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

Ladies and gentlemen, good day, and welcome to Kellton Tech Solutions Limited Q3 and 9 Months FY '24 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 financial year '24. Before we begin, I would like to mention a short cautionary statement. Some of the statements made in the today's conference call may be forward-looking in the 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 fundamentals, business and financial quarter under review. I now would introduce the management participating with us in the today's earnings conference call. We have with us Mr. Niranjan Chintam, Chairman and the Whole-Time Director; Mr. Karanjit Singh, Chief Executive Officer; and Mr. Srinivas Potluri, Chief Executive Officer. I would now hand the conference call to Mr. Niranjan Chintam. Thank you, and over to you, sir.

Manas, thank you. Just a correction, Srinivas Potluri is not on the call. He had some family situation that he could not join. So maybe this is going to be Karanjit and me today. So with that, I want to start off with the revenue numbers. In the Q3 FY '24, our revenue for this quarter was about INR 245 crores with the EBITDA of about INR 18 crores and a profit of INR 8 crores. The EBITDA margin was around 7.6% and PAT margin of 3.3%. Yes, it was, all in all, a challenging quarter for us, just like everybody else in the industry, it has been a challenging quarter. Typically for us, Q3 quarter has been a quarter where the number of billable hours are lower because of the holiday season in the U.S. So hence, typically, there is a slight dip in profitability, but in this quarter, there were additional challenges like there were delayed starts. We had won a contract with LIC that required us to ramp up a lot of employees that -- cost incurred due to that. And other things that we had to do during this quarter, just for the -- just like everybody else has reported. So that's the reason why it has been a challenging quarter where we had a revenue growth of only 2% over the previous quarter and the profit declined. It's just a onetime event we believe that it's going to be, and this quarter is looking much better than what last quarter is. But unfortunately, we had to face this last quarter. From a 9-month revenue point of view, we are at INR 736 crores, which is about 9% year-on-year increase, and an EBITDA of about INR 73 crores and a PAT of about INR 40 crores. With operational highlights, just like we announced already to the market, LIC, we have won an LIC contract, which is a 8-year contract, where we are building their whole HR solution for them where -- from hiring all the way to pensions will be managed by the system that we are building. And this is a challenging opportunity for us, about 150,000 people will be on this. This is just a continuation of the confidence that the industry is showing on us since we won the FCI and then with Karnataka State Government, now with LIC. We also have won about 11 new contracts and new customers this quarter despite being a challenging quarter [indiscernible] starting a little, but we have 11 new customers that we have got them on board. We also -- Singapore is showing an uptick in activity. So we have won 2 new customers there. We also have launched a design studio with Kellton. So we are also being recognized there for our design capability, and we are very excited about that. So with that, I want to ask Karanjit to talk about the customer wins that we had during the last quarter. Karanjit, do you want to give a sampling of the customer wins that we had last quarter?

Yes. Thank you, Niranjan, and hello, everyone. So this last quarter, we have added 11 new clients, and the clients are spread across various industries. But I'll give you a little bit of a sample of the kind of work we are doing. And again, this is all good digital work. So one of the clients that we're partnered with is a broadcast media production client. And we are working with them on tracking the real-time viewership data using IoT devices. So we're kind of helping them upgrade the solution to what they presently have, which is both IoT as well as the software that goes with it. And obviously, it involves a lot of industry protocols. We have signed up with -- we have collaborated with a health care client. They were providing end-to-end services, complete SI work, where we are helping with the design and manufacturing of VR headset as well as integrating that back to the software that they have, where they kind of do some health monitoring using the data that they acquire. And they are again trying to do a transformation in the industry using this particular solution. We're happy to be part of that. We have signed up with a leading food and beverage company in India, a very marquee brand, where we're helping them with modernizing their quality control processes, where we kind of help them with our SOPs and checklist and things like that. And this is using our own Kellton hyper-automation platform that we have. So this is one good win that we've had. We have also signed up with a large -- one of the largest motor -- the car manufacturing companies, where we're helping them with developing their engineering and data security and communication app that will help their R&D organization. We also collaborated with our client in the aerospace industry on their SAP RISE journey. Also, we have -- apart from the usual, we also do a lot of work with start-ups. So we're doing something in the fitness space. We are helping the new -- a new start-up in the Middle East region and coming up with their -- rolling out their platform. Similarly, a video-based platform. And also, we had a collaboration with one of the Big 4 companies. That's one of the ones that Niranjan spoke about in Singapore. In fact, now we're talking about other regions as well with the -- where we are actually collaborating with them to provide them these deeper skills needed in the digital side to help them ramp up with their initiatives. So, I guess, yes, that should give you a sense of the kind of client wins we have had, all of them are pretty main incentive in the digital space and we continue to acquire these customers. Thank you. Niranjan, over to you.

Thank you, Karanjit. Manas, let's open up for questions.

[Operator Instructions] We have our first question from the line of Mohammad Afroz, an individual investor.

Yes. Sir, I have to ask a question regarding the -- as -- first of all, I would like to congrats the team as we are adding new clients. I would like to know what is the size of these orders, like LIC and Karnataka governments and other clients we have added? What is the size of that business, okay? And the second thing is that, we are not able to encash our bills, which are due as trade receivables. If I calculate, it is around the INR 275 crores is still showing on my -- this website, it's still on your books also. If we calculate at least 10% interest, it goes to INR 27 crores, okay, yearly. And we are achieving this INR 8 crore profit in this quarter. So it is not worth to do a business, instead we should have to make an FD or something like that. So how can we improve this and outcome from these problems?

Okay. Thank you, Mohammad. So let me answer the first part of the second question first. I understand, yes, you're right, we -- I keep telling our operation sometimes saying I'm funding this large company. Unfortunately, the nature of the business is that, right? So we have a large corporation that are bad paymasters, okay? Just when it comes to paymasters being collectibles, it takes a long time. There are a few customers -- just examples and I keep talking about. We have an IBM that was 90 days plus. We have UPS that paid us 90 days plus. And we have smaller ones like pay us in a little bit in probably 30, 40 days, right? So we have various different customers with various payment cycles. And talking about the government contracts that we talked about Karnataka and LIC, both of them are milestone contracts. What does that mean is that we need to achieve a certain milestones. And typically, these milestones, right, in a commercial contract, what we tend to do is probably we do monthly or at least once in 2 months cycle. Whereas when it comes to the government kind of contracts, the first milestone is met after about 10 months. That is how the gestation period happens. So when that happens, right, yes, we are accruing those, but we're not collecting the money, okay? So that's the reason why these DSO days are high. You're right, the number -- you're almost right on the ballpark on the number when it comes to what is our receivables number is looking like. But that is the nature of the business we are in. Unfortunately, since our size is not as big as probably some of the bigger boys, right? Our negotiation capability is less than what the big boys have. So we'll have to visit this for a little while longer, if we want customers like them. And you're right, they could always say, okay, hey, I'll walk away from this within the bank, but hey, that means my employees are idle, right? So I cannot do that. There's a cost factor to that when you keep my employees idle. So I will have to do this because some of the cutting-edge work that we do is with these large customers. So that also sharpens our capability. and that is something that we need to keep for other customers that we'll be going after. And also, they are the referenceable customers. When I say, okay, I did this for a Fortune 100 company, I'm able to do it for you, then they'll believe us versus saying, okay, I did this for a small start-up. That is what we have to factor in. We are -- if we were, like you said, right, just sitting on money, I could have done that, but that is not what our business is, right. We want to provide the cutting-edge technologies. Thank you, Mohammad.

[Operator Instructions] We have our next question from the line of Shah Nawaz, an individual investor.

Sir, I have a couple of questions. So first is, sir, the order book size -- what is the order book size you have now?

So let me get back to you. Ask your next question, I'll answer that, and I'm going to get the data and talk to you on that. Go ahead. I'm waiting for the data to come in, and I'll speak to you about that.

Second question is, in your annual report, you said it is -- you're going to do $200 million business in '24-'25. It was $300 million some time back.

I'm sorry?

In your annual report -- hello, am I audible?

Yes, you are audible. Go ahead, yes.

Yes. In your annual report, the guidance was like $200 million is aspiration, but -- for the '24-'25. So where we stand, sir? Are we really confident that we're going to do that in this financial year coming up -- coming financial year?

See, unless we face the quarters that we faced like last quarter, right, where it was very challenging for everyone, not just us, right? And the jury is still out as to how the market conditions, if and when U.S. is going into recession, we should be able to achieve that number. We're not shying away from the number that we gave. It's just that external factors will influence is what I'm trying to say, but we do want -- we will be achieving this number. Shah Nawaz, sorry -- one of the questions that Mohammad asked me earlier, I didn't answer that, let me just answer that. The LIC contract is around INR 90 crores and the Karnataka government is around INR 45 crores [indiscernible] -- sorry, Shah Nawaz, go ahead.

And your order book, sir, as of now?

I'm waiting for the data. I'll give it you. I'm just waiting for the data.

Okay. Sir, employee size. What is your employee size?

Today, we are around 1,800 people.

1,800. Okay. And sir, one more thing. Actually, I want to understand is, I mean, you have given references, the entire industry is challenging. Actually, I agree with you, but the PAT margin or the EBIT margin, if we see, it's really -- I mean, compared to any other peer in IT or digital industry, I think you are struggling most.

I agree on that. I'm not disagreeing on that, Shah Nawaz. This has been a challenging quarter.

That is actually where we are interested as a shareholder.

Yes. I understand. We would be. That's what I'm trying to say, right? There were some hires that we made, like I said, ramping up both on the sales side as well as for the LIC contracts. We had to hire a number of people. And in this market, you are aware that while we are saying the market is tight, but the employees hiring also is a challenge, too, right? So there are cost factors associated with that. That was what triggered and some, like I said, late starts that added. Whereas for us, since our balance sheet or revenue size is smaller compared to others, the hit is going to be obviously showing versus others where they're able to hide it because of the large revenue base and large [indiscernible]. That's the reason why you're seeing the numbers out here. And yes, we had a bad quarter. We would be doing much better this quarter and quarters going forward. Again, external factors might influence it, but otherwise, we will be doing much better.

So we are almost mid of it...

To answer your question -- sorry.

Yes, yes. So you said...

To answer your question about order book, we are around INR 800 crores is what the order book is -- sorry, go ahead. Sorry, you said something, Shah Nawaz. Go ahead.

So the aspiration for the quarter is great, correct sir, particularly in Q4, in terms of top line and bottom line. Can I take this as a...

Today is February 14, right. I'm going to say...

[indiscernible] half of the billing might have been done.

I will just say, at this point we're doing much better than last quarter.

Much better than last quarter. Okay. Great, sir. All the best to the team. Especially, I'm having a lot of faith in you. Maybe I'm very harsh sometime, but with the management I'm happy...

Hey, [indiscernible] Shah Nawaz. Every time it's great. Yes, you keep us honest. Yes, please.

Yes. You all are in our prayers, sir. We are going to see great things under your leadership.

We have our next question from the line Gunit Singh from Counter Cyclical PMS.

I would like to understand -- so you mentioned reaching $200 million revenue. So I mean -- and you also mentioned that you're doing much better in Q4 as compared to Q3. So I mean to just get a sense of what kind of top line and bottom line can we expect in FY '25 based on the order pipeline and the new orders that you got?

I just can't give you that information, Gunit, at this point. I just don't want to project out. I can give you targets a little bit longer, but I don't want to give short-term targets at all because that is something that I don't want at this point.

Right, right. And even if you, I mean, don't have an exact number, but what kind of growth are you looking at for FY '25? I mean given the current order book and the pipeline, and you said that you are ramping operations...

At this point, right, I just can't give you that, Gunit. I can give you what we are seeing in the order book and what the pipeline is showing. But I don't want to say what can be booked, right, it's too much external influences that are going to matter this year specifically because of all the elections that are going on all over the world. So I just don't want to predict that, Gunit. I apologize, just can't do that.

Got it. Got it. So just to get a sense, I mean, so the $200 million for the target that you set out, I mean, do you have a year in mind, say, within 3 years, 5 years or 10 years?

So we said -- at that point, we said 3 years is what we give the target, and that is what the target we are sticking to at this point. Yes, go ahead.

All right. So basically, by FY '26, I mean, we should be somewhere around that number?

Correct. Yes. That's what the target gave us. Correct.

All right. And sir, what is our order pipeline currently?

It's around INR 800 crores, just around -- it is over INR 800 crores.

INR 800 crores...

I'm talking about order book, order book, order book, yes. The pipeline is going to be huge, and it keeps changing, right, as we go on. The pipeline is going to be very huge. I just -- pipelines I cannot give on, right? I can give you order book. What is pipelines is just sales numbers that sales people are telling us if and when they converted it and we put it into our order book.

All right, sir, got it. And when you say that currently Q4 is much better. So I mean, are we talking about quarter-on-quarter? Or are you talking about Q4 last year?

We're talking about both, quarter-on-quarter as well as Q4 last year.

[Operator Instructions] We have a follow-up question from the line of Mohammad Afroz, an individual investor.

Sir, as I see, our sales figure has improved since the last quarter around INR 4.7 crores. But our expenses also increased, like employee costs increased INR 6.4 crores, interest INR 0.3 crores and other expenses INR 6.4 crores. It sums to INR 13.1 crores. And sales are INR 4.7 crores. So if we are spending so much on these expenses and employees, so why we are not getting the output and we are not seeing the fruits on this revenue side of all these expenditures?

Mohammad, like I said, right, we ramped up for some projects that have started and some projects have got delayed, okay? So because of everybody, this is not just us. Everybody went through the same thing last quarter. There were surprises all the way till December, and there were certain projects that were supposed to have started, didn't start. But we hired the people and they are on board. So that are getting started this quarter and the next quarter. So that is why you'll see improvement in our revenue numbers and profitability, okay? And the other thing like I said, right, LIC required a lot of upfront employees that are required. So we have to ramp them up completely. We had employees in our internal lab, we had to hire internally, then we have to consult things. All of those are costs added to that. So those are the factors -- those are 2 main factors. So when you ask interest cost, right. Interest cost is again, as you are aware, right, interest rates have gone up and have stabilized. Now hopefully, it is going to come down. So that's a bearing of that than anything else. It's not like we did additional significant product. There are some slight increases in working capital requirement that gets adjusted. See especially, like I was saying earlier, right, some of these government contracts are milestone based. So I'm going to have 10 months before I get paid. Now I have to pay my employees and my subcontractors. They're not going to stop. I have to pay rentals in our offices in Bangalore, offices in Bombay to cater towards these customers. Those costs are being incurred. So that cash flow becomes tight, right? So that's why some slight additional working capital we would have taken to help us get over this milestone-based contract. And that cost is showing up in finance costs in addition to the interest costs, okay?

So when we are expected to the billing of this LIC and Karnataka government.

It varies, right. Karnataka has [indiscernible]. We started -- go ahead. Go ahead.

Yes, you continue.

So you were asking, I don't have the exact date on when that is. Since we started -- correct me if I'm wrong, we started sometime in July, August of last year is when we started for this one Karnataka. So it's 10 months from them is when we should be able to collect. Whereas LIC was in November -- in December timeframe, so if we start from 10 months from them, right? So this is going to be the thing, that's how it works. So around May -- May is when we should be getting the money from Karnataka government and LIC is going to be some time in October, okay, that's when the first milestone, assuming that no delays happen and all that stuff, right?

Will this billing improve our margins drastically?

See, the billings is already accounted for accrual basis, okay? All of those things are accrual basis, we do that. Costs also accrual basis. It is not going to increase as such. It's already accounted for today. What is the impact is, is the cash flow impact. So we'll get cash, so the interest cost comes down, okay? And some additional things that we might get. It's not like a significant impact is going to be. So there's some impact is going to be there, for sure.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Niranjan Chintam for closing comments.

Thank you, Manas, and thank you, everyone, for getting on our Q3 earnings call. I appreciate asking us questions, and we would love to continue to -- for you to ask us tough questions just so that we can give you all the information as is. We don't want to hide anything. This is something that we're proud of. Also we want to give as much information as we can to our investors, so that they can make some informed decisions on our company. So thank you again, and looking forward to talking to you in the next quarter's earnings call, or if you will pass by Gurgaon and or Hyderabad, please look us up. Thank you very much.

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