Mastek Limited (MASTEK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Mastek Limited Analyst Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Diwakar Pingle from Christensen. Thank you, and over to you, sir.

Thank you, Liezl. Good afternoon to all of you, and thanks for joining in on a weekend for this call. This call is to discuss the Mastek signing a definitive agreement to acquire Evosys. The press release and the presentation have just been mailed to you. Some of you might be just getting this in your inbox. In case you've not got that, there are some exchanges, too, so you can take a look at that. We recommend the digital full presentation because John is going to go through it and do a page turn of that. To take us through the call today and answer your questions, we have John Owen, Group's CEO; Abhishek Singh, Group CFO of Mastek. We're also joined by Mr. Umang Nahata, CEO of Evosys. The structure of the call is not formal. John will start the call and will go through the construct of the transaction. Abhishek will give a brief comment, and then we'll open it up to Q&A. I'd like to remind you that everything that is said on this call that reflects any outlook for the future or which can be considered as a forward-looking statement must be viewed in conjunction with the risk and uncertainties that we face. These risks and uncertainties are included but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual report that you will find on the website. With these few words, I'd like to turn the floor over to John. Over to you, John.

Thanks, Diwakar. And may I just also welcome you to this exciting call. And firstly, I apologize for the inconvenience of impacting your weekend. But as you know more than I do, there are strict disclosure rules for an Indian public company when we do a transaction. So we've just informed SEBI, and we are now sharing this information with you. So please bear with us because we're in various parts of the world. So the handovers may not be as smooth as they usually are. So please bear with us. And first of all, can I just welcome Umang Nahata, the recent Chief Executive of Evosys. He's joining Mastek, and we're really excited to have Umang both in the business and on the call. And Umang will be available for some commentary later on when we've been through the presentation. The purpose of today's call is really to, one, share the formal announcement of our acquisition of Evosys; two, introducing that this is a company to you and explain the market it serves; three, share the strategic rationale for Mastek and Evosys and what we expect the result of joining forces, our motivation and our future expectations and why we feel the combined business will strengthen Mastek to be more robust. It's -- both companies are successful, both companies are confident in their own future success, but I think together, we make a special force and that's what hopefully comes through this presentation. And we'll also expect -- explain the deal construct and why the structure is important to the success of the transaction over the long term. This isn't a business that was looking for an exit. This is a business that's looking to grow faster and safer within the portfolio of Mastek. So as I said, before I start, it's a real pleasure to introduce Umang. What I will say, over the last sort of 2 years, as we've been buying Evosys, has been a culmination of 2 years' work by my team against some strict evaluation criteria of market fit, operating model, cultural fit, affordability and motivational alignment. We've evaluated about 60 to 70 companies over that 2 years and rejected most of them as there were too many compromises against that criteria. Evosys is a great match on multiple levels. So as we enter with high confidence success -- so we entered this with high confidence of success, and that's neither complacency nor naivety. We all understand the inherent risks of acquisitions. However, we're all confident we're going into this with our eyes wide open. We have clear alignment of objectives, both the buying and selling for the right reasons at the right time, and the reality is there will be challenges. And when they are, we have clear mitigation plans that we've discussed. Having been engaged with Umang and his team for the last 12 months, we've been able to build a good working relationship and understanding based on trust, respect and most importantly, we both share the same burning desires to build a successful business and capture the unique opportunity that digital transformation generates for new service providers, and that opportunity is now. Evosys was started by Umang and his friend Rakesh Raman 14 years ago. So if you say it's an overnight sit, then it's taken 14 years to be overnight. But before we move forward, I want to acknowledge and congratulate them on building such a great company in Evosys. They should be incredibly proud of the great business they've built and the team they've built. And then they're equally excited to start their next chapter of their journey with Mastek. So as I said, Mastek is buying a great company with great leadership, great momentum and a great market opportunity. So the timing is absolutely right to scale quickly and decisively. We evaluated buying Evosys now with a lower risk option than trying to bolt-on multiple smaller entities over the next few years. That strategy is more complex, more time-consuming, will be slower, and in fact, introduce more of what I call compound risk. Also, on completion, we can now shift gears and focus back to running the business with more time and more resource. A little background for Umang. He's a qualified chartered accountant. I won't hold that against him, and he also holds a software engineering degree. And today, he, like Rakesh, are very accomplished business executives with all-round skills. And like my good friend and trusted colleague, Abhishek, they are all significantly younger and fitter than me. So not only do we acquire access to a great business which will be a catalyst to overall Mastek growth, but we also strengthened our executive leadership of Mastek with accountable senior leaders who have the right age profile, experience, energy and most important, the motivational drive to build Mastek into a serious powerhouse over the next decade. This is why I'm really excited by this transaction, and I'm confident in our future performance, our future outlook and our future stewardship. So to help structure the conversation, we've prepared a brief presentation that you should now have in front of you, and we can go through that. And then we'll take some questions to round out your understanding of the opportunities in front of us. So if we start with Slide 4, which is Evosys' numbers, if that's okay. As you can see, a well-balanced, rounded organization, 1,300 customers globally, and that for Mastek is a really attractive addressable market that we can start to cross-sell core digital services into. Very much 1,000 customers on cloud which is that next-generation revenue, so strategically well placed. Good geographic diversity with 30-plus countries. They've got a solid concentration in the U.K., the U.S. and the Middle East, and that will bring some geographic diversification for Mastek, which is good, having had the last 3 years with a very heavy orientation towards the U.K. Significant talent in 1,300-plus and growing consultants. And when you think of our digital commerce business, we are a Silver Partner, I think, and we are in one pillar, which is digital commerce or Oracle Cloud commerce. Evosys bring out more pillars and they're a Platinum Partner. So again, we've got real critical mass behind that market initiative, and they've got strong competencies across those pillars. If we move to Slide 5, the company overview, you'll see it's well established, it's been round, and it's built momentum, and it's absolutely coming to the market with the right solutions at the right time with the right credibility and capability. The solutions are really attractive because they're around an ERP, which is enterprise resource planning, human capital management, supply chain management and customer relations, all these areas that are really intrinsic to a digital company. And they've got real credibility. And those are the starting points often for company digital transformation journey. Evosys really do focus and they carve out a really good niche in that cloud migration, which is growing faster than the traditional IT industry. And we've got lots of alignment with our industry verticals, particularly in the U.K. with the public sector, where Mastek is very strong in the central government, Evosys is particularly strong in local government. And we can start to seek to bridge those 2 together. Again, retail is very strong. From a location, we like Evosys because it is Indian. It's got an Indian engineering base. It's got a strong offshore operating model. So there's a good cultural fit, there's a good operating fit, and we can start to drive some operational synergies against the target operating model. And again, they see strong growth in that strategic markets of the U.S., the U.K., and we will start to look at the Middle East and Mastek as a strategic market because those 3 areas, we've got real critical mass. The revenue mix is interesting because it comes from -- although the heritage is in implementation services, they're starting to build really strong annuity services around managed services. So again, some good momentum, some good mix, and the direction of travel is both going to give us revenue resilience, and it's going to allow us to not only broaden our customer base as a group but deepen those customer relationships. And I think going forward, as we exit Vision 2020, that's how we will look to build sustainable, repeatable growth is by increasing our customer base, and we will do that with a very good sales engine from Evosys and some account mining from Mastek, so we deepen those customer relationships. And we don't just do a front solution on ERP, but we take a full digital portfolio to that customer. Moving forward to Slide 6, you will see as Mastek, they've got proof points in the industry. So Mastek last year won the U.K. IT Vendor of the Year Award, and we were awarded CMI Level 5 for our methodologies. And as you can see, Evosys are also proven with their accolades from Oracle, and they were the Oracle Partner in 2019 for human capital management, and in 2017 for enterprise resource planning. So again, good critical mass, good credibility, good IT as well. And I think that's what we really like about Evosys is they have IP that they built around methodologies and merger called Evosys Glide that helps customers on the journey to digital transformation. Moving forward to Slide 7. The strategic rationale for Mastek is very clear. I think after the last 3 years, we've been heavily exposed to the U.K. for good and for bad. And that's because at this stage of our journey, we're now looking for more geographic diversification, so we can balance out some of those [ roots ], and we can enjoy growth in certain markets and new markets, particularly the Middle East over some critical mass. I think the revenue will also become a lot more solid because we've got transaction revenue coming off this market opportunity with Evosys in the cloud migration. And I think Mastek has shown it's got good solid annuity revenue from very big anchor accounts, particularly in the U.K. And this market segment, we're both in the enterprise, in the small, medium enterprise. And I think the small, medium enterprise is an area that is underserved by some of the bigger, larger software service providers. And that's an area we'd like to carve out a niche. Evosys also complements Mastek's strength and so the ERP market migration is a new area for us. But as I said at the start, it's usually the starting point for digital transformation journey. And I think if we can move earlier in the decision cycle, it helps us sort of penetrate new accounts because we're not competing with preferred supplier lists, we're going in on competence with a compelling reason to invest around cloud migration. And as I've said before, Evosys has a very strong sales channel in partnership with Oracle, and I think that's a competitive advantage that we see. It's not just a great delivery company. It's not done really well. It's not just done very good in revenue growth, its sales engine is respected, trusted by Oracle. And I think that momentum, we can ride on and invest more in. And I think, again, that recognition, Gartner recognizes both the market of cloud migration as fast as some sort of [ hot ] and also Evosys as a company that can really compete and win in that space, and we're starting to build some differentiation. I think the [ answer ] is, this isn't sort of taking that competitor and trying to sweat costs out. There is very little overlap, if any, of capability. We're coming from an app development, the BI and analytics, Evosys are coming from an implementation around ERP. And what we do, if we came from those 2 ends of the spectrum, by coming together, we can actually fill that capability gap in between. And so we don't see any sort of operational synergies and any operational costs coming out, we think this is about building for growth, and this is a stimulus for growth, not for taking cost out. And both have a very strong offshore model. And I think Evosys is even stronger. So we can actually go into the markets, maybe in Europe or parts of Asia, with a very low-cost entry model, which was a really good beachhead for Mastek to look at, is it worth investing in core services in a new market. So it gives us market entry potential. Most importantly, it comes down -- as a human capital business, it comes down to people. And I think, as I've said, Umang, Rakesh and their team also come and strengthen our executive leadership and give us some future proofing as we build our executive capability. But I think fundamentally, the core values of the company, the people centricity, the delivery track record, we think in our DNA was very similar. So I expect Evosys culturally to fit in very easily and quickly into Mastek because we share that DNA. I'll now hand over to Abhishek to go through the transaction details because this is a global transaction, and it's a very -- sophisticated, but I'll let him go through. And I think the way we structured it, hopefully, give you the confidence that this is about 2 successful companies coming together to accelerate success and growth. Nobody looking at actually subsidizing a weakness or [ rebasing ]. So the -- Umang and his team are absolutely part of the future. This is not just a short-term transaction, and I'll let Abhishek go through the transaction details, and then we'll open it up for questions, if that's okay. Abhishek, over to you.

Thank you, John. So the transaction is a 2-step process here where Mastek U.K. has gone ahead and acquired the Middle East business for about $65 million consideration via business transfer agreement. And the second leg of this transaction, which is a separate one, is that Evosys India businesses, the mature market businesses of U.S., the U.K., Australia and the rest of the world businesses have been demerged into the wholly owned subsidiary of Mastek for which there is a consideration of 15% stake in Mastek that has been provided. From a structure point of view, both Umang and Rakesh on the part of the management team at Mastek focusing on the Oracle services, as we call it. And obviously, this aforesaid transaction would be subject to regulatory approvals and customary closing conditions. That said, these are done in 2 separate legs, and these are 2 separate transactions to be consummated. I would want to offer the floor to Umang, who has joined us from Ahmedabad via phone call, kind of get -- give his first reaction as we are all settling down, having signed the papers and kind of completed the formalities, share his reaction, and then we'll open the floor for question and answer. Over to you, Umang.

Thank you, Abhishek. First and foremost, thanks a lot to John, Abhishek and the entire Mastek team for welcoming us with such warm heart. It is very interesting and important milestone in Evosys' life -- in our life at Evosys. And we are extremely excited to -- looking forward to what the future holds for us. The -- like John did explain earlier, I think there are multiple synergy points that we see in the whole transaction. Firstly, as it was an organization, we very much were looking for a future that gives us much bigger platforms to work in, much bigger areas to perform, a much larger playground to work in, and Mastek offers all of that being a public company, being already dealing into customers large and doing much more deeper business there. So that platform is something that we really challenge and look forward to. I think there is very much complement in terms of the business models that we have. Our business model is to hunt for new customers. Continuously, we've add -- constantly add new models quarter-over-quarter all the time. However, we had not gone very deep into those customers since we are only Oracle focused, and we did only that part of the business for the newer customers. And now with -- as we join hands with Mastek, that allows us to harvest that relationship much more and go deep within those customers and explore much more business within those customers and deliver a much fuller solution and platform to them as we move forward. This complement, I think, very well -- you see that as making business, 1 plus 1, 11 here, clearly, as we open those, and now we also have a chance of further building on to what we have initiated. Thirdly, I think the culture and fitment between the 2 organizations is phenomenal. I mean it's extremely pleasantly surprised in terms of all the interactions that we've had with the Mastek and the team there. And when we look at our culture internally, the ambition, the aspirations to grow the operation, part of their integrity within the whole transaction, the transparency with each communication and information flows within the organization. All of that is very, very warm and close to our heart. And I think that gives us the real comfort. So as an organization, we are very excited. It is a stage wherein we see ourselves backed by organization, by financial muscle via corporate governance setup and a platform that allows us to push and deliver more. We clearly have been seeing tremendous growth within the Oracle arena. We have been the leading partner for Oracle for the last 3, 4 years, constantly being much better than most of our peers within the Oracle. We're all having really good success there, transforming medium and now very large customers from enterprise to cloud applications, developing various assets as we do that. And I think this is our chance to not only accelerate and grow that business further, but even build a big tail and try to do much more deep business within the customers that we have acquired already and if we happen to acquire in the future. So once again, thanks to the Mastek team for welcoming us, and I really look forward to the coming years of doing business and working in a public company.

Super. Thank you, Umang.

Liezl, we can open the floor for Q&A now.

[Operator Instructions] The first question is from the line of Mohit Jain from Anand Rathi.

First is on the dilution. This 15% dilution that you have spoken about. This number, and there's a number which is on the website, so that number includes 15% and this will be on top of the $65 million that you mentioned on early.

So there are 2 separate transactions here, Mohit. The first one is where Mastek U.K. has gone ahead and acquired Evosys business out of Middle East, and that's the value that you're seeing there for $65 million. And for the growing market businesses of Evosys in U.K., the U.S., Continental Europe, Australia and parts of Southeast Asia, that's the second leg of transaction that is being done via Mastek's subsidiary by the route of demerger. And that's where you have 15% equity stake.

So this total revenue that you are acquiring will be how much? And how is the geographical data from the final entity from a customer perspective?

Yes, sure. So we've outlined that in our press release. So March '19 financials had $60 million in revenue. And the split of that was right around 45% out of Middle East. U.K. and Europe constituted around 30%. North America was around 17%, and rest of the world was around the balancing number of possibly around 8% and change.

So the Middle East -- the numbers in the Middle East is 45%?

That's right.

U.S., 17%. And Europe?

U.K. and Europe put together is around 30%.

And equally split, 15% each or?

No, no, no, heavily towards U.K. So Mohit, this acquisition gives us the footprint into the markets like Middle East, which has the ability and now with the wherewithal of resources and now with the new set of leadership coming in each of these countries, they are also bringing in the willingness, the stuff that we have seen in, for example, Kingdom of Saudi Arabia, where they want to invest heavily in their health care as well as education sector. The stuff that they have been reaching out via some of those agencies who are picking up those work as we did for U.K. government in our last 20 years of being in U.K. So Middle East is really an interesting market and our lack of presence there, this gives us the foothold there. And the other part that's exciting for us is the growth in cloud space that this acquisition is experiencing or rather this transaction is experiencing here. 60-plus percent of its revenue is in cloud space, cloud implementation-related, and that's experiencing a very high CAGR. So I would say that if we put these numbers in the context of what it brings, the legacy of it has always been Middle East, but the growth has been fueled by the matured markets of U.K. and U.S. over the last 24 to 36 months.

So U.S. still remains established here, right? The [ revenue of 12.5 million ] from the U.S. market annually?

That's about right. So the foray of Evosys in U.S. has been relatively sooner than possibly U.K. and Europe. And the growth that they have experienced in U.K. and Europe has been far faster. U.S. is following that footprint, and I would expect that to accelerate over the coming time.

So I think, if you look at the U.S., it's coming from -- it's a shorter period, but the growth rates are actually going to be higher. I mean if you look at the opportunity, now we've got more critical mass, I'd expect that to be disproportionately starting to contribute faster. But it is -- as a company, it's been a rough time.

So [ with the nature as ] faster, the growth rates expected are more like a 15% kind of number or...

Yes. I mean the growth rate would be the growth rate, Mohit. But yes, we expected faster than that.

Faster than 15%?

Yes, it's also about...

[indiscernible] you think?

Mohit, it's not just predicated on our expectation, but it's also about the market coverage and the way the investments have been structured. So if I could just use the market coverage as a reference, I have seen a number of -- or higher number of headcount and recovering sales and the field sales of contact headcount there in U.S. than what I have there, U.K. and Continental Europe, which has experienced better growth rate. So this shows you that despite lower revenue share, the investments have been in line, and the fact that the on-prem to cloud migration and the sweet spot of ERP, HCM and STMS for Oracle, it gives us that level of confidence that with this kind of market coverage, which is practically 6 to 9 months old, this will give us an accelerated growth rate in the U.S. market.

Okay. And this is like all transactions or one of these...

Apologies, Mr. Mohit Jain. Sir, may we request that you return to the question queue for a follow-up question so the participants may take their turn. [Operator Instructions] The next question is from the line of Ashish Kacholia from Lucky Investment Managers.

Abhishek, I find the presentation very incomplete here in the sense that we have no idea of what you are paying in terms, what we are getting in terms of EBITDA and the entire structure. The presentation is very incomplete. So if you can just fill out the -- what is the rationale of this price that you are paying? So we have paid about $65 million from our U.K. subsidiary. That's about $65 million in 2 [ stones ], is about INR 450 crores there. Another 15% in the Indian entity. So that's another INR 160 crores. So it's about INR 600 crores. So for INR 600 crores, what is the kind of EBITDA that you have acquired?

So this will equate to something like $11 million -- $10 million to $11 million in EBITDA, if I had to just try to do the equivalent of 70% of the economic interest that this configuration brings on table.

So we are paying roughly about 10x EBITDA. Is that correct?

That's a good reference, Ashish.

Okay. And what's our own EBITDA for the year that has gone by? FY -- I mean TTM, what would be our own EBITDA? Pardon me, I don't have the numbers in front of me right now.

No problem. So before I answer that question, I rather answer the question you had before that of what’s the rationale [indiscernible]. The first thing here, Ashish, is that you're looking at a growth market we're looking at catching the wave that's already established. Oracle, in its OpenWorld, outlined that less than 10% of its on-prem customers have touched the cloud base. It was further solidified by 1 partner, I think as a wave, and we did that evaluation on a paid basis to establish that. And we also did the checks in the market, the likes of, let's say, the DAZ Systems acquisition by Accenture, roughly 15 to 20 months back. And all of that equates to possibly a higher, if not, a similar valuation, so give us the rationale. Now as a seasoned investor on our [ country ], you know that some of our challenges have been our ability to unlock the value and possibly the Brexit-driven overhang and revenue concentration by the board. We've tried to kind of balance all of that. The company, what we are investing in to kind of unlock the value. So while 10x EBITDA multiple clearly looks optically high, so there are markets -- enough market references. Even if you do the revenue multiple, it just falls in that space.

Well, I thought that the big clarity for Mastek was to grow the U.S. footprint. So there's the marketing for that, right? I mean yes, there's going to be some growth, but the growth comes off such a small base that in the overall scheme of things, it doesn't really move the needle. So why then kind of go down the path as it doesn't serve a larger objective of becoming bigger in the U.S.?

Ashish, with respect, I think it will. It's not buying a U.S. business in lock, stock, and barrel but it's buying a U.S. potential, which is a big market. And I think we've got to recognize Evosys is -- it may be a 10x multiple, but it's also a premium brand. And what we've seen is this company has a very good sales engine, so it will grow. And I think if we didn't do the transaction now, quite frankly, in 12, 18 months, we probably couldn't have afforded it. So I think that's the -- the assumption is we are going to grow into that value. The U.S. will benefit, but it's a -- this is a better strategy of balancing out. You're just putting a lock, stock and barrel and buying a U.S. business, which is going to give us more geographic diversity, particularly on a year when you're going to go through a U.S. election. So I think it's -- you're right, it's -- we still need to bolt throughout our U.S. business and get a critical mass. This will give a critical mass around that digital commerce footprint. However, it's not the 1 dimensional -- that's all the U.S. strategy. We still need to execute that. But this is a good company growing at a good multiple. And this is the time to get in and grow with it, not wait for it to grow, then buy it at a premium. Does that help answer the question?

Okay. And yes, it would be very nice if you could give us the last 5 years' financials of this company, the P&L, cash flow and the annual report. I'm sure you can mail that to the shareholders.

Yes. And I think we spoke about getting together.

The next question is from the line of Nirmal Bari from Sameeksha Capital.

My question is in continuation with the previous analyst. So our strategy initially was to focus only on U.S. and U.K. I think the U.K. was our home market and U.S., trying to penetrate in the U.S. So how do we see this in our Middle East entity and then on Continental Europe, which we had continuously are waiting for so long, and we are entering those markets?

Sorry, let me just be very clear. We are not changing strategies and -- but to get a perfect fit on all organizations is very difficult. We are, as Mastek with core digital services, we're focused on India, the U.K. and the U.S., and that strategic focus remains. We will add to that the strategic focus of taking core digital services to the Middle East, as Abhishek said, because there is a very good foothold and reference that we buy when we get Evosys. All other markets are going with an offshore model of just sort of the ERP cloud migration. So it's a light touch. We're not going to go into Continental Europe unless there is -- we're taken there by our customers. So please don't confuse. We're not shifting strategy. What we're saying is this is a way of entering markets in a cost-effective way, but those strategic markets, which is where Evosys has been putting their sales investments over the last few years are the U.K., the U.S. and the Middle East. Everything else is probably a little bit tactical. So please don't assume, because we're talking about 30 countries, that we're changing that focus. We're not going for a sort of a blanket approach. We're very focused around the U.S., the U.K., the Middle East, those are our core markets.

Okay. And secondly, just, Mr. Abhishek, the EBITDA margin -- EBITDA for the company in FY '19 was sort of USD 10 million. So that places the EBITDA margin somewhere around 15%, 17%. Is that understanding correct?

So without getting into details here or the specifics of this, and what I would indicate is that this is a high-growth asset in a high-growth opportunity and amply recognized for delivering that. And what I was sharing was that some of the acquisitions or reference acquisitions have all gone in the 2x revenue plus. From the evaluation base that we have had of Evosys to the time we are talking about 60 days away from the end of the financial year. Every indication that it is living up to the expectation of a good top line growth with healthy EBITDA numbers. So the $10 million that I indicated was the proportionate number and not the business entities that we got.

Okay. Proportionate number for the current year? For the current year, I think, for the 60 days that have been in the current year.

No, no. For the share of the economic interest that I have in that entities. It's not a 100% acquisition there, Nirmal.

Okay. So there will be more [indiscernible] markets would be only 13 percentage stake in the company after this acquisition. Is it?

That's right.

And that would be how much, sorry?

So that would represent possibly 30% of the economic interest.

Okay. Okay. Fine. And secondly, I was referring to the BSE announcement that you had given, in which it states that the turnover of the demerge division is INR 306 crores, while the total turnover is $60 million, which would be INR 420 crores. So the turnover of the Middle East division, that was acquired by our U.K. subsidiary, is it around INR 120 crores only? Or is it -- is there something that I'm missing out here?

So Middle East is around $23 million, Nirmal, if that helps you do your math.

The next question is from the line of Sarvesh Gupta from Maximal Capital.

So first question is on this transaction, as also a previous participant was alluding to that our own company is trading at a 4x EV to EBITDA, and then we are buying this company at 10x and we are diluting 15%. So I think that is something which I could not understand because the currency that we are using for part of this transaction is currently being valued very cheaply. So that's where I think shareholders need to understand if this was the right currency to be used even though the revenues take out the part B.

Sure, Sarvesh, I can take that. And John, if you want to chip in?

Yes. Sorry, Abhishek, before you start -- if you could go -- and I agree with the math for that. I think we're going to look at what does using shares driving behavior in long-term value creation in retention. And I think as Umang quite rightly said, they're coming into this -- they're coming into Mastek with a view of we've got a bigger platform, where can we take this? So I think it is important, not just from the currency and the value, but does it drive the right behavior strategically for all our shareholders over the next 3 to 4 years. So that's why we use stock, not because of just the currency. And I'll let Abhishek use a little -- and go basically finish the answer.

Thanks, John. So I'll just add to your comment there that the reason for my stock to be valued at 4x EBITDA or 5x EBITDA or whatever that number is, and I dissected it in many different ways. That's one way you've looked at it. My market cap as of yesterday's close was around INR 1,050 crore. Everyone knows that we have got INR 500 crore or equivalent of cash on the balance sheet, not the cash and cash equivalent, INR 500 crore of cash. Why do you believe we don't have that valuation unlocking? These are the steps that we have taken to actually unlock the value and address the essential concern that investors have had: U.K. revenue concentration, public sector, Brexit overhang, limited focus, U.S. growth, investment in the business and the bespoke application solution that we focus on, which has a prolonged sales cycle but very stable revenue visibility. We wanted to complement this with the type of business which has a high burn rate, faster win, faster delivery and that could become a complementary one. Now if I evaluate every opportunity with the limitations that I have, there's only as much that we could do. And that's why if you see, last 3 years, we have been in the market, trying to assess the assets that are out there. It does not necessarily check all the boxes. So as a shareholder, it's a fair challenge from you, and we are sharing the rationale here that we have evaluated it from all the parameters. And it's about landing the asset that helps you unlock rather than living with the parameters that we have.

Okay. The other thing, if you can indicate while you can share data on it later on is for the $37 million of ex of Middle East business because Middle East business for this company does not seem to be growing if you see the last 3 years of revenue. So that is like a constant. But for the remaining $37 million, what has been the growth and what has been the EBITDA margins? And if you can share the EBITDA margin for Middle East separately?

Okay. I'll just give you an overarching comment here. If you recollect, I shared that this business has got 60-plus percent plus of its revenue coming from cloud. And the genesis of this organization has been from Middle East. They were the first set of on-prem customers that it landed. And from there, it expanded and went into U.K. and the U.S. So there as well, while optically the numbers are flat, the kind of on-prem to cloud migration that this business has been able to drive despite top line being constant, that's the exciting part of it and that presents an opportunity. That also helps us move from the low gross margin to a higher margin and the lower cost for the end customer kind of approach that we are driving. So while we'll get to the numbers at the opportune time, but I did want to leave you with it that Middle East is not a laggard, but it's mostly the stability that it provides and is experiencing the cloud wave that's coming on the backdrop of a very long period of on-prem installed base that it has. And it also is a strong market for Oracle.

Okay. But any ballpark...

Sorry to interrupt Mr. Gupta. Sir, may we request that you return to the question queue that...

Just one question, madam, if I chip in. I just wanted a ballpark number of growth and the margins, if you can give us some indication about where it is?

So various geography-wise split as against that, I would say that this organization is in a very high-growth, high-opportunity zone, and the quality of earnings also reflect the growth.

The next question is from the line of Bhavin Shah from Sameeksha Capital.

Appreciate having both companies sort of -- both management staying on and having a stake in Mastek. Well, I'm just trying to understand some few basic things. So on that economic interest at $11 million, is that for which period? And what is the after-tax profit number really corresponding to that? And what is the working capital situation of this company? And $23 million Middle East revenues, we have 70% economic interest. So we are paying what, 3.5, 4x revenues in there, is that correct? And on overall cost of consideration of INR 600 crore, looks like we're going to add after-tax profit of maybe what, about INR 30 crores, INR 40 crores, is that correct? I'm just trying to understand. I mean I think it would -- yes. So -- and I confer with other callers where some more details would have really helped us focus on more interesting aspects of the transaction. But here, we are just trying to get to some basic details, please?

Sure. Thank you, Bhavin. So I would start with professing the fact that these are 2 separate transactions structurally culminating into one business decision. So while you -- while all of us look at the Middle East revenue and the Middle East considerations as well as the rest of the world businesses, what I would like to indicate is that the businesses could be intertwined at a fundamental level. So the best way for me to give the reference here would be that all these considerations would actually sum up to a 70% economic interest in the combined entity, if I had to put it in that way, and that would equate to the corresponding EBITDA share that comes across with this. Clearly, from a business cycle and business nature point of view, the matured businesses of U.K. and U.S. follow the same kind of payment cadence as we experienced, possibly a little bit higher. We experienced around 60 days. These business -- these geographies experience around 70 to 75 days. But again, in line with the industry. Middle East obviously is a different market. It's stable. It is solid. It is relationship driven, but it clearly has its -- this one on the payment cycle. So you would expect this in the high 100s as the payment cycle would be. As far as the cash flow or the cash-generating part of it, it does overall -- on an overall basis, it does few cash and it's able to fund its growth and has -- still has enough for investment. From the structure and the presentation and stuff, I take the feedback from you and from all the participants here. Time was of essence here. So we could do what we could, but nevertheless, we accept that feedback. Having said that, it is -- the fundamental of it is that it is a high-growth business, delivering a high-revenue growth as well as high quality of earnings. The structure of it is such that it may be just confusing us callers here on the call right now. But as we go forward and have some more conversations between now and the next week, it will get clarified.

So I'll focus on the entire -- overall acquisition, Abhishek. So 70% economic interest translates to what after-tax profit number?

So that would be roughly around, if I had to just put it as that, $60 million in top line for the last financial year with around INR 70 crore, INR 75-odd crore in PAT, if my memory serves me right. That's the reference that I have.

So INR 70 crore, INR 75 crore, are we taking 70% of that? Or that's our economic interest is INR 70 crores?

No, that will be the total.

So I take 70% of that, it's about INR 50 crores, that's with our economy...

That's right.

The next question is from the line of Sachin Kasera from Svan Investments.

First of all, regarding the credit base mentioned by a couple of participants regarding disclosures and all. See, this is such a large transaction that you are doing in the history of Mastek. It's almost 70% of our size. And the public disclosure and the corporate governance of Mastek has been so high despite being a much smaller entity, that the type of disclosures we are seeing on this is really, really low. And while I understand that we had time constraints, you mentioned that you were working on this transaction for last 2 years. So I find it very surprising that we could not even have the basic details in the presentation. See, the financial markets are going to open on Monday and they're going to react to this transaction, it's such a large transaction, it can have significant implication on how the market reacts to a stock. So I feel very, very -- honestly, sir, I'm extremely disappointed the way we have put up the presentation. Even in terms of clarity, whether we are acquiring 70% of both the entities, one entity 100%, one entity 15%. How do we all come to terms with the details of this transaction, especially a large transaction. So I have a sincere request that before the markets open, please give us proper details of this. Otherwise, it's going to be very, very difficult for us to evaluate what the company is doing?

Okay, Sachin, noted. Thank you.

Yes. And just one basic query. So are we at least have this clarity whether you're acquiring 100% in Dubai this entity and 70% in the U.S. Although like 100% in Dubai and -- see because you're saying overall 70%, the growth rates of both the -- are very, very different. So if you are acquiring only 50% in high-growth entity, while you will be acquiring today 70%, it may actually be only 50% or 55% of future profits. So that's again very confusing. If you could just clarify on that.

So a good reference for us, Sachin, would be that it's a proportionate one on -- that's why I've been using the term, north of 70% share of -- but I've said, 70% of the economic interest, which basically means that if you had to go a consolidated level, it will be 70% of the total profits that it generates.

So it's fair to assume that hypothetically if the company's profits were to double in the next 2 years, irrespective of whichever geography grows, our economic interest will also grow at 2x. Is that a fair mathematical understanding?

Absolutely.

The next question is from the line of Nisarg Vakharia from Lucky Investment Managers.

Most of my concerns and questions have been addressed by the previous participants in several forms. I just had one point to make to Abhishek. When you say that the whole market knows that I have INR 500 crores of cash and still the market is not respecting my profitability is because we have had a large 1 year of absolute degrowth or flat revenues. And it's very simple that if you have one quarter of 5% to 7% constant currency growth, the market appreciates you in exactly 1 month. So I just wanted to make that point to you before you feel that the market does not appreciate the INR 500 crore cash balance on our balance sheet. Thank you.

Thank you. Point very well made.

The next question is from the line of Amit Chandra from HDFC Securities.

All the questions regarding the valuations and everything has been already discussed, but I would like to mention one of the things. So we have paid for the Middle East entity around 2.7x sales and if I see the financials of the Middle East entity that you have reported so there is 3% decline in the last financial year report. So as you mentioned that there has been shifts from on-premise to cloud, so that would be on-premise revenue and that is being reflected in the overall recent growth rates. So I would just like to understand that while we've paid such a high valuation for the company, that which is only focused on one platform [ in cloud ] and that's also the on-premise to cloud shift that we have seen because if you see the growth rates like prior to that year, it has grown at a decent rate. So it's the first year where this transition has happened. And as per our experience, the transition at least takes like 2 to 3 years to stabilize. And after that, again, you see the hyper growth rate or the expectation that we had. So if you can clarify on these aspects, it will benefit...

Thank you, Amit. So like the feedback from most of the participants here, clearly, the statutory requirements and the way the deal has been structured has hamstrung us. So I'll make it amply clear here that while you -- it's essentially the whole economic interest reflection working backwards, this is 2x revenue. Whether we look at it as Middle East or growing markets and how we want to do the computations, I don't think we have enough data here on the table. So I do want to clarify that this reflects the 2x revenue as a reference. It is a high growth both and a high quality of earnings business and -- which justifies the valuation even from a market comparable point of view. So it's not just Middle East. Middle East just presents an opportunity of a stable revenue base and a good momentum on on-prem to cloud migration. What we haven't touched -- even touched about is what opportunities present. It has 12 right customers, as an example, which are Absolute, Oracle, ATG and Endeca Shop, where we would start exploring our digital commerce capability cross-sell. What we haven't talked about is essentially that 24% of the 30% revenue in Europe and U.K. is essentially in U.K., where Evosys as a premier partner is penetrating the U.K. public sector both in local market as well as in the central procurement department. What we haven't talked about is that home office, where they have just opened up and which happens to be our premier customer and then the largest customer, they have made an entry and that has created a referenceability for us to actually take the Oracle capability across all the slew of names that we have been talking to you about, whether Ministry of Defense, Ministry of Justice, Nursing Advisory Council. It is clearly a unidirectional assessment that we have had on this call. Having said that, I have taken the feedback and I remit back to all of us here on the call is this acquisition presents us an opportunity to cross-sell both ways. On its own, it is in a space which is growing at a very, very high rate and has a good quality of earnings. And I do want to share some of the data points here. When we talk about the Oracle ERP, HCM, SCM capability, it forms 16% of total Oracle revenue. Oracle has around $40 billion in annualized revenue, 16% of that is focused in this space. Compare it with a digital commerce space that we try to service, less than 1% of Oracle's revenue comes from that space. $225 million in annual revenue for digital commerce versus 15%, so around $6 billion is what Oracle makes in this space. That's the level of difference. That's the level of opportunity that it presents. So request you to assess this transaction in the light of the opportunity that it presents in its totality as against the geographical concentration.

Okay. Sir, as we mentioned that it's an hyper-growth company, but seeing the numbers, I'm not able to visualize that. But if you can share the consolidated numbers of the company, so over the last 5 years? And also, in terms of the shift to cloud, out of the 1,300 customers or the 1,000 cloud customers that you have mentioned, so how many customers have actually shifted from on-premise to cloud for [ U.S ]. If you can like comment on that?

Sure. So while the exact numbers, I would request Umang to come in and throw some light on the number of transitions we have been able to achieve.

Yes. So we have done more than 80 customers that we have migrated from on-premise to cloud. And within these customers, there are existing Oracle E-Business Suite customers, Oracle Peoplesoft customers, even SAP customers, whom we have been able to migrate from SAP on-premise to Oracle cloud.

Okay. That is how much percentage of the total customers, roughly?

So on an overall we have...

I think, Umang, I can fill you in on that one for all of us here. We have 300-plus active customers in the business. And we are talking about 80 of them that we have successfully done, that's around -- right around a 25% plus of the total customer base that has been affected.

The next question is from the line of Ashish Aggarwal from Principal Mutual Fund.

Just a couple of questions. First of all, this $60 million of revenues. This is for FY '19, right?

Correct.

So what could be the trailing 12-month revenues for this company?

It's closer to $70 million.

$70 million, okay. Secondly, when we said that 70% is our economic interest, and as economic EBITDA or our share of EBITDA will be around $11 million, is it fair to assume that this company is like 20%, 25% EBITDA margins?

You got that.

The next question is from the line of Sahil Desai from Hornbill Capital.

I know you've given these numbers in different places, but I just want just to get my head around it, we haven't had much time to go through the filings. If you can just give us revenue, EBITDA and PAT based on the 70% economic interest? And then the consideration, $65 million plus, if you can just give us the total consideration?

So I think we have outlined it there, you look at it, it's $60 million in top line for fiscal '19, 70% economic interest represents that, but EBITDA has been in the references of 20%. So that gives you the share that comes along. And as far as the consideration is concerned, we've right now valued the acquisition at around $138 million.

$138 million?

Yes.

And the EBITDA is $12 million in dollars?

Yes.

The equivalent of $60 million for FY '19, our economic interest EBITDA would be how much?

So 70% of that is what our number would be.

70% of $12 million?

Yes, are you talking about $60 million -- fiscal '19 reference is $60 million.

Yes. No, I just want our economic interest, what is the revenue, EBITDA and PAT? And how much are we paying for it? Just these 4 numbers.

So Sahil, you do the 70% of the math. I'm giving you the total detail because it's structured in that fashion. So 70% of everything that I've shared with you is what the proportionate number would be.

So you're giving the total number. $60 million is not 70%. $60 million is the total revenue?

100%, yes.

Okay. Okay. Got it. And the PAT is -- the INR 50 crore PAT that you gave, INR 56 crore, that is 70% or 100%?

That is 50% -- that is my proportion, that's 70%.

Okay. Understood. And for that, you're paying -- $138 million is the purchase consideration?

So that's 100%.

Sorry.

That is 100%. That's [indiscernible] 100%.

Total purchase consideration is $138 million, right?

That's right.

Or that is the total value of the business?

That's the total value of the business. That's the total purchase consideration plus working capital of rounding off number, yes.

Mr. Sarvesh Gupta, your line is in the talk mode, please go ahead. As there's no response from the current participant, we'll move onto the next participant from the line of Nisarg Vakharia from Lucky Investment Managers.

Yes, Abhishek, in case you plan to outline a lot more disclosures to the exchange, as Sachin had mentioned, over the next 2 days before the market opens, I also request you to look into some of the large transactions that have happened in India, a classic example would be Sun Pharma acquiring Ranbaxy and the kind of disclosure that they had made of, if I remember correctly, $300 million, $400 million of EBITDA synergy, what sort of top line growth we look at because as of now it all seems very hazy. So if you can look into those and update your presentation will be very helpful for us.

Sure. Thank you.

The next question is from the line of Ashish Aggarwal from Principal Mutual Fund.

Sir, just one clarification, this $138 million is for the 100% of the company. So for 70%, the value we are paying is $100 million, right?

Right.

So $65 million is the cash you will be paying and $35 million is 315% stake in Mastek, which the promoters of Evosys will get?

That's right.

So potentially, we are valuing our own company at close to $200 million, $210 million?

About right. Yes.

The next question is from the line of Sachin Kasera from Svan Investments.

Abhishek, what happened to the balance of the economic interest? Are they already coming far from the agreement which has predetermined formulas on the basis of which our interest can go up to maybe 100. It is linked to certain milestones. So if you could throw some light on that, that will be really helpful.

Exactly, Sachin. So it is linked 10% each over next 3 years and at a pre-agreed formula which is essentially based on the EBITDA performance.

And will that also be again a combination of cash and stock? Or that's open as of now?

Kind of open, but we'll have definitely both the components.

Okay. Okay. Secondly, you had mentioned that there are similar transactions in this space, which happened a much higher multiple. So again, one more suggestion is that if you could give some of the details, maybe that will help the market appreciate that it is much better that we have got a much better deal at a much better price. Again, it would be really helpful in evaluating the merit of this transaction.

Great point. Thank you. I'll take that feedback as well.

Mr. Kasera, may we request that you return to the question queue for a follow-up question. The next question is from the line of Sarvesh Gupta from Maximal Capital.

Just one small point...

Sorry to interrupt, Mr. Gupta. Sir, we are not able to hear you.

Hello. Is it audible now?

Yes, sir. Thank you.

So just one small point. So after this transaction, since we had around INR 500 crore in the balance sheet, so all the cash would be gone more or less, right? By the end of this year, we should expect marginal cash on the balance sheet?

Fair observation. However, I would qualify that -- as of the date of the transaction, we believe we are at least $10 million net cash as against all the outstanding debts for the acquisition. And then there will be operating cash that will come into the business as from both sides as well as the 2 units of noncore asset that we have on the block that we expect to execute in the ensuing period. So we like to build back on the healthy cash balance in the next 60, 90 days again.

And also, the 40% of the remaining stake in Majesco is pending to be sold. So that is also additional liquidity?

That's what I meant. The $10 million, I'm net cash positive as on date of the transaction. And I also visualize another $20 million to $22 million of noncore assets coming in, which includes Majesco, which includes real estate that I'm on and the operating cash that comes in for the next couple of months as well from the business. So we have a clear visibility of how we build this cash back to a very healthy level that Mastek has always enjoyed and given its investors the confidence.

And because this is a relatively large transaction, so should we assume that at least for a year or 2 now, we would not be looking at any other acquisitions?

So we never look at these things in such binary fashion. It is always about what business needs and what are we trying to address. If you look at it, the last thing we did was in December '16, and it took us 3 years plus to get the right one and land it and for the business. However, yes, the large transactions are ruled out, but if there are tuck-under opportunities that presents itself which becomes a business accelerator, then we would be open to that. And by tuck-under, I mean, a $5 million reference.

Okay. And there would be some few million dollars of transaction costs involved here, if you can throw in the rough number apart from the $60 million -- $65 million that you are paying?

Yes, this transaction is same as any other. We have to pay all our economic advisers who are involved in the transaction. I'm reasonably sure they are glued on to this call as well.

Understood. Understood. And look forward to getting all these numbers to understand a bit more. I think on the business side, basically, those are more [ consistent ] hence the call has been more around the numbers, but I'm sure that there are good business reasons which will help accelerate the growth and help the company to meet its true potential.

Thank you. Thank you. I appreciate your comment.

The next question is from the line of Sachin Kasera from Svan Investments.

Just essentially, we've been hoping that this is a sensitivity, which is going to have a higher, higher growth. So do we have a -- while you have not shared specifically, but is there a road map or a 3- or 5-year vision that has been called out as the existing management how the company will look like in the next 3 to 5 years? And secondly, in terms of the business model or the mathematical model of the company, while it continues to have a higher margin, at what level of growth do we see further -- is it like after 10% growth, we see further expansion in margins? Or at 15% growth and above, we see further expansion in margins, that will be really helpful because we don't have the P&L statement, so we don't know how much is the fixed leverage in terms of the growth?

Sure. Sure. Fair comments.

Ladies and gentlemen, that is the last question. I now hand the conference over to Mr. John for his closing comments.

Okay. Thank you very much. And again, thank you for joining us at the weekend, and thank you for your questions. I think we'll take on board the clarification of the numbers because I think that will help you sort of model it. But if I look at the strategic merits and where we're focused, I'm really excited. As -- and I think we've said, Vision 2020 was all about unlocking the potential and getting Mastek ready to move to mid-cap, and I think that's what we're talking about today. Let me be very clear, after today, and in simple terms, in conjunction with what we said at our Q3 earnings, we do expect our core business to return to growth and that will grow into fiscal '21. So please do not get -- this is not a distraction, our core business is growing. However, we've just acquired something that grows faster. And this transaction is accreted both to the growth rate and the earnings quality. Two, we will continue to monetize our noncore assets, and that is the Majesco investment that we're 2/3 of the way through and it is some real estate because I think we believe we can put capital into the business to get a better return for all our shareholders. We have taken on board over the last 2 years the concentration in the U.K. and that's been -- it was good for the first 2 years, it's not been so good for this year. And I think it's right to diversify our revenue mix both in geography and in revenue mix, and Evosys absolutely assists us here. And this, as an organization, takes us through the $200 million annual revenues. And I think that will attract a different and a sort of more interest from the capital markets because we're then moving out to the high risk, small cap perspective. What I will say is we're starting to close out Vision 2020 and the strategic intent we had, which was to fix, to win and to growth. And we're trying to now build this consistent balanced portfolio for what I call Vision 2023, and Nimbus is a key growth generator in that strategy. But I think we've also got to remember what we will build on. And it is -- we all have solid customers. Mastek has solid customers, Evosys has solid customers. Now we can actually deliver more services to them in what I call, we're selling from the inside out versus from the outside in, which was the Mastek challenge to break into new accounts. Both companies have remained and will retain a great execution culture. That both businesses are agile and adaptable, and we can pivot to where the market opportunity is. And I think the market is moving. And I think plan is that early entrance into digital transformation for enterprises. So I think it actually puts us to the top table way ahead in the decision-making process. So for me, acquiring Evosys is now about kicking on and building a stronger core business around 1 Mastek core. Let's remember where we started Vision 2020, 3.5 years ago, and if you look at our revenues, if you look at our balance sheet, if you look at our share price, if you look at our valuation, our earnings, everything has made a step change in the right direction. We have come off a core in the U.K., a core fiscal '20. But again, Q3, Q4 and going into fiscal '21, we're starting to see those green shoots of recovery. So I sincerely hope that we shared the solid business logic, and I think with the numbers and as we execute, we'll get more competence in this. This is a great opportunity in front of us. And the fact that, as a team, we're motivated and we recognize this is the start of the journey and not the end, should give people encouragement that, look where's the growth rate, where we're going to be. So in conclusion, we consider this is the best use of our capital at this time to invest and to build a highly valuable and respected company for all our shareholders and our stakeholders. As we give you the information and we engage, I hope you become as excited and inspired as we are, that together as a team, this platform with Evosys and Mastek can take Mastek towards the mid-cap. With that, I'll close. I'm sure we'll meet next week. We'll provide the information, but thank you for your interest. Thank you for your support, and we're now down into executing and extracting the value for you. Thank you.

Thank you. Ladies and gentlemen, on behalf of Mastek Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.