Mphasis Limited (526299) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for joining the Mphasis Q4 FY 2021 Earnings Conference Call. I am Lizan, your moderator for the day. We have with us today Mr. Nitin Rakesh, CEO of Mphasis; and Mr. Manish Dugar, CFO. As a reminder, there is a webcast link in the call invite mail that the Mphasis management team would be referring to today. The same presentation is also available on the Mphasis website, www.mphasis.com, in the Investors section, under Financial & Filing as well on both the BSE and NSE websites. I request you to please have the presentation handy. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shiv Muttoo from CDR. Thank you, and over to you, sir.

Yes. Thank you, Lizan. Good morning, everyone, and thank you for joining us on Mphasis Q4 FY '21 Results Conference Call. We have with us today Mr. Nitin Rakesh, CEO; Mr. Manish Dugar, CFO; and Mr. Viju George, Head, Investor Relations. 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 involve certain risks and uncertainties. A detailed statement in this regard is available on the Q4 FY '21 results release that has been sent out to all of you earlier. I now invite Nitin to begin the proceedings of this call. Over to you, Nitin.

Thank you, Shiv. Good morning, everyone. Thank you for joining the call early this morning. As we together face the mounting unprecedented challenge and a shared concern over the spread and growing impact of the COVID pandemic, I hope all of you and your family and friends are doing well. Our thoughts are with those who are affected. Our key priority is ensuring the health and well-being of our employees, their families and all those within the communities where we live and work. We've initiated various global business continuity protocols and other measures to ensure we maintain safe working environments and seamless operations. We are confident that when this pandemic is over, we'll emerge stronger and more prepared to tackle any and all challenges. Let me open our earnings call this morning with a view of our performance in FY '21. Our fourth quarter performance rounds out a satisfying FY '21, wherein we recorded an overall revenue growth of 5% in constant currency and U.S. dollar revenue growth at 5.6%, which places us well above industry average in FY '21. Our core markets, the U.S., and our investment market, Europe, have both grown well, with the latter, in particular, exhibiting strong growth. Growth in Direct business is accelerating with FY '21 growth of 17.2% in constant currency, well ahead of the prior 2-year CAGR over FY '18 to '20 of 12.3%. We believe that our Direct growth for FY '21 is industry-leading. Direct now accounts for 86% of our overall revenue as of fourth quarter '21. In terms of growth by geography, U.S. and Europe have fared well with overall growth of 8.5% and 16.7%, respectively, on a 3-year CAGR basis. Excluding DXC, the growth numbers are significantly higher at 13% and 20%, respectively. As mentioned in our earlier calls, Europe 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. Direct in Europe has grown 25% year-over-year in constant currency in FY '21. Our pipeline in Europe is strong, especially with new clients, and expect this region to continue to be a growth driver for FY '22 and beyond. From a vertical standpoint, we are pleased with the growth in our anchor vertical of banking and capital markets, which grew 26% in FY '21 in U.S. dollar terms. Fourth quarter marked the third straight quarter of 20-plus percent year-over-year revenue growth in BCM. On a full year basis, we believe this is a best-in-class growth in that industry segment. We continue to enjoy market share gains with our key BCM clients, and expect sequential growth in this segment in first quarter and to sustain our annual growth trajectory to FY '22. Our investments in high tech, a focused vertical for us, are also delivering great dividends with growth of over 50% in FY '21. Our insurance business has registered 3 successive quarters of sequential growth over second to fourth quarter FY '21, having bottomed out in first quarter. We have built a robust TCV and pipeline in insurance, including large deals, and expect to convert this into revenue in the coming quarters as well. We've seen improving client mining clearly in FY '21. And as we've said before, we've [ consolidated ] our standing with our key clients, resulting in continuing market share gains. This is borne out by our client metrics. The lower chart of the slide shows that our top 5 and top 10 clients have grown consistently, registering 13% and 19% growth, respectively, in FY '21 in USD terms. The average contribution of our top 5 clients exceeds $100 million, and all our top 5 clients are greater than [ $25 million ], which we believe is quite unique for a company in our size category. Our FY '21 top 6 to 10 client growth at 42% was more than twice the overall Direct growth, indicating strong growth down the 6 to 10 category as well. Our top 10 -- 11 to 20 clients grew 16% for the year, indicating the increasingly wholesome nature of our growth. Several factors support our robust performance in Direct, namely: number one, our personalized customer engagement model with key clients that includes a client partner, the delivery leader for the account and a dedicated account CTO as well as a customer being the center of our go-to-market and resource allocation, allows for a high degree of account-specific innovations; secondly, our ability to build ever-growing pipeline on the back of our effective tribe and squads model, which gives us future visibility; thirdly, our capacity to switch large integrated deals using our proven transformation model, such as front-to-back and zero cost transformation, which we have discussed with you in the past. The $250 million engagement that we announced today is a good example. I'll cover that separately in a few minutes. Finally, scaling up of the digital competencies of our talent and well-established skill learning resource platform, Talent Next, have seen rapid adoption since its inception less than 3 years ago. It's provided Mphasis the scale muscle trend to enable execution on the next-gen positioning at scale. On the TCV front, we recorded -- received of $245 million of the deals won in fourth quarter '21, making it the fifth straight quarter of over 100 -- $200 million of net new TCV, not including renewal deals. Our FY '21 net new TCV at USD 1.11 billion is up 51% over FY '20. In addition to the TCV signings, separately, I'm pleased to announce the closing of a landmark deal for $250 million in the U.K. A few words about this. Mphasis agreed into a deal with the client in the U.K. to set up a shared services entity that will service middle and back-office functions, while applying digital transformation using the Mphasis front-to-back construct. Given the expertise and the capability being built in this partnership, we also expect to be able to capture additional opportunities through this program. We expect the yield can generate revenue by Q2 FY '22, as we are currently in active transition with a gradual ramp-up that will run through FY '22 and beyond. The initial terminal agreement is 10 years, with an expected TCV in the range of about $250 million, and even beyond as we potentially migrate to other LOBs within the client and scale of the operation. We see this deal as a solid evidence of our ability to construct end-to-end digital transformation-led complex and longer-tenured deals, given that deals of this nature and longevity are not common in our industry. We believe that our commonly rising TCV trend and our track record of large deal wins is a testament to our ability to scale and create large longer-tenure deals persistently. Specifically, I would like to make 2 points about our TCV composition that continuous to shape our deals on an ongoing basis. Firstly, there is an increasing component of larger and longer-tenure deals. These large deals are transformation-led, integrated and leverage our deal archetype and tribes. Second, there's a heavy new gen services portion in our net new TCV, thanks to the tribes, with a contribution of 73% of FY '21 deals in new gen areas. As we've stated before, our tribes and squads model is focusing on high demand contemporary teams continue to define our positioning in the market, enabling us to play opportunities aligned along these identified approaches. We also continue to look across horizons, and the agile org design lends itself to extension into these new offering areas that continue to drive differentiation and increased pipeline and large deal motions with high-value deal on an average. Our tribes-led deals account for 3/4 of FY '21 TCV. We've accelerated adoption of the tribe construct across a larger organization to align with the transformation that was started in the GTM org in FY '19. Secondly, the strength of this tribe is not just the expertise in high-demand tech areas, but also in how multiple tribes collaborate to structure and execute on higher [ auto ] deal archetypes, favoring increase in sizes. As an example of a large deal archetype in motion, a leading BFSI client that has substantially grown through acquisitions is beset with legacy issues plaguing its tech architecture. Disjointed system architecture, inefficiency due to duplication of applications, absence of relevant SOPs and poor governance of SLAs resulted in higher running costs and poor customer adviser experience. We are engaged in fundamentally transforming the middle and back office of this client. This will allow the client to free up capacity, focus on new customer acquisitions and enhance customer experience in addition to the benefits of greater worker efficiencies and accelerated cost savings. Ancillary services include, not limited to, client administration, payment processing, claims processing, procurement, data management and storage, software management, network and security solutions. Multiple drivers are at play here for this engagement, namely data, DevOps, NEXT Ops, customer experience and digital. Coming to our client metrics. Our track record in migrating clients from one revenue bucket to the next continues to be healthy, as we've called out in the previous quarters. Specifically, our conversion ratio of clients in one revenue tier to the next is approximately 50%. Specifically, slightly more than half of our $10 million-plus clients are $20 million-plus clients. And the same holds true for the conversion ratio from $20 million to $50 million bank and so on. We are especially pleased with the strengthening position with several top clients post vendor consolidation. We continue to believe there are wallet share gains emanate from our companies given positioning. The average size of a large deal is showing an increasing trend. As the slide indicates on the right, the average large deal size on LTM basis, at USD 79 million, is 2.5x from that 2 years ago. With the inclusion of the new $250 million engagement that we just referred to for Q1, this metric will turn up. As mentioned, our large deals are increasingly multi-tower, transformation-based and longer tenure. The growing size reflects this capability evolution. Why are we seeing this good momentum? As per an NPS survey that we constituted using an independent third-party Big 3 consulting firm, Mphasis gets significantly high NPS from its top 15 clients. The NPS survey covers our top 15 clients, which contribute 60% of our Direct revenue. At 50% NPS, our score is well ahead of peers performance with the same set of clients. Based on the client feedback, factors that contribute to such high score include: strong pool of domain experts; strong digital capabilities on cloud native app development and legacy modernization; flexible engagement models to drive client relationships; robust account management practices with on-site delivery leads; and finally, quality of delivery with delivery tightly embedded in sales and account management. We are organized on accounts and not by verticals or horizontals. Mphasis does not have the traditional metric structure of vertical horizontal geos that can weigh down decision-making. This means our GTM is aligned along with the customer as a basic unit, and resource allocation is done at a granular level of the customer. This creates improved customer centricity, agility and responsiveness. It also aligns well with our agile org design around tribes and squads, which also provides a strong technology-led design architecture and unique competency, with the domain contextualized solution set targeted towards each chosen industry vertical. The voice of the customer measures are strongly aligned with our best-in-class performance with the key clients reflecting in robust market share gains and strong FY '21 Direct growth. We've seen -- we have seen operating leverage in our business play out over the last 3 years, with 3-year EBIT growth slightly ahead of our revenue growth, EPS growth ahead of the EBIT growth and cash flow growth out of the EPS growth. Our philosophy of operating in a stated EBIT margin band, hence, predictability and as we have been steady in our margin performance through FY'21. We've also generated cash of $180 million in FY '21, which represents a growth of 7% Y-o-Y and at 74% of EBITDA. Our free cash flow generation as a percentage of EBITDA continues to rise. Excluding onetime income tax benefit of INR 424 million in FY '20, FY '21 net profit grew 6.5% to INR 12,168 million, while EPS grew 6.3% to INR 65.18. Our improving cash flow situation is enabling more shareholders hold a friendly cash return actions. For FY '21, Mphasis Board of Directors recommended a dividend of INR 65, including a INR 27 special dividend, subject to shareholder approval. This translates to 100% of payout in net profit terms. In keeping with our theme of continuity and acceleration to build a sustainable, scalable organization, we are constantly at work along 4 axis. First is continually augmenting our capability, both from a go-to-market as well as delivery perspective. This broadly consists of tribes and squads expansion; specialist resource buildup in our cloud unit, which structured as a guild cutting across the tribes; domain experts. Second, geographic expansion of sales and delivery. We are expanding our sales trends in the U.K. and Canada. You may have seen the recent press release with the U.K. PM office endorsing our expansion in the U.K. We also continue to make early inroads in other markets in Europe, with cornerstone clients established in many of these markets, and one large deal in Q4 '21 came from one of those non-U.K. markets in Europe. We will shortly make a detailed announcement on our investment plans in Canada as we expand our existing footprint in that market. We've added a geography leader already in Canada, and we continue to invest in the market, both for wallet share expansion, new cloud acquisition as well as other proximity and technology enhancement opportunities. Furthermore, we are building our delivery centers in Mexico, Costa Rica, Taiwan and Estonia to add further diversity to our talent pool and supply chain as well as to provide credible global delivery options to our clients. Over FY '21, we have scaled up Taiwan as well as added new centers in other locations, with additional plans in both Latin America and Eastern Europe. Third, deepening and broadening of the leadership pool. We promoted tenured leaders while also bringing in new management talent. The Executive Council constitutes the highest leadership group in the company. And to increase the focus on scalability, we expanded the ExCo group with 3 new members recently, as they've been added to this group as part of the FY '22 expansion plans. Finally, we've also expanded our portfolio of IP-driven AI/ML innovations. Mphasis is working on several disruptive innovations enabled by technologies such as AI/ML, quantum computing, et cetera. We've also been granted several patents for these innovations, and they are deployed across several of our global clients. We continue to be a market leader in offering our AI/ML and content computing solutions to some of the leading technology marketplaces. NEXT Labs is at the forefront of building these innovations. A key component of our continuity and acceleration strategy is a new client acquisition program. We've reinvigorated this program over the last few months with dedicated leadership. We've carved out 5 well-considered select verticals to focus on for NCA, namely BFS and insurance, in both of which our positioning and track record is already solid. These 2 verticals are large enough to continue to provide growth runway in the long term. Logistics, high tech and health care form the other 3 verticals on the NCA level. Each of these 5 verticals has its respective client acquisition strategy, led by dedicated sales, delivery and domain NCA leadership. We have an elaborate operating model in place to transition clients with strategic status with the client engagement structure and investments defined through the phases of the transition. As clients move through the transition phase and become strategic clients, we progressively bring the full force of our secret sauce and dedicated client resources and GTM motions in engaging with such accounts. Our strong growth in high tech as a result, the NCA investment program is encouraging. We see this becoming the next $100 million vertical. Our cloud guild running across tribes is also a pivotal element in our tribes offerings, with our tribes-led cloud wins up 49% year-over-year, constituting 20% of our FY '21 TCV. 40% of our pipeline is cloud-led versus 27% a year ago, and there has been a 38% growth in the cloud-led pipeline alone. We are ranked #1 in the AWS machine learning marketplace, leveraging our advanced consulting partner status in the Amazon Web Services partner network. The Mphasis AWS collaboration provides 140-plus machine learning and deep learning algorithms and pretrained machine learning models applicable across a diverse set of data tribes and industry use cases. We are also fortifying a dedicated partner strategy around each channel partners such as AWS, Azure, GCP, Snowflake, ServiceNow as well as VMware. We're also building out a partner-based structure that adds value to our sales, GTM, technology and delivery by hiring partner specialists for each of these roles as part of the [indiscernible] for each partner. Very recently, ISG in its latest mainframe services and solutions assessment recognized us as a leader in mainframe organization using the cloud architecture. To sum up, I will leave you with 3 points. One, we run it off a good FY '21, well above high average industry growth overall and industry-leading growth in Digital and Direct. Direct grew 17.2% year-over-year in constant currency. Our Direct growth will continue to be supported by robust TCV that we've added across verticals. Our TCV on a trailing 12-month basis is 51% higher than that recorded over the prior period. Direct performance has helped us mitigate the declines in DXC, the contribution of which has now reduced to 12% revenue on a 4Q '21 basis. Two, multiple KPIs are moving in the right direction, namely: track record in winning large deals is consistently improving with USD 100 million, USD 200 million and now USD 250 million deals in less than a year. The nature of our deal is increasingly transformation-led and longer tenure-based. Two, our growth is getting broad-based with Europe, high-tech aiding growth in addition to the anchor verticals in -- of BCM and anchor geography of the U.S. We continue to drive market share gains with our key clients. And finally, our client mining metrics across revenue bucket is improving. As a referenced, our top 6 to 10 clients are now growing well above our Direct revenue growth, while the top 11 to 20 clients have kept up as to the overall Direct growth. Three, investing for growth by using operating leverage, operating in our stated target operating margin band, we believe that our margin stability ensures that revenue growth transfers into sustainable EPS and PAT growth and consistently rising free cash flow generation, with cash flow growth exceeding revenue and profit growth. Coming to our outlook for FY '22. Given our TCV strong position with anchor clients and robust pipeline, productivity of our multipronged investments, we see good and continuing growth visibility for FY '22. We expect to build on our industry-leading Direct growth in FY '22. Share of Direct at 86% of fourth quarter '21 revenue will continue to increase. We fortify the investment muscle through FY '21, and we believe that this reflects our growth bias and will serve us well in FY '22 as well. Our guided operating margin band for FY '22 is 15.5% to 17%, with the band extended by 50 bps at the upper end. While the low end of the band is unchanged, the band is wider than usual to accommodate for existing uncertainties in the environment. And as the situation improves, especially in India, we expect to tighten the band to FY '22. We believe that our margin stance enables us to make the weighted investments in tune with our continuity and acceleration team to sustain our industry-leading Direct growth while also absorbing rising costs associated with the supply side. On that note, I'd like to have the operator open up the line for questions.

[Operator Instructions] The first question is from the line of Mukul Garg from Motilal Oswal.

Yes. Nitin, I just wanted to start with the views on banking and capital markets vertical. If you see this quarter, obviously, there was a decline. Is this a combination of weakness at top client and DR? And specifically on the top client side, the revenues are down almost high single digit -- high double-digit on a Y-o-Y basis despite the commentary on wallet share gains. So if you can help us understand what is happening there. Is this some kind of a near-term pause, and it will rebound? And if you can give us some view on DR growth as well.

Sure. So Mukul, I think the -- if you look at the full year basis, the growth in BCM is actually very, very healthy, 26%. Of course, we've seen some very strong growth, and at the back of those 3 strong quarters, I think this is as nothing but a little bit of a ramp-up pause. Yes, there is always going to be some volume fluctuations on a sequential basis. So -- but we already called out in the commentary, if you remember, the fact that this will be a sequential growth quarter for the BCM business. In terms of the top client, I think, again, every client has a different trajectory. Given that all the vendor consolidation items are being stabilized, without necessarily going into too much details on what's happening in a particular client, we actually expect all of our top 5 clients to be growth accounts this year. And we already have witnessed trajectory related to that. So from that standpoint, the confidence that we're having in the Direct growth being market-leading is stemming from the fact that all of our top 5 clients actually are well positioned for absolute revenue growth, not just wallet share gains.

So to add, Mukul, on the Digital Risk question that you had, I don't think you should draw a conclusion on Digital Risk. We talked about the fact that Digital Risk is now a composite service with multiple other services. And I don't think that assumption that Digital Risk actually had a decline is supported by any numbers that we have given. Obviously, last year, we had the benefit of additional services getting added and the benefit of interest rate movements. So we will probably not have Digital Risk grow as much as it grew last year, but -- thinking in the traditional sense, but we are very confident about our new portfolio of services under that business. And we don't think it will be volatile as it was before, if that is what you are -- that is what your question.

Understood. No, that was very clear. And Nitin, the second question obviously comes back to the usual commentary around DXC. You now have 1 quarter left in the MRC kind of given the run rate which is there. You will have almost $40 million-plus left after that is over. You are supposed to -- there was supposed to be some clarity in terms of how the DXC relation will pan out in FY '22, whether this will lead to an extension of MRC, or whether there are other means you -- which will come in your direction. If you can just help us understand how to look at DXC going forward.

So Mukul, I think it's -- I mean, I stated it in my commentary, it's very clear that the contribution of DXC revenue will continue to decline. And we think it will settle somewhere in the mid-single digits as a percentage of revenue as we go through the next few quarters. Again, I think it is not usual for any clients to renew or give MRC outside of circumstances like the ones we had with the buyout 5 years ago. So I think we do have a strategic relationship. We are a strategic partner at DXC. We're a provider. We continue to be very much in the mix of all of their clients. We don't believe that necessarily means that they have to actually recommit an MRC to us. But at the same time, we also believe that we have long-term visibility beyond September '21 and actually maintaining a relationship. The way to think about it, as I said, is on a longer-term basis, we think we will settle in mid-single digits of percentage of revenue. On what happens to the MRC post-September, we'll give you more visibility because it's not fair for us to comment given that we still have about 4, 5 months to go through that process and given that we only know the final numbers after the financial numbers come out at the end of September.

We'll move on to the next question. That is from the line of Manik Taneja from JM Financial.

Just wanted to pick your brains on a couple of things. Number one is given the kind of devastation that the current way of COVID is leading to in India, do you see any near-term impact from a delivery standpoint? That's question number one. The second thing is we've heard commentary from some of the global peers around the possibility of pushing for price increases given the tight supply side dynamics. So I just wanted to pick -- get your thoughts on this.

So I think the first answer is, as of now, based on the current status, there is not an impact on operations or delivery. We've really worked hard, and I'm very thankful for the efforts that the teams have done despite personal stress and having affected people in their families and their extended families, and we obviously have many employees affected as well personally. So I think so far, so good. Obviously, we are trying to maintain not just continued operations. We're also trying to maintain the fact that we have record TCV wins and order book to execute on. So I think the second aspect of that also is can we continue to execute on the pipeline and conversion, which I think so far seems to be going well as well. But of course, we'll continue to watch the situation as it evolves. We believe the worst should be behind us, but it's not done until we get to the other side of that curve. But so far, I think we are fairly stable. On the second question around price increases. I think there is some truth to the fact that there is a little bit of pricing leverage available given the demand supply dynamics, and a lot of our clients see that because many of them actually have their own operations in India as well. And the same thing applies in developed markets, especially in the U.S. There is a fairly rapidly tightening labor market, especially in tech. So yes, there is some leverage on the pricing front. But from our standpoint, given that we've seen majority of our deals are generated proactively, even though they may get competitive, pricing isn't really the only thing that we worry about, but there is definitely a move towards price-to-value versus a P/E price or discounting discussion. So I think as the next 2 or 3 quarters play out, we'll get a little better sense. Right now, it's all hands on deck to just deal with the current prices and make sure that we were able to service the growth that we signed up with.

The next question is from the line of Vibhor Singhal from PhillipCapital.

Yes. Maybe just one question on the margins front, the kind of margin guidance that we have given for next year. So I just wanted to pick your brain not just for the next year but from a long-term perspective in terms of, I mean, we've had the effects of reduced travel expenses and other factors in this year. But I think most of that benefits, which other companies have kind of some in the margins, we have chosen to reinvest them into [indiscernible]. So over the, let's say, more longer term, let's say, maybe 2- to 3-year perspective, what is the kind of sustainable margin that you're looking at? Are you looking at a similar kind of place that we have right now? Or are you looking at some sort of post-stabilization of [ BSE ] revenues, some sort of margin uptick or downtick? Some sort of guidance in terms of, Nitin, the direction would be good. What we're looking at from [indiscernible].

Sure. I think again, you actually answered your own question. We guided for a stable margin band, and we chose to reinvest every possible dollar that we would find from an investment standpoint because we saw the opportunity to actually get to industry-leading growth in Direct, which we did. As we get into FY '22, some of those costs will definitely come back. But we also have the ability to dial up and down some of the other investments because most of our investments are operating in nature. We are not making 5-year investment decisions with capital investments. So I think we have the ability to balance out some of those increased level of investments through operating leverage, through cost containment measures, through G&A controls and of course, through -- to other levers such as even pricing. So from that standpoint, the guidance given this year already shows you there's an upward bias to the EBIT number compared to last year. We are still being a little bit measured, given just the level of uncertainty. But from a medium- to long-term perspective, I think I've always said that the stated goal is to grow above market and to have an upward bias in the operating margin profile. And we still believe that's delivered over the next 2 to 3 years.

Right. And as you mentioned that probably the [indiscernible] is somewhere around mid-single-digit share of revenues. But do you believe it will have some positive impact on our margins? Or is this probably going to be some similar kind of [ effect ]?

No, there definitely will be some positive impact. Then that also becomes a little bit of our -- you talked about the fact that some costs will come back. So we can always counter some of those costs with the fact that we have a little bit better of a margin profile in the current book of business. So there are -- yes, go ahead, Manish.

Just to add to what Nitin said, Vibhor, I think the most important thing to note is that we are not necessarily -- we are not trying to push the margins, and the margins are not getting up. This is our conscious choice. Any upward movement in margin gives us an opportunity to kind of figure out what investments can be made. And like Nitin mentioned, the increased investment is reflected in industry-leading growth in Direct. And we have guided that this year as well, Direct should repeat the performance despite already a good year of growth from a base effect perspective. So I think the TCV wins, the confidence on being able to deliver on the Direct growth, all of those are reflective of our investment philosophy paying off. And as they say, some of these things are understood only when you look at it a little long term. So 2, 3 years down the line, this should reflect in us being able to demonstrate a significantly better performance on Direct growth, which eventually will mean a healthier business mix and probably higher value creation.

The next question is from the line of Dipesh Mehta from Emkay Global.

A couple of questions. First about, Nitin, can you say some detail around the $250 million deal industry perspective? Where -- in which industry we are winning? What kind of competition we face? And what helped Mphasis to get the deal? Second question is about the DXC business -- yes, second question on DXC business. You indicated about mid-single-digit kind of sustainable trajectory of that business. So you expect it to be quick, or it would be gradual over period kind of thing, that's it? And on the DXC business, now revenue run rate is lower than MRC. So how it will -- we will get compensated? And how one should understand from that accounting perspective? Third question is about the dividend. Now we have declared INR 65, including special dividend. Whether the existing shareholders that are promoter, BCPs, each one will receive it, or it could be the new shareholders?

So Dipesh, I'll take the third question first. I think the timing of the dividend payout depends on the shareholder approval at the AGM. So I don't think it is -- this is the annual dividend cycle, and we are following that cycle. As we get to the AGM, as we get to the -- and depending on where the deal is on the approval process, whoever is the shareholder will actually receive the dividend. On the other 2 questions, let me get the DXC question out of the way, and then I'll get to the $250 million deal. I think I'm guiding based on the fact that we think over a medium term, we should get to that mid-single-digit number. It's not -- immediately, it's not -- I'm not guiding you to that I'll give you the number next quarter. But I think from a long-term sustainability standpoint, I think that's where we think we will settle in that business. I already answered earlier on, I think to Mukul, that as we get past September, we'll give you a little bit more breakup of what will happen to the shortfall because at this point in time, it's not fair to comment. We're still a few months away from that timeline. And as you can imagine, when you are in a client situation, you don't want to show your hand or get in a situation where your position in our contractual discussion is compromised. So from that perspective, we would like not to talk about the legals of what that means because we are still actively engaged with the customer and being a service provider. On the last question -- or the first question that you asked me around the $250 million deal, I'm glad somebody asked me the question because the highlight of the quarterly announcement should be the deal. It's the largest deal that we've ever signed or announced. We have obviously announced a $200-plus million deal earlier in FY '21. We did $100-plus million deal as well in FY '21. So I think this is very satisfying to us. The deal is with a client in the U.K. It is in the BFSI segment. We competed with the best and the brightest names in the industry. The names were from global SIs to global consulting firms to global digital-only players. This is -- something that helped us was the fact that we were early engaged. We understood the client really well. We have a strong combination of multiple tribes coming together. And we were able to establish a decent level of credibility with the executive suite of the client to be able to actually -- for them to actually take a bet on us for a long duration for a very strategic transformation program. And in many cases, their future strategy depends on this program. So very satisfied. I think this is the first lot of that win. There is much more potential at that client alone, to get what this deal will mean for us in the market, both in U.K. and Europe and of course, in the U.S. because this is a very global industry.

Understood. And if I can squeeze last one. Do you think changing deal tenure? Because you are defining now larger deal and longer tenure. Were there any implication on your correlation with revenue conversion?

So far, actually, if you see this quarter, the conversion correlation actually improved [ 2.91 ]. So of course, this is a portfolio or a number of deals. But I think I'm glad that we are also able to construct deals that go long term, 5, 7, now this is a 10-year deal. And the reason is that it actually gives you a sustainable outlook on long-term relationships and gives you the ability to invest and, of course, monetize those relationships. So I think having a good mix of deals -- and not every deal won't be 10 years, every deal won't be 1 year, but having a good mix of deals that [ attract ] also the time horizon will definitely continue to give us good revenue correlation. And given that we're only announcing net new TCV, I think you should be very confident that the correlation will stay high.

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

Congratulations on a very solid deal win. My first question was on margin, and I'll probably layer it into 2 parts. One is for this quarter, we have had a very strong improvement in utilization at on-site offshore. And we have also seen a recent offshore shift. Despite that, our margins are actually slightly dropped. So just wanted to understand what's -- or what's going on there within that? Is it a timing difference? Now the second bit is more from an annual basis. And if you look at last year, possibly initial part of the year, there were discounts given to customers. All those have come back. And we have a couple of large deals which will go into steady state possibly next year. And on the reverse, you also have this large deal, which is coming through. And we also have headwinds, some wages and so on and so forth. So relatively, are you -- from a margin standpoint, if you think about it, the lower end of the band, are you more worried or more comfortable at the lower end versus the top end, considering the concept of whatever you see in terms of the tailwinds and headwinds? Yes, those are the 2 questions on margin.

So yes, I'll take a quick stab at it, Nitin, and then I'll have Manish and Viju maybe chime in. Firstly, I think the Q4 margin question, I think it's linked directly to a couple of deals that are in transition and conversion. So we were -- we actually carry the team, but we were not still able to convert to revenues. That should correct in itself in Q1. If you look at the billable headcount that we've added in Q4, it's actually a record number. It's 1,350 people have been added, of which over 1,200 are actually in the IT side. So that should give you an idea of what the propensity of revenue acceleration will be given just the addition we've done in Q4 from a revenue -- from a billable headcount perspective. It's the highest we've ever done in any quarter in the history of the company, right? So of course, we are now sitting at record revenue number from a quarterly standpoint. But given that we were already sitting on a fairly strong sequential growth number, the number at Q2 of FY '21 was our biggest sequential growth ever. On top of that, we had another sequential growth quarter in December. And then we're now saying we've added a record number of billable headcount in Q4. So some of that margin pressure that you're seeing in Q4 is because of the extreme ramp-up that we went through as we had to convert some of those deals to revenue. I think the longer-term question on margin, the reason we've given the band a little bit longer is because we've actually, as a team, agreed to be a little bit more flexible in providing our operations teams and our delivery teams a slightly relaxed bench and buffer requirement, given just the fact that there really is significant disruption in the employee base in India. So that's the reason. And we don't know whether that's required for a month, 2 months or 3 months or 4 months. As that normalizes, as we revert back to some of the normal supply chain and situations, we'll probably be able to give you a little bit tighter band. I don't think the comfort is at the lower end or the upper end. I think we won't give you that range, if you were only comfortable at the lower end of the band. We're just keeping a little bit of operating flexibility, so we don't surprise you as we come back and look at the situation and in case the situation doesn't improve in the short run. Manish, Viju, you guys want to add anything to that?

Yes. To give a bit an honest picture of that, Nitin, from a numbers perspective, you would see that while our on-site headcount and offshore headcount have grown equally. You will see that the offshore revenue have actually grown higher than the on-site revenue because some of those people who are in transition are [ more or less ] billable and are shown as utilized, but we haven't been able to get revenues for them because it's typically the nature of the transition from an accounting perspective. And like Nitin mentioned, as they come into billability next quarter, those margins should be recovered. So this cost of people that we are carrying in transition got compensated by the benefit we got because of movement offshore and improved utilization, which is why you see the gross margin to remain at the same level of 29.1%. The reason why you see the net EBIT margin move from 16.4% to 16.1% is because we also invested in some of these proof of concepts and large deal billing, because of which the sales and marketing expenses actually show an expansion from 7.2% to 7.6%. So on an overall, while there are a lot of puts and takes at a very broad level, the puts and takes within the gross margin netted off themselves, and the investment that we made should reflect in TCV wins, including the large deal that we just announced for quarter 1.

Sure. But just one more, if I may. So you spoke about Digital Risk. And you said that growth this year would be similar to last year. Correct me if I'm wrong. And basically, if I picked this number wrong, I think somewhere you said 26% growth in the past year, and this year would be similar. Have I understood correct? Or is there a mistake in what...

No. I don't think we gave a number for Digital Risk. And what we said is when you look at Y-o-Y, last year, Digital Risk had multiple advantages because it started with a low base. We added complementary services, and interest rates also help. So this year, we don't think Digital Risk will repeat the performance of last year in terms of Y-o-Y growth. But we think it will remain stable. It will be at the company average, and it will not be an outperformer.

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

Sir, I have 2 questions. One is a follow-up of the previous one. So the Direct business growth, I think somewhere I heard that the Direct business growth for '22 is likely to be similar to '21. Is that correct? Or that was also misread?

No, that is not misread. We said it will continue to be market leading.

And on a Y-o-Y basis, similar to what we have done in the past?

Yes.

Okay. Second one on your...

It was market leading.

Okay. Second one's on the average tenure of net new TCV now, while correlation is something which will take time to come up, given the large number of statistics involved there. In terms of average tenure, can you give us some trend on FY '21 or versus FY 2019 or on a quarterly basis? How the average tenure of net new TCV has moved over the last few quarters?

Yes. I mean, I don't have the data handy. I don't know if maybe we can provide that statistic from the next quarter, but I can tell you that there is an upward bias, but it's not by a big number. It's just that instead of just doing -- if you look at 3 years ago, we were probably doing relatively shorter-term deals going up to a year. In some cases, they were 2 or 3 years. Now we have started to see deals between 3 and 5 years. I would say the average will probably be between 2 and 3 years at this point in time, which has improved from being about a year, 1.5 years, I would say, 2 years ago. But we can give some more color on that as we go through the next quarter or so. I don't know, Viju, if that's something you want to talk about from a correlation standpoint because you run those numbers.

Right. So from a -- from fourth quarter perspective, you are saying that the average is going to be in the ballpark of 3 years?

Yes. It's -- I would say it's pretty consistent with what it was in the last quarter. Of course, the 10-year deals is not in Q4 number yet. So I don't think that has skewed the number anyways in a big way.

And on a Y-o-Y basis?

I would say, it probably has inched up a little bit but not by a lot.

The next question is from the line of Sandeep Shah from Equirus Securities.

Just a related question is, this year, FY '21, we have done a very good performance despite the pressure in the DXC, and the growth rates have been industry-leading. But that should have also helped by growth in the ACV number, not talking about TCV, where TCV growth being 51%, ACV growth would have been also good. So Nitin, just wanted to understand looking at the pipeline because DXC pressure may continue in FY '22. It's very requirement that the ACV growth should continue at a very healthy pace for you to have, again, an industry-leading growth, including DXC in FY '22. So looking at pipeline, are you confident that even the ACV growth in FY '22 could be robust?

Short answer is, yes, otherwise, I wouldn't guide to the fact that the Direct business growth will be industry-leading in FY '22. So I think that is -- and of course, I gave you another very strong data point, which is the billable headcount addition in Q4 at 1,300 is the record number ever. And all of that translates to run rate gains on revenue, then of course, we will have the full 4-quarter benefit for FY '22. And that's the reason why we are guiding to the fact that the Direct business growth will be industry-leading as now a different industry growth rate. Industry-leading in FY '21 was a different number. Of course, we beat that by a mile with FY '21, Direct growth of 17-plus percent. But to sustain our industry-leading growth status for Direct in FY '22, it has to be higher than what we delivered in FY '21.

Got it. This is helpful. Just in terms of the DXC. So should we model that the minimum revenue guarantee can still be achieved maybe by a 1-quarter extension. So how should we model DXC? And your comment of mid-single digit over next 4 to 5 quarters, or it maybe even longer than that in terms of contribution of DXC?

I think it's -- the way I would recommend you think about it is that there will be a shortfall. The key question will be how do we treat that shortfall. That's difficult for me to give you the answer right now, given what I just explained. Having said that, I think modeling it to the guidance I gave in terms of where it might settle is probably the best way to do it over the next few quarters.

Okay, okay. So if there is a shortfall we may not trigger or may trigger the penalty clause that we will update post the September as a whole. That is what we are trying to achieve.

Correct, correct, correct.

The next question is from the line of Ashwin Mehta from AMBIT Capital.

Yes. So Nitin, just want to get a sense in terms of the pipeline post the conversion of the $250 million deal flow and the deal wins this quarter. How does that look in terms of distribution on size of deals and the quantum versus earlier?

Ashwin, I think I mentioned that despite record conversion, if you look at all the 4 quarters are over $200 million net new TCV. In addition to that, we announced another $250 million deal. But despite all of that conversion of almost $1.4 billion over the last 4.5 quarters, we actually are still sitting on a record pipeline, which means the ability to bring new deals, originate new deals, construct them, piece them together using the deal archetypes is actually fairly good. And I believe that now it's getting institutionalized as a muscle. And we'll continue to expand that into additional accounts that we've opened as well as we run the accounts with the maturity model. So I think that workflow cycle is actually working quite well. So we are still sitting on a record pipeline despite record conversion. And we're also seeing an increasing bias towards cloud and transformation in that pipeline. And it's actually across verticals. So the health of the pipeline is still fairly good, and it has a pretty solid mix of large deals as defined by the category of large deals in [ single ] bias.

Okay, okay. Fair enough. And the second question was in terms of the fact we've done pretty well with our top 20 clients. In terms of initiatives to, say, replicate that same template over the next, say, 20, 30 clients of ours, what are we doing on that side to, say, be in sustainability over a much longer period of time?

Yes, we are doing exactly what I just said, but except that we're first -- we first had to do to the non-top 5. So we did that to 6 to 10. That's why you see the growth rate of 6 to 10 at 42%. We're then obviously doing the same with accounts in the next category, 11 to 20. So I think we have a very strong solid runway ahead of us within the top 20 itself. But having said that, if you see the NCA book, that has actually grown very healthy, 40-plus percent as well. And the fact that we've created these 5 distinct NCA units within hunting, focused on banking, insurance, high tech, and so on, it should give you the sense that we have a pretty strong account mining principles combined now with the hunting muscle. So I think the key question will be, we'll always have emerging accounts that we will continue to put in. We actually call them cathedral accounts because we want to bring them as cathedrals with strong conditions. And that process is continuous -- its continuous process that we follow through our account mining principles. And the reason we did the NPS survey was to actually get a voice of the customer as a feedback loop back into that program. So I think a very strong focus on top 5, top 10, top 20 and, of course, bringing new logos of high quality in. And you will see that we are probably bringing 5 to 6 new clients every quarter. But these are clients that we are very chosen, very targeted, very named account strategy and hunting as well.

Okay. Perfect. That's good to hear. And just last question in terms of the BPO business. Approximately what proportion of our business -- given that we've launched newer services, we've launched efficiencies and we've also launched countercyclical offerings, what proportion of our business would be kind of linked to the mortgage volumes?

I think Manish answered that question. So we did see an uptick last year given just the interest rate cycle that I think peaked by December or even before December. At this point in time, I would say that of the 26% BPO business that you're seeing in the overall book of business, the growth is -- bulk of the growth right now is actually broad-based. It's not just dedicated to one unit or one client or one service client, and it's actually been fairly consistent, I would say, even over the last 3 or 4 quarters. So the issue is the cyclicality that used to bother everybody is something that we really work hard at, and we've integrated much more services. We've added new service lines besides just refinance our origination. We've added servicing. We've added quality control and a bunch of other things from -- and at an integrated level. So I think the fair way to think about it is that as a portfolio, mortgages is very much part of our value chain. We've actually combined tech and ops in many, many clients. And we do believe that we are at a point where the interest rate sensitivity may not be such a big issue. And at a portfolio level, we still believe that BCM will actually see robust growth this year.

The next question is from the line of [ Nitin Jain ] from [ Fairview Advisor ].

Yes. So just a question on DXC. So last quarter, the management had clarified that the rate of decline in DXC would be contained. But we don't see that playing out at least in this quarter. So any comments on that?

No, I think, Nitin, I've given you the guidance based on where we think it will settle at. I think it's 12% of revenue in Q4, down from 24% 4 quarters ago. I think this is a strategy we are playing out very consciously. It's something that we'll continue to manage based on the prospects and the ability to continue to grow the Direct business. So I think if you follow that guidance, we'll probably come out on the right side of the growth profile and, of course, the client metrics. And yes, we did have the comfort of the MRC, but clearly, we are below that. At this point in time, what we have to do is to continue to find growth areas around that. And we'll also continue to look for additional levers of growth using some inorganic levers just to make sure that we stay in the top quartile category anyways. So I think that there's additional levers available in case we need to continue to deploy those. But at this point, we are very, very pleased with the fact that we've managed the -- the Direct growth was actually managed to making it any downside. And at this point, we are sitting on some very, very strong healthy pipeline and, of course, deals and conversion in the Direct business.

Okay. And just wanted to clarify that the EBIT guidance that the management has given is inclusive of the Datalytyx acquisition last quarter.

It's consolidated EBIT guidance, yes.

Ladies and gentlemen, we'll be taking the last question. That is from the line of Abhishek Shindadkar from Elara Capital.

Congrats on a good execution. My question is on the headcount. Now if I look at the tech services and BPO headcount over the last 4 quarters, it seems that both on-site and offshore basis, we have kind of let go or taken services employees and added BPO employees. So just wanted to understand, while the Q4 addition looks very robust, on a Y-o-Y basis, we are still down on our tech services basis. So just wanted to understand the strategy here. And also, what is the implication of this on the revenue mix FY '22 that we're talking about? And the second is on -- is it possible for you to kind of give us the vertical mix on a pure Direct core basis? Because you have given some data points in the presentation, but including DXC, the data gets distorted. So would it be possible in EPS? That could be really helpful.

Yes. So I think the first question is very simple. I think what's happening is you're getting -- you're confusing the fact that there is DXC decline. And DXC business is virtually 0 BPO business, and that's why you're seeing that the tech services business is not showing to be significant headcount growth. It's not that -- it's not fair to read it that way for the Direct business. The second question on the vertical breakout ex DXC. I think If you reverse calculate from the growth rate, you'll be able to actually get a pretty good number. Maybe we can provide that as additional information in the MD&A next time. But at this point in time, I think the disclosure is what it is. But you should be able to reverse calculate that based on the last 3, 4 quarters of growth.

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

Thank you, guys, for joining the call today. I think our engineering-led DNA and the client centricity model has helped us to stay consistent with our performance, and we continue to invest in strengthening our targeted go-to-market and resilience. I think the accelerated digital transformation journey for businesses globally has translated to a continued growth for us during FY '21, and it's been a breakout year in terms of growth and TCV wins, especially in the Direct business. Thanks again for joining us today. Stay safe. Take care, and we'll see you in the next quarter call.

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