Persistent Systems Limited (PERSISTENT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Persistent Systems Earnings Conference Call for the First Quarter of FY'22 ended June 30, 2021. We have with us today on the call Dr. Anand Deshpande, Chairman and Managing Director; Mr. Sandeep Kalra, Executive Director and Chief Executive Officer; Mr. Sunil Sapre, Executive Director and Chief Financial Officer; Mr. Saurabh Dwivedi, Head of Investor Relations; and Mr. Amit Atre, Company Secretary. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Kalra. Thank you, and over to you, sir.

Good afternoon, good morning, good evening to all of you, depending on where you're joining us from. It's good to be with you once again, and I hope all of you are continuing to stay safe and healthy. Before I go into the financial and business updates, I would like to start by thanking our team members and customers for their resilience and their trust in us during these unforeseen times. Several of our team members and their extended families were impacted during the second wave of COVID-19. Sadly, we even saw a few of our colleagues succumbing to COVID. We pray for the well-being of their families and their loved ones. As a countermeasure from our side, we have been undertaking vaccination drives for all our India-based employees and their families. We are happy to report that more than 10,000 of our associates and their families have availed of these vaccination drive and the facilities associated. As the vaccinations have progressed, a small percentage of our employees have also started to work from office. We expect the numbers to go up gradually. However, we'll be taking a cautious approach to return to office while considering the possibility of a third COVID wave as well as region specific nuances. Once again, we sincerely pray for everyone's well being and with that let me get into the business and financials... Coming to the quarterly financial performance, as you would have noticed, we delivered yet another quarter of strong growth delivering continued progress on all major business metrics. On the financial side, the revenues came in at USD 166.8 million of Q1 giving us a growth of 9.2% quarter-on-quarter and 27.3% year-on-year. This is in U.S. dollar terms. In rupee terms this translates into a growth of 10.5% quarter-on-quarter and 24.1% year-on-year basis. This is among the best quarter-on-quarter, year-on-year organic growth delivered by us as an organization. Our EBIT for Q1 came in at 13.5%. This translates into an EBIT growth of 13.5%, and this translates into a growth of 13.7% Q1. Now let me give you a little color on quarter's performance from an industry vertical and service lines. Quarter's growth was broad-based and was led by health care and BFSI industry verticals. These grew 15.5% and 11.8% respectively on sequential quarter on quarter basis, followed by software and high-tech segment that grew by 500% on a sequential quarter-on-quarter basis. On a year-on-year basis, the growth was broad-based as well with all the 3 industry segments bearing very well. Healthcare came in at 32.1%, Banking Financial Services at 23.5% and Software hi-tech at 27.9% year-on-year. We also saw consistent growth across our top account categories, whether it was our top 1, top 2 to 5, top 6 to 10 or top 11 to 20. All of these saw a significant growth quarter-on-quarter. To give you specific numbers, the top 1 customer grew by 3.4%, top 2 to 5 by 15.6%, top 6 [indiscernible] well and top 11 to 20 by 10.9%. This should give you the confidence of our strategy in terms of account mining working out very well. Further, to substantiate this, the number of customers that we have in the [indiscernible] moved significantly up this quarter, going up from 17 to 21, an addition of 4 customers in the greater than 5 million category. Similarly on the greater than 1 million category and less than 5 million revenue run [indiscernible] we added 10 customers on a sequential quarter-on-quarter basis. The quarter ended with 76 customers in this revenue category compared to 66 in the last quarter. Before I move on, I would like to point out 2 aspects. In the last 2 financial years, we've been reporting our revenue breakup by 2 organization units, Technology Services and Alliance. As we have been sharing with you in our previous calls, the business is now organized around industry segments and service lines. Hence, we are discontinuing the reporting of our revenue breakup by the 2 organization units as a utility of the same is no longer available. Revenue for our CE/CLM reseller business, which is categorized under our IT business has been accounted on a net basis from Q1 FY '22 onwards. That is for the CE/CLM reseller business, we are only taking the margins for value-added reseller services as the top line revenue in our P&L. This wasn't associated due to the lack of associated services engagements with such reseller revenue. Now coming to the order book for the quarter. We had a good quarter from an order booking perspective. The total contract value for the quarter came in at USD 244.8 million. The annual contract value of this is to the order of $188.8 million. In terms of new bookings, the new business, total contract value was $147.7 million, out of it, the ACV component or the annual contract value component stands at $93.5 million. Just to refresh everyone's memory, the TCV, ACV numbers that I just spoke about, include all bookings, small and large renewals as well as new bookings across existing and newer customers. Coming on to employee numbers. We had yet another quarter of significant additions in our team count. we got in 1224 new colleagues, bringing our total colleague base or the employee base to 14,904 at the end of June 2021. The attrition for quarter came in at 16.6% compared to 11.7% in Q4 on a trailing 12-month basis. As you would have seen, attrition has been increasing across the industry, given the shortage of digital skills in the industry and the ongoing upsurge in demand. This is definitely a focus area for us as a management team. We've taken many proactive measures with an aim to bring this under control. The measures include increased engagement levels with our employees, flexible working hours to get work-life integration, increase in fresh grad intake, upscaling of our existing employees and helping our people with long-term career development and planning with active learning and development interventions. As you may be aware, we had undertaken salary increases in November 2020. For the last financial years, I think much ahead of our other peers or FY'22, we have reverted to our normal wage hike cycle in June. We continue to strengthen our leadership. Suresh Prabhu joined us as a Chief Delivery Officer for industry verticals. Suresh comes in with a strong experience across multiple product organizations. Suresh's experience should help us further enhance our digital engineering expertise. We also continued to strengthen our team with addition across sales, delivery and enabling functions. These additions to our team would help us strengthen our muscle as we move with conviction towards our [indiscernible]. Coming to the M&A front. The integration of CAPIOT has progressed well, and we continue to see quarter-on-quarter growth in our integration factor services. We acquired IP and business during IP and the team of Sureline during Q1, the IP and the team of Sureline has augmented our capabilities in cloud migration and modernization services. Continue to scout for potential targets in our focus areas and hope to give you an update on this in the coming quarters. Moving on to ESG. I shared with you in our previous analyst call, we're now appointed an ESG consultant to define a ESG road map for the company against standard ESG practices. By the end of FY 2022, we'll come up with a comprehensive report on our ESG road map and the status of our current initiatives against the [indiscernible]. Now I'll turn the call to our CFO, Sunil Sapre to give a detailed color on the quarterly financials and related [indiscernible]. I'll come back after Sunil's comments to give you some more details on the key client wins for that quarter and awards and other recognitions the quarter gone by. Over to you.

Thank you, Sandeep, and good evening to all, and hope you are all safe and keeping well. Sandeep has given a fair amount of detail about the business. Let me give you some more financial details for the quarter ended June 30, 2021. Revenue for the quarter at $166.82 million registered Q-o-Q growth of 9.2% and Y-o-Y growth of 27.3%. And you will recall that in the year of the pandemic when the pandemic outbreak happened. In the last quarter -- in the first quarter of last year, we have also had a growth. So this is a significant improvement in year-on-year growth that we have seen. The revenue in INR terms was INR 12,299 million, reflecting growth of 10.5% Q-o-Q and 24.1% Y-o-Y. As regards industry verticals, BFSI grew at -- by 11.8% quarter-on-quarter health care by 15.5% Q-o-Q and technology companies by 5.2%. Coming to Linear Revenue. Offshore linear revenue grew by 10.7%, primarily on account of volume growth of 8.6%, while billing rate grew by 2%. The on-site linear revenue grew by 12.9%, comprising of volume growth of 10.2% and increase in billing rate by 2.4%. With continuing efforts on improving the level of engagement with customers, you would observe that the number of customers in greater than 5 million category went up from 17 to 21. And in 1 million to 5 million category went up from 66 to 76. As you are all aware, this quarter has Visa expenses on H1B visas. The impact of this cost on the margin was 50 basis points. Given the increased demand for talent in the market, the attrition during the quarter went up to 16.6%. We continued the hiring momentum during the quarter, adding 1224 to the net head -- as net headcount addition. This is on the back of the 2 quarters gone by in the earlier years where, If you remember, we added 1618 employees in Q3 and 1242 in Q4 of last year. The gross margin stood at 33.5% as against 33.9% in the previous quarter, largely because of the onetime seasonal expense on visa filings. These NM expenses were in line as regards G&A expenses, there was an impairment in one of our investments in start-ups. The impact of this on the margin was 60 basis points. There was also an increase in recruitment expenses on the back of continued hiring and some leadership hires. Collections from customers against some receivables that we had provided for earlier, resulted in reversal of doubtful debts -- doubtful debt provision, whereas the total spend on donation towards COVID was slightly higher than the previous quarter. So these 2 items in some sense of the future. Overall, SG&A was at 17.2% as against 17%. The EBITDA came in at 16.4% as against 16.9% in the previous quarter. We will observe that these 2 onetime or one seasonal item in form of visa costs and the other in terms of the impairment are the 2 main reasons, otherwise most of the items were in line. Appreciation and amortization accounted for 2.8% against 3.8% in the previous quarter, as we will recall, we had mentioned about one of the products that had completed amortization in the last quarter. With that, EBIT was at 13.5% as against 13.2% in the previous quarter. Treasury income for the quarter was INR 256 million against INR 211 million in the last quarter. Or [ ex gain ] was INR 109 million against INR 174 million in the previous quarter. With that, the profit before tax was INR 2,031 million at 16.5% as against 16.6% in the previous quarter. The effective tax rate for the quarter was 25.5%, same as in the previous quarter. And with that, PAT for the quarter was INR 1,512 million at 12.3% of revenue as against INR 1,378 million in the previous quarter at 12.4% of revenue. Coming to the operational CapEx. It was INR 141 million in this quarter. The cash on books at INR 19,955 million as at 30th June compared to INR 19,831 million as at 31st March. As you would be aware, it also happens to be a quarter of payout of the annual bonuses. And thus trends lower in terms of net cash added during the quarter. As Sandeep mentioned, we also had a small acquisition-related payout during this quarter. As collections continued to be very good, the DSO came in at 54 days as against 55 days in the previous quarter. Forward contracts outstanding as of 30th June was $140 million with an average rate of INR 76.7 million -- thank you all, and I hand it back to Sandeep.

Hey Sunil. Now to give you a color on the key client wins from the quarter. Our press release for the quarterly result carries a number of our experience and I'll just highlight a few. The banking financial services and insurance segment, we were chosen as a partner to co-engineer our next generation microservices platform and to manage the legacy products by a leading U.S. state and local government solutions provider. This is roughly a 5-year deal with a provider to pretty much take our legacy products to the next generation and also accelerate the product growth. The next win that we saw in Banking Financial services was with one of the largest banks in business where we were chosen as a partner to transform wholesale and commercial lending operations to consolidation of multiple legacy systems of record. In Healthcare/Life Sciences, we have chosen to manage the sales force roadmap, implementation and provide managed services to support proprietary inventory management platform moving to sales force for a large U.S. based pharmaceutical company. We've chosen by a large U.S.-based global retail pharmacy company to implement and modernize cloud-based security utilizing Microsoft Azure. In the Software and High-tech and emerging technologies, we won a multiyear, multimillion dollar deal involving the implementation of Salesforce platform to drive business growth through customer experience and unified business processes for an education private organization. For a leading player in gaming products and services, we were chosen to provide rearchitecting, reengineering and modernization services of gaming systems. This is again a multiyear multimillion deal. Now moving on to the awards and recognitions for the quarter. Q1 saw us get continued recognition from multiple industry leading analyst firms and as I mentioned a few. For the fifth consecutive quarter, we were named a top 15 sourcing standout for managed services in Q1. Global ISG Index in Booming 15 category. ISG also named Persistent a rising star for digital transformation in 2020 ISG provider for health care digital services of the U.S. We were named a star performer in Everest Software Product Engineering Services PEAK Matrix Assessment for 2021. Moving on to the partner ecosystem. We continue to invest in deepening our collaboration with IBM, which is a Hybrid Cloud Adoption in the enterprise. Under this collaboration, we will continue to invest in IBM Technology and help its customers adopt Hybrid Cloud architectures, Redhat OpenShift business-specific clouds and advanced security factors. During the quarter, we also became a key development support and deployment partner across the IBM population portfolio including IBM Cloud Pak for business automation, robotic process automation and other network automation solutions. More details on these partner activities are available in our earnings release and on our website. In summary, we delivered well in Q1. We're seeing a good traction for our services in the markets we serve, and we are confident of good earning going ahead. With this, I would like to conclude our prepared comments. I would like to request the operator to open the floor for questions. Go ahead please. Go ahead with the questions.

[Operator Instructions]

Right. I'll begin with the questions on the chat first, and then we can go to the audio questions.

Sure, sir.

Sandeep, and Sunil, the first question that we have got on the chat forum is, could you give a number on what level of growth as the acquisition of CAPIOT enabled in this quarter? Also, do you expect [indiscernible] margins going forward?

I will divide the question and I'll have Sunil answer that. and can you tell us who asked the question so we can...

So yes, the question came from Jenil Jain from Omkara Capital.

Okay. Sounds good. So on the question around CAPIOT growth for the quarter compared to the last quarter, the CAPIOT growth would have been roughly around $500,000 quarter-on-quarter. Sunil if you can answer that margin question.

Sure. So on the travel expenses coming back, while there has not been resumption of travel in a very big way, but we do expect U.S. and Europe to slowly have increased travel going forward. The next 2 quarters, we can expect about 30 to 40 basis points of increase in travel expenses which will come back by end of December, if we reach a good level of vaccination in India, then the outbound travel from India could also start towards the 2022. So overall, if you look at the full year, it will take 2 or 3 gradual moves towards making the travel expenses back to a level of 10%. It will still not be the same as what it used to be in pre-COVID times, but that is how we look at that.

And Sunil, we may want to clarify the travel expenses for this quarter, just to clarify, were on account of H1B filings and not on account of travel. And that happens every year in this quarter. So...

Okay. Before we go to the audio questions, I think the only other feedback I got on the chat forum is maybe the voice from our side is a little low. So if we can speak a little more loudly.

Yes. We'll move to our first audio question, which is from the line of Nitin Padmanabhan from Investec.

And congrats on a great quarter. The first question was around the TCV and ACV data. Now it's been like 3/4 of this data. In the current quarter performance, is there revenue accretion from deals won in Q3? That was the first question.

So you're talking about deals, 1 in Q3 revenue accretion from that, obviously, would have happened a little bit -- as you look at it some of these deals take time to ramp up and that's what is happening. As we kind of win deals over the quarters. Every quarter, as these ramp up, you are seeing the revenue consistently kind of go up in terms of growth. If that was the question.

Yes. that was the question. The second one was on -- in terms of the rising attrition and the compensation increase, I think we are likely to give next quarter. Just wanted your thoughts on how are you approaching that and what's the potential impact there when we look at next quarter.

So for us, pay rate, the hike cycle is July onwards. So we've already given the letters out in terms of [indiscernible]. I will let Sunil comment on the margin impact and what our plans are to recoup that. Sunil, over to you.

Yes, sure. So if you recall the -- historically, we've been having wage hikes. And typically, the revenue growth and several other levers, most commonly allow the company to recoup. Now currently, we are seeing 2 phenomena in the market. One is that we have significant tailwind in terms of revenue growth, but this is coming also in a combined way where the digital technology-oriented skills are not exactly adequate to fulfill this demand. As a company, what we have done is, we have significantly increased the hiring over the last few quarters. And that's where you will find that our utilization -- offshore utilization has hovered over 80%. So we have first concentrated to ensure that we are able to fulfill the business. Now at this point in time, we have the utilization lever which is significantly you can say, one of the areas that we are working on. The second part is also the mix between lateral hires and fresher hires. That is another area that we are looking to optimize. And lastly, of course, the fact that we have onboarded these people and the converging when it happens in terms of better utilization will provide the cushion to absorb the pay hike, so these factors are what, will be the areas to look out and watch out for and we are conscious of the fact that we have to manage the attrition in a controlled environment, I mean, in a manner that we can be comfortable with respect to deliverables and the sustaining the quality with the customers. Last but not the least, we will also take a conscious view in terms of potential areas where we can work with customers wherever we have flexibility in pricing because I believe that there is a point of time when customers do understand that these skills are not easily available and to ensure that their deliveries and quality is not affected, we do have pricing power in some of our businesses. I hope that gives you a good understanding of this...

Yes, sure. That's very helpful. Only the quantification of what we could expect in terms of potential headwind is the only last thing and then I'll get back into the queue.

Yes. In terms of overall impact from the wage hike, it will be of the order of 250 to 275 basis points, and we expect all these levers to allow us to absorb most of it. Maybe there could be a 75 to 100 basis points of headwind in 1 quarter in which the hikes actually start. But with increased revenue, we're trying to see how much we can contain that. But it will not be more than that kind of...

Next question is from the line of Vimal Gohil from Union Asset Management.

And firstly, congratulations to the team, splendid results. I have 2 questions. The first one is on attrition. So you mentioned that FY'21 really saw industry-leading wage hikes being rolled out by the company. And despite that, while it has been a phenomena for the industry as a whole. But our attrition sequential increase in attrition seems to be a tad higher as compared to what some of the peers that have reported numbers. So if you can just comment -- give your comments there. The second bit is on your subcontracting cost. So currently, our subcontracting costs are at 14.7% of sales. This is probably the highest in the industry currently. What is your sense? I mean, does our business particularly need such high levels of subcontracting? If so, what would be the sustainable level for subcontractors going forward? And along with the margin levers that you just mentioned, could lower subcontracting costs be another lever that we should count. That's all from my side. All the best.

I'll take the equation part and I'll have Sunil talk about the subcontracting cost. So on the attrition side, you have to look at companies in the context of the areas they work in. So if you look at Persistent, we have always been on the cutting edge of technology. We are the leaders in digital engineering. And hence, the kind of skill sets that we have in the company, whether it is doing custom products for technology companies or doing digital engineering-enabled programs in cloud, data, salesforce, et cetera, we are on the cutting edge. And those are the skill sets that are the hottest in demand in this post -- if I can say, post-pandemic times. So that is the reason that we may have a tad bit higher attrition that looks like from the outside as compared to a general robust IT services company, which also does ERP or legacy stuff or legacy infrastructure management. So that is the rationale that is there. Having said that, this is the area of focus for us, and we are committed to making sure we do the best in terms of engaging our employees, and we have good plans in place for that. Now over to you, Sunil, for the subcontracting part.

Yes, sure. So on the subcontracting side, you would have observed over the last few quarters, given the fact that we are continuing with this situation of restricted movement, right? So on one side, the flexibility of using your own staff, while they may be in a particular country. But the mobility of that staff within the country is limited, whereas we have been winning deals you would have seen in several new areas where we definitely require certain skills that may necessarily not be available to join on a full-time basis. Our approach is to ensure that we are able to convert these as we get more visibility of their continued deployment and not to kind of engage them that can lead to a disruption of costs. So the whole idea is to optimize that and be rest assured we are continuously keeping track to ensure that they are -- there is -- that is a channel that we use only in select cases and to fulfill the -- once the flexibility to travel improves, the reliance on that will gradually reduce.

So is it that -- maybe there is a need for more local delivery centers probably that could have been the case if we had more local delivery centers outside and probably had more local employees hired before, we wouldn't have required so many subcontractors. And the subsequent question then would be that if at all, we are -- as and when travel starts, you will replace it with your people on site. And further, can those on-site people then -- can that work shift offshore when the project really is steady state. So can that happen? And as I said, the question was really to gauge if subcontracting can really be a margin lever for you. And lastly, just one more question on the TCV. Is there anything in the -- sequential decline in the TCV this quarter?

Okay. So let me answer these questions. So as far as -- and I try and keep it brief because we need to take multiple people's questions. So absolutely, you're absolutely right, in an ideal scenario where COVID could have been predicted, people would have had on hiring done and we would have -- any which was skilled up the nearshore, onshore kind of things. They are on the road map. As soon as the COVID gods allow us to do it, you will see us have more presence on site as well as nearshore centers. Is it a lever going ahead for margin improvement? Yes, it is. But again, we'll have to let things pan out as we go along. The first and foremost thing is to make sure we have a good growth going. We need to fulfill our customer demand. We know that we deliver our products absolutely impeccably. And that's where some of these things will play out. So that is the first thing. And in terms of TCV, look, a company that does -- today, we announced, let's say, $166.8 million, roughly $167 million. We are talking about TCV of $245 million. And last quarter also, the TCV was roughly in the same range. So I think it's a fairly healthy thing. As a management team, we are fairly comfortable with this. Some quarters will be higher. Two quarters back, it was higher than this. Some quarters will be at this level. Some quarters will be at a lower level. Look at it from an annual perspective. And look at what we have delivered on a sequential quarterly or sequential year-on-year basis. All of these point out towards a healthy trend. And we are comfortable with the TCVs where they are, and we will try our best to do more. Hopefully that answers.

[Operator Instructions] The next question is from the line of Sandeep Shah from Equirus Securities.

Congratulations on once again a great quarter as a whole. So Sandeep, my question is more on the operating leverage. So despite last 3 to 4 quarters, solid Q-on-Q growth which is coming. The EBITDA margin grow on a Y-o-Y basis looks better. But on a Q1 basis, has been hovering around 16.5% to 17%. And one obvious reason is the increased supply side issue. So in this scenario, how do you tackle this supply side issue in terms of business perspective, a, in terms of pricing negotiation with the plan because you are all saying the attrition is going up because of the hot talent. And, b, in terms of any restructuring of your low-margin business units, if you can throw some light besides the other margin levers, which the CFO has spoken about.

Sure. So as far as pricing negotiation is concerned, I would say it's a collaborative thing with our customers. A number of our customers have been with us for years and even the newer customers understand the market dynamics. And so we are in discussions with many of those on scene when the contracts anniversary periods come, how we can work with them to bring in the cola at the right levels, et cetera, that gives us the cushion to be able to retain the talent and do the right things. And in some places, we are looking at other ways and means of doing special bonuses along with the customers as well. So that's as far as price negotiation is concerned. So all of that is [indiscernible] and the other part about low-margin businesses at any point in time. We are having an eye on the low-margin businesses. And we are continuing to rationalize some of that. If there are more [indiscernible] that, we have brought good tailwind behind us. We have a good growth momentum. And so this isn't small or large or low-margin businesses, rest assured we have an eye on the ball. Balance if we take those decisions, we'll have [indiscernible]

Okay. And just a second question in terms of Alliance business. Can you throw some light whether it's now on a consistent growth path both on the IT as well as in terms of revenue? And also, any efforts to improve the margin on this side of the business. And just a feedback today, I think the audio of both the CEO and the CFO has been read. So I think there is a difficulty in hearing your opening remarks. So if we can rectify it would be really appreciated.

Okay. We'll try and speak a little louder. Let us know if this is any better, Sandeep. Is this any better for you?

Yes, yes. It's better. I think in the opening remarks, it was really bad, and it has improved thereafter. Yes.

Okay. Sounds good. If we have time towards the end of the call, and we are able to complete the questions, we will try and do that. And otherwise, in the recorded version, we'll make sure that it is corrected. So let's go back to the Alliance business. Your question was on the growth in the Alliance business. Yes, so Alliance business is definitely seeing some amount of growth. If you look at our top one customer, the sequential part is the Alliance business. So you can pretty much relate to it. The top one business grew by 3.4% sequentially. So from that perspective, you should be able to gather between that and the fact sheet that we have, all the details about that. Now in terms of margins, et cetera, as well, as I said, we have an eye on the ball in terms of which are the businesses where the margins can be improved. And part of the thing is -- those are being implemented, and that is where, despite the onetime things that we talked about, the impairment that we talked about, the basis points because of the H1B filings we talked about, we still were able to come in at about 16.3, 16.4, right? And if you add back those things, we are actually higher than the [ 17 ] whatever was there last quarter. So from that perspective, we have an eye on various parts of the business, and we will keep continuously looking at what we can optimize.

Mr. Shah, sorry to interrupt, but maybe please request you to return to the queue for your follow-up question as we have several participants in the queue waiting for their turn. The next question is from the line of Manik Taneja from JM Financial.

Congratulations for a very solid performance. I'm just trying to prod you a little bit further on the revenue productivity trends. We're seeing about 2% to 2.5% sequential increase here. Do you think that the tight labor market drives an opportunity to press customers for higher pricing, especially because of the tight supply side environment? That's question number one. The second thing is that, if you could help us understand the number of freshers hired in the quarter, the plan for the year? And given the fact that historically the industry used to complain about the quality of fresher talent. And currently, most of the industry peers are talking about increased fresher intake. Do you think that problem start showing up once again after a certain amount of time.

Okay. So let me go back to the first question first. So the first question, if I got it right is you were asking about, typically, the increase would be in the 2% to 2.5% range in terms of the price increase on a yearly basis. In this situation, do we have the ability to go higher? So in some cases, yes. But we have to be cautious of the competitive market that we play in. So while we definitely believe we have the pricing power in some of the customers. In a number of larger customers, we play in a competitive environment as well. So wherever we have the ability to play competitively and do more, we will do more. Otherwise, it may be in this range and so on. So that is as far as that is concerned. In terms of fresher hires, we had roughly about 400 freshers in this quarter. For the yearly basis, we are looking at roughly about 2,000 freshers, but they will obviously be staggered out, and they will go through their training programs, et cetera, before they become productive. A typical training program may last between 4 to 6 months depending on the technology that they are in. So that is the ideal answer to your question.

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

This is actually a follow-up on the previous one. I think the first part of the question is billing rate improvement seen in 1Q FY '22. So what happened in the last 3 months that your billing rate both on-site and offshore has moved up sharply and changing the trend which we were seeing over the last few quarters? And second is on the fixed component of S&M. S&M cost as a percentage of revenue is behaving as a totally variable cost. So is there some element of it, which moves in line with revenue? Or should we expect it to behave like a fixed cost going forward?

I will have Sunil answer the question. So Sunil, go ahead, please.

Yes. So on the sales and marketing costs, I don't think that they will be fixed in absolute terms. There will be some kind of additions to the cost happening. But in terms of percentage to revenue, you will find that on a wider revenue base, there will be some release of basis points in the sales and marketing cost. And on the first question about billing rates, yes, I mean, consciously, we have been working with clients and trying to optimize the pricing position that we have, like Sandeep mentioned, whether in new projects or in case of renewals, wherever we have an opportunity to discuss the same with the clients. And we have that kind of a benefit available in certain parts of our business. So it's consciously happening, it's not because of anything particularly outstanding in the earlier quarters, but it's a conscious effort to improve our -- that's needed to ensure that we are able to hire good talent and pay them well.

So 1Q, you already saw some price increases, right?

Yes.

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

And congrats on strong exhibition and healthy momentum. Two questions. First about, I just want to get what is driving strength in health care. So if you can provide some perspective, what is driving demand and how we are addressing that strength of demand in health care? And second question is related with India business. If you can provide some perspective because India is doing well for us. And we have not seen any impact despite second wave of COVID in India. So if you can provide some color, what is driving strength in India.

So the first question first, strength in health care. So the strength in health care is driven predominantly on the back of focused attempts by us in different parts of health care. So health care is a portion in any country -- it's one of the biggest GDP spenders. Health care part, as far as we are concerned, there are instrumentation companies and medical device companies on one side. And on the other side, you have pharma payer provider. So we have gone deeper into hiring talent, which can kind of go into each of these segments and mine these segments for us, whether it is for the existing customers and also do the right lower acquisition from a new perspective. Now in the Instrumentation companies that has been a traditional strength for us. In the provider and pharma, we are partnering more deeper with Salesforce. We have the best capabilities in the market on the provider segment in the U.S. as far as Salesforce is concerned and right from Digital Front Door to many other solutions for the health care market, we are the leading provider. So that is what is panning out well for us. And we have further invested in our sales capabilities, which we'll try and keep this at pace but every quarter will be 15.5% sequential, whether it's health care or other segments. But overall, the segment we have gone deeper in our penetration and hopefully, that will keep faring well for us over a period of time. Now on the India side of it, there are 2 parts in the India market. There are a number of our global customers whose Indian subsidiaries we work with. So that is one segment for us. Second segment for us is the companies in India like NBFCs, et cetera, where we are a big leader in the Salesforce space in implementing many different things like their loan origination systems and for one of the leading mid-tier NBFCs, we are basically doing a huge multiyear transformation program as well. So there is good market locally for us. And then there's a market in India for the global customers, their Indian subsidiaries and so on. Wherever the contract originates from that's where we accrue the revenue. That's where the global company's Indian subsidiaries, that revenue is accrued in India. So that's where you see the growth come in India now. Hopefully, this answers your question.

Next question is from the line of Girish Pai from Nirmal Bang.

I have a question for Sandeep and one for Sunil. Sandeep, your digital engineering stems from your OSPD capability, which is your legacy capability. But what is your right to win in the enterprise modernization market, especially against incumbents, so fairly strong there. On what basis are you winning those deals? And is this sustainable?

Sure. So let me answer that first, and then you can have the second question for Sunil. So Girish, if you look at it, what is the digital engineering side of it. And why is that giving us a seat on the table in the enterprise side. Today, if you look at it, everyone in the enterprise side, if you go to a large credit card company or a credit card issuer, they want to look like feel like a software product company. You go to an ATM company, they want to have software solutions outside of the ATM as well. You go to any company, everyone is looking at products and platforms, whether you are an enterprise in the banking financial services space or health care or any others, right? And everyone is talking about agile development. Everyone is talking about going more digital. Who has the more skills in that? Is it the legacy providers? Or is it providers like ourselves who have been doing this for the last 30 years we were entering in the product segment. And that is the skills that are today relevant for enterprise modernization. So what we used to do for product companies in a cloud-first kind of a product development is today applicable for a cloud-first platform development or enterprise modernization. So that is where today the barriers for us competing with who's who, whether it's a U.S.-based organization or a European heritage organization or an India heritage large organization, those barriers are broken and we are competing fairly squarely for that market share. And that's where we are winning as well. So that's as far as the enterprise modernization story and our right to win is concerned. So you can ask the second question to Sunil, and we'll take it from there.

Next question is from the line of Abhishek Shindadkar from Incred Capital.

Congrats on ending quarter. My first question is regarding the growth in Europe. Anything that we should read each being quite volatile, both on a quarter-on-quarter and a Y-o-Y basis? And my second question is more about the strategy. So now we -- with us positioning ourselves as a pure play OPD player. Historically, Persistent has operated at a very higher band of margins. So I'm not asking from a quarter perspective, but structurally, how do we position ourselves, whether we would like to kind of achieve a higher band or kind of reinvest and kind of accelerate the growth, which is more comparable to OPD players?

Sure. So let me try and briefly answer both the questions. So the growth in Europe, yes, it used to be volatile because 1 part of our business out there was majorly focusing on the resell of CE/CLM, which is an industrial product, which we also engineered for one of our largest customers. And that used to -- since it's a product sale, sometimes some quarters, it just go up, some quarters it used to go down. And the other thing was, we were trying to provide services around that. Now if you look at it this quarter, we have taken the revenue and net accounting. If we had taken it on gross accounting, even Europe would have grown much higher. And the growth rates being one, the volatility being second both the things to take care of the volatility. And since we don't add much value in the reseller business, we have taken it to net. And now on, you should not see much volatility in the Europe business and in the IT businesses. So that's the answer on that. The strategy part, yes, today, if you look at it, our skills are fairly well in demand. And can we try and get a little bit more margin over a period of time? Absolutely. But is that the highest priority for us right now versus making sure we continue the growth momentum. The growth momentum is at the same time, we will see wherever we can keep moving on the margin parameter over a period of next few quarters and years. Our aspirations are to do both, pretty good growth and also increase the margins, but that will take time. And growth is priority for us as of this point in time. Hopefully, that answers both of your questions Abhishek.

And just a small one for Sunil. Nothing to worry about the unbilled this quarter? Or any comments that you would like to make.

There is nothing to worry about that. It's just a matter of the paper work that we had to get done over to the next 2 weeks. So it is getting built in this.

The next question is from the line of Madhu Babu from Canara HSBC.

So now I think our growth is almost mimicking EPAM. So do you encounter EPAM and Globant in competition a couple of our deals? And second is that with the kind of cash balance and with the kind of momentum. Is it the right time to go for a much bigger acquisitions?

So Madhu Babu, yes, we encounter a variety of competition in different kind of segments that we deal with. In some segments, we do compete with our -- the names that you mentioned, the EPAMs and Globant as well. And in some segments, we compete with other people. And our growth rates, as you rightly said, they are raising up. And hopefully, it bodes well for us over the longer run. Now the second part of your question was around acquisitions. So at any point in time, we are evaluating 3 to 4 tuck-in acquisitions. And where should we find the right target, we'll absolutely go after it, and that is definitely a stated part of our strategy. And we have very clearly said our acquisitions would be tuck-ins either to make us more smarter, sharper on some of the service lines that we have, or to go deeper in an industry vertical, whether it is BFSI or health care or in a geography like Europe. So we are working on all this. We hope to announce something in the next quarter or so, and it will be an ongoing process.

Next question is from the line of Rishi Jhunjhunwala from IIFL.

Sandeep, one question on head count, right? So our headcount is consistently growing at least 10 percentage points above revenue growth for the past 2, 3 quarters. How do we read that? I guess there could be 2 or 3 ways in which it could pan out, either revenue growth catches up with head count growth or you will pool off hiring over the next few quarters? Or probably, is it the case that incremental business is coming at lower pricing. And as a result, while volume growth might still be there, it's not necessarily translating into revenue growth. So just wanted to get some clarity around that.

Right. So overall, the headcount will continue to increase because a number of our businesses, obviously, are dependent on our ability to staff them and scale them over a period of time. So our business is -- a good amount of that is linearly dependent on the head count. I wouldn't read it into the headcount increasing as yield decreasing or cooling off and so on. At least for the next few quarters, we believe, the headcount this pressure will still be on, and we can do with more is less here as of this point in time. And if you look at the realization, et cetera, we are comfortable, and we talked about, hopefully, time to increase. Hopefully, that answers. If I missed something, please let me know.

And just quickly...

Go ahead. Please.

So yes, so this quarter's growth, right? I mean, really, it is one of the best focus for you, I just wanted to understand whether -- is the growth also could be attributed to some of the revenues probably getting booked later in the end of the quarter, which would have otherwise spilled over to next quarter? Or do we expect the momentum to continue in the next quarter, given that it generally is very fairly strong, even though, of course, not similar kind of growth, but it will remain healthy.

So the bookings, et cetera, that we have done, if you look at the bookings sequentially on a quarter-on-quarter basis, that should give you the confidence of the growth continuing. I'll not put a percentage there -- but -- and there was no end of the quarter phenomena. There's no onetime IP license, et cetera, that we sold. It was scaling up our services business over a period of time and built up over the quarter based on the deals that we won in the last few quarters and even in this quarter. And we have done healthy bookings. We have a healthy pipeline. So we are confident of the online growth.

Mr. Dwivedi, would you like to take chat questions from now then?

Yes. We just have time for a couple of questions, which have come on the chat forum. So the first question, to you, Sandeep from -- this is from Atul Bhole, DSP Investment Managers. In light of substantial deal wins across industry and shortage of skill set, do you see risk of delay in deal ramp-ups?

Look, it is a reality that a number of our peers are also having good order bookings, et cetera. And there is pressure in the market for talent. But the objective at our end is our ability to forecast our requirements and try and be ahead of the curve in terms of trying to hire the right skills, et cetera. And we are doing our best. So far, we have not seen any delays in any of our customer program ramp-ups. And thankfully, all the ramp-up that we have done. We have hired roughly about 4,000 people in the last 3 quarters, and that has kept us on pace and we have not missed any customer commitment even in COVID times. So we are hopeful and it's an ongoing business challenge, and we have good processes in place to take care of it.

Okay. And the last question, which may be either you or Sunil can address from Debashish Majumdar from Edelweiss Finance. He's asking, unlike most of the peers, are on-site contribution to the revenue is going up significantly in the last few quarters. What is the reason there? Are we addressing the high demand scenario in a different way than competition? And in the previous high demand cycle between 2010 and '16, Persistent used to operate at 16% to 18% EBIT margin bracket. Do we see potential to go back to those levels in the medium term?

Okay. So let me quickly try and answer because we are running out of time. So as far as we are concerned, look, when we talk of digital transformation-related projects, there's an upfront a good amount of interaction that's required with the customers. And at times, you need more upfront head count to be deployed on site to be able to have those discussions and engage at the levels with the business that we need to. So that is there and those are normal business scenarios. So I don't think that thing to worry about. As far as the margins are concerned, as you have said, we've got a good growth going growth with the right balance of margins is what we are looking at. We are not looking at squeezing EBITDA out of everything that we can. Businesses can be done differently. We are confident with our growth and right balance of EBITDA. So with that, I think we should stop here. So once again, we'd like to thank our 15,000 team members, our customers and our partners for their unflinching support in this COVID times as well. We have been on a good growth journey for the last many quarters. We are bullish on our prospects for the future. We appreciate you spending time with us on the call today and look forward to connecting with you again in 3 months. Hopefully, with a positive update on an ongoing basis. Please stay safe, stay healthy. Thank you.

Thank you very much, management. Ladies and gentlemen, on behalf of Persistent Systems Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines.