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

Ladies and gentlemen, good day, and welcome to Datamatics Global Services Limited Q2 FY '22 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.

Thank you, [ Sanford ]. Good afternoon, everyone, to all participants in the call today. Welcome to the Q2 FY '22 Earnings Call of Datamatics Global Services Limited. The results and investor presentation have been already mailed to you, and it is also available on our website, www.datamatics.com. In case anyone has not received a copy of press release and presentation, please do write to us, and we will be happy to send it to you all. 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, Chief Financial Officer; Mr. Mitul Mehta, Senior VP and Head, Marketing and Communications. Mr. Rahul will start the call with brief overview of the quarter on business, which will be then followed by our financials, which will be given by Mr. Sandeep. We will then open the floor for Q&A session. As usual, I would like to remind you that anything that is said in this call, which gives any outlook for 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 our website. With that said, I now hand over the call to Mr. Rahul. Over to you, sir.

Thanks, Asha. Welcome, and thank you, everyone, for joining our quarterly Q2 FY '22 earnings call. We're glad to have you all on the call today, and I would like to start by wishing you a very happy Diwali in advance. I hope all of you remain safe and healthy through this festive season. I will share with you some business performance highlights, and Sandeep, our CFO, will update you on our financials. And post that, we will get into a Q&A. I'm glad to inform you all that we are seeing business coming back to normalcy. We are witnessing strong demand environment across segments and industries we operate in. The overall industry is going through a large-scale business transformation, especially in cloud and digitization. We are also very well positioned to capture these opportunities and grow in the coming quarters. Coming to the quarter performance. We reported another strong quarter, backed by a broad-based revenue growth and robust margin expansion. Our revenue grew by 4.8% on a year-on-year basis and 4% on a quarter-on-quarter basis. However, excluding CIGNEX, which was a subsidiary we divested in Q4 last year, we have grown 24.1% on a year-on-year basis. And despite the headwinds we had from salary increases and the supply side -- and supply side challenges, we continue to maintain our double-digit EBITDA margin at 16.7%, a growth of 513 basis points on a year-on-year basis. We are seeing significant traction in our BPM business, which contributes 55% of revenues, and it grew at about 25.4% on a year-on-year basis. BPM EBITDA margin was at 23.5%, which is the highest over the last 11 quarters. The growth was aided by new logo acquisition, expansion of business from existing customers and continuous effort on cost optimization. We are confident of maintaining this margin performance on the back of revenue growth, increased automation and repricing our services. Our IT revenues, which contributes 45% of revenues, grew at 8.6% on a quarter-on-quarter basis. The IT EBITDA margin stood at 8.3% for the quarter. However, without considering the investments we are making in products, our EBITDA margin was at 12.1%. We have a very healthy pipeline of orders and are focusing on improving our margins in IT, which will be driven by growth and repricing of our services. Our AFC business has a strong pipeline, and we should see some deals in the next few months. We are continuously focusing on account mining and cross-selling and acquiring new logos. Several of our customers are increasing their wallet share with Datamatics, and we have acquired 33 new logos with several million-dollar deals. As mentioned in our earlier calls, I would like to reiterate the challenges brought by the pandemic has accelerated the client spend and investments in platforms-based digital solutions like digitization, cloud, automation, artificial intelligence and digital experiences. And this has created a huge opportunity for companies like ours. We continue to see large opportunities in digital processing automation and dynamic content management. As you are all aware, we provide BPM and IT services, which are driven by good quality talent in the company. This makes our suppliers' and clients' situation very important -- and a very important piece to drive our future growth. The whole IT sector today is going through a challenging time when it comes to people and talent availability. We have taken several steps in stemming -- stepping up our recruitment activities, particularly increasing the intake of pressure and giving increments to key talents to mitigate the risk of rising attrition and be better prepared for growth. The current situation will put margin pressures on our operations in the coming quarters, but we are mitigating that through repricing our services. I just returned from a long trip to U.K. and U.S.A., and the customer mood there is very upbeat. We have increased our focus on the U.S. market and [ expanding ] the U.S. sales force to focus on digital transformation opportunities, including our Intelligent Automation products, that is TruBot in robotics and TruCap+ in the Intelligent Document Processing. We have recently received excellent ratings by [ analysts ] operating in this space. This is why we remain confident of the market opportunities in intelligent automation as a key driver for growth going forward. I would like to take this opportunity to thank our customers and shareholders for continued support and trust. I would also like to thank all Datamaticians for their dedication shown during this difficult time. We are confident of sustaining our growth momentum and margins for the remaining fiscal year. With that, I will now hand over our call to our CFO, Sandeep Mantri. Sandeep, over to you.

Thank you, Rahul. Welcome, everyone, and thank you for joining us on our quarter 2 FY '22 earnings call. I hope all -- that all of you are safe and healthy. Very warm wishes for the festive season in advance. Let me start with the key financials for Q2 ended on September 30, 2021. So our net revenue for this quarter was at INR 299.2 crores, up 4% on a quarterly basis and up 4.8% on Y-o-Y basis. Without CIGNEX, if we talk about revenue, we reported a growth of 24% on Y-o-Y basis. And the growth was broad-based across all our business lines and all our verticals and geographies. The ratio of IT and BPM was at 45-55 during this quarter. BPM revenue for the quarter was at INR 164.6 crores, which is a marginal growth of 0.5% sequentially and 25.4% over last year's same quarter. BPM EBITDA margin was 23.5% for the quarter, which is up 285 basis points, and it is highest over last 11 quarters. IT services margin -- for the IT services, revenue for the quarter was at INR 134.6 crores, which is a growth of 8.6% on a sequential basis and a decline of 12.8% on Y-o-Y. But this decline is primarily due to the CIGNEX divestment, which we did in quarter 4 FY '21. And if you remove the impact of CIGNEX divestment, then actually, we have grown 32.6% on Y-o-Y basis. Our IT services EBITDA margin was 8.3%. And as mentioned by Rahul, if you don't consider investment in products, our EBITDA margin for IT was 12.1% for the quarter. Our consolidated EBITDA grew by 51% -- 51.4% on a Y-o-Y basis, while without CIGNEX, it was up by 87.9% on a Y-o-Y basis. Our consolidated EBITDA margin for the quarter was 16.7% as compared to 14.4% in Q1 of FY '22 and 11.5% in Q2 of last year. We were able to maintain and grow double-digit EBITDA margin, primarily due to our continuous focus on cost optimization and automation, and as mentioned by Rahul, along with price increase in some of our customers. This was despite headwinds due to increased salary and supply side pressure in our IT business side. As mentioned by Rahul, we have taken several measures to get future-ready and avoid any business losses due to the supply side challenges. Overall, industries [ hit ] in this issue, and we are not different from their situation. However, we are confident of maintaining double-digit EBITDA margin for the rest of the fiscal year. We talk about PAT, which is after noncontrolling interest. PAT stood at INR 35.3 crores, which is a decline of 10.8% on a quarterly basis and a growth of 129% on Y-o-Y basis. Without CIGNEX, our PAT grew by 171.5% on Y-o-Y basis. However, the Q-o-Q drop of 10.8% is primarily due to the impact of exceptional item, which is on account of onetime exchange gain of the INR 10.2 crores arising from buyback of equity capital and redemption of preference share capital held in one of our overseas subsidiaries in Q1 FY '22. If we remove this onetime item, then on a Q-o-Q basis, we would have grown 20% in terms of PAT. Diluted EPS for the quarter was INR 5.99 per share, which is higher than last year's same period, which was at INR 2.62 per share. Now coming to half yearly results, our revenue was at INR 586.9 crores, a growth of 4.3% on Y-o-Y basis. Our EBITDA was at INR 91.3 crores, which is a growth of 48% -- 48.4% on Y-o-Y basis. EBITDA margin for H1 FY '22 was 15.6% as compared to 10.9% in last year as well, which is a 462 basis point growth from the previous year margin. The growth is primarily driven by our disciplined execution and cost optimization measures. Our PBT before exceptional item stood at INR 82.8 crores, a growth of 93.9%. However, PBT after including exceptional item on account of onetime exchange gain of INR [ 28.92 ] crores, we were at -- our overseas subsidiary was at INR 93 crores as compared to INR 42.7 crores in H1 FY '22. Our EPS is at INR 12.7 per share as compared to INR 4.9 per share in the last year's same period. This is -- as to now, we will talk about balance sheet. We'll continue to remain healthy. As on September 30, 2021, our total cash and cash equivalents plus liquid investments, net of debt, stood at INR 341 crores. Our free cash flow-to-PAT ratio was at 135%. Our DSO was at 65 days in -- as of September. We continue to remain cautious on the pandemic situation and are confident of combating challenges and maintaining growth momentum. In terms of our geographical footprint, the U.S. comprises 55% of our business, while India is 36%, u.K. and Europe is 15% and the rest of the world is 4%. I would like to bring to your notice that from this quarter, we have started reporting our revenue by industry in a more detailed manner. So in terms of industry footprint, BFSI continues to remain the largest segment for us, which is 30% of our revenue; Education and Publishing is 23%; Technology and Consulting sector is giving 20%; Manufacturing, Infra and Logistics is 10%; Retail is 6%; and not-for-profit or Government organization is giving 7% of business; rest, others are in Others, which is about 4% of our total revenue. Our client concentration remains healthy, with Top 5 clients contributing about 27%, Top 10 at 39% and Top 20 contributing at 52%. We added 33 new clients this quarter. Our total headcount for the quarter was 10,548, and our annualized attrition was at about 27%. So these are all briefly financials summary for the quarter. With this, I will now pass over the call to operator to open the floor for Q&A. Thank you very much for your patience, and I appreciate your continued interest in Datamatics. Thank you.

[Operator Instructions] The first question is from the line of Ravi Gupta, individual investor.

So I can see that we have a cash of around INR 341-odd crores. So how are the plans to utilize this cash? Any plans for acquisition or anything?

So there are 2 areas of -- in deploying this cash. One is we are looking at some acquisitions. Nothing in a very mature state, but we are in dialogue with a few companies. And the second is that we are investing more on the Intelligent Automation product suite that we have, which is TruBot and TruCap+. And we need to take that to market more aggressively. So that's where -- these are the 2 areas where we consume some of the cash reserves that we have.

Okay. So would it be also fair to assume that there can be some possibility for dividends or buyback? Or are these meant to go on to acquisition or something like that?

Well, whatever dividends, buyback, we've explored, and that does not make too much sense from a tax point of view. It's not the most efficient structure. There were some loopholes that the government has flagged, so I don't think buyback makes sense. Dividend, we want to explore as the year passes and the Board takes decisions, then we'll, of course, come back to the shareholders. So we will come then, when it comes to dividends, when we come to the end of the year and see how the performance is.

Fair enough. Then one more question that I had regarding to -- while I can see that net attrition being quite high at around 27%, so are we in any steps to take the...

Any one metric -- this is not...

The attrition is 27% is annualized, which is about high, but it's not as high. Some of the industry players are having much higher attrition than that. Having said that, as I mentioned in my address that we are proactively recruiting very aggressively to offset the impact of attrition. We have key people we are looking at giving increments to retain them. And then we are repricing some of our services to our customers that will offset the increase in costs that we may have. Having said that, yes, it will put pressure on the system, and it is doing that. But I think we will be able to manage the attrition issues reasonably well.

[Operator Instructions]

Well, I guess -- by that, the analyst community might be quite happy with the results we've just declared so that's why they may not have too many questions. But anyway, I think if there are no more questions, then we can conclude the call shortly. Although we are happy to field any further questions, I'm sure we will continue to show some good performance in the next few quarters.

Sure. I'll check for questions. [Operator Instructions]

Please, should we conclude the call?

Sure. Sir, there's nobody in queue.

Sure. Gentlemen and ladies, thank you very much for being on the call, and it is a pleasure to talk to you. And wishing you a very happy Diwali again in advance, and best wishes to everyone.

Thank you very much, sir. Ladies and gentlemen, on behalf of Datamatics Global Services Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.