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

Ladies and gentlemen, good day, and welcome to the Datamatics Global Services Limited Q3 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pratik Jagtap from EY Investor Relations. Thank you, and over to you, sir.

Thank you, Inba. Good afternoon to all participants in the call today. Welcome to the Q3 FY '23 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 the press release and presentation, please do write to us, and we will be happy to send it out 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 Rahul Kanodia, Vice Chairman and CEO; Sandeep Mantri, EVP and Chief Financial Officer; and Mitul Mehta, EVP and Chief Marketing Officer. Rahul will start the call with a brief overview of the quarter on business, which will be then followed by Sandeep talking on financials. We will then open the floor for question and session answer. As usual, I would like to remind you that anything that is said on this call, which gives any outlook for the future or which can be construed as a forward-looking statement, must be viewed in conjunction with the 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 on our website. With that said, I now hand over the call to Rahul. Over to you, sir.

Thank you, Pratik, and welcome, and thank you, everyone, for joining our Q3 FY '23 earnings call. Excited to have you all on the call today. Let me begin by wishing everyone a very happy and prosperous new year. We announced our Q3 results yesterday, outlining our operational performance. I will briefly discuss some of the key business performance, and Sandeep, our CFO, will provide an update on the financials, after which we will open the floor for questions and answers. Coming to the business update, I'm pleased with the overall performance of the business. We are delighted to report that our Q3 performance was strong, with a year-on-year growth of 23.9% and a sequential quarter growth of 8.5%. The growth was broad-based, driven by all 3 segments of Digital Operations, Digital Experiences and Digital Technologies. This performance is noteworthy given the backdrop of an uncertain global economy and Q3 being traditionally a weak quarter for the IT sector due to the holiday season. Our EBIT margins have improved sequentially from 12.5% to 13.5%, primarily led by a healthy business growth, tight negotiations and cost optimization. While Sandeep will speak on segment numbers, I will touch about how our segments are performing. I'm happy to share that our Digital Technologies business, which was under stress for the last 2 quarters, has bounced back. Our EBIT margins have improved from minus 2% to a positive 2.2%. And I'm very happy to inform you that Datamatics has successfully delivered Automatic Fare Collection and mobile ticketing system for Mumbai Metro Line 2A and Line 7, which was inaugurated by Honorable Prime Minister Shri Narendra Modi yesterday. It is a proud moment for every Datamatician to be associated with the product, which will be transformational for millions of Mumbaikars. Kolkata Metro also went live with our AFC solution last month, which was also inaugurated by Honorable Prime Minister. In Digital Operations, we have witnessed strong growth on the top line. However, EBIT margin declined by 323 basis points sequentially. This is in line with our expectations as we ramped up our headcount for Q4. In Digital Experiences, our EBIT margins continue to be strong at 27.8%, up by 235 basis points sequentially. On a YTD basis, for the first 3 quarters, we signed new business worth of [ 57 million ]. Our deep pipeline remains healthy. In conclusion, going forward, we are optimistic about the overall demand environment and are confident of maintaining a growth of over 17% in this financial year. With that, I will now hand over the call to our CFO, Mr. Sandeep Mantri. Sandeep, over to you.

Thank you, Rahul. Welcome, everyone, and thank you for joining us in Q3 FY '23 earnings call. To begin, I would like to wish everyone a very happy and safe New Year. Let me take you through the financial performance for the quarter ended December 31, '22 results, and then I'll take you to 9 months financial performance. Despite normally being a seasonally weak quarter, we reported strong revenue growth driven by all 3 segments we operate in our quarter 3 FY '23. Revenue stood at INR 372.6 crores, which is 8.5% up on a sequential basis and 23.9% on a Y-o-Y basis. A healthy growth, favorable exchange and cost optimization, all these have led to a healthy consolidated EBITDA for the quarter at INR 59 crores or 15.8% of revenue, which is up by 14.2% on a sequential basis and 16.7% on Y-o-Y basis. Our consolidated EBIT for the quarter was at INR 50.2 crores or 13.5% of revenue, which reflects a growth of 17.1% on a sequential basis and 18.1% on Y-o-Y basis. We aspire to keep and grow healthy double-digit EBITDA and EBITDA margin in the coming quarters as well. Our other income on a consolidated basis stood at INR 10.6 crores, which is a growth of 10% sequentially and 87% on a Y-o-Y basis. Primary reason is better return on investments and exchange due to favorable exchange rate. Our tax rate for the quarter was at 25.3% as compared to 24.2% last quarter -- quarter 3 of FY '22. We expect our tax rate to be in the range of 22% to 23% on a yearly basis. Our quarterly PAT after NCI was at INR 45.9 crores, which is growth of 14.8% on a sequential basis and 24.1% on a Y-o-Y basis. Our EPS for the quarter was at INR 7.78 per share, which is higher than last year, same period, which was at INR 6.27 per share. When we see segment-wise performance, our Digital Operations revenue was at INR 152.8 crores, a growth of 6.7% on sequential basis and 24.2% on a Y-o-Y basis. Digital Operations EBIT margin was at 19.5%. Its contribution to total revenue was 41%. The margins are in line with our expectation as we ramp up our headcount in quarter 3 in preparation for quarter 4. Our Digital Experiences revenue was at INR 61.2 crores, a growth of 16.7% on a sequential basis and 46.9% on Y-o-Y basis. EBIT margin was at 27.8%, and the contribution to total revenue was 16%. Our Digital Technologies revenue was at INR 158.7 crores, which is a growth of 7.4% on a sequential basis and 16.6% on Y-o-Y basis. EBIT margin improved to 2.2% from a negative 2% in last quarter. The technology contribution to total revenue was 43%. And the primary reason for this margin improvement is growth in revenue as well as optimization costs, resulting in better recovery. In terms of geographical footprint, U.S. is the largest geography, with 54% of our business coming from U.S. India is 29%. Rest of the world, including U.K. and Europe is 17%. When we talk about industry footprint, BSFI continued to remain largest segment for us, which is 24% of our revenue, followed by education and publishing, which is 22%. Then technology and consulting, which is at 16%, nonprofit or nongovernment organization are at 13%. Manufacturing, infra and logistics is at 12%, Retail at 8% of our business, with other businesses at 5% of our total revenue. Our client concentration remains very healthy, with top 5, 10 and 20 clients contributing to 24%, 37% and 52%, respectively. We added 30 new clients in the quarter. Now coming to 9 months FY '23 financials, our revenue was at INR 1,042.9 crores, a growth of 17.5% on a Y-o-Y basis. Our EBITDA was at INR 158.4 crores, which is up by 11.7% as compared to last year. EBITDA margin stood at 15.2%. Our EBIT was at INR 132.3 crores, which is a growth of 12.5% on Y-o-Y basis, and EBIT margin to revenue stood at 12.7%. Our other income was at INR 33.4 crores, which is a growth of 135.6%, which is primarily due to exchange in SEIS incentives and better investment income. The tax rate for 9 months is 22.3% compared to 21.4% in the same period of previous year. We expect tax rate to be in the vicinity of 22% to 23% for full year. Our PBT before exceptional item was at INR 163.3 crores, which is a growth of 25.3%. Our PAT after NCI was INR 129.2 crores, which is a growth of 15.5% on a Y-o-Y basis. Our EPS for the 9-month was at INR 21.92 per share as compared to 18.98 per share in the last year same period, which is a growth of 15.5%. If you see segment-wise revenue mix for 9 months FY '23, Digital Operations revenue was at INR 443.4 crores, which is up by 18.2%, and EBIT margin for the same segment was at 21.8%. Our Digital Experiences revenue was at INR 159.8 crores, up by 35.4%, and EBIT margin for experience -- Digital Experiences business, rather, was at 25.7%. Our Digital Technologies revenue was at INR 439.6 crores, up by 11.4%, and EBIT margin was at negative 1.25% on a 9-month basis. Our balance sheet continues to remain in a healthy position -- very healthy position. As on December 31,'22, our total cash and investment stood at INR 455 crores. We don't have any debt on our book now. We are a zero-debt company. Our DSO was at 68 days for the first 9 months of this year as compared to 74 days as on March 31, '22. With this, I will now pass on the call to operator to open the floor for questions, and thank you for your patience and continued interest in Datamatics. Thank you.

[Operator Instructions] We take our first question from the line of Faisal Hawa from H.G. Hawa & Company.

Sir, for a midsized or a small-sized company [indiscernible], where do you see the actual opportunities? And how will we compete against much bigger rivals and -- so we may have a problem both for talent as well as business from a major company. So what is the kind of positioning that we are taking to really grow our revenues quarter-on-quarter? And what is the kind of revenue increase that you see in dollar terms year-on-year for the next financial year?

So in terms of competing with the large customers, we service different market segments. So we don't see very heightened competition in the segments that we serve. We don't very often come across TCS or Infosys or anybody of that kind. Occasionally, we do. And in fact, statistically, we tend to win more often than they're winning. The reason being that we tend to work more closely with the customers and our solutioning efforts tend to be far more engaged. In terms of the market segments, still the U.S. is the largest market. It's still a huge market. And I don't see any issues in terms of growth. As far as talent is concerned, if you see our attrition rate, it's pretty much in line with the rest in the industry. So we're not having any attrition rate that is higher or lower. So -- and we are able to attract talent. I don't -- we don't see an issue that talent is going to, let's say, Wipro or HCL, are not coming towards Datamatics. So I don't see that happening at all. So I don't see those headwinds that you may perceive, and we've been around and we continue to grow at a very healthy pace. So had we seen those challenges, then we would not have had the growth that we are currently showing. So I'm not seeing those headwinds for us.

And sir, for the next year FY revenue guidance?

So this year, we will certainly give about 17% growth next year. I am certainly looking at 15% plus. We are right now going through our business planning exercise, so I don't have all the numbers already. But yes, it will be in the vicinity of 15% for next year.

And sir, what would be the top 5 clients concentration in revenue for us?

Our CFO just mentioned that, and I will just ask you to refer to that.

24%, 37% and 52% for 5, 10 and 22 -- 20 clients.

[Operator Instructions] The next question is from the line of [ Harshit Toshniwal ] from [ BottomsUp Research ].

I hope I am audible.

Sir, can you switch to handset modem speaker, please? The audio is a bit muffled.

Just give me a minute. Is it better now?

Yes, you can go ahead, sir.

Okay. So the question was, sir, on 2 parts. One, when we look at our business, if you can throw some more color. I think in one of our calls, you mentioned that Digital Operations is basically the back-end processing. Digital Experiences is more the front-end services for the client, like maybe a website designing, website management, et cetera. And Digital Technologies is largely the automated fare system business for us. So if you can throw some color on the -- on my understanding of these 3 businesses. And the second question is that our margins are very high in the Digital Experiences and the Digital Operations. And -- but for technologies, what would be a more sustainable state of margin? And if I understand it correctly, the metro automated fare system, et cetera, all these would be more like software-as-a-service, which we provide. So in that case, shouldn't those margins be more around 30%, 35% levels because gross margins are typically high? But if you can please help me clarify on these understanding as well.

Sure. So our Digital Operations in the back office where we do a lot of finance and accounting services, the banking and back-office operations, insurance back-office operations and back office for a lot of publishing and retail companies. So that's what we do on the Digital Operations side. The reason is digital is because we use a lot of technology tools, automation in doing the back-office operations for our customers.

Okay. So just to clarify on this. When you say back office for insurance, et cetera, so does it mean the claim management or [indiscernible]? Or do we -- so is it more like a software-based service? Or it is more like an [ IT ] solution, which is a constant service?

It is a BPO service on the back of technology platform. So we do a lot of sales processing, account opening, KYC, those types. So there's a lot of process coming from -- the other thing we are mute. So that's on the Digital Operations and Digital Experiences, as I said, front office, which is more customer management, and that is led there by a heavy research and managers team. So we do a lot of analysis and research on customer behavior and customer life. And based on that, we engage with customers. So that's a lot of customer management services. And the Digital Technologies is not only AFC. AFC is one component of it. There are many other things that we do on cloud, on mobility, on low-code-no-code application modernization and migration, things like that. So there's a lot of work we do on Digital Technologies. Fare collection is one component of it. So if you see, our traditional margins have been fairly healthy even in technology. Its last 2 quarters, we had a huge challenge. And that is because of some project overruns as well as some clients, which kind of had a multi-vendor strategy today. They went across to other -- the part of the portfolio went up to other vendors. The other issue is also we have a huge -- as you know, last 6 months have been, for the IT industry, quite troublesome in terms of attrition and salary hikes. So it's a combination of all these things that are put together. Plus, we have been investing on our product space. So that investment continues. And therefore, we see a little muted margin. Otherwise, if you first extract the investments we are making, our margins are in the vicinity of about 13% to 15%.

Okay. So just a few questions, sir, on that. So it's very clear on the experiences part and the Digital Operations part. On that, the only question is the margins which we maintain are very -- so around 20% margin from for a business process looks typically -- so is it that we have created our own IT products like TruBot, et cetera, which helps us to command this margin? So that was the first question. And on the Digital Technologies, sir, if I try to look at it, this is more like an IT service there where we would be, say, competing with the TCS, Infosys, Wipro, et cetera. So to that extent, when we look at our margins, even historically, we were there in the around 8% to 10%. Is there room for this margin to improve to a 15% kind of number over time, obviously, gradually ex of the investments in the products?

Yes. So the -- you're right. So the margins will improve. Certainly, this year, we'll see better margins. on Digital Technologies is -- one of the reasons the margin is muted is all the investments that we're doing in AI and robotics and all that stuff, intelligent automation is captured in the technology space, and we are not capitalizing those expenses. We are expensing them out. On the maintenance of the margin on the Digital Operations and Digital Experiences, we expect that we will maintain the margins roughly in the same range. It might go 1% up or down, but that's normal when you're having this 26% to 27% margin. 1% fluctuation is not something that's unexpected. But we will maintain fairly healthy margins even in the next year.

The question on the operation side was that the margins of 20% are very strong. What is it that allows us to maintain such high margin in our business outsourcing world? Is it the stickiness? Or is it the automation IPs, which we have created, that helps us to maintain that margin?

Yes, it is the automation IP that we are deploying in our operations, which gives us the production huge benefits.

Got it. Got it. One more -- got it. No, I think this is clear. Just one -- so I think on the cash part, sir, so do we -- our cash balances have improved a lot over the last 2, 3 years because of the strong accrual. So we are sitting with around INR 450 crores. And if I understand correctly on products from our previous call, I remember, we invest roughly INR 20 crores to INR 25 crores per annum on products part. Now I just want to understand that -- and what stops us from -- your -- the way you look at this cash flow, you want to distribute it at some point of time, maybe because of some regulatory hurdles you are waiting for that or you think that it is ultimately going to be used for acquisitions at some point of time. Because if I remember, the balance used to be around INR 150 crores, INR 200 crores earlier. But the way we are generating cash flow, this keeps on increasing. So some plan on that, if you can throw some light.

So we are looking at acquisitions actively. We are in dialogue with some of the companies. Obviously, nothing has happened [ till it all happens ]. So there's -- yes, there's a lot of disturbance on the line from...

[ Mr. Toshniwal ], when you are not speaking, please mute your line. There's a lot of typing noise coming from your background.

Yes. So we are looking at acquisitions, and some of these funds will be consumed in M&A activities. We are in dialogue with some companies, but we will talk about them or announce them as they mature.

Okay. But the reason I asked, sir, because we are already growing at a very good pace of 15%, 20%. And I believe your guidance is all ex of acquisitions. So to that extent, which is why I asked this question because if we have an acquisition of around INR 400 crores, then probably it adds 20%, 25% to our current sales broadly roughly. So that was the one part which I wanted to clarify. And I have one more question after this. Maybe I can add it right now or I can ask after this.

No, no. So you can ask because I think I already answered the question that we are looking at acquisitions. Obviously, we're not going [indiscernible] acquisitions because we've got to keep some reserves [indiscernible] working capital and other investments. At first, we are doing R&D. We keep investing in new technologies. So you do need funds for that. You need to have a healthy reserve. In any case, you never know when certain things go wrong in the global market. We had the [ wireless ] issue. We had the war with Ukraine. Something else can pop up. So it's important that the company maintains a healthy reserve. Having said that, we are actively looking at these investments both in R&D and technology and acquisitions.

Got it. Got it. Got it. And sir, the other question was on the investment in the product and the technology part. So if I remember last 3 to 4 years, we have been investing in it and probably if I take an annual expenditure of INR 25 crores, INR 30 crores, then we would have already put around INR 150 crores of expenditure on the latest products. I think at some point of time, you mentioned that you would want to give some number on the product revenue when it scales up, but just want to understand that it has been 5 years since we have been investing in products, and that is impacting the margins of the technology business. So what is the outcome, which we are getting out of it? If you can throw some color of what -- out of the total Digital Technologies revenue is coming from the various products and how much more time of investment and scale up do you think will be needed here?

Sure. So we are beginning to see an uptrend in terms of the kind of deals we're getting. That's one direct benefit. There's another indirect benefit. When we go to the market with these products, we're getting spin-off benefits on the BPM side. So some of the deal sizes that we're getting, larger deal sizes on BPM is on the back of some of these products. Now if one does not correlate and therefore, offset those costs, the cost of [indiscernible] as investments because we're building the product. We are ready. We have deployed them in our own operation [ because this is for efficiency ]. Because of that, we are able to get larger deals and new deals. So there is a spin-off benefit to these investments. Unfortunately, the product license in terms of a direct sale has been a little muted. Having said that, we are seeing a good swing in terms of the deals.

So yes, this is Mitul here. So from a product perspective, as Rahul mentioned, there is already -- there are green shoots. We have been -- the pipeline looks very healthy. So we have already onboarded some customers this year, and there have been some real marquee customers. And going forward, we also feel that next year will be also in here that we will see a good growth, which will bring a certain amount of [ weight ] to the entire business. So we will -- I think next year is going to be critical for us.

Okay. Got it. And sir, if I look at our shareholding, I think there was some promoter stake, which was pared down in last -- this quarter. If you can throw some color as to the reason for promoter stake coming down. I mean if there's something -- because regulatory, we are well below [ 75% ]. So that was not a concern. But just wanted to get a sense of -- I mean is there any update on that part?

So if you read the SEBI disclosures, it's all over there. The promoter as they age are providing for their grandchildren, and therefore, they've created a separate trust in which they have deployed some of the equity.

Okay. Okay. Okay. So the public holder, which we see universal trustee, that is nothing but that trust itself.

That is correct.

Okay. Okay. Okay. Very fair. Those are, I think, a great set of numbers. Thanks a lot for answering all the questions. Just one big question on the technology part, if you can separate the product investment and show it as a separate line item, it will give us a much clearer picture of the technology margin because I think that is one business where analysts tend compare your margins with maybe a typical IT service company, and that creates some discrepancy to the difference between the margins because on the operations part, we are definitely commanding a lot of margin. And what I thought -- the way I was thinking is that all these investment in products is actually helping us in the business versus outsourcing business, the operations business. So does it make sense to classify them as a part of the operations cost rather than taking it in the technology piece? But any which way, I think thanks a lot for the good numbers. Wish you all the best.

[Operator Instructions] We'll take our next question from the line of NGN Puranik from ENAM.

Rahul, congrats on a good set of numbers.

Thank you. Thank you.

Excellent. All around you have been doing very good all across businesses. I have question on your automation business. So if you can give a meaningful understanding of what's happening in terms of creating the market-focused solution, taking into the market, branding, marketing, customer targeting, is the hiring complete? What's the long-term outlook for this? Are you happy with what's happening in the product business? Or some of these automation businesses, it has to see the result in a reasonable amount of time. So what is your view?