Mastek Limited (MASTEK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Mastek Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Diwakar Pingle from Christensen IR. Thank you, and over to you, sir.

Thank you so much, Lizane. Good afternoon to all of you, and good morning depending on the geography you are in. Thanks for joining the Q3 FY '21 earnings call of Mastek. The results and presentation have already been mailed to you, and you can also view that on our website at www.mastek.com. In case anyone here doesn't have it, please do write to us and I'll be happy to send it to you and I'll be happy to have mailing this. To take us through the results today and to answer your questions, we have the top management of Mastek, represented by Ashank Desai, Vice Chairman and Managing Director; Abhishek Singh, President of Mastek; Umang Nahata, Co-Founder of Evosys; and Arun Agarwal, Group Vice President Finance. Ashank will start with a brief overview of the quarter gone by, which will be followed by Abhishek who will share an update on the U.K. and the U.S. business. This will then be followed Umang who will share an update on the Evosys business; and Arun will speak on financial update. I'd like to remind you that everything listed on the call that's reflects any outlook for the future or which can be construed as forward-looking statements must be viewed in conjunction with the risks and uncertainties that the business face. The 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. That said, I will now hand over the call to Ashank.

Thanks, Diwakar. Good day to all of you. Thank you for joining us on this quarter 3 earnings call. I'm delighted with our performance of this quarter. Demand for transformation and cloud migration projects across geographies have built us a glorious momentum, keeping in mind that overcame even seasonal weaknesses that are typically in this quarter. What I plan to do is, I plan to highlight this achievement not only from this quarter's perspective, as much as what it means to us over next quarter and next financial year. And not only that, but go beyond the 3-year vision that we have started ourselves to begin. This is based, of course, on our last 14, 15 quarters of continuous performance, improving revenue and margins, we are here. That is the hard work of last many quarters, and now going forward what it means is what I want to cover. First, of course, are the revenues, which you all know, has done quite well. We have grown 76% year-on-year revenue and 208% EBITDA. Of course, this is based on acquisitions. However, the performance is balanced quarter-on-quarter in terms of organic as well as inorganic growth. Both of them have done very well. And more importantly, there is a good order backlog and a cash flow, this you must have seen our financial performance, it demonstrates our resilient business model and relationship with customers. So financially, strong results, very high EBITDA percentage, maybe a record percentage in our history. And more importantly, order backlog and a very strong pipeline that we have added this quarter. This would mean the order backlog and pipeline would mean a very stable resilient performance over next many quarters. But I don't want to stop only on finance here. We have to look this through the lens of our customers. We have been -- we have added 57 customers, again, record customers so far. And more importantly, these customers were in all sizes and in all regions and in all sectors. For example, in public sector, we have central government in U.K., local government in U.K., a public sector, United Nations agency in U.S., all of them giving large orders to us. In healthcare and life sciences, we have multibillion-dollar healthcare providers in U.S. We have NHS, our customer in U.K., we have a multibillion Finnish pharmaceutical company, we have subsidiary of a large pharma company, again in Southeast Asia. In manufacturing, again, we made big foray in terms of -- in U.S. particularly, a multibillion-dollar global company manufacturing oscilloscopes, videos and mobile test statements, also the globally recognized manufacturer of bikes and so on. Rest of the world, outside all of these also, we have done good customer base in manufacturing. We have good customers in financial services, telecom and retail. So it has been in all the regions and in all the sectors which gives us a stability and new customer base in digital and cloud migration. And that is going to be our foundation because Mastek, Evosys together are doing cross-sell to each one of them. In fact, few of these clients are a cross sell. We have jointly gone together. And together, we are much more powerful than our individual stability where customer sees us as partner for the cloud movement in ERP and then digital transformation. The second -- third lens, I would like to highlight is employees. I think you cannot deliver unless you build capabilities, talent, leadership. This quarter we have added 250 persons which is almost 6%, 7% addition to our workforce in just one quarter. And some of it is financially reflected even in this quarter. And what is more important, it is, again, a new technology workforce for next quarter and quarters beyond. So we have been working very hard on building the sales, marketing and delivery infrastructure, including a few senior persons to have a delivery -- sorry, to have a leadership point of view. Beyond that, of course, what we are building really is a portfolio of companies step-by-step, as we said, starting from digital focus that we had all these years, we are doing cloud. We are still looking forward to building thesis around it internally in terms of products and services, and acquisitions is required. Given our cash position, close to INR 700-plus crores, we are in a good position to choose, select and add to our portfolio again for our 3-year vision. So I will not go beyond this. I will only say that Mastek has come out strongly outside this COVID problem that all of us had. We had planned ourselves to deliver from home. I am really proud of Mastek [indiscernible] we could deliver all the reasons to our customers in spite of all the difficulties, and we have built a pipeline of talent, pipeline of customers and pipeline of financial resilience to deliver next few quarters. I think I'm very optimistic and look forward to a bright future. Thanks for the support of our customers, our employees and all of you. I now hand over to Abhishek to cover some more details. Abhishek?

Thank you, Ashank. Warm hello to all of us on the call. This is my first call with all of you in my new role, which is driving our U.K. business. With that said, I will be sharing the perspective on all of our organic business, which includes U.S. and India business. So starting with our [indiscernible] U.K. business. We continue to drive very robust business performance in the geography. Revenues grew 6.5% quarter-on-quarter. This is in constant currency terms and 20% also on a year-on-year basis, on the back of a very strong U.K. public sector performance. If we just look at our sectoral performance, public sector grew 40%-plus year-on-year, which reflects the trend that we have always outlined, the core [indiscernible] scenario, the clarity in the sector, our investment in the sector reflects on our business performance. And that trend continues to be validated by our financial performance here. In terms of order booking, it stood pretty robust. Again, we had 120% quarterly revenue in the form of quarter booking for the quarter. And though this was a seasonally weak quarter for the business where both order booking as well as revenue had some negative impact of the seasonality. As you are aware of it that holiday season does bring in curtailed working days, and as a result, there are furlough impacts which impacts our revenue. Having said that, the most important indicator for us is not only the revenue growth and the order bookings, but the people that come along with that. And we are very happy to report that we added 100-plus heads during the quarter, just with respect to the U.K. business, which gives you an idea of the momentum that we are experiencing. If I were to expand that and quickly look at some coverage on public sector and a lot of you have had those questions for us as to what's the scope and why do you feel so confident? We'll go to some of the data that we have gathered in the space and software and IT services, which is [indiscernible] publish the data on the spending by the U.K. government in the space. And interestingly, the government sector spends GBP 12 billion-plus per annum in the IT services and software space, 70% of which is concentrated towards operation and delivery. And if you look at the major spend of central government, followed by local government, followed by healthcare and followed by [indiscernible] are the top 4 spenders, and Mastek is present in the 3 of the 2 -- top 4 spenders with the investment made to cover the local government, which comes along with significant capability that Evosys has in that space. So the key point is that with a GBP 12 billion growth of market opportunity, and Mastek has got a significant degree in the 3 of top 4 spenders. And interestingly, healthcare has been the bedrock of our growth over the last 12 months. It is the best-performing subsector, which is growing at 3%-plus per annum on its own on just around GBP 2 billion-plus of the services opportunity that they have. So this gives you an idea, hopefully, that the headroom for growth that we have in the sector and why we continue to be so bullish here. And our approach is a 2-pronged approach that is deepening our existing relationship as well as widening the customer base that we can have to ensure that there is no concentration risk. And to that effect, I'm very happy to share that we landed another new logo in the U.K. public sector space last quarter, which represents a significant spend. We have got a framework win, which gives us access to roughly around GBP 15 billion -- or GBP 15 million of potential opportunity in that customer. So moving on to the pipeline side, it continues to grow and -- with the access to medium and large deals in the Mastek context. But overall, we are very confident of this sector, driving growth for the overall geography. If I move my analysis quickly onto the private sector part as we have outlined earlier, it is in build phase where we are looking to onboard the sales leadership this quarter. And which will then be followed by investment in field sales and the coverage of the market. However, the exciting part is the opportunity and the speed at which the opportunity is coming our way and the need for us to invest and convert that into revenues for Mastek. We have had a bunch of relationships coming through Evosys relationship. And a significant mode is in the pipeline, which when converted, provides us with very good visibility of the growth that the sector can drive for overall Mastek. With that said, I will say that we continue to make investments in our digital capability and serve the evolving needs of our customer. And to that effect, we will be adding possibly triple-plus digit of FTEs in the coming quarter as well. Moving on to U.S. business. This has been -- this is the most challenging quarter for that business given the negative seasonality of the holiday and Christmas and New Year season. The development work with the retail customer is that it's minimal. However, even with that environment and significant retail focus, the geography has been able to deliver a 3% plus constant currency quarter-on-quarter growth. And that talks about some of the fundamental shift that business is trying to drive. And in that direction, the biggest one is that it has been able to add non-retail customers to help insulate itself from the sectoral concentration and the seasonality effect. Our U.S. business added 5 new logos in that space. Its operational discipline and the profitability focus, coupled with cash management, puts it in a very, very good place. With sales team in place, we do believe that the geography will deliver accretive growth in the coming times. And a quick touch point on the India business. It continues to be our testing ground for RPA and automation capabilities, and we have successfully landed multiple logos during the quarter in that space. We continue to defocus on our domestic government business and build on our enterprise business. And to that effect, the revenue grew 44% quarter-on-quarter, but that is on a very, very small base. So hopefully, that gives you an idea of where the organic business stays and the directional clarity that we have. And I'll hand it over to Umang to bring in colors on the Evosys business. Umang, over to you.

Thank you, Abhishek. Hello, everyone. Good afternoon, good morning, good evening wherever you are. So thank you for joining the call again, and I'd like to highlight to you the movement that has happened in the Oracle Services business in this quarter. As Ashank mentioned, this has been a phenomenal quarter for us in terms of various accounts on -- all the accounts on, I would say, from order booking to revenue to EBITDA performance, employee additions, [indiscernible] et cetera. A bit of breakdown there. So we added 49 new customers in this quarter. I think continuously growing from 40 above, which is very close to 50. Out of which, 15 of these customers were in North America. And this is, again, a key focus geography over [indiscernible] we are anticipating a highest growth in the coming period. And we are clearly seeing signs of that kind of growth in the geography. Another interesting part of the customer addition was 10 of these 49 customers, the customers who are more than $1 billion in revenue. And these are the kind of customer portfolios that are going to become our key focus for cross-sell business as we move forward. So we are not only adding customers to the Oracle business, but we are constantly also adding prospects to our cross-sell and digital services business. The revenue and EBITDA profile continue to grow steadily and directionally in the same percentage that we have been growing in the previous quarters and Arun will highlight more on the details as we go forward. Similarly, like Ashank and Abhishek mentioned, we are continuously adding workforce to our teams. So we've added more than 120 new employees this quarter, and we look forward to adding a similar if not larger number in Q4. Another key aspect of our business that is really showing strong signs is the seamless execution of these projects while working remotely and also while working largely from offshore. So in this quarter, we had 40 customers who had went live, and this is transforming from their on-premise business end-to-end to an Oracle Cloud platform and running on a completely new digital environment. Mind you, these customers would usually have anywhere between 40% to 50% on-site engagement in the normal world. But in the COVID world, these were hardly 15% to 20% on-site engagements and still exceptionally well delivered, very happy, very successful and lot of positive ratings all around on Gartner, on Oracle CI, et cetera. Moving forward to where are we on the strategic side of the businesses. Like I've been highlighting earlier in the previous calls, our strategies are clearly based on 3 key pillars, and we continue to focus on these 3 again. The first is directly based on our vision which was trying to deliver a 3x tangible measurable ROI to our customers. And that's where our strategy of developing and continuously enhancing the VBD program, which is value-based delivery program that allows us to do outcome-based contracting with our customers. So we are happy to report that we're enhancing that program continuously and now we are setting a target for at least covering 20% of our customers as we go forward to very tangible outcome-based contracts. So far, whatever customers we have signed up on that kind of program, we've been able to deliver 100% results in terms of the risk and reward programs that we have added. The second key part of the strategy is the on-premise to cloud transformation. Again, this is led by a program called Glide, which is our [indiscernible] program for on-premise to cloud transformation. After the report that we now have more than 100 customers that we have migrated from on-premise to cloud, including 8 customers where we are migrating them from SSC -- ECC environment to Oracle Cloud environment. Again, that we are one of the very few, if not the only partner that is running aggressively this campaign of marketing SAP customer -- SAP complete program. It looks like migrating customers from SAP ECC to Oracle Cloud. We believe the product right now is in its best shape and clearly has an edge over any other product in the market. And therefore, it is our strong chance working with Oracle to gain market share in this space. The last and definitely not the least program is called the cloud application managed services program. We codename it CAMPS. This is where we are now trying to build the next-generation service which is as the customers go live on their platform, how do we help them sustain digital advantage, sustain record advantage and continuously get more value out of their services. So converting the implementation programs into post managed services and then also adding our business -- services business to it. Again, very happy to report that we've moved up to more than 32% of our revenue. It's now a part of the CAMPS program, and we are looking at an -- our vision is to growth up to 40%-plus over the next few quarters. The last and not -- one more new initiative that we're now adding, which is our attack to the upmarket industry. So we were largely operating in the mid, mid- to upmarket segment. But we're now looking at the top tier of the market. And this is where verticalization is going to become our next key attack strategy. And we are looking at 3 key focused verticals on which we will be building this up. Like Ashank said and Abhishek mentioned, healthcare and life sciences is joint key verticals where we are very focused on and we have good strength and wins all across globally in U.K. and U.S , in APAC, Middle East, everywhere. And that is going to be our key first target vertical. And the second target vertical is going to be manufacturing and engineering and construction. This is where we're getting good traction in North America and globally. But we feel that's a vertical where the cloud transition has just started. We are early on that journey. And if we work well, we will be able to create a significant dent in the market moving forward in that direction. So that's -- from a strategy point of view, we are looking at those 3 key strategies and added the fourth one. Last section that I wanted to cover with you guys is the integration of Mastek and Evosys, I think that is going really well from all aspects of the business, from people integration, from systems and back office IT integration, from the cross-sell and the business integration, which is the most important aspect. On the cross-sell side, we had another really good quarter in terms of North America. We had -- so while we had in the earlier quarters reported about co-sell on the digital services side, this quarter, we had co-sell on the e-commerce and Oracle services side, we have one really good customer wherein we bought in together an entire lead to cash cycle starting from e-commerce and then landing into the Oracle ERP. And joint combined effort really was able to get the better of Tier 1 competition in that market. So I think we are continuously seeing the advantage of putting the 2 companies together. One plus one is clearly making 3 and we are hoping that it become 4 and 5 as we move forward. So that's broadly where the whole direction of travel is. Very happy from the progress and looking forward to a good Q4. Thank you. Over to you, Arun.

Thank you, Umang. A warm welcome to everyone on this call. I'm going to share with you the highlights of our performance for this quarter and 9 months ended December 31, 2020. The date was circulated ahead of this call containing the details of our financial performance. So I'll be focusing more on the key highlights. Quarter 3 FY '21 results were in line with our expectations. It has been another quarter of our consistent financial performance and delivering strong momentum across all leading and lag indicators. And why I say leading and lag because as Abhishek, Ashank and Umang mentioned, our order book is healthy. Our revenue is growing. We're seeing momentum across all the geographies. Our pipeline is gaining the traction, and we are committing those deals for the future revenue. Going ahead, slightly on the Brexit actually has led to good traction in both public sector and the digital transformation deals. And that's what is reflected in our organic business growth, specifically coming from the U.K. market. This quarter marked the crossing of a significant milestone for Mastek. The reported highest ever quarterly revenue at INR 60 million-plus, we saw a revenue growth of 8.1% quarter-on-quarter in INR terms. EBITDA margin stood at 23.5%, an enrichment of 233 bps quarter-on-quarter. Going ahead, I'm glad to inform that Mastek and Evosys has entered into an LOI with a leading professional services organization in North America under joint go-to-market strategy for an order value of $1.8 million. This is our third significant deal under joint go-to-market strategy this year. And as we had reported in last 2 quarters, we had got earlier 2 deals in our U.K. and Europe regions, and both were multimillion-dollar deals. Coming to very key -- very specific to financial highlights. Our total income stood at INR 446.8 crores, up 8% quarter-on-quarter and 76.4% year-on-year. Operating revenue stood at INR 442.8 crores, up 8.1% quarter-on-quarter and 81.7% year-on-year. Here important to add is this performance is aided by deliveries in both organic and Oracle services and across the geographies. While overall revenue grew by 8% quarter-on-quarter, organic side of business grew by 7.4% quarter-on-quarter in rupee terms and 6.3% in constant currency. Operating EBITDA at 23.5% versus 21.1% in quarter 2, showing an improvement of 233 bps quarter-on-quarter and 965 bps year-on-year. This improvement is primarily driven by revenue growth, higher offshoring, as mentioned by Umang and Abhishek, coupled with COVID-driven discretionary services which is coming from the travel and other stuff. Total EBITDA stands at INR 107.8 crores, up 18.9% quarter-on-quarter and 149.6% year-on-year. PAT stood at INR 70.3 crores, up 18.9% quarter-on-quarter and 170.3% year-on-year. I'm really delighted to mention, our gross cash stood at INR 778.6 crores versus INR 476.4 crores in the previous quarter. Cash net of debt stood at INR 520.9 crores versus INR 223.4 crores in previous quarter. There's a healthy increase in cash driven by both robust cash generation which happened through the operation. And also, we collected INR 237 crores from the sale of Majesco stake in this quarter. Our free cash flow to net income basis stood at 125.3% for 9 months ended December 2020, which is, again, driven by focused collection across the geography and further confirms the focus which management and the company is bringing to collect all our deals from the customers. Moving further on the -- again, leading a LAN indicator put together, 12 months order backlog stands at INR 946.7 crores versus INR 940.5 crores in September '20, marginally up by a percentage in INR terms. Order booking was strong across despite being a seasonally weak quarter due to Christmas and New Year shutdowns in our major markets. So as Abhishek mentioned, both U.K, U.S. and also as Umang mentioned, we have seen good order coming in across all the markets and across all the verticals. Again, just to like -- again to focus, we have added 57 customers during the quarter, of which 12 customers are having $1 billion-plus in their revenue. And thereafter, giving us lot of depth to go and mind those customers to sell digital transformation services and make this acquisition one plus one, 3. So we are focusing in that direction. On the employees side, headcount stood at 3,602 as of December 31, 2020, reflecting net addition of 248 resources during the quarter. We are looking to hire similar count in coming quarters. Last but not the least, again, company has given increment across all the geographies and verticals on 30th December, 2020. So all our employees have done with their appraisals and the hike which couldn't happen in quarter 1 and quarter 2 has been effective December 2020. We expect to build from here. I would like to thank you all for your continued support at setting times filled with phenomenal opportunities is how we see it ahead. With this, I will now open the floor for Q&A. Thank you.

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

Abhishek, congrats on great numbers. Very strong ramp-up across segments. My question is how much of this pop in revenues would you reckon into the pent-up demand, especially in U.K.? And what do you think of the sustenance of this space of growth? I asked this because post Brexit last year and COVID thereafter, there was a different curtailment of spends against the government to your [indiscernible]. Abhishek, did you get that question?

Baidik, you did cut out in between, but nevertheless, I'll try to answer and if I have missed something, happy to come back. So you're right that there was and there continues to be significant budgetary pressures on various departments. But that hasn't necessarily resulted in cuts, but essentially about redirection of the spend. Having said that, Mastek in U.K. have GBP 100 million at this point of time, and the market opportunity that I outlined is in billions plus in just an addressable space. And you've got 3 of the top 4 spenders as your customer, and not customer over last 9, 6, 12 months, but basically for years and years. So we are reasonably comfortable and confident to build on the opportunity that we see. And it reflects in the pipeline and it reflects in the order booking.

Sure. On the margin front, how much do you reckon as a function of the current cost environment? And what do you think is a sustainable number? I think Ashank in his opening remarks leads us to the sustainability of these margins unless I got that wrong?

We have always mentioned and maintained, Baidik, that margins are favorably impacted by the COVID situation, that some of the discretionary or variable spend has been significantly off due to lack of travel or marketing initiatives and stuff. So it will have some downward pressure as world opens up. But we've all struggled to predict and project what that would look like. Having said that, we've always maintained that high-teens EBITDA -- very high-teens EBITDA is what our endeavor is as a combined organization and on a go-forward basis. And the surplus would always be invested back into the business, either for market coverage or for capability development.

Sure. And can I just squeeze in one last book-keeping question. The transmission to your PAT post minority interest is normally in range of worth 14.5%. That's the minority discount. But this seems to have expanded to about 19% this quarter. Could you help us understand that please?

I'll defer to Arun to give better insight on that, Baidik. Arun?

Sure. Sure.

Yes. Thank you, Abhishek. So Baidik, again, it's a function of the margin which we are making in the Oracle set of business, right? And also, there are 2 compositions, one we have done 100% acquisition as part of the business. And other part of the business which is more into developed market is where we have the sharing ratio because they continue to hold the shares of that company. So again, as we grow more in the Evosys side of business more on the developed market, this ratio will tend to be squeezed.

Sure. And if I could just squeeze in one question for Umang. The base is relatively low. But as we scale up, is there a risk of maintaining the flywheel in order book and revenues given the short-term mix of engagements as Evosys? And the lead indicator from Oracle licenses is pretty good. But if you could give us some color on how Oracle is helping us in go-to-market? And in the competing system, where would you place Evosys?

Baidik, you got cut out in the last minute. But I understand your question is more around how is Oracle helping us and how do you see continuity of that, is that correct?

That's right. That's right.

Yes. So I mean, Oracle clearly sees us as one of their top partners across all geographies and key verticals and therefore them bringing us in continuous -- to be a key factor of our sustained growth. Actually, from an Oracle point of view, what is important is the kind of success that we deliver. So currently, we are one of the highest suited partners as far as cloud renewals are concerned. And these are not just renewals for our business, but also renewals of the subscription. So that's one of the key indicators that they look at when they recommend partners going forward. And this is where we have the highest install base of working customers. So I think our relationship with Oracle is extremely strong, and is extremely strong on tangible data points and reference cases and not just individual relationships. So I think this is going to definitely continue well. And as we continue to not just deliver where we are, but keep improving our delivery and offering more ROI to our customers in terms of the output that they would get from their Oracle investment. So we clearly see no signs of -- we in fact see more and more larger customers coming to Oracle. And that would allow us to not just grow the overall order book, but also growing the kind of customers that we are interacting with and create a much larger pool of customers that we can cross-sell to.

This is Diwaker Pingle here. Just a quick reminder to all participants in view of the huge queue. So we would really appreciate it if you kind of stick yourself to only 2 questions per participate so that everyone gets an opportunity. This is a kind request.

We'll move on to the next question, that is from the line of Nirmal Bari from Sameeksha Capital.

Yes. Congrats on the very good set of numbers. My first question is basically a book-keeping question. Would it be possible to get how much of the healthcare vertical revenue is coming from the U.K. government?

Hello. Arun, you may have the insight. If you wanted to just share that. But, Nirmal, at an overarching level, I would say that the majority of that is coming from NHS with a small portion coming from our U.S. and UK. businesses, which are Evosys-driven businesses.

Yes. So roughly, 25% is what you can take as the number, which is coming from the health market in the U.K.

Okay. And the second question is on the major win slide that you had provided in this quarter, the U.K. central government project of 3 years and $1.15 -- sorry, 15 that you said. Is this one of the projects that we talked about in the past about -- that we were approaching through along with channel partners and all? Or this is a project that we won individually and those larger projects are still there in the pipeline?

Nirmal, larger projects are still there in the pipeline, most of the wins that are there are through our direct route.

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

Just one question on the U.S. strategy. So I'm not clear what you alluded in the opening remarks. One is verticalization. So you will offer its services into 2 verticals, manufacturing and healthcare, is that correct? For the U.S. private sector?

Abhishek, can you answer it?

Sure, Ashank. Thank you. So Mohit, it's alluding to the fact that our U.S. business on the digital transformation side or the organic business, as you know, that is overly retail-focused. Practically 90%, 95% of that business is retail-focused. So we have been looking to broad base it. And to that effect, the wins of this quarter, 5 of the wins of this quarter were in non-retail space, which gives us confidence of not only building the non-digital commerce, nonretail business, which is not impacted by that cyclicality. Having said that, overall U.S. business, if you look at it in totality, Mohit, it has got both Evosys and Mastek components, and Evosys part of the business definitely has got good traction on the healthcare side apart from various other sectors, whether it is manufacturing or retail or financial services. So healthcare is one of the most successful verticals that we are chasing on the Evosys side of the business.

Okay. And to augment U.S. x1 deal, Joint go-to strategy deal in North America, can you tell us little bit more about it?

Yes. Abhishek, I'll talk about the deal. So Mohit, this is a deal where the customer was looking at both digital commerce and cloud transformation as requirement. And that's where the Mastek-Evosys team came along and put together a joint pitch of looking at digital commerce and the cloud transformation added to it. So it starts from commerce and then ends up into the ERP. And that's the combined proposition the customer loves because they hardly found a partner who could do end-to-end both commerce and transformation with specialization. And it is at the first phase of the transaction that is close to $2 million, and we are currently, as we speak, working with the client for Phase II and Phase III, which will be almost twice the size of Phase 1.

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

And congratulations on a very good set of numbers. First question was to just understand this operating margin a bit better. If one can split the growth in operating margin Y-o-Y, what are the 2, 3 factors which have contributed? Of course, revenue growth will be one of them. But if you can split that to be able to understand sustainability of the same? So that is question number one. Second is there are some numbers which I could not understand. For example, the Middle East margins as well as the North America margins have increased a lot. Similarly, I could not understand the number where we have added so many employees, but nothing on the on-site. In fact, I think it has come down. So if you can just help explain these numbers, why there is no addition in the on-site and all the additions have been on the offshore, and secondly, the Middle East and North American margins?

Abhishek, if I may take that.

Yes. Sure.

Yes. So again, as your first question, I'm going one by one. So from last year to current year, and you -- when you entangle the margin profile, you will find that, one, Evosys has a better margin profile, as we mentioned in the earlier calls. Generally, they are in high -- early 20s to high 20s depending upon the COVID impact while Mastek is in the mid-teens. And hence as we acquired Evosys, combined businesses have been better and better than what it was one year back. So that's one of the reasons. In addition to that, as we have mentioned, and you rightly asked, you are seeing more headcount in offshore than the onshore. And that's one of the reasons in this COVID-driven environment, one there's a lower discretionary spend in terms of travel, marketing and other initiatives and rightly so because they are travel [embargo] as well. People are working from home, and thereafter, doesn't make much of the difference wherever you are working onshore or you're working offshore. And we're able to convince our customer in terms of robust delivery, irrespective of the location, which we are working from. And all this reasons put together is actually helping you deliver better margins. And as Abhishek mentioned in earlier question, once this travel restrictions go back and world comes back to normal and people will start coming to office, we expect some of these costs to come back, again, into the business. And some of the investment is also taken to get the future growth and thereafter, the margin will normalize. I hope I'm able to answer all your 3 questions.

The next question is from the line of [indiscernible] Capital.

Congratulations on a good set of numbers, sir. My question is, we have a cash -- net cash position of around INR 530 crores. So are we looking at acquisition in the U.S. markets because we had stated that we are trying to gain bigger market share in the U.S.?

So let me answer that. As I said, we are keeping this cash reserve for acquisitions. And obviously, U.S. being our focus in terms of future growth, that is the primary geography in which we are looking for expansion through M&A. So what you say is right. And in fact, we always look forward to some acquisition possibilities.

Okay. Any time line that you could provide me, sir?

You know these acquisitions, it's difficult to give any time line.

Just a broad base, sir. Okay. Okay.

It can take long time or quickly done. We are on the job. We have -- we should not be hurrying it because we have to be clearly seeing synergy with our business very clearly. We have to see the culture value match. We have to see the leadership pipeline. So it is not about revenue. Revenue is the last thing that we look at. And honestly, what we look for like what we did with Evosys, we took a very long time for that. But the reasons are there to see.

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

Sir, firstly, we pay tribute to Sudhakar Ram on his demise. And sir, what is our plan to deploy new MD and where it will be best, U.S. or U.K.?

I couldn't hear that properly. Could you repeat, please, what you said?

Sorry to interrupt. Mr. Naredi, you are sounding very away from the microphone.

No. No, I'm not far away. What is new MD plans and when company will gray or where it will be best, U.S. or U.K.?

I'm not clear. Abhishek or Umang, could you answer that?

Yes. Thank you, Ashank. I don't think I got that question either. But Mr. Naredi, if I heard you right, you was talking about where is the best investment, is it UK or U.S., and if it is with respect to the inorganic initiative. We are looking for capabilities and -- at this point of time, especially bolstering our cloud offerings. To that extent, it will be geography agonistic. Having said that, U.S. continues to be our focus because we do want to grow, and it's one of the largest markets and one of the biggest consumers. So not necessarily in that order, but it will be always about the capability that helps drive the business objectives forward with the U.S. focus.

And my point was, there, where we will employ the the full-time MD or CEO. Okay. Let me answer that. As we said, U.S. being focused, we are looking for preferably a CEO who has great experience in U.S. He or she could be positioned in U.S. as a first preference, but we have to be flexible on that. But U.S. experience and end market is what we are looking for. So can you [Technical Difficulty] which is based in U.S and looking -- and providing us options as we speak.

But any time line you can discuss when we will get?

As soon as possible is all that I can say. As we look at it, we have options on our table. We are looking at -- we'll start our interview process. So many of these things depend, again, as I said, not on time alone. Time is important. Board is spending lot of time. But we have to have the right candidate. And we are willing to wait if required.

The next question is from the line of [ Vivek Gautam ] from [ GS Investment. ]

Congratulations on the base set of numbers and consistent improvement in performance over last quarter. Please keep up the good work. My question is regarding our forecast on U.S. and for our company moving into the next orbit by focusing in the U.S. How much is the percentage of business you plan to have from U.S. besides U.K. and in what time frame? Number one.

It's difficult to give time frame. But obviously, we are much smaller in U.S. and much successful in U.K. The least thing we can do is to start to aim at least equal revenues coming in the coming few years. That's what we will aim at.

And how much is the business growth due to the cost saving and some cost cutting, from one off, working from home? And how much of it is sustainable?

Arun? Or...

Yes. Yes. So Vivek, as I mentioned in the earlier answer, at the moment, you are seeing operating EBITDA of 23.5%, right? And it's a composition of 2 savings. One -- again, I'm bucketizing in 2, there could be more, but they are 2 important ones. One is your offshoring. As we are delivering under travel embargo or travel restrictions kind of a scenario, we are able to convince our customer and deliver from offshore with the capabilities which we enjoy. However, once the travel restrictions are lifted, some of this costs will go back, right? And at the same time, we will be investing further down the line to escalate the growth and growth in the revenue, which we are looking for across the geography. So that's the reason we believe high teens is what we have endeavored to deliver down the line as well once travel comes back and COVID normalizes.

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

Yes, sir. Congratulations for a great set of numbers. Sir, my question is, you have rightly highlighted the opportunity size in the U.K. government size in millions of dollars. Now reading an article posted yesterday in which that has recently shortlisted around 12 companies for -- on the health side of orders, roughly around $800 million, around INR 6,000 crores. So -- and congratulations to be a part of that 12 shortlisted company in the likes of IBM, Accenture and others. So is this kind of the deal that you were talking post-Brexit? Or this is more about the deals which you were talking in the earlier calls? And on that question, sir, I mean, in this $800 million dollars, is this the size which NHS is talking, how much of the pie -- probably, if you can quantify something which we'll be getting out of it?

Thank you, Darshit. So this is one of the endeavors that we had though it is a framework deal just to qualify that. Framework does not mean that you get the revenue. Framework means that these are the 12 IT services services firm who will be bidding for that buy and clearly the buy is extremely large at GBP 800 million pounds. So rightfully recognized and commented upon, Darshit. Here onwards, we will be bidding the if this was the hunting license to bid for in that particular framework. Having said that, as market, we have had very, very substantial success in the healthcare space over the last 12 months or rather the calendar year '20, if you were to look at. And that included lot of large and small deals that included an infrastructure -- health infrastructure of national importance that we are building for NHS Department of Health and Social Care. It includes the offshoring initiatives to help them manage their costs and the scale of the support that NHS needs in these pandemic times. So yes, that is part of one of the large endeavors that we were chasing. Having said that, the NHS endeavor is heavily broad-based and we're experiencing success from all around.

Great. And Umang, this last question is for you. So on a longer-term perspective I would like an answer for that. So we are -- I mean, seeing lot of clients and companies moving towards cloud migration, and obviously, COVID being playing a catalyst for that. And even a lot of Indian companies are also speaking, like Infosys CEO saying in the con call, they probably will be also looking at acquisitions in the cloud space. So -- I mean, we understand we have a big opportunity, and Oracle being one of the leaders in this space. So one question is, how do you see the growth panning out in this space over the next 2 to 3 years? I mean, do you think that this kind of could further accelerate or it could normalize? And second one, we are currently being one of the preferred partners for Oracle. So do we intend going ahead to even develop capabilities for other cloud applications like SAP or some macro sector or something else? Clearly helpful to know your thought on that.

As you rightly pointed out, the cloud definitely is a very booming market and it is the de facto platform that everybody is going to move to, so there is a journey. And everybody is going to move to, it's just a matter of time. So the why question is completely gone now. And therefore the size of business acceleration is very visible across the board. And our portion of the business is right now focused on the SaaS side of cloud, which is the application cloud services on Oracle. And this is where we continue to see significant growth and the implementation services which new customers transforming to cloud, I clearly see in the next 3 to 5 years, there will be lot of legacy customers that will migrate from on-premise to cloud. We are also developing, as we speak, the managed services proposition on cloud which we call cloud application managed services. And that is consistently adding up to our revenue profile as we move forward. So not only are we getting new implementation customers, but we're also consistently converting more and more customers to managed services and also winning new managed services business directly from customers who would have chosen Infosys or Accenture for their original implementation. So given the two, we see a very sustained growth model in terms of new implementations continuing to grow over the next 3 to 5 years, and a lot of repeatable revenue base adding in terms of cloud-managed services as we move forward. As far as growing from beyond Oracle to other application sides of the business, while SaaS -- on the SaaS front, we continue to look at Oracle as our key partner. On the PaaS and IaaS front, we already are partners with Microsoft and other platforms. And we, Evosys-Mastek together, we do a lot of work on Azure, AWS also. So our intention is to grow the PaaS and the IaaS across platforms whereas SaaS currently is focused on Oracle.

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

Sir, my question is on the margins. So in the last 2 quarters, we have seen around 550 bps of margin expansion. So most of the expansion of 400 bps that is coming through the other expenses. So if I say historically, the other expenses consist of the subcon expenses, which is around 67% of the other expenses is subcon. And subcon as percent of revenue is 21%. So now my question is that, have you been able to bring this subcon as a percent of revenue substantially at a lower level or where we have [indiscernible] the cost and other expenses because it has not been growing since the last 3 quarters, and we have seen significant ramp in revenues? And also -- and the offshoring opportunity in the in the U.K. government contract. So as it was largely on-site, so after the COVID, are we seeing significant offshoring there?

Abhishek?

Yes. So a lot has been already articulated, Amit, on the margin part. Clearly, if I had to just put a finger on the pulse, offshoring has a major, major role to play. And you've rightfully identified that contractors and replacement of those contractors with Mastek resource is one of the key focus that we have had. And the fact remains that majority growth coming from offshore has also helped the because a lot of it has happened on the NHS side of the business. Going to your question on the government business and its ability to offshore. Clearly, there are pockets which are available for and ripe for offshore, NHS is one of those. And there are couple of departments within NHS who are very, very focused on -- every part of the work needs to be necessarily done at offshore because it gives them the scale, the speed at which it can be ramped up, as well as the cost benefit, which helps them spread their own on budget and get done more with the same amount of budget that they have. So that definitely is happening. Having said that, certain part of our business is security cleared and aspects, which requires it to be necessarily in the geography, not only for resources cleared and qualified by the government, but the business also remains in the geography. So all said, that depends on the side of business that we are driving, which drives offshoring. And it continues to be our focus.

Okay. And sir, in terms of the subcon, subcon as a percent of revenue still it remains -- so 20% is a very high number. And if you see for the peers, I think 20% is among one of the highest. So how do you see that like moving? And will that come back to the industry average? Or it will remain at these levels?

Amit, I'll just respond on that anecdotally. There's nothing about us, which is same as the peers in the industry. We are 70% -- if you look at just the U.K. or the organic business, 70% of that is onshore. So there are nuances of the business or the revenue, which drives that kind of spread. Having said that, we understand that it's a substantial lever not only for margin, but also for the quality of service that we provide to the customer. Having said that, if the customer requires certain pieces and they can be serviced through subcon, that will continue to be the focus. So it will be business-driven rather than it being just a legal approach.

The next question is from the line of [ Gaurav of Mehta ] Research.

Firstly, congratulations on the great numbers. Really excited to see the way this company is coming along. My actual question is around what are you planning to do with the cash in terms of acquisitions or dividends? I suppose you already answered that little bit saying you are going to keep it for acquisition. So if I may ask, are you looking for companies again in many similar domain? Or are you planning to expand your direct offerings and that is where your acquisition efforts are now focused?

As I said, I'll answer it. As I said, this is about synergy. First, it has to fit in our overall offering of digital and cloud transformation space and allow us to make one plus one equal to 3. That is one. Second, of course, preferred place is U.S. market. And third, of course, is the -- any acquisition is as successful as values culture match and leadership chemistry. So we look for all these three things. So we are choosy. We evaluate. We have a framework today which is very, very exhaustive, which we used at Evosys actually. And we'll go as we go ahead. We can't see a specific domain here, I think it has to be seen in overall totality of value chain.

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

Yes. This question relates to, again, the Evosys part of business. So one is how are we seeing the average ticket sizes growing over there? And what are the plans for -- when we say that we are targeting larger customers and all, so what are -- how are we getting into these customers? And is there some competency building that is still to happen, which would enable us to target larger-sized customers -- agnostic service deals?

So Nirmal, the average size deals are definitely going up quarter-over-quarter, not just year-over-year. And just if you look at this fiscal, we would have already moved it up by $250,000 to $300,000 on an average in terms of the average deal size. We're closing more -- I think the $1 million to $5 million is where our sweet spot is right now in terms of deals that we get and our chances of winning. Clearly, our vision is to expand that to $10 million and $50 million kind of transactions as we move forward. And there are -- it is not about competency that is missing. It is more about getting the customers confidence, then trusting us with that size of business. A part of that is now being a part of Mastek because we are a part of a public company, much more strong corporate governance and an overall financial muscle. So that has taken care of some -- to an extent, in terms of the way the customers look at us. The other aspects, we always spoke in that strategy. There are 2 key strategies that we are looking at. One is around the SAP attack or the SAP complete strategy. Because SAP has installed base of large customers, and we are the only partner that Oracle has in their city who could work on SAP complete campaign. So whenever large SAP customers come to the block, we become the de facto choice. The second approach that we're looking at is around verticalization. We spoke about adding back to our armory as we go forward in terms of investing around key verticals, so healthcare and life sciences being one, and manufacturing and engineering and construction being the other. We are already seeing good relationship and good traction in those customers. We have a good installed base of 50-plus customers in both of these verticals. And now we are trying to up the game in terms of creating the right market and -- sales and market investments to push us into the top league. So I think we are ready for that market, and it was more a matter of customer confidence that we wanted and the right GTM tools. So I think we have both of them in place. So over the next 2 or 3 quarters, we should start seeing us moving into the $5 million to $10 million deal range and moving out from the $1 billion to $5 billion deals that we are in right now.

Okay. And second one is on your view on the Middle East market. That market has shown significant margin expansion in the current quarter, but revenue seems to be flat since the acquisition, so?

Yes. So the Middle East market, we are quite hopeful that will now pick up significantly. So I think we have been speaking about the data center opening up in the Middle East for some time. The data centers opened last quarter. So the data center in Saudi is now in place, and the data center in Abu Dhabi is also now operating. And as we speak, we are seeing a lot of healthcare and public sector and large banking kind of pipe now coming out to the market because they were looking at data center, which was there in the geography. And with this Oracle setup of data center in the geography, a large number of our install base on to my customers as well as the general market movement towards cloud will really speed up. So the earlier quarters were more flattish based on the managed services and some degree of SMB work that we were doing there. But in the coming quarters, we should see a jump up in terms of the order book and revenues that come out of Middle East, especially back from the data centers that have now gone live.

Okay. And one last question, if I may...

I want to say something at the end, Diwakar.

Yes, sir, you may please proceed.

Okay. So if the questions are over, I just wanted to end on little bit of somber note with all the enthusiasm in this quarter, of course, that we wanted to convey to start with. But we were very unfortunate, as all of you know, to lose one of our founders, Sudhakar Ram. We were 4 of us, Sudhakar Ram, Ketan Mehta and Sundar were together for the last 35 years. We have built this company, and Majesco, as you know, it got demerged together, over the last many years. His loss is, of course, something which is really terrible. And we, however, are committed to Mastek, and we have, in his place, Ketan Mehta who is one of the founders who successfully managed this, Majesco, which was the demerged company. You know the success of Majesco. Some of you might be knowing about how we handle this Majesco and made it $750 million valuation in U.S. and then returned the money to the investors, which was applauded as a corporate governance success and success in a company -- product company successful first time. So the point I'm trying to make is founders are committed to this company and its future and realizing its full potential and is very keen to build leadership internally and externally, getting best in the company so that it moves up on the growth part very fast. So thanks again to all of you. Your support is very critical to us. Our journey continues. 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.

Thank you.