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

Good evening, ladies and gentlemen. A very warm welcome to the Q4 and Full Year FY '24 Earnings Conference Call of Hinduja Global Solutions Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Snighter from Adfactors. Thank you, and over to you, sir.

Thank you, sir. Very good evening, everyone, and welcome to the earnings call of Hinduja Global Solutions Limited for Q4 and financial year 2024. From the senior management, we have with us today, Mr. Partha DeSarkar, Whole-time Director and Group CEO; Mr. Vynsley Fernandes, Whole-time Director, HGS and Head of Digital Media business; Mr. Srinivas Palakodeti Global CFO; and Mr. Lakshminarayanan, C S, Chief of Staff, NXTDIGITAL; and CFO, ONEOTT iNTERTAINMENT Limited. As a reminder, before we begin the earnings call, I would like to mention that some of the statements made during today's call might be forward-looking in nature and hence, it may involve risks and uncertainties, including those related to the future financials and operating performance. Please bear with us if there is a call drop during the course of the call, we will ensure that the call is reconnected at the earliest. I would now like to hand over the call to Partha sir for his opening remarks. Thank you, and over to you, sir.

Thank you, and a very good afternoon to all of you. Before I get into the details of the call, I wanted to make sure that the audio is clear. Can anyone confirm on the call if the audio is clear?

Partha, Vynsley here. You're loud and clear.

Perfect. Thank you, Vyns. So once again, good afternoon to all of you, and I am on the investor presentation deck, Slide 4, that has been speculated and is also available on the website. So happy to announce that we have moved into South Africa, Rainbow Nation as it is called. We have just incorporated a new subsidiary called Team HGS in South Africa as of March 2024. We expect to start operations in either Q2 or Q3 of this year with a center in Cape Town. And we're expecting to be able to support clients primarily from U.S., North America and Australia from Cape Town. South Africa is quite a mature destination so far as international outsourcing is concerned. It's the preferred delivery definition for U.K., North America and Australia based. It's got a good reputation of a very well-educated workforce and Cape Town itself has about 80,000 full-time employees to support international clients and create about 10,000 new jobs every year. Very happy to finally make our footprint in South Africa. It has been something that we have been considering for a while, and we should be able to start off within this calendar year. I'll move to Slide 5 now, and I'm also very happy to announce that we started our cybersecurity practice. It is something that we announced about a month back. It is the most comprehensive cybersecurity solution for the market. As all of you know, with artificial intelligence making kind of a big flash with businesses worldwide, concerns about security and protection of data, privacy and other matters is becoming of paramount importance. So our cybersecurity solutions, secure artificial intelligence workforce, security testing, digital forensics, vCISO and staffing, vCISO means a virtual CISO and staffing, we can also provide that, SecOps automation and SOC-as-a-service. Security operating center is acronym for SOC. There is a large market for these services across industry verticals. And we believe that it's going to be a very attractive target market for all of us. And this obviously leverages cutting-edge technologies to secure many AI and ML applications that are rapidly gaining ground in this year. A quick recap of a fairly busy year that has happened in HGS. From shareholders perspective, we completed our first ever buyback, 60 lakh equity shares were bought back at a price of INR 1,700 per share, and we returned about INR 1,020 crores to the shareholders. I'm also very pleased that we were able to announce a dividend of INR 7 per share, which turns out to be at 25% of our consolidated profit after tax. You also know that last November, we had launched our center in Barranquilla, Colombia, to provide support for English, Spanish, Portuguese to North American clients. I'm happy to announce that, that particular center is almost full, and we have about 200 people who are working for us there. Artificial intelligence and generative AI, we are setting up labs in Bengaluru and in the U.S. for multiple CX-driven use cases. We also have developed our own proprietary platform, Agent X. And I'm happy to report that, that has now been deployed across 16 plus clients. You also know that in the Americas and in U.K., almost 95% people work from home as a result of which through the last 2 years, we have been trying to consolidate our brick-and-mortar footprint to a bare minimum that is required to support a hybrid workforce. We have continued in that and we've been able to shut down 4 centers that we have during this whole year. I'm also very happy to report that NXTDIGITAL launched CelerityX, a comprehensive suite of enterprise WAN solutions for Indian enterprises, very excited about that. And Vyns, my colleague, will cover that in great detail and the subsidiary OIL has completed a majority acquisition, 51% of a leading Mumbai-based ISP, Seven Star's [Audio Gap] On Slide 7, our other income has increased by 62% almost. And profit before tax has also moved in positive territory. Very, very sharp improvement in profit before tax, as you can see from the figures in Slide 7. Coming to Slide 8. A comparison of FY '23 with '24, again, very good improvement in operating revenue and even better in operating EBITDA with operating EBITDA improving by 45.8%. Other income has, however, come down slightly to the extent of 6% and our CFO, Palakodeti, will cover that in great detail. There's nothing -- no reason to be concerned about that. Coming to Slide 9. As you know, acquisitions have been a significant part of our growth story historically. We just completed an anniversary of acquiring TekLink which we acquired in Feb 2023. I'm happy to report that TekLink has done very well. Its revenue for FY '24 was $36.6 million. Its EBITDA was 23.9% for the fiscal, and we are making good progress on cross-sell opportunities and have signed several engagements with existing HGS clients. Similarly, we are also able to sell HGS services into TekLink clients. The other acquisition that we did in Australia in February 2022 -- March 2022 has also done well in FY '24. The revenue grew by 26.3% on a year-on-year basis, but more spectacular was the improvement in EBITDA that grew by about 35.4% for this year. Moving to Slide 10. At a very high level, we are transforming our CX operations using applied analytics and AI. And we are customizing our horizontal suffering -- solutions for fast-growing vertical. We are in the process of shortlisting a few verticals that we are going to strengthen and focus. AI-led process management solutions, deploying many Agent X licenses and gen AI platforms to improve the customer journey. We have spent a significant amount in building up and scaling our sales teams across North America, U.K. and Australia in the hope of capturing a fast-growing market that all of us are excited with the advent of AI. Our pipeline looks good. We had a slightly slow year last year, 2.5% revenue growth is not spectacular, but we hope with a scaled up sales engine across the 2 major geographies, our growth in the coming year will be much better than it was last year. With that, I'm going to put myself on mute and hand it over to my colleague, Vynsley Fernandes. Vyns, over to you.

Thank you. Thank you, Partha, and good afternoon to everyone. And I hope everyone can hear me loud and clear, and [ Shilpa or Tanuja ], if you can confirm that my voice is okay.

Yes, it is.

Yes. It is okay.

Thank you. Thanks, Partha. So I'm going to go straight into Slide 12. But before I actually talk about it, I think if you recall, if I'm not mistaken, probably the last fiscal '23 call that we had, we spoke about how we were going to leverage as part of HGS, the incredible pan-India network that we've built and the infrastructure that we've built for the way forward, which is driving retail broadband, enterprise-class solutions and, of course, commercial broadband as well, that being the future growth of this country and being part of the digital inclusion that the government has been pushing so hard. And we're very delighted that CelerityX, Slide 12 that you look at, which we launched just a year ago, well, actually less than a year ago, set up specifically with very unique and innovative products ranging from SD-WAN and security to broadband over satellite and network-as-a-service solutions has been able to make significant inroads. The solution is one of the first products that -- actually one of the first early products that we developed along in synergy with HGS' tech team and NXTDIGITAL. And this solution called OneX that we've launched recently has already seen some major, major traction. It's a very interesting product, just to give you a very quick background. The challenge for smaller banks or credit -- I'm sure you know India has a very strong network of cooperative credit societies, the moment you step out of the cities, cooperative credit societies is the mainstay, the main backbone for financial transactions. And often they face challenges of data security, challenges from threats from networks, et cetera. And this product, OneX that has been launched, is a unified network-as-a-service solution that will benefit even the smallest of credit societies because this essential service to prevent cyberattacks in the network infrastructure or anything is now available to them at a democratized price. So we're actually looking at extending this to as many credit cooperative societies in the country, and we're very delighted that a few months ago, we entered into a strategic partnership with Maharashtra State Cooperative Credit Society or MAFCOCS. This partnership allows us basically to offer our services to over 40,000 branches of MAFCOCS' credit -- cooperative credit societies in the state and with the potential to, of course, expand to about 100,000 branches nationwide. So we've already received -- very proudly, we've received our first order from Samata Sahakari Patsanstha for its branches across Maharashtra. We are in the process of implementing that project and we believe that, that will set the tone for credit cooperative societies nationally to be able to put in the best-of-class technology without having to spend -- without having to go burn their pockets to a great extent. So this is a fantastic product. And if you look at Slide 13, it's been -- it's got a lot of traction in the media as well because clearly, you can see that the input or the objective of this product is -- will be a game changer going forward for cooperative credit society. That is something we're very proud about on Slide 13. If I go to Slide 14, and Partha, my colleague mentioned it, this I come back to retail and commercial broadband. This has been the driver for us in this fiscal. In fact, we have continued to push broadband as being the mainstay because the -- while India may have close to 200 million homes, barely about 35 million or 38 million actually have a wired broadband -- wired, I refer to specifically, broadband connection. And the kind of potential to grow, improve ARPUs is very significant. And even a company as large as Hinduja Global Solutions needs to have strong partnerships to be able to penetrate such a huge expanse of market that's available. So one of the steps we took was completing a majority acquisition of leading Mumbai-based ISP Seven Star's broadband business, and they're basically very strong in western suburbs of Mumbai and the rest of Maharashtra. And we've already acquired a majority stake, and we're already growing the business. It's not just focused on increasing broadband penetration but also the idea is to offer customers a much wider portfolio. We're currently -- even as we speak today, we're testing our IPTV solutions, which gives you a digital television or a cable television-like experience using Internet protocols. Of course, as you know, OTT is already available from us. We have an aggregator product called NXTPLAY, and we've extended this relationship also to Triple Play, a very strong player in the National Capital Region across Delhi and the entire NCR. And more importantly, I think what attracted us was the strength of Triple Play in the commercial hub of Gurugram. You have so many companies there, they all are looking forward to quality of service, and we're working very closely with Triple Play to elevate the quality of service that we provide. This will -- this relationship is a strategic alliance, and we are looking to engage in further strategic alliances across the country to be able to offer customers not just the quality of service, but also a wider portfolio of services. Again, like we've delivered in the case of CelerityX, if you look at Slide 15, very, very well received by the media in terms of coverage all across the country. And that shows that we are on the right track of all the foundation that we laid in FY '23 and earlier has started to pay handsome dividends in '24. And if you go to Slide 16, as they say, the evidence of all the efforts should be in the results. And I think the results are very, very obvious for everyone to look at. We've looked at our broadband subscriber base and I'm talking about the retail base growing from about 1 million -- around just below 1 million customers last year, rounded off, to about 1.22 million, which is about a humongous 23.8% growth in a year. And we've been able to control broadband churn very, very well marked approach in terms of growing and all that is a result of quality of service. Similarly, our digital television subscriber base, a lot of -- a couple of questions have come up in the past about the future of digital television. There is still significant headroom in Tier 3 and rural markets where penetration is still highly limited of digital television. And NXTDIGITAL has the unique advantage of having the only Headend-In-The-Sky platform where we can deliver digital solutions through satellite. So effectively overnight, anyone in the most remote area of India could install this service and pretty much go live. And we've seen traction on that as well with the base growing by about just over 8% year-on-year to about 4.43 million. But I think what's really notable about this is the second piece which is the churn, the industry level, we know is significant double digits annually as -- in the low 20s or mid-20s annually. And we've been able to buck the trend and literally halve that. So overall, if I had to step back a bit and say the objectives that we set out for FY '24, where we own course? Yes, we were. We looked at 3 clear aspects. We looked at CelerityX being our future driver for high-value customers, high-value, low-volume enterprise customers. That has taken off brilliantly, and launching OneX and signing up with MAFCOCS, it's achieved its objectives. Retail broadband has seen significant traction, which is our volume driver of being able to grow the retail broadband across the country, and the third vertical, which is digital television, has continued to make inroads into markets which are still underserved to a great extent, Tier 3 and rural markets. So overall, like I said, we've focused hard and we've been able to achieve that, and we hope to continue on this trend going forward. And thank you very much for joining us today on this call. I truly appreciate that. With that, I'm going to hand over to my colleague, Pala, who is the Global CFO for the business. Pala, over to you. Thank you.

Thank you, Vyns. And good afternoon to everyone. Thank you for joining this call, and welcome once again. I'm on Slide 18. These are the results for the quarter ended March '24. As you would see on a year-on-year basis, our revenues are up about 2.7% between quarter ending March '24 and March '23. Our other income is also up by about 62% on a year-on-year basis. But while the growth in revenue at overall level may look soft, I think the focus I would like to draw your attention to the operating EBITDA numbers, which is excluding the other income, there has been a substantial growth. EBITDA at INR 66.2 crores, is about 82.5% higher than the quarter ended March '23. And this has clearly led to significant improvement in the EBITDA margins. Operating EBITDA margins are up from about 3.4% to 6%. So clearly, as both Partha and Vyns mentioned, there is a lot of focus on the -- improving the margins of the business, but the revenue growth may be slightly on the lower side. Moving on to Slide 19. This is the full year performance. Again, revenue from operations have grown 2.5%. A couple of drivers. We have taken a conscious decision to reduce the onshore revenues in markets where the profitability is less. And we are encouraging our clients to move from onshore to offshore to delivery locations like India and Philippines. So clearly, while the profitability improves, as these clients move work from onshore to offshore, there is clearly a reduction in the billing rates and the margins also and hence, the revenue growth will look muted. But if you focus the operating EBITDA line in the bottom of the table, it's a very good story. Revenues -- operating EBITDA has improved close to 46% and at an overall level, our EBITDA margins have expanded again significantly from 5.4% to 7.7%. As Partha mentioned, there is a reduction in other income between March years FY '23 and FY '24. Two, 3 drivers: one, because of the exchange rate variation, we had FX gains of about INR 57 crores in FY '23, that has come down to about INR 20 crores in FY '24. Also in FY '23, Partha mentioned, had mentioned that we had done some rationalization of the real estate. We also sold off a couple of properties outside India. And clearly, there were capital gains from that, which all sits under other income. So these are the 2 broad drivers for the drop in other income, lower FX gains and lesser amounts from sale of property, leading to the drop of roughly about INR 30 crores. This has resulted in a slightly lower PBT. If you see, the PBT drop is coming largely from the drop in other income because EBITDA has clearly increased substantially. Last year, we did have some benefits from profits from the discontinued operations or sale of the health care business. And so total PAT for the period last year was INR 334 crores, and also the tax reversals line were much higher. At a PAT level, that has come down from INR 334 crores to -- in FY '24, INR 131 crores. But clearly, we are very happy with the overall results, given there is a strong improvement in the operating EBITDA, which sets us in a good position to grow in next year. Moving on to Slide 20. This is the balance sheet, a couple of call-outs. You would see on the share capital, there is a reduction from INR 52.5 crores to INR 46.5 crores. That's clearly because of the buyback of 60 lakh shares. Partha had mentioned this, which was completed in June of 2023. The DSO days remained strong and unchanged at 59 days which is par for the business which we are. Nothing major to call out from a cash flow perspective. Just to highlight, INR 1,254 crores was the outgo on account of the buyback and the taxes of the buyback, which was incurred by the company. Moving on to Slide 22. We have a strong balance sheet. Our net worth is about INR 7,643 crores. Gross debt is about INR 1,305 crores, giving us -- and we have a net cash and treasury surplus of about INR 5,000 crores, given the low debt and the large equity base. So from a gearing ratio, leverage ratio point of view, we are in a very strong position. And we have totally about INR 6,400 crores of surplus cash in the form of investments, loans, bank balances. After adjusting for borrowings of about INR 1,305 crores and things like unpaid dividend, we have a next surplus of about INR 5,012 crores, which is available for funding future growth. Moving on to Slide 23. This is how our revenues are generated. We have about 50% coming in from the BPM business and 37% coming from Digital Services, which includes the Digital Media Business. Moving on to Slide 24. On a full year basis, our BPM accounts for 55%, the Digital Services, including the Digital Media, accounts for about 36% and 9% comes from other income. Moving on to Slide 25. On the operating revenue side, if you look at the table on the -- chart on the left, in terms of delivery location, India is obviously the highest, 42%. This includes the Digital Media Business as well as what we do work in India for servicing our clients from U.S. and U.K. U.S.A. accounts for about 20%. This is the part which has come down significantly as we are shrinking the U.S. onshore business. And Canada and U.K. are the next biggest geographies, accounting for about 14% and 9%. If you look at the table on the right-hand side, that is the revenue by origination. The India business is 34%, which is primarily the digital media business and our HRO business, then U.S. is the second largest at 33%, both onshore and offshore comes as part of 33%, followed by U.K. and Canada at 13% and 14%. And as Partha mentioned, our Diversify acquisition is doing well, growing rapidly, and that -- hence it accounts over 5% of our revenues for the quarter. Moving on to Slide 26, a similar view. This is for a full year basis. I think there has not been much change, I won't spend too much of time on Slide 27. If I go to Slide 28, this is our revenue by vertical. Clearly, media accounts for the largest share at 32%. This consists of the Media business in India as well as clients in U.S.A. and Canada from the Media business, followed by Consumer & Retail at 20%. And then we have BFS at 14% and Technology at about 13%. The Public Sector is 9%, primarily from clients we have in U.S.A. and Canada -- and one Canadian client. Moving on to Slide 29. This is the client concentration. We are in a comfortable place there. Our top customer accounting for 9% and if you take the top 5 or the top 10, including the top 6 will -- top 5 will account for about 26% and top 10 accounts for about 36%. So we have a fair amount of wide diversity in terms of clients to account for the remaining 64%. In terms of DSO days, no change. It has remained at 59. So we are good from a revenue generation as well as from a collection point of view. And the DSO days are for the overall company, including the BPM and Media business. That's all I had in terms of presentation. So now we would like to open the floor for questions and also like to use this opportunity to hand it back to the moderator.

[Operator Instructions] First question is from the line of [ Narendra Gandhi ], an individual investor.

So could you give some qualitative view how we should see growth and margin for broadband and digital TV business?

Right. So Narendra, thank you very much. This is Vynsley. I'm assuming Narendra, you can hear me, right?

Yes, sir.

Okay. So Narendra, the broadband business, the challenge in giving you a qualitative aspect as such, because there is such a wide range between a 10 mbps pricing and a 1 gig pricing. But I'll try to kind of sum it for you when you look at an average revenue per user, et cetera, right? ARPUs in the key cities, strangely enough, are actually plateauing out whereas ARPUs in Tier 2, Tier 3 and Tier 4 markets are actually growing because of the lack of a qualitative service in those markets. So people are willing to pay more for a better quality of service available to them there. Therefore, you will end up as high as about 35% in terms of your -- effectively your margins in markets like those, whereas in the city markets, you'll probably go down to anywhere between 16% to about 25% to 28%. I'm giving you the industry kind of approach. From our perspective, we've always promoted a mix, and that's why I mentioned to you that -- how do we challenge it out. We propose the mix that we're working on. So in the cities, we try not to sell broadband on its own as an individual product. We bundle it along with an OTT aggregator service, or we bundle it along with our digital television platform, which is already available. From a growth perspective and the kind of horizon that we're talking about, like I said, we've seen a 23% growth already year-on-year. Would we continue with that aggressive growth? I'll actually give you a slightly different answer. What we'd like to do is every time we grow, there is a following of harvester mechanism. So there is a hunter mechanism, which is now being put in play, which is to grow the business by 23%. Then there is a harvester mechanism, which focuses on improving the value derived to that -- delivered to that customer and therefore, getting a greater share of revenue, pushing ARPUs up by offering IPTV, pushing ARPUs up by offering OTT and other bespoke services. I hope I was able to kind of give you a sense of that.

Also I wanted to ask that going ahead, is it that broadband would entirely compensate for degrowth in Digital TV business? Or you still feel that good amount of growth left ahead for the segment?

So, Narendra, I believe and not just believe, belief is one thing, as they say, results are another thing. If you go -- if you look at the deck that I presented and go to Slide 16, our DTV base has been increasing, and that's a unique reason for that. The degrowth that you are talking about often happens in the cities where people, at some level, at the top level kind of move to OTT and don't necessarily renew for the second television and third television at home. So they've got 3 TVs, they'll switch to OTT and they'll retain only one TV on a DTV, digital television service. For us, because we're unique and we have the Headend-In-The-Sky platform, and we're the only company in the country today to have the Headend-In-The-Sky platform, we're catering -- our growth is being seen from markets which are Tier 3 all the way down to rural. So growth for us, we've seen in distant markets in Eastern parts of Uttar Pradesh; and certain challenged -- as in underserved areas of Andhra and Telangana; Maharashtra, certain regional pockets. So growth will continue to happen. Will it be the heavy rapid growth that you saw in the years earlier? No, definitely not. But I think from our perspective, when you look at the industry and the industry is actually showing some level of degrowth and we are actually showing growth, it now reflects clearly on the delivery mechanism because it's easier to go via satellite to a customer in a remote location than to go on a wired basis to customers. So digital television will continue to grow. Having said that, we are not -- we are very clear that all the verticals have to grow in parallel. But in terms of focus, our focus for the next few years or the next several years is how to accelerate our broadband subscriber base because we believe that's where the value creation is significantly while digital television continues to provide that really strong rock solid foundation of being present in multiple pin codes, 4,500 pin codes in the country. Narendra, I hope that is...

Yes, yes.

[Operator Instructions] Next question is from the line of [ Vivek Jhala ] from Jhala Family Office.

I've just got 3 quick questions. The first one is if you could speak about your Headend-In-The-Sky technology. Basically, what are its key USP compared to DTH and so on?

Right. Are you going to list out all 3 questions at a -- or should -- would you just like me to answer each one, Vivek?

However you are comfortable?

Okay. I'll tell you about HITS. So HITS is a very unique technology. And Comcast is a great example of it in the U.S. See, India, why is HITS very relevant for a country like India, there are 3 or 4 reasons. What HITS does is it delivers a signal -- like your DTH, it delivers a signal via satellite. So wherever you're in the country, wherever you're in the political -- in the geography of India, you can receive this service, the signal from the satellite over India. But what makes it unique is this service is in C-band as against KU-band, which DTH is and which therefore does not get affected by or does not suffer significantly from rain attenuation. C-band is a particular kind of band which doesn't get affected. That's the second thing. Third, why does it make it unique is that our entire focus is rather than increasing the cost to consumers, we work more on a DTN model, which is direct to network where all someone has to do, let's say, in a hamlet of, or a village of 500 homes is the local cable operator who invest in the technology, which is nothing but the size of a refrigerator and he puts dishes that receive the signal and he redistribute them to his entire village or entire town or mini township. So it's very unique in its aspect that it doesn't require -- I do not need to connect my Mumbai digital headend or my Delhi headend to these locations physically by fiber, right? And therefore, be subject to the Vagaries of whether fibers getting cut on highways where there's so much, don't forget, in India, we've significantly invested in infrastructure work. So you have highways being built, you have bridges, tunnels. So there's a lot of vagaries, a lot of impact or challenges to terrestrial fiber, I'm talking about intercity. So delivering signals via satellite are definitely a huge advantage, and that is one of the reasons -- that is the key reason, Vivek, why we've seen traction on the digital television subscriber base.

Second question is, what would be your strategy ahead with regards to the net cash and treasury surplus that you have?

Okay. I think that's for Pala. Pala, would you like to take that?

Thanks, Vivek, for the question. Clearly, we do have a net cash company. And as you would have seen, we have done acquisitions. So we've acquired since the sale of the health care business, we acquired Diversify, a company in Australia. We've acquired the TekLink business. We've also made investments in Seven Star, so -- and we are also using this for organic growth. We have started operations in Colombia, and as we mentioned at the beginning of the call, we are soon going to start operations in South Africa. So it's going to be used as a combination for organic growth as well as for acquisitions which will be strategic in nature and adding to our overall capabilities and offerings.

And just the last one. Has our business mix changed substantially over the last few years from traditional CX to more digital and digital operations? And if you could just shed some light briefly on each of these segment mix?