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

Ladies and gentlemen, good day, and welcome to Datamatics Global Services Limited Q4 FY '23 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Pratik Jagtap from E&Y Investor Relations. Thank you, and over to you, sir.

Thank you, Aman. Good afternoon to all participants in the call today. Welcome to the Q4 and Full Year FY '23 Earnings Call of Datamatics Global Services Limited. The results and presentation have been already mailed to you, and it is also available on the website of the Datamatics. 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 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 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-answer session. I would like to remind you that anything that said on this call, which gives any outlook for the future or which can be construed as forward-looking statements 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, sir. Over to you, sir.

Thank you, Pratik, and a very warm welcome, and thank you, everyone, for joining our quarter 4 FY '23 earnings call. We're glad to have you on the call today. I'm extremely pleased with the overall performance of the business during the year. This was the first quarter in which we surpassed a INR 400 crore revenue mark. This revenue growth was broad-based, driven by all 3 segments of digital operations, digital experiences and digital technologies. Despite the global economic situation, we managed to maintain a healthy margin throughout the year. We had a strong EBITDA growth of 25.5% with an EBITDA margin of 16.6% for financial year '23. I will briefly touch upon each of our segments and their performance. The digital technologies, our EBIT margin saw a considerable improvement from 2.2% to 9.1% in quarter 4 of financial year '23, primarily due to renegotiated prices and tighter cost controls. Going forward, we are actively focusing on hyperscalers and depending on -- and deepening our client relationship as our growth strategy. Our deal pipeline for the next year remains strong. In digital operations, we witnessed strong growth on the top line and our EBIT margin improved from 19.5% to 23% on a sequential quarter basis. Traditionally, our Q4 tends to be better than Q3 due to the cyclicality of some of our projects, which requires us to ramp up head count in Q3 and execute in Q4. In digital experiences, through our top -- though our top line saw a slight decline in quarter 4, EBIT margins continue to be strong at 28.2%. We have a healthy pipeline, and our business will grow on the back of new customer acquisition. Going forward, we anticipate that these operations will continue to generate strong margins in the same range as this year. We are seeing supply side challenges easing off, which would help us in optimizing our cost for the next financial year. In quarter 4 of 23, we signed a total contract of about INR 20 million and added about 21 new customers. In line with the account growth, our capabilities and strengths demonstrated to our existing clients have resulted in several deal wins, which remains strong for the quarter. I'm happy to share that we have recommended a total dividend of 100%, which is INR 5 per share. On a concluding note, I'd like to add that while there is some amount of slowdown across the globe due to macroeconomic factors, we do not see a material impact on the deal wins or existing client spend. We expect to see a sustained growth momentum for financial year '23, '24, given a decent pipeline of opportunities. This makes us optimistic about our overall demand and confident in maintaining an overall revenue growth of 14% to 15% in financial year '24. With that, I will now hand over the call to our CFO, Sandeep Mantri. Sandeep, over to you.

Thank you, Rahul. Welcome, everyone, and thank you for joining us in Q4 and full year earnings call. Let me start with the financial performance for Q4 FY '23, and then I will take you through the FY '23 numbers. Our Q4 FY '23 revenue stood at INR 46.3 crores, which is up by 11.7% on a sequential basis and 32.9% on a Y-o-Y basis. As Rahul highlighted, this was a milestone quarter for us as we exited the revenue mark of INR 400 crores for the first time ever in a single quarter and was heavily supported by all the 3 segments. Our consolidated EBITDA for the quarter was at INR 34.1 crores, which is up by 42.7% on a sequential basis and 63.5% on a Y-o-Y basis. Our cost optimization strategy, coupled with other initiatives help us maintained a double-digit healthy EBITDA margin of 20.2%. Our consolidated EBIT for the quarter was at INR 75.3 crores, reflecting tremendous growth of 50% on sequential basis and 78% on a Y-o-Y basis. EBIT margin for the quarter was at 18.1%. Our other income on a consolidated basis stood at INR 5.3 crores, which is a decline of 50% sequentially and 56% on Y-o-Y basis. Primary reason for decline is the exchange gains, which was not there in this quarter. Our quarterly VAT after NCI was at INR 59.7 crores, which is a growth of 30.2% on a sequential basis and 30.9% on a Y-o-Y basis. Our tax rate for this quarter was at 27% compared to 35.3% in the last quarter, it is quarter 3 FY '23. Our EPS for this quarter is at INR 10 E13 per share, which is higher than the last year's same period, which was at INR 7.73 per share. When we see segment-wise revenue performance, digital revenue -- regional operations revenue was at INR 187.3 crores, which is a growth of 22.6% on a sequential basis and 31.6% on Y-o-Y basis. Operational EBIT margin was at 23%. Its contribution to total revenue was 45%. Our digital experience revenue was at INR 59.5 crores, which is a slight decline of 2.7% on a sequential basis, and there was a growth of 48.8% on a Y-o-Y basis. Its EBIT margin was at 28.2% and its contribution to total revenue is 14%. Our digital technology revenue was at INR 169.5 crores, which is a growth of 6.8% on a sequential basis and 29.4% on a Y-o-Y basis. EBIT margin is 29.1%, although the margins were negative in the first 2 quarters of FY '23, this segment has performed very well, and we will see continuous improvement in the margin trajectory of Digital Technology segment. Its contribution to total revenue was 41%. Now coming to annual numbers, FY '23 financials. Our full year revenue was at INR 1,459.2 crores, which is a growth of 21.5%. Our EBITDA was at INR 242.6 crores, which is again up by 25.5% as compared to last year. EBITDA margin stood at 16.6% on a Y-o-Y basis, and we aspire to maintain the similar kind of margin next year as well. Our EBIT was at INR 207.6 crores, which is a growth of 29.8% on Y-o-Y basis, and EBIT margin stood at 14.2%. Our other income for the year was at INR 38.7 crores, which is a growth of 47% on a Y-o-Y basis primarily due to exchange gains, SCI incentive and better investment income. Our PBT before exchange item was at INR 243.4 crores, which is a growth of 32.7%. Our paid off NCI was at INR 189 crores, which is a growth of 20% on a Y-o-Y basis. Tax rate for the year was at 23.9%, which is slightly higher than our earlier expectation of 23%. Our EPS for the full year was at INR 32.05 per share as compared to INR 26.71 per share in the last year, a growth of 20% on a Y-o-Y basis. If you see our segment-wise revenue mix for FY '23 digital operations revenue was at INR 630.7 crores, which is up by 21.9% and EBIT margin for the digital operation was at 22.2% on an annual basis. Our digital experience revenue was at INR 219.3 crores, which is up by 38.8% and margin was at 26.4%. Our digital technologies revenue was at INR 609.1 crores, up by 15.9% and EBIT margin for the full year was at 1.6%. We continue to maintain a healthy balance sheet as on March 31, 2023. Our total cash and investment net of debt [indiscernible] company stood at INR 498.2 crores. Our DSO was at 67 days for the full year as compared to 74 days as on March 31, 2022. In terms of geographical footprint, the U.S. remains our largest geography with 54% of our business coming from here, followed by India at 27%, rest of the world, including U.K. and Europe at 19%. In terms of industry footprint, BFSI continues to remain the largest segment of us, which include 24% of our revenue, followed by education and Publishing, which is 22%; then Technology & Consulting at 19%, noncorporate or nongovernment organization at 12%, manufacturing intra-and logistics at 12%, deteriorated 8% of our business and other segments up 3% of our total revenue. Our client concentration remains very healthy with top 5, 10 and 20 clients contributing to 24%, 37% and 52%, respectively. The Board has recommended a total dividend of INR 5, which includes 3.75 as final dividend and 1.25 as the special dividend per share for the year ended March 31, '22, '23. With this, I will now pass on the call to operator to open the floor for questions. Thank you for your patience and continued interest in Datamatics.

[Operator Instructions] The first question is from the line of Pallavi Deshpande from Sameeksha Capital.

Congratulations on a very good quarter. Just wanted to understand on the digital technology side, how -- what's driving the turnaround and what would be a strategy going ahead? I think you mentioned about the margins also being substantial. Did we see some new client additions?

Yes. So we are looking at new plant addition quite significantly. Our margins improved because of better negotiation, as I've mentioned, and also tighter cost control. I do -- going forward, we will be focusing on hyperscalers, which is things like Microsoft Power Apps, AI, cloud, those analytics, all of those areas. And that we are beginning to get some very good traction on that, plus deepening our client relationships. So these will be the main driver for growth. Our focus on the U.S. continues, and that's also getting us some very good traction. In terms of margin stability, I think the margins will be stable. We may have a dip this quarter because of the increments. Every company goes through the increment cycle around April. So in this first quarter, we'll have a dip but it will normalize through the course of the year. So I think we should have a fairly healthy margin going forward.

So we had a lot of volatility in margins that we saw in quarters in FY '23. So do we see stability? And do we see -- I mean, stability at what levels around what level?

Can you repeat the question?

We saw a lot of volatility in the quarters in FY '23 for this division. I think because of a large client drop off also.

That's correct.

Right. So -- I mean the stability we see is in respect to 4Q margins, are we restricted to that or [indiscernible]…

So the stability should be there -- so the client that shrunk has now stabilized. In fact, it's marginally grown. So I don't see an issue on that front. But we have got a very healthy pipeline with good margins coming in. As I said, we negotiated prices, so we should be okay. Having said that, of course, we see in the market a little bit of an issue with the BFSI segment, particularly in the U.S. Having said that, so we think there'll be a little bit of softness in BFSI, but our pipeline is healthy and our pipeline is good. So I'm not concerned from a Datamatics point of view. But at the industry level, you may see a little bit of a slowdown, particularly in BFSI. But Datamatics concern, I don't see that impacting us majorly.

Right. Yes. I mean that's good to know because the BFSI is an export. But also on the UI part or whatever, you've seen those companies actually also top on in cash, I guess. So is that also improving the environment with tightness and liquidity. I mean what's driving overall the environment for the space in the U.S?

Sorry, you are not very clear. A, Your line is not very clear. And also the question is not very clear. If you would repeat it.

I just wanted to understand the space, right, in the RPA space, UI reported numbers, which showed that the bond rate is coming down for them. The losses were down. So does that indicate to you more sanity in the marketplace in this space in the RPA space particular?

Yes. So yes, you're right. So there is some sanity coming in. Valuations have become more realistic than what they used to be. I think the company has stopped burning the way they were, they were I think unnecessarily burning. We are getting fairly good traction. Our deal sizes are increasing. The customer acquisition rate has gone up. So I think we are well positioned. As far as UFS is concerned, some of our -- we are also getting some customers moving out of UFS and switching over to us to our products. But overall, we are getting some very good traction in that space. And the annual coverage for our products has been extremely good. The customer feedback also has been very, very healthy.

And in terms of the price negotiation, you mentioned, what would be the kind of price uptick you've seen in there?

So through the course of last year, at varying points, we did negotiate with our customers, and we were able to raise prices anywhere from 5% to 30%. Of course, each customer, each project are very different. And that should go through for this year as well because we already renegotiated. So last year because it happened through the course of the year, you did not see the full impact. This year, you will see the full impact. And of course, we continue to talk to many of our customers for revised prices. Fortunately, what's happening is that the Western world, America and Europe, in particular, are going through huge inflation. So their cost structures are going up. And because of that, they recognize that they may need to pay higher because their own cost trajectories are going up. So we are finding it a little easier in negotiating prices with customers.

And sir, lastly, on the acquisition side, if you put an update how are you looking at that now? And I mean, how close are we to complete or doing a deal here?

So we are in dialogue. We have initiated dialogue with several customers or prospects target companies. We are looking at making acquisitions somewhere in the range of $20 million to $50 million this year. Having said that, we are not just going to buy a company for the sake of buying a company, so the due diligence has to be fairly thorough. And then we try to fit our strategies as to fit into our customer acquisition and deepening our expertise. So in that sense, we are looking for a good fit. Fortunately, we in dialogue with some companies, and I am very hopeful that in this financial year, we should be approved to close some deals.

And this would be in the digital technologies piece or?

That is correct. That is correct.

The next question is from the line of [indiscernible] from Mount Intra Finance.

Am I audible, please?

Yes.

Okay. Congrats on a good set of numbers. So last quarter, we had said that we've taken some price hikes that we renegotiated certain deals with customers and that some of that effect will come in the next quarter, that was the Q4. So I just wanted to ask, you've got strong growth of about 11.7% -- what proportion of this growth was due to the price hike and what portion maybe was due to the ramp-up of deals won during the year?

I don't have that breakout. Some of it is not easy to get because some of it would be an increase in business from customers for whom we hike prices. So it's a combination of both volume increase as well as price hikes. Some of them are new customers. So I don't have a breakup, but that number may not be the easiest one to calculate.

Okay. Understood. Now last quarter, we had given a guidance where we get about 15% growth for FY '24. Now despite the strong quarter in Q4, you kind of given a range of 14% to 15%. So just trying to understand, are we baking in some kind of conservative in our outlook for FY '24 or has something changed materially in the demand outlook. Could you just give us some clarity on that?

Yes. So there's no impact on the demand outlook that remains equally robust. But one is seeing some softness in the U.S. BFSI sector, and one is seeing some headwinds, particularly out of U.S. and Europe. Many other companies are predicting slower growth. So we think that there could be some softness. However, as far as Datamatics is concerned, we are still seeing a very healthy pipeline. So I don't see that as an issue, but we are being a bit cautious because we don't know which way the world will go over the next 12 months; because of the economic challenges that they're having, inflation and recession obviously.

Okay. And you just called out that the real win for the quarter was about $20 million. Did I hear that correct?

That's correct.

And this is in range with our normal range? Or what is the normal range of deals that we usually get?

Typically, it ranges about $15-odd million, $70 million, so $20 million is in range with our regular things.

And we expect this to carry on even in FY '24.

Yes, we expect -- as of today, where we stand, we expect that trend to continue.

Okay, sir. Thank you. Congrats on good set of numbers.

[Operator Instructions] The next question is from the line of Akshat Mehta from Sameeksha Capital.

Am I audible?

Audible but a little clear.

Yes, please use the handset, Akshat.

Congratulations on a good quarter. I have a couple of questions here. What is the kind of -- you said that this quarter, we will be taking some hikes in terms of employee costs. So what is the kind of hike that you are planning, if you can share like on that?

Sorry, can you repeat the question? The increments? Yes, the increments would overall range approximately averaging about 10%, 10.5%. But obviously, it's not the same for you. On some higher performance would be getting higher, some lower performance will be lower. The churn. So yes, overall average approximately 10%, 10.5%.

Okay.

Also, you will see an impact in Q1 because obviously, the increments come in now, but it will normalize over the course of the year.

Okay. Secondly, out of which area -- out of the 3 segments that you have operational, experience and technology. And obviously, there are different solutions that you brought in that. Which areas are you seeing the most growth coming out of at the moment?

Right now, we're getting a fairly even growth across the board. If you see our growth was highest in the digital experiences last year. But this year, we're looking at a fairly balanced growth across all these 3 segments.

[Operator Instructions] The next question is from the line of [indiscernible] from Crown Capital.

I hope I'm audible.

Yes.

Congratulations on a great set of results. Sir, I just wanted to ask, so we are planning for a 14%, 15% growth, but our margins, you're probably looking at the same range as we did this year, but will we also have some kind of operating leverage that could drive our margins even higher?

Yes. We are looking at some of those operating benefits and leverage, and we should be able to improve margins a little bit, for sure. I think on an overall basis, we could be looking at plus or minus about 1% -- so that could happen as we go through the course of the year. Both through operational efficiency, price negotiating, tighten the belt, so we have a multitude of factors attributed to it. But you're right. So the -- there should be some improvement in margins as well.

Okay, sir. And sir, in acquisition -- so in organic acquisition that we are looking at. So that will also give us a higher revenue than our 14%, 15%. So 14%, 15% would be our organic revenue and whatever we get from our new acquisition would be another. Correct, sir, is my understanding correct?

Yes, that is correct.

Correct. Okay, sir. So around what kind of rails are we looking at the acquisition in terms of which segment or when could we close or could you give some more details about the acquisition that we are planning.

So we are looking at acquisitions in the hyperscaler areas, which I mentioned earlier, around Microsoft Power Apps, Salesforce, cloud, those kinds of technology areas. We're looking at companies in the range of $20 million to $50 million. It could be one acquisition or it could be 2 or 3 smaller ones. That is unclear as we go through the process of discussing with target companies and negotiating with them. So it's not quite clear which way go. But yes, it's somewhere in that range.

Okay, sir. And any sort of time line like you could see in the second half of the -- nothing concrete, but just a small range that could help.

That is correct. Nothing so concrete. Therefore, I don't expect anything significant in this quarter or the first quarter. But depending on how the negotiations mature, there could be something in Q2 or Q3.

Okay, sir. And sir, any other risks that you could see that we could face or we are on a stable pipeline of growth.

No, I think we are in a fairly stable pipeline. I don't, at this point, see any risk.

The next question is from the line of Pranav Mashruwala from Dolat Capital.

Yes, can you hear me?

Go ahead. Yes, we can hear you.

Yes. So yes, I just wanted to ask about your India plans. So India plans -- India is about 27% of your revenue? And how do you see growth panning out for India and contributing to our FY '24 guidance?

India has traditionally grown very well for us. However, India tends to be a little lower margin, it's a very price sensitive market. So our focus is now increasingly focusing on the U.S. and Europe. So that's really where we're at. So in that sense, in a proportionate ratio, India might slow down. Although India itself is growing and it will grow very healthy, but we will put more effort on the U.S. and Europe, therefore, proportionately, India will be a little lower.

And BFS segment, any particular specific pockets of areas where you see the slowdown in more queue?

Not in particular, we're not seeing -- we see a fairly healthy pipeline. But yes, many of our customers who are in that segment are -- this is nowhere right now because it's possible that some of them start tightening their strings. But right now, we don't see that happening on the ground in terms of my current deal pipeline and the flow, I don't see that. But given the situation in the U.S., it's possible that some of them could slow down a little bit. So we have been cautious, but we are still optimistic because we don't see an impact on our pipeline.

Finally, on the education learning segment. So how do you see the outlook here in this segment?

So all of our business is in that segment is mostly in the traditional education space more and not in the EdTech, the EdTech has been impacted quite significantly. So I don't see an impact on Datamatics because the larger part of our business is in the traditional education space.

Our next question is from the line of Arpit Shah from Stallion Asset.

Am I audible?

Yes, sir. Slightly muffled, I could ask that you'd be a little closer to the mic.

Yes. Just wanted to understand if there were any one-offs in revenues this quarter at least in digital operations. Because you had a very high sequential growth of around 20% or so. Just wanted to understand if there was any one-off in digital operations.

No, there is no one-off deal. We do tend to have a little higher quarter in Q4, typically compared to Q3. That's been the traditional cycle that you see in the Datamatics. So I think it's that and this quarter are always stronger. But yes, there's no one-off deal that has caused this cycle.

Got it. And just wanted to understand, are we seeing any kind of J-curve in digital technologies margins? Because it probably moved from minus 4%, minus 2%, to around 9%? And are you seeing double-digit kind of margin in this business? Or how does it look like going ahead?

Yes. So yes, so if you're asking whether the 9% will go into double digits up maybe 12%, 13%, 14%, 15%. So that will happen as we improve our operations. And as the price renegotiation has a full impact. So it should improve, but I don't have a figure to exactly to where it will end up for the year. But yes, it should improve to double digits. Obviously, quarter-to-quarter, there will be some fluctuation, as I mentioned earlier, Q1 it might go down a little bit because of the increments, but then it will normalize through the course of the year. But actually, it should improve a couple of percentage points.

Got it. And does the products business section sit under digital technologies products?

That is correct. It does.

Okay. And then the ASC contracts which you wanted to sign a couple of quarters back, is that in digital technologies?

That is also correct.

So is that lumping a very fast figure? Is that the reason the margins are in…

Thing up -- well, we've got several prospects that we are talking to. But these are very tender-driven projects and they're semi government in nature. So they take time to materialize. But -- and they are chunky deals. So when they materialize only you get a $20 million, $30 million, $40 million deal. But yes, they do sit into data technology, and we are in active dialogue with several prospects, but nothing will close in the next -- perhaps towards the end of this quarter, maybe early next quarter, we might have something happening.

Got it. Even in the third quarter of FY '22, we have seen a margin of around 8% on digital technologies. And after 4 or 5 quarters, we've moved again to 9%. So do you see any risk that this number would move back to, let's say, lower single digits?

No, I don't see that at this point in time, there's a slide. We had a slide largely because of our large customers who had chosen a multi-vendor strategy, and therefore, a large chunk that moved out, which, of course, and also what happened last year is that the whole IT industry went through a crazy phase of huge salary hikes. So there is a combination of salary hike plus the squeezing from customers was the result. I don't expect that to happen now. We're already seeing a supply side easing off. So I think that should be -- we should be okay.

Got it. And we saw about 11% to 12% of sequential revenue growth from Q4 to Q3. So why are we heading for 14% to 15% kind of growth rates? Is it just trying to be conservative or do you have any ramp downs or different kind of revenue adjustments that you have to make? Or what is it? Why is this 14%, 15% happening?

No, we don't have any ramp-ups. We are just being a little cautious given the situation in the U.S. is a little uncertain and a little volatile, particularly the BFSI segment. So we are being cautious. So far, as far as R&D pipeline is concerned, we don't see any impact. But yes, but we don't know which way we'll go in the U.S.

And the 20% margins we have done this quarter that continue or will come back to 16% to 17% kind of number, which we did for FY '23?

No, it will come back. A 20% quarter is not to sustain at that level. It will come down a little bit.

So on an annual basis, we had 15.6%. And I think for the next year or so, we should be in the same range between 16% to 17.5%.

[Operator Instructions] The next question is a follow-up question from the line of Pallavi Deshpande from Sameeksha Capital.

Yes. On the digital technology side, if you could just share -- I think total client additions were 21 for the organization. So how many would have been on the digital technology side?

In the quarter -- I don't have that number for…

For the year.

For the year?

Okay. 21% was for the quarter, right? Either for the quarter or the year.

So we are running at about -- we had 79% for the year, so roughly 20% per quarter. A good chunk of them are coming from the digital technology side. But I don't have that breakup handy with me right now. But suffice it to say we're at about 40% to 50%.

Right. And on this side, what would be the share of implementation work that we do on the digital technology side?

I don't have that breakup either -- how much implementation versus software support maintenance developed -- we don't do that.

Right. And on the education and learning side, would that be lower margin than the overall margin side?

No, no. That's fairly healthy margins.

And just -- what would be the implied hiring plan for FY '24?

So increasingly, we are going more on platforms and technology rather than head count. So we will see a disproportionate increase in revenue versus the employee head count. But this year, we would have added approximately 1,200 employees at net increase. Next year, I think we should be in the range of about -- depending on the growth rate of cost at about maybe 1,400, 1,500 employees.

Assuming a growth rate of 15% of the revenues, that would be 1,400?

But our employee head count may not increase in line with the revenue increase.

And lastly on this, on the India business and the automatic fare system, what percentage of share would that be of the India business for [indiscernible]?

Can you repeat the question? Your line is not clear.

The automatic fare system which you have and what would be the share of that in the India revenue would it be a major chunk of India revenue?

Our India revenue is about -- in EFCs, yes, give me a second. So it's about 1/4 of India. 25% of India got from the EFCs.

Alright. And I just wanted to then get that part. So I think you mentioned that that's lumpy and you expect that in there in the second and third quarter as such?

So these projects tend to be lumpy and chunky because they come -- when they come, then it's a large deal, otherwise, it doesn't come a while. So start of every month or 2 months you're signing new deals. And therefore, the next deal -- and because it's very tender-driven, it depends on certain guidelines and time lines given by the government, and therefore it's very hard to predict. But yes, I do expect sometime around the end of Q1 or early Q2, we should have potentially something maturing. But that depends also whether we win the deal or not. So yes, that's when we expect to hopefully sign the next deal.

Right. And in terms of business it's like we're hearing a lot about the low code, no code, how is that driving growth in new areas as well?

So we are implementing it, for us it's going quite well. We are implementing several projects using low code, no code. So therefore, we're generating more and more business on those platforms. And the margin is also fairly healthy. So we're quite optimistic on pushing the low code, no code solutions into the market. We are beginning to see some internal productivity benefit gains as well, but they are still in a little bit of a pilot phase internally.

Right. And so -- I mean, in terms of the other business -- just application modernization, how is that progress?

So that's done well in low code, no code as part of that application modernization.

Right. Okay. Yes. And on the investor -- lastly, on the investments in the product space. I think as you mentioned in the last call that we may be done with that solely on the marketing side that you need to do ramp up that. What would be -- I mean kind of what would be the kind of spend or can that also be gain on margins in the near term?

I think as we mentioned in the previous quarter call, we are spending about INR 40 crores to INR 50 crores in that spend. We will sustain that for now. And as we spend more marketing and the growth will happen. So the growth and the marketing increase will try to offset each other, but we will sustain spend at about INR 40 crores to INR 50 crores.

The next question is from the line of [indiscernible] from Ruston Investors.

Sir, just one clarity on the margin guidance. So when we are expecting our digital technology margins to hold above the current and eventually move to a double-digit number, why are we guiding for sub-17 margins on an annual basis?

So we're just being cautious because we really have some concerns on how the U.S. market may pan out. As I mentioned earlier, our deal flow is equally robust. So we don't see that as far as Datamatics is concerned. But if the headwinds in the industry grow stronger, then we will not be able to push that back. So we're being more cautious in that. So -- however, we did mention that we do expect some improvement in margin. So I am hoping that we are -- we will see improvement, but it's very difficult to calculate the figure right now.

Right. That's all for me.

The next question is from the line of Arpit Shah from Stallion Asset.

I just wanted to understand the capital allocation, the kind of acquisitions you are looking out for. So these would be mostly on the just processing side or they would be more on the product side, how would that look like?

No, we are looking at acquiring on the product space. We have our own IP, and that's what we are going to push in the market. As I mentioned earlier, we're going to double down on that because we're getting very good traction from customers as well as the analysts. The acquisition will be more in the hyperscale space, which is around cloud, power apps, low code, no code, Salesforce, those kinds of things. It's all on the services side.

That we broadly had on the capability side or would be looking to add a lot of numbers on your side first around that?

Can you repeat that capability or?

Are you looking to add numbers through acquisition, or are you trying to add capabilities through acquisitions?

We are augmenting our capability and competence. And of course, there will be a natural augmentation of some customers as well. The small competence are customer based.

Got it. And what are the typical, let's say, cap rate you're targeting or the kind of paybacks you're targeting from the acquisition?

So it depends on deal to deal, there's no formula, but we traditionally look at about 5x to 8x earnings. And if it goes well, then we can recover cash in less than 5 years, if it doesn't go well, then you would recover over 10 years. But 5x to 8x is roughly the range we typically look at. But then, of course, it defends deal to deal and it depends on what area of technology the target company is in. And how much they have in terms of their own IP and platform versus pure services. So that would vary but roughly at a high level, that's the range we look at.

[Operator Instructions] The next question is from the line of [ Shreya Bhawalkar ] as an investor.

First of all, congratulations to you Rahul, sir, and Datamatics team for the wonderful result. My question is something related to everybody's talking nowadays. And it is about nothing but ChatGPT. So I just wanted to know what is your take on ChatGPT and how are you going to leverage it at Datamatics?

So we have -- we are piloting about 20-odd projects using open AI and other AI technologies, which includes GPT and LLM. ChatGPT is, of course, the consumer version of it. That's not something that we are using at the enterprise level because a lot of that information then goes to Microsoft. But if you look at ChatGPT or LLM, there are several projects that we are currently implementing at a pilot level, also testing out the efficacy of it from a legal perspective and compliance. So those things are being evaluated as we decide how do we implement this technology for our customers.

Okay. So that's it from my side. And once again, congratulations.

[Operator Instructions] The next question is from the line of [indiscernible] from Swan Investments.

Congrats on a good set of numbers. Sir, 2 questions quickly. So one I wanted to understand…

Sir, your voice is not very clear. Can I request you to re-answer?

Is it better? Am I audible?

Yes, it's slightly breaking, a request to come in the network area as well.

It's working now.

Yes, go ahead, please.

So my first question was, is it that the margins in particular in the Digital Technologies business are varying -- is it an investment mode? Are we -- or how is it -- could you give some color to that? And secondly, I wanted to understand that what would be a target margins do we see in this business going forward or in a good case scenario?

Yes. So the margins were varying last year because as we mentioned that we -- one of our larger customers decided to have a multi-vendor strategy. So there was a squeeze on the revenues from there. It was a very healthy margin customer. Plus at the same time, you had the salary hikes that were going in the IT services, which is actually crazy. The supply side challenges that we had at an industry level. So that really squeezed the margins. Over the course of the last 1 or 2 quarters, we've improved that steadily. I do expect that to improve going forward as well. We closed this last quarter at about a 9% margin. And that is, of course, after all the investments that we are making in our products and our platforms in each of that. Given that our product and platform should remain steady and the revenue should grow, I do expect some improvement on margins there as well, plus 1 or 2 customers that we talked about the larger ones have also stabilized. So I think we should see an improvement in margin. But having said that, we are equally being cautious or conservative given some softness in the market in the U.S. and Europe. And therefore, we are projecting a conservative number. Having said that, it's very hard to predict exactly where it will be next year. But I do think that we will be significantly better than the last financial year.

Got it. Got it. Not just next year, but otherwise, what would -- what is in a normal scenario as a…

A normal scenario, it should get to the high teens for sure. And that is our -- again, that is our goal because in the next 2 to 3 years, we should certainly get there.

The next question is from the line of [indiscernible].

Yes. So since you have high exposure to U.S. market, what is the forex scaling this year or in this quarter?

The forex impact.

Forex scaling this quarter will be -- so our other income is about INR 36 crores, INR 37 crores, which includes forex scaling as well. I think -- so we -- if you're talking about revenue then it'll be about 4.5% for forex.

So I think the constant currency growth was about 7.5%. And we declared a 21-odd percent total. So between 17.5% and 21.5% is the currency impact.

Okay. 24%?

4%. That's 4%.

The next question is from the line of Harshit Toshniwal from BottomsUpResearch.

Firstly, congratulations for a great set of numbers, it truly is out of the park. 2 questions. So on the technology side, if you can give some breakup of what is the core product revenue and what is the services revenue within that? And the reason I'm asking is that because you think that a large part of margin improvement is because of our tie-up with hyperscalers. So when you say that, you mean that are products like TruBot, TruAI, et cetera, all of those are now there on hyperscalers platform, and we are getting more traction in business through that distribution channel. Is that the reason of margin improvement to a large extent? And the reason why I'm trying to separate is that because within the enterprise, the IT services business would be where we would want to do the acquisition. So some color on what has been the trajectory on that particular part within technologies?

Yes. So we traditionally don't break up the products and the services business. But having said…

Broad percentage mix.

Hyperscalers -- the hyperscalers are all in the services space. The hyperscalers is not -- our product business is quite different. Although it falls technically into the same hyperscale area, but the ones that we are talking about are third-party platforms like Microsoft and Salesforce and cloud and things like that. So those we are going to be focusing on. We do have a starry business ready today, but our focus is going to increase in the next year.

If I can -- sorry to ask this because I just wanted to understand that when we say that hyperscaler, then do we mean that our product is there we work for Microsoft, Salesforce, et cetera, or we work for implementation of Salesforce at different clients? I'm just trying to understand that -- our profile or do we work directly for these hyperscalers?

The third one, where we implement these platforms as a client location.

Okay. The typical IT service implementation business?

Yes, implementation, yes, and building solutions around it, on top of it.

Okay. So the margin improvement has come because of the growth in that particular business?

Also the other traditional IT business, both. So we -- yes.

And the other part, which I'm asking that the investments in the products, that is something which we are doing in our own in-house build products of TruCap, et cetera, the 3 to 4 ones, which we are having. Now that is something which is yet to yield revenue and there is some scope of margin improvement through that. If you can help us understand that, that particular segment, is that profitable right now in itself? And secondly, who is the distributor for all those products for us?

Yes. So we have multiple distributors, dealers, resellers in the U.S. and in India. That product is not profitable, we are still in the investment mode. So we are investing currently, as I mentioned early, we're investing about INR 40 crores to INR 50 crores a year, and we've sustained that level of investment. But it's beginning to show some very good traction. We're getting many, many deals and with larger size deals. So we are still very bullish to that as an investment. You see the product business typically gives you returns for 5 to 7 years, roughly. So we are probably still in year 3 or year 4. So we still have next 2 to 3 years to go from an investment strategy point of view to see the returns that we are expecting.

Got it. And that is actually positive because -- that is actually positive which means that our services margin is actually much more than 9%. It is just that because of the product being there, it appears to be lower. But otherwise, the real margins are much better than the ones which gets reflected.

You're right.

Okay. And one last question, if I may ask on the acquisition part, which you mentioned, that when you are saying that you are looking out for acquisitions, so does it mean some smaller players who are doing implementation of Salesforce, et cetera, we are looking for some kind of players who have some revenue obviously in that segment or anything specifically? Because the reason I ask is because that -- when you say that 8x to 10x earnings, I'm just wondering that the kind of assets which will be available at those kind of valuations -- so some more clarity on how exactly or what stage are we at? Should we expect something over the next 6, 7 months or over the coming years? Or you think that it is still that we are not yet very close to where exactly we can find those kind of opportunities?

No. We are in dialogue with some companies. So finding the opportunity is not a major challenge. I think the bigger challenge is making sure that the company is the right fit and the financials are appropriate to that. So we did look at some companies. We've talked them at the last minute because for some reason we were not comfortable with that. So companies are available, valuations are fair. Right now with the market coming down, we are getting better value from an acquisition point of view. And we will make sure that we acquire a good company for sure. So…

It would be more IT -- the service implementation ones?

Yes, these are the service implementation ones here, right? And I expect that sometime in the next -- this financial year, we should be able to close a deal or 2.

[Operator Instructions] We have a follow-up question from the line of Pallavi Deshpande from Sameeksha Capital.

I just wanted to understand the product side of the business. So with geographies that we'll be targeting? And you also mentioned that showing good traction. So currently, where are they showing traction in which market?

The primary geography in the United States, that's by far the dominant market. There is some element in Europe as well. We -- since we are based in India, we have a corporate in India as well, although our focus is more in the U.S. and India. So if you look at the largest patch, it would be America and India, America will be #1, then followed by India.

Sorry, I didn't get the last part.

The largest part would be the United States followed by India.

Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to the management for the closing comments. Thank you, and over to you.

Thank you, everyone, for participating on this call, and thank you for your confidence in Datamatics. We hope that next year remains as robust, and I'm sure together, we will enjoy the fruits of it. Thank you again for being on the call. I look forward to talking to you the next quarter.

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