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

Ladies and gentlemen, good day, and welcome to the Kellton Tech Solutions Limited's Q2 and FY '24 Earnings Conference Call. [Operator Instructions] I would like to thank you all for participating in the company's earnings call for the second quarter of financial year 2024. 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 the 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 now hand the conference over to Mr. Niranjan Chintam, Chairman and Whole-Time Director. Thank you, and over to you, sir.

Thank you. I'm sorry. Just traveled and then I'm having some throat issues. I apologize for that in case if I'm coughing or have to take a water break. So that said, thank you, everyone, for joining the call. Again, apologies for having this call during India-New Zealand Semifinal. We timed it perfectly where we got to innings break. So with that, let me start off with the financial numbers for Kellton Tech's first 6 months of financial year 2024. The total revenues that we have achieved is INR 490 crores, which is about 10% year-on-year increase. And the company has reported EBITDA of about INR 54 crores, which is about 6.4% year-on-year growth. And EBITDA in 6 months is above 11%. The net debt profit stood at INR 31.9 crores. The PAT margin is about 6.5%. The EPS for the first 6 months has been INR 3.32. That's the 6-month review, the quarterly revenue. But the quarter -- Q2 quarter numbers are INR 241 crores, which is a 5.8% year-on-year growth. The company has reported EBITDA of about INR 26.8 crores, which is about 3.1% growth year-on-year. The EBITDA margin is around 11%. The net profit for this quarter came down to INR 16.5 crores, which is a 7.1% growth over -- quarter-on-quarter. The PAT margin was about 6.8%. The EPS for this quarter stood at INR 1.78. Now coming to operational highlights, and I'll let Karanjit explain in detail the number of -- each of these clients that we have won about 8 new clients for this quarter. A little bit more on operational highlights. Kellton has to the notified to the Exchange we have won the Karnataka State Government HRMS contract, which is the transformation of their existing [ panel ] we are doing things to. So we are doing things -- we're going to carry it to about 6 lakhs state government employees, which is about 600,000, which is a significant win for us because this is probably the largest deployment that is going to be in the country, a single deployment. Kellton has also achieved the milestone of achieving the 2023 Economic Times' premier tech company brands award. Also, Kellton has forayed into the Singapore markets. We've been making some baby steps. Now we are making some aggressive investments there and started acquiring new customers in the digital transformation space. With that, Karanjit, can you please briefly talk about the client wins that we had last quarter?

Sure. Thank you, Niranjan, and hello, everyone. So as Niranjan said, we have acquired 8 clients during this quarter, and these are spread across various industries, but all of them are very significant transformative digital efforts. We have basically -- for the first time, we are going to -- we've got -- we have signed up 2 initiatives on the India Stack. This is the latest initiative by the -- on the India Stack, building on from Aadhaar and onwards. And we are basically going to help on the supplier onboarding journey for one of these initiatives as well as the whole QA automation. Similarly, on the generative AI, while there is a lot of talk of generative AI, we can proudly state that we actually have almost 8 to 10 projects, real projects working. One of them that I'm mentioning here is where we are helping -- we are helping a company, which is a startup, which is trying to build a SME platform, so which will help you have virtual SMEs all the way to addressing RFPs. It's a very -- they have a very robust thought and road map for themselves. So we just began that thing. One of the things that will do is it will you take your -- where the AI part comes in is they are going to take the -- an SME and capture all his knowledge and basically create a digidouble for them so that their clients can interact with the digidouble and they're always available and they can scale. We have engaged with a very large retail chain. It's actually a -- it's a company which has multiple retail stores in different categories, pharma, sports, things like that. And there, we are engaged with them on the data side. So we have begun that particular engagement. We have -- with another company we are helping on the -- this is an SAP initiative on the enterprise side, where we're helping with what's called SLO, which is essentially these are large-scale reconfiguration of your existing SAP implementations because we want to reconfigure the way the whole implementation is because you may have had a spin-off or you may have a merger. We have also signed up with a couple of other customers in the U.S. where we are helping them build -- there's one product company where we are going to do all the product engineering. They were not happy with their present vendor. It is almost a hot swap with the release expectation within the end of that month. We took over that. This is a pretty significant piece of work. And we took on that, and we were actually -- we are trying to put order into that release process. We did the first release, and then we continue to work with them on multiple initiatives. And, yes, there're a couple of others that we have signed up in manufacturing. There is a large media house in India. We have worked with Zee in the past. We signed up with another media house to develop their content management system, which is, again, a very, very large project that we took on. So yes, this briefly should give you a sense of the kind of engagements in terms of the transformative efforts in the digital space. Thank you. Niranjan, over to you.

Thank you, Karanjit. Moderator, can you open up for questions?

[Operator Instructions] The first question is from the line of [ Shahnawaz ] from -- I'm, sorry, [ Shahnawaz ] is an individual investor.

Sir, first of all, the number what we talked in May, then there was like commitment we are going to growth exponentially along with the EBITDA of great -- good EBITDA. But this quarter is again is a very unfortunate number. So I mean -- even revenue has dropped down from Q1 as well as the EBITDA is similar. And if you look at the balance sheet, which has a lot of outstanding, receivable is very high. So what EBITDA we are earning? Again, it is almost 6 months. That also almost 5% to 6% would go as interest cost because of the high receivable. Third question, I mean, how do you see, like you said, Karnataka, you have won an order. Sir, can you define the value of the order, what is the size of the order? Because if it is big, at least the market should know what is the value of the order. And how you are seeing the business because I just want to see the comparison in AI when you search there, 2, 3 company domains are there, and they are able to give 74%, 75% EBITDA. So there is a peer-- I should not compare, but there is a peer, of course, Saksoft is there. That company has performed 4, 5x. And because of their -- if you look at the revenue, manpower side is also less. But they are far better than in even cash flow or in terms of -- in fact, they are giving dividend also. So what is your say, and how you see the future, sir? It's been -- I mean, always we talk, and sometimes back you said $300 million. We came to $200 million -- EBITDA $200 million by 2025. But I don't see even in 2025 $200 million is possible. So can you give some light -- 4, 5 questions that I've asked in one go, so can you...

Multiple questions, let me try to answer each of them, [ Shahnawaz ]. And can you mute yourself, [ Shahnawaz ], there's is a lot of background noise there?

Yes, I'll mute.

[ Shahnawaz ], thank you, and I appreciate you asking the questions. So let me answer each one of them. Karanjit, correct if I'm wrong -- can you mute yourself, [ Shahnawaz ], if you don't mind? Okay. Thank you. So Karanjit, correct if I'm wrong on the Karnataka government order size. It's about INR 40 crores. Karanjit, am I right with the number?

Yes, it's about INR 45 crores. INR 45 crores.

Yes, INR 45 crores. INR 45 crores. But there is a lag between when we can raise an invoice because it's a milestone-based project. So there's almost a 10-month lag before the first invoice goes to Karnataka government. So that's the reason why some of the things that you're seeing, right, it is not accrued. Unless we meet the milestone, we cannot accrue the revenue into our books. That's the reason why some of this revenue that you probably have seen, there are some costs have incurred now versus the revenue is coming in a little bit later. Also, you asked the question about the revenue, why is the revenue a little bit lower than last quarter? It's also due to deferment. Some of the orders that we have won have been deferred by a quarter in most cases, and some of them are by 2 quarters. This is just because of the headwinds that the industry is facing in the U.S. It's not a reflection of what we're doing. It's a reflection of how all other companies are facing headwinds there. The budgets that have been pushed back. So we will be starting a lot of these contracts starting probably the first quarter of calendar year 2024. So all these deferments that are going on, we continue to hear, yes, we have the -- we are the finalist, we have won it, but the start date is getting pushed back sometimes by a few months, sometimes by a few quarters. That's the reason why you see the revenue dip there. To answer your question on the AI-based company. You're comparing us with somebody else. I'm not sure which company, but again, let's not name names here from the discussion sake. I understand that your question of our margins are lower compared to others because we are delivering on-site. Many of our projects, especially in the U.S. and some in Europe, we're delivering on-site whereas some of these companies are able to deliver bringing back the contracts to India and delivering from India. We have been experimenting with that. Some of them, we are successful, some of them we are not. So as customer insisting that they need to see the faces, they need to sit there and do the work, because of that, our margins are lower. So that's more or less slightly different. We always have been started with that model where we had many on-site personnel, delivering projects in country versus offshoring it to India, there is a significant difference between them and us. I understand our model is different from theirs that's the reason why you see the revenue -- not revenue, I'm sorry, margin differences. Coming to the revenue numbers you asked about. We are confident that we're going to achieve the $200 million target that we have done. Right now, we have in this planning exercise of 2024, and 2024 calendar year. That's the reason why all of our people have been traveling around, I am talking about management. [indiscernible] is on a plane as we speak. That's the reason why he couldn't get on the call. But 2024 is looking much better. We're hoping that the headwinds that we're facing is going to go away. There are many projects in the pipeline that they have and the pipeline looks very solid. And 2024 will be much better than 2023. Again, I'm talking about calendar year at this point because we do calendar year plannings, whereas the reporting comes to the financial year reporting. That's the reason why you see the difference. Okay?

And, sir, just to interrupt so when we can likely to see that? Because, as you said, you are doing a lot of projects on-site, right, on-site. So -- and I assume the trend continue. So whether the pressure on margin will continue like this? Or there is a mitigation plan you have, which is maybe implemented or 75% is done and you are planning because the overall -- see the bottom line -- everybody, we have the bottom line. And even your cash flow I was seeing is very poor, sir, to be very blunt. So that there also in 6 months, only hardly operating cash is INR 11 crores. I mean, such a big company. So how you are seeing the improvement in EBIT margin, sir -- margins EBITDA because I have seen you have done some...

Right. The share price was more to do towards the operating money we took from the bank. It's nothing to do a reflection of our personal needs, it's more for the company. The requirement, I think -- we did talk about [indiscernible] and [ Shahnawaz ] said, hey, we keep asking [indiscernible] property, and we are not a Tata Birla. We don't have property. We're first time entrepreneurs [indiscernible]. Hence the only asset that we have that is not pledged in the shares, and the banks are demanding more and more whenever we ask a small amount of money for operating reasons, right? And we have to pledge our shares to get that operating [indiscernible] that we talked to you about, right? The first milestone billing that we can raise is 10 months from now, whereas every month, there's over INR 1 crore of employee cost that I'm incurring. In addition to, we have other costs like infrastructure cost, the office setup, all that stuff, right? If we're talking pure employee costs, it's a little bit -- it's over 1 crore. So we are almost lacking -- by the time we raise a bill, we're about INR 15 crores into the project. So these kind of things require investments upfront, whereas the revenue comes later. So that's the reason why you see some of dispersion on the cash flow requirements and all the stuff. Okay? So I hope I answered your question, sir.

Yes, I got it, sir. So I think that another 10 months, the pressure in the margin will be there. Or how you're seeing...

You're just looking at only 1 contract, right? We have many contracts like that. I'll just give you an example, if that is question...

Overall, like where the market can get some confidence [indiscernible] Kellton is going to bring EBITDA [indiscernible]. Unfortunately, we are talking...

The execution is also happening [indiscernible]. So when we have these large milestone projects, [ Shahnawaz ], we would have these cash flow pressures that we are facing. But I cannot accrue the revenue, but I have to expense the costs today. That's where the challenge is coming. Okay?

How is the future, sir? I mean under...

Future, 2025 is looking much better than -- like I said, calendar year 2024 is looking much better than the calendar year 2023.

That answered you question?

Yes, yes.

[Operator Instructions]

[indiscernible]

Sir, we do have 1 questioner who has joined the queue. The next question is from the line of [ Mohammad Afroz Namakwala ], an individual investor.

Sir, I would like to know about -- 2 quarters previously that profit was a bit low. So the reason was that we have done overcosting. And it was said that in next coming quarter, you won't be looking at this overcosting effects in our balance -- this P&L. So could you please clarify and would light why this quarter is also our profit is flat?

Okay. So, [ Afroz ], I think you are referring to my comments wherein I said the employee cost has gone up because of the yearly appraisal cycle that we have done, okay? Whereas our clients have not increased the bill rate -- sorry, yes, bill rate, yes. So the way it happens is, at the time of renewals is when the negotiation happens. Typically we sign 1-year contracts where the rates are locked in. So the cycle or the renewal cycle, every customer has different renewal cycle. So we negotiate an increase in the bill rate. So some of them have come in place. Some of them are going to come in. It's a process that goes on over a period of the next year is when the bill rates starts growing. Some of them are facing headwinds. I'm talking about the companies that're facing headwinds. And they are asking for, "Hey, freeze it," or say, "Okay, reduce it to some extent," some of the customers. So we have facing a combination of those 2. So this balances out over the period of the year. At this point, I don't have a date where I can say, okay, everything is baked in now, let's -- now we are back to normal. I don't have that date because it's a continuous evolution process that we are doing. And yes, companies are facing headwinds in the Western world. So we are seeing that impact when it comes to some of the raises that we're looking at -- some of bill rates margins. So some customers, right, new-age customers, I mean they are able to ask -- demand for premium and we're getting it. Some of these AI related ones that Karanjit was talking about earlier, where you can get a significant better margin than the old technology-wise that we will provide services on. So I think we are making progress, but we are not there yet. It's a continuous process.

And 1 more question I would like to ask you, sir, regarding our debts. I mean the debtors -- the sales we do and we have to collect our money back. Our debtors days are around 2 quarters, that is around 180 days, which is dragging our profit because of the interest we are paying and our funds are stuck with those debtors. Even our debtors or our clients are, I think, this Adani and very big companies, so how it could be that we should get our -- this money earlier of our cycle money?

Okay. So let me answer that question, [ Afroz ]. We are a small company when it comes to the economies of the world, right, [indiscernible]. Adani has been very strong in payments, let me make it very clear to you. When we saw sign payments of those cycles, and when we raise an invoice, we're getting paid. Unfortunately because of whatever happened, there was some pressure on them and that pressure we also got transfer that pressure for us, right? Now we are back to normal with Adani. But where you have larger customers like UPS, like IBMs of the world, right, where we get paid often [Technical Difficulty]. So those things that we cannot negotiate with them, we're too smaller player. They will say "Hey, you either take it or we may have somebody else," right? What we'll do then, right? We have no choice but to take care of these kinds of things and we agree to that. So yes, what we are seeing is that the debtor days went up, I agree with it. That is because of reflection of what's happening in the industry or what the pressures that the companies are facing. There is -- I'm just making the numbers for just the discussion here. Where we used to get in 30 days, now we're getting 45 days, 60 days. So those delays are happening, which is because of their customers itself, they're facing their own cash flow issues. So that is getting transferred to us. But overall, these have been long-term customers of us. [indiscernible]. It's just that because of their facing pressure, we're also facing pressure. That's the only reason why these debtor days have gone up.

[Operator Instructions] You have the next question from the line of [ Shahnawaz ], an individual investor.

Sorry, sir. One question was, what is the order backlog we have, sir, that is subject to us?

So we have about 8 months' worth of backlog. So if you look at the revenue that we have [indiscernible], right? We have over 2.5 quarters worth of revenue is what we have. But in some cases, right, some of the contract varies, but today, we have about 8 months' worth of backlog.

And is there any write-off in the outstanding in the asset -- current asset...

No. So there'll be very small write-offs if you're going to do anything, right? It's a very small write-offs. It's probably -- I would say I'm just making stuff up here, right? Probably less than 1% is what we write off. I think last year was probably less than that. And this year, maybe 1% [Technical Difficulty].

1%. Because the outstanding is huge, so sometimes [indiscernible]...

That's the nature of the business that we're in, [ Shahnawaz ], that is what I was the talking earlier, right? That's the nature of the business we are in. Some of these milestones, some of these are payments that get -- we did accrue some startups and those accruals should get paid up in the next month cycle. We raise an invoice, then we -- to get the cycle of 30 to 60 days to 90 days payment cycle. So we end up pretty much almost like 5 to 6 months before we are realizing the cash. That's the nature of the business, yes.

Thank you, sir. But I hope that our Q should increase, Q has reduced in the last 2 quarters. So...

[Operator Instructions] We have the next question from the line of [ Rajesh Mundra ], an individual investor.

Even after implementing 1 Kellton, why there is not much significant increase in revenue of company in 6 months?

Okay. So you're saying, we completed 1 Kellton initiative, why is there no increase in revenue? That's the question, correct? So the answer to your question is that we just finished it, like I said earlier, right? We finished [indiscernible] the brand refresh recently. So there is a cost because of the branding refresh. Right now, our brand is looking a little bit refreshed compared to what it was old and dated. We did that exercise, that was completed also. And we have made some very high-profile hires in the last quarter. There're a couple of senior personnel that we hire, 1 is Practice Lead, Practice Head that we hired in the U.S. Then we recently hired in North America Salesperson Head. So these costs are all coming into play. We are increasing our, I guess probably the overhead at this point is the anticipation of increased revenue in calendar year 2024, hence, the reason why these costs are loaded in. We'll start seeing revenue. Already the price of the Practice Head that we have hired has -- his cost has already been recovered by the sales that he has provided, I am talking about the contracts that we have won because of him. So those are some of the things that are now getting baked in, right? So these are all the stuff that is a process that is going on. It's not upfront. We won't get it, but over a period of the next 1 year, you'll start seeing the margins as well as increased revenues.

Sir, another question?

Go ahead, [ Rajesh ].

How is the economy in U.S.A.? Whether it is recovering? Because our revenue is dependent on U.S.A.

Yes. So we have -- see, the customers that we are talking to are deferring new starts by a quarter, some of them, some of them a few months, some of them 6 months. We are seeing various different things. People have -- everybody is waiting and watching, right, what is going to happen with the inflation? Inflation has come down. I think you've seen that last number that came about, is about 3.2%, what they're predicting was 3.7%. So there are improvements that are happening, I would say. But from a macroeconomic situation, it's still not out of the woods yet. We will see how -- this quarter is almost -- from a cyclical point of view, our bill rates, revenue numbers are not that great for this quarter because of the holiday season. The Thanksgiving has already started. I am in U.S. today, doing some planning exercise. Around this time of the year, we do planning. So I am traveling the U.S. for that. So we see that slowdown has happened. The slowdown is going to be affected till probably mid of January and then when it's going to take off. So to answer your question, we will not know until Q1 of calendar year 2024 is when we would know how the economy is going to be in the Americas. Excuse me, sorry about that. So we would get a better hand on that. But there is some slowdown. Everybody is seeing it, and we are seeing it. While we are still continuing to get new customers, existing customers, there are some deferment and some customers, which were given verbal to execute a signed order, they're taking some more time because [indiscernible] we are waiting for the next year [indiscernible].

[Operator Instructions] We have no further questions. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thank you. And thank you, everyone, for joining. Again, apologies for getting a little bit late this earnings call. Hopefully, you did not miss much of that New Zealand-India cricket match. Looking forward to talking to you next quarter. Until then, thank you. And good luck to India. So thank you, gentlemen and ladies. Bye-bye.

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