Mphasis Limited (526299) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Mphasis Limited Q3 FY 2022 Earnings Conference Call. Please note, the management would be showcasing a presentation that is available on the webcast link shared in the invite as well as on the Mphasis website, www.mphasis.com. [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.

Thanks. Good morning, everyone, and thank you for joining us on Mphasis Q3 FY '22 Results Conference Call. We have with us today Mr. Nitin Rakesh, CEO; and Mr. Manish Dugar, CFO. Before we begin, I would like to state that some of the statements made 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 Q3 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, everybody. Happy 2022 to all of you. Thank you for joining our earnings call this morning. If 2020 was a year of resilience and accelerated digital adoption. 2021 was a rollercoaster with great business momentum, yet the year had its dark moments. As a leader, which has also been a year of many personal learnings and tectonic shifts, some of them being: The employer employee relationship has changed forever with the future of work that will be very different, requiring a very different engagement model as well as a very modern take on management. Mphasis recently announced a hybrid first work model, where work from anywhere collaborated in the office as the core team. We will continue to embrace this hybrid model in active participation with our clients. We are also reconfiguring our office workspaces where possible to create collaboration work spaces to foster the culture of collaboration with clients as well as within our teams. Secondly, [ empathy ], inclusion and ESG are here to stay, and we must continue to reinvent every power of our value chain to be able to become more inclusive and diverse, starting, of course, with diversity of thought. The past year highlighted beyond all doubt the importance of making a business resilient to weather any storms that come our way. Building this tenacity, sustainability and social responsibility has always been the foundation of Mphasis. Our efforts are underpinned by a fourfold approach aimed at reducing our environmental footprint, building sustainable supply chains, inculcating our diverse and inclusive professional culture and adhering to the highest standards of ethical governance as well as leveraging the power of technology for solving societal challenges. I'm happy to report that Mphasis has moved up from 37th to 69th percentile year-over-year in the S&P Global's Dow Jones Sustainability Indices, Corporate Sustainability Assessment Annual Review for 2021. We showed major improvement across all areas, environment -- governance. The company's scored high in the corporate governance areas of code of business conduct, privacy protection practices, Board diversity and identification of emerging risks. Human capital development and talent retention are categories under social performance was scored high. Mphasis climate change strategy as well as management of Scope greenhouse gases has also scored well above environment-related performance criteria. Being early adopters of renewable energy, we have set a year-on-year target for the reduction of energy consumption and carbon footprint. And finally, acceleration in take option is a great tailwind, but it brings with it a higher risk of [ obsolescence ]. Metaverse, crypto, such as decentralized finance, also known as DeFi, NFTs, AI and so on. This is something that will continue to push the boundaries and 2021 has turned out to be a breakout year in terms of these trends, much sooner and much bigger than expected. As 2022 is kicking in, clients too are increasing focus on investment to counter with startups in NFT and DeFi space, especially. For example, the CEO of 1 of the largest banks just announced a huge tax spend increase to be Fintechs. This is not an isolated incident. Today, we also announced a partnership with CrossTower, one of the world's leading crypto exchanges to build the COE, a Center of Excellence focused on Web 3.0 and the series of blockchain based products that will be launched and traded on the CrossTower platform. The partnership between Mphasis and CrossTower will accelerate and scale the Web 3.0 talent within Mphasis providing new avenues of application of innovative blockchain-based solutions in public and private industries, including financial services, supply chain, health care, life sciences, insurance, logistics, retail and so on. Moving on to our performance. Our direct business growth continues to accelerate on a larger revenue base. In the third quarter of FY '22, our overall gross revenue was $414 million, which represents a dollar growth of 7.5% sequentially and 24% on a year-over-year basis, and 7.8% sequentially and 24.2% year-over-year in constant currency terms. This is a quarterly decade high annual growth. Direct segment continues to power our growth, growing 9% sequentially and 26.1% in constant currency terms. On an organic basis, direct has grown at 6.3% sequentially and 32.4% Y-o-Y in constant currency terms. The trajectory of our direct annual growth is consistently rising with Y-o-Y growth dropping 30% of the third straight quarter. Year-to-date, direct growth stands at 33.5% Y-o-Y in constant currency. This is the highest recorded Y-o-Y constant currency growth for direct in the quarter. For the first time, Direct's absolute quarterly revenue has increased by use of $100 million on a year-over-year basis. The contribution of direct is 93% continues to rise, and we continue to prioritize our growth and investments in the Direct business. This showing has helped us manage the decline in the basic channel. The contribution of which is now reduced to 5% already. DXC revenue declined 10.4% sequentially and 49.2% Y-o-Y in constant currency terms. This is in line with our guided commentary of DXC dropping to within mid-single digit as a percentage of revenue by end of FY '22. Given the overwhelming contribution of direct to our business, which now exceeds 90%, we expect that our overall revenue growth will continue converging with growth in the Direct business. Geography-wise, all our markets fared well. Our core markets, the U.S. grew 36% year-over-year for direct. EMEA grew 26% year-over-year, and our pipeline in Europe continues to be strong as well, especially with new clients. And as mentioned before, we continue to expect this region to be a growth driver beyond FY '22. From a service end perspective, Application Services, our largest service offering, grew 39% overall and 55% year-over-year for the Direct segment, sustained by the teams of digitization and cloud for our transformation of apps. Specifically, I would like to call out our constant growth performance in the Direct business. Market share gains with top 10 clients and beyond have helped drive growth here, growth contribution from our key clients has been consistent, reflecting increasing relationships and share gains. While our top 10 clients as a block has grown at 30% in the last 12 months, what's equally heartening is the consistent growth coming through from the beyond top 10 clients, including new clients, a team that we have highlighted in earlier calls, and we'll double click on that shortly. Thanks to our broad-based success with clients across tiers. -- and our year-to-date consistency, we reiterate our industry-leading growth stands in the direct business for FY '22 on top of industry-leading growth for direct in FY '21, in line with the FY '22 guidance articulated at the start of the fiscal year. With our secular positioning, we are replicating performance in our flagship vertical, banking and financial services in other verticals as well. BFS growth has accelerated to 29% Y-o-Y in constant currency for this quarter, representing the sixth straight quarter of over 20% annual growth. Direct BFS grew 8.9% quarter-on-quarter and 31.6% year-over-year in solid terms. This growth is broad-based across our segments of BFS. We continue to enjoy market share gains with our key banking customers. This quarter also has seen robust growth in the T&T vertical and the logistics and transportation vertical using direct with T&T growing at 24.2% sequentially and 112% year-over-year and logistics and transportation growing at 5.2% sequentially and 35.7% year-over-year. Insurance is also tracking double-digit Y-o-Y growth trajectory. Our client stack reflects this company's position with several top clients post vendor consolidation. We continue to believe that our wallet share gains originate 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, especially in new areas of expand, as articulated in the earlier parts of my remarks. Notably, we continue to see strong growth from the lower half of our top 10 clients, as well as robust growth beyond our top 10 clients. Our top 5 and top 10 clients have grown consistently registering 25% and 30% growth, respectively. On a quarter -- on third quarter trailing 12-month basis, the average contribution of our top 5 clients is $130 million per client on a trailing 12-month basis as well. Our top 6 clients are all U.S. $75 million or plus on a trailing 12-month basis, with top 4 at $100 million plus and we have $500 million plus customers on a quarterly annualized basis. We believe these client-related data points are unique for a company our size. Top 67 clients have grown at 48%. And this repeated much as an average growth of indicates strong growth diversification among our key clients beyond the top 5. Our clients in the 11 to 20 buckets have also grown at 21% with the quarter year-on-year growth for this year, most high at 35%. Notably, all of 7 top clients over 100 -- over USD 50 million plus grew sequentially for the third straight quarter. In short, our strong client performance across the board supports our industry-leading growth in direct. Our new client revenue continues to grow rapidly, growing at 80% Y-o-Y in Q3. We recorded TCV of $335 million of net new deals in third quarter of FY '22. This marks the eighth straight quarter of $200 million plus net new TCV, 1 is included in renewal deals. Our TCV is up 25% financial year-to-date. Despite strong TCVs over the last few quarters, our pipeline is still up suggesting that our pipeline generation engine is firing well. We generate a high percentage of our TCV through proactive deal pursuits where win rates are materially higher than in the competitive RFP situation. As we report our TCV on a net new basis, excluding renewals, we find the correlation between our direct TCV and revenue growth to be high, exceeding 0.9. The correlation is also improving as we are able to substantially retain our deals or some of our renewals. Coming to our client metrics. Our track record in migrating clients from one revenue bucket to the next continues to be healthy. Specifically, our conversion ratio of clients in 1 revenue tier to the next and improving at well over 50%, representing one of the best rates in the industry, as mentioned before as well. Account of $75 million and above at 6 significantly of the 2 new clients in this -- on a Y-o-Y basis. $60 million plus clients now at 7 is up by 2 from the 5 clients we had in this category a year back. On a quarterly run rate basis, we have 5 clients in the $100 million plus bucket. I'm also pleased to report that in this quarter, we have closed more large deals than normal. We have won 4 large deals vis-a-vis 1 or 2 large deals in average every quarter, and this is marked by increasing deal sizes, as the slide indicates. The average deal size on a trailing 12-month basis is $71 million, well over twice what it was 2 years ago. As mentioned, in our prior calls, our large deals are increasingly multi-tower, transformation based and longer tenure, passing multiple products of the digital tech value chain. The growing size reflects this capability evolution as mentioned before. As an example, One of the largest U.S. banking clients entered into a more comprehensive multiyear deal with us to repair the shorter duration contract. This contract is over $300 million estimated TCV with both renewal and net new components. Our Tribe pipeline addressing the change imperative of client back program is up by 7% sequentially and 10% year-over-year despite pipeline TCV conversion of $1.3 billion over the last 12 months. Our pipeline is well distributed among our 8 tribes, indicating our traction across various digital tax back. It also comprises an increasing portion of pursuits and opportunities in smaller verticals. For example, it's encouraging for us to see a pipeline progression in sectors like airlines and health care, nonmainstream verticals for us, but giving us good growth now. Blink in its first full quarter post acquisition has enabled a large number of leads for our core client base. We already have 2 deals, 1 through this, thanks to Blink with momentum building from smooth initial integration. Q3 FY '22 also witnessed the highest ever pressure addition in the quarter by far. In FY '22, we are likely to close with the highest ever pressure addition in the year of over 5,500. This hiring is concentrated in the second half of this fiscal. Over the past few quarters, we have worked through substantially utilizing the internal workforce capacity created by the DXC downsize. With this behind us, we are now expanding in our muscle in campus hiring and have increased our targets going forward. Our improving pyramid together with our initiatives on pricing improvement, subcontractor rehold and other optimization initiatives will provide us cost leverage in the coming quarters. We are also pleased to see scaling up of the digital competencies of our talent with a well-established key learning resource platform, Talent Next. This has seen rapid adoption since its inception 3 years ago. Talent Next provides Mphasis with the skill muscle to enable execution on the next-gen positioning at scale. It's well positioned to develop and strengthen digital competencies of incoming pressures as well. With growing emphasis on obtaining relevant certification, certification to learning participation ratios on Talent Next is also consistently rising. Talent Next identifies the roadmap for employees to higher positions and promotion. Of the record 12,700 plus employees came on Talent Next this quarter, more than 40% of our claim certifications. In addition, we're also aggressively actioning our plans to expand in non-metro Tier 2 cities in line with the hybrid module. Our margin philosophy allows us the flexibility to manage our profitability in environment of rising costs of talent in a heated market. In this quarter, we were able to increase our headcount 8% sequentially with a strong hiring at junior and trainee levels towards capacity creation, which reflects in the higher bench and lower utilization in this quarter. Despite the strong hiring numbers in much larger than usual bench, we improved our overall gross margin sequentially by 60 bps and on an organic basis, 120 basis points. Notably, we incurred RSC and ESOP stock charges in this quarter as well as we executed on our stock ground plan subsequent to our shareholder approval at our recent AGM. Our reported metrics included the M&A-related charges of 80 bps for the quarter. Adjusted for M&A-related charges, operating profit grew 9.5% sequentially and 22.4% year-over-year to INR 4,966 million in Q3 FY '22. Adjusted operating margin instep 10 bps Q-o-Q and declined bus Y-o-Y to 15.9% in Q3 FY '22. This is in line with our stated operating margin of 15.5% to 17%, which remains unchanged despite increased stock and cost as we alluded to earlier. To reiterate, we retain our stated organic operating margin behind despite costs starting this quarter. Our adjusted EPS for the quarter at 20.3% grew 16.4% Y-o-Y. Our DSOs further improved to 59 days, a multiyear low DSO position achieved despite strong growth. This has resulted in record collections. Third quarter operating cash does not fully reflect record collections as there have been some lumpy annual statutory payouts made in this quarter. This will normalize in fourth quarter. To sum up, I will leave you with 3 points. One, our strong direct growth is consistent. And for the third straight quarter, we've grown at over 30% year-over-year in constant currency on an organic basis. Financial year-to-date direct growth is at 33.5% in CC terms. This performance has helped us mitigate the decline in DXC, the contribution of which is now reduced to 5% of revenue in Q3, '22 basis. Secondly, all KPIs are moving in the right direction, namely our growth is getting broad-based to the Europe T&T logistics and transportation, aiding growth in addition to the anchor verticals of BFS and anchor geography of the U.S. We continue to drive market share gains with our key clients. Our client mining metrics across revenue buckets continues to strengthen. As mentioned before, the average of top 5 client contribution is $130 million per client. And our 6 to 10 client category continues to grow well above our direct revenue growth with 48% growth trailing 12 months as was the top 11 to 20 client category also growing at strong growth rates on a Y-o-Y basis. Our robust people addition in this quarter is due to record pressure and trainee intake, which will provide us the pyramid leverage in the coming quarters. Our cash flow generation as a percentage of EBITDA stays healthy. Our DSO position is at a multiyear low despite strong growth enabling record collections in the quarter. YTD operating cash flow is at $147 million, representing over 71% of our EBITDA in FY '22. Thirdly, investing for growth by using operating leverage and operating in a stated target operating margin brand. We believe that our margin stands ensures stability and critical workforce retention through stock incentive plans in an environment of supply headwinds. Both revenue growth translates into sustainable EPS and PAT growth and consistently rising free cash flow generation complemented by improving DSO. In summary, our growth strategy envisages us making sustained investments in line with our continued and activation team along the 4 vectors: geography, expansion, leadership breadth and depth expansion, buildup of digital competencies including by M&A and new account scale up. Together with the increasingly diversified nature of our client base and metrics and pipeline buildup, we believe this will help us sustain the magnitude and drive consistency of our direct growth. Our strong performance in the first 3 quarters of FY '22, the imports of confidence in retaining our guidance for the industry leading growth in direct for FY '22 on top of industry leading performance in FY '21. We also expect to see greater convergence of our overall revenue growth through direct. On that note, I request the operator to open the line for questions, please.

[Operator Instructions] The first question is from the line of Nitin Padmanabhan from Investec.

Congratulations on the quarter on the deal wins. Just a couple of questions. One is -- so good to hear on the pressure additions, I think that's something we were looking out for. I just wanted your thoughts on how we should think about margins considering relative to the industry, we are a little later in the cycle in terms of pressure additions. So do you think that in the near term, there will be some pressure on margins versus -- and then sort of pick up later? So that's one. And second, if you think of all the headwinds that have come through from the acquisition this year, -- What are the one-offs out there that you think will not possibly repeat next year. There are 2 things on margins, and then I had 1 more after that, yes.

This is Manish here. As we had stated earlier in all our conversations, margin for us is something that we want to operate within a narrow band of 15.5% to 17%. And Blink acquisition did translate to some charges because of amortization of intangibles and the retention bonus. We are expecting the impact of that to be near the 1%. As you could see, we have been able to contain it to 5.5% to 0.6%. This quarter, it is at its peak at 0.8%. So taking your second part of the question first, these expenses are going to remain constant or actually reduce going forward in absolute terms quarter-on-quarter. And as the revenue grows, their impact on the margins are going to be lesser and lesser. And as we have indicated in our Blink announcement, this over a period of time will get utilized, and we should get back to our reported numbers, as it relates to the impact of acquisitions. From a stock brand perspective, we just want to call it out saying we have made an investment, which helps us in retention of key talent. Like we have done in pressure hiring. As you would know, over the last 2 years, we have had a significant reduction in our DXC revenues, and that led to a significant number of those employees coming out of the execution, which we needed to kind of retrain and then deploy back, that not only increased the cost as we were training them and maintaining them on the bench. It also meant our ability to onboard pressures was limited to that extent. As that get lesser and lesser and as we are able to now kind of push our pedal on the pressure hiring, we have decided to kind of make sure that we take advantage of that position and build our trainee bench as it was reflected in the training utilization. And going forward, as the impact of DXC costs keep coming down, the cost of redeployment and the fresher tool gets into billability, it will reflect an improved utilization as well as lower cost of execution. So I guess, we will help us in terms of tailwinds that we can then decide whether we will use that for reported improved margins or we will use that to continue investing in growth which is what our stated philosophy has been. As we get to next year, we will give you better visibility to what that range of EBIT margin we should look forward to. However, at this point in time, we believe we have made investments in almost every bucket that you can see from the retention of key talent, whether investing for creating talent pool, which will help us grow at good cost structures and our Talent Next platform, which is where we primarily depend on for creation of talent rather than depending on lateral is helping us in terms of when we look at the throughput that we have got, from what it was before. So overall, I think it's a very positive place to be.

Sure. Perfect. That's helpful. The second one was on the broader deal wins and things. I think we have done very well there. But I just wanted to understand in terms of the -- you mentioned the deal sizes have increased. But can you throw some light in terms of the deal tenures right now? Has this sort of come off a bit? Has it reduced? Or it continues to be in the close to 4-year kind of bracket? And second, in terms of the -- I think a lot of players are benefiting from a lot of short cycle flow of business. Are you seeing that in meaningful measure within our business? And do you think that correlation chart which you have shown, do you think that dot will sort of remain at the higher end of the line? Or what's the second question?

Sure. So I think on the deal cycle deal duration, I think this quarter was an interesting one. We had 4 deals. The largest deal that came from a new customer in our multiyear transformation deal in health care segment. I think that is very interesting to us as well because a lot of the muscle we've built in solutioning deals in other industries are not starting to get applicable in other industries as well. We also have and we mentioned that we signed a large deal with an existing banking customer where the total value of the deal included the renewal of $300 million. So there is a large component that came on and that's a 3-year deal. The other 2 deals that we announced in the large segment are probably much more shorter cycle quick consumption deals because they require ability to deliver product and software in here. So I think for us, it's an interesting mix bag. There is definitely some sense of urgency that is leading to short cycle deals, but they're still pretty chunky. But at the same time, there is also a need for multiyear transformation deals, especially the ones that relate to application transformation using cloud or data platforms we bill, they are not going to get done in short cycle. So I think it's really -- some of them are getting broken into short cycle deals with a multiyear program in mind, but we're still getting multiyear deals in the next year as well. So I think that's kind of the way we are seeing the business develop.

Anything to follow up on the tenures? Versus...

Yes, there is I would say there is a little bit more short cycle deal in the recent last couple of quarters because the sense of urgency was high. But that doesn't mean that there are no longer-term large deals either. So I think the fact that the larger deals is [ 92 million ] was multiyear also means that there are still those 3- to 5-year deals that you can find. But on an average, I don't think the division would have shifted to radically lower even though we are seeing some short burst spend cycles.

We'll move on to the next question. That is from the line of Dipesh Mehta from Emkay Global.

Congrats for very strong execution. A couple of questions from my side. First, I just want to understand how we manage talent supply because if I look our employee addition, we added around 2 percentage quarter-on-quarter billable. So -- expanded 50 percentage. And overall revenue is around 7.8%. But if I look at your utilization, we dip 300 bps quarter-on-quarter. So I just want to understand because 2 percentage organic business headcount addition and 8 percentage and still utilization decline. So if you can help us understand what played out from a utilization perspective. And overall, selling supply management perspective? That is first question. Second question, which I have is about on-site BPO headcount. It's showing steady decline. Was there anything to read with the Digital Risk business there.

Dipesh, this is Manish here. First of all, we explained in our earlier comment, this was our quarter of making sure that we push the pedal on getting freshers onboarded, get them trained and you would see in subsequent slides, in one of the slides that Nitin talked about, how our throughput on balance mix platform has almost doubled. So talent creation is what we are focusing with DXC redeployment behind us. That is what has caused utilization, especially the training utilization number looking that lower. It's an investment which would yield result going forward, both in terms of our ability to scale and in our ability to make sure that we are able to deliver scale at profit. To your question on BPO, as we had mentioned earlier, digital risk business has now been completely transformed in terms of complementary services and a different go-to-market cross-selling to those customers, which is what has got to large-scale clients. What you see as headcount reduction on site in BPO is all the case of the project, and it is not reflective of any specific unidirectional movement either because of interest rates or because of digital.

I had just follow up on both parts. I was referring to utilization ex trainee only. So I don't think it has implication because of fresher addition kind of thing. Obviously, with trainee utilization growth is even higher. But if ex trainee 300 bps decline is there, so whether anything to -- campus sorry.

I would say it's partly investment for growth plan. As you scale accounts, we need to make sure that you give time for the deployment of people. I think it's -- in my mind, it is just an investment so that we can make sure revenues are not let go on the table. It will not to be reflected or seen in any other way.

Manish, if I try to get sense, employee is on anything to do with higher attrition because 2 percentage seems to be lower than, let's say, the way we expect business to grow. And whether anything to read with attrition which might have a little higher than what we might have planned and those kind of things?

Dipesh, most of this, yes, most of this, Dipesh, is really people who have been hired, but they are going through onboarding process. So I don't think this is a linkage to attrition. I think the attrition is back to planning obviously happens in advance as well because we have a pretty decent lead time to plan for that. I think that the combination of the fact that we are, in some cases, hiring ahead of demand. In some cases, people are waiting on for onboarding background check, ID creation. Also keep in mind, this was a follow up quarter so that also sometimes has an impact because what you're seeing is per average utilization will give a different number as well. So I think there is no -- not much correlation between utilization, number ex trainee and attrition, it's really a reflection of how many people do we have that are onboarded and waiting to be absorbed into the equation. I think the same thing is applied to the trainee concept that's clearly under deployment training for billable projects. So I think that will give you -- give us a fuel over the next 2 quarters. So we are -- our dependence on traction will be lower than in the past.

And the last question from my side is, I think you indicated 1 deal, large deal from health care. So if you can help us understand because now we are doing very well on BCM side and now you on high-tech side, consistently. And we are creating new growth engines. If you can provide some update on the health care and other part of emerging industries, how the traction is -- If you can provide some details.

Yes, I think Dipesh that is the reason I provided the detail at the $72 million deal is actually in the health care segment. It's a replatforming deal where we are entering into a contract with a customer with an intent to replatform their core system and restructure the operations that run down the core platform. So the transformation deal that was done over 3 years. And I mean, it's early days. Our health care business is roughly around 5% of revenue right now. We do expect this to be a turnkey deal as we can replicate some of the learnings. I think our pipeline of new logos in health care also is pretty interesting. So we'll give you more update as we go forward, but it's definitely one of our chosen areas, and we talked about it for the last couple of years.

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

Congrats on great quarter yet again. So just a couple of questions from my side. One is, I just wanted to basically understand our growth trajectory going forward for the Direct core business. We were doing really great I think this year, we should at least do kind of growth, which, of course, comes from a low base of last year. How do you see maybe next week quarter standing out? The demand -- I mean, of course, there would be a high base of effect which will come into play. But do you believe that the demand environment is strong enough for us to be able to deliver strong growth going forward as well. I know it's not possible to quantify that in any manner. But is there some objective outlook of the.

So I think I'll give you 2 data points that we can think about as you construct the viewpoint on future and sustainability of growth. Number one, I think Y-o-Y numbers, you may think is skewed still because of low base effect. Remember, we actually only had 1 quarter of decline in FY '21, which was the June 2020 quarter. After the mid September quarter, we had a very sharp recovery. And from there on, we've constantly grown in high single digits sequentially. In addition to that, each quarter this year, this financial year also our sequential growth has been very strong. So I think for us, the constant currency sequential quarter-on-quarter constant currency revenue, organic revenue growth is the baseline that we live and abide by. And I think that has been very healthy, and that should give you a sense of the fact that on a run rate basis, there is a very strong momentum and tailwind. Second data point is on the TCV and pipeline. I think in this business, pipeline is the biggest lead indicator followed by TCV, followed by TCV revenue conversion. And of course, all the other operating metrics come from there. The fact that we closed 1.3 million TCV in the last 4 quarters, the fact that we are still sitting at a pipeline that is 10% higher than this time last year. And the fact that we have a very decent order book position with the strong TCV sold even in this quarter at least gives me the confidence that we have the momentum and the growth doesn't seem to be trading away any time in the short term. If I then triangulate that with the data points we're hearing from customers, where they do expect elevated levels of tech spending as referenced by some of the very public big bank announced partly mentioned an announcement in the last couple of weeks since the start of the new year. That also gives us the confidence that we are in a, I would say, a fairly strong secular tax spending growth environment and should give us the opportunity to continue to grow at a little bit levels.

Not important. That's really happy to hear that. My next question was on the pricing front. So if I were to, let's say, take a cue from the data that the earlier participants have sold, it seems that our headcount addition is significantly lower than our revenue growth. Despite T&M being almost 50% of our revenues. So are we seeing some kind of a pricing positive development in our business. Is there some sign of some semblance of pricing power coming into the -- our business proposals. It might be quite small in as well. But do you think there is something like -- which you are able to comment on right now? And if we have, how sustainable is that going forward?

Yes, I think we -- almost 2 quarters ago, we actually proactively called out the fact that we are seeing pricing leverage and the ability to actually high price the deals, not necessarily having to bid with below market prices. That has continued to play out in the last 2 quarters. And I think the environment currently also is fairly conducive to right pricing. Of course, we cannot do an across the board price hike or overnight basis. So what we're doing really is making sure that we are able to price for value. And where ever we have an opportunity, we can price based on not just pure headcount rate card basis, but create other unique pricing construct as well. So I think the environment for pricing is tailwinded. There is appetite for us to continue to see get right pricing. Of course, we are in long-term relationships with customers. So we will have to continue to do the right thing to ensure that we do price to value and not just price hikes. And I think we've seen good price increases in existing business. As well as on a new business basis. I think it's a good environment for pricing, and we've seen some benefit of that, as you pointed out.

Right, right. If I could just do a bit more on that. Any specific service lines or specific part of business, where do you feel there is more pricing power than the other one?

I think, again, keep in mind, the highest demand for skills will drive the highest between supply and demand. and that's where we have the highest pricing power. So by definition, almost all things is the transformation, whether it happens to be a cloud competency, cloud, public cloud, hyperscaler certified capabilities, ability to apply application transformation using hyperscaler platforms, data, of course, a lot of work is getting done on newest platforms such as Snowflake Salesforce. I think -- that's really where the pricing power is. It's not going to be in maintenance contracts. It's not going to be in testing deals. It's really a combination of where can you find unique solutions, construct those unique deal and then, of course, price them in a way that gives you a little leverage.

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

Nitin, I wanted to pick your brains around both the industries move as well as your move to essentially expand to Tier 3, Tier 4 locations and go where the talent comes from. But do you think this at some point of time helps the industry manage its force much better and thereby different margins in the wake of some supply side segments in general.

Sorry, I'm not very clear. You're asking about going to new locations? Manik, can you repeat the first part of your question? Is it about going to new locations?

Manik Taneja, we're not able to hear you.

Am I audible?

Now you're audible. can you repeat what you said in the first part, you broke up.

Yes. So I wanted to understand from you, given the expansion in Tier 3, Tier 4 locations that thing happened across the industry. Do you think this is a lever that helps manage the cost of talent, given whatever one has been hearing about the salary increases in the last 12 to 18 months.

Absolutely, Manik. I think it's a very concerted effort, of course, at an industry level, but more importantly at an individual company level to go find areas of next tier, non-metro Tier 2, Tier 3 towns, where in conjunction with educational infrastructure that is available, local, state and city governments. And of course, there's a very concerted effort even by the central government to promote this. So I think next new talent creation across the entire value chain is the only way we will sustain this level of growth for the industry. Of course, each company will have a different strategy. We are also following our own strategy that worked for us purely based on the needs that we have in our business. So that's one definite lever that will create net new talent that will effectively over a period of next 3, 4, 5 quarters, start meeting the supply-demand mismatch. I don't think supply/demand mismatch is going to go away any other way. Second lever also is you have to start looking at some global talent pools because that also gives you some leverage because, yes, we can create new talent pools in India, but there is also always need for certain onshore talent. So we are also starting to see what we can do with the locations outside of India, whether it's nearshore, same time zone, we did in Mexico and Costa Rica, we're expanding into Canada. We've done some onshore Europe, we are very interested in looking at what we can do in Eastern Europe, in addition to what we already have there. We've done Taiwan. So I think it's a combination of globalization and going down the value chain in terms of non-metro Tier 2, Tier 3 towns, and that's really, really good news for the long term growth of the industry.

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

I had a couple of questions. So Nitin, you mentioned on Blink Interactive that we won 2 synergy deals this quarter. And this is within 3 months of closure of the deal in -- sometime in September. So if you could throw some light, what went on well for you guys over there? And was this faster than your own expectations?

I think a great question. So this is definitely a high need area. Most of our client base, which obviously is enterprise Fortune 500, clearly is now pivoting towards what the big tech companies have done in terms of customer experience and design. So there was a lot of initial excitement and interest generated by the field. as we announce the transaction. And I think we ended up creating a very long list, prioritized long list of inbound leads to our channels. And it was not a surprise to me that we had two early quick wins and there's an interesting list of plants next to that, that we'll continue to convert. So I think right now, the need for the skill set is high. It validates our acquisition thesis that we will expand our TCV -- sorry, our addressable market, our TAM. And of course, that will lead in to increased pipeline in our TCV reports as well. So I think that's the way it has -- it was -- the thesis was conceptualized and that's the way it's playing out. But still early days, to be honest, it's only been 3 months. I think we have a lot of opportunity still ahead of us. Scaling that talent is not as easy as scaling some of the other parts of our business. So there is a very concerted effort underway in terms of how we can actually create more scalability in that talent pool without diluting the quality of work. And at the same time, we are diluting the brand that Blink had created in the market over the last 20 years. So I think it's a good place to be in, very pleased with the initial success because it's important to create early wins because that creates more momentum for us for continued growth.

Got it. Got it. And then the other bit is on the growth within the segment. So applications growth versus BPO and ITO. So BPO and ITO are clearly lagging the applications growth. So if you could highlight the nature of business there and the mix of new gen services versus applications.

Yes, I think bulk of it, again, it's 1 partly by design, partly by the demand pattern, the bulk of the growth is in applications, whether it's net new app dev or very large projects coming out of application transformation, migration of data platforms, restructures and migrate to cloud, whether it's or Azure, restructuring our legacy platforms away into, cloud, private, public, hybrid, I think that's really what's driving a lot of that growth and pipeline as well. So again, not a surprise, I think very, very linked to the trial construct that we created. And I don't expect that to change dramatically going forward as well.

Okay, sure. And 1 last bit for me is if you could highlight on the attrition rates, where are they for you directionally versus last few quarters? And any, dimensions that you planned.

I think they're still elevated compared to historical level. I think on a -- I would say, in the very short term, they are probably stable at best, but they still continue to be elevated. We do expect that with some of the actions we just announced whether it was from a stock brand perspective or overall engagement that we are creating through our new work for future employee value proposition. And of course, the quality of work that we are giving to the team, we will potentially see improvement. But , I think we are undertaking all the initiatives and so we broke out all the supply chain and talent initiatives in a little bit of detail this time. But my expectation is that this situation will improve as supply catches up. And of course, as we continue to invest in understanding what this new workforce model will deploy.

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

Nitin, just wanted to ask, as we scale up, we are also scaling up our average TCV win each quarter. So last year, we were between $250 million, $275 million net quarter. Now this year, we are comfortably above close to $330 million. So do you believe pipeline is enough and our efforts are enough that these numbers with the scale-up will continue to keep up, and that will help us in terms of the momentum in terms of sustaining the growth year after year?

I think by definition, large deals are lumpy. It is -- in some quarters, we have gone on projects like this one, we had 4. So it's hard to kind of give you a number. But I think the average trajectory in the first 9 months of the year, we've seen 25% growth in TCV sold. I think, again, I will guide you back to the data that we gave on the pipeline. As soon as the pipeline continues to stay strong, which means you are originating deals, we are creating new opportunities and you are pricing them and you're winning as many as you can. That will give us the best [ reindicator ] for what will happen to the TCV in every quarter. We typically don't target a number every quarter. I think it's really what percentage of the pipeline can we convert and how many more deals can we bring in. So I'm very, very focused on making sure that the pipeline continues to grow, and the conversion rate continues to be strong. I think that's the only way we can manage it.

And you said pipeline is up by 10% Y-o-Y, right?

Y-o-Y, despite the $1.3 billion of that last year pipeline having been converted in the last thing in 12 months. And it's also up about 7% sequentially. So I mean, keep in mind, the trajectory of both pipeline and TCV.

Yes, yes. Great. And just on DXC. As you said, the target was to achieve at mid-single digit. We are already there. So do you believe worst is getting behind in DXC where most of the remaining business is more sticky annuity based, where further decline may not be that big?

I think again, a directional. Yes, I just take one then I hand it to you. I think directionally, we just said, given the trajectory we were seeing in direct end of FY '22, we think it went into mid-single digits. So I think, of course, direct growth has -- and of course, the Blink acquisition helped there as well. So we've achieved that 5.4%, 5.5% number this quarter. Again, I think we will probably -- we are already seeing a little bit more stabilization compared to what the percentage decline was on a sequential basis, early part of the year. But I think all I can tell you is the focus for us really is to preserve as much as we can, but focus on growing direct as fast as we can. So from that perspective, I think directionally, the growth will still really, really come from direct.

Just to add to that, I think the comment that we had made earlier that MRC is not the end of it and obviously, this new relationship that goes way beyond that. So this quarter revenues reflect that. However, given it's not an investment category for us and Direct is delivering what we aspire to, it will continue to mean that mathematically, DXC will become lesser and lesser as a percentage.

Okay. Okay. Okay. And whichever DXC-led clients are coming off because of the decline in the business as a whole, contractually, we are allowed to tap them directly or we may be restricted to do that. And if we do that, are we gaining traction out of that as a whole?

That's a question that I would like to keep away from going into details. We respect the relationship. We want to make sure we do right by every client relationship directly or indirectly. And I think we have followed that protocol really intently over the last many years in the relationship because it's just -- it's not in our DNA to really violate any principles that what's in the contract. So I think -- That's a question that I would like to just avoid I have made a question on.

No, no, fair enough. And just last question, Manish, this EBIT margin of 15.5% to 17% is, we are talking about organic margin, excluding Blink, right?

That's right. The guidance was 15.5% to 17% before we did the Blink transaction and Blink was expected to cost about 1%. We are currently at 15.1% with the Blink charges and without that we are at about 15.9%. So that's how we are calling it well within the change.

The next question is from the line of Mukul Garg from Motilal Oswal.

Nitin, I think it's quite heartening to see the broad-based client growth which you have had this quarter. But I just wanted to narrow down to your key BFSI client. You also hinted earlier about the increase in tech budget, which they have announced. If you can just help drill down to, a, whether you have already started seeing some benefit of that come in your relationship with them? And b, how much of your business comes under their run the bank or change the bank category? And how do you see the potential gains flow down to you?

So I think without going into specific client relationship, all I'll tell you is that for the third quarter in a row, we had sequential growth in all top 7 clients that are over $50 million. So by definition, that should tell you the answer to what you're asking me. We have definitely seen benefit coming out of the expanded tech spending. We do very little run the business type of work. 90%, 95% of it is really all change related primarily given the fact that, that's where the find is. And that is where they would like help. Otherwise, many of our clients have their own large teams globally, and they wouldn't really need us if all we could do was execute day-to-day business. So I think the focus really for us is to be thought partners, change partners. Our focus is for us to make sure that we are able to give them capabilities that they're looking to acquire new, new platform builds, new transformation projects, new modernization and this is not just for 1 client, that's across the board. And just that's the nature of the strategy that we followed with the Tribe construct. So I think we are seeing, of course, very strong share gains across all top 7 customers. That's the reason why we're seeing that level of growth the top 5, top 10 and top 20 as well.

Sure. And maybe another way to ask this is, if you look at the commentary, which is coming out of big banks in U.S., do you expect that to kind of migrate down to other institutions as well on the -- in the banking space and this spend to materially jump or increase going forward as the competitive intensity kind of runs through the whole spectrum of the banking ecosystem. And naturally, that should help us accelerate our growth there.

Short answer is yes. It's not just in retail banking. It is in payments, retail banking, wealth management, asset management, stock broking, almost every segment is going through a very significant reinvestment secular trend. I mean if you just look at the value that has been created with the new age exchanges and the new age trading platforms, -- That's really, really putting a lot of pressure on making sure that everybody in the ecosystem is able to step up and invest. Now by definition, dollar amounts for large banks are much larger. So that's where the bulk of the incremental dollar spending is visible to us. But that doesn't mean that this is not going to circulate down to the next 10 or 20 financial institutions. And that's why one of the heartening thing for us is in the NCA reporting business. A lot of that growth is actually coming out of banks that we have acquired in the recent last 12, 18, 24 months in financial institutions, asset managers, wealth managers, that entire cohort is actually growing very, very strongly for us on the new business side as well. So I think very, very pleased with the shape of the client pyramid. Very pleased with the fact that we have some very strong names in that mix. We gave out a breakup of -- in the last earnings call, how many Fortune 500 names we acquired, you can assume that definition of 50% of our business is banking, 50% of those names will also be from that segment. So I think it's really a broad-based approach to spend growth. And the announcement we made earlier today around setting up of Web 3.0 blockchain COE with a crypto exchange also goes further in capturing another spend area that is beginning to pick up because every large bank is starting to build infrastructure for actually managing this opportunity for their customers.

The next question is from the line of Nitin Jain from Fairview Investments.

So my question is regarding the deal win. So it seems to be playing out a little differently from us. And by different, I mean, positive difference. Like we've announced 4 large deal wins this quarter. So I want to know what we are doing differently from the industry that we are still able to garner a good number of large deals. And have we started tapping into Blink's Fortune 500 clientele?

I think what we're doing is really -- I mean we have been very consistent on a -- with making sure that we are taking the deal that work in one customer to the next customer because there is a lot of repeatability in those transformation constructs that have been created. I think we gave out a detailed explanation of the fact that we are not waiting for clients to define the problem. We're taking a very proactive approach using the Tribe construct. Then investing in the customer to understand what their strategic erection is and how we can align with that and really, really then creating a very high-quality delivery infrastructure that delivers to development. So I think high tech -- high trust is really the way we think about creating a client relationship. And that really is the reason why the client metrics on the client pyramid have also improved. So I think the real secret -- is in execution, but also is in building competency and leading with capability, design architecture and engineering, which I think is need of the hour. And that's a call we took 4, 5 years ago, and that's saying this in today. At the same time, we are also looking around corners to see which other areas to keep investing in. And just another time, I'll remind you of the partnership we announced with . I think it's a combination we're manifesting.

Okay. And just a follow-up on that. So when can we expect it to start reflecting in the margin. So because last 2 quarters, we -- I know -- I mean, discounting the Blink acquisition, -- We don't see the positive leverage playing out in terms of margins. So any comment on that?

So let me just give the math for you again. 15.1% reported, 80 bps impact from the Blink acquisition, 15.9%. We also said we've actually taken utilization down significantly. You can assume that's probably 100 to 150 bps impact of that. In addition to that, we announced the ESOP award stock plant, and that itself is another 80 basis point impact. So that is where the leverage is, right? Despite all of these increased expenses, we are still directly maintaining and sustaining that margin and growing at 30-plus percent, 3 quarters in a row on an organic basis. I think it's -- to me, that is still at operating level right there.

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

It's around the T&T growth on a sequential basis. So how much of the sequential growth is attributed to the Blink acquisition and the two new deals run in T&T. Could you throw some light on the size of those?

I don't think we announced the 2 new deals in T&T this quarter. I think 1 new deal largely we announced was in health care, and the other deals are not in T&T. I think there's the impact of Blink sequentially is about $9 million. But even if you take that out, if you see the Y-o-Y number, you will see a pretty significant growth in T&T almost to the tune of high 80% to 90%. So I think pretty broad-based growth within T&T as well. And it has been growing for the last, I would say, 6 quarters or so at the back of deals that we won in FY '21 as well as in the more recent past. I think it's a -- while Blink brings a role to play there, it is not only Blink driving that growth.

Just to add to what Nitin said, the $9 million incremental in Blink is not all T&T, only a part of that is T&T.

Ladies and gentlemen, we'll be taking the last question. That is from the line of Mr. Nitin Padmanabhan from Investec.

I just wanted your thoughts on our on-site offshore mix, right? Well, most companies have sort of seen a very strong shift as being within the range and possibly driven by the large deal strategy as well. So just wanted your thoughts on how we should think about the onsite offshore mix as we go forward.

So Nitin, this is Manish here. If you look at even a very long-term data points of Mphasis. It has been consistent in terms of the kind of work that we do and the on-site/offshore mix. As you rightly mentioned, digital work, working on change the business side of things, where you are consultative on where we don't go beyond -- behind RFP responses, do tend to have on-site centricity. I think the important thing to remember is, we look at the business with the customers first in terms of what adds the maximum value to the client and on-site offshore is an outcome of that. As long as the deal makes sense, from the delivery of value to the customer perspective and our bottom line perspective, we don't necessarily want to push for offshore centricity, especially when we now see the talent pool quite a bit dispersed across the globe. And anything outside of India for us is on site, right? So even if you were to take talent from other markets, it will get classified as on site. So the kind of work that we do and the talent pool diversity from a geography perspective, I think we are quite happy with what we are at this point in time in terms of on-site offshore.

The only thing I'd add to that, Nitin is that if you look at the recent additions in headcount in the MD&A as well as the fact that we've added a significant number of trainees, and we will continue to do that in Q4 should give you a sense that a lot of the incremental headcount addition will be offshore-centric. Of course, we want to make sure that we invest in having the right talent wherever needed, purely because of the program need will have it. But I think the tailwind for offshore reduction is a little bit higher than we've seen in the previous last half say 6 quarters or so.

Sure. Just a quick follow-up there is on the -- when you look at on-site headcount, right, and you think about attrition in those markets and you think about the inflation in those markets overall, do you think that the -- whatever cola is there and that sort of completely offsets the sort of headwinds? Do you think that on-site cost inflation sort of becomes a -- from an industry perspective, itself becomes a bigger sort of a worry. And sort of anyway, you've been sort of diversifying geographically there. But I just wanted your thoughts broadly on on-site wage inflation, attrition from an industry perspective and whether on-site cost increases are a big risk from an industry perspective, our perspective overall?

Yes. I think I don't -- I wouldn't say that just the onshore wage inflation is an issue. I think the issue is really the talent demand/supply mismatch. There is definitely work to be done in creating this net new talent in almost every market that we're operating in. So to me, I think the only answer I can give you is take you back to the pricing tailwinds and the price to value discussion. And I think we are going to use that very effectively to continue to meet all headwinds on cost of labor, and of course, the direct cost. And that's the reason why quite pleased with the way the margins actually sequentially improved at a gross level, by applying many of the same levers. So I think it's a reality that we are all living with, our clients are living with it and the ability to just continue to price to value the only way that we can manage.

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

Thank you, guys. Of course, we are very pleased with our performance and the strong growth in our direct business. Our operating metrics, client metrics and KPIs are all operating at very healthy levels. We continue to be very excited about the opportunity that the market presents, especially with the new expanded plan coming out of new spend areas as well as the digitization of the entire value chain for both enterprises. With that momentum, we do believe we are in the industry as well as our subsidiary with a fairly strong position. We look forward to talking to you next quarter, and we continue to deliver responsible growth. Thank you for your continued interest in Mphasis.

Thank you. Ladies and gentlemen, if you have any further questions, please write to [email protected]. I repeat [email protected]. With that, on behalf of Mphasis Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.