Expleo Solutions Limited (EXPLEOSOL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Expleo Solutions Limited Q4 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, Ms. Gupta.

Thank you, Nirav. Good afternoon to all participants in the call. Welcome to the Q4 FY '24 Earnings Call of Expleo Solutions Limited. The results and press release have already been mailed to you, and you can also see the same on the company's website. In case anyone does not have a copy of press release and presentation, please do write to us, and we will be happy to share with you. Representing the management today, we have Mr. Balaji Viswanathan, Managing Director and CEO; Mr. Periakaruppan Palaniappan, CFO, whom we will be referring to as Mani. Balaji will start the call with a brief overview of the quarter and year gone by, which will be then followed by Mani, who will be giving you a brief update about the financials. After that, we will open the floor for Q&A session. As usual, I would like to remind you that anything that is mentioned in 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 risk 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 it on our website. Having said that, I will now hand over the call to Mr. Balaji. Over to you, Balaji.

Sure. Thanks, Asha, thanks Nirav. Thank you for the investors and analysts who have joined the call. For the quarter ended 31st of March, we have seen a marginal growth. Primarily, we had -- if you recollect the last quarter, we had a onetime benefit. If we were net out with that, we had a very marginal growth of around 3.6%, 3.7%. And excluding that, we had growth of around [ 2.6%. ] The core markets are still showing weakness in terms of pipeline and demand. Some of the markets like Middle East and India are actually showing better pipeline and more opportunity, but the size of the opportunities obviously are relatively smaller. One of the challenges have been around the expectation of demand, based on which, we have built a certain amount of bench from Q2 -- calendar year -- calendar Q2 of 2023 onwards. And unfortunately, some of the opportunities did not really materialized, so we had a higher bench or the higher number of people than what we required when we started the calendar year. We've been acting on optimizing our bench and the talent pool based on what our demand is and the traction from end of February 2024. While part of these actions are actually shown this quarter, that is in Q1 of this financial year, but most of the actions will actually start to show from Q2 onwards, which will actually help us in getting to the target EBITDA margins of 16% to 18%, which is what we have been talking about for the last 1.5 years to 2 years or so. Overall, we have been investing in AI and the digital technologies, which is what is showing the growth opportunities as well. And we have been investing on both in terms of training, upskilling our team and also in terms of inducting some of the leadership from these domains. And over the last 6 months, most of our growth opportunities are being primarily in this and that's what we actually show in our digital share of the business as well. We had not much traction with some of our smaller customers, that's why you'd probably see a slight decline with the smaller customers, but we have actually signed record number of new customers where the opportunity sizes have been relatively small, which we hope that after demand picks up within the course of the next 2 quarters, we will see more number of customers.

Sir, may I request you to speak a little louder, please?

Is it better now?

Yes. Thank you.

Yes. As we go through the next couple of quarters, we will actually see more number of those customers moving beyond 0.5 million getting closer to 1 million and 1 million-plus customer range. That's basically what we have as a summary. I would like Mani to provide more information about the financials. Mani over to you.

Thanks, Balaji. So I'll talk about the financial results for the quarter compared to the previous quarter. So it's a quarter-on-quarter comparison. Our operating revenue was at INR 2,554 million compared to INR 2,502 million in the last quarter, an increase of about 2.1%. Our overall total income of about INR 2,572 million. It's down by 1.6% compared to the previous quarter of INR 2,615 million. When it comes to profit, our EBITDA was at INR 398 million, which is 15.6% compared to INR 385 million to 15.4% in the last quarter. Profit after tax was at INR 148 million, which is 5.7% compared to INR 338 million, which is 12.9% in the previous quarter. EPS stood at INR 10.12 in this quarter compared to INR 21.93 in the previous quarter. Overall cash position, we were at INR 1,840 million net cash in this quarter compared to INR 2,117 million in the previous quarter. I'll move on to the year-on-year comparison. Operating revenue, as I said, for this quarter is at INR 2,554 million compared to INR 2,311 million in the same quarter last year. So this is an increase of about 10.5% year-on-year. Total income is at INR 2,572 million this quarter compared to INR 2,349 million same quarter last year, with an increase of 9.5%. On profit, EBITDA, we were at INR 398 million this quarter compared to INR 431 million in the comparable quarter last year. As a percentage, this is 15.6% versus 18.7% same period last year. On PAT, profit after tax, we were at INR 148 million this quarter compared to INR 290 million in the same quarter last year, which is 5.7% versus 12.3% comparable period. On EPS, we were at INR 10.12 this quarter versus INR 18.73 in the same period last year. On cash we were at INR 1,840 million this quarter compared to INR 1,557 million same period last year. I will talk about the full year comparison. On a full year basis, full year ended March '24, we were at INR 9,649 million on revenue -- on operational revenue compared to INR 9,033 million in the previous year. This is a growth of about 6.8% on full year-on-year basis. Total overall income, we were at INR 9,724 million compared to INR 9,194 million in the last year. This is a growth of about 5.8%. On profits, EBITDA, we were INR 1,483 million, which is 15.4% this year compared to INR 2,001 million, which is 22.2% in the last year. Profit after tax, we were at INR 887 million this year, which is 9.1% compared to INR 1,357 million which is 14.8% in the last year. EPS, we are at INR 58.27 this year compared to INR 86.27 in the last year. On net cash position, we were at INR 1,840 million this year compared to INR 1,557 million in the year ended March '23. That's the overall highlight on the numbers. Thank you.

[Operator Instructions] The first question is from the line of Rohit from ithought PMS.

So Balaji just wanted to understand for this quarter that our margins were about 13%, and you attributed that there was a benefit et cetera. So how do you look at the coming year FY '25? So if you can just maybe give your overall views on what kind of growth? And how should we think about margins for this year?

So from an overall growth percent, we are -- as you could see, we've done around 3% organically in this quarter. And we expect that we will probably be similar growth percentages over the next 3 quarters as well, which would basically make it up closer to the double-digit growth is what we are expecting for the year. Having said that, of course, each quarter comes with its own challenges depending upon how the core markets react, particularly U.K., Germany and France, where most of our businesses usually comes from. From a margin perspective, our EBITDA should be in a similar range is what we are at right now, which would be in the range of -- right now, we're at 15.6%, but we expect that we should be in the range of 16% to 17% over the next 3 quarters as we start reducing our bench and our utilization rates going forward. Mani, do you want to add anything more?

Yes. I think you covered most of it, Balaji. So we're looking at similar growth rates, our profitability should be in the range of 16% to 17% for the next 3 quarters.

Got it. So just 2 more questions on this. So one is, I mean, our longer-term goal in terms of FY '25 goal was obviously much higher goal in terms of workforce. And at the same time, I think which we sort of deferred. So I mean we had that 10,000-odd workforce goal. And at the same time at the time of the merger, we had this plan of increasing our outsourcing and offshoring to the Indian offices. So in that context, I mean how does that strategy play out because you're still sort of guiding for only 10%, 11% kind of growth for this year? So how does -- I mean, how should one look at it? Maybe not this year, but like longer term, maybe 2 years out, how does one look at the overall business from here on? Because I understand we had some one-off last year. But even adjusting for the base, 2 to 3 years of sort of flattish kind of growth, 2 years of flat kind of growth at least on the profitability side. So I just wanted to get how should one think about the business let us say 2 years out from here? In the context of the larger target and in terms of workforce, and also the greater outsourcing that -- or offshoring that was supposed to happen at the group level, which should benefit Indian company -- I mean, Indian companies, which are listed.

Because of the softness in the European market, the growth whether it is from the group also has been relatively lower. Having said that, the group contribution to our revenue growth is higher than what we have been able to do directly from the other market of ours. And from a profitability perspective, I think we had a setback in the last 2, 3 quarters because of some softness in demand and some of the onetime benefit, which actually gave us a bigger push last year, but organically, our expectation is that we will be in the 16% to 18% range, which is what we talked about earlier as well. And I don't see that changing significantly from what we are right now because we had significant amount of cost because of some of the headcounts that we had in the last 2 quarters, which we have started acting on, and that's why we are still only inching towards 16.5%, 17%, which is what we would expect over the next couple of quarters. And we should be in the 16% to 18% range. And in terms of headcount growth, if the headcount growth was not just organic, but it was supposed to be a combination of both organic and inorganic and given the current situation, the inorganic component has not kicked in at all and hopefully sometime next year, when the markets become better and we are able to get a little more access to cheaper funds, there is also an expectation that we will -- the group will do some acquisitions and which will actually help us in growing the headcount numbers in India as well. But of course that these are all expectations right now, nothing concrete at this particular point of time.

Got it, and we had -- we are opening a few branches and sort of opening new offices, in the context of this subdued demand, how should one see it? And then finally, Balaji, cash balances is also getting activated. And we were initially waiting for the merger to happen and that is also done now. You've talked about inorganic also, but any sense on like -- if you can articulate the broader capital allocation strategy? How do you -- how would you want to distribute the cash or use the cash rather sorry, so if you can maybe talk about that?

So the offices that we opened, which is actually expanding our capacity in Chennai and Bangalore is primarily in anticipation of some of the demand and also expecting people to come back to work because that is one of the important elements for us to have a more cohesive team and also whom we will be able to upskill a lot more easier rather than having everybody working remote. So right now, we have the capacity -- the capacity that we have added both in Chennai and Bangalore will give us a little more headroom than what our current demands are. And we are looking at opportunities to expand even beyond this, provided we have a more clearer outlook on demand and where it's going to come from. But we are still optimistic that we should be able to add more facilities because the outlook from 2025 onwards at this particular point of time looks even though not firmed up, but it certainly looks better. We expect that once the core market starts opening up and we are able to -- because the inflation and other elements are actually stabilized in most of these markets, particularly in U.K. and Germany and France. So once we start seeing some growth, we should be able to grow faster in India from those markets as well. On capital allocation, we are still similar to what we talked about earlier, we are still thinking, but we will be able to decide on something which will -- some inorganic opportunity even within India, even though small because of our cash component, which will help us in adding better capability and which will help us attract more business from the group as well. If we are not able to find anything over the next 1 or 2 quarters, then we will decide on how do we allocate the cash accumulated.

And no -- sir, actually the -- that's helpful Balaji. The office -- question was not necessarily about Chennai and Bangalore, but we are also opening overseas offices? So...

The overseas office in Dubai is actually we are closing down our free zone entity in Dubai and opening an on-site office in Dubai, primarily because the government regulations have changed there, which allows foreign entities to operate from mainland, which is to cater to the local business within Dubai. So till now, we were actually having a local contractor or local human resource company, which is actually providing us the visas. We don't need that anymore because of this change in rule, and that's the reason why we opened a new office in Dubai.

Next question is from the line of Mihir Manohar from Carnelian Asset Management.

Sir, I wanted to understand, I mean, do we have testing as a service in our verticals, I mean, I just want to get better understanding, do we have testing as a service offering?

Yes. That is the biggest component, Mihir. We started off as a testing company, while we have actually branched out beyond testing, testing is still our bread and butter. Only thing is that earlier we used to have a significant amount of manual testing or functional testing element. Now that particular component has actually increased more in the automation -- automated testing space and DevOps rather than the functional testing element.

So what would be testing revenue for us, I mean, in this financial year, FY '24?

So the way the business is split, Mihir, is that now we have 30% of the business which comes from engineering and 70% of the business which comes from technology services is what we call it as. Out of the 70% on the technology services, close to around 45% outsourced from the quality assurance or what we call it as the software testing space. And the remaining is automated testing, performance testing, security testing, multiple other elements including DevOps, software development, and other things.

Sure, understood. So 45% of the company, right?

No, 45% of the 70%, so it's approximately 1/3.

Understood. Sure, sir. Sir, how do you see this particular price of -- part of the piece in this specifically generative era, I mean GenAI era. I mean there are talks that the manual testing, part of the piece will get substantially impacted. So your take on this will be quite helpful.

No, it is going to get impacted. And that's the reason why we are gearing up our own investments in AI as well. We have a couple of POVs and tools that we have created based on GenAI and what we call is the best predictive quality assurance and risk-based quality assurance as well, which will primarily drive more of automated testing and the test engineering part, and that's the direction on which we are going as well. So 10 years back probably quality assurance was 90% of the business.

Sure. Understood. That's helpful. My second question was on the engineering outsourcing. I know we were looking at the engineering overall outsourcing, which was there from the group, I mean for the corporate restructuring, which happened to take it from 5% to 20%, 25%. Can you just mention what is the current status on this? And to what level of penetration have you reached for the engineering outsourcing and what more kind of scope can be there? If you can quantify that, that will be helpful.

So engineering, what I mentioned is approximately 1/3 of the total business that we do in this particular point of time. And the group business that we do is approximately 33% to 34%. If I compare it with what it was when the merger happened. When the merger happened, the group business was approximately 27% of our total business, 25% to 27% of the total business, right now it is close to 33%, 34% of the total business, and that is the pie which is growing and that pie is primarily from the engineering services.

Sure. Understood. And just last question on the margins. You mentioned about 16% to 17% over the next 3 quarters. Should we see 16% reverting back immediately in the first quarter itself?

Yes, we are at 15.6%. I think we should be able to get to 16%.

Next question is from the line of Faisal Hawa from H.G. Hawa and Company.

Sir, we always say that the outlook for IT services is still not very clear to us. But why are we not attempting to get more work out of our parent itself? And I appreciate that we have increased our share with them also by around 7% to 8%. But I think the easiest way could be to get work from them and get a lot of outsourcing done.

Yes, Mr. Hawa. So that's what we have been trying to drive as well, to recollect what we said is that by 2025 we should ideally have 45% of the business coming from the group and 55% of the business coming through our direct market. The challenge with the core markets, which I said, which is primarily U.K. and Europe, continues for the group as well. So whatever challenges that we are facing, they also have the same challenge, and what the outsourcing which the group does is primarily the new business that they are trying to acquire rather than the missing one because it's not easy to ramp down the existing headcount in Europe and start building the headcount here. It's only for the new businesses that the group is winning where we have a significant portion of the business, which comes to India. And if there is a challenge with getting new businesses, then obviously it'll have an impact. The group is trying to do everything possible, and that's the reason why our share from the group business is continuously increasing.

But in most conversations on LinkedIn, et cetera, Expleo Global is always saying that they are growing at 20%, 25%, and they have almost, I think if I am correctly informed, they've reached like EUR 1.7 billion revenue. So I mean, at the very least, we should be growing commensurate to that and we should enjoy better margins also because that involves 0 marketing cost?

Not really. I'm not sure where you saw the EUR 1.7 billion. In the last year, we closed at around EUR 1.49 billion. And currently, we are at little over, but the expectation is that we will probably be in the range of EUR 1.5 billion to EUR 1.6 billion this year. We have not touched EUR 1.7 billion yet. And the group is growing at anywhere between...

EUR 0.15 billion, but this same entity used to be EUR 1 billion around EUR 1.5 billion to 2 years back?

No, it was actually -- so when the Assystem and SQS acquisition happened, we were close to around EUR 1.1 billion. And when the COVID hit, the revenue went below EUR 1 billion. And then in 2021, we crossed the EUR 1 billion mark again. Last year, we closed at around EUR 1.2 billion. And when we -- this year, we closed at around EUR 1.4 billion. And the expectation is that we'll close anywhere between EUR 1.6 billion -- EUR 1.55 billion to EUR 1.6 billion this year is what our expectation. We'll be growing at an average of around 12% to 14% at the group level, and group was -- group is actually currently at an EBITDA percentage of a little less than 9% and the expectation of the group also will be at around 10% this year.

So sir, when we pitch for new business, why are we losing out, which vertical or which capabilities absent in our company, due to which we lose out on business?

So losing out on business is primarily if I were to look at from a capability perspective, we only pitch for where we have the capability rather than trying. That's why I'm saying that now we are trying to invest in terms of even the smaller acquisitions that we are doing, in terms of what capability we don't have, which we can actually pitch. And on losing out either it's because of the price or it's because of some of the size of the engagement because the customers look for larger companies that have larger engagements. We are not losing out primarily because of capability because we choose the areas where we have capability. And it's only in smaller engagements where we try and do the experiments because that's where the customer also will be okay with experimenting or trying out with somebody new.

So the most recent acquisition that we made around 1.5 years back, what is the revenue of that company now?

When we made the acquisition, they were at around EUR 3.5 million -- $3.5 million. Last year, we closed a little over $5 million from that sector.

But they are helping us with the capabilities at least?

That's right, yes.

[Operator Instructions] Next question is from the line of Jagdishwar from Japa Investments.

So this is regarding the receivables days. If I see the slide, the receivables day is showing at 104, and I presume it is based on stand-alone numbers, but if I take the consolidated number, receivables days are quite less. So why is it that you are showing our receivables day on stand-alone number, and why not on consolidated number? This is my first question.

Yes. Yes, I'll take this question. Jagdish this number is actually a consolidated financial number. I'm not sure why you're saying this is standalone. So 104 days would basically be consol...

I guess INR 950 crores is the top line, if you divide, let's say, 250 divided by 950 it is coming at 94 days. Stand-alone receivables are much higher than consolidated receivables.

You are only looking at, I think accounts receivable slide. I think this DSO includes unbilled as well.

So how do you calculate it, if you can explain, I mean my calculation was showing that I was using all the consolidated number, I am getting the receivable days of 94, and presentation says 104 days of receivables. So your calculation methodology you can explain?

Sure, I can -- yes, I can probably provide that explanation separately. But what I would like to confirm with all of you, it's on the consolidated financials. And the reason why the DSO has gone up compared to the previous quarter is because one of the collection from our group has been a little lower in this quarter and also from one of our key clients. It's low from this -- in this quarter, and we have been able to collect from both group as well as from this key client and our cash balance has substantially improved in the month of April and our DSO has gone down from 104 to 98 days.

Okay. I see. No, it has gone down on Y-o-Y -- I mean, so your basis of calculation is consolidated balance sheet receivables at the end of the year receivables divided by total revenue for that particular year, that's right, is it?

That's right.

We don't adjust anything other than that?

Yes, correct. It is receivables, including unbilled, it's sum of the 2 dividend by...

Okay. That is your own internal figure.

That's right.

Okay. And second question is, we have missed dividend again this year. Last year, wet get some dividend. And given the size of the acquisition proposed or planned or thought out, isn't it prudent to maintain some kind of dividend payout policy to ensure stability in signaling shareholder interest for financial year end by, I mean, we closed. I mean it is a reasonable number given the environment, and we're still sitting on a sizable cash. So Balaji if you can explain your thoughts on this?

Yes, sure. So there was a similar question from Rohit as well when we started the call. So what we are doing is that we are looking at what kind of acquisition that we can do locally here in India while the group is having its own plan. And we have -- we are looking at what we'll be able to do during this quarter, and if we are not able to close anything during this particular quarter, then we will go back to the board and ask for suggestions on how we can do the capital allocation and cash allocation. So the plan is to see if there is anything that we can do as an acquisition, which will be more accretive for everybody. And if we are not able to do it, then we will relook at what we need to do from a dividend perspective.

Next question is from the line of Krunal Shah from Enam Investment Managers.

So my first question is on the rationalization that we are looking at in the head count, is there a number in mind where you want this to settle?

Yes. So it will be based on what we have, the demand. So right now, I think most of the action has been already taken. We are not expecting any big changes. But like what you would do typically it takes 3 months for the headcount to actually exit from the system and that's the reason why there are some numbers which are already there in the system as well. So we don't expect the headcount to reduce significantly from here at this particular point of time. And currently, we were running at approximately in the mid-teens in terms of our bench percentages, which we are looking at trying and getting it to 10% or so, which should happen during the course of this quarter.

And second question is, the business that we are generating on our own, so the parent business is going well. What are the steps we are taking to grow our business faster because we're still a small company. And at this stage, our growth can be much faster because we have a lot of good techs on our books or in our facilities which we have. So what are the steps we are taking to utilize that better?

So even though the group is not big in the U.S. or not focusing on the U.S., we did the capital investment around 1.5 years back of buying a data management and data quality company in the U.S. and that particular business is growing quite fast and it's growing at almost 40% to 50% year-on-year. And the other markets like Middle East and India, India, of course, we all know the profitability is a challenge. So we are being -- we are focusing on that, we will be able to do a balance between both profitability and the growth. So both the India market and the Middle East...

Participants, please stay connected.

Some other incoming call, which I had to disconnect. So we are looking at what is it that we can do in growing both Middle East and the India market.

Okay. So in terms of actually the revenue mix, we still get -- yes, sorry, we get 50% of our revenue approximately from Europe, which is a key market for us, despite if you take out the group business as well. So how are you -- how can we grow that business? Middle East and India, I understand, but Europe is a very competitive market because a lot of Indian companies, as you said these companies are present there, how do you plan to grow that business -- part of the business?

So that's what we are trying to focus through the group from specific domains. Particularly in the technology and digital space, India is the most preferred location for the group to outsource as well from Europe. So as the demand goes up in Europe, we will take more business from the group. And like somebody else also mentioned, one of the other gentlemen mentioned, the opportunity to grow through the group basically would mean that we -- our margins are more or less secured because it's a cost-plus model, and we really don't incur too much on our sales expenses.

Okay. And this subsidiary that you're opening in Thailand, what is the idea behind that?

It's for one particular customer who is actually a group from whom we are trying to engage in this particular market where they want to grow that particular geography. And there's an opportunity to add some 40, 50 headcount during the course of this year, if we are able to do it. Of course, it's not finalized as yet. We just wanted the Board to approve setting up that office. We will open the office once we are clear about the opportunity, and its only in-principle approval that we have taken.

And in terms of our business development team of the own business, not the group business, what would be the strength like and how that has changed over the last 4, 5 years?

So when I joined 6 years back, we had around 6 people who are doing business development. Right now, we have 14 of them between India, Middle East and in the Southeast Asia market. Recently, we also hired a sales manager in U.S. as well, that was around last -- end of last year. So we have around 14 people right now, and we also have another close to around 18, 20 people who are part of presales, who are also focused on each of these geographies.

Next question is from the line of Priyankar Sarkar from Square 64 Capital Advisors.

Sir, one quick question clarification rather. Sir, if you can split how much we get from the group engineering as well as for the technology segment?

Mani, do you have that number handy straightaway?

We don't have it handy, but I think I can look at it...

Yes, I can probably try and give you a rough order of magnitude. So approximately $34 million to $35 million is what we did with the group, out of which around $11 million to $12 million is from the technology business and the remaining close to around $21 million to $22 million is going to be Engineering.

$11 million to $12 million is from Tech and the rest is from engineering?

From engineering, yes.

Okay. And sir, which segments, only -- I'm only talking from the group, which segment is growing faster, engineering, right?

Engineering, yes.

And sir, in terms of competition in the engineering space, who would be our competitors?

It depends on sector. So if you were to take the automotive sectors, its primarily people like KPIT and Altran, which is part of Capgemini now. If you take the avionics or the aero sector, it's primarily the OEMs, so they have their own captive centers here, whether its Boeing or Airbus, so all of them have their own centers here, and apart from that Capgemini, Altran from a digital perspective also, companies like AxisCades and Accord and others are also a competition for us in the aero structures and avionics.

Got you. And sir, in this engineering space, which is approximately 33% of our business, 1/3 rather, so that -- how would the split be in terms of auto and some of the other major segments?

So it's almost 50% is aero and approximately 40% is auto and another 8%, 10% is other manufacturing industries.

So 40% is Auto and 50% is Aero?

Right.

So sir, we would be also bumping into likes of Tata Elexi and L&T Tech also in auto?

Yes. So L&T is also a customer of ours, but they are also a competition in some cases.

Okay. And sir, in this auto and aero, there's a bulk of the revenue, do we work with the captive or do we work with -- like do we work with Boeing, let's say, for example, Boeing in captive in India? Or do we work with Boeing directly with the U.S. counterpart?

So we work with both, so there the group outsources to us. They also have Airbus and Dassault and others as customers. So we do work through the group for those customers, and we also work with the local companies. When we are calling out the local Airbus or Renault or Stellantis or any of those, those are part of our external revenue. Those are not part of the group numbers that we are talking about.

[Operator Instructions] The next question is from the line of [ Rajesh Choudhary ] from Zenith.

My question would be like, see, our revenues have increased by, I think, close to 6% from the last year in quarter 2 to this year, but our expenses, mainly the employee expenses have gone by, I think, close to 16.5%. So will this trend continue in time to come or can there be a check on that?

So the reason why we had our employee expenses go out -- going up is primarily similar to what I mentioned. We have higher bench at this particular point of time, which we hired last year from the calendar quarter Q3 onwards, in anticipation of opportunities and growth, which we were expecting from the end of last year almost, which didn't materialize. So we have started working on how to optimize this. And that's why I said that we'll probably have a better utilization rate and a lesser bench ratio for next quarter onwards.

So because like 12% difference is a lot of difference.

We are acting on it and that's where the optimization effort that's going on, which started from February onwards, and we should start seeing the results from this quarter, but most of the results will be seen from next quarter onwards.

And did we have any ForEx loss this quarter? In my understand, I think there is a loss of INR 5.6 crores in the presentation that you have given. Is there any ForEx loss?

Mani you want to take that?

Yes, yes. I'll talk about that. There is a ForEx loss in this quarter. So we have a ForEx loss of almost about $56 million in this quarter compared to...

That is INR 5.6 crores, yes.

We have -- in the previous quarter we had almost $94 million ForEx gain.

So this loss is probably because we don't hedge our currency or what?

Sorry, I didn't get your question.

We don't do any hedging in the currency?

Yes. So far, we have not done any hedging, but we are looking at starting a hedging program going forward. We have also gotten got principle approval from the Board recently, so we'll be starting the hedging program too.

So we can expect that loss to be minimized or low loss in time to come?

Yes, we should see some minimization in the coming quarters. And on the hedging program, we'll address it over a period of time. It's not going to immediately change the picture significantly, but we should definitely see some minimization in the risk.

Because every year in 1 or 2 quarters we have been facing this issue. So I'm not sure why this has not been addressed earlier, but anyways.

That's because the ForEx movements are unpredictable, right? It's based on market.

That is true. That is why we have the policy of hedging.

Just to clarify here, many of these losses are what we call as -- almost 80% of these are notional because it's not converted as yet. But we have to do the mark-to-market every quarter and that's the reason why this shows. Right now, it's not that all these money has converted into Indian rupees and we have incurred these losses.

That's right. Yes. So again, just for perspective here, I want to clarify. So last year, we had $107 million of ForEx gains and even in the last year same quarter, we had $12 million of ForEx gain. Previous quarter, we had $93 million of ForEx gains. It is only this quarter we had incurred a substantial loss of $56 million. So this is the first quarter where we had a substantial loss otherwise we have always been winning the game. So when we talk about why this action has not been taken? It's -- the impact of that has been felt only in this quarter. So now we had acted and we have started the hedging program. So you should see the benefits coming in the future quarters.

And there is one more, last question is like we had an aspiration of doubling our workforce by FY '25. So are we still on track for that? And secondly, will that convert into doubling of revenues as well or no?

No, it's not likely to happen because we anticipated a substantial amount of business growth, and we also anticipated some inorganic growth as well, which we thought was likely to happen in the last financial year and this financial year, which we don't see that happening at this particular point of time. But from a headcount-to-revenue perspective, yes, ideally the headcount growth should double the revenue, but the significant amount of the growth is going to come from the group, which is on a fixed markup. It may not exactly be that, but approximately if we double the headcount, the revenue should also -- almost double, not exactly double, but almost double.

So this is on whole at the moment? Or will this -- can be taken care in the later part?

No. I don't see us -- we talked about March 2026 should be 10,000 headcount. But given where we are right now, unless otherwise there is some significant market correction and growth that's going to come, I don't think we'll be able to achieve what we have set as our goal.

[Operator Instructions] Next question is from the line of Gunit Singh from Counter Cyclical PMS.

I want to understand the quarter-on-quarter headcount has gone down, but still the employee expenses have gone up by 6% to 7%. So what is the reason for that?

Mani, you want to take that?

Yes. So one of the reasons is because we also have some wage increments coming in this quarter. So that's kind of taken our costs higher though the head count has not grown that much. The second reason is our proportion of on-site employees have gone up. So that's also kind of taken our costs higher comparatively. Though, on headcount basis, it's not that significant a growth, but on costs, we have -- costs have gone up.

On-site as in movement from work-form-home to on-site.

No, no, no, offshore.

Moving from India to outside.

And then you mentioned that the demand scenario will -- is likely to pick up, but right now, it is still under pressure. But you also mentioned that you would not be significantly reducing the headcount and that you will reduce the bench from about mid-teens to 10%. So I mean without significant demand, I mean, how do we see the bench reducing without any reduction in headcount? I mean can you throw some light on that?

See we didn't reduce headcount that's what I mentioned. So bench will reduce with reduction in headcount. But most of the actions have already been taken. Right now, the numbers that you see are people who are on notice as well. And as you know, in India, you need to have the 3 months minimum from the time you start taking action for the headcount to not show in your books. So -- and most of the action has been taken, but the numbers will actually show only going forward.

Got it. Got it, Sir, and lastly, you mentioned that we would be continuing with the current growth trends. So we saw about an 8% to 10% increase in revenues in FY '24. So I mean, in terms of FY '25, do we expect the revenues to be stable? Or do we expect to maintain these levels? And on top of this, do we also expect a similar kind of growth of about 8% to 10%?

We expect that we should be closer to double digit for this financial year. While the initial target was much higher than that, we expect that we should be able to -- we should be closer to double-digit growth for FY '25.

So double-digit growth with an improvement in EBITDA margin to 16%, 17%.

Next question is from the line of Rahil Shah from Crown Capital Partners.

No, I was just going to ask on the similar, the growth thing. So what is stopping us at the moment from growing in mid-teens at least? And by when do you see us getting there? And what will be required to get us there? If you can just speak on that, please?

So originally our plan was that we'll probably be able to grow at 20%, 25% number, that's the basis with which we had the headcount when we started the year as well. However, the demand wasn't in line with that and that's the reason why we are acting on optimizing our headcount as well. This year, we don't expect -- we expect to be in that double digit like what I mentioned. And hopefully, by end of this year, once the demand starts picking up from the core markets, we should be in teens or even better than that closer to the 20% range, which hopefully should be seen in the next financial year.

So by first quarter next financial, you think you'll be able to start with the teens and 20% growth. And it's dependent on the market improvement?

Absolutely.

All right. And when you say EBITDA should be in the range of 16%, 17% over next 3 quarters, why do you just mention next 3 quarters? Or do you expect for the full year or quarter four, it can be different, higher or lower?

So it depends, once the demand picks up, in the first 2 quarters, we may have to invest in getting our headcount and making sure that we are ready to capture that growth. So that's why we are watching every quarter, the quarter that where we see the demand picking up, we may probably have a little bit higher cost, but over a period of time, it should go back to the 16% to 17%.

But sir, still on an average, we can assume 16%, at least lower end for the year.

That's right.

Next follow-up question from V. P. Rajesh from Banyan Capital Advisors.

Thanks for the opportunity. Balaji, one question was just to understand what was the growth in this quarter for the group business versus the non-group business?

So in this quarter, the non-group business grew by around 4% to 5%, and the group business grew by around -- sorry, non-group business grew by around 3% and the group business grew by a little over 5%.

I see. And in terms of the wage hike that Mani talked about, have we been always giving the wage hike in Q1 calendar -- or rather Q4 fiscal year or there was something special, which is why we did it in this particular quarter?

We actually postponed our wage increment by 1 quarter. Normally, it happens from January 1st onwards. This year primarily because of the slowness in demand and also we wanted to align with our budgeting process, we postponed it by a quarter.

So the number we are looking at is INR 156 crores of employee costs. This is without the wage hike, is it?

So part of the wage hikes were done in January, where we had already promised. Part of the wage hikes are actually from effective from April 1st onwards.

I see. Okay. So this INR 156 crores of employee costs in the June quarter, do you think it is stabilized there? Or will it go down because of the actions you have taken on the reduction of the workforce?

Mani, you want to take that?

Yes. I'll do that. So yes, we expect this to slightly go down because in this quarter, it was just a partial wage hike, and then there is also -- while we have taken action, the people still have about approximately the 3 months' notice, so the headcount has come down towards the end of the quarter. So that's why you see a headcount reduction. But for the cost perspective, the costs have been mostly there in this entire quarter. So you will see that going down in the subsequent quarters as Balaji mentioned. But the other part of the wage hike will also come in. So that is kind of, to some extent, compensate. But overall, we still expect that we will continue to take actions, so we should continue to see some reduction in this cost. Though it may not be substantial, there should be a margin reduction to this cost. It shouldn't go up.

Got it. And just the last question on the revenue by industry. Our engineering business seem to be coming down. So anything in particular that you want to call out there?

So we have some challenges with automotive industry and particularly the reason was that if you recollect last quarter, we had a onetime, which came from one of the customers, and last year also it was from the same customer where most of the work which was done way back in 2021 where we were billing the change requests or the increase, so that's the reason why there's a slight dip that you would see in the automotive specifically. But other than that, it's not coming down. Organically it's not coming down.

Next question is from line of Rohit from ithought PMS.

Yes, Balaji, most questions have been answered. I mean I was just trying to sort of further understand beyond CY '24, how does one look at growth. I mean, that's the only question that I have. You're saying 10% this year, roughly. And as you said that CY '25, 10,000 is not happening. Have we sort of revised our internal targets to something which is more achievable ow so CY '25 or something and if you are willing to share that?

We haven't reworked on the numbers in terms of headcount Rohit, primarily because we are trying to also stabilize on make sure that we have a clearer view on what is going to come from the group or what is going to be done from the direct markets. But like what I mentioned, the expectation even in this year, we thought that once the core market picks up, we should probably be in the high teens or so. But that's not something which we are seeing at this particular point of time, but hopefully, before the Q4 calendar year, we should start seeing some growth. And that's why we're saying that next year, our ambition or our endeavor is to be in the mid-teens to 20% plus range, which is what we did in '21 and '22 to go back to those growth rates.

And just sort of related to this, I mean, it was asked earlier as well in the call, the base is so low, right? And what else -- I mean, ideally, we shouldn't really be too much impacted by the market, I'm sure, I mean, markets definitely impact the demand environment and et cetera. But given the base itself is so low, especially if you look at our direct business, is there something that we can do more to get at least better than the market growth given that size is like not very high. So I mean, is there something which is lacking? So...

So you can find different reasons, but -- see, the challenge is also that when the market itself is slow and all the bigger players are ready to throw in anything to get even smaller engagements. Because normally, you don't find the bigger players battling for $1 million and $2 million deals. But nowadays, everybody is there in the race for everything. So it is -- it's a question of how large the pie is and who is ready to take what part of that particular pie. So I agree with you that, no, when we are small, we should be able to -- technically, what you're saying is right. But that's not what we are seeing in the market at this particular point of time. One is the customers discretionary spend itself is lower. And wherever there is a spend irrespective of the size of the deal, we are actually seeing bigger players playing in those opportunities as well. So it's a combination of multiple things. But having said that, that's the reason why at least -- we are at least seeing some amount of marginal growth from where we are.

Right. And just last question on this, so let's say, if growth picks up, whether it is direct or your group business. As you scale, right now, we are at about $100-odd million, more than $100 million, around $120-odd million. But let's say, as you sort of get to more close to $200 million, is there any leverage or operating leverage benefits that you will have and can the margins go beyond what you have indicated or it is not going to be the case? How should one think about that?

I would say that the margins depending upon the mix that arise in engineering business grows more and the engineering margins are not as much as what the technology services margins are currently. We don't expect -- that's why I have given the range as 16% to 18%, I don't think it's going to change way beyond that.

And I would really appreciate if you can have a clear thought process on the payout because -- and your capital allocation, because markets typically would not like cash being -- I mean at least the thought process are very appreciated. And we've been waiting for a very long time, Balaji. I mean, we waited for the merger to happen, and after merger, also, there is no clear thought process. So I mean it is really -- as shareholders, I mean, you must -- have at least some clarity. I would really appreciate if something will come in the coming quarters.

Yes. Absolutely.

As there are no further questions, I will now hand the conference over to the management for closing comments.

Okay. Thank you for all the participants and the questions. Appreciate all your interest with us. And hopefully, we should be back with better results for next quarter and looking forward to the same level of support. Mani, you want to add anything more?

I think you covered it Balaji. So yes, we are expecting to definitely have better results next quarter. So we'll come back with better numbers.

Thank you, so much.

Thank you very much. On behalf of Expleo Solutions Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.