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

Good evening, ladies and gentlemen. A very warm welcome to the Hinduja Global Solutions Limited Business Update Call. From the senior management, we have with us today, Mr. Partha DeSarkar, Executive Director and Group CEO; Mr. Srinivas Palakodeti, Global CFO; and Mr. Natarajan Radhakrishnan, President and Chief Innovation Officer. [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, Faizan. Good evening, everyone, and a very warm welcome to business update call of Hinduja Global Solutions Limited. Please note today's call is on TekLink acquisition and questions should be limited to this. Because we began the investor call -- before we begin the investor call, 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, including those related to the future financials and operating performances, benefits and synergies of the company's strategies, future opportunities and growth of the market, company's services and solutions. I would like to further mention that if there is any call drop during the course of 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 have joined us for this investor call today. It's our pleasure to present to you our latest acquisition, TekLink, which we announced a couple of days back. TekLink is in the data and analytics space, a crucial service offering towards pivoting HGS into the technology-enabled digital CX field. You would recall that we divested of the health care business in January 2022. Since then, we have acquired quite a few businesses, which are different from the businesses that we used to do in the past. We entered Australia through an acquisition for Diversify. Then we acquired the digital media business of NXTDIGITAL that just got over. We have been focusing in our M&A activity on further capability building on the digital customer experience side. And TekLink, with its capabilities in data and insights, is the next logical step in that direction. The [indiscernible] new HGS is focused driving digital-led customer experience services and solutions. And as we go on, we are going to do quite a few of the tuck-in acquisitions, a string of pearls, if I may use to say -- if I may use that term, to bring that capabilities and bolster our presence into a technology-led company. Our goal is to operate in the intersection of strategy, marketing, technology, data and process management. And that is what we're trying to drive with this particular acquisition. And while I speak, I hope that you are able to access the presentation that is there on our website. Since you are, I would request you to move to the next stage, that kind of draws out our vision of what we are trying to do. Our focus areas are going to be 5 that you see on the top of that slide. These are horizontal capabilities across digital marketing, e-commerce, serving that with technology, data and analytics and process management. Two decades of our history have gone in building our process management capability. That is the circle that you see on the extreme right of the slide. What TekLink acquisition does is it filled up the gap that we had in our data and analytics practice, which -- when we divested our health care business. So we are building it back. Further building our technology capability to bring in elements of digital marketing and e-commerce is what we are planning for the future. The industry [indiscernible] target are below that, banking and financial services, the obvious choice, direct-to-consumer retail or e-commerce. We have significant presence in this area. Technology, media, telecom, those of you who follow our journey over the last 2.5 decades, this is our mainstay. The new verticals that we have developed over time has been the public sector, which is the mainstay of our U.K. operation, and the bond digital companies that our technology companies who are essentially product companies, bringing in new services and depend upon us to provide the customer interaction services. So work will straddle across technology, strategy and design, technology implementation, managed services and analytics and insights. And the service areas that we want to build our capabilities are in digital customer engagement, digital experience, cloud and security, analytics and insight, intelligent automation and contact center transformation. This, you will understand, is quite different from the labor arbitrage business that we traditionally have been in the last 2 decades. We are building on our capabilities of being in this labor arbitrage business -- labor arbitrage-based customer service space, and we are building on top of that. And our partners, as we pivot the company towards a more technology-driven services company, would be the name that you see below, the usual suspects, AWS, Microsoft, Twilio, Sprinklr, Automation Anywhere, Adobe and UiPath. I will now ask you to move towards the next slide, which tries to explain to you what the TekLink acquisition brings to HGS. We just signed a definitive agreement to acquire 100% for USD 58.8 million, subject to customary and agreed adjustments. There would be earn-out-based payments in the next 2 years based on financial performance of the company, and the management of the company is expected to stay with us for the years of the earn-out. We have just signed the transaction. We expect to close it in the next 2 months. So there would be some post-signing pre-closure activities that we will be working on for the next 2 months. I'm very excited by the synergies that we will have as a result of this acquisition, and happy to say that from the position where we almost had no technology revenues. With the acquisition of TekLink, our digital services revenues will end up being close to $100 million of a total revenue base of about $500 million. So that means about 20% revenues going forward -- 20% of our revenues going forward would come from technology services, which is a proof point of our ambition to become technology services company. With that, I'm going to hand it over to Natarajan, our Chief Innovation Officer, to take you through the rationale and the contours of the deal. Over to you, Natarajan.

Thanks, Partha. Very good evening again. My sincere thanks to all the investors who are attending this call. Partha has already explained our vision of being a digital experience company, technology-led company. In the last 12 months, we have taken a lot of steps towards that. I would also like to recount the journey of digital over the last few years before talking about this particular acquisition. This is Slide #8 in the investor's presentation. You would remember, we acquired a company by name Element Solutions way back in 2018. It was a $8 million, $8.5 million revenue base. Over the last 4 years, we have managed to grow this technology business by a CAGR of 30% year-on-year. And we are not a broad spectrum IT services company and that is increasingly becoming commoditized and price competitive. We have chosen to focus on what I call 3As in a cloud-first model. That is automation is the first A, analytics is the second A, and artificial intelligence is...

Sorry to interrupt you Mr. Natarajan, the audio is breaking from your line, sir.

Okay. Is it better now?

Yes, sir. Thank you.

Okay. So I was saying our philosophy, our levers or 3As, automation, analytics and artificial intelligence, delivered in a cloud-first model. We are not a broad spectrum IT services company. We are gradually moving away from a services-led business to a business which is differentiated by solution accelerators and products. By products I mean implementation of commercially off-the-shelf products. We do have a rich domain experience in select industry verticals. Partha already mentioned 6 industry verticals. We do have technology, e-services and solution [indiscernible] in these verticals. And we have very deep relationships. Many of our clients have continued over the last 15 years, if I include the clients of an earlier acquisition, they've all remained with us. In fact, we received a very, very high customer satisfaction score in the recently concluded survey, and partnership with the names Partha already mentioned, Microsoft, Adobe, AWS, Twilio and Automation Anywhere. And globally, we have about 750 technology professionals. Most of them are based out of U.S. and India. The 6 practices Partha has already covered, starting from digital experience, which includes websites and e-commerce; digital engagement, where we do digital marketing, online reputation management kind of services; cloud migration, managed services, cybersecurity; and then data and analytics, our objectives are data modeling, analytical reports as a service, descriptors, predictors, proscriptive and cognitive analytics. All of that is under data and analytics. And we do a lot of process automation using tools, very tool agnostic. We use Automation Anywhere, UiPath, [ Power Apps ], all of that. And finally, given our experience in the contact center world, we also have a very strong contact center transformation offering. As you know, contact centers are becoming -- moving from -- transforming from a physical model to a phygital model, a combination of agents, plus lots and lots of technology. So these are our 6 offerings, and the revenue growth has been very, very robust. Given this background, I moved on to Slide #9. As Partha mentioned, we announced this acquisition of TekLink a couple of days back. TekLink was founded by Mr. Pankaj Gupta. Pankaj has nearly 33 years' experience in the IT services and products space. He has worked in marquee companies, like TCS and SAP before setting up TekLink way back in 2003. TekLink focuses on implementing financial planning products, data science and analytic services offerings. It's headquartered in Warrenville. It's a suburb of Chicago in Illinois, U.S. They have a small presence in Europe, and India delivery centers are Hyderabad and Indore, primarily in Hyderabad, small number of [indiscernible] in Indore. They have expertise in multiple industry domains, strongest being [indiscernible] consumer goods, all the consumer, retail, confectionery food companies. They have a very strong presence. There are over 55 clients, in fact, acquiring new [indiscernible]. And many of the existing clients have been with them for 10-plus years. 275 employees, almost all of them focused on analytics and planning, except the support services teams. And they also have -- TekLink also has strong partnerships, SAP, Anaplan, Google Cloud. These are mostly nonoverlapping with what HGS Digital has today. And they continue to receive high customer satisfaction score and well regarded by analysts. In fact, the 2022 Gartner Peer Insights rates them 4.6 out of 5, and also carries a 97% would recommend score from the clients. If you look at TekLink service offerings, it's a broad swath of offerings covering the entire data science and analytics space, right from data warehousing, data visualization using tools, big data, advanced analytics, including predictive and cognitive analytics, implementation of enterprise planning products, trade promotion management, SAP, TPM implementation, consulting advisory services and application management services around business intelligence. It's a broad collection of offerings covering the entire analytics space. Let me move on to Slide #10, some color in terms of their financial performance. Their revenues calendar year 2020, TekLink had global revenues of $20.1 million. And in 2021, it increased to $21.8 million despite COVID and somewhat depressed market conditions. And in the current calendar year, for the first 9 months, their revenues are approximately $22.5 million. This is a significant growth over both 2020 and 2021, and despite the market conditions you can annualize the revenues and make some estimates on full year revenues. And the EBITDA is fairly good. It's in the mid- to high-teens. And the overall headcount is about 275 people. 210 people in India, and the balance 65 is spread across U.S. and very few FTEs in Europe. On the right-hand side, we have revenues by origination. 91% of the revenues are from U.S.-based clients. And the balance, 7% from Europe and 2 percentage points from India. These are mostly global clients. So you may want to ask why this acquisition, what is the rationale for this acquisition, that is covered in Slide #11. As Partha mentioned, with the sale of health care business, our data and analytics practice kind of scaled down significantly. And we need this -- this is a very important cog in our overall scheme of things. I mentioned 6 different service offerings. These are not really standalone. These days most of the deals are multi-tower, crossover kind of deals, automation plus digital customer engagement, analytics plus customer experience. So even for -- we have to grow our data and analytics practice, plus even for our other offerings, data and analytics is absolutely the capability is essential. So this is -- this makes perfect sense to augment our capabilities in this space. And we are very strong in financials and [indiscernible] and bond digital companies. And TekLink has very strong presence in the FMCG space, especially consumer, food, retail, confectionery and also pharmaceutical space. These are additive over and above where we have strength. And similarly, their platform partnerships, particularly SAP and Anaplan are a tremendous value to us. And it brings on board 275 data and analytics professionals to our company with expertise in consulting as well. And we see a tremendous opportunity to cross-sell and upsell our offerings across each other. We expect to take the data and analytics offering and sell it to HGS Digital clients. And similarly take our digital customer experience, digital customer engagement, cloud security, contact center transformation offering to TekLink customers. We expect a significant synergy through this cross-sell and upsell. And finally, culturally, it's a very, very strong alignment. HGS Digital has a very entrepreneurial culture and a client-focused culture. We are very happy to note that TekLink had a very similar cultural approach, and that indicates us on cultural alignment. So all in all, it's a perfect synergy. It's almost like a perfect acquisition candidate for us. So that was the rationale behind acquiring TekLink. I'll probably stop there, and we can take any questions on this particular acquisition.

[Operator Instructions] First question is from the line of Jay Shah from [indiscernible].

Congratulations for the acquisition. So we have 3, 4 questions in line. We just wanted to understand the rationale behind the valuation that has been considered while acquiring this TekLink. I understand it's around 2x the annual revenues. First is that. Second is how many years do you expect the synergies to materialize on the cost and revenue front? And third is, what kind of percentage share you see in the existing contribution from the U.S. market post this acquisition? I believe the HGS current share is around 30%, if we look at the delivery by location share. So how it is going to change post this acquisition?

Pala, you want to take that question?

Yes. Can you hear me?

Yes, sir.

So let me start on the revenue by origination. If you see what -- as of Q2, we had about 31% of our revenues coming in from U.S. right? And that's on a base of about $138 million. Now if you go back and if you look at the slide, which we have presented, so it's going to be about 91% of TekLink revenues, and just to annualize that's about -- that's going to come to about 90%, right? So about $27 million, additional will come from TekLink, which is all U.S. origination. And so 31% of 138 and another $27 million, so that's roughly what will come from a U.S. origination perspective. Now as we have mentioned from a delivery perspective in this kind of business, it's a combination of what is done in India and also what is being done in U.S. So it's difficult to put a number in terms of the impact on the revenue by delivery given it is entrenched and this is different from the normal BPM work, which we do, right, as in part of the BPM work [indiscernible] look at the way that's it. In terms of synergies, both -- we are focused primarily on revenue synergies. Of course, there'll be opportunities on the cost side as well. So we'll have about 210 people coming in as HGS employees in India post the acquisition, additional employees. And obviously there will be scope for synergies on the cost side. And that should happen fairly quickly post closing. We are very excited about the cross-sell opportunities, which come up what Nat talked about. We were able to sell our services primarily from digital as well as the BPM services through TekLink customers and also offer the analytics services, which TekLink specializes in, to our existing HGS customers. Again, we think those synergies would start coming in fairly quickly once the transaction is complete, and we expect both 90-odd days for the integration to get completed. In terms of valuation, as we said, of course, this is negotiated. And as you correctly said, it comes close to 2x revenue. And looking at the nature of business side, we believe this is a fair valuation. And as we've also mentioned, there will be additional earn-outs, but that is based on the future financial performance.

Noted, sir. Just one follow-on question, sir. There is a separate cost, which is mentioned around INR 2.6 crore for the business [ transaction ]. So is it part of this $58.5 million?

Yes, yes, it is part of the $58.8 million.

The next question is from the line of Jyoti Singh from Arihant Capital Markets.

Sir, my question is on the acquisition side. What your expectation on the margin front? How we are -- what's your view on the margin trend going forward? And how we are seeing -- how much this company will be a benefit for the Hinduja Global as we were doing pretty decent on the health care business side, which we already sold?

Pala, do you want to take this or shall I...

No. Go ahead. I mean, we already said this company will have EBITDA margin in mid- to high teens. I mean -- so that's what we expect going forward. Obviously, we'll try to improve to cost and revenue synergies. But this margins, we believe will be sustainable as we go forward. Nat, please see...

Yes. This is comparable to our existing EBITDA margins on the technology side of HGS. Partha mentioned, with this 20% of our overall revenues will be from technology business. The existing as well TekLink business are in the mid- to high teens in terms of EBITDA. So it is very comparable. It is not out of the [ WACC ].

Okay. And sir, what are the geography front -- I mean which geography we are targeting through TekLink?

TekLink is primarily a U.S.-focused company. They do have some European clients, particularly U.K., Spain and Switzerland. And the India business is all global clients. They are not really India our focused. So I would say 90% plus are U.S. clients.

Okay. So sir, as we have a major revenue from the U.S. across 91%. So is there, due to current scenario, they are facing any downside about the macroeconomic situation?

Interestingly, the analytics side of business, analytics part of the industry -- IT industry seems to have done very well. The demand continues to be very strong in this space. TekLink's existing customer spend of existing clients fees have gone up in the last 9 months. And they have also managed to acquire 10 plus new clients in the past 9 months. That indicates a robust demand scenario. And even in our existing digital business, wherever we go around, we are not seeing any kind of slowdown, particularly on some of these offerings. So I would say these are segments where the demand has managed to kind of counter the recession.

[Operator Instructions] The next question is from the line of [ Heena Parekh ] from [indiscernible] securities.

So since TekLink services are [indiscernible], which industry contributes the most at top line?

Pala, let me take this one. FMCG is the most dominant industry segment that includes all the consumer companies, food companies, confectionery companies, plus also retail and pharma. That is outside FMCG. These three, I would say, are the top industry segments.

Okay. And is it possible to share segmental breakup of each industry for TekLink?

We will come back and do it formally.

The next question is from the line of Nayan Gala from Etica Wealth.

Yes. So I was just going through the release, which was uploaded on the stock exchange. And it says that we are planning to -- we have signed one more letter of intent to acquire [ Uknowva ]. So if you can just help us understand the definitive time frame to sign an agreement with that?

Let me take this. We said we would like this session to be focused primarily on TekLink because the other one is at very early stages, so it's hard to -- right now it is difficult to specify time line. I request the question should be limited to TekLink.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Partha DeSarkar for closing comments.

Thank you, ladies and gentlemen for being with us for this call to explain what is the plan going forward with TekLink. I can assure you there are many that we are lining up as we speak. And we'll have many more opportunities to interact as we build our technology capabilities for HGS 2.0. Thank you very much.

Thank you.

Thank you, everyone.

Thank you.

Thank you, sir. Ladies and gentlemen, on behalf of Hinduja Global Solutions Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.