Mphasis Limited (526299) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for joining the Mphasis Q1 FY 2022 Earnings Conference Call. I am Lizanne, 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, that is www.mphasis.com, in the Investors section under Financial & Filing as well on both the BSE and NSE websites. 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.

Thank you, Lizanne. Good morning, everyone, and thank you for joining us on Mphasis Q1 FY '22 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 Q1 FY '22 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, and thank you for joining the call this morning. I hope all are staying healthy and well. As we step into this new financial year, I look back at the past year and all the events that unfolded throughout the year. It is remarkable how much we have accomplished not only in terms of financial performance but also in our commitment to help clients, communities and our employees. I wish to first thank all Mphasis employees globally for their dedication and relentless efforts in the face of difficult personal challenges during an unprecedented situation. In the midst of this crisis, there were also powerful opportunities. I'm glad that we made the investments at the time we did and proud of how we were able to achieve client demands. Our Bring T back into IT strategy enables us to profitably play in higher value and significant digital-led constructs. As we look back at some of the core mega trends that were in play before the crisis, it was clear that the end customer-led disruption was becoming the norm, with expectations shifting dramatically towards a digital-native experience, powered and shaped by use of creative technologies that were being deployed in front of the customers. This also led to a pressure on most traditional enterprises to become more agile and responsive, especially in response times while staying resilient in face of shifting volume and demand patterns. The demand from businesses to their CIO and IT providers was to provide this combination of great customer experience, high agility while lowering the operating costs, including the cost of associated legacy technology. The recent crisis is a major accelerant in this regard and has accentuated the need for enterprises to fast-track their transformation programs, leading to a snapback in demand along a few major themes such as public and hybrid cloud adoption, data-driven transformation to drive better personalized experiences as well as to unlock the power of data-driven revenue streams. There is also a renewed focus on core modernization, combined with the themes of cloud and data as well as investing in building new platforms that can drive a new business architecture aligned towards agility and customer centricity. The investments in consumer-facing tech have also seen an acceleration with the digital-first mindset. All these trends are well captured by our tribes as we have discussed in the past few quarters and as I will further elaborate shortly. Playing profitably in these themes is instrumental to our market share gains and growth. Our 4-pillar strategy for FY '22 and beyond, as outlined in the last call, is underpinned on building a scalable, sustainable growth firm. To recap, our theme of continuity and acceleration to play profitably in the 4 tech mega trends identified in the prior slide rests on fortifying 4 pillars. First is continuously augmenting our capability, both from a go-to-market as well as a delivery perspective. This consists of tribes and squads expansion, our 2 differentiators, which we mentioned before; specialist resource buildup in our cloud unit, which is structured as a guild foundation to all our tribes; domain expertise that cuts across all the units that we operate across all geographies. Second, geographic expansion of sales and delivery. We recently announced our expansion into Canada to build on our existing operations there. We are setting up a new Mphasis Canadian headquarters in Calgary, Alberta, in partnership with Government of Alberta and University of Calgary. This is a great showcase of public-private partnership for tech transformation in the region. Through this multifaceted partnership, we plan to co-invest with the university to establish a quantum city center of excellence that will be dedicated to promoting the commercial application of quantum technologies. Recognized as one of the fastest-growing service companies in quantum computing, Mphasis will act as anchor company committed to growing applications of quantum size to users in global markets while enabling fundamental research in quantum science and engineering throughout the university. We are also expanding our expansion to the continent -- on the continent in Europe with plan for the Nordics and DACH, especially Germany, along with our anchor clients in each of those regions. Third, deepening and broadening of the leadership pool. We promoted tenured leaders while also bringing in new management talent. And finally, expanding our portfolio of IP-driven AI/ML innovations. We continue to be a market leader in offering our AI/ML and quantum computing solutions to some of the leading technology marketplaces. NEXT Labs continues to be at the forefront of building these innovations. A key component of our continuity and activation strategy is the new client acquisition or the NCA program. We've reinvigorated this program over the recent quarters with dedicated leadership. We've carved out 5 well-considered select verticals to focus on for NCAs, namely BFS and insurance, in both of which our positioning and track record is already strong. 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 charter. Each of these 5 verticals has its respective client acquisition strategies led by dedicated sales, delivery and domain NCA leadership. We have an elaborate operating model in place to transition NCA clients to strategic client status with the client engagement structure and investments defined through the phases of the transition. We are pleased with the outcomes of our NCA strategy. Our strong growth in high tech is encouraging. We see this becoming the next $100 million vertical on a quarterly annualized basis. We are already there. We also see our tech-based propositions and solutions frameworks, having valuable use cases in multiple verticals, augmenting our NCA strategy. Another heartening outcome is that today, we count all top 10 U.S. banks ranked by asset size among our clients when 3 years ago, we had 5 in this category. Except for Q1 of FY '21, the pandemic quarter, we have had consistent sequential growth every quarter led by the direct business growth. Our direct business growth is accelerating on a larger revenue base. In Q1 FY '22, our overall gross revenue at USD 362.9 million, registered a growth of 6% quarter-over-quarter and 18.8% year-over-year in U.S. dollar terms and 5.9% quarter-over-quarter and 16.3% year-over-year in constant currency. Direct business continues to power our growth, growing at 10% quarter-over-quarter and 34.7% year-over-year in U.S. dollar terms and 9.8% quarter-over-quarter and 32.5% year-over-year in constant currency. The trajectory of our direct annual growth is consistently rising with the growth dropping 32% in this quarter from 7% 4 quarters back in first quarter FY '21. Our year-over-year growth in direct is the highest on record. The contribution of direct at 89% continues to rise. As we continue to prioritize our growth and investments in direct, the strong showing has also helped us to manage the decline in DXC, the contribution of which is now at 9% of revenue. DXC revenue declined 18.1% quarter-over-quarter and 48.7% year-over-year in constant currency. This is in line with our commentary of DXC dropping to mid to high single digits as a percentage of revenue by end of FY '22. We continue to add clients in the significant revenue buckets. In this quarter, we added 2 clients in the USD 100 million-plus category and USD 50 million-plus category each to take the count of $100 million and $50 million clients to 4 and 7, respectively. Geography-wise, all our markets fared well. Our core market, the U.S., grew 27.8%. Direct in Europe has grown 35.5% year-over-year in U.S. dollar terms. Our pipeline in Europe is strong, especially with new clients, and we expect this region to continue to be a growth driver for FY '22 and beyond. Specifically, I would like to call out our sustained industry-leading growth performance in Direct. Market share gains with our top 10 clients and beyond have helped drive growth year. Contribution from our key clients has been consistently rising, reflecting increasing depth of key relationships and share gains. While our top-10 clients have collectively grown double digits year-over-year on a consistent basis, what is equally heartening is the growth picking up beyond the top-10 clients, a theme that we will return to in a bit. We believe that our broad-based success with clients positions us well for industry-leading growth in direct for FY '22 on top of our industry-leading direct growth in FY '21, in line with our FY '22 guidance articulated last quarter. Our growth this quarter in direct was broad-based across most verticals. Our largest vertical, banking and capital markets, has grown 23.7% year-over-year in constant currency for the quarter, representing the fourth straight quarter of 20-plus percent growth. Our direct BCM grew 11% quarter-over-quarter and 29.3% year-over-year in U.S. dollar terms. On a year-over-year basis, we believe this is best-in-class growth in that industry segment and was broad based across our segments of BCM. We continue to enjoy share gains with our key clients in BCM. This quarter also saw robust sequential growth in ITCE and Logistics and Transportation verticals within direct, with ITCE growing at 16.4% sequentially and 168% year-over-year off a low base, and Logistics and Transportation growing at 14.4% sequentially and 27.7% year-over-year in constant currency. Our client stats reflect the strengthening position with several top clients post vendor consolidation. We continue to believe that our wallet share gains emanate from our competency-driven positioning. As our top clients prioritize and execute their spending plans, our preferred partner status places us well to capture additional market share. Notably, we are also seeing stronger growth from the lower half of our top-10 clients as well as growth beyond our top-10 clients. Our top-5 and top-10 clients have grown consistently, registering 17% and 24% growth, respectively, in 1Q on a trailing 12-month basis. The average contribution of our top-5 clients exceeds $110 million on a trailing 12-month basis as well. Our top-4 clients are now $100 million plus on a trailing 12-month basis, and all our top-5 clients are USD 75 million plus, which we believe is unique for a company of our size. Top clients #6 to 10 have grown at 56% on a trailing 12-month basis. This is much higher than average growth of 6 to 10, indicates strong growth diversification among our key clients. Our clients in the 11 to 20 bucket have grown at 19% on a trailing 12-month basis as well, with 24% growth for the overall direct business on a TTM basis. Notably, all of our 7 USD 50 million-plus clients grew sequentially. In a nutshell, our strong client performance across the board supports our industry-leading growth in direct. We recorded a TCV of $505 million in first quarter, an all-time high per Mphasis. This quarter's TCV includes $250 million deal that we signed in this call and announced in our last earnings call. This marked the sixth straight quarter of $200 million plus net new TCV that is not included in renewal deals. Our TCV on a trailing 12-month basis is up 62% year-over-year. We believe that our firmly rising TCV trend is a testament to our improving track record in the scale and consistency of large deals. Specifically, I would like to make 2 points about our TCV composition that continues to shape our deals on an ongoing basis. There's an increasing component of large and longer tenure deals. These deals are transformation-led, integrated and leveraged our multiple deal archetypes and tribes in combination. Secondly, there is a heavy new-gen services portion in our net new TCV, thanks to the tribes, with a contribution of 85% of first quarter deals in new-gen areas. As we report our TCV on a net new basis, excluding renewals, we find the correlation between our TCV and revenue growth to be fairly high, exceeding 0.9 in this quarter. Coming to our client metrics. Our track record of migrating clients from one revenue bucket to the next continues to be healthy. Specifically, our conversion ratio of clients in one revenue tier to the next is solid and improving. Specifically, half of our $10 million plus clients are $20-plus million clients, and over 3/4 of our clients in the $20-plus million category are $50 million plus and 60% of our $50 million-plus clients are $100 million-plus clients. These stats have continued to improve. We win 2 large deals on average every quarter, marked by increasing deal sizes. As the slide indicates, the average deal size on an LTM basis is $96 million, 3x of what it was 2 years ago. As I mentioned, our large deals are increasingly multi-tower, transformation-based and longer tenured. The growing size reflects this capability evolution. Our margin philosophy affords us the flexibility to manage our profitability in an environment of rising costs [indiscernible] market. In this quarter, we were able to absorb higher cost of revenue and unexpected COVID-related expenses by modulating our discretionary spend on the SG&A side, and thus, operated in the stated margin range. We've hired 1,981 employees in the first quarter of FY '22, which represents a 7% addition to our workforce. Our utilization rate reflects our capacity buildup, including trainees, and we expect to deploy our bench in the second quarter while continuing to aggressively hire to service new demand. Our EBIT margin for the quarter at 15.9% are in line with our stated operating margin band of 15.5% to 17%. Our EPS for the quarter at INR 18.16 grew 23.1% year-over-year. We had a onetime COVID impact of about 30 basis points. Our EPS growth reflects -- exceeds our operating profit growth, which in turn exceeds our revenue growth, which we believe indicates operating leverage in our model. Our cash generation stood at $48 million in Q1, represents the fifth consecutive quarter of $40 million-plus cash generation and the highest absolute level in the past 19 quarters. Our operating cash flow as a percentage of EBITDA continues to rise and exceeds our profit. Our closing cash balance of $462 million is highest since the first quarter of FY '17. Several ingredients go into formulation of our success mantra that powers our robust performance in direct, namely, our personalized customer engagement model with key clients with sales client partner, delivery leaders for the account and dedicated account CTOs. Customers are center of our GTM and resource allocation, which allows for a high degree of account-specific innovation. Second, our ability to build ever-growing pipeline on the back of our effective tribes and squads model, which gives us future visibility. 85% of our TCV wins are tribe-like. Supporting our tribes model with the smart surround and reinforce strategy that characterizes Mphasis innovation DNA, including client-dedicated CTOs and consulting-oriented technology advisory group, programmatic innovation with our Sparkle program, focused research and IP innovation through our NEXT Labs group. Our capacity to switch large integrated deals using our proven transformation models such as front to back and zero-cost transformation, which we have discussed in the past with you, the $250 million engagement that we've announced is a good example of this. And finally, the scaling up of the digital competencies of our talent with our well-established key learning source platform, Talent Next. This has seen rapid adoption since its inception 3 years ago. It provides Mphasis the skill muscle to enable execution on next-gen positioning with an approach to a T-shaped talent, blending domain and technology competencies for next-gen skills. All of the above together constitute our business operating model designed for differentiation, repeatability and scalability. This model enables us to win more proactively with higher win rates. Over 80% of TCV deal wins are proactively shaped. We are pleased to note that given the strong demand for our services and strengthening position across our client base, we also see pricing leverage in our business. To that end, we have actioned a value-based pricing program and are seeing early success in some parts of the portfolio. We expect this to be able to help mitigate some supply side challenges and provide currency for further investments with our clients. To sum up, I'll leave you with 3 points. One, we're off to a good start in FY '22. Direct growth, 32.5% year-over-year in constant currency, will continue to be supported by robust TCV that we've added across verticals. Direct performance has also helped us mitigate declines in DXC, the contribution of which is now reduced to 9% of revenue in the first quarter. Two, all our KPIs are moving in the right direction. Namely, our track record of winning large deals is consistently improving with $100 million, $200 million to $250 million deals in less than a year. The nature of our deals is increasingly transformation-led, and long tenure based. Our TCV at an all-time high of $0.5 billion is up 62% on a trailing 12-month basis. Our growth is getting broad-based with Europe, high-tech, Logistics and Transportation aiding growth in addition to the anchor verticals 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 buckets continues to strengthen. As referenced, our average top-5 client contribution tops $110 million, and our top 6 to 10 clients are now growing well above our direct revenue growth with 57% LTM growth. We've added to our count of USD 50 million and USD 100 million clients with 4 clients in the $100 million plus and 7 in the $50 million plus bucket. We believe this is unique for a company of our size. Three, investing for growth by using operating leverage and operating in a stated target operating margin band, we believe our margin stance ensures stability in an environment of supply headwinds. Thus, the revenue growth translates into sustainable EPS and PAT growth and consistently rising free cash flow generation complemented by improving DSO. Our strong start to the year reinforces our confidence in reiterating our guidance for the industry-leading growth in direct on top of industry-leading performance in FY '21. We retained our stated operating margin band of 15.5% to 17%. Our margin stance enables us to make the needed investments to sustain our industry-leading direct growth while also absorbing rising costs associated with supply side. We expect continued growth from our key clients as vendor consolidation gains continue to accrue in a healthy spend environment. It's an increasingly diversified nature of our client base and their metrics that are foundation of our growth. On that note, I request the operator to open the line for questions, please.

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

First of all, Nitin, congratulations. Excellent quarter in terms of growth. The first question obviously is on this -- the kind of growth you are delivering currently. I think this probably will be one of the strongest growth ever in your history. If you can just give us some sense of like how sustainable is this? Was there any one-off which was there? And combined with the deal win number, what's the perception of the market right now versus maybe a quarter back? Are you seeing an acceleration in the overall deal environment or it remains -- it was robust and it remains so?

Great question, Mukul. I think there are 3 or 4 questions in your question. So let me address them one by one. Firstly, I think as I mentioned in my opening remarks, the spend environment is actually fairly tailwinded. I think a number of the trends that got accelerated, thanks to the [indiscernible] despite the unfortunate human cost of the crisis, are basically forcing enterprises to accelerate a lot of their longer-term spend plans into a crunch time frame. I think the basic pivot -- structural pivot in enterprise tech consumption really is very simply the massive migration from spending money in a CapEx-driven on-prem data center-centric model to consuming almost all tech [ model ] as a service because that gives them the agility and the customer centricity that is needed to compete in the market today. This is not an overnight shift. This is not a 1-, 2-quarter phenomenon. This was something that started in the 2012, '13, '14 time frame, slowly was picking up speed and got massively accelerated by the crisis. We still believe this is a 3- to 5-year journey for most enterprises at the very least because of the complexity required in actually making that pivot and changing that model. It is a technological change. It is a skill set issue. It is a culture issue. So I think this is -- in many of our conversations, clients are calling it a tech investing super cycle that will last at least a few years. Now of course, our growth has been very broad based. I mentioned that across client segments, across industries. It is not led by 1 client expansion. It is not led by 1 deal conversion. It is actually fairly broad based because the fact, all of our $50 million-plus clients have grown sequentially, and all of our verticals have seen solid growth on a year-over-year basis is really a culmination of all the work that we've done. And the fact that we've actually had a pretty strong TCV wins for 5 quarters in a row now. So I think it's a -- to me, it is -- we are in the midst of a pretty strong tech investment cycle. And the challenge for us will be to keep up with those demands, to keep up with [indiscernible] and to also continue to look around the corners because a lot of the tech is actually evolving very, very rapidly. Not only the consumption has evolved rapidly, the change is also evolving very rapidly. So ability to just look ahead and making those investments, what looked like a 3-, 4-year runway is probably a 2-quarter runway to invest, and hence, we have to be very, very nimble in those investment decisions as well. So hopefully, that gives you some color.

Sure. And I know that DXC is becoming a smaller part of your business. So this is kind of a repeated question. Any update on the resolution with DXC, given the stage where you are in the MRC?

Again, I said that last time also, Mukul. I think we've given you some guidance on where we think we will stabilize. At this point, it's a little bit premature to talk about the next steps publicly. As we have more updates, we'll provide them as we go forward.

The next question is from the line of Manik Taneja from JM Financial.

Congratulations for a very solid performance this quarter. Just wanted to get some sense on a couple of things. We've seen our onshore proportion of revenues increased in the current quarter. This is contrary to the trend that we've seen across the year. So is this led by some of the new deal ramp-up. And do we expect this to reverse? That's question number one. The second question was with regards to your comments on pricing. You suggested that you were seeing some pricing leverage in the market. Just wanted to get more insights on the overall pricing environment. And do you think that has negated some of the supply side pressures?

Sure. I understood your second question. I am a little bit unclear as to what the question was on the first part. So let me address the pricing issue and then maybe you can summarize your first question for me again. I think what I mentioned on the pricing side was that as you go up the value chain, as we [indiscernible] our ability to drive value-based pricing and move away from pure simple cost-plus models as well as actually work closely with customers in ensuring that they are able to see the value we bring and the environment we are operating in, and hence, give us the ability to do right pricing. So I think that is the program that we are very collaboratively working on with our engagement teams as well as with our clients. And we definitely expect that to release some of the supply constraint-driven margin pressures. Of course, the intention for us is to make sure that we are able to balance growth needs, investment needs and operate in the band that we've stated. So we definitely think that is a lever we can use to continue to invest in the business. I think on your first question, you asked us whether the growth acceleration was due to one large deal or something broader, am I right?

So Nitin, basically, the question was with regards to the on-site -- increase in on-site component of revenues in the current quarter. Just wanted to understand, is this led by some of the large deal ramp-up...

I understood. I think headcount addition is a leading indicator for revenue. Definitely, some of the larger deals require us to ramp up on-site first and then we obviously find ways to continue to stabilize as we -- sometimes transition and sometimes stabilize the program. If you look at fourth quarter, we had a pretty strong headcount addition on site. And that's obviously converted to revenue this quarter because that's the way the cycle works. If you look at the current quarter, we've actually had stronger headcount addition offshore. So some of that will actually normalize as we go forward. So I think the long trend doesn't look like it's going to change dramatically. We will probably have a bias towards growth offshore, but at the same time, we'll obviously continue to proportionately add people in whichever geography we talk about based on where we need the talent or where we need to deliver the work. Also, keep in mind, we've also added newer geographies outside India. So some of that also may be playing up in the revenue numbers, and we can give you some more color on that as well as we go forward.

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

Congratulations on a great quarter. My question is on margins. So this quarter, we have seen gross margins fall off quite a bit, and we have dialed back on S&M and G&A. Just wanted your sense on how much of this gross margins is recoverable going forward. And we don't report attrition, but it's very clear that from an industry perspective, it's going up quite a bit. So in that context, in terms of gross margin recoverability and your ability to continue to sort of invest in S&M, I just wanted your thoughts on that.

So Nitin, I'll give you a quick response, and maybe Manish can add some more color to it. Broadly speaking, the impact on gross margin is explainable by 2 or 3 factors. Firstly, if you look at just the COVID impact, we called out about 30 bps or so as a onetime impact. Then we had utilization that dropped because we ramped up. There is obviously a lead -- lag time between hiring, deployment and billability or ability to convert the employees from a revenue standpoint. That obviously has an impact on the margin as well. There is some element of this onshore versus offshore based on just the phase of the ramp-up. And also, of course, there is some element of the ability to attract talent and I think you referenced attrition and cost of labor. So clearly, we're going through those as well. I think the key thing to note is that we talked about over the last 3 or 4 quarters the fact that we will prioritize growth with a margin band that we want to operate in. There are certain discretionary spends that are non-manpower related even that sit in our SG&A expense line. And I think we were able to manage those to make sure that we stay in that operating band ratio. Combined, the factors that I talked about from the standpoint of some pricing leverage, some normalization in the on-site/offshore mix given the onboarding trends of the first quarter and, of course, our ability to continue to operate the supply chain so we keep our margin steady is -- are the things that we'll focus on as we go forward. I don't know, Manish, you want to add anything to that?

Ideally, Nitin, you covered all the points. I would just like to give one color to it, which is, short term and long term. There are, to your point, Nitin, Nitin Padmanabhan, I mean, there are a few cost which has come in as a onetime, whether it is the COVID expense or the investment for growth reflected in lower utilization, those are recoverable in the short run. And when we look at some of the longer-term investments, those investments [ where you ] probably have matching from our pricing conversation. So I guess, to your point, gross margins are certainly recoverable, some in short term, some in long term. And while that happens, the profitability can be maintained in that range that we have talked about very, very clearly. And the primary levers are the discretionary spend, which we can kind of control and that's what we have demonstrated in this quarter as well.

Sure. That's helpful. Just one more from my side. The unbilled revenue has gone up quite a bit this quarter. Just some color if you could give there. What's driving that? And when do you expect normalization?

Yes. Sure. As you know that once the month gets over, the invoicing happens after the month. And when you are in an accelerating mode, your subsequent month revenues are typically much higher than the previous month. And if you look at the last month revenue of previous quarter versus last month's revenue of this quarter, that's a delta significantly larger than the incremental unbilled. Just to give you some quantification, the actual increase in unbilled is about $13 million, while the quarter-end -- month-end revenues are actually higher by about $17 million. From aging perspective, 95% of this is within the payment contracted terms. So I would say that this unbilled is just a reflection of the scale of growth. And as this -- as the period goes, we will bill them, and it will move to the billed category. Overall, on a DSO basis, if you look at it, unbilled happens to be 35 days out of the 61 days of DSO, which is pretty much in line with what we have seen in the past as well.

We'll move on to the next question. That is from the line of Sandeep Shah from Equirus Securities.

Congrats on a very great execution, both on revenue and margins. Nitin, it's good to hear about the pricing comment as a whole. So just wanted to understand, is it becoming a pricing uptick from most of your strategic accounts [Audio Gap] wanted to understand that -- because at one end, in the industry, there is a traditional portfolio where pricing pressure continues, at the other end, there is a new generation portfolio where pricing increase can be possible. So how these buckets look like for the Mphasis? And what confidence drives us that even despite some legacy portfolio, we are confident to bring the pricing up going forward? So some color will help as a whole.

I think you actually answered your own question. Pricing leverage is a function of what part of the value chain you're operating in. I think I called out some 4 or 5 key trends at the beginning of my presentation. Those are areas where it is possible for us to look at value-based pricing. It is also possible for us to construct some transformation themes like zero cost, where we can actually bundle the run business in a managed outcome construct, apply extreme automation and then find the savings to deploy back into the change in the transformation programs. Those are turning to be fairly popular with at least a number of our engagements where we are able to help the client find the money to apply into transformation and hence increase the size and scope of what we do. I think on a pure run the business or legacy portfolio basis, you're right, there is pressure on those costs because that's a leaking bucket and will continue to actually be the leaking portion of tech spend as the spend migrates with this new mode of consuming everything on demand. So I think the blend -- on an overall basis, we do believe that we have the ability to continue to improve our pricing leverage. Of course, as I mentioned, we are working very closely with our engagement teams and our clients and making sure that we're able to right price all our engagements.

And just on deal pipeline with a great closure of larger deal size, can you throw some light whether such larger deal size or mega deals are still in the pipeline or pipeline now has a more mix of small to medium size? And second, on BPO, this time also, the revenue growth has been robust. So is it driven through digital? Or is it outside digital risk which has driven the growth in BPO?

I think first question on -- we've said in the last 3 or 4 quarters that our pipeline continues to be robust, which means, as we've converted almost $1.6 billion into deals won, we've continued to actually add new deals to the pipeline. And as always, the large deals will be lumpy, but some will be $50 million, some could be $250 million. But the pipeline actually continues to be fairly robust and fairly healthy and fairly broad based across the sizes of deals as well. Of course, we'll give you more color as we get through the next 2 or 3 quarters. On the BPO revenue growth, I think some of it is, as I mentioned, over the last -- I think in FY '21 third quarter, we talked about the fact that many of our deals are actually bundled, where we are able to find operating levers to apply automation on the business process, apply the whole customer journey map, adviser workstation and digital interventions. So in a number of ways, it is led by digital transformation. I think the DR portion has been fairly stable given that most of the volumes that we saw increase happened in FY '21. So I think that portion will continue to stay stable. But broadly, the BPO's growth is really driven more by transformation projects that are bundled along with many of our large deal constructs.

Okay. And just last bookkeeping question. Manish, I wanted to understand in terms of the ForEx hedge gain in the revenue line, will it be a tailwind to the margin in FY '22 versus FY '21?

So at this point in time, we ended the quarter at INR 74.3 average, and at least for the -- given our hedge policy of covering 100% for the next 4 quarters and progressively reduce percentage over the next 4 quarters, the forward premium that we have is higher than what we currently are experiencing. So we do believe that if the exchange remains at the levels at which it is, we should see some tailwind on margins, at least for that 4 to 6 quarters period.

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

Congrats on very strong execution and very healthy deal intake number. Two questions. First of all, the revenue mix. Is our revenue mix still towards more new-gen business? And we -- as you commented about value-based pricing program, do you think structurally our margin will expand over medium term, considering these 2 factors where your new gen is growing and you have some ability to price it better? Second question is about, can you provide some update about how the Blackstone companies as a portfolio doing for us over, let's say, last few quarters? And the third thing is about the headcount addition. How we are managing our overall resource requirement, [ campus ] versus lateral. If you can provide some color.

So Dipesh, on the first one, I think I actually reiterated the philosophy when I talked about the pricing discussion. Firstly, our attempt is to maximize growth, maximize TCV wins and, more importantly, TCV conversion to revenue growth. And that requires a certain investment, both in capability, competency buildup, utilization, having the right talent, all of the above. So I think we will prioritize growth. And the reason we want to hold the margin in the band is because there will be puts and takes that will require us every quarter to adjust up or down some of these investments. So I think pricing is -- at this point in time, at least, we are seeing it as a hedge against some of the inflationary pressures. But at this point, our expectation is to continue to operate in the margin guidance that we gave. And of course, there is -- there will be, as I mentioned, based on specific quarterly movement, for example, in Q1, we had unexpected COVID issues. But I think we'll continue to operate in the guidance range that we gave but prioritize for growth. Second question that you had was around Blackstone portfolio. I think we -- again, it's very much part of our direct business. It continues to be a fairly strong contributor to pipeline growth as well as TCV conversion. By definition, of course, those are companies that are not the size and scale of some of our larger accounts. But as a cluster, that is definitely very, very valuable to us, and we'll continue to invest and prioritize on that growth. Not only Blackstone but all the other stakeholders that we are now working with will sit in that bucket. We obviously made a lot of investment in creating a go-to-market approach and making sure that we have the right setup for us to service those customers. We'll continue to give you update as we have any. Hopefully, there will be some more specific updates. I think it's a little premature for us to talk about some of those at this stage. And finally, I think on the supply side, we are taking a supply chain approach. It's a blend of, of course, campus recruitment as well as lateral recruitment. And not to forget the third leg of the stool continues to be a talent transformation program called Talent Next. The additional thing we've done is we've added new supply centers. If you remember the last quarter, we talked about addition of our delivery centers in Taiwan. Actually, we expanded that significantly. Mexico is a new center. Costa Rica is a new center. Estonia is a new center. And we just announced -- we actually expanded in the U.K. for a specific client project outside of London in a city called Leeds. And we also announced a program to actually apply talent transformation and attract the talent pool from Calgary over the next couple of years. So I think all of these are supply chain initiatives as well as expansion in some markets like U.K. and Canada. All of this kind of goes into solving the puzzle for finding the right talent for the right job in the right market at the right price.

The next question is from the line of Amit Ganatra from HDFC AMC.

I just have one question. So now DXC is a very small proportion of your overall top line, and anyways, the other business segments continue to do well. So how long before you can now confidently guide that you will have industry-leading overall top line growth and not only the direct core growth?

So Manish, I think the answer to that is that as we have any update, we'll give you. I think at this point in time, let's just stay with the fact that we expect industry-leading growth in direct, which is now 89% of our revenue. And we still expect top quartile growth in the overall company. Where we end up with FY '22? Again, we have 3 more quarters to go. But I think it's only fair given the current position that we will give you outlook based on our current visibility. So I think that's the best guess -- visibility I can give you at this point in time. Having said that, I think, keep in mind that we have seen accelerating growth in direct, and that has actually really helped us mitigate -- and in many cases, we were able to actually take dynamic calls on where we want to invest and what segments we want to grow. So it's great -- as we try to manage the balance of the portfolio, it's great to actually have the optionality of making sure that we are able to grow in strategic chosen areas. And that's the philosophy that we'll continue to follow.

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

Manish, just one question on the margin trajectory for the rest of the year. Like, are you guys -- given the situation on the attrition side, are you guys planning some onetime correction or wages in one of the quarters? Or do you think the margin trajectory for the year should be quite similar to what we have seen in the past years?

Given we saw the increased demand and the supply situation and this being a year of execution, while we had a northward bias to our margin, we felt it prudent to keep it in the range of 15.5% at the bottom. And we want to make sure we continue with our philosophy of investing for growth and capture the opportunity for that at this point in time. We would like to make sure that we -- or rather we believe we should be able to sustain the margins in a narrow band and try and maximize from a growth opportunity perspective. As we talked about the investments that we made last quarter, and we managed to still deliver consistent margins by managing the discretionary spend, I would say that sustaining the margins is something that we will certainly be able to do during the year.

My specific question was, like, generally, first half versus second half, you had a different trend, of course, in FY '21. But before that, we used to have better margins in the second half because most of the things used to happen in the first half. So from a second quarter specifically perspective, you are saying there is no specific correction that you'll see in 1 quarter or something, it will be the way it used to happen for Mphasis spread across the year. Is that correct?

See, the good thing from our model perspective is, the compensation increase is baked in on a quarterly basis given the philosophy of that being linked to the DQ score, which we talked about extensively in the last quarter's earnings. So we don't expect a lumpy one quarter big impact because of that. And at the same time, the tailwind that we will have on the margins, how much of that will flow into the EBIT will depend on our desire to continue to invest and plow back some of that to the [ SE ] expenses. And if we still get some tailwinds and the whole supply situation becomes better, both in terms of COVID as well as in terms of availability of talent, then it may see an northward bias. But at this point in time, based on what we see, we think it will remain in a narrow range.

Understood. And second was on the M&A side. I think a few quarters back, we were talking about expanding some presence in Europe. So is there an upgrade there or how you guys are sort of approaching this whole thing of increasing...

I can take that.

Sorry, Nitin.

Yes, I can take that, Manish. M&A is not just a Europe issue, to be honest. I think it's a multifactor metric that we are working with. There is a competency element. I think we've talked about strengthening some of our tribes. Some of our tribes are market leading, some of them need more investment. And some of that acceleration can happen through M&A. For example, we did DevOps strengthening through Stelligent. We did data tribe strengthening through our acquisition of Datalytyx in November. And we've identified a few more areas as well as prospects that we are actively looking at right now. Second element is customer acquisition-driven. There are segments of verticals or clients that we don't operate in. We have a very clear identification of which segments are attractive to us, and we have that on the list as well as on the search process. And thirdly is geography. I think if you can find something that helps us accelerate growth in a new market, we'll definitely look at it. But there is really a combination of these 3. If we can find something that cuts across 2 out of 3 or 3 out of 3, that we'll get prioritized. And that's the philosophy we are taking. Very actively looking, very actively diligencing businesses and very actively continue to source new transactions.

So we should expect something in FY '22, is that a fair estimate?

It's not done until it's done. So it's hard for me to give you certainty on that, but the intent is definitely there.

Anything on size, how big or small could it be or any comfort range that you have while looking at these targets?

We talked about some indication in the last quarter. We said we are not looking to do transformational. It's not about doing a mega deal. It's really about looking at -- still the mindset is a little bit, I would say, strategic stroke tuck-in. Truck-ins are a little bit smaller. Strategics are a little bit bigger. But I would say anything that is sub-10% or 15% of revenue is probably the upper limit right now.

The next question is from the line of Vikas Ahuja from Antique Stockbroking.

Congrats on a very solid quarter. I have 2 questions. First, deal bookings continue to surprise positively. Just wanted to understand what has changed exactly? Or what are we doing different that our bookings are much stronger than compared to our peers, especially? And secondly, on DXC, the revenue has been declining, and now last quarter, you said it will end up around mid-single digit. My question is, DXC has been comprising continuously on the negative side. What gives us confidence now that it will actually end up at mid-single digit and they will not exit it completely?

Yes, I think on the first question, I actually spent a considerable amount of time going through the -- what works for us and what's the success formula that is actually working and giving us these larger deals and bigger TCV deals. If you kind of go back to the earnings deck that we presented and look at the slide that talked about the 4 ingredients on Slide 12, that's really a culmination of all the work we've done, all the deal archetypes we've constructed, early engagement with clients, consulting-led, tech advisory-led group, repeatability of our go-to-market muscle. If a deal archetype works in one customer, it can be replicated to the other. And most importantly, our mindset of being in the business of one, which means every customer gets a fairly dedicated engagement personalized kind of mindset. That helps us contextualize, understand the client environment and then position for maximum impact. On your second question around DXC, of course, there are no guarantees. No customer has given any guarantee. We have to continue to work to kind of win that business. I mean based on our understanding of the accounts, the relationship, their needs, our ability to help whether in industries or in geographies, we do believe at this point in time that we will have continuity of relationships. As and when things evolve and if things change, we will give you the update. But I think that's the best answer I can give you right now on our visibility. Of course, as I mentioned, right, if things change, we will update you. There are no guarantees in business. We have to earn every day.

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

Congrats on the very good set of numbers. My first question is on the Logistics and Transportation, the gross margin that we gave in segmental info. There we have been recording significantly stronger gross margins in Logistics and Transportation. So what is the reason for that? And is that sustainable?

I think, again, every client environment is different. Every industry has its own different dynamic. Competitive intensity, value pricing we talked about, some of those things are at play here. So I think this is not something new. It's historically been true as well. And we do continue to believe that as well as we keep feeding growth into that segment, we'll have the ability and the leverage to continue to generate good margins there.

And the second part is on the Orders that we report, so is there any segment significantly big enough there that we would want to break out that segment out from it?

We made certain changes to the segment reportings. I think we still have some more work to do as we expand some of these segments. We talked about 5 focus areas on the NCA side. We are right now clubbing many of those in Others. We will start reporting it separately as we believe we get to a point that we need to start reporting. I think at this point in time, these are good visibility areas for us to give you.

The third question is, one of the participants earlier asked this question, but I'd like to frame it a bit differently. On the supply side, what we are seeing from the industry, there's so much of issue regarding attrition and wage inflation and everything. We have typically, over the years, been giving salary hikes over the entire duration of the year, and there's no one single quarter where this impact. But at this time, are we planning to do it a bit differently? I think there would be a salary hike related to normal [ upskilling ] as well as we would give some -- one-off salary hikes in any particular quarter just to retain employees?

I think that's a good question. We debate that constantly. And I think as part of that periodic adjustment that we've talked about, we always have some discretion in how we want to play that, how we want to spend that, so to speak, retention pool. So I think we'll continue to make those decisions on a pretty dynamic basis, on a judicious basis. I think I have a little bit of a different approach and view to this demand supply dynamic. I think we are -- as an industry, we are in the business of creating net new skills. We exist because clients expect us to bring skills to them. They expect us to bring a lot more than skills today. But at the very heart, we have to continue to find ways to create new supply chains. And I think I talked a little bit about how we've expanded that across locations, across geographies, across tiers, across experience levels and across cities, and I think we will just continue to do that. And whatever it takes in the interim to keep customer service delivery at the heart of everything we do and make sure that we are able to retain, retrain and onboard new talent. I think all of those are part of the equation.

Okay. And the final question is, if you can please repeat the 11 to 20 customers' growth in the current quarter sequentially as well as year-on-year. I missed that number earlier.

Sure. I think the 11 to 20 number is 19%.

Year-on-year?

Yes -- not -- trailing 12 months.

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

Congrats on a good set of numbers. Nitin, one question in terms of -- we've done pretty well in the top-10 accounts, and now we are seeing a broadening of that growth, let's say, 19% growth in your top 11 to 20. So if you can just give some idea on the next set of clients, their profile in terms of size, scale as well as potential to drive continued improvement in terms of deal flow going forward.

Absolutely, Ashwin. I think the profile of customers is actually not that different because if you're would recall, most of our clients -- I talked about the fact that we now have top-10 U.S. banks by assets as customers. We had 5 of them 3 years ago. So those will, obviously, not be sitting in top 10 already. That's a good example of what potential exists outside of top 10. I think by definition, we are obviously a little bit more tilted towards the Fortune 100, 200, 500 client segment anyways. So that's where I think the opportunity is really, really immense. We have the playbook. We understand what it takes to create that being in the business of one mindset. We operate with a very high client-centricity mindset. We invest in engagement and understanding of the client priorities, and we take the best of Mphasis through our tribes and engagement teams in there. So I'm actually very excited that we have a tremendous group of customers outside of top 10, but I'll just say not just the top next 10 but the next 25 to 30 that actually can definitely be target-potential areas for us to bring into this -- into the client metric that we've talked about. The reason we now have 4 clients over $100 million, 7 clients over $50 million and the fact that we've improved every segment or metric is really the playbook that we will just continue to apply at scale. And that's really what I think we are very, very focused on from an execution standpoint.

Fair. And just one more. In terms of, say -- do you see an exercise of that MRC shortfall-related penalty clause in DXC near term? And could that be a onetime benefit for us in terms of margins near term? Or we would still think about smoothening the decline here instead of going in for that penalty?

Yes. At this point, I would refrain from making any comments or confirmations because it's just -- we want to just make sure that we have all the optionality we need as we think about those things. So we'll give you an update as we go through the next in a couple of quarters.

The next question is from the line of Ashok from SUD Life. As there is no response from the current participant, we'll move on to the next that is from the line of Rishi Jhunjhunwala from IIFL.

Just one question. Given that we are seeing a pretty sharp decline in DXC for the past 4, 5 quarters, I just wanted to understand a bit in terms of how do we manage the supply side there or the headcount, right? Because if you really look at that, DXC is largely a non-BFSI portfolio. So just wanted to understand the fungibility, does that help? How do we manage supply there? And is that -- does that have any bearing on margins in the near term?

Absolutely, Rishi. Great question. I think there is -- there are 2 ways to think about it. There is some potential for us to redeploy. There is extremely high complexity in matching those ramp-downs with ramp-ups. And in many cases, we actually have to run them through the Talent Next program with that visibility in mind. So I think it's a complex equation that we have to manage. That definitely has a bearing on many of the metrics that you see in the MD&A. For example, you will see a decline in ITO business. You will see a decline in some elements of our verticals. So some places we do have fungibility. In some cases, we use that as best as we can. [ On our part ], our first effort is to make sure that we are able to run them through our reskilling programs and absorb them. And that's one of the reasons why you will see, on a net addition basis, we are still -- while the numbers are going up, we are still able to actually reuse and redeploy some of those people. To your question around margin impact, yes, that has some impact on holding cost or utilization because it's impossible to match it on a day-to-day basis. But that's something that we've made part of our management metrics, and we have to continue to focus on those on a daily basis.

Great. And secondly, on the deal wins, right, given that the quantum has increased substantially, can you give some color on how the average tenure has moved over the past 1 year and also if the large landmark deal that we had won has already started giving revenues in long-term?

Rishi, I think the average tenure -- I mean, we haven't put that number out publicly. We obviously are tracking it internally. If you look at the metric of the $96 million average deal size, that obviously is also impacted by the fact that the large deal was actually a 10-year deal. That's probably the longest deal we've actually signed in the history of the company. But most -- on an average basis, our duration definitely has moved, I would say, closer to the 2- to 3-year mark. There's always a blend. There are some deals that are more shorter term, less than a year, depending on the type of work we do, but there are many that go in the 3-, 4-, 5-year catalogs. So I think it's a very good, I would say, reset and capability reflection that we're able to actually do larger, more transformational deals that run longer as well.

If I can just add to that, Rishi -- Manish here. While there is an increase in the number of large deals and the size of large deals, and we are winning significant amount of TCV, the tenure is not increasing very significantly is also reflected in the fact that when you see the correlation coefficient, which we have been reporting, that has actually shown an improvement in terms of year-on-year, which means we are converting the TCV to revenue in a better manner than what we were doing before.

Yes. I think the only other question that you asked, Rishi, is the large deal conversion. I think we talked about the fact that we are going to be in transition in the current quarter, and we expect that to start converting to revenue in Q3 onwards.

The next question is from the line of Sulabh Govila from Morgan Stanley.

I just had one question. So on your top-10 client base, where we've seen a significant growth this quarter, Nitin, you touched upon client mining and market share gains, particularly in the strategic accounts that we've seen there. So just wanted to understand that where we are in that journey of these vendor consolidation exercises. And how much do you think has played out already in the numbers there?

I think the fact that we're able to grow all of our top accounts over $50 million, there are actually top 7 accounts, so to speak, and the fact that you're still seeing 6 to 10 grow dramatically faster than 1 to 5 or even 1 to 10 is reflective of the fact that we are on the right side of the consolidation, especially in our strategic accounts. Secondly, I think, as I mentioned earlier, we definitely feel there is runway ahead from this investment cycle that we are seeing in tech. It's not a short-term phenomenon. So there's definitely going to be -- as long as we have the right set of competencies and we make sure that we continue to invest in those, I think there is a runway ahead for us to continue to gain wallet share in those accounts. Of course, we are very focused on the rest of the pyramid outside of the top 5 to top 10, as I just mentioned, because I think that's where we are [ seeding ] these accounts to actually become another $20 million to $50 million to $75 million to $100 million accounts, in that sequence, as we progress them to the conversion. If you remember, I actually talked about conversion rates because that's something we measure very, very closely.

The next question is from the line of Ashok from SUD Life.

This is Hasmukh from SUD Life. Congrats for the good numbers -- consistent numbers on the direct side. I have one question on the DXC front. Just wanted to dig slightly deeper on the revenue leakage here. So let's say, in terms of what type of work is being getting transferred? Or is it a lower margin business for you and it is being transferred to any other, let's say, Indian vendors or DXC wing insuring it? Any color on that front will be helpful.

Again, at least to our knowledge, we don't think this is a wallet share issue. I think it's -- for us, what we are doing really is continue to focus on where we think there's opportunity for us. And I think the life cycle of those businesses is different. And we'll continue to -- as I mentioned earlier, [ from ] where we think, there is best use of our growth investment in dollars. The relationship continues to be good. We know there is opportunity, but we'll continue to focus on where we think there is best, as I said, use of our strategic focus.

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

Thank you, operator. I think, again, we've had a great start to FY '22. Thank you all for your questions, your patience, your interest and your coverage of the company. We look forward to staying consistent with our performance and continue to keep our clients and our employees at the heart of everything we do. Thank you very much. Stay safe, and we'll talk to you next quarter.

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