Hinduja Global Solutions Limited (HGS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Hinduja Global Solutions Q1 FY '21 and FY 2021 Post Results Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to hand the conference over to Mr. R. Ravi, Vice President, Head of Investor Relations. Thank you, and over to you, sir.

Thank you, Ayesha. Thank you, ladies and gentlemen. I R. Ravi, Head of Investor Relations at HGS wishing all a very good evening and a warm welcome to the first quarter of FY '21 post results conference call. To discuss the first quarter results, I'm joined by Mr. Partha DeSarkar, Executive Director and Chief Executive Officer; and Mr. Srinivas Palakodeti, the Global CFO. Before we begin the conference call, I would like to mention that some of the statements made during the course of the call are maybe forward-looking in nature, including those related to the future financial and operating performance, benefits and synergies of the company's strategies, future opportunities and the growth of market of the company's service and solutions. Further, I would like to mention that some of the statements made in today's conference call may be forward-looking in nature and may involve risk and uncertainties. Now I'd like to hand over the call to Partha DeSarkar to provide his perspective on the performance for this quarter. Over to you, sir.

Thank you, Ravi. A very good afternoon to all of you, and thank you for joining the call today. I hope that you and your families are all safe and healthy. I would like to speak about our operational and financial performance, followed by strategic initiatives. After that, I will hand over the call to our CFO, Mr. Srinivas Palakodeti, to discuss the financial performance in greater detail. We will then open up the conference call for the Q&A session. The last 5 months have been extraordinary for all of us, both as individuals and as businesses. When the pandemic initially spread and the lockdowns were announced, we believed that it would be a very different -- difficult period. HGS did face a few days with challenges in delivery and reduced planned volumes back in April. However, we did really well to manage the situation by shifting to the work-from-home model very, very quickly. Today, we are operating almost at 100% capacity and delivering services as business as usual for our clients, both from remote working and office locations where allowed. A significant part of our workforce is currently working from home. Our clients have been very appreciative of our employees' commitment to not just keep the processes operational but also their value addition to support clients and their customers with the new challenges they are facing. I'm proud of team HGS' performance and their thriving execution in the last few months. Coming to quarter 1 FY 2021, it has been a very interesting quarter for HGS. Despite the COVID-19 pandemic-led disruption to the global economic activity, HGS had a better-than-expected start to the current financial year in terms of revenues, profitability and free cash flow generation. On a like-to-like basis, the revenues were up 8.7% for quarter 1 FY 2021 with EBITDA margins modestly inching up to quarter 1 over last year's first quarter. In quarter 1 FY 2020 (sic) [ FY 2021 ], HGS reported revenues of INR 12,359 million, of which the pass-through revenues accounted for INR 815 million and the India domestic CRM business accounted for INR 724 million. Due to change in contractual terms and disinvestments done, if you deduct the 2 from quarter 1 FY 2020 reported revenues, the pro forma revenues for quarter 1 FY 2020 works out to be INR 11,366 million. Hence, on a like-to-like basis, the revenue growth for quarter 1 FY 2021 works out to actually 8.7%. Of this, the currency impact would be about 7.7%, and the organic growth contributed 1%. EBITDA growth of INR 1,458 million, EBITDA margins improved 11.8% in quarter 1 FY '21 from 11.6% in quarter 1 of last year. EBITDA margins improved despite lower revenues. Net profit for quarter 1 FY 2021 improved by 21.7% over quarter 1 FY 2020 and 9.8% over quarter 4 FY 2020. This financial performance was a result of various factors, including higher volumes than expected [Technical Difficulty] ramp-ups and [Technical Difficulty]. The Board of Directors at a meeting held on September 2020 approved an interim dividend of INR 6 per share as compared to the interim dividend of INR 2.5 per share in quarter 1 FY 2020. This is about 20% higher on an annualized basis. Let me talk about the 3 key areas driving growth for us. One, our domain focus and [Technical Difficulty] are the big advantages for HGS, resulting in minimum impact. As you all know, we are largely focused on healthcare and insurance, and we also have substantial exposure to customer engagement verticals, which include telecom, media technology, banking, consumer and retail. Both in discretionary and nondiscretionary segments. Each of these verticals and the sub-verticals are coping with these structural changes brought about by regulatory policies, technology changes, consumer preferences, and of late, macroeconomic factors caused by the pandemic. I want to put on record that HGS has minimal exposure to hotels, tours, travel related verticals. As a result of that, we were able to bear the storm much better than companies who've got significant exposure to these travel and tourism industries. In quarter 1 FY 2021, our biggest vertical, healthcare [Technical Difficulty] performance, led by better-than-expected volumes in large-payer clients, especially in June. The provider business did see some volume drops with key clients but saw good growth as well. The consumer engagement [Technical Difficulty] across key verticals, in U.S., Canada.

Sorry to interrupt, Mr. Sarkar, your voice is cracking in between. So we are unable to hear you clearly.

Okay. Is this any better?

No, sir. It's still the same.

Okay. I think there's nothing I can do.

Sir, can you read out something again?

So in quarter 1 FY 2021, our biggest vertical health care posted the strong revenue performance. Is this clearer?

Yes, sir, this is better. Now you can go ahead.

Yes, this is better.

Okay. Led by better-than-expected volumes in all large payer clients, especially in June. Provider business did see some volume drops with some clients, but saw good growth as well. The consumer engagement services segment saw growth across key verticals in U.S., Canada, U.K., Jamaica and Philippines. How is the voice now?

Yes, sir. It's clearer now.

It's clear now.

Okay. Over the last few years, HGS has invested in strengthening our client relationships and enhancing our domain knowledge. We have long-tenured partnership with most of our clients. In these times of uncertainty, this client intimacy and our expertise has provided us with competitive advantage in the market. We continue to support clients under our regular SLAs. We've also won short-term contracts away from competition who could not scale up or shift to work from home quickly for supplemental work. The COVID pandemic has given rise to several opportunities for expanding scope of work across newer activities. For example, rising COVID-19 cases has led to the decline in elective procedure providers and hospitals, resulting in revenue losses and have furloughs for them. They are now looking for lower cost alternatives, which HGS can provide from its offshore [Technical Difficulty]. We will continue to pursue opportunities to help clients navigate these tough times and to hand hold them to structural [Technical Difficulty] that's happening in the marketplace just as we speak. Number two, winning momentum with clients. In FY 2020, we signed up with 59 new clients, including 29 core BPM services, the highest in a year. Public momentum continues into quarter 1 FY 2021. We won 9 new clients for BPM services and 5 for HRO/ Payroll Processing. This cut across healthcare, consumer electronics, retail, communications, oil and gas and NGO verticals. We expanded relationship with existing [Technical Difficulty] customer care and tech opportunity quarter. We also won contract with [Technical Difficulty] for our digital services. The sales pipelines for all these segments, customer interaction, back office and digital services is looking strong from a business demand perspective. I want to mention here a cautionary message, though, the clients are very interested in deploying digital services in a bid to transform their processes. However, they are also simultaneously about the long-term engagements currently, given the uncertainty. Some of the deals that we have signed are smaller contracts, we expect them to ramp-up in coming quarters. Scalable and agile organization. We try to build a scalable and agile organization with the right skills to support our vertical and service line growth ambition. We now realigned the organization to an integrated vertical service line structure, including leadership [Technical Difficulty]. This is in line with our [Technical Difficulty] one experience [Technical Difficulty] approach strategy, which we have been driving in the past few years. Over the last 5 months, we have reengineered our workflow focuses for a work from home, everything from hiring and training new employees, engaging clients and associates and delivering high-quality services on how to sell and transition remotely has been redesigned for a virtual distributed operating model, and this is crucial for our response to the pandemic as long as [Technical Difficulty]. The scale of the remote working model that we are driving is quite significant. For example, between April to July of this year, we hired and onboarded 2,000 people globally through virtual channels mostly for work-from-home roles. We've also invested and created a work at home center of excellence that focuses on sharing best practices and leverages learnings to deliver an enhanced remote working solution to clients. It includes the work-from-home leadership university, which has so far trained 100 global leaders across operations.

We would request the participants to stay connected as the line for Mr. Sarkar has gotten disconnected. Thank you for patiently waiting. We have the management reconnected. Sir, you can go ahead, please.

Sorry for that interruption, we're all working from home and networks at home are not necessarily the best as we have in office, unfortunately. What I was saying is we've created a work at home center of excellence that focuses on sharing of best practices and leveraging learnings to deliver an enhanced remote working solution to clients. It includes the work-at-home leadership university, which has so far trained 2,100 global leaders across operations. Learning and development, improvement, security compliance [Technical Difficulty] serving majority of our workforce home. To sum up, the overall state of our core business continues to be reasonably strong, and it has been further strengthened with the divestment of [Technical Difficulty]. On a like-to-like basis, we have been able to report stronger revenue growth for the past few quarters. The COVID pandemic and our work-from-home capabilities has helped us achieve several wins in both healthcare and ES verticals. While some of the wins may be of short duration, project type in nature, we do expect several of them to convert into long-term contracts. The sales pipeline remains [Technical Difficulty], especially for the healthcare vertical. We see strong demand for the open season in quarter 3 of FY 2021. While stay at home orders have been relaxed [Technical Difficulty] some views that we operate in, the pandemic cases continues to rise, and the coming months still look uncertain. We are taking a conservative approach to shift to offices on scale based on social distancing guidelines and the need for safety measures. This means that majority of our employees will continue to work remotely for the next few months. Our goal is to continue to provide high-quality services to clients despite the mode of [Technical Difficulty] with no disruption. In the interest of transparency [Technical Difficulty] on September 5, 2020, has asked the company to [Technical Difficulty] the overall cost business structure of HGS. The Board does feel that the [Technical Difficulty] is complex and needs to be simplified. The report will include relooking at the portfolio to identify gaps in our offerings and ways to bridge the gap to M&A, et cetera. The exercise will also review profitable businesses, loss-making contracts and businesses which were no longer fit [Technical Difficulty]. The objective of this review is to [Technical Difficulty] improve performance and enhance share [Technical Difficulty]. On completion of this exercise, the Board will evaluate various options, implications and decide the future course of action. This review [Technical Difficulty] where hiring consulting is required. To sum up, please note that we are keeping a close control on the operating costs as well as on capital expenditure. Despite the pandemic, our free cash flow to capital -- in quarter 1 FY 2021 was [Technical Difficulty] than 112% as in FY 2020. So any further business structuring in the future can only [Technical Difficulty] which can be used to prune debt, provide debt covenants give us the leeway. It will also create a war chest for future acquisitions if necessary. Just to add, we reported net cash of INR 63 crores in quarter 1 FY '21 as against INR 73 crores of net debt in FY 2020. With that, I will now hand over the call to Pala to walk us through the quarter 1 FY 2021 financials in greater detail. Thank you all once again for being with us on the call today [Technical Difficulty] because my line dropped. Over to you, Pala.

Thank you, Partha. Are you able to hear me clearly?

Yes.

A very good afternoon to all the participants in the call, and thank you for joining us on the Q1 FY '21 post results earnings discussion. As in the past, we would like to start by stating for this discussion, the EBITDA and the EBITDA margins have been computed excluding ForEx losses and gains, which have been considered to be part of the other income. As required by the auditing standards, we have published our financial results as continuing operations and discontinued operations. The discontinued operations refer to the India domestic CRM business, which we exited in end January 2020. However, for the purposes of this discussion, revenues, profits and margins will be mentioned for the company as a whole, i.e., aggregating, continuing and discontinued operations. I will start with an overview of the stand-alone financials. The stand-alone operations comprise the operations in India and the branch in Philippines. On a stand-alone basis for Q1 FY '21, HGS reported revenues of INR 5,261 million, a drop of 6.3% over Q1 FY '20 revenues of INR 5,618 million, which also included INR 724 million of revenues of the India domestic business. If the revenues of the India domestic business are excluded, on a like-to-like basis, Q1 FY '21 revenues have increased by 7.5% over Q1 FY '20. The drop in revenues, coupled with costs relating to work from home led to drop in standalone EBITDA margins from -- of 18.67% in Q1 FY '20 to 16.8% in Q1 FY '21. Other income in Q1 FY '21 of INR 235 million comprised income from sale of SEIS scrips of INR 172 million. Income on treasury surplus of INR 81 million, FX loss of INR 39 million and other items of INR 21 million. PAT for Q1 FY '21 was INR 315 million, a drop of 11.6% as compared to the PAT of INR 357 million in Q1 FY '20. Now I'll discuss the consolidated financials of Q1 FY '21. On a consolidated basis for Q1 FY '21, HGS reported total revenues of INR 12,359 million, a drop of 4.2% over Q1 FY '20 of INR 12,905 million. You may recall that Q1 FY '20 had pass-through revenues of INR 815 million, and which did not accrue in Q1 FY '21 due to change in the contractual terms. In addition to this, if the revenues of INR 724 million of the India domestic CRM business, which we exited, are excluded from Q1 FY '20 revenues, for Q1 FY '21, HGS revenues have grown 8.7%, comprising 7.8% due to exchange rate variations and around 1% due to volume growth. During Q1 FY '21, HGS recorded improvement in performance in India, U.K., Jamaica and most other businesses. The profitability of the operations was impacted due to COVID-19 disruptions and extra costs related to work from home being rolled out. EBITDA margins for Q1 FY '21 on a consolidated basis has improved from 11.6% to 11.8%, an improvement of 20 basis points. The improvement in EBITDA margins by 22 basis -- by 20 basis points despite the revenue drop of 4.2% on year-on-year basis, reflects the improvement in the mix of the business. On a consolidated basis, other income in Q1 FY '21 of INR 308 million comprised income from sale of SEIS scrips of INR 172 million, income on treasury surplus of INR 81 million, ForEx gain of INR 314 million and other items of INR 23 million. PAT for Q1 FY '21 was INR 492 million, an increase of 21.7% over Q1 FY '20 and in sequential basis, a growth of 9.8% over the quarter ended March 2020. For Q1 FY '21, the Board of HGS has approved interim dividend of INR 6 per share. From payout perspective, it works out to 25% of the consolidated Q1 FY '21 profits, which is roughly in the same range of 24%, including dividend distribution tax of the full year FY '20 consolidated PAT. This is the first full quarter post the sale of the India domestic CRM business. For Q1 FY '21, healthcare vertical accounted for 56% of total revenues; share of telecom and technology verticals stood at 14.1%; consumer and retail at 11% and banking and financial services at 8.4%. For the quarters, Q2 to Q4 of FY '21, we have forward covers of around USD 72 million at an average USD/INR rate of around INR 74. We also have forward covers of USD 73 million for our Philippines business at an average USD/PHP rate of PHP 51.6, which is significantly higher than the current USD/PHP rate of PHP 48.6. Coming to capital expenditure during Q1 FY '21, HGS incurred capital expenditure of 345 -- INR 349 million, which included around INR 43 million of work from home specific capital expenditure in the form of -- as IT assets, headsets and other communication-related items. During the quarter ended June 30, 2020, gross debt reduced from INR 6,042 million to INR 5,777 million, a reduction of INR 265 million. The debt of INR 5,777 million comprises INR 3,759 million of debt in overseas subsidiaries and INR 218 million (sic) [ INR 2,018 million ] on the India balance sheet. The debt on the India balance sheet comprises of INR 1,416 million of external commercial borrowings, INR 600 million of working capital demand loan and around INR 2 million of other working capital loans. Cash and cash equivalents of the company rose from INR 5,308 million to -- as of March 31, 2020 to INR 6,406 million as of June 30, 2020, an increase of INR 1,097 million. Taking into account the short-term ICDs, which we are treating as treasury surplus of INR 3,150 million, as of June 30, HGS has net cash of INR 3,779 million. EBITDA to free cash flow conversion which stood at 60% for FY 2020 stood at 112% in Q1 FY '21 and similar to 111% in Q1 FY '20. As on June 30, 2020, OpEx fee stood at 37.8% of total fees as compared to 38.3% as at March 31, 2020. Average monthly revenue per employee, which stood at INR 101,738 for Q1 FY '20 has further increased by 8.5% to INR 110,409 in Q1 FY '21. HGS in -- 2 years back had acquired 57% stake in a company called Element, which has been renamed as HGS Digital LLC. During the quarter -- sorry, during FY 2020, HGS increased its stake in HGS Digital LLC from 57% to 71.33%. In August 2020, HGS has further increased its stake to 85.66%, which denotes our continued investments and commitments for growing the digital business. I now conclude my portion and open the floor for question and answers. Thank you.

[Operator Instructions] The first question is from the line of Siddharth Oberoi from Prudent Equity.

Yes. So sir, last year, your headcount was about 45,000 people. And now it is 37,165. So there's almost a 7,500, 8,000 reduction in your employees. Yet your employee benefit expense is higher by INR 78 crores. Could you explain why?

Okay, this is Pala here. So the quarter ended March 2020 -- I'm sorry, quarter ended June 2009 (sic) [ 2019 ] also had employees of the India domestic business. And those -- about close to 8,000 employees have exited the company when the business got sold off in January of 2020. So that accounts -- that helps explain the drop in the headcount. Coming to the increase in the employee expenses, what you've talked about. One, you need to factor into account the exchange rate, given that we have significant cost overseas. And if you look at the average exchange rate for the quarter ended June, that was somewhere of June of 2019. The exchange rate is roughly about INR 69.4. And for the quarter ended June '20, it came in at about INR 75.4. So there is an increase of about 6,000 -- sorry, INR 6 for the dollar between quarter ended June '19 and June '20. The other point which we want to make was, clearly, this is the quarter where we had the impact of work from home is this -- and especially in the initial period, we were in the process where we were moving out IT equipment, getting the links going, getting the customer consents were required in place. So obviously, there was a period in that where the revenues were lower than expected. But who -- we had employees whom we had to pay full salaries for -- because they were on the roll and while the work from home was beamed out. So you need to see the employee cost in that context, especially when you look at from a percentage of revenue basis.

And so, sir, how many of these employees do you pay in dollars that they were impacted by INR 6?

Yes. So if you look at the number of employees that we have, out of that 17 -- out of that 37,000, which we have, around 17,000 are in Philippines -- are in India and about 9,000 are in Philippines. So about -- between India and Philippines, we have 27,000. And we would have, in between U.S., Jamaica and Canada, somewhere in the range of 8,000 to 9,000, another 1,500 people in -- or close to 1,600 people in U.K.

Okay. And also, in the previous con-calls, you had talked about the tax rate coming to about 26% to 29%. But if we see the tax rate this time again, it is 34%, 35%. Why is that?

So it's a slightly technical question, but let me try by best. So we have a branch in Philippines, and there is a what is called a tax sparing credit between India and Philippines. Now in the period when Philippines performs well or as per norm, we get tax benefits flowing into India. In the case in the current quarter, given the costs related to keeping work from home, in the initial period, we had to arrange for employees' accommodation, boarding so that they could stay close to the offices and work and subsequently transport -- transportation costs incurred. The profitability of Philippines has been lower than what it should be. So clearly, that has become a drag on the profitability, both at the EBITDA level and it also plays out at a tax level in a different way. It's -- in a way it's like a -- I mean I hope that it helps understand.

No, sir. Not -- actually, no. It does not explain why a majority of the revenue that comes from other sources, at least in India, you must be paying 26%, whatever business is here in India?

No. We have some -- no, it comes close to 30%, while we do have some SEZ, those -- most of them have -- the SEZ holidays have expired. We have completed the mandatory 10-year requirement.

Sir, but then still, it would be -- if you have moved to the 22% plus surcharge tax, surcharge slab, it still comes to 26%, 25%, 26%. And if your important subsidiaries, also for the blended would be still lower.

No, no. Let me clarify. There's a choice of moving to a tax rate, which is lower and give up all the concessions or we stay with the existing regime. As things stand, we are staying with the older regime as far as taxation is concerned.

Okay. So -- but sir, what is the future thing? Is it going to remain at the 35%, or are you going to eventually drop to what others are paying like 26%, 27%?

No, that analysis is going on because we have some SEZs which are at lower rates, and that's the international business, obviously. So we will decide during the course of this year, whether we want to switch to an ostensibly lower regime or stay with what we have, taking into account the tax and the other accounting implications.

All right. Okay. Sir, also this other income of INR 30 crores that has come in. This is a ForEx gain?

As I mentioned, it's a combination out of about INR 31 crores, there is an exchange gain of about INR 3 crores. There is an interest income of about INR 8 crores, and there is INR 17 crores of income -- there is something called SEIS scrips, which we sold, and we got about INR 17 crores of income from sale of SEIS scrips.

What is that? What did you mention?

It's a scheme, which is there from the government where for -- if you are exporting -- if you do export of services, you get certain incentives, which you can avail or you monetize. So we have monetized.

Okay. Okay, so this is not recurring, right, this INR 17 crores. This is a one-time?

No, no, it's -- yes, yes, that is a backlog. So we have to apply, get benefits and then you sell, yes.

So -- no, but my point is, is this for just this quarter? Or is this going to accrue in the subsequent quarters as well?

No, no, it cannot accrue every quarter because this is all pertaining to scrips for a particular financial year.

[Operator Instructions] The next question is from the line of Maan Vardhan Baid from Laurel Capital Partners.

Can you share with us some more details about the restructuring that you have thought about? And sort of give us some context or maybe some immediate areas that you've already identified, which needs to be addressed?

So let me take that question. See, on an ongoing basis, we have been reviewing our [Technical Difficulty] businesses, and Board has asked the company to review the overall profit and business structure. We do have a fairly complex structure with a number of foreign subsidiaries and holding companies. So we are looking at that and seeing what can be simplified. We're also looking at what are the gaps in our existing offerings and way to bridge the gap through mergers or acquisitions? And if possible, if necessary even divestments for unprofitable businesses so which are not necessarily the strategic fit of the business right now. So our departure -- our divestment for the India domestic business was step 1 of that plan. And it got suspended because of the pandemic. So it's a little premature to talk more specific. The idea is to make the company stronger, improve its performance and enhance shareholder value and that's an exercise that's been kicked off now. When we have more details, we'll share. Right now, there isn't more detail available.

If you could also update about the performance of AxisPoint in this particular quarter?

Pala, you want to take that question?

Yes. So we continue to work on improving the performance of AxisPoint. There are 2 tracks. One is on the cost reduction, other is in terms of growing revenues. So our efforts there continue. While for the quarter ended June of 2019, AxisPoint had an EBITDA loss of about INR 1.89 million. That came down by about 1/3. So the loss for the quarter was about INR 1.25 million.

Sort of just also if you could update us on the outstanding ICDs to the parent group in this quarter, where do they stand?

So as of March 31, it was INR 340 crores. As of June 30, it reduced to INR 315 crores. And today, as we speak, it is in -- it's about INR 215 crores.

The next question is from the line of [ Satish Kumar Chandra ], individual investor.

You can hear me now?

Yes, sir.

Yes. Thank you for this opportunity to ask questions. And the excellent performance in the Q1 during this difficult time is commendable. But one question which is lingering in my mind as a common shareholder is why there is a delay in publishing your results? Because companies like TCS or Infosys, who have got thousands of arms, smaller divisions. They are able to consolidate their results much earlier. So what is the problem there the company is facing?

So...

[ Satish ] that's a very good question. And we are looking at how we can improve processes. Remote working is causing a road block in consolidated account -- consolidating accounts quickly. We took a long time for the last quarter. This quarter, we have tried [Technical Difficulty] and quarter 2, again, we'll try to improve, but very good feedback. I agree with you. We are working hard to make sure that we can announce the results earlier.

Because that's all about the image of the organization. Okay. Because that sends out a wrong signal to the customers as well as the...

I completely agree with you.

Yes. Yes. So I think you will go ahead and improve it. Yes.

We'll try our very best.