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

[Audio Gap] Thank you, Tanvi. 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 Second Quarter FY '21 Results Conference Call to discuss the second quarter results and the first half FY '21. 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 today's conference call may be 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'd like to mention that some of the statements made in today's conference call may be forward-looking in nature and may involve risks and uncertainties. Before I hand over the call to Mr. Partha DeSarkar, I would like to mention that if there is a call drop during the course of the conference call, please bear with the management. Because of COVID-19, all of us are taking our calls in Mumbai, hence, call drops are proving to be a recurring problem. Now I would like to invite Mr. Partha DeSarkar to provide his perspective on the performance of the second quarter and as for the first half. Over to you, sir.

Thank you, Ravi. A very good afternoon to all of you, and thank you for joining us on the call today to discuss our second quarter and our first half FY 2021 financials and business performance. I hope you have had an opportunity to review our earnings press release and the attendant fact sheets of the reported financials, which are available under the Investors section on our website www.teamhgs.com as well as in the BSE and NSE website. Before I start the update, I hope you and your families are safe and healthy. I would also like to wish you all a very wonderful and happy Diwali in advance. As always, I would like to begin the call with a brief overview of the financials of Q2 FY 2021, followed by the strategic initiatives and operational performances. After that, I will hand over the call to our CFO, Mr. Srinivas Palakodeti, to discuss the financial performance of the quarter under him, and of the first half of the financial year in greater detail. We will then open the conference call for the Q&A session. I have to say that I am very pleased with the way things stand now. Despite the COVID-19-led disruptions, HGS has had a better-than-expected performance in the second quarter, continuing the momentum from quarter 1 FY 2021. For quarter 2 FY 2021, on a like-to-like basis, we have reported a reasonably strong revenue growth of 11.9% over the last year's second quarter. The organic growth contributed to 6.9% of this, and the balance came from positive currency movements. On account of COVID-19, the year-on-year organic growth on a like-to-like basis in quarter 1 was a tepid 1%. But in quarter 2, the revenue growth rates have returned to our normalized rates. And we expect the trend to accelerate as we enter into open enrollment and the holiday season in the second half of the year. On a sequential basis, the revenue growth for quarter 2 was 7.8%. This strong growth can be attributed to all our top clients adding to Q2 revenue growth. The health care vertical continues to report very strong volumes. And in Philippines, our business added to the positive growth trend. You would recall, Philippines had some struggles to implement work from home in quarter 1 because of which the quarter 1 for Philippines was depressed, but all of that is behind us now. And Philippines' quarter 2 has been back to its usual strong numbers. EBITDA margins for quarter 2 FY 2021 expanded by 220 basis points to 14% over the previous quarter. On a year-on-year like-to-like basis, the EBITDA margins were up by 120 basis points. The positive impact of margins has been largely due to our statistic cost rationalization and optimization efforts like exiting unprofitable contracts and divestments of the India CRM business. Do note that last year's quarter 2 EBITDA included about INR 148 million of EBITDA from India domestic CRM business, which was sold in January 2020. Despite that, the EBITDA in absolute terms is higher over last year's quarter 2 by about INR 160 million, and the growth stood at 9.4% year-on-year. On a like-to-like basis, the EBITDA growth increased by 19.8% year-on-year. On a sequential basis, the EBITDA in quarter 2 was up by 28.4%, primarily driven by the turnaround of the performance of Philippines, as I mentioned earlier. On the back of the strong operating performance in quarter 2 and some tax write-back, I'm glad to share that the reported net profits for quarter 2 FY 2021 improved by 65.6% year-on-year and 65.2% sequentially. This is the highest-ever reported profit after tax for HGS in its corporate history. But do note that, that it includes a onetime tax write-back of a substantial amount, the details of which Pala will cover in detail. The strong performance in quarter 2 has led to a good overall first half for HGS in FY 2021. The net sales have increased to INR 25,685 million, a year-on-year growth of about 5.4% on a like-to-like basis. The EBITDA stood at INR 3,329 million, while the EBITDA margins were at 13%. The net profit was at INR 1,305 million, while the net margin stood at 5.1%. Operationally, we are at 95%-plus service levels across our geos, and continue to support the majority of clients through work-at-home model. However, a couple of thousands of our employees in Philippines, India, U.K. and Jamaica are delivering essential services from the key service locations in a safe and socially distant environment. I want to reiterate that HGS' exposure to the hardest verticals such as travel, logistics, hospitality and tourism is limited. Our core health care verticals -- our core verticals, that is health care, telecom, technology, consumer and public sector are doing much better than expected. Despite what's happening across economies worldwide and the cautionary stance shown by businesses, we have seen a significant uplift in the demand environment for BPM services. We added 12 new logos for our core BPM services and 8 for our HRO payroll services in Q2 FY 2021. We signed 49 opportunities for expansion of businesses with existing clients in the quarter. And we also signed engagements with 17 clients across new and existing for HGS Digital services. Our [ FX ] pipeline continues to be strong, led by our domain expertise and execution capabilities showcased by HGS in the last few months. With the open enrollment season and the holiday season coming up in quarter 3 and quarter 4 of FY '21 as well, as the clients looking for digital-led transformation projects, we expect to continue to add new businesses. A little bit more detail about the work-at-home model. We expect the work-at-home model to remain our primary mode of delivery this year and also for a portion of the next year, and are strengthening this capability. We have set up a work-at-home center of excellence to drive sharing of best practices across our business and scale the model in the right way. The proof of that is our client satisfaction from what we have done. We did have an early advantage through existing work-at-home solutions in North America where 1,000 associates were supporting multiple clients virtually. Clients are increasingly recognizing the benefits of work at home, and we have begun to win specific engagements of these services in other geographies, other from North America. One such example is a U.K.-based public sector client signed in quarter 2, which has gone live in quarter 3. We will hire about 700 people who will be all work-at-home for this client by December 2020. We believe that work at home will play a big role in the future in the workplace. In line with this, we are launching a hybrid operating model by leveraging a combination of work-at-home and office-based employees. We think that such a model will provide us a USP in the highly competitive and price-sensitive U.K. market. You are also aware of the licensing norms that have been deregulated by the government of India for the OSP licenses. That is obviously a very encouraging move by the government to promote the work-at-home environment it. In December 2020, we also plan to launch a new London engagement hub with a capacity of 60 FTEs, which will replace our old system delivery center and support the move to hybrid operating model in the U.K. Coming to HGS Digital. Our Digital business that includes the format element solutions, automation and analytics practices and social care practices have performed well in Q2 FY '21. The business grew by around 4.2% over the previous quarter and 11.5% over the last year's second quarter. It has also acquired an additional [ 14.33% ] percent stake in HGS Digital LLC to reach overall 85.66% in August 2020. AxisPoint Health, we continue to focus on growing revenues and rationalizing costs in this business. I'm very happy to mention that we have signed 2 new clients for us AxisPoint in the last 2 weeks, and that is very encouraging for that business. To sum it up all, our overall state of core business continues to be strong. We have been able to report strong revenue growth in the past few quarters. We will continue to review our business portfolio and take appropriate action to improve the overall portfolio of the business. Looking ahead, the uncertainties related to COVID-19 are likely to persist, and we believe that the work-at-home model will continue to be so in the foreseeable future. Keeping in mind the safety of our people, the company is going to be very conservative about moving back large numbers of employees to offices till the pandemic is behind us. With that, I will now hand over to Pala to walk us through quarter 2 FY 2021 and H1 FY 2021 financials in greater detail. And thank you all once again for being with us on the call today. Over to you, Pala.

Thank you, Partha. A very good afternoon to all the participants on this call, and thank you for joining us on the Q2 FY '21 post-results earnings discussion. As in the past, we would like to start by stating that for this discussion, EBITDA and EBITDA margins have been concluded after excluding ForEx losses and gains, which have been considered as part of other income. As required by auditing standards, we have published our financial results as continuing operations and discontinuing operations. The discontinued operations refer to the India domestic CRM business, which we exited in January 2020. For the purposes of this discussion, revenues, profits, margins, profitability 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 financials comprise the financials of the India business as well as the branch in India. On a stand-alone basis for Q2 FY '21, HGS reported total revenues of INR 5,896 million, a drop of 0.8% over Q2 FY '20 revenues of INR 2,942 million, which included INR 727 million of the revenues of the India domestic CRM business. If the revenues of the India domestic CRM business are excluded, on a like-to-like basis, Q1 FY '21 revenues have grown by 13.1% over Q2 FY '20. EBITDA margins on a stand-alone basis for Q2 FY '21 were at 22.6%, up 576 basis points over Q1 FY '21 EBITDA margin of [ 16% ]. In Q1 FY '21, we had several costs relating to the rolling out of work-from-home infrastructure as well as loss of revenue while this rollout was being done. These negative factors are no longer in play in Q2 FY '21, resulting in a sharp increase in profit [indiscernible]. On a consolidated basis, EBITDA margins have improved by 173 basis points from 20.8% in Q2 of FY '20 to 22.6% in Q2 FY '21. Under other income in Q2 FY '21, there was an FX loss of INR 263 million on account of appreciation of the rupee and the peso against the dollar. This loss was offset by INR 206 million from sale of SEIS scrips, interest income on treasury surplus of INR 70.9 million and other items of INR 63.2 million, resulting in an overall other income of INR 77 million for Q2 FY '21. PAT for Q2 FY '21 was INR 389.7 million, an increase of 23.6% over Q1 FY '21. However, compared to Q1 FY '20, PAT is down by 33.5%, primarily due to a drop in other income from INR 267 million in Q2 of FY '20 to INR 77 million in Q2 of FY '21. Now I will discuss the consolidated financials for Q2 FY '21. On a consolidated basis for Q2 FY '21, HGS reported total revenues of INR 13,326 million, a growth of 3.3% over Q2 of FY '20, which was INR 12,906 million. You may recall that Q2 FY '20 had pass-through revenues of INR 268 million, which did not accrue in Q2 FY '21. If the revenues of -- which were pass-through in nature, along with revenues of INR 727 million pertaining to the India domestic CRM business are excluded from Q2 FY '20 revenues, HGS revenues on a like-to-like basis in the quarter have grown 11.9%, comprising 5% due to exchange rate variations and 6.9% due to volume growth. EBITDA margins have improved from 13.3% in Q2 FY '20 to 14% in Q2 FY '21, an improvement of around 70 basis points. In the consolidated financials under other income, in Q2 FY '21, there was an FX loss of INR 217 million. This was offset by INR 206 million from sale of SEIS scrips, interest income on treasury surplus of about INR 68.9 million and other items of INR 93.7 million, resulting in overall other income of INR 150.2 million for Q2 FY '21. You may recall, in April 2008 (sic) [ 2018 ], HGS had acquired 57% stake in Element Solutions LLC, which has now been renamed as HGS Digital LLC. As per the transaction documents, HGS is obligated to buy the balance stake in 3 equal tranches at an agreed valuation multiple. Out of the 3 tranches, 2 tranches have been completed. At the time of acquisition, as per accounting standards, our provision was made towards contingent consideration payable. As the performance of HGS Digital LLC has been significantly better than originally and the such, the total consideration payable for the 3 tranches is higher than [indiscernible]. As per accounting standards, an amount of INR 147.9 million has been provided as a cost under exceptional items, which represents the difference between revised contingent consideration payable versus original contingent consideration payables. To put things in perspective, HGS Digital LLC had an EBITDA of INR 1.6 million in FY 2019, which almost doubled to INR 3.3 million in FY '20. And for the first half of the year, HGS Digital LLC had EBITDA of INR 1.65 million, which on an annualized basis, would come to about INR 3.3 million for FY '21. So that was to explain the exceptional item. And to repeat, this charge to the P&L of INR 147.9 million is onetime in nature, as 2 tranches have already been purchased from the sellers of HGS Digital LLC. Coming to the changes in deferred taxes. You may recall that HGS had acquired Colibrium in FY '15. During FY '20, it has been repurposed to provide technology support to the HGS health care business. HGS Colibrium brings in technology capabilities that support the technology applications used by the HGS health care business, and enables HGS to offer differentiated solutions and value-added services to existing [indiscernible]. To complete the business synergies, HGS Colibrium has been restructured, reorganized and made a subsidiary of HGS, Inc., resulting in recognition of deferred tax assets arising from past tax losses. As mentioned in the publishing page, the company for its India business has opted for the tax regime of lower taxes of 25.17%. That is without claiming any benefits such as SEZ benefits. Consequent to this, there is a reduction in the value of the deferred tax assets. The net impact of the above changes is reduction in the tax line of INR 122 million for the quarter ended September 2020, and this charge is -- which is actually adding to the benefits at a PAT level, is onetime in nature. Coming to PAT. PAT for the quarter was INR 813 million, an increase of 65% over Q2 FY '20 and with the same amount on a sequential basis. The Board of HGS has approved the second interim dividend for the quarter of INR 6 per share. From a payout perspective, this translates to 15% of the consolidated Q2 FY '21 profit. Before moving to the H1 financials, on AxisPoint, as Partha mentioned, we continue to manage costs and -- while we seek to win new business. EBITDA loss for Q2 FY '21 was lower than losses in the same period by INR 0.5 million. And for the half -- first half of the year, losses -- EBITDA losses were lower by INR 0.85 million. As Partha mentioned, we've had some new wins in AxisPoint and expect the performance of this business to improve going forward. For H1 FY '21, HGS reported flat revenue growth of [Audio Gap] that on a like-to-like basis, revenue growth has been 10.3%. Similarly, EBITDA growth on a reported basis is [ 3.86% ]. But on an adjusted basis, the growth is around 10.4%. Coming to forward covers. For Q3 to Q4 of FY '21, we have forward covers of INR 53 million at an average rate of INR 74.6 to the dollar, marginally higher than the current spot rate of USD/INR of around INR 74. We also have forward covers on the USD/Philippines leg of around INR 50.9 million, at a rate of INR 51.7, which is significantly higher than the current spot rate of INR 48.28 that was versus the U.S. dollar. Moving to key balance sheet items and cash flows. During Q2 of FY '21, HGS incurred CapEx of INR 226 million. And for H1, the CapEx comes to INR 576 million, which included around INR 43 million for work-from-home-specific capital expenditure. CapEx for H1 FY '20 was INR 439 million. During the quarter ended 30 September, 2020, gross debt reduced from INR 5,077 million to INR 5,454 million, a reduction of INR 323 million. The debt of INR 5,454 million comprises INR 3,600 million of debt in overseas subsidiaries and INR 1,837 million on the India balance sheet. The debt on the India balance sheet comprises INR 1,287 million of some ECB and INR 515 million of working capital demand loan, which was falling due on 8th October, 2020 and has been repaid after the 30th September balance sheet date. Hence, currently, on the India balance sheet, there is no debt, except for the ECB of INR 1,287 million. Cash and cash equivalents fell slightly from INR 6,046 million on 30th June to INR 6,078 million as of 30th September, a drag of around INR 328 million, taking into account the short-term surplus in the form of loans of INR 4,922 million, HGS has net cash of INR 5,546 million. Collections have been as per target, and DSO days have come down from 76 at the end of Q1 FY '21 to 71 days as at 30th September. EBITDA to free cash conversion stands at 54% for H1 FY '21. Coming to the revenue profile. Revenues from U.K. have grown 18% sequentially and about 82% over the last year's second quarter. With this investment of the India domestic CRM business, revenues from India primarily for the HRO payroll business, now account for 4.5% of the total revenues as compared to 10% during the previous financial year. Revenues from the health care vertical grew 10.8% on a year-on-year basis [Audio Gap] 45.5% of total revenues. In the fact sheet, you would see there is a drop in absolute amounts of the revenues from the telecom and banking financial service verticals. This is primarily due to the sale of the India domestic business, which was about 60% telecom and 40% mostly from the financial services. Our efforts to increase revenue productivity continue. At the end of Q2 FY '21, our average monthly revenue per employee stood at -- sorry, INR 115,000, up from around INR 99,000 in Q2 FY 2020, an increase of 16.5%, highlighting the change in the mix of the business and the exit of the India domestic business. On a sequential basis, revenue per employee has increased by 4.8%. I now would like to conclude my portion, and throw the floor open for questions and answers. Thank you.

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

You've been mentioning about these large order wins. So can you give us some light on what kind of a growth in revenues and profits these can bring? How large are these orders, the new wins?

See, the new win -- it was actually signed in quarter 2, but the execution started in quarter 3. So it's a fairly large win. And I think more details of that -- so we've mentioned that we are going to hire about 700-odd people in U.K. by December 2020. So it is for the public sector, U.K. public sector. We are working for the HMRC. In terms of the specific size of the contracts, we actually haven't yet disclosed that. And there is -- it's one of the largest contracts that we have won historically in the company, largest new contract that we have won historically. I'm not at liberty to mention this because of confidentiality reasons.

Okay. And another one you had bagged in Q2, which was in the U.S. So that has started to come on books? Or will that come? You mentioned that you would be employing 2,000.

It will probably be -- I'm sorry, what was the question once again? Can you just repeat the question?

You had mentioned that you've been employing about 2,000 employees over the course of the year in the U.S.

That is not just 1 client, that is over multiple clients.

Okay. So what kind of margins -- is there margin sustainability in these? Or they have been backed because they are large orders, given there have been some surrender of margins?

No, we generally don't surrender margins to -- generally, we don't. But Pala, you want to take that question?

Yes. So if you -- so that -- this is Pala here. So if you look at the fact sheet between September and June quarters, there is an increase in the headcount between U.S., Jamaica of roughly about, yes, 1,600 people, right? So that hiring has already happened primarily to -- some for the new business as well as to cater to the open enrollment season. So coming to the margins perspective, we expect margins in Q3 and Q4, as we see, broadly in line with what we had in Q2. Through the caveats, a couple of caveats. One, there is a fair bit of volatility on the exchange rates. And the second, while indications are good, we have hired people based on forecast. The final profitability will depend on how the volumes have come in, specifically for the open enrollment season.

Okay. All right. And there was a business restructuring that you had mentioned in, I think last quarter or the quarter before that. What is the progress on that?

So we are reviewing our portfolio of businesses, and there are some businesses that we have, which -- so you would have seen our corporate structure is pretty complex with a large number of subsidiaries. And some of the losses in some of the subsidiaries, actually, we've been able to merge. And the tax gain that you see out here is actually arising out of utilizing some of those tax losses. Therefore, stuck at a subsidiary level in some of our health care businesses. So that is one part of the restructuring.

Okay. So -- hello?

Yes. Go ahead, Siddharth.

Yes, yes. Actually, in the last con call, you had said that these related partly loans have been repaid, a part of them. But we see that the amount has actually exceeded the March quarter. So can you explain why and how?

Yes. So we...

So we've -- okay, Pala. You go ahead.

No. Go ahead, Partha. I can add on. Go ahead.

Yes. So these loans, as I said, as we generate more cash, we deploy these funds with some of these Hinduja Group entities. And those loans get repaid, so it goes up and down. As we speak, we have again got some repayments in October, some are expected in November. So that is based on the feedback received to get it down to a lower level within the next 2 quarters.

So are these -- are banks not -- are these promoters not sourcing it from the banks? Why are the banks not lending them? I'm sure they're bankable. So why would they need you to -- I mean, actually, basically, they're dipping in the treasuries of Hinduja Global to get money for whatever they're doing.

Yes. These are -- they have got reasonable book credit rating from credit rating firms. So we've looked at credit ratings before we've lent.

So is there a limit that you would lend? Like now it's INR 492 crores. So you say you can go to INR 800 crores or 1,000 crores. Is there a limit that you have set? Or is it depending on how much money they need?

Agreement that has been approved by the Board is INR 500 crores.

But then there's no limit because the Board consists of the promoter's majority. So they can go to any extent to say, "okay, let's rate the entire treasury, give it to us, short-term loan, we'll obviously give it to back in 6 months, 1 year." So is there a -- is there some limit that has been set? Or no?

I thought I answered that question, that it is INR 500 crores.