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

Ladies and gentlemen, good day, and welcome to the Kellton Tech Solutions Limited's Q1 FY '21 Earnings Conference Call. [Operator Instructions] I would like to thank you all for participating in the company's earnings call for the first quarter of the financial year 2021. 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 belief 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 a financial quarter under review. Now I would like to introduce you to the management participating with us in today's earnings conference call. We have with us Mr. Niranjan Chintam, Chairman and Whole-Time Director; Mr. Karanjit Singh, Chief Executive Officer, India; and Mr. Srinivas Potluri, Chief Executive Officer, U.S. I request Mr. Niranjan Chintam to give his opening remarks. Thank you, and over to you, sir.

Thank you, Tanya. Good evening, everybody. As -- just like everybody else, Q1 has been a challenging quarter for us. This is primarily due to COVID. Most of our employees are still working from home. So the revenue numbers for this quarter, we'll start off with the numbers, and then we'll give you some qualitative discussions around that. Revenue for the quarter is INR 181 crores of revenue, which is about 12% less than last quarter. EBITDA is about INR 25 crores, which is 2.8% less than last quarter. Profit is INR 14 crores. It's about 0.6% less than last quarter. Primarily, the difference between the top line and the bottom line is due to less travel. Travel was an expensive line item for us every month and that has not happened. Very insignificant travel. This is mostly due to bringing people back home than any travel, outward travel, that is, going out. That's the reason why the PAT numbers as a percentage and EBITDA numbers as a percentage are way better than last quarter. Now like I was saying earlier, employees -- all of our employees are working from home -- or most of our employees are working from home. While we're working from home, we were able to deliver projects and go live in a number of incentives. I'll let Karanjit and Srini talk about that right after my opening remarks. We also have taken care to make sure that our employees' well-being is taken care of while they're at home and the families. So we have set up doctors on call for the employees as well as employees' families to reach out and talk to them for anything, it may not be COVID related but anything just so that they have somebody they can talk to and seek help in these stressful times of COVID and associated, I guess, pressures that people are feeling because of that. Now just the qualitative side. I will give -- hand it off to Karanjit to talk a little bit about the operational stuff and the challenges that he has and how are they overcome in India, and then we'll hand it over to Srinivas Potluri. Karanjit, you want to talk about the operational challenges of last quarter and how we overcome it?

Yes. Sure. So yes, I mean, I'm sure all of you are aware, so the change was very sudden. And of course, the first 1 or 2 months, especially in India, the lockdown was very intense. And of course, there's a lot of uncertainty. Good thing of all of this is, this is the first time that we, as a company, did virtual working or work from home almost at 100%. We were anticipating some amount of restrictions to come in place. And so kind of luckily for us, we kind of about 2 weeks before have started putting together a team, which would work on and test out the work from home. But anyway, the lockdown was very sudden. It was announced for a day, if you all remember. And then suddenly, it became like for 15 days or something at the beginning. And we basically -- the good thing is we were able to transition all our people to work from home almost instantaneously. In fact, the week before that when the lockdown was done, as a test, we had gone from that Monday to about 50% of the people; by Wednesday, we were at 75%; and we were testing on Friday, right? So about on that Friday, I remember, it was almost 95%. We only had very few people in the office. And so that was good. We were just possibly -- we planned ahead, and also we got a little lucky. On the business side, of course, there was uncertainty, both from our customers as well because even they were also equally uncertain, especially on the travel, hospitality, retail. So there were -- obviously, a lot of them have got completely shutdown, some of them got partially shutdown. And of course, everybody was doing their own scenario planning. But then post the 2 months, we were like, where does the stock -- there were requests -- individual requests from people in terms of accommodation for projects, requesting a little slowdown on some of the projects and those kind of things. So there was that uncertainty from the business side as well. And we had to work through it. So we did some scenario planning. We had to work through how things will pan out and at what time does it turn? And equally surprising for us is in -- from June, customer -- yes, from June onwards, customer conversations started happening, restarted, reinitiated their pipeline, again started -- on the business side started reopening. And there afterwards, in fact, we have actually seen a lot of acceleration. In fact, some of those jokes that go around that COVID has accelerated digital transformation is true to an extent. And we are actually seeing a lot of digital road maps or projects that we were working on or opportunities that we're working on for 6 months, a quarter, a year, suddenly got accelerated. So even during the lockdown, we had some closures. I think there were about 11 customers that we acquired. And a lot of these, if you see, interestingly, are the ones where people have had no option but to move. So like either as online education or even internal employee, I would say -- call it, internal employee training or development, those kind of things have got accelerated. We have also seen that customers have come to us, where they have now asked -- come in, in a sense, come back and kind of relooked at their digital and accelerated the customer experience or redoing an existing digital online presence or a mobile presence. So those are the kind of things that have got accelerated during this time. And I think now things are slowly getting back to normal. On the personal front as well, what has happened is that, obviously, there was no choice initially. And of course, people had to work doubly hard because we also had to ensure that the customers were -- sometimes -- also we're working for the first time remotely. So we wanted to ensure that they were comfortable. And so that was a big concern from my outward customer-facing people as to will customers be comfortable, will they approve the invoices, will they approve the milestones. But very proudly, I can say at least till about -- we had like 55, 60 releases, small, medium, large, all through that lockdown period. And we anticipated some mishaps, but actually people have gone over and above and worked actually longer hours, a lot of our managers have said. And of course, some of it was -- there was no choice also to go out. So that is really was a surprise, a pleasant surprise for us, where we delivered whatever has to be delivered. However, there was also a certain amount of fatigue that's set in, especially for junior folks who were stuck alone, let's say, in NCR or in Hyderabad, where they're living in PGs and they can't get out and those kind of things. Those issues happened. But I think as the lockdown progressed and relaxed a little bit, we allowed people to go back and relocate themselves to whatever, their parents, their house or whatever. So those things are going on. And as Niranjan mentioned, we are also providing the required support. Hardware support was an issue. In fact, initially during the intense lockdown, even power supply is going off or laptop going off. There were some isolated incidents. But slowly things opened up and there were new things that came out. And so we'll manage it through, and now we are getting into a more programmatic way of managing all of the things. Yes. That's my update. Thanks.

Thank you, Karanjit. Just a little bit of more commentary on that. What we have noticed is that customers are now looking at new opportunities, which is something that in this kind of a time, like Karanjit was saying, delivering some of these trainings online to manufacturing-related activities, how do we automate manufacturing-led activities. We are seeing that a lot of traction going on. This is something that both Karanjit and I have been talking for years and years, and now we start seeing the adoption happening very rapid, which was something that is pleasantly surprising, but it only validates what we've been talking about for the last 5 years. While all this was going on, we did add 11 new customers, too. This is also a huge kudos to Karanjit and Srinivas Potluri's team, our salespeople, who are able to sell sitting at home which earlier was face-to-face meeting with the customers, now they're able to sell it by sitting at home. Srini, do you want to add something from the U.S. geography on the Q1 challenges? And how we overcome that?

Sure. Absolutely. Thank you, Niranjan, Karanjit. And I just wanted to add to whatever Karanjit and Niranjan have been talking about Kellton's reaction to the COVID. Obviously, it's not something that only Kellton got impacted, it’s the entire world, unprecedented situation. One thing that I would like to speak very highly about is the speed and the agility with which Kellton reacted internally to the COVID pandemic. So we basically came together, created a task force or a tiger team. Globally, we had representatives from each business unit and geography. We got together, made some decisions twice a week, understood what everybody was facing with. So that was -- I think that was great. We reacted quickly to the changing situation. I mean it was a new environment every day with changing dynamics. So I think we reacted very well. Some of our customers decided that they wanted to either cut down on the number of resources or the number of towers, et cetera, in the U.S., not understanding how long the impact would be. So we had to make a quick decision in the U.S. and we did and we said -- we sent out e-mails and notes to all of our customers, picked up the phone, called them personally at the executive level to make sure they were comfortable and understood what their ask was, reacted in a lot of cases and gave them some discounts either on the billing rate or on the number of hours that were being billed. And these were obviously time-bound for a quarter. So everybody was happy, business continued, but at a slightly lower pace because the customers wanted us to slow down to figure out how things would be. The staff reacted extremely well. We took the opportunity for all of our technical resources to come together, get trained. We obtained more partnerships on the technology side. And then obviously, everybody got trained, certifications, et cetera, did a lot of outreach from a business [Technical Difficulty] and worked on building our pipeline and the webinars and started doing proactive webinars, reaching out to clients and talking to them about changes in technology, et cetera. So we have set up once the first quarter ended, meaning around June of this year. Clients and customers came back. We reached out to them, and we said, "Okay, we are doing fine now. We understand what the new normal is. Let's get back up to speed and so on." So we have seen things coming back to normal. And first quarter, we expected to be fully functional like we were last year. We don't see any changes. So yes, there was a bit of a slight drop in revenue. We didn't lose any clients, but we did have requests from the clients to slow down, started picking up again. We are concentrating on the net news now. So things are going well. Kudos to the Kellton team and the internal employees that stepped up, understood the new normal. We made sure that they were healthy, and there was no pressure from the clients to have them travel to the client side. We made some policy decisions internally. So everything has been -- has worked as well as it could have during the new normal. And I'm happy to say that we are back on course, and then we expect to be -- fully reach the potential that we are saying we will. Thanks, Niranjan.

Thank you, Srini. Tanya, can you open up the call for questions, please?

[Operator Instructions] The first question is from the line of [ Vibhor Gupta ], an individual investor.

Yes. First of all, congratulations to the team to achieve these good numbers. My question was -- I'm having a couple of questions. First one of them is how the deal pipeline is looking? Is the company geared towards closing larger deals, looking at the current scenario? And the second question is, the revenue from Europe has decreased over the last quarter. Is there any specific reason for that?

Okay. [ Vibhor ], can you repeat the second question?

Sure. So the revenue from Europe has decreased over the last quarter.

Europe. Okay. Got it. Okay. So let me answer first the pipeline and then answer the Europe question. The pipeline is looking very strong, just like we said earlier, 11 new contracts were signed in Q1. So they started producing revenue from this quarter. And we continue to see more in the pipeline increasing. As like I was saying earlier, our sales people have figured out a way to sell from home without dialing and sitting in front of face-to-face be it either with Zoom calls or with Google Meet or any other technology means that is available with the customer, they are able to communicate with them and able to sell. Even during these times, we have closed multimillion-dollar deals in both the U.S. and, you can say, multi-crore deals in India, while all this pandemic was going on. And these are not just a onetime, we see that for multi-year contracts that we are signing. Now coming to Europe. Europe has faced a severe lockdown. And yes, there is a dip in revenue. And -- but we see that now it is, again, opening up, and we see customers' engagements happening. And we believe that probably like, Srini was saying, by Q3 of this year, we should be back to normal of what we were in Q4 of last year. So hope -- our hope is that this is the new normal, and we will not be impacted with the second wave of COVID, and we should be back to normal or back to the same numbers that we were in Q4 by Q3. That is what we are anticipating, given where we are with the pipeline today.

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

Are you feeling okay? Your voice is slightly down this time?

No. I'm actually in the U.S. and it's early in the morning. I didn't have my coffee. So it's just that I'm speaking with my headphones on. That's all it is. Nothing else.

Okay. There's like a distinct change in the quality of voice. I was just wondering if you're fine.

No, I'm good. It's just that the international call, maybe that it's not somewhat clear.

Right. Right. Good to know. Good to know. Sir, most of the questions you have already covered in your opening remarks. I had a few questions where there are certain things which I'm missing. So if you can probably help me out. So one was the auditors resigned, and it was very early in their tenure, right? I believe they were going to be there for another 4 years. So what exactly happened there?

Okay. So the auditor, there was some disagreement on the fees part of it. And when we saw that, it's kind of uncomfortable feeling that both him and us had. He said, okay, it makes sense. When we volunteered him to resign, he said, okay, that is fine. But it's primarily the dispute started off with the fees, and that is how it originated. And when we felt that unhappy auditors are never good for any company. He has -- he wanted to resign, and we accepted his resignation. That is all it is. He was there for 2 years. He did a great job from where we were to where we are today when it comes to some of these reporting requirements, some of these be it compliance requirements of what he has made us go through a number of hoops. We are a better company because of him. And we appreciated his style of doing things and all the stuff. It's just that the disagreement was more to do with the fees and the amounts that the initial understanding and what it turned out to be. That is the only reason why. But now we have good controls in place. And now we are able to provide timely numbers to the new auditor. Every auditor comes up with their own controls, and we are getting, I guess, more and more mature in our control, so which is good for us. That's the only reason why, there's nothing else.

Right. Sir, another thing, somebody had asked a question in the previous con call about the promoter stake coming down. And you had said that, to your best of your understanding, that has not been the case. So -- but when we look at the shareholding pattern, there has been a dip. So again, there is something which is not adding up there.

So the -- yes, I did state that. I guess that was what the information that I had then. What I was told later on was, yes, there is -- there was a slight dip because more -- because of 2 reasons. One is because more and more ESOPs got allocated, so our percentage as a whole came down. In addition to that, there was some cash that we needed for the company, and we did take -- sell some shares and got that. We'll be using that to -- for -- we saw that the pandemic is going to require a lot of cash to be there as a cushion. So we are pumping that money into the company to get that. And you are aware, Agastya, we talked about this multiple times where we were having challenges with closing with the banks. And when we thought we were able to just close, some event or the other happened that is not in our control. So we -- this was more in our control and our people felt there was some strategy around it, and I was not part of that. But -- and we did reduce our shares and that money is now being used for the growth of the company.

Right. Sir, then I had 2, 3 questions on the annual report, which has come out in the schedules. And again, these are some things which, I think, I'm pretty sure I'm missing something here. If I look at the earn-outs, right, so that number has actually gone up, which -- earn-outs which are due. So that is one thing. Second is that the goodwill has gone up. And I can't understand -- because we have definitely sold 1 business. And I can't recollect us buying anything. I don't know -- so excluding the translational exchange difference, there is a INR 17 crore increase in the goodwill. So that is one thing. Then another thing, the earn-outs have gone up, which is again slightly confusing because what my understanding was that this year, whatever was remaining on the balance sheet that was supposed to go. And then the third question is that -- so this balance sheet was released during the Q4 results also. But now that I'm going through the schedules, I see that there is a INR 105 crore number, which is part of accrued revenues, which I would, under more circumstances, read as receivables. So our receivables of INR 300 crores on a revenue base of around INR 700 crores, INR 750 crores. So that's a lot of receivables. So can you explain that?

Sure. Let me first answer your goodwill and earn-out. We did buy Tivix, Agastya, last year, and that is what is reflected in additional earn-outs as they need to be paid. But the other one is, you're right, it comes to the currency fluctuation. When we started off the prior rates at this year, I think, rupee went up by about INR 5 to INR 6 -- I'm sorry, dollar-rupee parity went up by INR 5 to INR 6, and that is also the coincidence. So that's the reason why you see the goodwill and earn-outs going up. The goodwill, primarily, like I said, is a currency fluctuation. The second one is the Tivix purchase that we made. Now coming to talking about your question on -- you can call it that these are receivables. These are not receivables. We have not raised the bill yet. So when we say accrued, this is unbilled revenue, right? We have not billed it. That bill takes place. At any given time, pretty much, we have close to 20 to 30 days, depending on the type of contracts that we have is unbilled. Because we have to do an accrual basis, we do accrual basis for -- both for accrued revenue as well as accrued payables. That is what has been reflected as accrued revenue.

Sir, I can understand 20 to 30 days, but this is INR 105 crores on a revenue base of INR 700-odd crores. So that would mean...

So this is a part of it.

That this is about 14%. So that's more than a month.

So yes, that's typically what it is, right? When we have these government contracts that we end up -- when we have these government contracts in India, India is the one that secured it up, that's why it went up. There was a couple of projects that we have worked on and that we did not get confirmation from the government, so we were not able to raise a bill. Hence, it became that -- a lot more. Typically, this is close to 30 days is what it is. You're right on that. But in this Q4 scenario because of COVID, some approvals did not happen, that's why that is, but that should come down now and become 20 to 30 days is what it usually goes.

Right. Sir, the reason that I asked this question is that same schedule is showing that you had, I think, INR 85-odd crores in the previous year as well. And again, what I -- how I understand is that last year, we did not have any government contracts. This year, we do have. So still this number has gone up. So that is where I'm...

It went up by INR 20 crores, right? It went up by INR 20 crores. That is what is the milestone of the government contracts. But if you look at INR 80 crores, right -- INR 80 crores x3, right, it comes almost to INR 240 crores. So that is typically our quarterly revenue, right? So 1 month is always going to be in the accrued revenue.

Okay. Okay. And sir, final question is on the cash flow statement, there's this entry which I haven't seen in many companies. This is cash flow from financing activities. You have changes in reserves of INR 15 crores -- INR 15.5 crores. And last year, there was a negative number of INR 5.64 crores. So again, what's the nature of this? What are these reserves? And why is this appearing in cash flow from financing?

Okay. Let me get that answer to you. I'm going to ask our finance guys, they will answer that for me. I'll take the next question from you, Agastya, while they are...

Yes. That's about it, sir. That's about it. The final question actually was a combination of that. So receivables, obviously, there will be some problems. We discussed it last quarter also during this COVID period. So are you seeing -- the business, it seems is slowly getting back on track. But are you seeing the receivables coming down now?

So this quarter also, we saw -- I think receivables are around 96 days, like 4 to 5 days more than the last quarter. But we are seeing in -- starting in Q2, right, we are recovering that amount. Because of lockdown, people were unable to answer or, in some cases, people were working from home, how do you reach people. So all those challenges were there in the Q1. But Q2, I think we are seeing things coming back because people have figured out how the systems would work. And we are getting better responses for payments as well as -- but there are still some delays in, Agastya, on receivables. It was like, say, normally, what we used to get X plus 30 days. Now it's become X plus 20 days, but it's still a challenge there. We have not come back to X yet. And we are hoping that by next quarter, we would be getting back to normal. But we understand and our customers also are facing this cash flow crunch. Same is the case with every bank. Despite whatever the government is trying to do, the banks are still not lending freely. That has been a challenge. And we are facing that, and we are trying to figure out how to do, I guess, fund raising in this alternate finance world, right? So we are ready to get that.

It's just that, sir, just one final thing on this, that if we look at the trade receivables and if I look at the unbilled revenue, the total is over INR 300 crores. If I add the 2 numbers, that is INR 317 crores. That's approaching 50% of sales, which is like 6 months. That's a huge number. So I understand in IT companies, I have a private equity investment in an IT company, and I see them struggle a lot with receivables. 100 to 120 days is understandable, but we are now approaching 180-ish that's a very big number. So that's my only thing. But anyway, sir, thank you for answering all the questions, sir.

Sure. So the answer firstly on the cash flow reserves there, Agastya, this is acquisition funding and payables. That is what is added there in there. That is the reason why you see that. So the difference in 19 to 20 is acquisition and contingent payment. That is why -- other finance liabilities, right? That is what is showing up there. That is about 12 -- INR 17 crores.

Can you repeat that, sir? I lost your...

Okay. So I was saying that this is mainly due to increase in acquisition payment, and that is what is showing up in the cash flow. As acquisition contingent payment was INR 36 crores versus INR 21 crores. Last year was INR 21 crores, this year was INR 36 crores. That's the difference...

The next question is from the line of [ Tarun Sharma ], an individual investor.

So my question is, how is the business outlook in the U.S.? And how currency fluctuation has affected Kellton?