business, if you see the sales and marketing budgets of product companies compared to services companies, they're about 3x more than the services companies. So we will have to increase our spend on sales and marketing. And our initial agenda will be to get revenues growing and capture market share. So I would be a little hesitant to make a comment on the EBITDA, but it will remain healthy. That's for sure. But once we finish the budgeting in the next quarter, we'll have an idea of how the budget are for the next year. So apart from saying that it will remain healthy, and I'm confident of that, I did not give a number because we still have to do the budgeting exercise for sales and marketing for the automation area.

The next question is from the line of [ Dipesh Sancheti ] from Manya Finance.

Wish you a very happy Diwali in advance. Just wanted to know about your TruBot services. How much of the revenues come from onetime and how much is from the AMC of TruBot?

Yes. So right now, most of them are the annuity license revenues. So once you sell a license as a renewal every year, it's a subscription model. Onetime services are very small because onetime services relate to implementation, and we are not doing too much. We are encouraging our partners to do implementation, although we have done some of it. So the bulk of the revenue is an annuity tax.

So it's repetitive?

Yes.

Okay. And how much is it? Can you quantify it?

We don't give that kind of segment-wise breakup of revenue.

It is very -- right now, it is a very small segment. So we are not disclosing the numbers of this segment. We will disclose it appropriately sometime next year or next to next year when it becomes a really reportable number, right?

Okay. So you expect it to grow in the next few years?

Yes.