Mphasis Limited (526299) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Mphasis Fourth Quarter and FY 2020 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. You can also view the presentation on the Mphasis website, www.mphasis.com under the Investors section as well as on the stock exchange website. I now hand the conference over to Suraj Digawalekar from CDR. Thank you, and over to you, sir.

Thanks Aman. Good morning, everyone, and thank you for joining us on Mphasis Limited Q4 FY '20 earnings conference call. We have with us today Mr. Nitin Rakesh, Chief Executive Officer; and Mr. Manish Dugar, Chief Financial Officer. Before we begin, I'd 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. Detailed statements in this regard is available on the Q4 results release that has been sent out to all of you earlier. I now hand over the floor to Nitin to begin the proceeding of this call. Thank you, and over to you, Nitin.

Thank you, Suraj. Good morning, everyone, and thank you for joining our earnings call this morning. We apologize for the slight delay because we had to wait for the deck to get uploaded to the exchange portal. As we completed FY 2022 and moved into FY '23, we took stock of key themes shaping our industry, what our clients are saying and the spend patterns. What you see here is the IT forecast from calendar Q1 '22. Respondents, typically large enterprises, said they expect to increase their '22 IT budget relative to '21 actuals. At least 3/4 of the enterprises in every industry group intended to increase their tech spends in '22 with spending targets strongest in software and retail, with over 90% looking to spend more. In our view, the macro issue that has surfaced and intensified over last couple of months are not likely to change the bigger secular picture. That being said, some enterprises may tactically reexamine some portion of their tech spends, depending on the nature and geography of exposure in 2022 and how the macro plays out. Secular teams that are driving optimism for '22 spends and beyond include cloud migration and CloudOps, data platforms and analytics, DevOps and SRE, cybersecurity and digital design and customer experience. There seems to be a clear linkage between tech-savviness and financial performance. And this study shows that tech savy enterprises have outperformed their peers about 6% on average during the pandemic. At the high end of the outperformance spectrum are industries where tech is essential to business model transformation, such as retail or that have been late digital tech adopters such as energy and utilities, insurance and travel. Increasingly, cloud and AI are becoming performance differentiators. With established linkages between tech-savviness and revenue/market share performance, we believe that the lion's share of tech spending is not [ discretionary]and is likely among the last places that enterprises will look to curtail spending in response to any macro concerns. Moving on to our performance for the quarter and the year. Our fourth quarter FY '22 revenue at 26.8% Y-o-Y growth in constant currency terms is at a record high, with $430.7 million for the quarter, representing a 4.3% sequential growth. Our Direct business has crossed the quarterly run rate of $400 million and it grew 4.7% quarter-on-quarter and 37.6% year-on-year in constant currency terms in the fourth quarter. The year-over-year overall and Direct growth of the company has been rising throughout FY '22 and ended on a high note in fourth quarter due to the emerging convergence of overall growth with Direct growth as we have recalled out through the year. Our U.S. geography with Direct had robust growth of 43% year-over-year in fourth quarter over the fourth quarter '21 in constant currency terms. Q4 rounds out our strong performance in FY '22 when we recorded an overall FY '22 revenue growth of 21.2% in constant currency terms, which places us well above the industry average in FY '22. Our FY '22 Direct revenues grew to 34.4% in CC terms, which we believe is industry-leading growth amongst peer group. On an organic basis, Direct business grew 30-plus percent in CC terms in FY '22. This follows what was our industry-leading growth of 17% in FY '21 for the Direct business. Our core markets, the U.S. and our investor market, Europe, have both grown well on a full year basis. Direct business accounted for 92% of overall revenue in FY '22 and 93% for fourth quarter FY '22. DXC's contribution to our revenue was 5% as of fourth quarter, given the low and declining contribution of DXC to our overall revenue, Direct businesses' industry-leading growth reflects an overall improving Y-o-Y revenue growth trend sequentially through FY '22. With regard to geography growth, U.S. and Europe have fared well with an overall growth of 25% and 15%, respectively in CC. Excluding DXC, the growth numbers are significantly higher at 34% and 25%, respectively. As mentioned in our earlier calls, Europe continues to be a focus area for us, and we are pleased with the fact that our increased sales efforts and investments in this region are yielding good results. Direct business in Europe has grown at over 20% Y-o-Y in constant currency terms for a second successive year. From a services perspective, our application service line has been a driver of our growth -- at 44% growth in Direct apps in FY '22, thanks to secular themes of digitalization and transformation. And notably, Direct apps growth in fourth quarter was 51.4%. We believe this is also a testament to our continued investments in the right service areas using our unique tribes and squads led competency development model as well as our ability to leverage the repeatability that comes with this highly efficient mode of go-to-market. All our verticals saw strong double-digit growth in FY '22. We are pleased with the continued growth in our anchor vertical BFS, which grew 27% in FY '22 in constant currency terms. Fourth quarter '22 marks the seventh straight quarter of 20-plus percent year-over-year revenue growth in BFS. In fourth quarter, BFS grew 40% Y-o-Y over fourth quarter '21 in constant currency terms. On a full year basis, we believe this is best-in-class growth that is in that industry segment. We continue to enjoy market share gains with our key BFS clients. Logistics & Transportation business in the Direct segment grew 32.6% in FY '22, over '21 in constant currency terms. High-tech, also a focused vertical for us -- continued to deliver strong growth with the TMT vertical business having more than doubled in FY '22 with 110% growth in constant currency terms following from a 54% growth in FY '21. In our Direct business, 4 of our 5 verticals grew 30-plus percent in FY '22 in constant currency terms. Also in the fourth quarter, our contribution of fixed price engagements continues to rise, with the fourth quarter fixed price growth of 64% Y-o-Y in constant currency terms. Contribution of FP as a percentage of revenue has also risen by 470 basis points Y-o-Y in the Direct business. On an annual basis, as I mentioned, 4 out of our 5 verticals have grown 30-plus percent in fourth quarter over '21 in constant currency terms. FY '22 also builds on our client mining improvement. As we said before, we've consolidated our standing with our key clients resulting in continued market share gains. This is also borne out by our client matrix. The middle chart on this slide shows that our top 5 and top 10 clients have grown consistently registering 31% and 35% growth, respectively, in FY '22 in US dollar terms. Our top 2 clients contributed $150 million plus of revenue each in FY '22. The average contribution of our top client exceeds $140 million. All of our top 6 clients are greater than $75 million, which we continue to believe is quite unique for a company in our category. Client category 6 to 10 grew 48% in FY '22, sustaining at a trajectory of much higher than average growth in this category. Notably, even our top 11 to 20 clients grew 24% for the year indicating the increasingly broad-based nature of our growth. Our new client revenue continues to grow rapidly, growing at 60% year-over-year in the fourth quarter. In short, our strong client performance across the board supports our industry leading growth in Direct. Several capability and organization-based factors support are consistent and robust performance in the Direct business, namely our personalized customer engagement model with key clients, where the customer is center of our go-to-market and resource allocation, which allows for a high degree of accounts-specific innovation. Secondly, our ability to build ever-growing pipeline on the back of our effective [ tribe and squads ] model, which provides us good visibility into the future. Third, our capacity to switch large integrated deals using our transformation models such as front-to-back and zero cost transformation, which we have discussed with you in the past, also gives us the ability to fuel large deals on regular basis, including 5 large deals this quarter, a new record. And finally, the scaling of our digital competencies of our talent with a well-established learning and resourcing platform, Talent Next, which has seen record adoption through this year, especially in the last 2 to 3 quarters. Talent Next provides Mphasis the skilled muscle to enable execution of the NextGen positioning at scale. We recorded TCV of $347 million of net new deals in fourth quarter. Our average TCV metric is trending up over time. FY '22 net new TCV at $1.43 billion is up 28% over FY '21, crossing the quarterly average of $350 million. 73% of the TCV is [ new-gen ] areas. Our large deals are increasingly coming from noncore stock, smaller verticals and geographies other than the U.S., while we continue to also mine very well within our chosen marquee verticals. Despite strong TCV racked up over the last few quarters, our pipeline is still up suggesting that our pipeline generation engine is firing. We generate a high percentage of our TCV through proactively deal pursuits where win rates are materially higher than in competitive RFP situations. I'm pleased to report this quarter that we've closed more large deals than normal, and 5 large deals versus 1 to 2 large deals on average every quarter. FY '22 has also been the best year for large deal to the record, 12 such deals. As we report our TCV on a net new basis, excluding renewals, we find a correlation between our Direct TCV and revenue growth continues to be high, exceeding 0.9%. Coming to our client metrics. Our track record in migrating clients from one revenue bucket to the next continues to be healthy. We added 2 clients to the $150 million plus category in FY '22. Specifically, our conversion ratio of clients in one revenue tier to the next continues to be high at over 50%, as demonstrated by the growth of top 2 accounts into the next category. This ratio increases in the high categories as we move from $20 million to $50 million, $50 million to $75 million and so on. We continue to see success with our focused account-centric strategies with both our tenured and recent clients. In particular, we're also very pleased with the results of our new client acquisition engine. Through the NCA and our focus on highly -- high-quality scalable logos, we've been able to sign up at least 12 Fortune 500 companies and another 6 via M&A across the verticals in FY '22. This is not incidental as we've reinvigorated this program with a dedicated leadership. And as we mentioned before, we've carved out 5 well-considered select verticals to focus on for NCAs, as we now call them Enterprise 5, namely banking and financial services, insurance, logistics, TMT and healthcare. Each of these 5 new client acquisition verticals has its respective client acquisition strategies led by dedicated sales, delivery and leadership. We have an elaborate operating model in place to transition clients to strategic status with the planned engagement structure and investments defined through the phases of this transition. As clients move through the transition phase and become strategic, we progressively bring the full force of our engagement model, dedicated client resources and GTM motions in engaging with such accounts. What's behind our strong TCV record is our evolving tribes and squads model. This model, which has helped us scale our ability to service the growing pipeline and to close more deals continues to mature. The portfolio squads within each tribe ensures that we constantly evolve our solutions, adopting the newer tools and methodologies. To cater to our customers' need for speed, the tribes have also evolved a [ compostable ] approach to these offerings. This enables us to combine offerings from multiple tribes effectively to address the typical requirements of our customers. We've also identified over 40 solution architypes that are typically needed, thus allowing us to build frameworks and accelerators that facilitate faster deployment. These architects are then contextualized to the needs of the specific domain or even specific customer by our deal squads. Almost all of our pipeline is tribe driven. Our tribes-led pipeline is up 14% year-over-year, despite record conversion from pipeline to new TCV sold in FY '22. Coming to our financial metrics. Our margin philosophy affords us the flexibility to manage our profitability in an environment of rising talent cost in the heated market. In this quarter, we were able to absorb our RSU costs fully and manage organic margin in the stated 15.5% to 17% band on an adjusted basis. This has resulted in operating profit growth in line with the revenue growth and adjusted EPS growth ahead of our operating profit growth. Adjusting for M&A-related charges, operating profit grew 5.3% sequentially and 28.7% year-over-year to INR 5,217 million in fourth quarter FY '22. Adjusted operating margin was stable quarter-over-quarter and declined 25% y-o-y to 15.9% in the fourth quarter. This is in line with our stated operating margin band of 15.5% to 17%, which remained unchanged despite the RSU ESOP cost we incurred of approximately 120 bps in this quarter, up 40 bps on account a full quarter impact. An adjusted EPS for the quarter at 22.1% grew 8.9% sequentially and 30.3% year-over-year. To sum it up, I will leave you with 3 points. One, we closed a strong FY '22 marked by above industry overall revenue growth and industry-leading growth in Direct. Direct growth in FY '22 is 34.4% and marked by 30-plus percent year-over-year growth in all 4 quarters. Direct performance has helped us mitigate the declines in DXC, the contribution of which is now reduced to 5% of revenue in the fourth quarter. 2, all KPIs are moving in the right direction, namely our consistently improving track record in large deals with a record 12 deals signed in FY '22 and 5 in the fourth quarter FY '22. Our FY '22 TCV at $1.43 billion is up 28% year-over-year, following on a 51% growth in FY '21. Our client mining metrics across revenue buckets continues to strengthen our diversifying growth. As I previously stated, our average top 5 client FY '22 contribution is $140 million. Our top 6 to 10 clients continue to grow well above our Direct revenue growth with 48% growth in FY '22, while the 11 to 20 client category have also grown strong, healthy double digits. The broad-based nature of growth with Europe and multiple verticals is additive to our overall strong growth from the anchor vertical of BFS and geography of U.S. 4 of the 5 verticals registered 30-plus percent growth in Direct. Both our talent management strategies on course with sustained onshore expansion and capability buildup. Pyramid is a key focus area for FY '23. In keeping with this, we have seen robust fresher addition in the second half of FY '22. Our operating cash flow generation as a percentage of PAT is 100-plus percent in FY '21 and FY '22. Finally, investing for growth by using operating leverage and operating as stated target operating margin band continues to be the philosophy. We believe our margin stands ensures margin stability, managing for key workforce retention strategies in a tough supply environment. Our adjusted EBIT margin of 15.9% lies in the stated 15.5% to 17% band, even after including RSU cost of 120 bps for the full quarter. Coming to our FY '23 outlook. Given the consistency and outcomes from our executing our strategy, we are confident of sustaining our market-leading growth trajectory in Direct for the third straight year, while maintaining EBIT margins in the 15.25% to 17% range for FY '23 on a reported basis. Our confidence stems from our continuing market share gains with clients across deals and verticals, robust funding plans of our high-quality client base. Ongoing addressable market expansion as we extend and deepen our competencies, including through M&A and the strength of our pipeline and track record of converting pipeline into TCV and TCV into revenues. FY '23 will also see a substantially lower drag to growth from DXC than we had in FY '22, pricing, gross leverage and pyramid support our FY '23 margin outlook after providing for rising supply costs. With that, we open the call up for questions and answers. Operator, back to you.

[Operator Instructions] We have a first question from the line of Vimal Gohil from Union AMC.

Congratulations on a very strong FY '22. Sir, first of all, just a data point, if you could help me with what was the contribution for Blink in our Direct business for FY '22. That's one data point. The second question is a 2-part question. One is the overall impact of the rising interest rates on U.S. BFSI. And specifically also your -- the second part would be, what would be the impact on your mortgage business that is the Digital Risk business. If you could just highlight if you're seeing any sort of pain there? And given the rising interest rates, do you see banks across -- especially the legacy banks in the United States are sort of cutting down spends temporarily or something in FY '23?

So I think on the Blink question, the revenue for the quarter is around $11 million and also it has grown quite robustly quarter-over-quarter. So from a sequential growth perspective, this is fully baked into our Q3 numbers as well. So I think that's a good way to look at sequential growth on an organic basis. On the other question around the macro environment and the demand situation, I think at this point, it's fair to say that while there have been concerns raised and some of the bank earnings have talked about higher provisions. At this point, the demand is still fairly robust. The programs that many of our clients started in FY '21, '22, continue to be longer-term secular programs, as I mentioned in my script. Unlikely that they'll get curtailed very significantly even if the environment worsens from here. Of course, we'll keep an eye on for how that translates into budgets and additional incremental spend from here on, but at least at this point in time, pipeline, TCV, demand conversations are very robust. We've talked about 5 large deals this quarter. That's the record ever. Many of those deals are also in-year spend deals, and that's a trend that we started seeing over the last few quarters as the CapEx to OpEx conversion happens. So I think in a nutshell, not much to report in terms of tangible shifts in spend, but of course, conversations and cautiousness around interest rate and geopolitics continue to become part of the conversations, and we'll continue to watch it very closely. The other question you had was around the interest rate environment and the impact on the mortgage business. I mean, that business is cyclical. There is a part of that in our mortgage bucket that has cyclicality, but we've also diversified that over the last few years in adding new lines of business that are less immune to interest rate cycles and in some cases, even counter to the cycle. For example, it is not just about originations and refinance, it's about originations, refinance servicing, due diligence and most importantly, home equity line, which the last 3 of them are actually countercyclical to interest rates. I think -- while there will be some short-term impact, but we believe that we've baked that into our outlook for the full year, and we're fairly confident that at a portfolio level, we'll continue to find ways to drive growth.

Fair enough. Sir, just one clarification on -- so what was the total contribution for Blink for FY 22? Or is it 11% in ...because it was $11 million in Q4.

No, it was $11 million in Q4, not 11%.

It was $23 million for the full year money.

We have a next question from the line of Mohit from Anand Rathi.

Yes, sir, more on the operational side. So you spoke about this little slowdown potentially in the mortgage side or which is reflected in BCM side in this particular portion. So how should we read BFSI growth as a whole? Like insurance is doing well, but BFSI side, what do you guys expect? I mean, this quarter was a little slower compared to the previous one. And second was on the utilization. So you gave this margin outlook, but the utilization dropped quite sharply in Q4. So how should we read utilization numbers? And where do you expect it to stabilize going forward?

So let me answer the utilization question first. I think utilization is a direct correlation of the supply chain transformation that we talked about over the last 2 quarters. We've onboarded more than 5,500 freshers in the last 2 quarters alone, and that obviously will have an impact on utilization. Not only in excluding fresher, even including -- not only including fresher, even excluding fresher, because as they go out of training, they get excluded from the training number, but they are still sitting in accounts and still to be deployed into billable roles. So I think the utilization metric will continue to be monitored and managed closely, but at the same time, we don't expect it to improve sharply. Even without that sharp improvement, we do expect it to be a tailwind to margins because effectively, we are constructing the lower half of the pyramid in a very consistent, methodical and sustainable manner. So I think that's the way to think about the utilization metric. It is definitely a planned, conscious effort at diversifying across the pyramid. In terms of the BFS growth, I think we obviously had a very strong growth through FY '22. Even if you look at the fourth quarter number, it grew to 39.3% on a Y-o-Y basis. We actually don't call it BCM anymore, it's BFS. Insurance has shown out as separate, had strong sequential growth, still recovering on a Y-o-Y basis because of the restructuring we did in that over the last 12, 18 months. Outlook for the year in BFS continues to be -- as I mentioned, the application-led growth is very, very strong. Yes, there will be some impact, as I mentioned, from the interest rate cyclicality, but we believe that the guidance we've given for Direct business growth for the year reflects all of those puts and takes, including BFS.

Okay. And last thing was on-site, offshore, like we are still a little far from others in that ratio. So how should we read it? Now you have already increased fresher intake. If you could share any number for FY '23 fresher hiring. And on-site offshore, how much do you expect to happen over, let's say, next 1 to 2 years?

I think the on-site, offshore ratio has moved in favor of offshore this quarter compared to the previous quarter as well as previous year. And I think the trajectory and the pipeline suggests that migration should continue. We don't necessarily use market benchmarks because portfolios are different, verticals are different and service lines and the whole competency model is different. And I think we are also -- it's not just onshore, offshore, it's also multi-shore right now. So we are using a best shore approach given that we've actually added multiple geographies in non-India bucket over the last 18 months, including Taiwan, Mexico, Estonia and more recently, Canada. So I think for us, the answer is how do we manage the portfolio mix. It's not just one metric and one benchmark. In terms of the guidance towards fresher hiring, I think we will -- we'll continue to optimize the pyramid. That's the road map we are committed to. How much fresher intake happens is a question of how we are able to manage the utilization and how much we can afford based on demand as well as the ability to absorb them through the supply chain. So I think it's not one number I can give. It's too early in the quarter to give you -- too early in the year to give you a number for the year. But given that we added 5,500 in the last 2 quarters should give you a sense that we are really committed to the supply chain restructuring that we started.

Understood, sir. And Taiwan, Mexico, et cetera, would be currently counted on-site in our reporting?

Yes.

Or would it be part of your offshore?

No, it's all in one bucket in the on-site category.

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

I think I'm audible?

A little faint, but audible.

Yes, speak up a little bit?

Now if I'm audible?

Yes.

I just wanted to touch base on something that we used to talk about in the past in terms of the growth within the Blackstone [ portfolio ] set of companies. Could you help us understand how this segment has done on the course of FY '22, given the fact that this is still a smaller piece of contribution to the overall business? And how do you see this panning out going forward?

So I think you mentioned it, we used to talk about it in the past, and there is the reason why it is in the past. We decided not to break it out as a separate segment because it sits in the Direct business. I think it's fair to say that we continue to make good progress. While we are selective, the size of the portfolio that we operate in, not just within Blackstone, but also -- we actually upgraded that to a PE channel play, is also fairly large. So I think we've continued to make good progress in that. And there are -- all I can tell you is that some of those deals are included in the large deal announcements that we made as well. So I think it's a very considered, I would say, a very focused approach, targeted set of customers, targeted set of deals, and we are making good progress, and that's one of the drivers for our Direct business' growth.

And if I can chip in with one more question. So you spoke about the margin levers being growth, pricing leverage and the pyramid. With regards to pricing, given the concern around increasing interest rates and the possibility that banks look to optimize their spends, do you think this impacts the possibility of price increases in this vertical?

At this point, no, because keep in mind that pricing increase is not just a rate card discussion. There are multiple other ways to construct price increases, value-based pricing, outcome-based pricing, managed services construct. If you look at the fixed price construct movement, I gave that metric out in my script. I think all of those give you the ability to actually have a higher realization and potentially a margin tailwind. For new business, for highly in-demand skills, cloud architects, data architects, modernization deals, there is definitely a lot of pricing power available. It all depends on the portfolio and the value that you can derive from those constructs. So I think at this point in time, the environment is pretty comfortable despite the current pressures on inflation that we talked about.

We have a next question from the line of Nirmal Bari from Sameeksha Capital.

My first question is on the margin spend. So from an employee standpoint of -- could you not -- I know that we do not have a standard cycle of wage increases -- but on an average throughout the year, what kind of wage increase are we expecting to happen? That is one. And second -- so the impact of that on margins. And secondly, on the acquisition front. There's a standard cost that was being added. So will that cost remain the same in the coming quarters as well?

Manish, you can take that.

So -- yes, Nitin, I can. Also from a people cost perspective, there is a process what we follow wherein it's a continuous evaluation on the geek quotient as we call it. And based on that, a large part of the team, which is primarily the delivery organization gets evaluated and the correction keep happening. There is no number that we guide and we have been doing it over the quarters and we continue to do it. So it's baked in. From an acquisition perspective, we had talked about the fact that typically, the acquisition charges come from an accelerated accounting perspective, which means the costs are higher in the beginning and then they keep reducing as we go forward. And that is what we expect to happen in the next maybe 4, 5 quarters. And we should be able to absorb that and it should not have any further impact going forward. So to your question on whether that cost is reducing, yes, it is both in absolute terms and even more in percentage terms because with the reduction in absolute terms and growth in revenue, the percentage drops even faster.

But the reduction in the lower end of our margin guidance, would that primarily be allocable to employee expenses? Or how should we look at that?

So the way to think about it Nirmal, is we are not reducing the lower end. If you remember, our guidance was 15.5% to 17% and we had talked about an adjustment for M&A charges. Our reported margin this quarter is 15.2% after the M&A charges and the guidance suggests that on a going-forward basis, the margin should be higher than this quarter margin even after accounting for M&A charges. So if you were to, let's say, take M&A charges at 0.8%, this quarter is 16%, and we are essentially saying if it remains 0.8%, the next quarter will be 16.05% and so on. So it's just the adjustment of M&A costs in the guidance range, it's not a reduction in the lower end of the guidance.

If I can just add. I think the way to look at it is that the adjusted report -- adjusted margin adjusting for the M&A charge is 15.9%. So I think that's like-to-like comparison for the guidance we started FY '22 with. Since we've reset it based on the M&A cost, we are basically saying that the fourth quarter number is really the starting point. And hence, we are guiding above the fourth quarter number, even on the lower end. That's the way to think about it for our full year number range.

We have a text question from the line of Nitin Padmanabhan from Investec.

How should we think about growth for the top 5 clients considering you have benefited from significant consolidation in the past 2 years? The unbilled revenue has increased by $37 million sequentially, while the absolute revenue increased appears to be half of that. Could you give us some context to this?

So let me take the first part of the question, which is on the top 5 clients, and then Manish can answer the unbilled question. I think firstly, we're very pleased with the fact that we managed to grow these top 5, 6 customers very robustly. I think in fact, all the top 10 clients have grown robust, as you saw from the metrics in the analyst call -- in your analyst deck. The way to think about it is, it's not just wallet share gains, but then it's a combination of increased spend, which is the ability to play in new spend areas is extremely important for that. And that's the reason why keeping an eye and constantly reinventing the whole drive-based competency model with new areas of competency is extremely important. And that's the reason why every quarter when we present, we actually definitely talk about what are we doing in that space, including the changes that we just announced and then we presented to you a few minutes ago. So increased spend in new areas is one big tailwind. Second is, we've also taken action to increase our addressable market. Blink was a great example of how we actually now started playing in new spend areas that we were not playing in earlier. So that gives you the second vector of growth. And the third vector of growth, obviously, is wallet share gains. So I think if you look at these -- combination of these 3 things, we do expect that almost all 3 will continue to play out, at least in the near to medium term. We don't see any reason to believe that we've actually saturated any account, even from a wallet share perspective alone, forget the other 2 engines of growth. So I think long road ahead, very pleased that we've graduated top 2 clients to over $150 million. We've -- obviously, the teams are fairly focused on making sure that we are able to take as much addressable spend as we can because many of these clients spend -- that the spend is in very, very large numbers. So -- and that's the reason why we also focus on quality of logos that we bring in. So that's kind of the way to think about the top 5 to top 10 customers. On the unbilled revenue, Manish, you can take this one.

Yes. On unbilled, Nitin, the primary issues or primary reasons are 3. One is there is typical, as you know, the revenue accounting, when you do a fixed price contract is on a percentage of completion, while the invoicing follows a different schedule. So there is a mismatch between that, but we should be able to catch up this month or this quarter. The second thing is about a large part of our clients require a PO reference when the invoicing is done and that PO reference at times take time to come. And if you take what happened at the end of the quarter, we should be able to get the documents and mail the invoices in this quarter. So I would say largely, these are admin and invoicing-related matters, nothing to conclude that this has any impact on either collectibility or the DSO, so to speak.

We take the next question from the line of Dipesh Mehta from Emkay Global.

Yes. A couple of questions. First, about the Logistics & Transportation. Do you think any implication because of energy-related uptake which you are seeing across the globe? Because this quarter margin seems to be slightly softer as well as the revenue growth. So if you can provide some sense how you expect this to play out over FY '23? Second question is about the emerging business update. Can you provide some sense how the emerging business is playing out across some subsegment? So that update would be helpful, which area is doing well, which is not doing well? And the last question is about BFS related because now compliance related, some of the companies indicated good opportunity because of some of these things and related work and other things. Do we play in that area? And if yes, then how it is helping us for BFS to negate some of these mortgage-related challenges?

I think on Logistics & Transport, I think the issue so far, the inflation adjustment or reset of demand is not the real issue. The only reason you're looking at softness probably is base effect. And margin is a reflection of how much growth and utilization impact is sitting in their vertical because they definitely expect some -- they would have done ramp-ups in advance of billing and deal closure. So I think see that as a growth related or a large deal related ramp-up situation versus any impact or pressure from pricing or demand. On your second question around BFS related, I think the tech spend, especially in applications area is very, very robust. The actions we've taken around diversifying away from pure interest rate sensitives in our mortgage business is also helping. So I think -- we do believe that while as I mentioned, in the short run, you might see some impact. But through the year, based on the current scenarios and the movements that we've seen in the forecast and the pipeline we have, it looks like we should be able to meet the full year guidance on BFS overall, despite the softness in some parts of the business. And that's the portfolio approach, it helped us. It was a tailwind for a while. And that's the reason you have a portfolio where you actually have some parts of the business do better than the others. But on an overall net basis, the portfolio growth is robust. The third question, I think, was around emerging vertical. I presume you're referring to others. I think the biggest component of others is health care. And there are obviously a couple of other miscellaneous smaller verticals in there that we can't classify into the other big 4 verticals. So I think from that perspective, we will start thinking about potentially breaking it out into additional verticals just like we carved out high-tech and logistics from the others category over the last 3 years. But I think at this point in time, health care is the other primary focus vertical in the other segment that we will potentially start to report out and carve out separately in the future.

How it is doing? I think that was the question. Health care, how it is doing? And Logistics, you partly answered, but do you think any headwind because of this energy-related upticks which we are seeing right now?

At this point in time, no. So that's what I said that it is not headwind to report at this point in time. We are watching it. It is no -- it is not just Logistics & Transport that has an impact from energy because they have also a lot of pricing power, whether it is e-commerce related or delivery companies or even if you look at freight companies, if you look at airlines, significant pricing power in their hands right now. So they're actually passing a lot of their hikes back to the customer. It's not really a stress on their P&L. On how the health care is doing, I think we -- as I mentioned, right, you can see from our deal commentary, we announced a large deal last quarter. The largest deal was in the health care unit. In a new customer, despite being one of the smaller units, we are able to actually leverage the tribe construct, contextualize it to health care and grow it. So it is actually growing really rapidly. Still relatively small compared to some of the other verticals, and hence, we are waiting for it to attain a critical size before we break it out into a separate vertical.

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

Maybe just a couple of questions from my side. First question was basically on DXC. I know it's just 5% of the revenues and probably doesn't matter much in the overall scheme of things. But I think after multiple quarters of significant decline you've seen the revenue kind of stabilizing in this quarter. So not moving any growth [ capital ] out there in the year. But what is the outlook for this piece of the business at this point of time? Do you think it might have bottomed out? How is it looking out in terms of on the deals and the contracts that we have in the business? Till when is their continuity? Just maybe some subjective feedback on how should we look at the business going forward? And then I'll ask my second question.

Yes. So I think we called out maybe over the last quarter or 2 that we are somewhere in the ballpark of -- where we think this business can stabilize. So I wouldn't read too much into sequential ups and downs based on projects or engagements. So I think it's fair to assume that our focus will be to continue to grow the Direct business. And we still believe that we have the ability to have a revenue line with this segment. But I think the prioritization and the focus of growth given just the nature of our strategy will be to prioritize Direct growth. So I wouldn't read too much into the quarterly moves. I think 5% is where it kind of be guided towards, if you remember 2 quarters ago, the mid-single-digit number. But as the Direct business continues to grow, this will obviously continue to get dilutive if it doesn't keep up with that growth.

Got it. My next question was basically on the overall supply side environment that you're facing, both on-site and offshore. So if you could just take us through as to 2 -- I mean, how is the attrition number looking like in the offshore especially? Do you see it coming down or stabilizing or plateauing out maybe this quarter or the next couple of quarters? And on a similar front, on the on-site front. How critical right now is the availability of talent right now, which is leading to basically the high salary expectations? And given the high inflationary environment, we believe the on-site salary hike this year could actually be higher than what we have historically given on the on-site front.

So I think the right way to think about it is that definitely, the demand-supply mismatch continues to be in favor of shortage of supply. That has been the phenomena for the last 3 or 4 quarters that doesn't seem to be any different in the current environment. But given that over the last -- definitely over the last 3 or 4 quarters, our focus has not only been acquiring talent but actually creating talent, and I talked about that in the script as well, between Talent Next, trainee offtake and new centers that we call best shoring, not just on-site, but it's nearshore. It is off-site. It is new locations, whether it's Taiwan or Mexico, Costa Rica, Canada, even onshore in Europe, we opened Dusseldorf and Leeds in the U.K. I think the flexibility that we are trying to create in the supply chain from a best shore perspective, is something that is going to help mitigate some of the dependence on just resources available in geography in the U.S. or in the U.K. market, for example. So I think that's one way to mitigate and think about what we are doing. Second is obviously, significant work is happening on pyramid construction, not just offshore but even onshore. Obviously, the 2 markets have a different way of constructing the pyramid out. So yes, there is pressure on supply, yes, there is wage inflation. We baked all of that into our outlook for margin. At this point in time, attrition, I would say at best is stable. We will continue to work towards whatever measures we have taken in the past and additional measures we can take. Not just wages, it's a lot to do with engagement. It's a lot to do with internal rotation and upward movement and potentially quality of work. So I think it's a work in progress, it will continue to be. I wish I had a crystal ball to tell you it's going to peak in this month or this quarter or next month or next quarter. It's impossible to predict. So I think at this point in time, we have a headcount plan. We have a supply chain plan. We have a demand environment, and we'll continue to find ways to meet as best of the demand -- as much of the demand as we can.

Got it. And on the on-site salary hike part? Do you expect it to be higher than historically it has been?

Again, as I mentioned, we are managing it through multiple levers. So question is, it is not one number that goes out to one set of employees on-site or offshore. Again, since we don't do it in particular, we're not -- April 1 is not the date for the whole company. We are doing it fairly, based on need, skill, skill-up movement and engagement. I think it's a little bit harder to put a number on it. But I don't think -- I mean, if we expected it to be unusually high, we would have adjusted our margin guidance, given that we are guiding for a margin actually to be on an operating basis, healthier than what it has been in the recent past. And I think that should tell you the ability for us to manage puts and takes on margin and wages.

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

Manish, just wanted to understand in FY -- can you hear me?

Yes. You dropped, yes.

Yes. Yes. Manish, just wanted to understand in FY '22, what was the M&A related costs in terms of basis points? And how this will look like in FY '23? Just some clarity required here.

Sure. So first, from a concept perspective, once the transaction is done, there is a purchase price allocation that happens and then the cost comes in. And the cost is typically on a accelerated basis, which is why it starts with a higher number and then it eventually goes down. As we had explained, the impact of M&A charges in the P&L was about 0.8% in the immediate. So we did the transaction sometime in September. The quarter when -- with the full impact came in was the quarter after that, which is October, November, December. And then in this quarter, which is Jan, Feb, March, that number has already come down to 0.7%. And the reason why the percentage moves is twofold. One is the absolute cost reduces and the second is the impact of that on the revenue as the revenue base grows becomes lesser, right? So effectively, we had an impact of 0.8% in October, November, December and 0.7% in Jan, Feb, March. And depending on how the numbers pan out in this year, this number will keep reducing both in absolute and percentage terms on a quarter-on-quarter basis, from the 0.7% that we had in Jan, Feb, March.

Okay. So roughly what could be the Y-o-Y sitting in this number in FY '23 versus FY '22? Any color on this?

We don't call out specific absolute numbers on this, unfortunately, but this will become -- we had talked about when we did the announcement of the transaction that over a 2 to 2.5 years period, we should be able to absorb all of this and it should have no impact after that. Of which 2.5 quarters has already passed.

Okay. Fair enough. Just last question. We are doing extremely well in Direct business, no doubt about that. But I think last 2 quarters' order intake was good. Do you believe this quarter's growth rate is in line with your expectation when you entered in the quarter for the Direct [ growth ]? Or could have been slightly better because of the order intake? And do you believe that there could be a ramp-up in the growth going forward in the 1Q and 2Q within Direct [ growth ]?

So Nitin talked about the cautious optimism, and we would be happier if the supply situation was better. The supply challenges continue. We are investing in creating new sources of supply as well as creating talent through Talent Next. There is enough and more demand. Supply is certainly something that we will need to continue working on. And when we got into the quarter, we had talked about being industry-leading on the direct side, which is what we have delivered for the year. And I guess it's difficult to give an absolute number, but relative performance is, I think, what we can talk about and which is why we have talked about being industry-leading on the Direct business for FY 2023 as well.

Okay. Okay. And congratulations on recurring great execution quarter after quarter.

We'll take the next question from the line of Harshil Shethia from AUM Fund Advisors.

Are we expecting to reach our $2 billion run rate in the current year? Or what would be our target?

Manish, you want to take that?

So Harshil, what we have talked about is being industry-leading so far as the Direct business is concerned, and it all depends on how the industry does. But last year was a coming back year for the industry. So there is a general assumption that this year will probably be less growth over the previous year than we saw the last year. So depending on how the numbers go, obviously, the aspiration is to get not just to the EUR 2 billion, but to a higher number. But we don't guide a number, as you know. We are confident of getting to industry leading on the direct side.

Yes. And I understand that this year, the industry growth would be lower compared to last year. But definitely, we would be building internal capabilities and increasing our addressable market size by the Blink acquisition that we had done. So I think we would be having a better picture in the near term.

Harshil, the reason, actually -- the reason why it's an internal plan is because it's internal. So unfortunately, we can't -- we're not going to give you what the internal plan calls for. And I think you'll have to just make your assumptions based on the trajectory that we've shown.

We'll take the last question that is from the line of Abhishek Shindadkar from Incred Capital.

Congrats on a good Q4. 3 questions, if I may. The first one is on the Blink growth. Now when we acquired it was doing 42% CAGR. For the quarter, it's now growing at 20%. So if you can help us understand what is driving this solid acceleration? And does it change the assumptions for earn-outs in margins? I heard you in the previous question, but probably would like to understand that again. The second is on the margin compression in Logistics & Transportation vertical. How should we read that? I mean it's not one quarter but across the 4 quarters of '22. And the third question is a clarification. So the margin outlook shared, does this -- is that excluding M&A and ESOP costs? Or it includes both these costs? If you can help us understand that would be great.

So I think the last one is pretty straight forward, the margin outlook for FY '23 is all-inclusive based on what we know today. If there is a new M&A transaction that happens during the year, that's a whole different discussion. At that point, we will give you what the guidance would look like based on what impact that might have. Based on the current visibility, that is the reported margin outlook. On your first question around Blink, I think the sequential growth is not 20% but closer to 10%. It is pretty much aligned with the management plan. I don't think there is any dramatic shift in any assumptions or financial impacts given that, one, it is still a very small percentage of revenue. But we are very happy that it's performing as expected. And we constructed our deal thesis based on a certain thesis and that thesis is playing out both on stand-alone and more importantly, on direct synergy. So I think we are very pleased with the progress. Again, I would say still relatively early in calling victory, but very pleased with the progress we've made in 2 quarters that we've worked with them and very, very pleased with the performance of that business, the team, the alignment and the client feedback. And I think on the final question around Logistics & travel (sic) [ Transportation ] margins. I think some of it, as I mentioned, is definitely related to the significant ramp-up we've seen. We've also invested dramatically in building new capabilities in new subverticals within Logistics & travel (sic) [ Transportation ]. What used to be very much logistics and e-commerce driven is now has a very significant element of other subverticals within the transportation domain, including airlines because we've seen a significant resurgence of demand and the -- I think we announced if you remember this time last year, we made public the launch of an airline data platform in partnership with AWS, and that has become a significant driver of differentiation as well as the ability to attract high-quality new logos in that domain has been very, very significant, but that has obviously come at a high investment cost. So a combination of investing with domain and taking, obviously, an operating hit on that as well as building up teams in advance of ramp-ups and investing with our customers in potentially long-term strategic programs that give us the stickiness and the strategic intent with their outcomes is the primary driver of what you're seeing there.

That is helpful, sir. Just a clarification. In the previous earnings call, we had mentioned the Blink contribution was 9%, and I heard 11% today. So when the growth rate ...

It is 13.5% sequential growth.

Thank you. Ladies and gentlemen, that was our last question for today. I now hand the conference over to Mr. Nitin Rakesh for closing comments. Thank you, and over to you, sir.

Thank you, everyone, for your interest, and thank you for logging in early into the call. I know the time zones create a little bit of a challenge, but we appreciative of your interest, and we look forward to talking to you after the next quarter earnings as well. Thank you again, and have a good day.

Thank you very much. Ladies and gentlemen, on behalf of Mphasis, that concludes today's call. If you have any further questions, please reach out to Mphasis investor relations on [email protected]. Thank you, everyone, and you may now disconnect your lines.