Kellton Tech Solutions Limited (519602) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Kellton Tech Solution Limited's Q3 FY '20 Earnings Conference Call. [Operator Instructions] I would like to thank you all for participating in the company's earnings call for the third quarter of the financial year 2020. Before we begin, I would like to mention a short cautionary statement. Some of the statements made in today's con call may be forward-looking in nature, and such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made from the information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and the financial quarter under review. Now I would like to introduce you to the management participating with us in today's earnings call. We have with us Mr. Niranjan Chintam, Chairman and Whole-time Director; and Mr. Karanjit Singh, Chief Executive Officer, India. I request Mr. Niranjan Chintam to give his opening remarks. Thank you, and over to you, sir.

Thank you, Ayesha. Good evening, everybody. Thank you for joining our earnings call for Q3 FY '20. So I want to start off with the highlights -- broad highlights and then I'll open it up for discussion, questions and other things that you might have questions about. So with the 9 months quarter ending December 31, 2019, the total revenue is about INR 567 crores and the EPS came down to INR 5.86 per share. The company has an EBITDA of about INR 90 crores for the 9 months, and the EBITDA margin is around 16%. The net profits are about INR 56 crores for the 9-month ended. I wanted to please note that the numbers are not comparable to last year. The reason why I say that is we sold out SupremeSoft Global with a revenue of about $12 million. So every quarter, there's a $3 million deficit that we have to either make up or there'll be a difference every quarter, if it is being comparable for that reason. So we're looking at probably around INR 22 crores to INR 23 crores is what the difference for quarter would be because of the sale of SupremeSoft Global. So I just wanted to give you that note, so that they are not comparable. Now coming to the quarter ending December 31, 2019, the total revenue were about INR 192 crores compared to last quarter of about INR 187 crores, so a slight increase of about close to 3% quarter-on-quarter. EBITDA margin in this quarter is about 15.7%. The net profit is INR 19.3 crores compared to last quarter of INR 18.7 crores, again, quarter-on-quarter growth of about 3.2%. The diluted EPS for this quarter is at INR 2 per share compared to last quarter of INR 1.94 per share. So again, this is an increase of about 3.1% quarter-on-quarter basis. A little bit of highlights for this quarter. We have won 30 new customers or clients for this quarter, and we have won integration partner award with Software AG in London, and also a silver sponsor for Digital Transformation Conference 2019 held in Boston. So these are the broad highlights. I would be happy to take questions from the participants who have any questions, please ask the question. I'd be happy to answer.

[Operator Instructions] The first question is from the line of [ Agastya Dave ] from CAO Capital.

So sir, can you elaborate the sale that you have done of one of your companies? When exactly was it done? What was the consideration? And what exactly were the capabilities? I mean are there any capabilities that we have sold? Or is it just a business? And adjusted for that, what is the like-for-like growth? Second question is on the debt numbers. What are the current long-term and short-term debt? And the third question is on growth. So I believe this is the second company we have sold. And again, if this is the reason why the growth numbers are not very apparent? When will we stabilize and when will we have proper comparable numbers? And what's the outlook for growth going forward?

Okay. First of all -- first, I'll start off with when was this sold? It was sold around March of last year. So we're looking at 2019 March is when it was sold. But it was effective from January 1. So that means that we did not have revenue for the first -- I guess last quarter of last year. So it's beginning last quarter of last year and going forward. So now it's 4 quarters is what we don't have revenue from SupremeSoft Global. Now answering the last question, I'm sorry. Agastya, do you have a question on that?

No, no, no. I just wanted to figure out when was the effective overlap. So I believe now the overlap will be in Q4. So Q4 onwards, it will be like-for-like?

So yes, from Q4 onwards, you will see like-for-like, yes. Okay? So yes, you're right. This is the second company we sold. I think we talked about this quite a few times, Agastya, on these calls as well as in one-on-ones. That these kinds of sale amounts, we cannot disclose what is the amount received. But I would say this way that the amounts whatever we bought, we got a little bit more than what we've bought it for. But the reason, you asked the reason why we sold them off. The reason why we sold them off, again, I explained this a few times, all the low-margin businesses that we have, which is in the low single digits, right? So it's what we are bundling together and selling it out because the cost of maintaining them is high, and we wanted to ensure that we are working, while we want those customers and we continue to keep those customers. We do want to hide off this low-margin business, so that we can focus on a little bit high -- higher-margin business. So that's the reason why we sold the company. Now coming to the growth point of view, right? You should see growth coming in because like I said Q4 of last year and Q4 of this year would be like-for-like comparison you'll start seeing the growth. But with that said, we've been doing -- we're getting a lot of traction in India and we are going to see growth going forward. But at the same time, right, you asked about cash flow as well as the debt. The debt has been kind of constant since the last year -- last quarter and this quarter. While we did pay down some debts, but we also borrowed additional money. We have been growing. And I think we talked about it in last quarter also Agastya, where we said the banks have not been as helpful as what they used to be a year back. So we are having to put a lot of cash margins in this; in some cases, 100% cash margin for BGs that we are -- have to give out for the FCI contract that we won that we announced last quarter. So we have begun that project or projects. We already have some revenue that we booked this quarter from that project, but that is taking up a lot of the cash that we have. So we did have to borrow some to fund that that's why the debt, while -- I think we talked about last time also a little over $1 million is what we paid on every quarter for the term loans that we have, but at the same time, we'll have to borrow for the growth that we have.

Right. And would it be a decent assumption, if I assume that receivables are more or less constant? INR 184 crores was the number last quarter. Do you have a number for this quarter?

You're talking about the Q4? They will be around the same. But -- and I would say that India revenue probably would be higher than this quarter because the FCI is bunched up to the front, probably first 9 months is when the revenue is bunched up. So you'd be seeing a jump in the Q4 of India revenue. The U.S. revenue, you know the challenges that are going on there in U.S. We have -- we are having difficulty hiring there because the unemployment rate is so low that we're finding it difficult. At the same time, the costs have gone up too because people are in demand. People are getting, I guess, a drop at such a quick rate that we are having to increase some of our, I guess, benefits that we're giving from commissions to bonuses and all the stuff. So the costs have gone up there.

And sir, any breakthroughs in Europe?

Yes, I'll let Karanjit answer that. Karanjit? Can you answer that, Karanjit?

Yes. So basically -- yes, so the year before we were -- actually, we had acquired our first few set of customers. And this year, which is 2019, right? There is a -- last year, we kind of -- we're able to grow a few of these accounts to about 2 million, 3 million now. And we are now looking to the next set of push there, of course GDPR and all that, with that outbound -- outreach to customers in sales has become a little difficult, but we have created a robust pipeline in the last review and we are hoping that we will add the next few customers for growth this year.

[Operator Instructions] The next question is from the line of [ Saurabh Soni ], Retail Investor.

Yes. Sir, are we facing any challenges recently in paying employees salary in the last couple of months?

What?

In payment of employees salary?

No we're not having any challenges paying employment salaries. There were probably a slight delay for the last month or so but there's not -- there is no challenge as such. Cash flow has been tight, like I was saying it earlier because we are ramping up our hiring as well as the receivables from these customers. It's fair that there's no challenge as such. Slight delays. Typically, we pay around the 5th, probably it's stretched by a few days. That's all it is.

And what was the reason? I mean why it is -- slight delay is happening?

So it's cash flow challenges, right? Because of the tightness and the banks are -- like I said, banks have become a challenge for us. We are expanding. We have a lot of contracts, where we have to hire people to fulfill those contracts. That's the reason why.

Of course there is a lot of reviews coming up in Glassdoor by the -- so many employees actually. And basically, everybody is mentioning that there is a issue with the full and final settlement and delays in salaries. Regular -- I mean regular comments are coming there. So what is management planning to do about that actually because it will impact the credibility of the company.

We understand that. I think we are working. Our plan is by March end is when we're going to be able to catch up with all these things. So that is the internal management, and based on the cash flows that are coming in as well as the bank limits that we're working with by end of March, we should be caught up with all of those.

And -- but -- just last follow-up. Why there is a cash flow issue? Because we are showing a lot of cash flow, cash flow from operations on year-on-year basis. So it's a little bit hard to -- I mean why there is a issue in particular business?

Yes. Let's get into the details of that, Saurabh. It's a good question that you asked, okay? Just to give you a perspective, right? Just this year, right, there was about close to INR 15 crores of liability that was paid off, okay? There are earnout obligations that we are paying off. There are interest -- quarterly payments that I was telling about that we had to pay off. I'm talking about not interest. I'm talking about our term loans that we are paying off. So every quarter, we have a close to a little over $1 million that we pay down, okay? So all of this -- and mind you, so far, Saurabh, we have not taken a single penny from the market, in the sense that I have not raised any money from the market. Because there's always -- and the banks, like I was just telling you, just for the FCI, I have to put in 100% cash to give a BG. So those are the challenges why we're having this cash flow. And I've always been upfront and honest, saying cash flow challenges are there with the company. We are -- whatever money we are making, we are spending it out.

Yes, but I think we should maybe rather than focusing on a more growth, we should try to have some sustainability in the current processes, right? Because if the current employees will face any kind of these issues, then growth doesn't matter in that case, so I would...

Understood, Saurabh. We are not looking for growth. That is why you see that it's almost like flat. But with that said, we will get some wins. We will have to fulfill. If we does not, I can sit quite idle, right? I have to work on my future. I have to work on trying to keep our employees as well as the customer engaged. So I'll have to continue to do my sales efforts, my marketing effort, just to keep us relevant. If we don't, then we are in trouble that way too.

Sir, the line for the current participant dropped. We'll move to the next question. The next question is from the line of [ Nikhil Shankar ], Individual Investor.

Hello?

Yes, go ahead.

My first question is regarding trade receivables. So could you just give us some color on that? And also on DSO?

Okay. So we are doing -- it's 88 days is what we're doing when it comes to the trade receivables. But at the same time, right, this is the global one. In India, since we are doing some government contracts, this is a little bit more in India than the global 88 days.

Okay. And the amount? If I could get some color on the amount?

Okay. One second, Nikhil. I'll pull it up. If you want to go to the next question, I just need to pull it up.

Okay. My second question is on cost of material consumed, compared to last year, so the last year amount was north of INR 20 crores. And this year, you're showing it as INR 73 lakhs only. So what changed?

So last year, we did a contract with EdCIL. So this is the government of Mauritius, we did a contract there, where the hardware component was higher. So we don't have that, I guess, renewed contract on that. So that's the reason why we don't have, I guess, not much when it comes to hardware. So when we provide solutions, we provide a bundled solution using hardware. So the FCI order, yes, there will be some -- in this quarters some and next quarter some, there'll be some hardware sales that will happen, but not as much as what we had for government of Mauritius. Okay. To the question that you asked earlier, trade receivables, we are around INR 180 crores is what we are.

Okay. INR 180 crores. So that includes India as well as global?

That's correct, yes. Everything together. And that is consistent in last quarter also where we were, I think, a little bit higher last quarter, but now we are at INR 180 crores.

Okay. Just a follow-up question on your Mauritius contract. So the contract was for 2 years?

2 years, yes. Yes, that was ended, yes. That -- when I say ended, we are still in that maintenance phase of 2 more years, but we have successfully deployed both Phase 1 and Phase 2, and now we are in a maintenance mode for 2 more years for each of the contracts. The first contract, we should be finishing off next January, that is 2021 January. The second Phase 1 will be ending in 2022, January.

Okay. Just the last question. About the growth, I mean could you give us any picture on what do you think in next, say, financial year 2021, the revenues will be? Or the growth that you are expecting?

At this time, I'm more of a -- on a consolidation phase, whatever wins that we have is what we are working with. We are not looking to grow aggressively. We want to first get a little bit of this cash constraint under control. So we should be -- our goal is that by 2021, which is something that we have been announcing it from a long time, we should be in cash-rich position until 2021, I guess, and when I say that 2021, March to June time frame is when we'll be getting out of this cash crunch mode and we'll be -- like the earlier question that was asked, we would be having enough money in the bank to cover a few months of salaries.

[Operator Instructions] The next question is from the line of [ Agastya Dave ] from CAO Capital.

A part of the question was actually asked by the other participant. Sir, this 2021 that you are saying for the cash crunch to ease, what do you mean by 2021? Is this financial year '21, then June of financial year '21? Or that would mean like 6 months down the line, not even 6 months, 4, 5 months?

So I'm talking about calendar year June '21.

Calendar year June '21. And so...

I'll tell you why I'm saying that, right? All other term loans end by that year -- by that, say, March, April time frame is when all of the term loans that we took will end. Our earnout obligations, whatever we have, would have been paid off, okay? So then we will be having enough cash. So now instead of servicing for a minute, right now, close to 2 million that I'm servicing as debt and on a -- per quarter, I would be sitting on that cash.

Great. Sir, what's the total amount of earn-outs which are still to be paid out as of this quarter?

It's around INR 38 crores is what it is.

About INR 38 crores.