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

Sir, sorry to interrupt you. Tanvir, can you mute your line from your side, please?

Sure.

Thank you, Tanvir. So we have 300-plus customers -- sorry, people in the U.S. delivering our solutions. And these are largely billable people. We have what we call only field salespeople when it comes to the U.S. and the rest of the back-end, where we call the force multipliers, the lead generators happens from India. And your question on the U.S. market, I will defer that to Srini to answer because he sits in U.S. He is a better person to answer that. Srini, can you answer the U.S. markets? What are we seeing? Is there growth coming back? Those kinds of questions. I know I want to add a caveat there, Tanvir, that yes, the market is going to be dependent on the elections. A lot of people are on a wait-and-watch mode to see what the outcome of the election is going to be in November. So there will be a -- I guess, changes that might come up because of the election who wins. Srini, can you talk about what you're seeing now currently?

Sure, Niranjan. Thanks, Tanvir, for the question. The U.S. market definitely is showing an uptick, right? Compared to the initial part of the year, the first half of the year towards the end of the first half and the beginning of the second half, we are seeing personally some growth with net new investments coming in from customers for new projects, specifically on the AI side. So with our approach of AI first, we are seeing some traction. We are seeing some spend from our customers. That doesn't mean that we can predict if it will continue, it will deteriorate, which way it will go. But we have seen a small but significant growth curve that's going up. And now again, like Niranjan explained, the elections are the key. People [Technical Difficulty]. Sorry...

Sir, we lost your audio in between.

Can you hear me now?

Yes.

Okay. So as I was saying, the predictability of how the economy will go is going to be dependent on the election results. But at this point, there is nothing -- there are no indicators. People are just waiting and watching. That is the state here.

Thank you, Srini. So to answer your question, Tanvir, yes, there, we are seeing some signs of improvement. And I think Fed is also probably going to cut at least one round of interest rate cut that also will lead to more investments coming in, what I mean more and more spend coming in. So we are hoping to see that sooner than later. I think the expected is August, September, the time frame is when one round of interest rate cuts will happen. So Mr. Jaiswal, I think you asked a question about the employee cost going up. The employee cost was a year-on-year. So the whole year, it went up by INR 20 crores. It is not a quarter. So it was INR 20 crores and not INR 40 crores. The number probably may have missed out some where. But it's a INR 20 crore employment cost that went up on a year -- complete year. Okay. So that -- Nirav, go ahead for the next question, please.

Next is from the line of Shah Nawaz, individual investor.

So first of all, I want to congratulate you, now we are up to INR 50 crores, right? So -- but the bottom line is not changing, sir. So you know the market, how market -- what market actually need and as a shareholder, but we look forward, right? So I've seen your press release, basically. So the press release -- you spoke about enthusiasm in the new -- some analytics. Some analytics companies have given good rating to you. So -- and some more things, you talked about AI. In our previous call, you said the AI value is hardly INR 1 million in a year. So as you said, we are very much enthusiastic about AI. So what is the revenue and margin you are looking in the AI segment? This is my first question. And how you are seeing that this is a visibility in the coming years? And second, you have mentioned because some big 2 consulting companies, you are seeing a lot of improvement in the revenue. I mean, in the growth, and you have mentioned growth. So the growth means what kind of growth you're looking in, like how the growth is going to be in the quarter 2 and quarter 3 and so on and so forth? And the third question, I'm looking is on the order book, basically. So -- and my request is not to give me 3 quarter answer. So at least give me some number and value because that gives more picture to the shareholders how the organization is working because you have added 13 customers. It's quite a big number, right? So how...

[ I'll ] answer your question, Shah Nawaz, okay? One by one, I'll answer your questions, okay? So we'll start off with the big bid for that we talked about, see what that does is gives the credibility, right? If, let's say, I go tomorrow to another customer and say, hey, we have survived it or successfully delivered a solution to a couple of big 4 companies that builds up instant credibility because you understand, right? These big 4 companies have a lot of enterprise customers and the credibility of our delivery ability as well as the complexity of some of the solutions that we are giving is going to give a lot of credibility, not only in a pattern of back us to say that yes, we can deliver a solution. It's also to the customer just gets a validation by saying that, hey, they have worked with these big 4 companies, okay? That is what we meant by opportunities are opening up. The last time -- you are right, last time when we talked about it. But what we are seeing is a lot more discussions happening. I think we did talk about a huge pipeline being built in the AI space. The pipeline continues to grow for us. There are a lot of active discussions going on, not only with smaller ICDs that we talked about, even the enterprises too, when it comes to the AI delivery capability of ours as well as some of the projects, right? Most of the projects today that we are doing is going to be small in amount because people are trying out what it's going to be. The full benefit of this is going to be coming in the near future. What Karanjit keeps talking about the hype cycle. I'll let Karanjit answer about how this hype cycle works and then what happens in the growth phase and all the stuff. Karanjit, can you take about and talk about that? Before that, let me answer the quantitative stuff that you asked. I did mention earlier that we have an order book of INR 850 crores, Shah Nawaz. You may have missed that answer. So that's a number that I'm giving you that we have that as an order book. Karanjit, can you talk about the AI hype cycle, where we are in that and how we fit into that?

Sure. I think, I mean, the whole technology always goes through a hype cycle. That's a known fact. So we are experiencing the same. We have been through this in whatever we called as mobility and then again, the digital transformation and in AI, just that it is more accelerated. And right now, I think everybody got excited -- has been through the excitement. And as I said before in the call, customers are now kind of having conversions around, hey, what can you -- what can we do with AI for us or in some cases, the more advanced or the more sophisticated of them. I've already done a lot of work, and they've come to us with very, very specific tasks. If you see today, when we have an outreach to our customer base for new customers or even existing customers, all of them are always very excited to have a conversation around AI. And typically, these conversations are around 2 or 3 categories. One of them always is about, hey, what is this AI? Hey, I've heard all of this. What can you do in my context, in my business or my industry, or what are you seeing? So that's one. So these are slightly longer conversations where obviously, then we have to see what can be leveraged horizontally in their business context. Then there are very few limited sophisticated customers who have really -- actually are on the forefront adoption. And they are very, very specific about things, right? They're already fingered some use cases. They want to have much more deeper conversations on where they want to ask you how about customizing LLM for me or those kind of conversations. So these are both the conversations that are happening, which essentially tells us that essentially, AI is now moving from that whole initial excitement to actually AI-first adoption and win customers in these 2 sort of buckets at this -- the present moment. And I think as we sort of move quarter-on-quarter, we will see more and more specific combinations by our customers. And already, we see at least one thing, where everybody is speaking about, hey, can you -- how can this solution -- they're basically speaking about a solution being built in the context of AI. So that's kind of a significant movement in this adoption of this hype cycle.

Thank you, Karanjit. Nirav, go ahead.

Shah Nawaz, do you have any follow-up questions?

Yes. One follow-up question -- 2 follow-up questions basically. Any very big breakthrough in AI you have done or you are about to do? And second is when we are going to see the margin expansion bottom line? Basically, in IT, I was just calculating, IT companies are giving INR 7 lakh to INR 8 lakh PAT per employee, but yours is approximately INR 1 lakh or INR 2 lakh only. When that will improve per employee PAT like -- any time line?

I'm sorry, I lost you that -- what is that employee -- what is that you're saying, Shah Nawaz?

Actually, I have done certain calculations on the Indian IT industry. For that -- per employee PAT, if you look at like...

Got it. Okay, okay. Got it.

[indiscernible]. They are making per employee PAT is summing approximately INR 7 lakhs. But your case is INR 1 lakh or INR 2 lakh. So when that is per employee because you have 300 people in U.S. and the profit what really they are generating is hardly INR 1 lakh or INR 2 lakh per employee. So that is a bit surprising for me as an IT industry. So this is what I want to know when these employees, who are employed in the U.S. is really...

I understand. I understood your question there, Shah Nawaz. Okay, let me answer that, okay? So it's a continuous improvement, right? When it comes to the margin, it's not like overnight this improvement happens. We are starting to show that...

This is not happening [indiscernible] quarter.

Can you hear me out, please? Okay. So it started with last quarter and this quarter is a continuous process that we're doing. Yes, there is -- you have to look at from an EBITDA point of view because there are tax adjustments that happen quarter-on-quarter. This may not be the same. From EBITDA, we are making continuous improvement. And it will go on, right? Like I said earlier, too, the number of employees has come down, but the quality of employees that we are hiring, yes, we are hiring at a higher comps because the quality of employees now we are hiring is a little bit more than what it was. Now coming to the per employee, I don't know the numbers, how you arrived at that. I don't have the calculation in front of me, so I will not be able to comment on that. But for the next time, we'll do these kinds of calculations and probably we'll be in a better shape to answer that.

Next follow-up question is from the line of Tanvir Sure, individual investor.

Sorry, last time actually, my call got dropped. I did hear the fact that you are a credible in the big 4 as your clients. Actually, what I was more wanting to know is that what would be our [indiscernible]? Would it be some technology? Or Would it be a product that we deploy as a solution? That is something that I was looking to understand more.

Okay. So I think I got your question. So yes, we have multiple frameworks that we use to deliver faster solutions. We -- while we do have some products, but probably those are at a smaller scale compared to what the question you're asking. So our ability to deliver solutions and our ability to deliver complex solutions is what differentiates us from others. And since you said you missed out, we have delivered solutions that others have failed. We have picked up from where others have failed. This is including the big boys of Indian IT companies, where they have failed in solutions, we have stepped up and delivered. And this is not just in India, it is across the world, including Japan, U.S. So we have successful solutions where others have failed. So that is the USP that we have, okay?

Okay. And sir, also, I have another follow-up question. I missed out -- I'm not sure if you answered it. But-- what are you seeing in terms of discretionary spends for your U.S. customers? Are they back to what it was pre-COVID? Or is it still questionable? Or is there any ramp down in projects? If you could just throw some light on that.

Sure. We did answer this question, but I'll be happy to answer again. So right now, we are seeing early signs of recovery. And our quarter -- like Srini was mentioning earlier, the first half was not that great, but we are seeing signs of recovery. Customers are engaging with us, customers are giving us a net new work that is going on. But we are waiting for the elections for the big changes to happen. So a lot of companies are waiting and watching what is going to happen with the U.S. elections before they start opening up the purses. The second thing that is going to help with this growth is that Fed's going to do an interest cut. We're expecting one round of cuts this year, which will be in August-September time frame. And when that cut happens, that there will be discretionary spending coming back because the cost of finance has come down. So that -- yes, there are going to be signs. We are seeing signs that -- there is going to be one round of cut this year.

Yes. Sir, and what will be the cash on your books right now?

So let me answer that question as we go on, as we take the next question from the next person. Okay. I'll answer that because we're just digging it up, okay?

[Operator Instructions] Next follow-up question is from the line of Mohammad Afroz, individual investor.

Sir, I think I missed the first question of Mr. Shah Nawaz regarding the [ big offer ] of great clients in AI or you are near to [indiscernible] client, sir?

Okay. Sorry, I could not understand your question. Can you just repeat that again? I know you said something about I missed Shah Nawaz question. Can you ask the question again?

It was Shah Nawaz first question regarding the AI client that -- I also exactly don't remember.

I think we did answer all the questions of Shah Nawaz. We did talk about AI. Yes, we did talk about -- we are saying that there are a lot more qualitative discussions happening with the customers that we have not seen in the first quarter or the last quarter that we talked about earnings call. We are having better conversations with our customers because the engagement is much better, much deeper. So we expect the AI revenues to grow significantly. Again, like we talked, it's an AI first, right? It's not like these are brand-new offerings. We are taking AI to the core. That means whatever it is that they have existing, we are going to be taking AI to that, and that is going to help the customers' decision-making to be faster, better and able to provide better quality offerings to their customers, okay? AI is not going to change -- or is going to change the way they do business delivery is what we are helping with our customers do.

Next question is from the line of Manish [indiscernible] from Manish Piston.

So I have a question regarding the pledge sha sales, which your promoters have. So what am I expecting the pledge shares to be released in the future? And another question is regarding to the profit margin. Could you please give us some insights of what is the future planning to expand the profit margin?

Okay. So I'll answer the first question, which is that the pledge of share. The pledge of share is for working capital limits taken in India. Unfortunately, the banks in India, and unfortunately, I am not a Tata or a Birla. I don't have unlimited property to pledge. Whatever property I have for raising the working capital limits for the company. This is the working capital being for the CC as well as the BGs that we are required, we have to pledge our properties and what the bank's relationship that we have, which we are trying to move [ are requiring ] us to pledge 200% to 300% of collateral. And since we do -- like I said, we are first-time entrepreneurs and we are not Tata, Birla. I don't have -- all I have is an office building and my apartment. So that is not enough for to cover the hard collateral that the bank needs, so they're taking shares. We've been requesting them to release, but they have not released it, and we don't expect that to be released unless we move the banks to a different bank. And we are exploring that option, too, to see if other banks would provide us the same lines with less requirement of the percentage of collateral required, okay? So I don't have a time line to give you on that. Now coming to the margin part, I think I answered that. We are expecting that there will be continuous improvements. And what it is and how soon, I cannot answer that, but there will be continuous incremental improvement in our margins as we go and make changes to the way we service our customers using some of these AI assist tools that we have shared in our earnings presentation. So we continue to see that. As more and more adoption happens within the company and more and more adoption happens with our customers accepting these changes, we would be seeing more improvement in margins.

Okay. Okay. I have a follow-up question. So regarding the AI segment, since I have started investing, so I heard that your company is in the AI wave before it has become a buzz. And you also said that, yes, yes, you are focusing on the core of AI.

No, no. It's a core of digital transformation. I want to make sure that comment since I'm not sure if you are a technical person. See in a core, we mean it is that whole thing of how the data is used, how the cloud is used, how the security implications happen, that is the core. When you take that AI to this core, the way the businesses operate, the efficiencies of the businesses that we service will improve using AI and also reduce their cost of service for them and cost of customer acquisition for our customers. So that is what we mean by the core. I don't mean the AI core, right, which is completely different.

Next follow-up question is from the line of Rupam Jaiswal from Investwell Agents.

Actually, I just wanted to know like what are your R&D expenditure, which you are doing for AI solutions? And right now for new software on the items we are -- like products we are developing? And what are we planning to do in future? What we have done in the past and in the future, what we are planning to do?

So Mr. Jaiswal, I'll answer -- Rupam or Jaiswal, whichever I'm sorry. I guess, [indiscernible]. Sorry about that, Rupam. Okay. So to answer your question, right. When it comes to AI side of it, we do have R&D that we are experimenting within the organization by a way of products that we have -- that we have launched. And we are getting early signs of traction on those things. There is a spend that happens and we capitalize that. And the exact amount, I'll get to you while my team is pulling it up. But to -- so I think I lost my train of thought. The other question that you asked, I'm sorry, Rupam, go ahead. What was the other one? R&D spend and the other one you asked?

I was asking like what kind of -- like in future, what are we expecting to like deploy in terms of percentage of revenue towards R&D, like in that terms, if you can give me a [indiscernible] number.

Okay. That number also, I'll get to you because my team is pulling it up as we speak. So the last year, right, our R&D spend was around USD 2.5 million was what our R&D spend was. This year, I think, we're going to be around USD 3 million or something is going to be -- a little over USD 3 million is what we would be spending on the R&D side of it. And this R&D [indiscernible] is going to be an investment into the products that is going to give us returns over a period of the next 3 to 5 years.

Okay, sir. And the number which you have said INR 2.5 million or INR 3 million, it is in INR or is it in USD terms?

USD.

[Operator Instructions]

Nirav, looks like there are no more questions. Let's wrap it up.

Thank you, sir. Would you like to make any closing comments?

Sure. Yes. Okay. Thank you, everyone, for joining us and giving us a chance to explain both on the quantitative side and qualitative side of our business. I think we had a few new shareholders that have come on board and have been asking some questions, and I'm really happy to answer. And like every time I talk about it, if you are in Hyderabad and/or Gurgaon, please look us up. We'd be happy to chat with you and also get you to talk to our employees who are providing these great solutions to our customers. So you can get the first-time experience of sharing from them on how we do, what we do, that really gives you some kind of a clarity as to our capability as well as our ability to deliver. Okay. Thank you, everyone. Looking forward to seeing you. I think probably, we have an AGM soon. So looking forward to seeing you all of you at the AGM. Thank you, everyone, and goodbye, and have a great day.

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. Thank you.