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

Ladies and gentlemen, good day, and welcome to Datamatics Global Services Limited Q3 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.

Thank you, Indra. It gives me great pleasure to invite all of you for Q3 FY '21 earnings call of Datamatics Global Services Limited. The results and 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 and presentation, please do write to us, we will be happy to send the same 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 Mr. Rahul Kanodia, Vice Chairman and CEO; Mr. Sandeep Mantri, CFO; and Mr. Mitul Mehta, Senior VP and Head Marketing and Communications. We will be starting the call with a brief overview of the quarter, given by Mr. Rahul Kanodia, which will be then followed by financials, given by Mr. Sandeep Mantri, we will then take the Q&A session. As usual, I would like to remind you that anything that is said in this call, which gives any outlook for the future or which can be construed as forward-looking statements 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 our website. With that said, I now hand over the call to Mr. Rahul. Over to you, sir.

Thank you, Asha, and welcome, and thank you, everyone, for joining our quarter 3 FY '21 Earnings Call. We are glad to have you all on the call today and wish you and your families a safe and happy new year. I will touch upon some key business performance, and Sandeep will update you on the financials post -- and post that we'll get into a Q&A. I'm glad to see that business is bouncing back across segments. We are seeing increase in demands in technology spending cycles, both from new and existing clients. This acceleration is expected to remain a key growth driver for the IT industry over the next few years as digital transformation plays out. It is an era of technology upgradation, which is creating huge opportunities for the IT industry. We are seeing specific opportunities in the process automation and dynamic content management areas. Despite a seasonally weak quarter and the challenging environment, our overall quarter performance has seen a decent improvement over the last 2 quarters. With the continuous focus on execution and long-term client relationships, we are returning to a growth path. We reported a revenue growth of 6.1% on a quarter-on-quarter basis. We had a negative sequential quarter of 10.7% in quarter 1, followed by a positive growth of 3.1% in quarter 2 over quarter 1, and now it is 6.1% in quarter 3 over quarter 2, which brings us almost to a flat performance on a year-on-year basis. The key highlights for the quarter was the sustainability of a double-digit margin. Our EBITDA grew by 18.1% on a quarter-on-quarter basis, and margin improved by about 130 basis points to 12.8%, which was mainly aided by cost optimization and savings due to COVID. On the business front, our IT services, which constitutes 54% of our revenues, witnessed a growth of 2.5% quarter-on-quarter and a degrowth of 12.9% on a year-on-year basis. The degrowth was mainly due to closure of some projects and loss of a key customer, which we had spoken in the last earnings call. The loss has been partially recouped by new customers and other existing customers. Our BPM services which constitutes 46% of our revenues, witnessed a growth of 10.3% on a quarter-on-quarter basis and 16.5% on a year-on-year basis. The growth was primarily driven by a rebound in banking and insurance, back office processing and new projects in customer management and publishing businesses. A major event was the divestment of 62% -- 62.51% of our stake in CIGNEX at a valuation of INR 16.6 million, effective January 1, 2020. CIGNEX was -- CIGNEX on an average had a revenue of about INR 40 crores to INR 42 crores per quarter, which will move out of Datamatics' financials from the next quarter of this year. Our pipeline continues to remain healthy, and we are confident of sustaining the growth momentum in the coming quarters. We have recently launched a new version of TruCap+. It is an AI-enabled intelligent document processing product. It will allow enterprises to realize faster time to value and achieve greater straight-through processing with accuracy. The product is closely integrated with our robotics automation product called TruBot. Our total cash balance was INR 254 crores with no debt. And I am pleased to see that Datamatics' response and commitment towards -- to work in this difficult situation. We are currently working together as a team and focusing on execution and addressing the global business opportunities. With that, I will now hand over the call to our CFO, Sandeep Mantri. Sandeep, over to you.

Thank you, Rahul. Good afternoon to everyone on the call today, and thank you for joining us on our quarter 3 FY '21 earnings call. Wish you all a very happy new year. Let me start with the key financials for the Q3 ended on December 31, 2020. Our net revenue in this quarter was INR 303.1 crores, a growth of 6.1% sequentially and a marginal drop on Y-o-Y basis. This growth was mainly driven by our BPM business. The ratio of IT and BPM remains at 54%, 46%. So BPM has improved from 45% in last half to 46% now. IT services revenue for the quarter were at INR 158.2 crores, a growth of 2.5% sequentially and a drop of 12.9% from last year the same quarter. BPM revenue were at INR 145 crores, a growth of 10.3% sequentially and 16.5% over last year same quarter. The key highlights for this quarter is our EBITDA margin. So our EBITDA margin has improved substantially. For the quarter, it was at 12.8%, as compared to 8.6% in the last year quarter and 11.5% in last quarter. So compared to both the quarters, we have improved in terms of our EBITDA margin despite a seasonally weak quarter when we have many holidays in the month of December and November because of U.S. Thanksgiving and U.S. Christmas festival. We have -- we were able to maintain a double-digit EBITDA margin due to cost optimization and cost savings due to COVID. Our profit before tax for the quarter was INR 32.1 crore as compared to INR 21 crore in the same quarter of last year and INR 23.1 crore in the last quarter. So our PBT also has improved significantly when we compare to last quarter and last year same quarter performance. Effective tax rate for the quarter was 24.4%, which is similar to the same quarter of last year, and it was 26.4% in the last quarter. So we have improved on tax rate as well. As mentioned in earlier calls also, our estimated tax rate should be in the range of 25% to 26%. PAT, after noncontrolling interest for the quarter stood at INR 22.2 crores, a growth of 43.7% on quarter-on-quarter basis and almost 70% growth on Y-o-Y basis. Diluted EPS for the quarter was INR 3.76 per share, which is higher than Q2 of -- Q2 FY '21 and Q3 FY '20. Q2 was at INR 2.62 and last year was at INR 2.22, respectively. Now coming to 9 months financial. Our revenue was at INR 865.8 crore, which is a drop of 3% on Y-o-Y basis, out of which 1.3% is due to a subsidiary we divested in March '20. So the net drop is about 1.7%. So we are almost flat in terms of Y-o-Y revenue. The growth was impacted mainly due to COVID-19 pandemic in the initial quarters of the current fiscal year. For 9 months FY '21, our BPM revenue were at INR 397 crores, a growth of 9.1% on Y-o-Y basis. And our IT revenues were at INR 469 crores, a drop of 11.4% on Y-o-Y basis. Consolidated EBITDA margin remains stable for 9 months at 11.6%. BPM EBITDA margin is now at 16.4% as compared to 9.7% in last year 9 months. So we have approximately 700 basis point increase, which is driven primarily due to operational efficiencies and revenue growth. Our IT EBITDA margin though remains under pressure at 7.5% as compared to 11.3% last year. The key reason for this drop is one of we -- as we explained in the last call also, is a loss of a key customer and closing of some of the projects. And there are budget constraints also at few customers, and which has resulted into price pressure and ultimately lower margins. Our other income for the 9 months was at INR 6.3 crore as compared to INR 13.1 crore last year, which is mainly due to exchange gains booked in last year. This year, the exchange gain is not there because hedged rate versus the current rates are more or less same. Our profit before tax for the 9 months is INR 74.8 crore as compared to INR 77.9 crore in the same period. Our EPS is INR 8.67 per share as compared to INR 8.85 per share in the last year same period. So we have almost improved in every parameter for this 9 months and especially in this quarter. Coming to balance sheet number. As mentioned in last earning call, we are now a debt-free company. And as of December 31, 2020, our net cash and liquid investment stood at INR 254.3 crore as compared to 185 -- INR 181.5 crore at the end of Q2 FY '21. Our DSO stood at 68 days for the 9 months as compared to 83 days in last year. So our current ratio is also healthy at 3.59 compared to 3.38 in last quarter. So almost in all balance sheet parameters, there is a marked -- significant improvement. We have generated operational cash of about INR 145 crores during the period. So with -- free cash flow also grew significantly in 9 months, mostly led by consistent focus on liquidity and collections and the cash management at our end. We continue to remain focused -- cautious on uncertain situations, and we are confident of combating challenges and maintaining growth momentum. In terms of our geographical footprint, U.S. is 59% now; India is 21%; U.K. and Europe is 15%; and rest of the world is about 5%. In terms of industry, our largest segment is BFSI, which is 23%; tech and consulting is 19%; education and publishing is 26%; manufacturing is 5%; retail -- e-retail is 6%; and rest of the segments are 21%. Our client concentration also remains healthy with top 5 clients contributing about 27%, top 10 is 38% and top 20 contributing 51%. So these are the financials update for the quarter and for the 9 months. 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. With this, I pass on the call to operator. Operator?

[Operator Instructions] Our first question is from the line of [ Vikas Parekh ], an individual investor.

Congratulations for good set of number. So you have announced about this divestment of stake in CIGNEX. So can you elaborate on this what was the thought process behind this decision?

We touched upon it last time as well. So the -- we -- as Datamatics -- CIGNEX didn't fall into the core focus of Datamatics, we are focusing more on hyper automation, robotics, intelligent document processing and those kinds of areas. CIGNEX was more in the area of open source and things like that. And because we wanted to sharpen the focus of Datamatics, we decided to divest the noncore areas of our operations. So that was really the thought process behind the divestment of CIGNEX. In any case, CIGNEX was a 62% subsidiary of Datamatics. With the divestment of CIGNEX, we pretty much have now 100% control on all our operations.

Correct.

Okay. And 2, what is the status now about the steel, have we got approved from all the stakeholders and authorities and other stakeholders?

Yes. So we have got all the approvals. And in fact, first transaction has already completed. We have transferred the shares, and they have paid as per the agreement. So this CIGNEX is effective 1st of January. CIGNEX is not in the fold of Datamatics.

[Operator Instructions] Our next question is from the line of [ Darshil Zaveri ], an individual investor.

Congratulations on the good growth. I just wanted to ask, could you just share any outlook for revenue and EBITDA margin for FY 2022?

We are in the midst of business planning for FY '21-'22. So right now, it will not be appropriate for me to share the guidance. But when we meet next time in -- after March call, we will share you more concrete number on FY '21-'22. So I can say that we are on a growth path now.

So the margins will be stable only? If you could just clarify on that.

Margin will remain stable. It may marginally increase in next year as well.

We -- so once we put out financial planning, I think we will be in a position to come back with more concrete numbers.

More concrete numbers. Yes.

Our next question is from the line of [ Dhruvit Shah ], an individual investor. There seems to be no response from this line. [Operator Instructions] Our next question is from the line of [ Amit Dodani ], an individual investor.

Congratulations for the good numbers. Just a quick understanding. We have the 200-plus cash and liquid assets in our balance sheet. Are we planning any acquisition or any other -- any kind of investment with this cash reserve?

Yes. So we are trying to invest into our robotics and intelligent automation area of service. We've built some products in that space, and they will call for some significant investments. So yes, a lot of these cash will be consumed in that area of business. What the exact numbers are? As we said, we are going through a planning process, so we don't have the numbers, but we will certainly have the numbers by the end of this quarter.

Okay. Great. And sir, this cash will also include the divestment investment recovery for the CIGNEX? Like...

Yes, yes. Partially, this is included. So out of total INR 16 million, about INR 8 million is included in this INR 254 crores and it will come over a period of time.

Okay. And sir, how do you plan to add up this growth? Like we have diversified the CIGNEX. So do we have any plan for match the revenue in subsequent financial year?

So we are more on profitability right now. So our goal is to be more profitable in terms of margins. And obviously, we will have the growth -- we'll have decent growth in our businesses which we are continuing currently in. So that's the thought process.

So, yes. So will we be able to fully cover the hole created by the divestment of CIGNEX? I don't know right now, we are in the planning process. But as Sandeep said, our focus is more on profitability. So -- but yes, we will put in a lot of effort on sales with the agenda of selling the product businesses that Datamatics has. So yes. So we will claw back a good component of it, but exactly how much we will claw back, I can't say right now because we are going through the planning process.

When we meet next time, we will have more concrete numbers on FY '21-'22.

Okay. Sir, last 1 more question on the EBITDA margin. Like due to COVID, you are able to save a lot of cost. But when the company again begins to the fully operational, so whether this EBITDA margin will be the sustainable going further? Because of the COVID, we are saving a lot of cost, but once we are fully operational, we have to incur the similar cost again.

So it will be partial because there will be some savings because of COVID, like travel and hospitality cost, which will not be there in last 9 months. But once business resume operations, those costs will again start picking in the next quarters or next to next quarter. But partially, we have saved a lot of costs due to cost optimization. We have let go almost 5 facilities across the globe in last 9 months, so which has resulted into a significant saving. And then we have tried to offshore many of our projects from on-site locations, so which is also giving us good savings. And you can see the figures -- results are coming because of those initiatives. And we continue to do so, and we continue to do more and more automation in the operation, which will result in higher margins.

Yes. So to answer your question, some of the cost reductions are permanent. We will not get to all the offices back. Some of the cost reduction will bounce back. We like travel, there will be an increased travel, but it will not go back to the same levels that it was last year.

Yes.

[Operator Instructions] Our next question is from the line of [ Vikas Parekh ], an individual investor.

My question is related to [Technical Difficulty] question just before [Technical Difficulty] so this -- in the work from home model where the as per my understanding commentary from other companies the offshore has increased the share in businesses. So how is this happening with our company? And how is this demand environment? Because the view about the offshoring and the BPM business has improved a lot. So what is the case with our client?

So we had a mixed bag. In Q1, we took a significant hit and our quarter revenue degrew by about 10.7%. But then Q2, we had a little bit of a bounce back, and it grew at 3.1%. And then Q3, again, we've had a better growth, and we've grown at 6.1%. So we see it bouncing back. The hit was largely taken by the BFSI segment because a lot of the banking work that we do, they don't allow you to work from home because of data security reasons. So that piece of business was hit hard. Now that's bouncing back because we've resumed some partial work from office. So those people working in those banking projects have started working from the office once again. So that piece is bouncing back. However, the travel and hospitality business is still kind of struggling. Yes. So that's where it is. So we've had a mixed reaction. So business is growing. We see it growing again. But initially, we did take a hit.

Okay. So in this work from home model where we are able to save cost and there is a cost saving, which is visible to others as well. So is there any pricing pressure from client side? Do they want to take some share of this cost saving also?

There was pricing pressure earlier during the year. I think that pressure has partially eased now. The clients are not looking at taking advantage of the cost saving we are doing because they themselves are in the same mode, and they themselves are also reeling under the COVID impact. So no, they're not asking to reduce cost because of your cost cutting. Some of them want to reduce price because they are under pressure themselves because of COVID. But now I think the -- I see the pressure easing off as the world economy is opening up.

Just last question, sir if I can squeeze in. So we have recently launched this new version of this TruCap. Can you throw light on that as well?

Yes. So TruCap is an intelligent -- or AI-based, artificial intelligence-based data capture solution, which is able to ingest data from multiple different sources. And it is a very critical component of the robotics practice. So it will plug into our robotics practice. It also very well fits into the intelligent document processing area that we are targeting very actively. So it is a very key component of our go-to-market for the intelligent document processing practice as well as it augments the robotics practice that we have. We see -- we are very bullish about it, and we see good traction coming from the market on this product. Yes. Over to you.

[ Mr. Parekh ] do you have any more questions?

I will come back in the queue, if there is no one then I will ask again. Can I go ahead at this moment?

Yes, sir.

Okay. So can you -- there was some mutual fund -- UTI mutual fund deal that also happened. So what are about that? Can you say something about that as well?

UTI mutual fund also do you recollect?

Digital data, digital.

SBI?

Mutual fund. UTI.

Mutual. Yes. So this is more around their digital transformation process. That's a specific project. I don't have specific details on that project right now. But I know it was around their digital transformation.

Digital work room basically.

So in the -- so we've got a solution around the e-office, and we call it the digital workplace. And many companies are increasingly going with digital workplace because of this whole lockdown and more. So we've successfully delivered one to the Reserve Bank of India. We've delivered -- another one we're delivering to SEBI. And this one is for the State Bank of India.

UTI.

UTI. Sorry, UTI mutual fund for the same solution. So it's all around a digital working environment for all these companies. And with SEBI and with RBI-type of customers, we've done some very marquee projects in this space, including RECL. So this is just another customer in the same space.

[Operator Instructions] Our next question is from the line of Keshav Garg from BCIPL (sic) [ CCIPL ].

Sir, many congratulations for a good set of numbers. And I hope that the growth that we showed this quarter will carry on in future. And sir, I wanted to, first of all, understand that after the sale of our recent whatever announcement, Caspex or something, our subsidiary that we have made, sir, as on 31st of March 2021, sir, what will be the net cash balance with the company?

So this quarter, if you see, we added about INR 70 crores...

Correct. During the year.

During this year. So I suspect -- what's the cash balance?

So I think the cash balance will remain more or less same because CIGNEX will go out of fold, effective 1st of January. So the CIGNEX balance will not be there in the next quarter. So we will be -- I can't estimate right now, but if the collections are good and if everything is normal, then we will have about -- between INR 220 crores, INR 230 crores profit.

See but if I can, sir, as of September only, we had around INR 200 crore cash, cash and investments combined. Sir, so after the sale of subsidiary and internal accruals of the second half of this present financial year, sir, so the cash balance should -- I mean, I thought it will actually come INR 300 crores, INR 400 crores?

No. Cash balance included CIGNEX balance also until December 31. So CIGNEX, we have 62% stake. So though the cash balance is showing 100%, but we claim only 62% in that also so that is why the cash balance will go from CIGNEX and will move into Datamatics where Datamatics can use the cash balance now.

Okay. But you are saying it would be approximately INR 200 crore or thereabout?

More, more, more than INR 220 crores, INR 220 crores approximately, I would say.

Okay. INR 220 crore. Okay. Great. And sir, also this quarter, sir, our IT division somehow the profits fell and our BPM division profits shot up. So I mean, is it some kind of product mix change? Or what exactly is the reason behind this?

So we spoke about it the last earnings call as well. It was basically due to a loss from.

Highly profitable.

Highly profitable customers and a few projects which is in the IT space. And just the impact of that, essentially.

Okay. Okay.

Yes.

Sir, and also wanted to understand that on the working capital side, sir, do you seeing -- are you seeing some pressure on receivables ease?

Pressure on receivables is easing in the sense that we are putting a lot of pressure on collections. However, we have a lumpy business when we come to the AFC business, which is focused around the metro work, which is a working with government bodies. So they tend to be lumpy, and that gets a little erratic. So when we do the invoicing on that, we could have an increased DSO. However, outside of that, the rest of the DSO is well under control, and we keep the pressure on, on a consistent basis.

And there is no pressure on working capital as far as this MMRD. Only, I think 60 to 90 days is the time period when we get the invoices collected. So during that period, our DSO goes high. But when we collect the billing, it again bring down to normal levels.

Okay, sir. And sir...

And even if you see our December is 68 days compared to 83 days in last year, March 2020. If we do billing in, let's say, February or March for these metro projects, then obviously, we are not going to collect immediately. So to that extent, our DSO will again bounce up to some extent.

Okay, sir. And sir, after the fourth quarter results, sir, please consider a share buyback or a liberal dividend...

We said last time also that we will discuss in the Board meet -- the next Board meeting about dividend and about the -- about what you said I think last time also. So...

Great, great. And sir, also, sir, just a general question, sir, like you must be aware, sir, last -- since COVID, sir, the expenses of IT companies have dropped drastically on traveling, visa expenses, et cetera, et cetera. So, sir, margins have expanded to all-time or multiyear high for the sector in general.

Correct.

And sir, so if we see the sector the industry as a whole, sir, the debtor outstanding days are approximately 45 to 60 days. Sir, but in our case, sir, our debtors are around 80 to 90 days, and sir, our margin is on the lower side, it is barely 10%. Sir, so I think...

No it is not 10% if you see our last quarter, it is 12 point...

It's 13%. Sir, that's very encouraging. But still I'm saying that why our expenses didn't reduce as others? Like for the others in industry, why our expenses didn't fall?

No. So if you see our other expenses, they fall substantially from, I think, INR 130 crores to -- about INR 30 crores decrease in 9 months, which is a significant decrease. If you if you see our published result, you will see those numbers. And second, on the margin front, we are...

Yes. I think the bigger issue is that in Q1, we had a degrowth of almost 11%, 10.7% to be more precise. When the cost did not move, but the revenue went up, and that is a huge impact. And it's really that I think many of the other companies probably did not have that drop. And we -- unfortunately, we -- the timing was not very good for us, where we lost that customer, and so I think that's really the issue.

And basically, now that -- sir, basically, your other expenses have dropped, sir, but employee expenses have gone up. So sir basically, there is no margin expansion as has been seen with the other players. So sir basically, now with our revenues finally stabilizing, sir, so you think that our margins will go up now?

Yes. In this quarter, certainly, in the fourth quarter of this year, yes our margins will go up.

It will go up. And right now, our margins are at about 12 -- 13%, which is -- I think from last year's level, if you see last year same period, it was 9% or 8%, something like that.

Yes. Okay. Sir, so going forward, the margin should stabilize that like this 13% level only? Or it can still go higher to mid-teens?

I -- so depending on our investment plans that we have, which we will be planning into this quarter for the year. And as far as investments are concerned, we are writing off, we are expensing the investments. We are not capitalizing them. Depending on the investment plan, we will see the impact on the margin. So that is a decision we'll take as we go through the planning process.

[Operator Instructions] We'll take our next question from the line of [ Amit Dodani ], an individual investor.

Yes. Sir, quickly, a question on the IT solution. As you mentioned, like as I run through your presentation, like 95% of our business are retention business, and you mentioned that you have lost a big client, which pressurized your IT solutions businesses. So what was the contribution of this big customers? If you are saying 95% business are retention business, then is it more than 5%? Or how -- and what is our margin contribution from this customer?

So about -- this customer was -- last time also we said, this customer was about INR 5 million to INR 6 million, between INR 5 million to INR 6 million revenue range. And it was a high margin -- we don't disclose margins for the customer. It was a high-margin customer.

Okay. But what was the contribution? Like of course right now, whether it was contributing, to say, 20% into overall margin? Or how? If you can just throw some highlights.

So we don't get into individual customer-wise margin. And we would -- we -- out of this right now. Because we are not disclosing each project each customer. So -- but having said that, you can see our margin profile for this quarter, which is very healthy in spite of having lost this customer.

Okay. Okay. Sir, do we have any business in the mortgage industry and mortgage back office processing because it's another industry where automation is happening for the processing of management of entire mortgage process? So do we have any plan in this industry?

So that would fall into the BFSI industry, and we do have a good footprint in BFSI. Specifically around mortgages, I would not be able to say whether we do work or not. But I do think we have some...

We did some good projects in last to last year. Last year also, we did some good project on mortgage. Yes.

Is it? Okay.

Okay. Okay. Understood. Because we saw like -- we read some research because it's a kind of recurring business for the mortgage industry for the maintaining the property as per the U.S. laws and regulations. So I just wanted to understand, like, are we planning into this industry? Because kind of recurring revenue and some much easier work for the automation process.

Yes.

Yes.

Okay. Okay. And sir, on the UTI business, it's kind of one-off basis or do we get any recurring business from this project?

So this is a semi -- it's a platform sales. So there's a onetime cost, and this is a recurring license.

Licenses, yes.

So there is some degree of recurring because of license, annuity license. And there's about...

It's a 80, 20 ratio at standard. Maybe 20% will be the AMC and recurring...

10% to 15%. 15% approximately, yes.

[Operator Instructions] As there are no further questions from the participants, I now hand the floor back to the management for closing comments. Over to you, sir.

Yes. Thank you, everyone, for being on this call. We really appreciate the time you spent with us and you are willing to try to give us. We would like to, once again, wish you a very happy new year for 2021. Hopefully, COVID will be behind us very soon now that the vaccine is out, and we look forward to a more vibrant industry and environment and hopefully, a good growth. So thank you all for being with us again. Bye-bye.

Thank you members of the management. Ladies and gentlemen, on behalf of Datamatics Global Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.