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

Ladies and gentlemen, good day, and welcome to the Hinduja Global Solutions Limited Q1 FY '23 Earnings Conference Call. From the senior management, we have with us today Mr. Partha DeSarkar, Executive Director and Group CEO; and Mr. Srinivas Palakodeti, Global CFO. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rushabh Shah from Adfactors. Thank you, and over to you, sir.

Thank you, Renju. Good evening, everyone, and a warm welcome to the Q1 FY '23 Results Conference Call of Hinduja Global Solutions Limited. We are joined by Mr. Partha DeSarkar, Executive Director and Global CEO; and Mr. Srinivas Palakodeti, Global CFO, to discuss the Q1 FY '23 results and the key developments during the period. Before we begin the conference call, I would like to mention that some of the statements made during the conference of today's call may be forward-looking in nature, including those related to the future financial and operating performances, benefits and synergies of company strategies, future opportunities and growth of the company's services 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 risks and uncertainties. I would further like to mention that if there is a call drop during the course of the conference call, please bear with the management. Thank you, and over to you, Partha, sir.

Thank you, and a very good evening to all of you who've joined us for the conference call for our first quarter earnings for this fiscal. We do have a presentation that we have posted on our website, and I am going to refer to the presentation as I talk to all of you. Hopefully, you've had an opportunity to go through the presentation, are able to refer that as we go through call. So I go to Slide 3 of the presentation deck. We're happy to report a very strong revenue growth of 14.1% year-on-year. Pleased with this number because there were many concerns raised when we divested the healthcare business, whether the rest of the business has the momentum needed to grow the business. The proof of the pudding is in the number, 14.1%, which I believe is a fairly handsome number under all circumstances. The net profit was INR 73.3 crores. Again, a very good number to talk about because it's 9x the year-on-year growth on a like-to-like basis and Pala can share with you and our fact sheets have the comparison so that you can see for yourself. Our customer experience services and the digital solutions across all our geographies are seeing robust demand. We have rewarded our shareholders like we've done in the past, an interim dividend of INR 5 per share. And the total dividend outflow as a result of this announcement is to the tune of INR 21 crores. So I just want to make sure that my voice is audible. Can somebody confirm that my voice is audible?

Sir, your voice is audible. Go ahead.

Perfect. Thank you very much. So I will now move to Slide 4. The Slide 4 is a short financial dashboard. It shows you the revenue growth from INR 800 crores to INR 912 crores. This is the 14.1% growth number that we talked about. EBITDA has had a slight dip, 16.1%, from INR 46 crores to INR 38 crores, whereas profit before tax and profit after tax has seen really good numbers. Let me spend some time in trying to explain to you why the EBITDA has taken a hit. It is not a cause for concern. Most of the degrowth in EBITDA has come because of our Brexit support services that our U.K. business was doing has come down quite a bit. As you know, it's been a while that Brexit has been operational, and therefore, the trader support services that we used to do for the U.K. government, the demand for those services have gone down. And therefore, there has been a reduction in volumes from that particular contract. So that is number one. Number two, almost all our geographies are seeing good ramp-ups, and we are hiring people for the rest of the year and the hiring costs are reflected in quarter 1, but the revenues associated with those hirings will show themselves in quarter 2. So these are ramp costs that are showing up in quarter 1, causing some pressure on the EBITDA, but will convert itself to revenue and profitability in quarter 2. So hopefully, that should address any concerns that you may have on the drop in profitability. With that explained, I will move to Slide 5, which basically gives you a flavor of which all businesses done well. The consumer engagement solutions services onshore in U.S., Canada and U.K. have done well, and will continue to do well even in quarter 2 and in the rest of the year. Offshore India, Philippines and Jamaica showed good growth from existing accounts. We opened up a new center in Mysore in July to meet increased demand for our nonvoice support services from India, and that's something that we are very happy with. The digital business continues its strong momentum. Its business grew 57% on a year-on-year basis. Cloud, security and automation practices are the ones that are growing very well. And the fact that we are doing digital -- doing well in digital comes out from the third pillar actually. Last year same quarter, the contribution of HGS revenue from digital services was 9.8%. Now in quarter 1 for this fiscal, that is up by about 14.3%. So it gives you a sense of the fact that the digital business is really growing fast. We've signed out about 28 digital-led engagements across existing and new clients, focusing across robotic versus automation, cloud analytics, AI and digital customer experience. We are ramping up the team as well. You must be hearing from other IT firms as well that there is a big demand for labor. So we find us facing the same demand for labor. There is enough business available. The challenge is to people to hire in time to be able to deliver revenues. Move to Slide 6 to give you more color on Diversify, our Australian acquisition that we did in February of last year. Its revenue grew about 23% on a year-on-year basis. Its EBITDA margin is about 22.4% for the June quarter. Signed up 8 new logos since acquisitions in end-February, and we've got a healthy sales pipeline. It's a small business, but it's doing very well. Very happy with the kind of results that it's able to give. I think in the last quarter, we talked about real estate footprint consolidation. A lot of work has happened in that. There is a contrasting situation on what the government mandate is for bringing people back to work. For example, in Philippines, the government has mandated that 75% of the people have to come back to work. India also -- and that mandate has already come through. In India also we are heading towards a particular mandate from the government that will determine a certain percentage of people that need to come back to work from office. It's not yet implemented, it's a little futuristic. But we will see that some of the expenses that were low last year because we were not operating physical office infrastructure are going to come back because at least in India and Philippines, the government has mandated that we need to bring people back to work. But in U.S., U.K. and Canada, the number of people working from office continue to be miniscule, as high as 90% of the people are still working from home. And it's likely be -- we don't see any change in those stats at least in the next 6 months. So we are rationalizing our footprint. We've closed 3 centers in quarter 1, 2 in the U.S. and 1 in Canada; 2 more centers are to be closed in August in Canada. The annualized savings from this is expected to be USD 640,000. Today, we have 35 global delivery centers across 7 countries. U.K. will move to a smaller site in Preston in quarter 2 of FY 2023 that will yield an annualized savings of about USD 1 million effective quarter 3. And the good news is we've been able to actually sell some of the buildings that we used to own. We've sold a property in U.K., which was in London in the Chiswick area. We've moved to a much smaller rented place. And the property in Kentville, Canada has also been sold and the proceeds have been realized. This is also sometime in August. So you will see that these numbers reflecting in our numbers for quarter 2. So that has been our effort at real estate footprint consolidation, Slide 7. Slide 8 is a little forward-looking. We do see the tightening macroeconomic environment, but we remain cautiously optimistic. We believe that the coming quarters, we'll see good growth in both revenues and profitability. We will continue our efforts at real estate consolidation to the extent that our existing leases allow us to consolidate. We are taking a very hard look at general and administrative expenses. With the sale of our health care business, there is opportunity for us to reduce our general and administrative expenses. We are working very hard on that. And the ramp costs that I mentioned in U.S. and Canada was actually converted into revenue and profits in quarter 2, 3 and 4. So our focus continues to be on winning new clients. We put our CES sales team and the digital sales team together so that they are selling with 1 go-to-market strategy. Our new growth would be through hub-and-spoke model to leverage work from home. So we will not end up with the large footprint that we've had in the past of centers with 400, 500 seats. We're going to do smaller hub-and-spoke centers. We are looking at acquisitions to improve our delivery capabilities for the digital business. This is nothing new. This is something that we've been doing for quite some time now, evaluating acquisition candidates in the areas of analytics and robotic versus automation. So that effort continues. So far as a quick update on the merger with NXTDIGITAL is concerned, many of you would have seen that the company -- NCLT, vide its order dated 29th of July, has directed to convene a meeting of equity shareholders on September 2, 2022, to consider approval of the scheme of arrangement for the acquisition of the media and digital businesses. Our buyback of around INR 975 crores, based on FY '22 audited financials, will be announced at a later date upon completion of the requisite approvals and in compliance of the relevant provisions of the Companies Act, SEBI Listing Regulations and SEBI Buyback Regulations. We expect this to take place in the second half of FY 2023. With that, the general update that I had planned for you is now done. I am going to hand it over to Pala, my CFO, with a caveat that Pala has got a bad throat, he also has slight fever. So if you have problems in hearing him, just ask the question, and we will try our best to answer that in the Q&A section. So over to you, Pala.

Thank you, Partha. Welcome, everyone, for joining this call. I want to check, is my audio okay?

Yes, sir, your audio is okay. Go ahead.

Thank you. So I will move to Slide 11. This is the summary of the financial performance. Revenues for the year -- for the quarter ending June '22 came in at INR 912 crores. That represents a growth of 14.1% in rupee terms over the quarter ending June '21. And these are all for the existing business of Digital CX and HRO and all the -- since we've sold off the health care business, those numbers are excluded from the quarter ending June '21. So revenue growth of 14.1%. If you recall, we had done the Australian acquisition, the company called Diversify, towards end of February '22. So it was not there for the quarter ending June '21. So after the 14.1% growth, 5.1% growth is accounted from the Diversify acquisition and on -- the rest 9% has come in from the organic growth across different sectors. Coming at EBITDA, Partha did talk about the growth in -- the drop in -- reasons for the drop in EBITDA between quarter ending June '21 and the quarter ending June '22. But if you look at it on a sequential basis, if you look at the quarter ending March '22, quarter ending March '22 is the first quarter post the sale of health care business. And quarter ending June '21, there were some allocations assumptions on the costs. But if you look at the margins between quarter ending March '22 and quarter ending June '22, you will see there is a significant increase in the EBITDA margin from 0.6% to 2.2% (sic) [ 4.2% ]. On a sequential revenue growth basis, our revenues have grown 5.4%, out of which 2.9% came in from the timing difference of the Diversify acquisition. Quarter ending March 22, we had a little over a month of Diversify revenues. Quarter ending June '22, we had the full 3 months of Diversify revenues. So overall, growth of 5.4%, out of which 2.9% is from acquisitions and 2.5% is the organic growth. Moving on, on the interest expense. We are really a 0-debt company. So whatever you see is primarily because of a notional accounting charge because of Ind AS lease accounting treatment. The only other thing to call out is the other income. That total amount is INR 132.5 crores. So that had INR 66 crores coming in from the foreign exchange fluctuation, rest is primarily coming in from interest. And this foreign exchange fluctuation is basically driven by the exchange rate movement. For instance, you would know that dollar has appreciated against most of the currencies. So we have dollar deposits in Philippines, Mauritius. So all of them have to be remeasured at the rate as of 31 March. And similarly, we have deposits -- dollar deposits in Jamaica where there has been an appreciation. So this is the net impact of the overall FX fluctuation. At the PAT level, there has been a significant growth on a sequential basis from INR 7.6 crores to INR 73.3 crores. And if you see on a sequential basis, it was a marginal loss of INR 0.8 crores for the quarter ending March '22, that has gone up to INR 73.3 crores for the quarter ending June '22. Moving on to the next slide. This is the dividend payout. The dividend for the quarter ended June '21 was INR 7 per share. Please bear in mind, there was a 1:1 bonus given in Q4 of FY '22. So the expansion, the equity base has doubled. So on a like-to-like basis, the INR 5 share should be seen as a INR 10 per dividend share for the quarter ending June '22. And if you look out -- look at the payout ratios, the dividend of roughly INR 21 crores accounts for about 23.3% of the stand-alone profits or about 28.5% of the consolidated profits. And again, you would see, from a payout perspective, there has been a significant increase compared to the quarter ending June '21. Moving on to Slide 13. This is a brief summary of the summary profile. Our book value is -- we have a net worth of INR 7,982 crores. Our current market price is INR 1,346 crores. Our share price is trading at the P/E of the 15 on a trailing 12-month basis. And we are a gross debt -- we have a national amount -- small amount of gross debt. But effectively, we are a 0-debt company, with about INR 3,372 crores of cash. Moving on to Slide 14. As I said, we have a small amount of debt as of 30 June '22. Our ICDs to related parties is INR 1,215 crores. We have cash of INR 3,372 crores and debt investments of INR 2,568 crores. This also reflects the impact of the exchange rate between 31st March and 30th June. Moving on to the next slide, Slide 15. The CapEx for the quarter is INR 26 crores. Please bear in mind the CapEx of INR 158 crores for FY '21 and INR 237 crores for FY '22, that is based for the full year, including the health care business. But for Q1 of FY '22, we are at about INR 26 crores. DSO days, there has been an increase between March '22 and June '22 of about 6 days, but it's in line what we had as of March '21. And we are keeping a close tab on this, and there are no areas of concern given that we have a very solid customer base. Moving to Slide 16. This is revenue by delivery location. So U.K. and USA continue to be the largest. USA at 30%, U.K. at 26%, Canada is 17%, India is about 12%. Revenue by origination. U.S. continues to be the largest at 37%. U.K. is about 30%, Canada is at about 16%. Moving on to revenue by verticals. With our growth in our U.K. business, the public sector and others account is the largest one at about 34%, media and entertainment at 13% and telecom at 15%. So if you combine these 2 telecom and media, that would come to about 28%. Retail is at 19% and banking and financial services come in at about 17%. From a client-concentration perspective, as we have said earlier, post the sale of the health care business, there has been a reduction in the client concentration. So the top customer accounts for about 12%, the top 5 at above 40% and the top 10 customers account for about 56%. Looking at -- coming to channel mix. As Partha mentioned, we have seen very strong growth in our digital business. And share of digital has gone up from about 9% a year ago to 14%. Voice accounts for about 74% and nonvoice accounts for about 12%, which is essentially what we do on our HRO business as well as we do some amount of work nonvoice from India for an international client. Moving to the next slide, Slide 19. This is the stock price movement. This has been adjusted for the bonus issue. Moving on to the next slide, on Slide 20. This is the overview of the transaction with NXTDIGITAL, subject to necessary approvals. As Partha mentioned, after the Board approval and getting the necessary approvals from stock exchanges, et cetera, NCLT has asked for a meeting of the shareholders of HGS to be convened on September 2 to consider the scheme of arrangement. Should this approval come through, we would proceed with the next set of approvals required. And just to recall, this acquisition is noncash. Shareholders of NXTDIGITAL will receive 20 shares of -- for every 63 shares of NXTDIGITAL, their shareholders will get 23 (sic) [ 20 ] shares of HGS. On completion of the transaction, the share capital of HGS will go up from about 4.18 crores to about 5.25 crores, which is roughly about 52.4 crore shares. And NXTDIGITAL shareholders would own 20.4%, and promoters' holding would drop from 67% in HGS at current number to around 66.63% once the -- as and when the NXTDIGITAL transaction is completed. That's all I had in my section. Please do -- we'll open up the Q&A session after this. So I'll hand it back to the moderator for the Q&A. And once again, thank you for joining on this call.

[Operator Instructions] The first question comes from the line of [ Saloni Desai ] from Omkar Investments.

Hello, am I audible?

Yes. Please, go ahead.

Yes. Sir, firstly, congratulations, sir, on a good set of numbers. I had 2 questions. Sir, is there any more M&A deals expected in this quarter or are there any in process currently?

I cannot give you a specific reply to that question because that's very forward-looking. I'm sure you are aware of that. We continue to evaluate M&A deals on a day-by-day basis. So yes, we are looking at and evaluating M&A deals as we speak. But that is business as usual. I cannot confirm whether that is going to close in this quarter or not.

Okay. Okay. All right. And I had 1 more question. So digital contributes to approximately 12% to the total revenues. So how much, sorry?

14%.

Yes, 14%. So I just wanted to know like how much will digital contribute by the end of this fiscal, like can we expect it to grow by approximately 30% this year, too?

Again, I don't want to give you a specific number, but the aim is to increase the digital content of our revenues significantly.

Next question comes from the line of [ Anand Onea ], an individual investor.

I need to understand 1 thing. A few months back, in one of the interview, Partha said the EBITDA margin for the business -- retail business is in 2 digits. But we can't see that number which is reflected. Second question is about the buybacks. You were saying that this is a noncash thing, but the buyback is structured in the same -- in a fashion that the NXTDIGITAL shareholders is also getting the buyback amount. Could you explain these 2 parts, please?

Yes. So I'll answer the first part and the second part, Pala will answer. But yes, our plan -- our intention and our plans are to improve the EBITDA of the business for the coming quarters to a level which is at minimum double digits. So we are working on that. So you'll have to be a little patient with us. I've explained to you the circumstances under which the EBITDA has gone down this quarter. But I'm trying to see if by exit, we can get to the number that you talked about. So that's on the EBITDA side, sir. And Pala, I'll hand it over to you to see -- to take the question on the buyback.

Thank you, Partha. So as far as the NXTDIGITAL transaction is concerned, that is something which is acquisition of the business has been done on a noncash basis, without any cash outgo to the shareholders, going through issue of shares. As far as buyback is concerned, we had -- the buyback amount based on 31st March balance sheet works out to about INR 975 crores and that is something which will be done as permitted in -- during sometime later this year as permitted by Companies Act and SEBI guidelines for buyback and restructuring.

So to be honest with you, both the answers is not convincible, but I have 2 follow-on questions. One thing, you have entirely ignored the cash which was standing in the balance sheet and no proportionate was taken for the asset methodology. Secondly, Partha on that interview, you were damn sure that the margin today is at 2 digits and because of that, many investors entered into that. But it has not been reflected. I don't think so at a level of yours, these kind of small -- this is not a small negligence. You should at least put these points or give a statement after this -- your interview that a statement given by you was wrong.

I'm sorry. I think I mentioned that, yes, our intention is to bring the profitability back to a level which is at least double digits. I mentioned that.

Please go through your interview again once then, what you have said.

I'm perfectly aware of what I've said, and I'm perfectly aware of what I'm saying right now.

And the valuation? What about the valuation methodology, which you have used for NXTDIGITAL? Because that company was not having cash. You were sitting with so much of cash and still you only used the income methodology to value the company, vide there was not a proportionate. I think large -- many large companies use both the methodologies.

Sorry, your question is not clear. Can you repeat your question?

So when you are valuing a company, there are 3 methodologies to do that: market value, asset value and income model. The asset value, which could be more because of the cash, was ignored when you were doing the valuation. So I was not able to understand why that methodology has been -- not been taken? Because if a company which is sitting with INR 7,000 crores or INR 6,000 crores of cash has huge potential, which is not and cannot be taken in the income model. And because of that, 20% shares of Hinduja Global is given to NXTDIGITAL shareholders.

Yes. Let me take that. So the valuation which you are referring to, that was done by 2 independent valuers. It's not something which the company has done. This has been done by 2 independent valuers. And you would see their report, and they would explain what is it that methodology they have taken and why they have not considered certain elements of what you're talking about. And so you need to look at the valuation report.

Mr. [ Anand ], we will request you to follow back into the queue for more questions. Next question comes from the line of Jyoti Singh from Arihant Capital Markets Limited.

My first question is on the health care side business. So as last time, in the Q4, you did mention that we will see gap filling in the line of 2 to 3 years. So are we seeing any visibility for that? And my second question on the margin and revenue side. So how much growth we are expecting for the revenue and how much margin we are targeting going forward? As currently mentioned by the management that we are optimistic going ahead, but if anything, on the numbers side you can give?

So we don't give specific number guidance, I'm sorry. But yes, the -- next quarter -- the margins on the next quarter -- the coming quarters are expected to be much better than what it is today. And growth also, there is good demand. So I think we should be seeing good growth going forward. Beyond that, I can't get into specifics.

Okay. And sir, on the health care business side that I...