Mphasis Limited (526299) Earnings Call Transcript & Summary

Good morning, and thanks for joining the Mphasis Q4 and Full Year FY 2020 Earnings Conference Call. My name is Zaid, your moderator for the day. We have with us today Mr. Nitin Rakesh, CEO of Mphasis; Mr. Suryanarayanan V, CFO; and Mr. Manish Dugar, the upcoming CFO. Please click on the webcast link in the call invite mail that the Mphasis management team will be referring to today. The same presentation is also available on the Mphasis website, that is www.mphasis.com, in the Investors section under financial and filing as well as on both the BSE and NSE website. Request you to please have the presentation handy. [Operator Instructions] Please note that this conference is being recorded. I now hand the call over to Shiv Muttoo from CDR India. Thank you, and over to you.

Thank you, Zaid. Good morning, everyone, and thank you for joining us on Mphasis Q4 FY '20 Results Conference Call. We have with us today Mr. Nitin Rakesh, CEO; Mr. Suryanarayanan, CFO of the company; and Mr. Manish Dugar, who takes over as CFO, starting tomorrow. Before we begin, I would like to state that some of the statements in today's discussion may be forward-looking in nature and may be -- may involve certain risks and uncertainties. A detailed statement in this regard is available on the Q4 FY '20 results release that's been sent to all of you earlier. I now invite Nitin to take the proceedings of this call forward. Over to you.

Thank you, Shiv. Good morning, everybody. First and foremost, I hope that you and your family are safe as the COVID-19 situation continues to evolve. All of us are going through some extraordinary times. I want to thank all of you for your interest in Mphasis and for joining the call today. We truly appreciate it. I would like to start by mentioning that the Mphasis employee family has stayed strong and healthy through this crisis, and we are thankful for their support to our clients and to the company. Trust you've all had the opportunity to go through our Q4 FY '20 results and other operational performance information in our MD&A. Let me begin with revenue. We've been consistently transforming our business profile, and Q4 '20 is the 12th straight quarter of sequential revenue growth. We continued the growth momentum in FY '20 and registered another year of double-digit growth. Q4 '20 gross revenue grew 3.4% Q-o-Q and 14.7% Y-o-Y on a reported basis and 1.5% Q-o-Q and 11.1% Y-o-Y in constant currency terms. Direct International revenue grew 19.7% Y-o-Y and 5.2% Q-o-Q on a reported basis. In CC terms, growth was 15.2% Y-o-Y and 2.7% Q-o-Q. Direct Core revenue grew 5% Q-o-Q and 18% Y-o-Y in Q4 on a reported basis and 2.6% Q-o-Q and 13.6% Y-o-Y in constant currency terms. DXC/HP revenue declined 0.1% sequentially and grew 3.8% Y-o-Y in Q4 on a reported basis and declined 1% sequentially and grew 2.1% Y-o-Y in constant currency terms. We had $201 million of TCV wins in Direct International business, of which 79% are in New-Gen Services. Q4 '20 EPS grew 32.4% Y-o-Y to INR 18.9. Q4 '20 EPS includes onetime tax benefit of INR 2.3. For the full year FY '20, gross revenue grew 12.8% Y-o-Y on a reported basis and 11.7% in constant currency. Direct International revenue grew 15.4% on a reported basis and 13.8% in constant currency. Direct Core revenue grew 16.9% on a reported basis and 15.4% in CC terms, growing well above industry. DXC/HP revenue grew 7.7% on a reported basis and 7.5% in constant currency, in line with the industry growth as guided at the start of FY '20. FY '20 EPS grew 13.4% to INR 63.6. Despite a challenging market environment, we continue to see strong growth momentum and positive outlook in our key focus vertical of banking and capital markets, with a strong revenue growth of 11% in FY '20. We believe this is best-in-class growth in that industry segment and was broad-based across segments of BCM as well as Digital Risk. Excluding DR, the BCM growth was even stronger at 12% year-over-year, demonstrating the strength of Mphasis as a preferred service provider in banking and financial services industry. Insurance segment has also reported a growth of 9% Y-o-Y in FY '20, aided by some strong deal wins and continued improvement in our competitive positioning in that segment. We are also pleased with the consistent growth in Emerging Industries segment. Growth has been led by logistics and transportation subvertical, which has grown over 30% this year and comprises of about 53% of the emerging portfolio in Q4 '20. Given our limited exposure to the airline industry at less than 1% of our overall revenue and no exposure to hospitality, there has been no material impact on our business due to the global shutdown of travel triggered by the current crisis. As mentioned in our previous calls, Europe region is a focus area for us, and we are pleased with the fact that our increased sales efforts and investments in this region are yielding good results. Europe region revenue has grown approximately 14% in FY '20 in constant currency terms. We are seeing good traction here and expect this region to continue to be a growth driver for FY '21. Direct International revenue growth accelerated 13.8% in constant currency terms for FY '20. Direct Core constituted 82% of Direct International revenue in Q4 '20 and has continued to deliver above-market growth. Direct Core revenue grew 15.4% year-over-year in CC in FY '20, second consecutive year of 15-plus percent growth. Growth in Direct Core has been broad-based across strategic accounts, Blackstone portfolio and new clients. New client revenue grew 73% year-over-year in FY '20. Our deal win momentum continues to be strong, and we won TCV of $201 million of net new deals in the Direct International segment in Q4 '20, highest deal wins in the last 6 quarters and the second time Mphasis has crossed the $200 million deal win mark. For the full year, we have closed a record deals worth $750 million in net new TCV, a Y-o-Y increase of 16%. The deal wins have been broad-based across all client segments. New-Gen Services continue to be our focus area. Over 80% of the deal wins in FY '20 came from New-Gen areas, registering a Y-o-Y growth of 20%. And for FY '20, New-Gen Services' revenue grew 35.2% on a reported basis to 53.1% of Direct Core revenue. The financial year also saw a 50% increase in proportion of revenues from large deals, defined as $25 million or more of TCV. We also continue to see a strong pipeline of large deals, especially driven by a surge in interest in digital transformation deals post the COVID crisis. We expect to continue to drive robust deal signings and accelerate the transformation road map for many of our clients. Next, I would like to talk about our improving client metrics, especially in our direct business. We have been continuously improving the client pyramid and increasing the number of clients across key buckets. The chart that we see here is primarily focused on our Direct International client segment and does not include DXC clients. In FY '20, we added 1 client in the greater than $100 million bucket and 2 clients in the greater than $75 million bucket. Please also note that these are our marquee clients with long-tenure relationship, some over 15 to 20 years with us. Further, to strengthen the future growth by creating new drivers, we added 6 clients in the greater than $5 million bucket and 15 clients in the greater than $1 million bucket. Many of these clients are new additions to our portfolio. We are confident that we would be able to continue to move more accounts into our bucket through a proven account mining strategy. We also made further progress in increasing the fixed bid composition of our revenue to 28% in Q4 '20, our highest ever. This is a significant margin lever for us and also adds to the annuity portion of our portfolio, improving the predictability of our revenues. Even in the remainder 72% of the business, which is broadly classified as T&M, we have been driving a fixed capacity bucket, which stands at 15% of revenues as of FY '20, further providing us with predictability of revenue and additional runway to cover to fixed price of managed services. Moving on to DXC relationship. Our focus on service transformation and solution-led approach to GTM, coupled with geographical diversification and industry vertical market focus, is helping us maintain our consistency. We are engaged with DXC and their clients through this current crisis, and the collaboration has been fantastic. We also continue to stay close to our DXC client managers to enable any immediate areas of opportunity. We still view this as a strategic relationship, and I would like to update the following key items. Firstly, based on the annual thresholds we talked about earlier, there is still pending MRC of approximately 300 million, that is yet to be consumed between Q1 FY '21 and Q2 FY '22, that is until September 2021. Secondly, this MRC does not apply to the HP business and is applicable only to the DXC revenue. At DXC, while the $300 million constitutes as the remainder of the MRC, we expect to consume more than $300 million with the current run rate and our growth history. Our portfolio of services continues to be complemented to DXC's enterprise technology stack. We are focused on unlocking further value with a strong go-to-market foundation that we've established. Moving on to the earnings growth and the cash position. Operating margin for FY '20 has remained stable. We have achieved this despite a challenging market environment and client-related uncertainties at the end of FY '20. Our quarterly margin profile also showed a consistently improving profile through the year. Overall, we've been able to meet our guidance of 15.5% to 17% EBIT for FY '20. While we believe we should be able to maintain our margin profile despite the challenges due to the current crisis, we will provide a more updated FY '21 visibility on margins on our next call. Our operating cash generation remained strong and generated net operating cash of $40 million in Q4 FY '20, highest in the past 14 quarters. We generated $150 million net operating cash in FY '20, ending the year with a strong cash position of about INR 24,741 million, that is $327 million. Consistent with our policy of healthy cash returns to shareholders, I'm happy to announce that the Board of Directors has recommended a dividend of INR 35 per share for FY '20, subject to shareholder approval. From an operations perspective, in the past few quarters, we worked relentlessly on supply chain optimization with increased focus on the right pyramid structure, fresher hiring, fixed price of managed services expansion, automation and offshore leverage, thus strengthening our operating metrics. We expect to continue to leverage these for the short-term management of our business. And as we speak, we are working on balancing the very near term with a renewed focus on digital employee engagement as well as continued focus on reskilling using our digital Talent Next platform. I would also like to highlight that the Direct Core business, which is the driver of revenue growth, is also currently the driver for operating profits, being the highest EBIT business in our portfolio. While we have not seen broad-based signs of major demand dislocations, especially in our focused verticals, there are elements of reprioritization of budgets around discretionary spends. Looking at our core investment thesis and the execution update. We continue to execute against our plan for FY '21 and beyond. We witnessed strong overall revenue growth of 14.9% Y-o-Y in constant currency for Direct Core, and new client acquisitions grew 73% Y-o-Y. Continued momentum in deal wins, a growth of 16% Y-o-Y to $715 million, high portion of New-Gen Services of 81% with a Y-o-Y growth of 20%, continues to give us solid foundation for the years ahead. We've continued progress in implementing our IP-based platforms, delivery transformation, NEXT Labs and Talent Next programs as well as maintained a strong cash flow generation and an optimal cash strategy to maximize shareholder value. Let me address the current environment and its impact on our business before we end. The pandemic brought the world to a grinding halt and has plunged us all into a global health crisis and a global economic downturn. As it continues to affect every single country, what sets COVID apart from any other global crisis is the sheer explosion of innovations that have come to the fore. The pandemic has destructed the DNA of every traditional business model and given birth to a new way of collaboration and innovation. The post-COVID world will have a new political, economic and social regime. The shifts will happen on many fronts. In this new world, where the pandemic has changed the course of businesses, forcing every bank to transform into a virtual bank and transactions happening on every digital platform, the challenge the technology organizations face is how to rapidly innovate, adapt and look ahead. We've been working with our clients through the current business uncertainty to accelerate this transition. It has demanded new approaches to managing people, clients and technology. We are focused on strengthening our position through this period of uncertainty by staying close to our clients and enabling them to accelerate their digital transform journey for the changed times. What this means for the IT services industry is that while the pandemic has resulted in high volatility in financial markets globally and slowness in cash flow, clients are now restructuring their business operations and budgets while prioritizing their IT spends. Enterprises have begun deferring discretionary spends amid the pandemic with a focus on IT projects that make their operations cost-effective and flexible. IT services companies that can enable clients in making their supply chain agile, decentralized, resilient and reduce total cost of ownership while accelerating the digital pivot will drive revenue for the industry. Optimized work-from-home setups through digital collaboration tools is likely to drive the demand for IT infrastructure to support this shift, including transition of applications to the cloud and using cognitive in every aspect of the business, which will be a great opportunity for our industry. Broadly, our growing large deal pipeline is reflective of this pattern as well, and we have a large portion of that pipeline in such large transformation deals. Talking about the voice of the customer, our clients have been very appreciative of our efforts so far, and this is a good opportunity to strengthen the relationship and further step up the value pyramid. There are new areas of engagement that are emerging broadly into 4 categories. Firstly, acceleration of digital transaction capability. For example, digital contracts, remote onboarding of clients, remote management of application uploads, contactless customer experience, redesign and strong leverage of data strategies. Second, cost takeout approaches to reset OpEx considerations, in some cases, requiring strategic asset restructuring or deploying our proven 0-cost transformation approach. Thirdly, business models shift with supply chains to omnichannel strategy shift has led to reprioritization of programs, requiring architectural and design-led engagements. And fourth, sourcing strategy considerations where we have stepped into either provide replacement capacity or additional burst in selected areas. We expect the long-term decisions around strategic sourcing to have significant impacts and would expect to make this a tailwind as clients reassess vendor landscape away from pure-play, niche and tail vendors to consolidate strategies. We made a bold decision 2 years ago to adopt an agile org design, so the change for us will not be as dramatic as we look at responding to the current crisis. We believe we need to hyperscale digital delivery and use technology to amp up every part of our business management process. Further, since we started the business continuity planning process well ahead of the crisis, we managed to get 95% coverage to our overall global operations by March end. Our clients have, by and large, been very supportive, and we've seen some unprecedented levels of collaboration in all fronts. Through our new offerings launched through the crisis, such as virtual desktop as a service and cybersecurity offerings, we were able to rapidly enable our clients to go virtual as well. We're also quickly pivoted towards growth orientation across the board to generate additional opportunities. And as we mentioned, we are seeing a robust pipeline across multiple short-term and long-term transformation deals. Finally, while the fundamentals of the business don't change, the pandemic has reemphasized that every business is a digital business. At Mphasis, we made several choices over the past 3 years to build a cloud-native, cognitive-first business model with investments in areas like platforms, IP assets, setting up NEXT Labs, introducing Talent Next program for reskilling as well as adopting a client-centric org design. I continue to be confident that we are poised to emerge stronger from the current situation. Secondly, we continue to put our clients at the heart of our business. We also see the current disruption as an opportunity to strengthen our client relationships and identify new areas of engagement emerging in the evolving scenario. Over the coming days, we'll continue to demonstrate the customer centricity we are known for to help rebuild our client businesses both through the crisis and beyond. Towards this end, Blackstone's continued investment in Mphasis only proves our potential as a credible service provider with a strong financial position. In summary, a good Q4 and FY '20 order book, strong execution on ensuring business continuity and continuing to work with our clients to help them through the transformation and cost issues are all reflection of our extreme focus on the voice of the customers. While the current environment and uncertainty creates challenges in the very short run, some of which will be mitigated by execution of our order book, this also sets us up very well for the long run. This is reflected in the deal wins continuing in April and strategy engagement on the pipeline we are having with our clients now. Finally, I'm extremely grateful to our aligned and committed Board and our shareholders, especially our employees, as well. We stay focused on continuing to create value for all our stakeholders. Operator, I request you to open the line for questions, please.

[Operator Instructions] The first question is from the line of Mukul Garg from Haitong Securities.

I hope the Mphasis family is well and are doing fine. Nitin, just to start with, you highlighted the near-term challenges, which is quite visible to everyone. Is it possible to, either qualitatively or quantitatively, kind of walk us through the impact on business you are seeing over the next 1 to 2 quarters during Q1 and Q2? Do you see a meaningful impact? Or are you confident that deal wins should help you realize the business even in these uncertain times?

Sure, Mukul. Thank you for your concern and your comments. I think on the very near term, we mentioned that we got 95% coverage at the end of last quarter. And I think given that majority of our business continues to be in sensitive areas like banking, financial services and insurance, I think there were some constraints on privacy-related issues that didn't enable us to go 100%, mostly driven by client-side concerns. And I think while some of that has started to improve as of last week once we started seeing some return to office in our offshore locations, there's still some work to be done to kind of get over the finish line there. In addition, I think April was a tough month for ramp-ups because onboarding projects for -- with new employees or with repurposing employees required a little bit of logistical issues from our client side. So we did lose some momentum from a ramp-up perspective, even though the order book stays healthy. So I think once we get through these logistical issues in the next, I would say, 3 to 4 weeks, I think we should have a better idea of how the remainder of the quarter and, of course, the next 3 quarters will ramp up. So I think the near term continues to be a little challenging, purely based on logistical challenges more so than demand or any other issue. And I think while we've seen some reprioritization in budgets and some short-term discretionary impact, I would say, more as an immediate response to the crisis, I think we haven't really seen any broad-based disruption in demand per se in our vertical. So I think as we get through the short-term disruption, probably as we enter into, I would say, the next quarter, we should start getting back on the sequential growth part. That's the current visibility.

Understood. And also wanted [ to discuss through ] the commentary on the DXC, the remaining value, which is $300 million, which you highlighted. Now if we look at very simplistic rough maths over last quarters, you guys -- when you guys have done about $900-plus million of business there, out of which $690 million would be part of the committed value. If I just take a rough thing, can you just help us understand exactly how the -- we committed as well as additional business has been coming your way? Because if I split out the $300 million over the next 6 quarters, the incremental business to stay where you are right now would be almost [ $32 million ] per quarter, which seems a bit high compared to the last 12 quarters, and last 2 to 3 quarters have been more on the flatter to declining trend? So if you can just walk us exactly how it has been in the past and what's your visibility of incremental business?

So Mukul, it will be difficult for me to give you the exact breakup of what we expect to happen over the next 6 quarters. I think the reason I broke out the $300 million number and we decided to give more transparency is because there was a building concern and narrative that given that we've already seen $900-plus million of revenue from DXC, are we really running out of the MRC runway? I think that's the only reason we provided this clarity. I think we talked about -- about 3 or 4 quarters ago, we talked about the annual thresholds. So based on those annual threshold metrics, $300 million is the minimum balance left to consume. But I think what will be a good idea is to kind of use certain thumb rules that we've displayed through our performance over the last 14 quarters of the MRC kicking in and use that to kind of create a little bit of extrapolation because it's difficult for us to give forward-looking guidance on a quarter-by-quarter basis.

Sorry, just to clarify, your -- I think recent 3 to 4 quarters, you are running comfortably above MRC requirement business, which is non-MRC related, you are running comfortably above the underlying requirement that you think you should not have too much of issue with the DXC/HP business.

Yes. I think, Mukul, again, as I said, we are running above the MRC requirement because we've continued to provide value to the clients. I think, as I said, in the very short term, there will be some disruption given what we are seeing in the environment. But I think as we revert back to whatever form of normalcy we get back to, I expect us to stay above the MRC.

The next question is from the line of Nitin Padmanabhan from Investec.

Hope all of you are safe and well. First, on the top client, it appears to have fallen this quarter. I just wanted your thoughts there and how you see things evolving there? And the second was on the DXC piece, presuming that DXC's own clients get impacted, and if there is a, let's say, potentially a sharp drop in the near term, you think there would be sort of a catch-up as we go post that to meet the MRC. And the second part of that was, you had earlier explained about how we are helping with additional capacity. Some clarity there. Also, if you could just elaborate a bit there, it would also be helpful.

Sure, Nitin. So 3 questions primarily. First one is to top client. I think what you see as top client right now is basically the bunched-up contracts that we provide to DXC. So that's very closely related to the DXC [Technical Difficulty]

Participants, please stay connected while we reconnect Mr. Nitin Rakesh. Sir, please proceed.

Sorry about that guys. There's some logistical challenges, I guess.

Mr. Padmanabhan, you can proceed with the queries.

The question was the top client and the DXC, whether -- if it falls too much in the initial part, will there be a very sharp pullback. And the third was on the capacity that we are giving for them and what that opportunity is...

Yes. I got it. Sure. So I don't know what point I got dropped, but I think the first part is the top client is really -- in the current disclosures in the MD&A, the top client is actually DXC because that's the bunching up of a number of the service transformation contracts that are showing up as DXC. That's not a direct client. If you look at our client metrics slide that we published today in the investor presentation, that is Slide 6, we've given direct international clients metrics as a separate metrics. We'll probably be publishing those going forward to kind of keep it consistent to not cause any more confusion between DXC, their clients and direct clients. So I think there is -- we're not seeing any such drop in our direct top client. So whatever you are seeing is linked to the DXC's book of business. Secondly, I think you are right, there is mechanism for catch-up, catch-down of MRC. If we do see challenges in the near term, there will be ability actually to catch up in the remainder of the MRC duration. And thirdly, when I talked about additional capacity, that actually applies to not just DXC clients but to our direct clients as well because there have been opportunities that have been created through this last 6 to 8 weeks of crisis where our clients have required immediate assistance in actually setting up, especially in the whole lending space, things for additional capacity, transformation of the whole digital interaction model, enabling their customer care centers to remotely operate. So that's the comment around the additional capacity that was required. So we've created some immediate short-term opportunities that came out of that.

Sure. So the top clients, the bunching up is specific to this quarter and the earlier periods aren't comparable or it's just been the case?

No, I think it has been -- it's not specific to this quarter only. Since we don't give names of clients, I think there's probably some confusion on that front, which is why we decided we will take out, as I said, DXC compliant metrics going forward and report that separately as a channel.

And just one last one, if I may. So when you think about things going forward, we had very solid tailwinds, and that possibly allows for a decent Q2 or some sort of a good tailwind for Q2 in terms of when they will come on stream. But when you think about how the conversion of the pipeline is today and whether that could potentially have impact for Q3 or going forward, how do you think about it? Because this seems to be a trend we are seeing across the industry, wherein the last quarter deal wins are very solid, people have a view of Q2. But how do you sort of see scenarios going into -- going beyond that?

Nitin, I think, again, a little bit early to comment on that, which is why I think we'll probably been in a better place to give that commentary in the July call. I think very near term, our focus continues to be making sure that we are able to help clients get back, rebuild their businesses and their operations. And secondly, wherever we've seen any disruption in discretionary spends or project reprioritization, how do we use that opportunity to strengthen our position and win more wallet share. So I think that's the immediate focus right now. Good news is, as I said, right, that 2 things. One, we had healthy deal wins, especially Q4 deal wins were strong. We closed traditional deal business in April. We continue to have a fairly decent pipeline, and our large deal pipeline especially has actually expanded. If we continue to convert, then effectively it will start showing up in our revenue line at some point over the next 2 or 3 months. That's the way to think about it for now. We'll give you more color in July as we have a little bit more clarity on how things are stabilizing or if there is any additional disruption that comes up.

[Operator Instructions] The next question is from the line of Ashwin Mehta from AMBIT Capital.

So Nitin, just wanted to check in terms of the Blackstone portfolio, where did we end up in terms of revenues in FY '20? And if you can comment on the outlook there, whether this will be more immune from a demand perspective or what exactly are you seeing there. My second question was on -- what is the HP portion of the DXC portfolio, which is not part of the MRC? And is the service and technical help desk or customer service business decline largely linked to supply-led disruptions or there are demand impacts there?

At this point -- sorry, I don't know what happened there. I think, overall, the growth across Direct Core has been broad-based. We are -- we continue to report good growth across all segments, strategic, Blackstone and new clients. I think at this point, we'll continue to include Blackstone's business in the Direct Core business, and we won't be breaking it out specifically because that creates multiple subsegments that are hard to continue to report on. Having said that, I think the growth has been very healthy. We've been reporting growth in the range of 40% to 50%. Do we see that tail off? I think the base effect might come into play, but the pipeline and the demand generation continues to be robust. I think the second question was about help desk and allied businesses. I think it's not really -- it's a combination of both, but not so much a supply issue. I think it's again linked to the drop that we see in the DXC book of business where we had some contracts on the IMS front that rolled over. But nothing specific to call out for on the direct segment.

And just the last one in terms of the HP portion of the DXC portfolio, how much would that be?

Yes, I think we said 88% of overall HP/DXC revenue is DXC. So the remainder is the HP entity. But they are not included in the MRC number.

Next question is from the line of Sandeep Shah from CGS-CIMB.

Hope the management is safe. And just one clarification. In terms of the DXC, you are saying $300 million or upwards of that to be executed over 6 quarters. And if I look at the Q4 run rate of just the DXC channel ex of HP channel, it works out to be close to $288 million. So is it fair to say that the growth avenues would be limited entering into FY '21, where, at best, it could be a flattish or it's too much to...

Yes, I think you're reading too much into it. I'm providing additional color because there was a concern that we've already consumed the MRC. Just read the additional MRC in that context.

Okay, okay, okay. And just on the margins, you are saying, as of now, you believe the FY '20 margins at EBIT level are likely to sustain in FY '21, but more color would be given in the month of July, right?

Yes. I think as of now, we believe we have enough operating leverage built into our supply chain. We've put some actions towards the end of the quarter that you can see in our utilization numbers. So that gives us some confidence that we have the ability to manage the very short-term disruption. Keeping in mind that we still want to be able to continue to have growth orientation, so to that effect, balancing out the short-term challenges while making sure that we have enough headroom for growth as things come back to normal is the reason we said we will give more guidance in July.

Okay. And just last question in terms of the cash allocation. So if you look at the net cash as of March end was close to INR 1,900 crores versus almost similar at FY '18 end of INR 2,100 crores. But FY '18, FY '19, we have seen a handsome payout cash allocation as a whole versus FY '20/'21, the cash distribution seems lower, though it is still better, but not in line with the FY '18, FY '19. So any color in terms of cash allocation, why despite generating cash, the payout ratios are going down?

Actually, you are confusing the dividend payout ratio with total cash payout ratio. I think what we've announced today is the dividend, which is the annual recommended dividend by the Board. That has been fairly consistent in the 55%, 57% range and so is the case even this year. Keeping in mind that this year the gross payout will also be the net payout in the hands of an investor because of the distribution tax change. So I think the right metric is to look at dividend as payout ratio, not the overall cash payout ratio because whatever else was cash return was a special return of cash through buybacks. Also keep in mind, Sandeep, this is a very unusual situation where I think it's prudent to have enough liquidity on the balance sheet to maintain a strong financial position because not only it's important to run the business operation, it is also important from a client perspective to be able to see a strong partner with a strong cash reserve position. And also, I think it's important to keep some gunpowder dry, as some opportunities will throw up over the next few months that we want to be able to take advantage of. So keeping all of these factors in mind, we think that the current recommended dividend is a fairly healthy per share.

Okay. Okay. Fair enough. Just a follow-up. Is it fair to say that even we are open for buyback? Or as of now, we would like to conserve the cash?

I'm not commenting anything on that because that's a Board and shareholder decision. As of now, I think we took a decision on annual dividend and that's what we've communicated.

Surya, all the best for your new endeavor.

Thank you.

Next question is from the line of Madhu Babu from Centrum Broking.

Sir, on the large practice we have on the logistics and transport, so there we have a large client, so -- within the top 5. So what is the outlook in that account? And are there any pricing cuts within our large accounts in the banking where -- which will have an impact on the first half?

So Madhu, I think I will refrain from giving client-specific guidances. Again, your assumption is your assumption on which client is which number in our top client list. All I can tell you is that our position in all our top clients is fairly strong, both from a competitive standpoint as well as from a value -- being seen as a value partner. So I think we see nothing but opportunities to expand our wallet share and our footprint, especially in our top accounts through this disclosure, and that's the mindset we are going with there. On the pricing front, I think I mentioned that in my commentary as well that at least in our chosen verticals, especially banking and insurance, we haven't seen any en masse disruption on demand or pricing. We have seen some reprioritization for dealing with a very short run, but I think pricing continues to be fairly stable, at least for us.

Second one on the BPO practice, where there were some issues on work from home and all. So how is it currently for us? And any potential impact or any leakage there on the BPO front?

Yes. I think the -- again, we've not broken it down by segment when we had the call at the end of March. That was made public later. We talked about on-site coverage at 99.5% and overall coverage at 95% from an operations coverage perspective, and that includes BPO. So yes, while apps probably has the highest coverage, I think given the recent return-to-office initiatives that we started to see across our offshore locations in the last few weeks, I think we're starting to inch up overall coverage across the business, including BPO.

Sir, just one more on this work-from-home. I mean a lot of companies are saying that can be a new normal, a sizable portion of work can continue to work from them in the future. So how that can impact in terms of pricing or any disruption in the sector? Your views on that.

Yes. So Madhu, I think, again, I will -- all I can tell you is that lots will change post the crisis. I think at this point in time, it is a little bit premature and perhaps a little risky to predict how much of that could be. All I can tell you is we are very agile and nimble in our approaches, and we will take whatever action is needed to protect our position with our clients and that includes not just pricing, but overall wallet share as well as value. And I think given that we already took a lot of actions over the last 3 years in making this pivot towards cloud, cognitive as well as the whole agile workforce that we created actually bodes very well for this remote workforce. So I think we are well positioned, and we'll continue to take whatever action is needed, but we're going to go client by client. [ So we do not make any bold ] predictions for the future.

Next question is from the line of Dipesh Mehta from SBICAP Securities.

Two questions. First, about the Blackstone portfolio, if you can share a number how it has performed this quarter? And second question is on BCM vertical. How the subsegments are performing? If -- when I look at your corporate banking, it seems to be showing weakness for the last 2 quarters. So if you can help us understand across subsegments how BCM you expect to perform.

So Dipesh, again, I said, right, we will report Blackstone as part of our Direct Core business, and the growth continues to be fairly healthy. And I think from a continuity perspective, yes, we expect Blackstone to continue to be a strong driver for growth going forward as well. On subsegments of BPS, I think a lot of the subsegments are basically legacy of the past. I think what is important is that in our core transaction processing verticals, especially linked to the DR business, we'll continue to see good traction and good progress. We added to that with our lending on the base offerings in the last 2 weeks as well. So I think the best way to look at it is that as a segment, BPS will continue to show decent growth. And we believe that we can continue to leverage on our position because a number of our deals are coming across in a processing, technology and operations. So I think that's kind of what's driving the primary resurgence and growth in the overall BPS segment. And as I mentioned, I think, as we go forward, we will actually continue to provide maybe a refreshed view of our segments. So maybe when we come back in the July earnings call, we'll give you a simpler and a refreshed view of how to look at revenue segments across service lines.

Sure, sir. Just whether any COVID-19-related implication you saw -- see on your BCM vertical outside of Q1? Q1 might have been some implication. But from Q2 onwards, do you expect BCM and Insurance have included -- also likely to have some implication? Or you expect those sectors, at least from our client perspective, likely to be immune?

Yes. I think calling everything immune is a little bit overstating it, but I don't think we've seen the level of disruption that you are referring to from a supply side perspective in the BCM business. So I think we are fairly confident that given the trajectory of operations getting back to steady state, we don't think there is going to be a long-term impact on BPS per se. If anything, as I mentioned, I think we are seeing that as a growth driver because of a combination of the tech and [ RCs ].

The next question is from the line of Ruchi Burde from BOB Capital.

Most of my question has been answered. Just a last one, Nitin. So many of your industry peers have decided not to go for wage hike this fiscal. If I recall correctly, last year, Mphasis has undertaken a revision to its wage procedure. How do you see wage for this fiscal year?

Yes. So I think, again, as I mentioned, right, we talked about the fact that we have moved away from one big annual increment cycle to linking a lot of these actions through a specific employee-related progression and movement to the Talent Next pipeline. So I think at this point in time, we're not doing anything dramatically different. But as I said, we will continue to assess it [Technical Difficulty] Sorry, I think there's some disruption in the line even now.

Sir, I think you have to repeat the answer from the start because there was a large portion which has been missed out.

Sure, sure. The answer was -- the question was on [Audio Gap] Yes, I think the -- over the last 2 or 3 quarters, we've talked about the fact that our wage cycles have been moved away from being 1 annual increments, but we have linked it more towards Talent Next-related individual employee-based progression. So we don't expect that to change anytime soon. But as we said, we'll continue to focus on keeping a growth mindset and making sure that -- the overall performance.

Just a small clarification here. So would that mean -- would you tinker in some format the quantum of wage hike which would have otherwise been given, given the current scenario or the last year's skill-aligned wage revision procedure would run as it was implemented last year?

No, we are not making any retroactive changes. So anything we do will really be keeping in mind the current environment and on a go-forward basis because, I think, as I said, right, we have to continue to have growth orientation and make sure that we retain key talent as well.

So this would be a source of margin tailwind partially for this fiscal. Is that fair to assume?

No, I don't think that's what I said. I said when we -- anyways, we moved away from one big wage hike in the fiscal year. And whatever actions we are taking are linked directly to employees moving to the Talent Next pipeline, and we'll continue to follow that. We have adequate margin levers identified through all the actions that I talked about in the webcast. So I think at this point in time, we have enough confidence that we do not need to take any specific actions on employee or wage front that go beyond the usual.

Next question is from the line of Manik Taneja from Emkay Global.

Nitin, just with regards to your comments saying that...

Mr. Taneja, sorry to interrupt. If you could maybe just speak a bit louder. Your voice is a bit faint.

Sure. Is this better now?

Yes, much better. Please continue, sir.

Nitin, this was -- this question essentially is with regards to your comment saying that we are seeing a significant improvement with regards to our large deal pipeline. If you could essentially provide some commentary as to is there any geography-wise trends there? That's question number one. And second thing is with regards to the improving traction that we have continued to see in Europe over the last few quarters. If you could highlight what exactly is driving this success there?

So I think, one, the large deal pipeline is fairly broad-based, and I think it's fair to assume that 80% of the business is U.S.-centric, so we cannot have a large deal pipeline that does not involve the U.S. geography. And similarly, I think we cannot have a large deal pipeline that does not involve our key verticals and positions in those verticals. So I think it's fair to assume those 2 things. Europe has been on a good growth trajectory last 2 -- especially last 2 quarters because we made a lot of investments in our teams there and, at the same time, we've also been able to convert some large deals and transfer that to revenue. So we do have a fairly decent pipeline in Europe. Europe pipeline is mostly centric towards banking and insurance given the nature of the market and the proportion of their GDP tied into these 2 segments. But as we speak, we've also started to focus on non-U.K. European market that we talked about. But I think that's a little bit lagging in terms of the buildup. But I think it's fair to assume that it's clearly aligned to our overall position and our strength in the core verticals.

The next question is from the line of Rishi Jhunjhunwala from IIFL.

A couple of questions. First, Nitin, can you talk a bit about Digital Risk? So it has seen solid growth in the past couple of quarters, even though full year, it might still be a drag on financial services. But looking beyond Q1, if you really look at from a full year perspective, considering where the interest rate environment is, especially in the U.S., how does that impact your business from an origination perspective and, as a result, revenue perspective?

Sure, Rishi. I think the DR business has actually been, I would say, a tailwind last 2 quarters to the overall growth, while on a Y-o-Y basis, it's still -- because of the start of the year issue, it's still not growing faster in the company. But I think as we speak that the interest rate environment is fairly fertile for the refinance market, and that's the primary driver. We've also used that opportunity, as I mentioned many times before, to expand our position with existing clients as well as add new clients in that business. As we see additional opportunities come up through referral due to the current issues, for example, the whole mortgage forbearance issues -- areas, lending that are aligned to the same set of customers, PPG initiatives, I think we managed to use our position with the DR customers fairly favorably. Even despite -- even if I don't account for those cross-sell opportunities, on a stand-alone basis, I think we still think DR will be a growth business this year on a Y-o-Y basis.

Okay. And secondly, just a small question on -- if you really look at your ITO business, there is a very sharp decline in on-site head count by almost like more than 30% Q-o-Q. Just wanted to understand what would be the reason there?

Yes, I think it's linked to the top client comment that I made earlier. I think there were some IMS contracts that rolled over from -- on the DXC side that we haven't backfilled because it didn't make sense from a business perspective to actually be in those contracts. So that's the rationalization that we have seen from a on-site IT head count perspective.

Understood. So is it fair -- I mean -- so how much of our ITO business is actually coming from DXC versus direct?

I don't have that breakup off hand, Rishi, but it's fair to say that in the past, bulk of the IPO business used to be linked to HP. I don't think it's that big now, but maybe we can update that in the next call.

Next question is from the line of Nirmal Bari from Sameeksha Capital.

My first question was actually on Digital Risk. What is the kind of work that we do in Digital Risk? And how is it getting impacted by the low interest rate environment that is there currently in the U.S. and worldwide?

I think it's a little hard for me to give a primer on the entire Digital Risk portfolio, but it's primarily -- fair to say that it's primarily in the mortgage origination, refinance and home equity loan processing space. The interest rate environment is tailwinded right now because as interest rates fall, the mortgage volume and the refinance volume will actually go up, and that's the reason we've been seeing some tailwind in that business over the last 2 quarters.

So it is largely related to the mortgage finance industry. Would that be fair to say?

Yes.

And the second question was on the DXC, what was the MRC in the current financial year? Our total revenue from DXC was about $375 million. So out of that, how much was MRC?

I don't think I can disclose year-by-year or quarter-by-quarter MRC numbers. I think what we've done is we've given you the remaining MRC to be consumed between now and the end of the MRC period. The rest, I think, you'll have to just make your assumptions.

Yes. On the same thing, basically, we have given a breakup of the different kind of work that we are doing for DXC -- DXC's customers basically. So of that, the work that we are doing for DXC's customers, that is outside of MRC, would that be a higher value-add work and a higher-margin work as compared to MRC?

Actually, I don't understand that question. And even if you're asking me the margin profile of MRC versus non-MRC, that's not something that we can disclose right now.

Yes. Not just the margin profile, I'm also interested in knowing how sticky that work is. Once 1.5 years down the line when the MRC gets over, how sticky will this work continue to be for us with the DXC customers?

Not sure I can help you with that answer. But just keep in mind that we've been in these clients since the 2006 EDS days. So that should give you an idea of the tenure we have with these, especially in some of the large relationships, and the stickiness comes from the knowledge and the deep understanding of those clients. And of course, we must be adding value. Otherwise, there's no reason for us to be where we are in those clients, especially.

Next question is from the line of Dipan Mehta from Elixir Equities.

Just wanted to check, is there any outside chance that the DXC deal can come under force majeure and they may be wanting to reduce the commitment they have given for annual billing because of present pandemic crisis?

We don't see that situation as of now.

Have you been in discussion with them? Has it come up? Or -- I mean any color that you can give us on current pandemic and how it's affecting...

No, I cannot give you any more color on the fact that we don't see that situation playing out.

Next question is from the line of Rahul Jain from Dolat Capital.

Welcome, Manish. Thanks, Surya, for your support all these years. My question is, since we do not see meaningful challenges on the demand side as of now, have we taken any cost-saving measures in terms of our hiring plan or any curb on the S&M side? Or you can say that -- whatever is your comment on the positive-negative factors do we see on our OPM in FY '21.

Yes. I think it's fair to say that we've taken cost actions where we deemed necessary, especially if we didn't -- if there's discretionary cost items. Of course, there is a natural tailwind on cost with shutdown and travel and allied areas as well. I think we have been fairly prudent and cautious with every spend item. As I mentioned, we definitely pressed some levers to ensure that we are managing the workforce in a way that we minimize any additional bench, but at the same time, I think we're also keeping an eye on open demand, deal ramp-ups and, of course, making sure that we keep a growth mindset. We actually have net positions to fill, as we speak. So I think, for us, the balancing factor is to optimize costs without impacting our ability to grow the business.

Right. And in general, any more flavor you could give on the banking spend perspective? Any read that you could take out from your interaction? How they tend to behave in terms of changing any investment buckets or any cut or gain they see in their spend behavior?

I think at this point, it's fair to say that everyone is in a mode to reprioritize and reset their expectations for current year, and I'm talking about our clients. As I said, I have not seen any en masse demand disruption unlike in some other verticals that are hugely impacted because of current travel shutdown. So I think things will probably be more stable in the banking and insurance side than in other verticals. But that definitely does also warrant a relook at all discretionary spend and reprioritization of projects with the caveat that digital transformation budgets will actually probably get accelerated and where they can find the money, even areas where we are very actively engaged in ensuring that we play in that bucket as well.

[Operator Instructions] Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Rakesh for closing remarks. Over to you, sir.

Thank you. Before I close the call, I'd like to take this opportunity to thank Surya for his relentless support and leadership in setting new benchmark in finance, strategy and governance. He's played a pivotal role in partnering with the business and will continue to support us [ till his superannuation on October 23 ]. Manish Dugar will take over as CFO effective tomorrow, May 15, 2020. As we drive our business forward, I'm highly confident that Manish's broad industry expertise and extensive global experience will serve all our stakeholders well. We welcome Manish to be part of the Mphasis leadership team. Thank you, again, to all of you who joined us on the call early this morning. Take care and stay safe.

Thank you very much, sir. Participants, if you have any further questions, please write to [email protected]. On behalf of Mphasis Limited, that concludes today's conference call. Thank you all for joining us, and you may now disconnect your lines.