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

Ladies and gentlemen, good day, and welcome to Kellton Tech Solutions Limited's Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would like to thank you all the participants -- thank you all for participating in the company's earnings call for the second quarter of the financial year 2022. 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 caution 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 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; Mr. Karanjit Singh, Chief Executive Officer, India; and Mr. Srinivas Potluri, Chief Executive Officer, United States. I now hand the conference over to the management. Thank you, and over to you, sir.

Thank you, Nirav. Good evening, good morning, wherever you are from. I apologize I want to start off with apologizing for the delayed conference earnings call. Typically, we have it at 4:00 p.m. but since I've been traveling, I just wanted to have it at a decent time in the U.S., hence, the call was delayed. I appreciate you being concentrated towards that. Let me start off with Q2 numbers, and then we'll go into the qualitative aspect of it, the quantitative aspect first. The revenue for the quarter 2 is about INR 208 crores, or close to INR 209 crores, which is a quarter-on-quarter growth of 2.1% and a year-on-year growth of 8.9%. EBITDA was about INR 27.3 crores, which is a quarter-on-quarter growth of 3.8% and a year-on-year growth of 5.2%. PAT was INR 17.4 crores, a quarter-on-quarter growth of 6.3% and a year-on-year growth of 9.8%. EBITDA margin was about 13.1%. PAT margin is about 8.3%. The EPS for this quarter is INR 1.8 on a diluted basis. Now the highlights because this 6 months, I want to talk about 6 months period, the revenue was about INR 413 million -- I'm sorry, INR 413 crores with a year-on-year growth of 10.7% and EBITDA of INR 27.3. I think this is a small title here. It's more than 27.3, so it's about close to 50 crores is in EBITDA. Year-on-year growth of 4.5%. So the EBITDA margin for the whole 6 months is in a 12.9% PAT margin 8.2% EPS diluted for the whole 6 months is INR 3.5 3.6. Now coming to a little bit of operational highlights. We've won 20 clients, 20 new customers this quarter, which is a big achievement for our efforts that we are doing globally, but it's going to reflect revenue -- some of the revenue has started and some revenue will follow through over the next few quarters. Now with that, I would like [ Srinivas Potluri ]. We did talk about it last time when we said we are coming up with a new initiative where we are doing consolidation of all our operations and coming up with a new way of selling. I will hand over to Srinivas Potluri, who will talk a little bit about what we coined as of One Kellton. He is going to give a little bit of highlights of what we're trying to do and why we are doing that and where we are in that process today. Srini, can you take it?

Sure. Thank you, Niranjan. Is everybody able to hear me?

Yes.

Yes, sir.

Yes. Perfect. Okay. Yes. So good evening, everyone. Like Niranjan spoke about One Kellton. One Kellton is a big initiative that we have undertaken at this point, which includes integration of all of our acquisitions and going to market under one brand called Kellton, and that is try rallying cry One Kellton. What does it mean from an employee's perspective from this opportunity for individual growth combined portfolio of One Kellton products and services, they provide opportunity for cross training, acquiring useful certifications, et cetera. And from a carrier growth perspective, from a retention perspective, controlling attrition. I think this is going to work excellent. From our customers' perspective, it's everything that Kellton -- different brands of Kellton offer are available under the One Kellton brand, whether it be digital, whether it be enterprise, whether it be integration. Any of these challenges that the current enterprise phase or the digitally born organization space, we will be able to address them faster in a more agile fashion and provide value to our customers. So that is one of the driving forces. What does it mean from a perspective of the organization? We have reorged ourselves under the One Kellton rallying cry. All the geos will be focused on sales. And then we have what is called practices. We have a digital transformation practice, which is the main practice within Kellton. We have the digital enterprise practice. And these practices will be working across all geos, across all international areas, whether it be Americas, whether it be Europe, whether it be Asia. And delivery teams will take people or resources from the practices and provide them to the delivery teams for delivering projects to our customers. So this is a very exciting time, individuals and employees of Kellton are excited. We are rallying behind the One Kellton --. And we are, at this point, organized ourselves, all our direct reports, understand what this means. This information is being trickled down. We have had multiple global Q&A sessions with our employees to make them understand what the org change means, and how do we address our customer issues and problems. So we are in the process where officially, the One Kellton org change will take -- will come into play from Jan 1, 2022. But Jan 1, 2022, is just a date. At this point, we have started the process individuals are wearing multiple hats, they're continuing to do what they are doing and getting into the new roles that are being described for them. So it's a really exciting time for Kellton. We are happy to say that this will yield great results. And one of the reasons for the whole One Kellton rallying is to improve sales to improve delivery and increase our numbers. Niranjan?

Thank you, Srini. Yes. Thank you. So with that, --, I would like to open up for questions, we'll take the questions.

[Operator Instructions] The first question is from the line of S.K. Damani from SKB Consultants.

I just want to confirm am I audible?

Yes, you are. Go ahead.

Actually, first, I would like to add some small questions about accounts balance sheet. Some goodwill amount is sold at INR 152 crores, is it in any way realizable? Can I just have one answer, then I go to the second one.

Sure. So Damani, yes, because we have various acquisitions that we made along the way, right? So that INR 152 crores is the acquisition goodwill that is sitting on a consolidated basis. Is that realizable yet a brand has value. Every year, we do, I guess, on a goodwill impairment check just to make sure that everything is fine. And various geos have their own particular rules, so we follow the rules be it the CPAs in the U.S., in Europe, also the CPA and in India, we call the auditors. All of them take a look and they come back and say, okay, hey, there is no impairment or there is impairment, let's take the take a look at it. So, so far, all of them have said there is no impairment. Last year, we did take a goodwill small correction there because during COVID time. But at this time, they are realizable. I think the brand of acquired companies have more value than what is sitting on the books. We are just -- that is a book entry only at this time, the value is much more.

Very proud to know this. And sir, one thing, can it be possible to list out the way it has been accounted so that investing community really is able to assess this point of value. And give correct value to the share price of the company in the market. I mean, if it is acceptable timely execute, can you detail about the brands which are acquired and their certified market value or something like that. I move to the next question. Income to asset...

Let me finish up. Let me answer that for I can say -- It's a book entry between what the assets are and what we paid over that asset value for a consideration of purchase, right? It's a pure -- like I said, it's a pure accounting number. That is not a real reflection.

Yes. Okay. Okay. So very difficult to categorize this in this way that [indiscernible] company brand is valued this much in the market. That's why it is not in some detail. Okay, no problem. Coming to next intangible asset for INR 28 crores in the balance sheet. So I mean, is it that R&D we are doing, which we are creating this intangible asset.

I will answer that. Let's go to the next question, while our guys are wrapping up the numbers.

Okay. no problem. Now the next is regarding trade receivable INR 225 crores or are still outstanding in the market to be collected by us. So how much it is safe and how do we view it? Because it will [indiscernible] to 1 quarter [indiscernible]

Correct. So the answer to your question, Damani. First, let me answer the question about the intangible asset. The intangible asset is the patents and R&D, yes. Like you rightly pointed out, those are the numbers. That's the value so that we have sand for that, okay? Coming to your question on receivables. Yes, it's about 99 days is what the receivable is. 99.5% of it is going to be -- we'll achieve -- I guess we'd realize it rather, okay? There is going to be a 0.5% that we always don't know, right? What's going to happen? Hence, we -- I don't want to say 100% is receivable, right? So there's only 99.5%. So far, we have not written off much, right? It's less than 1% of our revenue in a calendar year that we write off.

Okay. Now sir next regarding current assets of INR 130 crores. So in this bracket, we did some FDRs or something like that, which are there or something else is there. Others current assets.

Correct. It's a combination -- yes, it's a combination of FDRs. It has advances to our, let's say, suppliers advances to our customers -- sorry, to our employees and some unbilled revenue is going to be there, right? So those are the things that we -- we characterize all of them together.

Right. But sir, there is one more problem other current assets of INR 153 crores, that also is there.

I'll get the answer to that I'll get the answer to that, also. Let's go on to the next one and our guys will collect the data.

Now, sir, I'm coming to certain operational features, it is written in your presentation that you have more than 300 customers and 20 has been added in this quarter. So at a given point of time, all 300 may or may not be active with you with some assignments. I think about because I have limited knowledge of software operations for the company. But I feel that some sort of engagement is there between client and you. So are they all actually -- my question is all 300 are active at given point in time or sometimes somebody is on in some of these of?

So 80% of them are active, okay? So let me answer just to generalize without going to specific number, right? 80% are active. There is going to be 20% that either they deferred the project because of -- this is recently that's happening is because of COVID pandemic. Some of the customers are deferring their prospects by a quarter or sometimes 2 quarters because their senior employees have resigned or moved on or there is a consolidation that is going on between 2 companies. They say, hey, because the parents -- new parent has come in, just let's defer this project by a few quarters. So those kinds of stuff happens. But as a general rule, 80% of them are active. 20 -- yes, you're right, 20 new customers that we acquired in the last quarter. So there is revenue has already come in, like I was talking earlier. Revenue started coming in for some of them. Revenue will start coming in the following few quarters for the others.

Actually, I just want to give the background why I'm required to ask this type of in -- for the client that know the operations, the quality of the company and the fundamentals, financials, et cetera, do not reflect in the price of the share. So that is why I'm going to search that we are the last piece, that's why our share is poking so low. I mean I know I may or may not be approved to discuss share market in this conference call. But this is the reason I'm trying to know that where the gap is existing. Would you like to speak something on this if it is committed under the law?

I wish I could have solved that problem, Mr. Damani, if that was there and I have solved it a few years. That is unfortunately something that I'm not able to solve. I am being as transparent as possible to the market, to the investors giving as much information just like what we're talking about. Anything that we have, we -- I'm happy to answer any questions that people close to me. I would invite you to come to our office, either go around on Hyderabad, interact with our employees and interact with some of our customers to understand what we do. And this is something that has been there since we incorporated, right? We're saying come to talk to our customers. We don't have nothing to hide. But unfortunately, I can't solve the stock market leading from the [indiscernible]

I understand. I really want to thank you in the sense that you are really very honestly and transfer as we you've answered all my questions and you are even much more confidence than about I was having before. So for that, I want to thank you. Secondly, I do want to highlight when you say this that Hyderabad office was not functional for all the lines. And Gurgaon people also -- they did not remediate contact numbers of the company desperately to better understand the company. I thought of contacting them and to develop communication with them because of a very sudden fall in the price of the share in the stock market. So I thought that we can really give some view about it through the exchanges that why and how it has happened. But the only thing that is the correct numbers are given and if the messages are reaching to the right person, they can call us back and we really do not want to discuss anything of the inside of the company. But a general thinking about the fact that how the teams are moving on or something that's majorly not gone wrong, which has not been reported on to the stock exchange by the company. So that is the reason we try to initiate it out with [indiscernible] So thank you very much from my side. I' m more satisfied and I wish you all the good and best luck for coming operations.

Thank you, Mr. Damani. So to answer your question about Hyderabad office being not available. The last -- since last -- I guess, 2020 March, our offices have been staffed by Kelltons groups both in Gurgaon and in Hyderabad. Hence, there may not be somebody that is in the office. All of our staff has been working from home -- or 95% of our staff has been working from home all over the world. Hence, they may not have gone back to you. But please send your queries to the general e-mail addresses. I will repeat that over the next few, I guess, answers that I gave you on where you should reach our compliance at kelltontech.com. So investors is coming at -- we can do it to make sure But we'll answer that for you. But please refer to Anupum. Anupum would be the right person for you to reach or to get to all the answers.

Okay. Okay. I will do that one more thing. Finally, One more thing, one more thing is regarding -- would you like to make any -- how you look at the next 6 months, would you like to give any comment on this?

So Mr. Damani, at this time, right, because we are doing like Srini was talking about the One Kellton initiative, we are working towards consolidation and relaunching the brand. Hence, I don't want to project anything for the next 6 months. I will be in a better shape to give you that answer probably sometime early next calendar year. I'm talking about probably February or March of next year is when I would be able to answer that to you. But at this time, I don't want to project anything because our focus now is to consolidate and relaunch our brand while the operations is continuing. So these additional, I guess, pressure that we have on our people is going to, I guess, not give a correct picture. Hence, I don't want to answer that today.

Sir, one more question because of this. So do you mean to say that all the wholly owned subsidiaries and send down subsidiary will be consolidated into one company? Is it like that? Or something else you mean when you say One Kellton?

Okay. So there's 2 answers to that. One, you are right, yes, we are consolidating the wholly owned subsidiary into one company. That's just a physical -- or a structural way of doing those things, right, just from a company structure. Again, I have to caution because there are some regulatory guidelines. There are banking requirements that we have to follow before we consolidate into one company. We will be working with the banking relations that we have and regulatory relations that we have to overcome to do that. But I'm talking that operationally is where -- like Srini has said, all of us are excited because -- like he pointed out, we have all these different BUs that have been working on a technology-specific one. We're getting away from that and doing one company-wide, hey, these are all our services that we're offering. We are now able to, I guess, leverage what we call enough pockets of excellence. We have excellent in every deal. Now we are putting them all together and saying, okay, now we are able to do a larger project than what we were doing earlier. It's not that we are not able to. It's just a mindset change. That is going to impact and give a lot of impact to what we provide to our customers and also give our employees a better growth path a better career path. So the retention is going to go up. They are seeing a lot of lateral moves that are happening. People can go from anywhere from, let's say, be it from India to anywhere in the world. Earlier, there is to be a limitation operational artificial limitation that the booked now that we are breaking up.

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

Congratulations. So my first question is, it has been seen from past 3 years, we have flat line for EBITDA and PAT on quarter-on-quarter basis. And it has been looking same for 3 years now. So what is the reason? Going forward, can we expect an improvement in the margin?

Yes. So just One Kellton initiative is going to give us that -- thank you, Vibhor, for the questions. The One Kellton is going to give us that leverage that we are talking about to get more margin because we have set many operations and now there is an improved margin. But at the same time, like we said in earlier quarters too. The last 3 years have been various structural changes we made, we sold out 2 of our divisions, there was COVID. Hence, the revenue was flat. We expect starting next fiscal year is when you will start seeing improvement like I was saying earlier to Mr. Damani, this next 6 months, I don't want to project any numbers because we will -- we are focused more on getting this One Kellton up and running much faster than what we want it to be, so that we can start showing results to both the market as well as our employees.

My next question is, so what is the current order book pipeline looks like? And are we poised for the growth for H2?

Okay. So the H2 growth, as I said in earlier, we're just more focused on this. So it will be flattish for the next 6 months, too. I mean there is going to be a slight increase in revenue per share. But not expected numbers, that's probably what you're looking at. There is going to be a slight improvement like what we talked about the 2.1% to 3% kind of a range is what it should be. It is going to be -- but the significant growth is going to be in the next fiscal year. Now coming to our order book. I think we have about 7 months' worth of order book is where we are today. The order book is pretty good. The pipeline is increasing also day by day. And this new initiative is going to give us a lot more in the pipeline. And also, we're trying to increase our customer revenue with this new initiative of One Kellton that we are doing, where there's going to be a targeted pitch to our existing customers to get more revenue out of existing customers. Not just from new customers but existing customers also. Thank you, Vibhor.

[Operator Instructions] The next question is from the line of Arpana Chohan, individual investor.

Am I audible?

Yes, go ahead.

First of all, congratulations on your performance in the last quarter. So your people said that 20 new wins last quarter. Can you please elaborate a bit on the deal size and the overall type of clients that you acquired too?

Sure. So the deal side, I'll talk -- I'll just give you a general number, just not to go specific on each customer. The deal size is anywhere between a few hundred thousand dollars to $1 million is what the deal size is. Now coming to the type of customer, Karanjit, can you take that and answer that, Karanjit, because you are aware -- much more aware of the customers than I am.

Yes. I give you a little bit color on the kind of customers. So a lot of these wins have been on the digital transformation side as well as [indiscernible] global classification. So just to give you a few of them. I have the [indiscernible] partner for nonprofit, [indiscernible] and different countries, and we are kind of building an insight application. We also have -- we've been chosen by a very large Asian conglomerate for helping them build a high-performance mobility platform, which will span across their various business divisions, okay? And then we've been selected for some SAP on kind of implementation as well as follow-on hosting and support services for a chemical company, and with the global health care leader in the [indiscernible]. We also have won be tech -- tech expect is -- It means the new areas that go on. And would like to highlight is a leading U.S. company which is in the health care space where we are actually going to do some AI and ML work around marketing and brand consistency from [indiscernible].

Okay. I have one more question. Yes. So people said, based on that One Kellton initiative, the expansion is happening across all your geos. So can you speak a bit about how your Europe expansion is progressing? And are we on track to achieve the revenue diversification targets that the company has set for this particular Europe geo?

So Arpana, to answer question already, we are seeing a slight uptick in the European region. We have -- as you are aware, we have hired a new person to head that division, and he has started producing results. There is actually probably, I guess, 2 percentage increase in percentage of revenues from Europe. So we think that, again, there is -- remember, there was a second and a third wave of COVID in Europe. There was a little bit of lag for us to take off. I think right now, we're again talking about there's a surge in Europe. So we have to see how that is going to affect our revenue numbers. But today, we have close to 100 openings in Europe. That shows you the type of backlog that we have, the type of wins that we are doing in Europe itself. So there is a lot of potential to grow there. So we are working. As you are also aware of the global shortage in talent. So that is also causing some delayed start to our projects. But effectively, Europe has taken off, and we will see continued growth from Europe over the next year or so.

[Operator Instructions] The next question is from the line of Shohan Joshi from Kellton Tech Solutions.

So -- a good set of numbers. I am an individual investor, so I don't know why they put in from Kellton Tech Solutions. Anyway, so I just want to ask I mean, how are we progressing on the NFT and new blockchain and AI/ML, I mean are the new clients only for the NFT blockchain or AI or there is some other aspects as well?

Okay. I'll let Karanjit answer that question. Karanjit, can you take that?

Yes. So if I understood your question well, you were talking about NFT, blockchain? So yes, right now, an blockchain is really sort of involved. So we actually signed up a very important customer in the U.S., and we have gone live with their first release, and we are actually working with them with a lot of follow-on engagements to basically deliver their road map, execute to their road maps. -- our relationship has strengthened with them. Coming to your thing, are we seeing a lot of demand. Of course, there is -- There is a lot of demand on NFT and blockchain. We have also done some demand generation activities in that area. And in fact, we have a healthy pipeline -- And we just about -- we have closed a couple of other customers in the NFT blockchain space. Given the expertise that we have in-house in this area. So the other answer is that the other area that we are seeing a lot of traction are whatever you mentioned really, which is about AI/ML, but this is just about green shoots. These are happening now. There's a lot of AI/ML application. I mentioned one of the customers in health care where we are going to use AI/ML to basically help check the quality of their marketing communications. And the third area that we're really going after is really insights, data engineering and insights analytics. Okay. So Yes.

In this regard, are we planning any acquisitions maybe say after a couple of years, if the things go well for our company maybe see around when the data integration gets [indiscernible] by Jan -- next year. Are we planning any sort of acquisitions in this field once we have had a greater command in the U.S. market?

Let me answer that question. So today, we are not looking at any acquisition. That is not in the road map. But with that said, right, as we see the trends going on and if we see something that comes along the way that we believe is the right fit for us, we will definitely look at it. So -- but to answer your question specifically, at this time, no. But we will be opportunistic based on how the trends go.

Okay. Sir, one more thing I want to tell you, in every con call, I hear one thing, investors crying about your PE, shares prices being low. But sir, believe you, on the operations side you guys are doing a phenomenal job. I mean I think the as an [indiscernible] understand that the share price is not [indiscernible] investor still ask why the share price is not moving or why your performance is not getting reflected in share price. But you guys are doing your job by well. I mean, I must really congratulate you. Sometimes become very real defeat answer that question. I mean, why the stock price is not increasing despite you doing a best performance so far as the operations are concerned. But fundamentally you guys are doing very well -- I really congratulate you, sir.

Thank you for the continued faith in us and hopefully, pretty soon in our performance is going to reflected in the stock price. But we're always looking for pointers from the people like you who understand the market better than us probably to guide us and telling us, We're doing something around clean we will be absolutely able to will correct that.

The problem is that not everybody wants fast many seeing the other IT companies, but people are not really able to understand the business that you are targeting. It's very important that we target the right customers, which you guys are doing it. So if they don't understand the business, it's really ridiculous to as the management and why the share price is not increasing. That is because investor income is not understanding what the people are doing. That is the fact, I'm telling you.

Thank you. But, hopefully that correction will happen soon.

[Operator Instructions] Sir, we don't have anyone in the question queue.

Okay. Thank you, -- So then let's close it out. Okay.

Sir, would you like to give any closing comments?

Okay. Sure, we do. Okay. Thank you, everyone, for joining the call. One correction our team has told me. Our order book is 9 months and not 7 months like I said earlier. So our order book is for 9 months. With that correction, that's the last one that I want to make a statement on. Thank you, everyone, for joining the -- our Q2 earnings call. And like I said earlier, if anyone of you who is interested in coming and visiting our office, please reach out to Anupam. We'll schedule a visit. Like I said, right now, we are 95% working from home. Specifically in Hyderabad and Gurgaon region, whereas rest of the world, people have started coming into offices to do their work. In India, they have not done that yet. We are on a wait-and-watch mode just to make sure that our employees are safe. Once we get an all clear and we start seeing what is happening within the community, we would probably end up being a hybrid model because I think we have successfully have delivered projects working from home 100%. So hybrid model would be followed when, where, how that is something they're just keeping our ears to the ground understanding what is going on with COVID, understanding what is happening in the market with our peers and then we'll make a decision. At this time, we are continuing to do most of our work from work from home, but that might change. But at this time, we don't have a time line as to when that will be. But hybrid model is the future, and we believe that is what it's going to be for the future. With that, thank you, everyone. Look forward to hearing and talking to you in the next earnings call, if not sooner. Talk later Bye-bye.

Thank you very much. On behalf of Kellton Tech Solutions Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.