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

Ladies and gentlemen, good day, and welcome to Datamatics Global Services Limited Q3 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Asha Gupta from E&Y Investor Relations. Thank you, and over to you, ma'am.

Thank you, Nirav. Good evening to all participants in the call today. Welcome to Q3 FY '24 Earnings Call of Datamatics Global Services Limited. The results and presentation have already been mailed to you, and you can also view it on Datamatics website. In case anyone has not received the copy of press release or presentation, please do write to us, and we will be happy to send you all that. 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; Mitul Mehta, EVP and Chief Marketing Officer. Rahul will start the call with brief overview of the quarter on the business, which will be then followed by Sandeep, who will take us through the financials. We will then open the floor for Q&A session. 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 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 the SEBI and subsequent annual reports, which you can find on our website. With that said, I will now hand over the call to Mr. Rahul. Over to you, Rahul.

Thank you very much, and a very warm welcome to all of you on the call. Thanks for joining our quarter 3 FY '24 earnings call today. We wish everyone a happy new year, and we're glad to have you on the call today. I will briefly discuss some of the key quarterly performance highlights, while Sandeep will provide an update on the financials, after which of course, we will open the floor for questions and answers. We have completed the 9 months of FY '24 and witnessed a revenue growth of 9% and an EBIT growth of 14.8% on a year-on-year basis. The performance has been even across all the three segments. Regarding quarterly performance, our revenue declined 0.9% on a year-on-year basis and 2% on a sequential quarter basis. Q3 is generally a weaker quarter in the industry, and we are no exception to this trend. The decrease in revenue during quarter 3 is attributed to a delay in the commencement of new projects, while the ramp-up of operations has already kicked off. We have noticed slowness in decision making of large deals in the western markets. Nevertheless, we continue to add new customers at a steady rate. We added 12 new customers during the quarter 3 of 2024 and our new deal pipeline continues to remain healthy. We are happy to be in the Forbes Asia 200 best under a billion-dollar company. The list comprises of the top 1% of 20,000 listed companies in Asia. It is a recognition of our outstanding corporate performance over the years by enabling enterprises to go deep in digital to create operational efficiencies, superior customer experience and sustainable competitive advantage. I take this opportunity to thank all our stakeholders, including our employees, customers and shareholders for being an integral part of our journey. With that, I will now hand over our 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 '24 earnings call. Let me start with the financial performance of Q3 FY '24. And then I will take you through the 9 months numbers as well. Our Q3 FY '24 revenue stood at INR 369.3 crores, which is a slight decline of 0.9% on a Y-o-Y basis and 2% on a sequential basis. Our consolidated EBITDA for this quarter was at INR 52.6 crores, which has declined by 10.7% on a Y-o-Y basis and sequential basis as well. Our EBITDA margin for the quarter is at 14.3% as compared to 15.8% in the last year same quarter and 15.6% on a sequential basis. Our consolidated EBIT for the quarter was at INR 43.7 crores, which is down 12.9% on a Y-o-Y basis. EBIT margin for the quarter was at 11.8% as compared to 13.5% in the last year's same quarter. Our quarterly PAT after NCI was at INR 41.3 crores, which is a 10% decline on a Y-o-Y basis. PAT margin for this quarter was at 10.9%. Our tax rate for this quarter was at 23% compared to -- 23% compared to 25.3% on a Y-o-Y basis. Primary reason for decrease in tax rate is normally changing the profit mix of various legal entities. EPS for the quarter was at INR 7.01 per share, which was lower than last year same period, which was at INR 7.78 per share. Talking about segment-wise revenue performance, our digital operation revenue for the quarter was at INR 160.4 crores, which is a growth of 4.9% on a Y-o-Y basis. Digital operation EBIT margin was at 16.5% and its contribution to total revenue was 43%. Digital experience revenue was at INR 57.5 crores, a decline of 6% on a Y-o-Y basis. EBIT margin for digital experience was at 15.4% and contribution to total revenue was 16%. Digital technology revenue was at INR 151.4 crores, which is a contribution to total revenue of 41%. Revenue declined by 4.6% on a Y-o-Y basis. Margin in this segment was at 5.5%. We continue to maintain a healthy balance sheet as of December 31. Our total cash and investments stood at INR 595 crores compared to INR 581 crores in the last quarter. So there is a slight increase in the cash balance. Our DSO was at 60 days as of December 23 as compared to 63 days in the last quarter. In terms of geographical footprint, the U.S. remains our largest geography with 54% coming from U.S., followed by India at 24%, the rest of the world, including U.K. and Europe was at 22%. In terms of industry footprint, BFSI continue to remain the largest segment for us, which include 26% of our total revenue, followed by technology and consulting stood at 24%. And post this education publishing store at 13%, manufacturing infra and logistics at 12%. Our nonprofit or nongovernment organization was at 11%. Retail contributed 10% of our total business and other segments are 4% of our total revenue. If you talk about client concentration, it is very healthy with top 5, 10 and 20 client contributing to 23%, 35% and 49% respectively. Now coming to 9 months financials, our 9 months revenue was at INR 1,137.2 crores, which is a growth of 9% on a Y-o-Y basis. Our EBITDA was at INR 179.3 crores, which is a growth of 13.2% and EBITDA margin stood at 15.8%. Our EBIT was at INR 151.9 crores and EBIT margin stood at 13.4%. Tax rate for 9 months was at 19.2% compared to 22.3% last year same period. Our PAT after NCI was at INR 145.6 crores compared to INR 129.2 crores, which is a growth of 12.7% on a Y-o-Y basis. EPS for the full 9 months was at INR 24.71 per share as compared to INR 21.92 per share. So there is a growth of 12.7% in terms of EPS for 9 months. If we see segment-wise results for the 9 months of FY '24, digital operation revenue was at INR 491.9 crores, which is up 10.9% on a Y-o-Y basis. Digital operation EBIT margin was at 18.4%. Digital experience revenue was at INR 182.2 crores, which is again up 14% on a Y-o-Y basis. Digital experience EBIT margin was at 18.8%. Digital technology revenue, we were at INR 463 crores, which is up 5.3%. EBIT margin was at 5.8% for the segment. 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. Thank you.

[Operator Instructions] The first question is from the line of Subhankar Ojha from SKS Capital Research.

So I have listened to the initial remarks. So what was the reason for the decline in your revenue. You said there was some delay in commencement of some projects. Can you throw some light on it?

Subhankar, sorry, your voice is breaking. Can you least come in a better reception area?

Is it better now?

Yes, go ahead. Can you repeat your question?

Yes. Of course. So I was asking about -- you commented on the delay in some -- commencements in some projects which is why the revenue declined by 1%. Can you give some detail on that? And where is it now with respect to the commencement of the project?

So the projects have taken up more slowly than expected. So they are not going at full steam. They are, but softer than we had expected. So two, three things are happening in the decline. One is the projects are taking off slowly. Some of the decision-making is slower. In any case, Q3 tends to be a little weaker quarter for us, particularly because we are ramping up for Q4. So some of these things are really outside of our control in terms of the slowness in the decision making. That's the primary reason.

So now with 9% growth for 9 months '24, what is your expectations now with respect to FY '24 all growth guidance?

So quarter four of this year, which is Jan, Feb, March, we expect that we will grow in the vicinity of about 11% to 12% on a sequential quarter basis. And therefore, that means for the year, we should end up somewhere between 4.5%, 5% roughly in a top line basis for the full year.

I missed that. Did you say 12% on a sequential basis for quarter 4?

Yes. Sequential basis, we are looking at somewhere around 11%, 12% quarterly growth, sequential quarter growth. And therefore, the year should end up at about 4.5%, 5% for the full year. Because last -- Q4 of last year, also, we grew at about 11%.

Yes. So the base is high, basically, fourth quarter for last year. Okay. And with respect to the use of cash, so is there anything that you want to update us with respect to -- where are we with respect to the inorganic growth?

Yes. So as we mentioned earlier, we have been in dialogue with some companies. We have looked at to date over 200 companies. Right now, we are in active dialogue with two of them. But obviously, it's too early to say anything, but we are in active dialogue with some companies. And hopefully, if that goes well and it matures, we should have some transaction, but it's a little early for me to say that. Rest assured, the good news is that there's an active dialogue, which -- we have been in touch with them for some time.

[Operator Instructions] Next question is from the line of Grishma Shah from Envision Capital.

Sir, I wanted to know what's the outlook going ahead across various segments and we see margins stabilizing in our -- in the segment where we were finding it little tough compared year-on-year. If you could tell us how each of these segments are looking while you laid down the outlook for the entire year?

Yes, yes. So each of the segments have had an even performance. We are seeing this behavior of slowdown across all the segments. So there's no one standing out. In the customer experiences as 2 quarters back, one project came to an abrupt end. So that has continued the impact on digital experiences. As far as the margins are concerned, we stabilized the margin. In fact, next year, I expect an improvement because we have done some degree of automation. And so I think next year, but of course, right now, we are in the planning stage for next year. So I'm speaking a little out of turn. But next year, we should see a healthier margins because of the automation. But in terms of the revenue performance so far for the year, all three segments of ours have been approximately evenly impacted.

But the Digital technology segment has seen some margin stabilization, right? So if you could tell us what's happening in that segment? And how do you see margins for that segment, say maybe in next year or directionally or medium term?

Yes. So on that segment, we are using more AI to automate some of our internal things, and we expect that, that should improve. So we are tightening our belt in terms of productivity, and I do expect the margins on Digital Technologies to improve in next financial year.

Okay. And we did win some contracts between Q2 and Q3. So anything major that you could share for the outlook going ahead?

Yes. So the contract we won, we did announce one large deal, but that is, as I said, going a little slower than we had anticipated and therefore, is not showing up in the revenue as actively or as aggressively as we thought it would. Having said that from a pipeline point of view, last time, we had talked about a $290 million pipeline. That pipeline is fairly healthy, and we are at about $245 million right now. So that remains roughly at a healthy rate. This year, this quarter, we approached 12 new customers. So the closure of customers is at the same pace that we had earlier as well. It's just that they're slower in deciding and they are slower in ticking off but we've closed 12 new customers, run rate has been roughly in the same range in the previous quarters as well.

And what's the feedback on the product side? I mean, how is that -- that segment picking up?

That segment is picking up well. We are getting a lot of interest. We've been in active dialogue with companies like Microsoft [indiscernible]. And they've given a very strong feedback on the products. So we've closed a few deals as well. So that is looking quite good.

Yes. Also, last quarter, we've spent live on Microsoft Marketplace, which is transactable. So that's also a channel, which will help us reach out to a larger Microsoft customer base.

Okay. Okay. And what about the bidding for the metro projects in India? I mean what's the progress on that?

So the metro projects are all going well. Right now, we did not bid for Chennai Metro because it was just not a very viable project. It was a very low margin project. But we are right now in dialogue with 3 prospects in India and 2 in the U.S. So we are trying to put more effort on the U.S. market and we should be quoting for some of them. These are long gestation projects. So it's not that every quarter something happens. But we are well placed for some of these projects that we're doing. We have done -- as you know, we almost completed Kolkata Metro. We made good progress on the Delhi. We are delivering on Delhi as well, which is the Meerut Corridor. So that's doing well. Kolkata is doing well. Mumbai Metro, of course, is Line 2A and 7 have gone live. Line 2B is just about starting. So I think we are well positioned with that.

Okay. And in general price increases for next year would be difficult to come by?

Yes, I would imagine. So I don't think the market will respond to a price increase. I think the key focus next year will be for improving margins, deep productivity more than the price increase.

[Operator Instructions] The next question is from the line of Parvati Rai from Equentis Wealth.

I just heard you speaking on the margins that next year, it should be an improvement given the automation and the other work. So I would like your thoughts on what would be the exit margin for this year that you're looking at on EBITDA?

Yes. So this year, we are at about 14-something. So I think it should be a little better, but we are right now, as I said, in the planning phase. We will spend this quarter planning our numbers for next year. So maybe in the next call, we could probably give more insights into that space. But it should certainly be better than this year.

Okay. And the other point that you made on margins that, especially with respect to digital technologies, where you did mention that it kind of stabilizing. In the previous quarter, you did highlight while it will be low single digit or for now, we're also looking at a 7% to 8% range. So does that still stand? And when are you looking at that range achievable?

Certainly, next year, we should be in that range.

Okay. And some more outlook from the deal perspective or the macro outlook because since you mentioned the decision making is slow and delay in large deals. And given we have actually -- the revenue growth has been far timid from what -- I mean last quarter, we did pull back on the guidance. So for next couple of quarters, how are we kind of expecting the market outlook, macro situation?

So we still have to see in terms of the macroeconomic scenario as to what happens with the U.S., the war in Israel, with the Ukraine-Russia war. So all of that is still sort of a little unknown. Having said that, as I mentioned, we are right now doing our detailed planning for next year. So probably in the next 2 months, I should have a handle on that.

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

Thank you very much, and thank you all for participating in today's quarterly call. I look forward to engaging with you once again in the next quarter. And I'm sure we look forward to good next year. So thank you very much for being on the call.

On behalf of Datamatics Global Services Limited that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.