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

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

Thank you, Lizan. Good afternoon to all participants in the call today. Welcome to the Q3 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 and to answer your questions, we have with us the top management of the company represented by Mr. Rahul Kanodia, Vice Chairman and CEO; and Mr. Sandeep Mantri, Chief Financial Officer. Mr. Rahul will start the call with brief overview of the quarter on the business, which will be then followed by the 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 the future or which can be construed as forward-looking statement must be viewed in conjunction with risks and uncertainties that we face. These risk 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 good afternoon, everyone. Welcome, and thank you for joining our quarterly -- quarter 3 2022 earnings call. Let me start by wishing you all a very Happy New Year and a safe 2022. I'm glad to share that we have reported another stable quarter and we were able to sustain margin performance despite the sourcing and supply chain side issues that we're all facing across the IT industry. The prolonged strong demand environment especially the newer digital technology has forced large-scale hiring of freshers. During the quarter, we added 541 net additions, taking our total headcount to 11,089. In quarter 3 of '22, our annualized attrition rate stood at 29% versus 27% in the previous quarter. And should remain in the range of about 30% for this year. We have ramped up our hiring process, and we'll continue to invest in hiring, training and upskilling all our employees. Coming to the quarter performance. Our revenue growth remained stable, excluding CIGNEX, which is a subsidiary we divested in FY 2021, that's quarter 4. We have grown 14.8% on a year-on-year basis and have grown 0.5% on a sequential quarter basis. Despite the sourcing and supply side pressures and have increased salaries, we have sustained EBITDA margins of 16.8%, a growth of 460 basis points on a year-on-year basis, excluding CIGNEX, and 396 basis points, including CIGNEX. Now if you notice, we have had over the last 2 or 3 years, we've moved from an EBITDA at a company level of 9.7% in 2017, steadily to 16% for the third quarter as of this financial year. So we've steadily improved our margins quite a bit. Traditionally, our quarter 3 results have always been softer than quarter 2, and we have seen the same this year. Although this year, it was weaker than usual. Our expected growth for quarter 4 on a sequential basis would be around 3%. We are seeing a significant traction in our BPM business, which contributes 55% of our revenues and grew at 13.7% on a year-on-year basis. BPM EBITDA margins were at 23.1% and the growth was aided by an expansion of business from existing customers and continuous efforts on cost optimization. Our IT revenues, which contributed 45% of our total revenue grew at 1.1% on a quarter-on-quarter basis. Our IT EBITDA margins was at 13.4%. However, after factoring in the investment in products, our margin stood at 9.1% for the quarter. Over the years, our IT margins have also moved up. If you look at last 4 quarters, in particular, we moved up from 4.7% to 9.1%. And likewise, the EBITDA margins on the BPM side in Q1 of '21 stood at 10.1%, which has steadily moved up to 23%. We are currently -- we presently have over 500 open billable positions in IT. The current environment of high attrition, high salary expectations and very high dropout ratio is hindering us from -- in cashing these opportunities, which is, of course, reflected in our growth. We saw several deal wins during the quarter across IT and BPM. We added 34 new clients this quarter. In Q3, we signed a total contract of about $85 million, of which we -- there were 3 large deals ranging between $15 million and $20 million spread over 3 to 5 years, plus several other deals totaling to about $15 million to be executed over the next 1 to 2 years. I am glad to share that recently, we were awarded the Automatic Fare Collection contract from Delhi - Meerut Corridor by NCRTC and the Kolkata Metro by Rail Vikas Nigam Limited. Both of these are fare collection projects where we are doing the automation of ticketing systems and fare collection for the metros in India. Additionally, we also entered into a long-term strategic partnership with the global leader in workforce solutions for providing digital customer management solutions. All these large deals, all 3 of them, which is about $70 million, will kick off from the next financial year. So we will see no impact in this financial year and they will all last between 3 to 5 years. We are witnessing a strong demand environment across sectors we operate in. To capture these opportunities, we are ramping up our marketing and pipeline generation activities and we have realigned our sales team with a sharper focus dedicated to each of our business units. Datamatics has a healthy pipeline of over $100 million. This includes a product pipeline of about $12 million, where we will be closing a few good deals this quarter. Based on the pipeline and large deal signed last quarter, we are confident and expect to have a growth of about 15% in the next financial year. The silver lining for us is that the overall industry continues to go through a large-scale digital transformation. And at Datamatics, we are very well positioned to capture these opportunities. To conclude, going ahead, we are very positive about our overall demand environment and are confident of our growth for the next quarter at 3% and next year at 15%. 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 3 FY '22 earnings call. I hope that all of you are safe and healthy. I wish you all a Happy New Year. Let me start with the key financials for quarter 3 ended on December 31, 2021, and then I'll take you for the 9 months results. So our net revenue for this quarter was at INR 300.8 crores, marginally up by 0.5% on a sequential basis and flat on a Y-o-Y basis. However, if we remove CIGNEX from our last year numbers, which we divested then we have grown at 14.8% on a Y-o-Y basis. And our ratio of IT and BPM was 45%, 55% during the quarter. Our BPM revenue for the quarter remained stable at INR 164.7 crores on a Q-o-Q basis and grew by 13.7% over last year's same quarter. Our BPM EBITDA margin was 23.1% for the quarter, which is 237 points -- 237 basis points up on a Y-o-Y basis. Our IT services revenue for the quarter was at INR 136 crores which is a growth of 1.1% on a sequential basis and a decline of 14% on year-on-year basis, but the decline was primarily due to CIGNEX divestment, which we did in quarter 4 FY '21. If we remove CIGNEX -- impact of CIGNEX divestment, then actually we have grown 16.2% on a Y-o-Y basis. Our IT EBITDA margin was at 9.1%, but without product spend, it remains at 13.4% for the quarter. Our consolidated EBITDA grew by 30% on a year-on-year basis. While without CIGNEX, it was up by 58% on a year-end basis. Our consolidated margin for the quarter was 15.8% as compared to 12.2% in quarter 3 of last year and 16.7% in last quarter. So we were able to maintain double-digit EBITDA margin mainly due to our constant effect on cost optimization and automation, along with price increase in some of our customers. This was despite headwind due to increased salary and supply side pressure in our IT business side. And as mentioned by Rahul, we have taken several measures to get future ready and avoid any business shortage due to the supply side challenges. Overall, industry is also facing this issue, and we are not different from the situation. However, we are confident of maintaining a double-digit EBITDA margin for the rest of the financial year. When we talk about PAT, which is often noncontrolling interest, PAT is at INR 36.9 crores which is a growth of 4.7% on a quarterly basis and a growth of 67% on a year-on-year basis. In fact, without CIGNEX, our PAT was grown by 93.4% on a Y-o-Y basis. Our EPS for the quarter was at INR 6.27 per share which is higher than last year same period, which was at INR 3.76 per share. Our tax rate for the quarter remains at 24.2%, which is same like last quarter and also last year quarter. Now these are quarterly numbers. Now coming to 9 months FY '22 numbers. Our revenue was at INR 887.7 crores, including CIGNEX, we reported a growth of 2.5% on a Y-o-Y basis. Without CIGNEX, we reported a growth of 20% on a Y-o-Y basis. Our EBITDA stood at INR 141.8 crores which is a growth of 41.2% on a Y-o-Y basis. If we exclude CIGNEX, it will be more then 75.5%. Our EBITDA margin for 9 months FY '12 was 16% as compared to around 11.6% in last year, which is a 438 basis point increase from the previous year margin. The growth is primarily driven by our disciplined execution and cost optimization measures. Our PBT, profit before tax and before exceptional items stood at INR 130.4 crores, which is a growth of 134% on a Y-o-Y basis without CIGNEX. However, PBT after including exceptional item on account of onetime exchange gain of INR 10.2 crores was at INR 140.6 crores, which is a growth of above 152.1% expedition excluding CIGNEX. Our EPS stood at INR 18.98 per share as compared to INR 8.67 per share in the same last year same period. Our YTD tax rate payments for -- our YTD adjusted tax rate payments for 9 months at 23.1% as compared to 26% in previous year period. So there is a slightly lower tax rate in this 9 months. When we talk about balance sheet, we continue to remain healthy as in December 31, 2021, our total cash, cash equivalents plus liquid investment stood at INR 372 crores. Our free cash flow to PAT was 113.8%. Our DSO was at 64 days as of December 31, 2021. And we continue to remain cautious on the new variant of the pandemic and are confident of combating challenges and maintaining growth momentum. In terms of geographical footprint, the U.S. is 54% of our business, while India is 25%. The U.K. and Europe is 16% and Rest of the World is 5%. In terms of industry footprint, BFSI continues to remain the largest segment for us, it is 32% of revenue followed by Education and Publishing, which is 23%; then Technology and Consulting, which is 17; Manufacturing, Infra and Logistics is 9%; then Retail is 7%; and not-for-profit or Government organization is 7% of our business. Rest, all others are 5% of our total revenue. Our client concentration remains healthy, with top 5, 10, 20 clients contributing to 27%, 41% and 53%. We added 34 new clients in the quarter. Our total headcount for the quarter was 11,089. So these are basically financial summary for the quarter. With this, I will now pass on the call to operator to open the floor for Q&A. And 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 Faisal Hawa from H.G. Hawa & Co. Mr. Faisal Hawa, we are not able to hear you.

Yes, can you hear me now?

Sir, your voice is breaking up.

Can you hear me now?

Sir, it's not clear. Your audio is not clear.

Hello, can you hear me now?

Yes, yes. Yes, we can hear you.

Sorry to interrupt, Mr. Hawa , we are not able to hear you at all.

[indiscernible] salary hike, et cetera. Because we are a smaller organization. So other opportunities for growth are not too much for our employees.

Sorry, Mr. Hawa, we could not hear your question. We really...

Hello, can you hear me?

Yes, it is breaking. You're audible, but it kind of comes and goes.

Hello?

Yes, we can hear you.

Yes. So can you give me some steps that we have taken that to -- attrition definitely is an industry-wide problem, but how we can retain the up employees because for a larger organization, the opportunity for growth and learning and relearning are much better. So how will we really retain our employees in this kind of a scenario? And are we taking any steps to increase our business in USA and Europe?

Yes. So I'll answer the second one first. So we have increased our sales team, both in USA and Europe. We've also augmented the marketing team and the lead generation team substantially for these geographies. So yes, to your point, we have augmented that and we should see a stronger growth in Europe and the U.S. for next year. Coming to your first question in terms of employees. Typically, what we do is in smaller organizations, you give employees a higher level of responsibility that empowers them. In larger organizations, they kind of get lost in the hundreds of thousands of people that are there. So employees do enjoy the liberty, the flexibility to take responsibility and deliver on their own. So of course, apart from that occasion, you do have to factor in the salary increases that we have to give to maintain a certain level of parity. So if see our attrition at 30% is high, but it's not so high. I believe Infosys is also some range of 25%. So we are not slow way out, vis-a-vis, the industry or vis-a-vis some of the larger competitors. However, the dropout ratio is right now extremely high.

If you were to name just 3 verticals where you feel that the growth will be tremendous within the IT services, which would be the 3 verticals? And any steps we have taken to really augment our growth in those verticals?

Yes. So BFSI and manufacturing will be the dominant verticals. And as I said, we've increased our sales activities in those segments. And we should see results because both of these and themselves very well to automation and robotics and things like that. So they are large spenders on technology. And today, technology is driving all businesses. So these are the large ones we focus on, and we're seeing good traction there.

We'll move on to the next question, that is from the line of [ B. Chetan ] a private investor.

I have a question for Rahul. Rahul, you talked about 3% growth for the next quarter. So I just wanted to ask how confident are you about achieving it given the current state of the economy?

Yes. Given the pipeline and given that we signed, I'm confident that we will [ achieve ] that number for the quarter, for Q4, that is.

About the pipeline, you mentioned that you have a $100 million pipeline. So how much out of that you think things you'll be able to close?

Statistically speaking, we should close between $25 million to $30 million as per our past track record and performance and conversion ratios are concerned. The conversion ratios are much higher for existing customers and lower for new logos as always the case. Existing customers tend to range between 60% to 80%. Newer logos tend to be about 22%, 40%, perhaps. So statistically speaking, we should close around $30 million out of the $100 million.

[Operator Instructions] The next question is from the line of Gopal Agarwal, an investor.

I wanted to know regarding this contract, Delhi - Meerut Corridor, that you were explaining. So I was curious to know when we expect revenue to start flowing from this particular deal? And also, are we eyeing more contracts of similar kind under this AFC? So that was my first question.

Okay. So let me answer that. So the Delhi - Meerut Corridor will start from beginning of next year. And this is a 5-year -- primarily 5-year contract with another 5 to 6 years of maintenance post implementation. So most of the revenue of Delhi Metro contract will get accrued in next 3 to 4 years, so from April onwards next year. And this contract will be the last size for us. So this should give us upside on margins as well.

Okay. Also, given we have decent cash in hand, so are we planning for any M&As, et cetera? And also, I would like you to provide some color on dividend payout policy and if you're planning to pay any dividend for this particular fiscal year?

So M&A -- as far; as M&As are concerned, while there are no serious or more active discussion, but right now, we are discussing with many companies. We will later know whenever it comes to a certain point where we are for about all those M&A. And then on this..

Overall, we have -- we are in dialogue with about 7 to 8 companies. But these are all early stages.

Initial stages discussion.

So as they mature, we will certainly reveal to the appropriate authorities. As far as dividend policy is concerned, this year, as you know, we have been declared an interim dividend. Final dividend, I think it depends on the Board. Once we close the year, the Board will sort of review and take the decision and make a recommendation.

So dividend discussion mostly will be in annual board meetings, most likely.

[Operator Instructions] The next question is from the line of [ Danish Mistry ] from Investor First Advisor.

Sir, I basically 2 questions. One was, this time, your Q-on-Q growth was just about flat, 0.5% Q-o-Q. Anything to read into that? Is it just some projects rolling off? Or like last time are we seeing some customer attrition? That's number one. And number 2 is regarding -- you've answered it in a way what the previous caller asked on employee attrition. But if you were to see our employee cost is about INR 20 crores today, and we've also spoken about expanding in different geographies, obviously, that would require us to raise sales headcount as well as we could be obviously facing some wage pressure here. So how do you see that panning out? And are we in a position to pass on those costs on to our customers?

So in terms of passing on the cost, we cannot pass on sales cost, but we have been able to resize our services, all customers are facing the same situation of high attrition in the tech staff and resource crunch. So they're all -- since we're all facing the same issues, we are more open to the idea of giving you a higher price so that you can also attract talent. We have been able to go back and renegotiate with several customers and increase our prices in several contracts that we have.

But are we able to pass on the entire cost to them? Or is it a staggered?

So that's not a perfect answer because the renegotiations have ranged anywhere from a low of 3%, 4%, 5% to a high of 30% as well. So depending on each contract, somewhere you're making more money, somewhere you're pretty much recovering your cost. And then there are some contracts we can't be renegotiate at all. So it's a mixed bag.

Fair enough. Fair enough. And on the revenue side, sir, the flattish growth we've seen this quarter, 0.5% Q-o-Q.

Yes. So we are -- as Rahul early said that we are ramping up our sales team, lead team, marketing team. We are putting a lot of effort in marketing and sales and presales. So those will actually start giving result probably from next year. And we are quite sure as we said that we will at least manage a 14% to 15% growth in next year.

Okay, sir. Okay. And currently, do we -- what is our current order book on hand in terms of contracts yet to be delivered?

So we don't track take order book that way because our businesses are like volume-driven businesses also. In retail we have mostly volume-driven businesses. So we really don't have a order book as such. But what we can say is basically the order which we won this quarter, like this quarter, we had about $85 million worth of new orders definitely a significant growth in next year.

Fair enough. And last question from me. Any -- what would be our utilization today?

Manpower utilization?

Yes.

We're extremely high. If you noticed as I mentioned that we have shortage of 500 people, billable people. So our bench is very low. Typically, though, we have technically a bench because of the tax season, we have a spike in Q4 every year because we do tax processing. And for that, what we have do is in Q3 we end up recruiting people who have to get trained. So that shows up on the bench. And Q4, they get deployed. So that's an annual cycle that we have. But as such, our bench would be in the range of about 4%, 5% at best.

Got it, sir. And what is the total...

[indiscernible] because of attrition.

And what is our total employee count today?

11,000. And we -- revenue growth -- one of the revenue growth -- one of the reasons for revenue growth in past 12 months, we have let go many of the low-margin customers. So that also has resulted in some kind of revenue cut during the period.

But of course that has improved margin .

That has another impact of improving margin. You can see that.

Understood. Understood. And what would be our top 10 concentration? Has that increased then? Because we have let go of the low-margin customers.

The top 10 contribution remains more or less same with 1% or 2% here or there.

So how much would that....

[indiscernible] is more or less...

So that would be how much around 60%?

Around 28% of [indiscernible] top 10 and top 20 is 50-odd percent.

I'm sorry?

I'm saying top 10 is 27% and top 20 will be about 50-odd percent.

[Operator Instructions] The next question is from the line of Mihir Manohar from Carnelian Asset Management.

You sir mentioned about the 15% growth for the next financial year. If you could throw some more light on a qualitative aspect as to which segments and what kind of deals do you see flowing into the revenue for next year? I mean what gives you that confidence of that 15% growth for the next year?

So a couple of things. So we -- as we mentioned, we signed 3 large deals in Q3 of this year. They will all file or start delivering from next year. So 2 of those deals are in the transport segment, which is in the fare collection. One of them is in the customer service management area. So those -- and then we have a strong pipeline of about $100 million. And the bulk of it is in the BFSI segment. So the BFSI segment is the other promising segment for us. So transport, customer management and BFSI.

Okay. Understood. And, sir, on the margins, any color on the margins for the next year?

So marginally, not -- we are still in a planning stage. So [ at least ] revenue, but margin will come back maybe in the next board meeting.

Yes. The question is how do we improve margins and our focus is on where -- how much we will be able to improve it. Sustaining margin should not be a problem, but the improvement is something that we are going through a detailed planning exercise, right now.

[Operator Instructions] As there are no further questions, I now hand the conference over to the management for the closing comments.

Thank you, Asha and thank you, everyone, for being on this call. It is a pleasure talking to you, and I look forward to talking to you once again when we have the year-ending numbers in Q4. I wish you all the very best and a good New Year. Thank you. Bye-bye.

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