Mastek Limited (MASTEK) Earnings Call Transcript & Summary

Good afternoon to all of you, and thanks for joining Q2 FY '21 earnings call of Mastek. The results and presentation have already been mailed to you, and you can view that on our website, www.mastek.com. To take us through the results today and to answer your questions, we have the top management of Mastek represented by John Owen, Group CEO; Abhishek Singh, Group CFO; and Umang Nahata, Co-Founder of Evosys. John will start the call with this overview of the quarter gone by, which will be followed by Abhishek, who will be going into detailed financials, and Umang Nahata, who will share an update on Evosys business. We will then take the Q&A session. I would like to remind you that everything that is said on this call that reflects any outlook for the future, which can be construed as forward-looking statements must be viewed in conjunction with the risks 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 can find on our website. With that said, I now hand over the call to Mr. John. Over to you, sir.

Thank you, Asha, and may I add my welcome to everybody. Thank you for joining us to review our second quarter results. As I said on our last call, our Q1 results must not be the high watermark for Mastek, but more of a solid and stable base camp to start our journey towards becoming a recognized and valuable mid-cap company. This statement remains true today, especially in the light of our strong Q2 performance. As cricketers, we all know test matches are not won or lost in the first session, however, they can give 1 team early momentum. It is this momentum that provides confidence to relax and play some shots or if you're of the bowling team, then a few early wickets with the new bowl, and then you can adopt a much more attacking field. Momentum is also a key to a services business, and this analogy also runs true for Mastek. Momentum gives us the confidence to accelerate our investment in building the company for a brighter future. Our confidence is rooted in demonstrating strong revenue growth across every business unit in Mastek, both in Q1 and then following it up in Q2. This broad-based performance continued in Q2 and look set to deliver sequential quarter-on-quarter growth for the balance of this fiscal year. Our organic business grew. Our recently acquired Evosys business grew and both delivered sequential growth, and we're now delivering accretive growth through some exciting cross-sell successes in Europe and the U.S., which validates our basic hypothesis that 1 and 1 can exceed 3. So in this context, I sincerely hope you're as encouraged as I am by our Q2 results. Despite my healthy paranoia, we seem to have been seen off the dangers of the COVID new ball, and we're now settling into building a big innings. To be clear, please don't see these results in isolation as a record quarter for Mastek, but more in the context of our ambition to be a solid mid-cap performer. Since we started our journey 4 years ago, we've delivered impressive revenue growth of 34% compound annual growth and equally earnings at 60%. Much to be proud of, however, the opportunity in front of us is much, much bigger than these short-term achievements. In cricketing parlance, once you get to 50, don't give your wickets away cheaply, rather refocus, get your head down and go on and get a big 100, and that's exactly the same for Mastek. Today, we operate in a growing market, fueled by COVID disruption -- sorry, cloud disruption. We have good traction, good capability and a strong reputation and proven ability to successfully compete in our selected verticals of U.K. government and health. Now with the addition of ERP cloud capabilities through Evosys, we now have access to a global repeatable enterprise mid-market. These accounts have traditionally been underserved by the traditional Tier 1s who tend to concentrate their resources on the more prestigious Fortune 1000 global corporations. Despite the constant shadow of COVID throughout the year, we have executed our plans fantastically well, for which I'm incredibly proud of and grateful to everyone at Mastek. We have a great team, and we operate in a demanding and dynamic market, which is a huge source of optimism and energy for our continued growth. This moving 100% of our organization to work from home in March this year, we've maintained our high productivity and quality levels, which is appreciated and respected by our customers. This also includes our secure government contracts where we have to innovate with the customer to ensure security standards can be protected, even though we do not currently go into a government office or work on a government-provided computer. Certainly, necessity is the mother of invention, and it is driving a more pragmatic adoption of new operating models, and we're at the forefront of these efforts with our customers. Consequently, under the very high likely event of a second COVID spike and future restrictive lockdowns in many of our markets, we do not see the need nor the desire to move back to an office-based delivery model yet. We have proven our business model is resilient, and we remain confident we can sustain our growth agenda despite COVID and the many operational constraints and challenges it presents. If you remember, we worked to ensure that the impact of COVID was shallower on Mastek and our recovery faster than many of our peers. We've delivered to this plan, but the most severe impacts of COVID will be front-end loaded into the first half of fiscal '21. Stability hopefully coming around Q3 with gradual market improvement in Q4. We stand by this hypothesis and probably feel the market has actually been more robust than we had predicted, particularly where we repurposed SG&A investment into the U.K. government, the health and the Evosys business areas. I'm therefore pleased to report that we have now fully rebalanced our business to realign our capacity with the new adapted demand curve we were seeing. Today, in contrast to where we started Q1, we are once again actively recruiting new Mastekeers to service our projected growth. As an example, we have recruited about 150 graduates in the first half, and we will recruit another 200-plus as we accelerate in the second half. Although we will remain vigilant on the impact of COVID, we are now signaling a clear change in focus from cut and grow towards an invest-and-grow strategy for the balance of fiscal '21. Our objective is to accelerate our growth and take that momentum into a stronger fiscal '22. This confidence to shift up the gears is based on our encouraging lead indicators, such as order bookings and accretive pipeline, gives us a much improved forward-looking visibility into the market, better than we've seen for some time. I appreciate we may look at the market through a distorted Mastek lens, but we do see good resilience and sustainable growth, particularly in our targeted growth segments of U.K. government, health and the ERP cloud. The U.S. remains a challenging market, but we, again, grew 6.5% quarter-on-quarter and see a steady road to recovery, and that will be the focus for the next few quarters. We acknowledge and know that we need a stronger U.S. business to meet our strategic goals, and we must build more critical mass in that region, which we will. Focusing in on Q2, we delivered a robust performance on many metrics, which is our source of confidence and underpins our comments on momentum. We again strengthened our customer base to 542 with 37 new customer wins during the quarter. In simple terms, our growth strategy remains land and expand. However, now we have real depth and quality behind each initiative. Today, we have the makings of an exciting repeatable customer acquisition engine in Evosys at the front end of Mastek's proven capability to retain and expand customer relationships. This performance enables us to build a broader, stronger and more diversified customer base. These wins also include major new account insertions with U.K. government departments, such as HMRC, that's the revenue and customs, and public health England, that many of you are aware, we incubated over the last 18 months. These government pilots must now convert into multimillion plan growth programs and replicate the previous expansions we successfully executed with the likes of the NHS, the home office and the Ministry of Defense. There is certainly a strong pipeline to support these aspirations. And irrespective of how Brexit rolls out over the next few months, our current business outlook for the next few quarters should be insulated from the political volatility and rhetoric. We deliver critical national infrastructure, and this is not treated as discretionary spend. We continued our success on cross-sell with some significant wins in Europe, which further validates the strategic value of merging Evosys and Mastek. Acquisitions can often bring distraction, and we've talked about 1 on 1 equaling 1.5, but I'm pleased to report our pragmatic and disciplined approach to market integration by retaining dedicated sales recourse in column one, Mastek organic and column 3, Evosys cloud migrations, has brought clarity, accountability and delivered strong organic growth. To maintain this focus and also exploit the huge opportunity we are experiencing from the emerging market in column 2, we are now investing further in dedicated teams to exclusively expand this segment. This model is repeatable, scalable and enjoys strong pull factors from the market. For our customers, it brings a broader range of capabilities to proven next-generation services company to help them deliver their enterprise digital transformation. COVID has been a massive stimulus for many companies to upgrade their technology estate, to enable remote, secure and fully integrated operations and unify their digital assets. This is where Mastek has seen as a fresh face to drive change and not protect the status quo. Moving forward. Order bookings were strong at $77.5 million, which represents a strong book-to-bill ratio of 1.4, and our order backlog grew 23%, all signs of a healthy outlook primarily driven by the expected growth from our targeted segments of U.K. government, health and the cloud ERP migrations. To give some additional granularity and comparator, our Evosys business also recorded a strong order performance, which represented 60% growth year-on-year. In addition, their average order value continues to increase as they benefit from being part of a larger organization. We're also seeing a healthy trend towards being trusted with more complex and larger projects. This is another indication of the momentum we discussed. Our second half pipeline in U.K. government, health and Evosys remains robust and validates our decision to repurpose sales efforts into those areas at the end of Q4 fiscal '20 as part of our COVID cut and grow line. It's also worth noting that a couple of game-changing projects out of the U.K. government segment moved into the second half for adjudication due to delays in procedural issues. I am particularly pleased with the momentum we've maintained in our revenue line. Where many peers declined in Q1, we delivered a very solid growth rate of 12%. And we've now followed that up in Q2 with another impressive 5.3% quarter-on-quarter in constant currency. This includes successes in organic businesses in the U.K. and the U.S. as well as the Evosys side of the business, reporting revenues of $55 million or 56% up in year-on-year terms. Revenue growth has also allowed us to leverage our cost base better, which has resulted in an 80 basis point improvement in our EBITDA levels to 21.9%. Like most companies, we've significantly benefited in quarter from nonrecurring cost benefits from reduced travel and living expenses due to the lockdown. However, our underlying trend for margin improvement plans remains on track. For sustaining this performance, I would like to formally acknowledge and thank every Mastekeer for their professionalism, their dedication and their enthusiasm, which are all fundamental characteristics behind winning teams. While we recognize and thank our loyal Mastekeers, who have supported our business while we have been operating well from home, it's also vital they materially share in the success when the company performs. Therefore, I'm pleased to confirm to them that we will be reinstating their annual pay review for fiscal '21, which will be effective from October 1 this year. Strategically and specific to Mastek, I'm particularly excited by the increase in offshoring dialogue we have seen from our customers. Certainly, the U.K. government is trying to square the circle of an increasing demand for digital solutions offset with the significant reduction in budget as the U.K. government looks at always to fund their COVID support lens. This represents a perfect storm for trusted and reliable partners such as Mastek to access additional capacity at lower cost by blending onshore and offshore delivery teams. Hopefully, this opportunity will develop as it differentiates Mastek from many existing suppliers. So in summary, I'm pleased with our performance, through COVID. The acquisition and the integration of Evosys has been well-managed to date and has not been a distraction to our organic business and actually provides a strong stimulus for a more concerted cross-sell initiative. We are taking strong momentum from the first half into the second half, which we anticipate will deliver better results not only and not only deliver our fifth consecutive year of revenue growth, a milestone that will pass in Q3, but more importantly, lays the foundations that propel us into fiscal '22 and helps establish Mastek as a recognized, respected and credible mid-cap company. This momentum and confidence is also reflected in the Board's proposed interim dividend at 110%. Abhishek will now take us through the financial breakdown to provide more context, and then Umang will walk us through the Oracle services business and how we align with Oracle after which we're happy to answer your questions. Abhishek, over to you.

Thank you, John. Warm welcome to everyone on this call. I'm going to share with you the highlights of our performance for the quarter and half year ended 31st -- 30th September. The deck circulated ahead of this call contains all the financial details that you may care to have a look at. I'd like to start with a comment that this result of Q2 is a testament of our business resilience, the committed workforce that we have and the trusting clientele that we enjoy. It has driven the stellar performance, and I'm happy to report an all-round growth on all the leading and lag indicators of financial performance for this quarter. This quarter marks the crossing of a significant milestone for Mastek. We reported the highest ever quarterly revenues in the history of Mastek at $55 million in the quarterly revenue. The same could be said about our profitability as well, with PAT being at its highest since 2001. The cross-sell and co-sell effort, John alluded to in his conversation, continues to gain traction. We closed a multimillion, multiyear deal with a leading design and consultancy firm in Europe under the joint go-to-market strategy for order value being $7.7 million over 3 years, and the incumbent was a Tier 1 strategic investor -- integrator rather. That tells you about the value proposition that we are able to build together at Mastek and Evosys. Moving from the milestones to the financial highlights for the quarter. If I look at our operating revenue, it stood at INR 409.7 crore vis-à-vis INR 386.1 crore, which is 6.1% growth quarter-on-quarter and 68% year-on-year. It's important to add that this performance is aided by deliveries all around U.K., U.S. and absolutely the accelerated growth in the Oracle services business. Our operating EBITDA is at 21.1% versus 17.6% in Q1. That's an improvement of 348 bps quarter-on-quarter and 936 bps year-on-year. And I would say that this is the cut and grow approach that we had adopted early on has helped us optimize our cost, reorient the resource towards more responsive and profitable side of the business. And as a result, you've got the revenue momentum. We have had the cost management and coupled with some of the savings from COVID, the obvious ones in travel, hospitality, marketing expenses and stuff has catapulted our operating EBITDA to these levels. Moving on to PAT. It is at INR 59.1 crore versus INR 46.6 crore last quarter, and that's up 27% quarter-on-quarter and 140% year-on-year. PAT sans minority interest stands at INR 51 crores versus INR 40.4 crore. That's also up 26% quarter-on-quarter and 107% year-on-year. Cash has been a very good story for us for few quarters now. Gross cash stood at INR 476.4 crore, and net cash after debt stands at INR 223.4 crore versus INR 174.9 crore of the last quarter. We repaid roughly around $5 million of debt during the quarter, and our total borrowing now stands at $34.1 million as of 30th September. If we were to add the proceeds from the Majesco stake sale, which was received late in the October month, then our gross cash is closer to INR 712 crore, and net cash is lower to INR 460 crore. The free cash flow to net income ratio stood at 145.7% this H1, is again a testament of the focus collection initiative across all the geographies as we all know the old adage cash is king. Moving on to the customer acquisition. It's been a highlight for us for a couple of quarters now. And we continue to build on that. We have added 37 new customers, 7 in Mastek and 30 in Evosys. 4 customers of the list are $1 billion-plus in their revenues and 5 of them are between $0.5 billion to $1 billion customer. And we tend to track these metrics because it gives you an insight into the IT spend and hence the ability to cross-sell and co-sell. If I were to dice these 37 new customer acquisition by verticals, 6 of these customers were in health care space, 5 are in retail, 5 are in engineering and manufacturing, 4 is in banking and financial services, while 3 of them are in telco. It gives you an idea of the diverse clientele and the wins that we are enjoying across. In terms of headcount, we've stood at 3,354 FTEs for the quarter, whilst we added 80 trainees who went live during the quarter. From financial highlights, if I were to just add some color to our experiences in the various geographies and starting with the U.K. as a geography, we had a good revenue growth trajectory. I would say that this quarter's result is possibly and arguably the best quarterly result in the last 5 years in terms of absolute pound revenues. We grew by 4.8% quarter-on-quarter in constant currency terms, driven by a good traction in public sector, which in itself grew by almost 7%. And private sector has remained flat, a reflection of the overall state of the economy and their own state of the business. This quarter has had some very interesting logo additions in health care space as well as other departments. We have won a large contract from a newly created health department, which is to track and trace the -- and provide the COVID services [ with determination ] in U.K. And these additions reinforces the confidence of our customer in Mastek's delivery. In tough times, customers tend to look at Mastek for the support, and to kind of ramp up and shore up the services of that business. On private sector, it's been a flat quarter, and we're trying to ensure that it's the bottom based on which we can drive and build some growth. However, what is important to note is that we believe the trend that we are experiencing is driving some offshore traction. And again, John alluded to that in his remarks. Customer budgets are squeezed. They need to do more out of the same dollar and pound. And to that extent, they are looking at offshore. Other part of it is also the fact that protracted work from home means that customers are comfortable with delivery happening from anywhere. And those are the factors that will help in the offshoring. We have also been hearing about the no-deal Brexit or the impacts of Brexit. And I would like to say that looking at our clientele, looking at the committed budgets and stuff, I would say we are reasonably insulated, and we'll have to continue to deliver and continue to outperform the customer expectation. The risk of second wave that we are talking about in the geographies, again, continued work from home is the way to insulate that and whatever happens in the larger environment does impact, but nevertheless, this is a solution for us. And all of these opportunities, all of these rather events in the economy is opening up more of transformational deals and offshore opportunities, which is what is exciting us right now. If I move my narrative to U.S. geography, as you all saw, growth of 6.5% quarter-on-quarter constant currency growth in terms of revenue aided by a couple of large customers that we landed and these are new customers. We have continued to work to a home in the geography. And again, the budgetary constraints that I outlined in the context of U.K. is far more prevalent in context of U.S., because of the retail customer, the retail focus that we have, and that's driving some protracted inquiry in offshore delivery to help manage their costs and scale faster. The geography also continues to be under risk of client bankruptcies, again, retail customers. So we have a very aggressive and focused approach to cash collection to ensure that there are no such events impacting our business and our cash. With sales team in place, we believe that we'll be moving forward and upward in this geography, as we've got traction all around. Slowly but steadily, U.S. will move forward. Moving on towards the Evosys side of the business. Clearly, a very stellar revenue performance. Services revenue grew in double digit. There's a small portion of licensing revenue that came down. And as a result, you've got overall revenue growth in high single digits. Having said that, the resilience of this business and the COVID impact is very, very [ palpable ]. There is all-round momentum, both in terms of pipeline as well as order bookings, and some of the data points were shared earlier in the call. And I think one of the major events that we are experiencing is Oracle opening up local data centers in many geographies, including Middle East, which we believe will help accelerate the cloud adoption. So we are hawkishly focused on opportunities arising out of such events. A lot more detail on managed services approach for annuity revenue versus a team for SAP attack and more will come from Umang shortly. I'll move forward towards the most interesting part of Majesco stake sale that landed by $32.3 million in cash, and that's now with us, which presents newer opportunities. As a management team and a Board, we are working on it, what's the optimal way of deploying and what's the best use of that cash. So hopefully, all of these narratives give you a good idea of where the business is. And above all, I would like to thank you all for your continued support and interest in Mastek. These are exciting times still with phenomenal opportunities, and we are very, very geared up and excited to land those opportunities. With that, I'll hand it over to Umang for his comment on the Evosys side of the business and the cloud phenomena we are experiencing. Over to you, Umang. Thank you.

Thank you, Abhishek. Thanks, John. Good afternoon, everybody. So clearly, a very brilliant quarter that we've had as a joint organization, and you've heard a lot about it from both John and Abhishek in terms of the various financial and operational and client acquisition parameters. So the first thing I would do is I would really want to congratulate all the [ Evolites ] and Mastekeers for this gallant performance. I think as an organization, we have come a full circle, not just in terms of all the business processes that we have to deliver working remotely, while client acquisition was always on. Executing projects remotely and especially making them move from an on-premise environment to a cloud environment, especially public sector or health care customers who are very on-site focused customers, executing those kinds of projects remotely did take a lot of change of culture, change of management, change of style and approach, change of IT environment that we had. And I'm very happy to report that we had 12 customers who went live in this quarter, which has completed all the cycles and steps that they had in terms of their maturity cycle. And we had 30 new customers who have kicked off their projects. So as you can see, the business is really geared up and evolved to deliver from a remote point of view, and we are constantly evaluating how would our future model look like and remote -- working remote continues to be a key part of that design. Going forward, I would also like to share some key insights into the performance of the quarter, the kind of wins that we've had and the various other activities. And I would also share a little future outlook in terms of where do we see momentum going forward. On the performance of the quarter, we've had a really good order booking growth at about 65% plus growth in the order book. Especially highlighted was the order book growth in North America and Europe, both of which clocked 200% plus Y-o-Y growth in the order book that we had in the geographies. The deal sizes is the another key highlight that I wanted to bring up. So our average deal sizes are constantly going up, and the number of large customers that we are now acquiring is phenomenal. Our average deal size for these 30 customers that we acquired is more than USD 600,000 per customer, and it is constantly going up every quarter as we see in terms of the orders that we closed and the file that we are dealing with. And the other interesting aspect of our customer wins that we had this quarter was the good spread and in the right verticals, so the vertical that we have good focus on. So while we have good public sector health care focus from both Mastek and Evosys, our commercial side of the verticals are really gaining strength in the Oracle side of the business, and I'm sure that it soon follow with the joint sales in those verticals. So we've had 4 good wins in manufacturing sector, most of them in North America. So that health care wins in U.S., again, out of private sector health care setups in the U.S. and there are engineering and construction wins all across in Europe as well as in U.S. and Middle East. We've also had a few good telecom wins in the Middle East that has also supported the transaction. So as you can see, the commercial or non-public sector kind of vertical is also really speeding up in terms of growth. And I'm sure that's a key view that we have as we go forward in terms of diversifying our portfolio from being that care public sector to a little more commercial-oriented as we move forward. One of the other interesting observation that we had in the deals that we won and that I wanted to share with you is many of these deals are on-premise to cloud transformation. In fact, more than 50% of these customers would be customers transforming from their on-premise application to cloud. And in a large number of these customers, we were not the incumbent partners. So the clients are choosing us over the traditional GSIs to replace them from on-premise to cloud, which I think is a brilliant sign. I mean that shows confidence in terms of the next-generation rate that we are trying to create, not just from a technology point of view, but from a culture and partnership relationship that we want to create with our clients. And that is really good line that we are moving forward with. I'll also take a minute to again talk about the joint win that we had in Europe, 57.7 million transaction over 3 years for one of the leading global engineering and construction consulting firms, spread out globally with offices in Europe, U.S. and other places in the world. I'll more talk about why the customer chose us. So like Abhishek mentioned, this was a customer dealing with an incumbent partner, a Tier 1 incumbent. And there are 3 key things that I think really made the difference here. One, of course, when you look at the customers have started looking at us with a fresh new eye of the next-generation supplier as the Evosys, Mastek combination, which has a super specialized arm in terms of cloud, but also a partner that has a much broader view of services that they can offer. And that's one of the key things that really moved them up. So they could find a partner with specialization, but also can take care of their broader services and needs. The second key aspect is the asset that we have been really building and working on was our on-premise to cloud transformation assets known as Evosys Glide. We are very happy to announce that we will be releasing version 2.4 of Evosys Glide in the coming quarters with many more automations and innovations in it, so taking care of RPA and chatbot and various other tools. So that the experience of moving from an on-premise environment to a modern cloud environment is much more digital, much more visible in terms of the ROI that it provides. Third, last but not the least, is our methodology of looking at value-based delivery. We call it VBD in Evosys. It's a philosophy where we really want to deliver outcomes to our customers. And we are happy even to the go -- even to put skin in the game on these contracts in terms of an outcome-based contracts with our customers. To deliver such kind of contracting, we have built an asset called VBA. We are actually releasing -- we just released release 6 of our VBA asset. It's an asset that allows us to do benchmarking of their current environment, evaluate the business ROI that we could deliver, and then constantly provide inputs to the client in terms of the value that we have provided, hence creating a much more objective model of outcome-based contracting that they can sign for. So those are some of the key factors of the quarter that I wanted to highlight. As we look forward and move forward into the rest of the year and years to come, I think there are 2 key aspects of our business that are going to be important. First, of course, the growth that Oracle ERP cloud is experiencing. it's -- Oracle is constantly growing at between 25% to 30% every quarter. In fact, last quarter, the ERP cloud grew more than 30%. So there is a good tailwind behind us in terms of the momentum Oracle is experiencing as they transform their customers from on-premise to cloud. And clearly, we have a very strong sweet spot in that market and group. The second is we've also constantly gaining market share from competition in these accounts. Like the example I gave you just before, wherein we are winning many of these accounts out of our competition, which was the existing incumbent traditional [ VSIs ]. Our strategy for keep -- continuing to win market share actually relies on 3 key pillars again. First and foremost is our ability to verticalize our solutions. Manufacturing is a key vertical that we are really trying to build on. We've already had good assets and good wins across manufacturing. We are one of the leading providers for manufacturing as a vertical for Oracle. And we are investing significantly in this vertical to build far more assets around not just cloud ERP migration, but also more innovative assets around IoT and other areas that could really digitize the manufacturing environment that we're working with. So that's one. The second area is the SAP compete market, and this is where we think is the sizable wave of business that we are really going to be able to penetrate. We are an Oracle-only partner. So we currently, as far as our ERP business is concerned, we service only Oracle. And as you know, Oracle, from all reviews of Gartner and all of the other analysts currently is leading the way as far as the cloud ERP market is concerned. And this is the time when Oracle has a good chance of really transforming the SAP customers to cloud. As you must have heard, SAP did announce their results and their wish of transforming their installed base into cloud and sunsetting their ECP environment. And we clearly see a way that many of these SAP customers are evaluating not just SAP S/4HANA, but also evaluating Oracle cloud or any of the other cloud platforms as an option. And gaining market share out of SAP is a key part of our strategy. In fact, in this quarter itself, we had a very large telecom customer, a 2 decade-old SAP installed base customer migrating lock stock and barrel to Oracle cloud using our SAP for -- Glide for SAP program, which we've built. So we constantly look at investing into that program, and we see this is a market where we will become a super-specialist also in terms of helping customers migrate from SAP to Oracle cloud. The third and the last piece of our future business that is going to be important is building a cloud-managed services solution platform. I think as the cloud solution matures, more and more customers are migrating or moving or stabilizing their business into the cloud. And hence, the managed services business in the cloud applications world is also constantly growing. We saw 2 large deals already that had multimillion-dollar contracts for more than 3-year managed services that we have won over the last 2 quarters, and we see many more deals coming out. What this view of cloud-managed services applications would look like is not just providing a traditional SLA-based support, but it is a much more modern outcome specific environment, which is not just supporting but constantly delivering enhancements and value for money that the client needs. And these are the differentiators that will help us not just continuously win new customers but also create a lot of stability in terms of repeatable revenue that we would add to our business. So that's the 3 key pillars of growth and future focus that we are constantly looking at, of course, added with our value-based delivery model that I spoke about earlier. Last and not the least that I wanted to talk to all of you is around the cross-sell and the integration between Mastek and Evosys. I think we are moving really well in terms of integrating the 2 organizers in the right direction. We've already integrated our CRM application. So we have a single view of our customers, and we are able to identify cross-sell opportunities and look at the various potentials that we need to work on. And we are going to migrate many of our other applications in the coming quarter. We also are -- the sales teams have become much more synchronized over these last 8 to 9 months, and we have a much clear proposition and offering that we're taking to our customers. We've already had some good wins that we spoke about earlier, and this pipe of cross-sell is also constantly building. The other aspect is trying to now invest in a dedicated team for the cross-sell initiative is the mix. We've already added a few resources, and we are looking at investing much more in terms of this pillar 3, which is a dedicated cross-sell team. We already are sitting on a pipe of more than 30 million, and we constantly look at expanding the pipe as we move forward with the dedicated team there and also bringing in many more wins in this year. The propositions also are quite well aligned. So while we already have a strong proposition around cloud ERP and cloud applications, we are now expanding our cloud proposition to look at various other adjacent areas in terms of cloud infrastructure migration, cloud application development, cloud security, et cetera. So I think all in all, it's the proposition, it's the team, it's the systems, all of them are starting to fall in line, and we clearly are moving towards the direction of making 1 plus 1 way more than 3. So that's broadly the outlook in terms of where we are heading and look forward to discussing more and sharing or answering to the questions that you guys might have. Thank you.

[Operator Instructions] The first question is from the line of Ashish Aggarwal from Principal AMC.

Congratulations on good numbers. Couple of questions from my side. First, I wanted to understand how sustainable are these margins of 21%. Because we have been talking about a 14% to 15% type of a margin band earlier. So how sustainable are this 21% margins going forward? Secondly, the Middle East business, just wanted to understand any specific problem we are seeing in Middle East business? Because that has been a geography where we are seeing a decline. So any specific issues around that? And maybe driven by some large accounts because it looks like that outside top 5, there was some revenue decline in those customer.

Thank you, Ashish. I'll take that question and -- the first one that you have on sustainability of operating EBITDA margins. It's a very obvious question for all the IT services firm who are enjoying a lot of cost savings on account of COVID. But I would like to draw our attention to 2 fundamental facts. It's not just -- rather 3. It's not just the COVID savings, which has catapulted our operating EBITDA, but also sustained revenue growth. If you look at it both on organic as well as Evosys side of the business, we have been having a significant meaningful growth, I would say. While most of the organizations have struggled with Q1, we sustained and then from there, we grow. Inorganic, obviously, has grown significantly. So growth gives you the leverage. And the other part of it is, it's not about what of this is sustainable, but what is the ambition. And the ambition here is about growth. And I would take a leaf from cognizance philosophy, many years back, and I said there is a threshold after which we would like to invest back into the business. And I think as a management team and our Board, they're very supportive of the growth ambition and not just maxing out the EBITDA levels that we have here. Answering your -- sorry.

Is there any number we are targeting that beyond this we will go and reinvest in the business?

Absolutely. High teens has always been our aspiration. And clearly, we have accelerated to that, aided by both organic and inorganic side of the businesses and their expansion. So high EBITDA -- high teens is what we like to sustain and use the rest to accelerate the business. Other part of your question, Ashish, was on the Middle East. And I'd like to qualify here that Middle East, there is no business or operational challenge, so to speak. I had mentioned in my note that services revenue has grown meaningfully, a very high rather, whereas the license revenue, there's a part of our revenue that comes from licenses as well, and we are consciously looking to kind of minimize it. And to that extent -- and it is a very, very low-margin activity. So that has gone down, and that's why -- and that is practically in Middle East. All of that is in the Middle East. That's why you see the Middle East revenues down. But from the sustainable and annuity revenues that we care for, that is not down, and there are no challenges in the geography. As a matter of fact, the geography has experienced margin expansions as well.

But it seems like that your customers outside top 5 has declined between 6 and 10 customers. It seems like it has declined on a -- in this quarter. Any specific reason? Or this is just the U.K. private clients have a problem?

That's right. The U.K. private where we had some degrowth, the maximum impact was experienced in this quarter, Ashish.

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

Congratulations to everyone on the Mastek team for delivering a very good set of results. I think, especially, the ROE increasing beyond 20% margins increasing beyond 20%, although it may taper off. But all these numbers have been very good and heartening to see that all the fruits of the past few years are coming to fruition, all the efforts. Now coming to the questions. One is on the macro side, given that the situation with regard to lockdowns and COVID scenario is changing very rapidly for the worse, specifically in U.K. and Europe, so if John can give some color on that side? That is question number one. And secondly, now that we have a net cash of almost INR 500-odd-crores, and -- so how do we plan to -- what are we thinking? And are there some specific areas or skill sets that we want to acquire through M&A now that we have again reached almost a similar level of net cash that we had when we acquired Evosys few quarters back?

Okay. Let me try and give you the lockdown. So I think on the businesses, it is. Lockdown, as I said, we are -- we will continue to grow, and we'll continue to deliver. So I don't think lockdown second peaks will be materially impacting us because we've already got the operating model working. We see the pipeline. We've got a lot in our -- a lot of our business now is moving to fixed price from T&M. So I think in the short term, lockdown doesn't have an impact. In the long term, it obviously reduces economic activity. And I think we've done a fantastic job of revectoring into those segments and those verticals that not only are growing, but have the ability to pay their bills. So U.K. government, health and the cloud. So the quick answer, Sarvesh, is the, I don't see lockdown having a material impact. It has a massive human impact, and I think we shouldn't sort of diminish that area because I think it is challenging for people. But at a company level, we're managing that challenge. Regarding the net cash, yes, we will look at how we allocate capital and where we get the best return for our shareholders. I think on M&A, yes, we would look to balance out our -- I think because the acquisition of Evosys is going well, and it's too early to declare victory, but I think you just heard Umang, great segment. They've got a great management team. And they've integrated. They're part of Mastek now, and there's a long-term view and fit. Regarding can we accelerate our growth and fill in some of the gaps that we have? Absolutely, we will allocate capital to do that. Now is it organic or inorganic? That's the question at the moment. We're putting some organic investment into the cross-sell because we're seeing good traction there. We may look at accelerating our inorganic, but it's got to accelerate the strategy, which is why I think the Evosys acquisition is a good sort of proof point. Can we follow that up? If we were, it would be around the momentum in the global market around cloud migration, and it would probably have a geographic focus on the U.S. Because, as I said, that's the area that we want to accelerate. If we're going to be a sustainable, scalable, reliable mid-cap, I think we've got to have a significant -- a bigger, significant presence in the U.S. So that's where we would allocate the capital, but only if we knew we could operationalize it and generate cash from that.

[Operator Instructions] The next question is from the line of Baidik Sarkar from Unifi Capital.

Congratulations on a great quarter. If I may extend John's cricketing analogy, I think the environment looks like a flat pitch and [ you've been batting ] around. So congrats again. John, I recall your comments in the previous quarter on the prospects from NHS and the Home Office looking rather well and possibly executing a hockey stick kind of growth towards the end of this fiscal. If I can request you just flesh out the outlook that you're seeing today, given how the environment is over there. And how do you -- and what do you make of that?

Well, I think if you take your cricketing analogy, you're right. If it's a flat picture and they're bowling half vollies, hit them. So I think the market is very attractive for us, probably because we've got the right portfolio, we've got the right focus on verticals, and we've got the right management team. So taking that cricketing analogy, it is a flat pitch. But it's amazing how many other people aren't hitting the half vollies that are coming up. Regarding the NHS, the Home Office, as I said, there are some big projects, what I call game-changing projects, coming through the pipeline that will be adjudicated in the second half. I think they will be adjudicated in the second half because government obviously changed their financial year at the end of March. So I do think those will be put to contract. And they're both in the Home Office and -- particularly in the Home Office and the MOD and the NHS. So those are the 3 big departments where we have a proven track record. We're engaged in business development with them. What I will say, and I'll segment it, if I may. One is we will grow with what we've already got. But can we accelerate the growth and get an inflection point in that? That's what I think the next, I'd say, 6 to 12 months, that's the opportunity in front of Mastek, and it is capitalizing on all the work we've done over the last probably 5 to 10 years of building a reputation for delivery and value for money. I think it's also important to say...

[ I think you've ] emphasized very broadly that you'd like to quantify. What's the range of opportunity looking like?

I think if I look at it at pipeline, I think our biggest order value we've had in Mastek is around about GBP 10 million to GBP 15 million. We are in a consortium that is hundreds of millions of which the Mastek element is on 3 projects. Each project is worth about GBP 25 million per annum. It's that order of quantum. Now I'm not baking that into the plan. We're not resorting to that, but that is what's -- now I do expect to win one of those. I'd like to win all 3. But that, I think, is to give you an inflection point, that's where it would come. We will continue to grow at that sort of 20% without those projects coming in. So I don't know if that helps sort of explain the trajectory.

That's interesting. Abhishek, a book keeping question on the minority interest part of the business. Was the first tranche of the balance 30% stake in Evosys due this September? How should we look at the reduction in the interest over the next couple of years?

First one is due September next year. So nothing has happened till date.

Sorry, are you saying the first installment is due September next year and not this year? I think I missed that.

That's right. That is right, Baidik.

All right. Sure. And I had a few questions for Umang, but he's answered most of them in his opening comment except what's the recurring portion of the services component revenue in the Evosys? I'm sorry if I had missed this number in his opening remarks.

So the -- currently, the support services account for around 30%, give or take 1% or 2%. And our ambition is to move that 50% in the next 2 to 3 years.

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

Congrats to the entire Mastek team for delivering a very good set of numbers. Just 2, 3 questions. One on Middle East. Basically you mentioned that you have moved the business on a little bit, and now you're looking more of less of licensing and that's why there's a revenue dip while the margin has expanded. So this is now -- the reset has happened? Or this could happen again [indiscernible]?

I think the line was -- sorry, John. Go ahead if you've got that.

I was going to say, I didn't pick up the whole question. But if I give you what our Middle East is -- and if I miss something, Abhishek will fill in the gap. But I think the Middle East is about driving stability and profitability. It's about getting cash generation out of that region because it has the ability to absorb working capital, and we want to basically turn our cash over quickly. But it is also an area where we innovate. So we talked about the SAP opportunity, which is massive, not just for Oracle, but also for Mastek and Evosys to actually support that and stimulate that growth. That capability was built out of the Middle East. So it also has the ability to innovate as a region. So the other element is, as Oracle particularly put their hosting centers into the Middle East. That will also unlock an area that we're very strong in, which is the public sector in that region. So I think that market will go from an on-prem to a cloud because they're hosted within the region. So the Middle East is a growth, but it's about profitable, targeted growth. It's about innovation and exporting that, and it's about making sure that our cash generation is positive.

Sure. And when we see the geographical breakup that you have shared, in the other segment, we can see a loss of close to around INR 4 crores. So is there some write-off that we have taken in any of the geographies? And is it more like a one-off and then next quarter, we should go off? If you could just clarify a bit on that, Abhishek?

Sachin, it's one-off, and it's for one of the government projects here. It's just won't repeat in the future.

Sure. And then just last question on the cash and the acquisition you talked about. So you mentioned that you -- Americas is one of the geographies you would plan to solidify our position. So are we looking at a significant acquisition maybe in the next 3 to 4 quarters to really accelerate the America growth?

I think we would -- it comes down to what our -- what's our -- what's the best use of capital. So I know that. In order to do that, I think if we said we were doing another acquisition 2 quarters ago, you'd have thought we were crazy, basically on the reaction we had to the Evosys acquisition. I think over the last 3 quarters or 2.5 quarters, we've proven that we've got the capability to acquire, integrate and operate an acquisition. Now the size of that would be questionable. It would be within what could we actually consume and again, make sure the momentum is in the business. I think the reverse way of answering it is the market, there is enough in the market for Mastek to grow faster than the market, number one. In order to do that, maybe buying a company that gives us some acceleration factor rounds out our capability could be attractive if that has the cultural fit that we had with Evosys. So the team come in with the right construct, the right deal structure. And it's actually an asset that can amortize our global capability, not just a geography. So what I will say, it won't be in the U.K. vertical because that's very much government. It would be in the global mid-market and around cloud migration. And if those capabilities could accelerate and we could integrate and it would make good value and give us more momentum, we'll deploy the capital.

The next question is from the line of Mohit Jain from Anand Rathi.

Just two questions. One is on the integration with Evosys, like what stage we are in? And is there a challenge that you guys can also lock off goodwill when the integration is complete?

I'll do the integration, and I'll let Abhishek talk about the accounting and locking off goodwill. Operationally, very, very well. So we've integrated the back office, the finance, the facilities. That's into a platform we call ONE Mastek. So we're trying to leverage our fixed costs and have a common look and feel to the organization. That is also going to have some significant investment over the next couple of years because we need to get a more operational digital footprint in our operating model. But that end is already done. We're now working on the people strand. So we're integrating. So we can move our resources around a lot more smoothly. I think as we talked, Mohit, about the strategy of the mid-market, that's where we actually want to put in for every dollar, we can amortize that over the global footprint, not just in where we were historically just into the U.K. or the U.K. public. And we are integrating sales and marketing, but in that a very disciplined column 1, column 2 and column 3. And column 2 is where, as Umang said, we're putting new resource in because we don't want to distract column 1 and column 3, and we will grow column 2. So integration functionally going well, culturally going really well. Everybody feels as part of one team. There's one share price. So we are working collectively. So I'm really pleased culturally how it's going. But that takes leadership from both sides. So I thank Umang and Rakesh particularly for driving that agenda within Evosys. I'll let Abhishek comment on the accounting element to that.

Mohit, I missed your specific question. What was that, please?

If the integration is going like as planned, is there a possibility that you guys can net off the goodwill as well by the end of the year? Because you can essentially become one company and, therefore, you will have the option of [ unit ].

Okay. I understand your question. Thank you. Now those 2 will follow their own independent path, Mohit. While integration is about getting all the assets and all the energies aligned to accelerate the growth, accounting will follow its path.

So then we continue to run in the same way as you are reporting currently?

Correct. Correct.

And second, Abhishek, was on utilization. Why was our utilization be down on a Q-o-Q basis with such a strong revenue growth? Like is there a pricing which has moved up? Or what would result into a lower utilization for us, Q-o-Q?

We have added trainees, Mohit. We have now started to add trainees in our organization across Evosys as well as Mastek.

Utilization -- just including trainee and your net addition was not much, right? It looks like on a revenue per employee basis, that our pricing has gone up for some reason despite offshoring also going up.

Yes. Pricing has gone up in a couple of accounts. That's there.

So now 2Q is the steady state for us or is there some element of like special projects or something which would revert back to -- like how should we take the reference? Like 1Q is the steady state pricing or is it 2Q, which is more representative of the steady state prices?

These are good representations, Mohit. We will add people. You will have some impact on the utilization. But overall, I think we have had the impact that we would imagine from the first phase of COVID, both in terms of clientele as well as the size of the business, the revenues as well as payment terms and pricing discounts to include. We have been able to operate at a place or 2 as well. So I would say that this is a good representation of the trend going forward [indiscernible] qualify that.

[Operator Instructions] The next question is from the line of Madhu Babu from Centrum Broking.

Sir, we mentioned that we'll go through consortium in U.K. again, so government projects. Because actually, now we are going mostly on a stand-alone compared to the early model. So how this consortium model and who are the leading vendors in that? And would you like to pursue more such kind of deals? And second is whether the furlough impact will be there time? Because some of the IT companies that have no higher furloughs. Your views on that.

Okay. So I think to answer you, are we going through a -- we're going through a more blended channel to market. So I think to answer the last question, which I think was from [ Baidik ], the -- our organic growth, direct selling will continue to grow in the mid-20s, I think, over the year. We're seen as a recognized trusted supply, and that's a direct sell. We're also -- when you get into big projects, and I'll use an example of the Ministry of Defense. They also want to build their own supply chain because defense is subtly different, and it needs to have continuity of supply chain. So it has different criteria. So in that, as an example, we've signed up to the military covenant, which means that we will take ex-service people into our employment because that's part of the military covenant in the U.K., which is if you want to be a supplier to that organize -- or that department, I think you should support those staff as they come out of the military life into a civilian life. And it also gives us huge access to very skilled, both technical people and leadership. However, if you want to do big projects and we're talking national infrastructure and major supply, yes, we're in a consortium with people like Kinetic, who is a multibillion-pound company that's got a very strong and deep military background. And just to give you an idea, they came out of Dstl, who do all the chemical checking on things like Novichok, which was obviously relevant in the U.K. So that just gives us a totally different access to a whole new market. It's not either or it's both, if that helps, Madhu.

Yes. On the furlough?

On the furlough, we don't see furlough impacting. I think we've probably balanced our business in the U.K. to be between supply and demand. We're actually looking at bringing on more people in our graduate training. So no furlough. We've reversed everything. We don't think it's -- never say never, but it's not in our plans for the next 2 to 3 quarters.

No. Sir, I'm asking whether the December, you'll have that shutdown in the last Christmas week and all, that will impact us.

Sorry, sorry, sorry. I think there will be elements of that. I mean Q3 is, as you say, on a T&M basis, there's less billing days. So we will have that. But I think the balance in the portfolio will offset the furlough impact. So yes, Q3 will have an impact of furlough, but I don't think it will be material on growth. But I think that would probably give you a stronger Q4. So probably Q2 to Q3, you'd look to modest -- flat to modest; Q4, a much more accelerated position, but not because of the business because of the furlough impact. I don't know if Abhishek, do you want to give a more granular detail to that.

I think, John, you've covered the aspects. Absolutely, there will be some impact there. Some of the programs go through it every year. And to that extent, we'll have it, Madhu Babu. But that said, the order booking that we have done and the acceleration that we have in the business, we endeavor to cover for it, if not more.

Just one more, if I can. So last 2 acquisitions have been on the Oracle side. So we seem to be completely aligned to one platform. So in terms of the next, like let us say, Azure or a Salesforce and all, so how are we placed in those platforms in terms of investments because we're completely into Oracle as of now?

Okay. I think the -- if you look at TAISTech and Evosys, they just happened both to be Oracle. There wasn't a big strategic decision to go with Oracle, number one. And if I look at it, the TAISTech that in digital commerce, Oracle have lost position in that over the last few years, where if I look at their ERP, as Umang said, they're absolutely up in the Magic Quadrant creating massive leadership and momentum against people like SAP and Workday. You're right -- our acquisitions would be to support that strategy. And at the moment, we have enough work coming from the Oracle channel. I think with the SAP, we need some capability, but I don't think we'd go to market with something like that. But you're right. Once we've landed a customer with Oracle, that customer wants to go on a more hybrid cloud ecosystem. So most of the customers will have Azure in there for that Office 365. They may have some Salesforce. They may be looking at Amazon Web Services. So I think we have got that capability and that experience from the U.K. that we're expanding into the global footprint. But as far as acquisition is concerned, Madhu, it wouldn't be go to market. It would be more about capability, if that helps. I don't think we want to deflect our go to market at the moment.

[Operator Instructions] The next question is from the line of [ Pratim Jain ] from Surana Maloo Family Office.

I wanted to congratulate the management for posting very strong financials. So my first question is regarding the net debt, sir. So we still -- like you told that we paid around $5 million this quarter...

We can't hear you.

[ Pratim ], you were not audible, [ Pratim ], in between. Hello?

Is my voice audible?

Yes. Now it is.

Okay. So...

Sorry, [ Pratim ], again, we are unable to hear you. Can you please use the handset, please?

Yes, I am using the handset. Is it audible now? Hello?

Yes. Yes.

So like the management told that we have paid around $5 million in debt. So -- and we have a lot of net cash. So what are the plans for reducing the debt further more?

What we mentioned in our respective presentation or conversation that, that is the strategy that we are looking at, what's the capital allocation strategy. Is this the best way of repaying the debt? Or should we actually deploy that, given that the cost of debt is very, very minimal, given LIBOR is extremely low at this point of time as well as onshore, the interest cost is very, very minimal. So it's in the works at this point. And if there are no better alternatives, then obviously, that's the easiest option that we have as a management to repay the debt, but it's being worked upon.

The consulting business of Mastek, the organic business, sir, the business has been seeing a de-growth for the past 3 years, sir, at a CAGR of 38%. So is the company planning on investing so that this particular segment sees some growth in the future?

By consulting, I would imagine you are referring to the IndigoBlue side of the business. And if that's so, I -- we do want to share that we did restructure that business, wherein just the consulting part of it is reflected there, whereas the delivery of that is mostly done by the other part of the organization. So -- and consulting is not necessarily our foray. It's the sharp end of the spear that opens the account, the agile consulting and intelligence around it. The bigger bet there is the follow-up business that it enables us to fit for and win. So that's the effectiveness. That's the way we are looking at the effectiveness of that.

Okay. Sir, one last question, sir. Sir, regarding the promoter holding, sir, 1 year back, sir, they were around 57% plus, sir, and now the pledge has become 0. So can you just give some information on why was the pledge created and why the pledge has been revoked now?

Thank you for this question. I think it will help answer questions that many people might have had. Actually, it was never a pledge. It was a technical pledge based on a bank covenant that we had for a debt that we had raised earlier. The new SEBI circular that came in September, October last year actually made it so, and we ensured that we addressed it. So there was never a pledge. And now with the interpretation and the revised status of ours, we are out of it.

The next question is from the line of [ Ravi Naredi ] from Naredi Investments.

Sir, this margin profit after tax 14.3% will be new normal in coming time?

Ravi, thanks for your question. We've tried to address it through operating EBITDA percentage, and we're looking at it from a PAT percentage point of view. I think it's one and the same profitability at any level will flow through. Having said that, our focus is that we would look to reinvest beyond a certain threshold back into the business and accelerate the growth. To that extent, for this year, it is -- there is a visibility, and we have a degree of certainty. Beyond that, the way business shapes up, the way some of these costs comes back, whether it's travel, hospitality, meals, entertainment, customer engagement, that will determine it as to where those percentages are. Having said that, we would like to endeavor to grow the business at a rate that we are able to sustain it, but that's on the best effort basis.

Right, sir. And sir, due to corona spread in Europe again, how it will impact us in this quarter, current quarter?

So corona impact has been there for now 7 months. We have been working from home. 100% of our workforce is working from home. And we'll continue to do so in the coming times as well. At this point of time, we'd like to believe that we will be able to sustain our delivery with the work-from-home model. And to that extent, we are in a better place.

The next question is from the line of Darshit Shah from Nirvana Capital.

Congratulations on a good set of numbers. Sir, just one clarification. If I heard John correctly, on the U.K. government opportunity, which is going to grow up in the second half of this year, so we roughly are eyeing around 3 deals worth GBP 20 million to GBP 25 million to bid along with the consortium. Did I hear it correct?

That is correct. Yes. They're in the pipeline. They're not in the forecast.

Sure, sure, sure. And just on the dividend part, so sir, do we have a stated dividend policy since we are having good amount of cash as well as we are generating a good amount of cash flow from operation as well, around INR 150 crores has already been generated in the first half and going by this run rate, we would probably end up INR 250 core, INR 300 crores in this year. So do we have a stated dividend policy for shareholders? I would like to know that.

Sure. See, based on the SEBI norms, we are not obligated to have one. But we do use a certain guideline to determine it. And there are some other factors also, which is about the sustainability and the serviceability as well as the best deployment of the cash, and we use those parameters to determine it. And endeavor is always to kind of maintain and grow northward on the dividend percentage.

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

My first question is on the employee expenses. You stated that we are taking salary hikes from first of October. So if you can state a number for -- I think, what would be the range for salary hikes? And secondly, what would be the net additions that we are looking at in the second half in terms of employee headcount?

Yes. I'll let Abhishek cover that, please.

I'll take that, John. I don't know whether there was an echo or the question. So Nirmal, the wage hikes are being worked upon as -- in principle, we have agreed to go ahead. What's the affordability and what's the right way to do it is being worked upon. Having said that, it's not going to be significantly different from what we had last year. And the headcount addition as a function of the business is both the lateral and trainee, the hiring of lateral folks as well as trainees. So we continue to add based on the business visibility. And at this point of time, as John said, the H2 looks to be stronger than H1. So we'll have some meaningful addition over the year.

Okay. And the second question is on offshoring. So last year in the -- in Q2 of last year, it's been sometime since then, but we talked about a GBP 20 million opportunity with the U.K. government for offshoring. Since then, work from home has become a bit more acceptable to maybe to the government as well. And so what is the opportunity there in terms of the agreeability of the government in terms of offshoring? And how do we see that ratio moving?

Okay. So I think when we started -- so today, we have about 60 offshore seats doing government work. And there is no reason why that can't go up 10x over the next 2 to 3 years. So that's the scale of the opportunity, and that's the scale of the ambition. I think we've got a proven model with the NHS. We've got a proven model with the Home Office, and we've got a proven model now with the MOD. So that, I think, will grow. And it's -- as I described, Nirmal, it's the perfect storm. Because government are going to have to look at budget reduction in capital budgets over the next probably 5 years to pay for COVID, but they have a massive digital program that they've got to deliver because that's a way of giving better citizen services and better value for money. And you can't -- you can't just reduce manpower and rate cards in that. So it is a perfect storm where if you want to deliver that digital agenda, you're going to have to look at different ways of getting access to capacity and capability. So it naturally moves to an offshoring model. But it's more intelligent offshoring than just here we've got some low-cost labor in a low-cost country because the cost of management and the risk is massive in that. So I think it will be blended. And I think we're probably at the forefront of the queue of people who they would trust to ramp up an existing model to deliver that. So that's where we're at. But we've got 4 or 5 customers who are actively looking at this dialogue with us from U.K. government. So I think it's a massive opportunity, but we really are in the foothills of that opportunity. But you're right, because of COVID, the client is more open to that and more innovative because they've seen the value of working remotely.

The next question is from the line of [ Jay Vivek from JS Investments ].

Congratulations on excellent set of numbers, sir. I wanted to inquire about the opportunity size of cloud implementation for Oracle in view of increasing work from home and what's the growth rate we expect. And do we confine ourselves to only Oracle cloud technology? Or are we open to the other AWS and other cloud technologies? And how is the competition intensity in it? And how are we performing?

Okay. I'll let Umang talk about the Oracle bit. But I think, as Mastek, we've always had a very strong capability in Amazon and Azure because that's a lot of the work that we've done and helped the U.K. government move to those platforms. So we have strong capability. What we've never done is go to market with those companies. We've been more engineering solutions with them. Where we engineer and go to market is obviously Oracle who have clear leadership position in the ERP and EBS space. But I'll let Umang give some commentary on that, if I may.

Yes. Thanks, John. So the -- although the working remotely or working from offshore definitely has increased with COVID, however, I think the kind of customers that we are now dealing with are much more large scale, and their expectations is outcome. So it is more fixed price based with outcome expectation. And therefore, there's no direct pressure on rates that we are seeing on the SaaS cloud out of the business. Just to add on John's comment, as far as the cloud application business is concerned, which is the SaaS, ERP, HCM, et cetera, there, we are working only with Oracle. But as far as the cloud in general is considered like the cloud migration of cloud using cloud for AppDev and innovation, there we work across the board with Oracle, Microsoft, AWS, et cetera.

The next question is from the line of [ Soham Das ], an individual investor.

This is Soham. So I had a few questions. I'm actually referring to the annual report. And on -- the interest cost is very low in terms of $17.7 million as the interest cost for the term loans as against INR 1.8 billion about INR for the term loan. Can you actually elaborate why exactly is this so low? Is it the LIBOR plus 190 or LIBOR plus 150 interest cost comes to about 2.5%?

Yes. I'll let Abhishek cover that. But having -- living in the geography, I can assure you LIBOR where it is, is very uncomfortable. But it's good for borrowing money. But I'll let Abhishek. He will give detail answer.

Sure, John. Thank you. So simple answer to that is, if you look at last financial year, the borrowings were limited to $10 million and kept reducing, though the line of credit was much higher, and that was at LIBOR plus 150. And to that extent, not very high even if you round it to 2% on that, that represents the number. And the majority of the borrowing was done at the back end of this financial year, the 45-day or 40-day worth of that cost or possibly lesser base of the cost was reflected in the last financial year. This financial year, you have a full-fledged impact there. So I'm not sure exactly where we're missing it, but it could be just the timing of which you are computing.

Yes. I think that is [ clear ]. The second point is that in the last quarterly call, you talked about the conversion of -- the marquee conversion of $200,000 client to a $4 million client. How is that shaping up? Are we seeing any more development in that area?

I think all our customers are -- so if I look at that one in particular, that customer has an active plan there with us to increase, what I'll call, our scope in that account. So the phone call comes in because we did an ERP. We did the managed service. And then the phone call, basically, you're at the top table when opportunities are being looked at. So the conversation went something like, do you guys have full stack developers because we've got a project that we need to do. You then have another -- do you guys have MuleSoft skills because we need to integrate this asset. And I think that's the beauty of this strategy of working with Evosys to get us to the table and Mastek to keep us at the table and grow. It's a very complementary strategy. And we've both got complementary skills. What it means to the customer is, I can go with one organization for my full transformation. Now we're only as good as how we deliver. And based on what Umang said, we're very good at delivering through the assets and repeatable tool set, a consistent outcome. And we're quite happy now to look at contracting for that outcome, which, again, is a massive differentiator to what their incumbent service companies do. But to answer your question formally, yes, the customers that we land are starting to expand on a gradual basis. And that's why we're putting more investment into that column 2 sales team to take more customers on that journey.

The next question is from the line of Devang Patel from Crest Wealth PMS.

Sir, in the U.S., we have seen quite a [indiscernible]

Devang, your audio has not clearly audible. So can you please use the handset?

Can you have me now?

Yes.

Okay. In the U.S., we see politicians make more noises about against H1B visas or jobs moving overseas when the unemployment rate goes up there. So similarly, in the U.K., do you expect any backlashes into government contracts, there is more offshoring?

So I'll put it this way. The protectionist sentiments has been there for some time now. We have seen it in varied degrees across various countries. And over the last few years, it has been a norm. That said, economics and politics is not berest of each other. While the politicians would have their own postures, the reality of business operations is always out there. So we have had some raising in thresholds of minimum wages in U.K. that was much ahead of, let's say, the H1 visa rhetorics that we heard in U.S. as a geography. Singapore and Australia were hard on expat visas much before some of these trends were witnessed. So as an industry, it's nothing new. And we look to service our customer in the right shore model. Sometimes it's onshore, sometimes it's near shore, sometimes it's offshore. So we wouldn't focus too much on that at this point of time. I think we have what is needed to service our customer.

I think just to help sort of -- from a U.K. perspective, and I think you're right. The U.S. has probably gone a little more protectionist. But I think that will probably change in the next few months. I think the U.K., ironically, its minimum wage threshold for visas was primarily driven by the European Union legislation, and Europe tends to be protectionist. I think as the U.K. comes out of -- through Brexit, the bilateral relationships and visa constraints will actually relax is my estimation. Because we do need access to Indian labor, both in our technology sector, but more in our health segment as well. So I think the Brexit allows the U.K. government to drive a more targeted immigration strategy, which I think will benefit India generally, but it will definitely benefit the technology sector and the health sector.

Ladies and gentlemen, that would be the last question for today. I now hand the conference over to the management for any closing comments. Thank you, and over to you.

Okay. Thank you very much. Let me just -- it's been a long call. So let me close quickly. Thank you for your continued support and your interest in Mastek. It is greatly appreciated, and we welcome the challenge, the questions and keeping us honest. So thank you for that. Hopefully, what you've heard today is a real change in tone and a real changing in the gears. We've gone from cut and grow to cut and invest. We expect the second half to be stronger than the first half. And we've got this lovely word momentum. So lots of the questions. We also have resilience in our operating model, and I think we have resilience in the markets that we serve. The verticals of U.K. government will grow, health will grow and the ERP cloud migration will continue to grow. So we have lots to be optimistic about moving forward. We generate cash, and we have a strong balance sheet. And as we said, we will look at our capital allocation of what's the best way to drive further growth for Mastek over the next few years. The acquisition of Evosys is going very well, and it gives us confidence to maybe look at using the cash there. But the reason the acquisition is going is because we've got a great team, and I think you've heard it from Umang today, and Abhishek is this is a team that's committed to grow this company and fulfill the potential of Mastek. That being said, Q2, very, very good, very happy with it. But we reset to 0 and we start again, but we're optimistic Q3 and Q4 will be better. So with that, we'll close. I thank you for your support. I thank you for your interest. Please keep us honest, and we'll keep delivering for you. Thank you.