Quess Corp Limited (QUESS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Quess Corp Limited Q2 FY '21 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sudheer Guntupalli, Lead Analyst, Technology & Business Services at ICICI Securities Limited. Thank you, and over to you, sir.

Thanks, Faizan. Good afternoon, ladies and gentlemen. Thanks for joining us today on Q2 FY '21 earnings call of Quess Corp. On behalf of ICICI Securities, I would like to thank the management of Quess Corp for giving us the opportunity to host this earnings call. Today, we have with us Mr. Ajit Isaac, Chairman and Managing Director; Mr. Suraj Moraje, our CEO; Mr. Subramanian Ramakrishnan, CFO; Mr. Guruprasad Srinivasan, India COO; Mr. Lohit Bhatia, President, Workforce Management; and Mr. Sekhar, Head of Emerging Businesses on the call. We will start with brief opening remarks from the management, which will be followed by a Q&A session. I'll hand it over to Ramki sir for the safe harbor statement and to take the proceedings forward. Thanks, and over to you, sir.

Thank you, Sudheer. Good afternoon, everyone, and thank you for joining our earnings call today. Please note that the results in the presentation have already been uploaded on our website. Anything we say, which refers to our outlook for the future, is a forward-looking statement, and that must be read in conjunction with the risk that the company faces. These uncertainties and risks are included, but not limited to what we have already mentioned in the prospectus filed with SEBI. With that said, I will now turn over the call to our Chairman and Managing Director, Mr. Ajit Isaac. Over to you, Ajit.

Thank you, Ramki, and a warm welcome, and good afternoon to all of you on the second quarter results analyst call for Quess. As mentioned, I'm joined by our Group CEO, Suraj; CFO, Ramki; Guru, Head of our India Operations; Lohit from our Workforce Management; and Sekhar from our Emerging business. Before I pass it on to Suraj, I want to give you the context of this quarter's results, some of the key issues that came out of it and how we're looking ahead for the second half of this year. If you go back and take a look at H1 of this year, effectively, for 90 days out of 180, the economy was entirely closed and for the balanced part of it, it was partially open. 60 days out of the first 90 in the first quarter was entirely closed, and then we had a partial opening. Consequently, our headcount what was 384,000 at the beginning of this year, reached about 334,000 in Q1 and about 324,000 in Q2, showing that there's some amount of stability coming into the workforce, where we lost just 3% in Q2. Also, we had elements of our business, 3, 4 parts of it, which were entirely closed in this period. Excelus and our food business were entirely closed; QDigi and Vedang, which was partially closed. So the combination of closed businesses, the fixed cost that we had to bear, set off some of the gains that we made from reductions in costs. But that being said, it should be reported that in H1 of this year, against INR 310 crores that we did in the previous year, we did about INR 270 crores, which is about 13% down against a workforce reduction of about 16%. I also want to touch on a very important aspect of cost. What is effectively INR 70 crores of Q4 of cost -- of ICT cost per month in Q4 has now become about INR 53 crores, which is a permanent saving in a sense of about almost INR 17 crores a month, unless we change our operating structure. This is a big win for Quess. And coming out of the pandemic, we think that one of the biggest gains is that we've got stronger operations, and we now have a leaner, fitter internal process mechanism to run our business. Also, our digital improvements have been significant. QJobs today has -- is approaching 200,000 downloads, and we have 50,000 jobs on our site. Monster has seen all around improvement in metrics. And in that business, we are digging in for the long haul. We know that we have a significant opportunity and the gains that we've made, although it's been extended over a period of 12 to 18 months, is substantial to give us a direction that is proving to be positive for us. The biggest gain over the quarter has also been our debt reduction from what was effectively INR 1,147 crores coming out of the last year. Our gross debt level is now INR 624 crores, it's come down by 45% or INR 520-odd crores. Similarly, our net debt is about INR 45 crores today and possibly will approach 0 towards the next quarter. Interest cost has also consequently come down a lot. All this has been aided by the fact that our OCF to EBITDA has been consistently higher than any number that we've had in the past. In fact, the last quarter, it was about 212%. So we're delivering on what we've promised. If you go back and check on what we've been saying in the last 2 quarters, our team with Suraj and our management committee, we've been consistently working on the objectives that we've been communicating to you about. Our PBT conversion is going up steadily. Our -- and this is the first indication that our path to our target ROE of 20% is well within our sight. So with this, I'd like to hand over to Suraj to explain more details of how we've got to where we are today and in terms of what we look forward to going forward. Thank you, and here is Suraj.

Thanks, Ajit. Good afternoon, everyone, and thanks for making time to be on this call again. Your support really means a lot to us. I hope that your families have had an auspicious start to the festival season. And that I hope more importantly that you're all transitioning back to work safely but steadily. The first half of FY '21 has seen our company and the world navigate a storm previously unseen. COVID's impact, I think, we will all say has lasted longer and deeper than we collectively expected at the beginning of the financial year. I think at Quess, we see this as an opportunity to further strengthen our own leadership as an institution within the market, strengthen our capability and step up our technology intensity. It is really a privilege for me today to share our Q2 results, to present you with a Quess that is almost net debt neutral. From a P&L perspective, we've seen improvements in our businesses successfully -- successively over the months of July, August, September. September saw -- recognized a headcount of 1% over the previous month. And so the growth has then started in earnest. And therefore, in Q2, you did see revenues grow 9% quarter-on-quarter, EBITDA grow 8% quarter-on-quarter. Unfortunately, our training and skill development business and the food businesses continue to be impacted by lockdown and work from home. An in-quarter EBITDA reduction impact of about INR 24 crores versus a year ago. If you adjust for these, you'll find that our EBITDA delivery has actually been higher than a year ago at INR 164 crores versus INR 162 crores. We're also delighted, as Ajit said, to report a strong OCF performance this past quarter with an OCF to EBITDA conversion of 212% versus about 48%, I think, a year ago, largely driven by good bad tax refunds, much better management of cash and cash equivalents and strong collection performance. This has allowed us to reduce our gross debt significantly. And today, we are almost net debt-neutral as a group. And for this, we are grateful to our employees and to our customers who stuck with us through 2 very, very difficult quarters. We remain committed to our north star of winning together with customers, people and investors and achieving 20% year-on-year OCF growth and an ROE of 20%. I'd like to talk about 4 focus areas during the quarter. One, our customers; two, our costs; three, our cash; and four, our technology intensity. Let me go one-by-one and just give you a brief overview. One, our customers. None of our businesses, none of them has lost a major customer over H1. On the contrary, our customer acquisition remains strong with 195 new customers in Q2 and 391 overall in H1. While our headcount did end the quarter at a 15% decline versus the peak in March and a 3% decline versus Q1, September did see our headcount numbers grow versus August. And we are optimistic that we will continue to see sustained growth from this point onwards as the COVID epidemic continues to subside. We remain focused on driving multi-stack deals and driving our cross-sell capabilities that are unique to us and to technology-enable our gray collar processes. Our focus on cross-selling performance continues. I mentioned last quarter that we launched 100 named accounts program where we were doing a very targeted cross-sell activity. Q2 saw this program generate about 11 deals with another -- with overall about a 28% lead generation rate in these 100 accounts, which is healthy by any measure. The annual contract value, full potential annual contract value of the 12 -- of the 11 deals landed has been about INR 120 crores, which is the size of one of our smaller businesses, if you will. So we will double down on this. We will accelerate this in the coming quarters. Cross-sells will continue to be firmly in our sights. So that was customers. Two, on cost. As Ajit said, our monthly indirect cost exit run rate in September was INR 53 crores versus a INR 70 crore average run rate of Q4 FY '20, 24% down. To put this in context, this amounts to the monthly EBITDA contribution of 2 of our mid- to large-size businesses in the group. The additional reductions in Q2 were realized through further reductions in real estate. We've actually, to date, given up about 43% of the buildings that we occupied. We've improved our organizational design. We have driven improvements in our operating model, including more shared services. We've driven automation, including implementing Simpliance's S.E.A.L Engine for compliance. And I want to emphasize that this reduction in direct cost was despite us largely ceasing the salary cuts that we had in Q1 and budgeting additional employee incentive payouts in Q2. Our employees, hopefully, will have a very happy Diwali. We will further optimize our operating model going forward. It's well in our focus. We've actually onboarded a new Chief of Corporate Services, Milind Kharosekar, who was previously an entrepreneur, a partner at Accenture, having set up their BP operations in Bangalore. We will keep improving our model, and we do have higher aspirations on this front. That is on cost. Three, on cash. Our OCF to EBITDA ratio for Q2 '21 was outstanding at 212%, driven by tax refunds, better cash management across the group and overall strong collections performance. Our DSO came down to 65 days versus 68 days in Q1, a testament to the centrality of the role we play at our customers. Today, I'm happy to say we are only INR 45 crores of net debt across the group, and we are working to reduce this further. I'd like to spend a little bit of time on technology and our technology intensity. Technology is revolutionizing work. I think this is the biggest cliche of the quarter. As India's largest employer, we want to spearhead this change. We have been alluding to several business model innovations in the last quarterly calls. And I'm privileged to talk today about 3 very specific developments that we are very excited about. First, let me talk about QJobs. We believe that the sourcing and matching of talent with jobs is increasingly automatable. As India's largest employer with the largest -- with the country's largest body of recruiters, nobody is better positioned to understand the mind of the recruiter and to codify the recruitment algorithms. To this end, we've developed a dedicated and cutting-edge asset called QJobs, which seamlessly matches gray collar jobs with seekers. QJobs allows seekers to create profiles, manage their own learning path, easily find verified jobs and seamlessly contact recruiters as per their role and location preferences. It brings several cutting-edge innovations such as skill verification, auto hiring and seeker verification to reduce the friction for recruiters. We've been gratified by the progress to date. In our 6-week beta launch period, purely via word-of-mouth, with not INR 1 spent on marketing, we have seen about 155,000 downloads and over 200-plus third-party recruiters onboarded. To date, 12% of the candidates who have applied for a job on QJobs have actually been made an offer, an outstanding rate by any comparison. In addition to 20,000-plus listings from Quess, several marquee third parties like Eureka Forbes, Delhivery, Swiggy, NoBroker, Rapido have placed their trust in QJobs, listing more than 50,000 jobs already. And with the site integration into our own recruitment system, and I can't emphasize this, the recruiter designed auto-hire engine, we're already sourcing 13% of our hires through QJobs, demonstrating the early promise of significant recruiter productivity improvements. For us, QJobs itself over time will create new revenue stream potential. But for the moment, just the potential improvements in efficiency to our own operations justifies our investments in this service. And we will operate free for the period to come to ensure that as we develop this, we drive traffic and we develop QJobs into India's leading auto hiring marketplace for gray collar talent. We are absolutely committed to this. That was QJobs. The second thing I want to discuss, and we've mentioned this previously, we believe our purpose is to drive the immense potential to improve worker productivity in the Indian gray collar space, be it in housekeeping, security, in-field sales or merchandising. The opportunity ranges from more seamless rostering and attendance capture, which today is often manual in many places, to automating geo management of frontline tasks. This quarter saw us launch our retail platform Workforce Management Solution, WorQ, previously called InEDGE. WorQ has industry-leading rostering, attendance and task management capabilities in addition to a one-stop HR IMS for all of our employees. So all of our associates today get their pay slips, apply for leaves, everything on WorQ. Each of our businesses are building their own workflows into WorQ as well. For example, automating night checks and security or digitizing housekeeping tasks checklists to drive their own frontline productivity and manage better outcomes for our clients. This month, we've hit 200,000 monthly average active users. WorQ is India's most -- and at this point, it's already India's most widely deployed workforce management tool. It's become integral to our customer offerings, and we will continue to build this out. We believe this is a core competitive advantage for us. The third aspect, I'll quickly touch upon is our employee benefits platform market. This is of the 3 platforms I'm mentioning, probably the one that is most early in development. It's offered to our own core employees and associates and potentially also to employees of our payroll customers in all segments. Market offers benefits such as loans, deals on 2-wheelers, housing, et cetera. And we've been piloting this with our own associates, have seen a very enthusiastic response. About 30-plus vendors on the platform to date, about 1 million visits from about 1.4 lakh employees with about INR 1.5 crores of loans already deployed to associates. As I mentioned, we're optimizing for product market fit, but we expect market to evolve into an extremely important element of our associate proposition, helping us manage attrition and help our associates take their money further, what we call winning with our people. So that was a brief overview of our 4 focus areas in the last quarter: Customers, cost, cash and technology intensity. I'll now give you a brief flavor of maybe the performance by platform, starting with Workforce Management and General Staffing within Workforce Management. So General Staffing revenues were up about 5.3% in the quarter versus Q1. The headcount was down by about 3.8% versus Q1. The headcount reduction in the quarter came mostly from Retail, down about 12%; BFSI down about 9%; offset by an increase in Logistics, up about 35%; and Telecom is up about 9%. We're encouraged that September saw a 1% increase in head count. And for every customer who de-grew headcount in the quarter, about 2 customers have actually shown a growth in headcount in the quarter. Q1 was the exact opposite. In Q1, for every customer who grew 2 customers de-grew. And we're hoping this is a sign of better growth to come. We anticipate Q3 will see the General Staffing business grow further. Although we may not see the typical festival season spurt, growth should start. New customer acquisition in GS has continued to be promising with 23 new logos added in the quarter. We are working on accelerating this, especially in the industrial vertical where we've traditionally been underpenetrated. We're also ramping up our presence in task-based contracts to meet demand from new customers who have very short-term needs. With a new label or recognizing gig platform based employment, we believe that the task-based work will be an integral part of the mix. General Staffing, monthly permanent will always be needed, but there will be a need for flex, and we want to see how we build our capabilities to match our customer needs in this area. GS will also, by the way, be the biggest beneficiary of our QJobs platform with an ambition to drive recruiter productivity to multiples of the current level and several pilots underway. So that was General Staffing. The second part of Workforce Management is IT staffing, where the domestic business is doing better than our pre-COVID plan. Our EBITDA, I'm happy to say, is up 52% versus Q4. We've seen a 240 basis point margin expansion from successful execution of our strategy to focus on higher-margin positions with some very impressive new partner acquisitions. So we are very excited about this improved trajectory in domestic IT staffing, with our businesses in Singapore, APAC and the Middle East remaining largely on pre-COVID business plans to date. The third part of Workforce Management is our Training and Skill Development business. This has -- this continues to be deeply impacted by lockdown through the quarter with many -- with most of our facilities not being able to open. Revenues was down about 84%. Losses have, however, come down in Q2 versus Q1 with us managing down some of our costs, although the EBITDA reduction in the same quarter last year was about INR 17 crores. So of the INR 24 crores I gave you earlier, about INR 17 crores comes from Excelus. The government has committed to cover some of the fixed costs we incurred during the last 6 months, but we've not provisioned for this yet. This amount, when it comes, if it comes, would be an upside, should it come. The government is -- the business has also started off -- it has started off operations now in B2G, and we've kicked off some exciting new B2B projects also, including one that will establish 150-plus vocational training centers pan-India. And we should see, by Q4, I think TSD coming back to full operational speed, assuming that COVID continues to subside and there's no major incidents in our centers. So that was Workforce Management. The second platform is Operating Asset Management, of which the first part is integrated facilities. The IFM business can be broken into Housekeeping and Food businesses. Our total IFM business revenue in Q2 fell by about 5% versus in Q1, and this fall was completely attributable to the Food business. So on the Housekeeping front, if you look at the IFM business, performance has actually been flat year-on-year despite IT services, the IT service sector, which is about 25% of revenues in Q2, seeing a reduction of 1/3 versus last year, owing to continued work from home. The manufacturing, health care, BFI infrastructures are pretty much back on track and back to pre-COVID level. So really Housekeeping has been flat. It's the Food business, which used to be about 15% of IFM revenues in 1H, like about a year ago, that's fallen by about 46% year-on-year. And that's really sort of what's driven the EBITDA reduction in this business. Our team has shown strong resilience though in this time using the quarter to further strengthen our go-to-market approach with a very sharpened vertical focus on health care, industrial, public utilities, emphasizing innovation such as chemical-free sanitation and biophilic workplaces. Our integrated sales teams have charted on a strong pipeline with focused efforts on 75-plus large and strategic accounts and have added 70 new logos in Q2, of which 5 were integrated offerings with security. We hope for an even stronger H2 in terms of customer acquisitions. On carrier, the second part of the OEM platform we've seen significant downsizing pressure, especially in IT services, which accounted for 1/3 of its pre-COVID revenues. Overall revenues of carrier are down about 1/4 year-on-year. We have not lost customers per se. On the contrary, we've added 20 logos in the quarter, but we have fewer heads deployed per site, especially given the reduced use of office buildings and the reduced use of transportation in IT and ITES in this period. So we do expect the numbers to recover as workers return to work. And in the meantime, we're doing whatever we can to drive new sales activity, especially Mantech combined view, by improving the operational performance and digitizing our workforce management to improve agility. The team has also done a great job on collections. They had their best collections month ever in terms of absolute collections brought in, and they have brought their DSOs down. On the industrial side, which is the third part of OEM, revenues have been pretty much flat quarter-on-quarter as declines towards the end of quarter 1 were offset by growth over quarter 2 with the startup of industrial and manufacturing operations across the country. The team is focusing hard on digitizing our hiring and workforce management while expanding business development capability. The sales side is looking really strong, and we expect really good momentum going forward in this business, which is now fundamentally stronger than where it was a year ago. That was operating asset management. On Global Technology Solutions, we saw revenues grow about 13% quarter-on-quarter, about 8% year-on-year, with EBITDA following a similar trend. Our North American IT business continues to grow healthily with our go-to-market integration under one brand completed. North American EBITDA actually grew 20% quarter-on-quarter on the back of new customers and service lines. During COVID, we commenced a new service line on end user computing, which has been the fastest-growing business to cross a $1 million annual revenue rate with very heavy -- healthy margins. We've seen new business come very fast in IT services, private as well as government sectors, with several new customer additions, both on the insurance platform and beyond. So the IT story is a good story in North America. On the BPM side of GTS, Conneqt and Allsec both saw revenue growth in Q2 versus Q1, at 17% in Conneqt and about 6% in Allsec. Talking about Conneqt, specifically, although -- interestingly, although revenues are lower by 12% versus a year ago, EBITDA was actually up versus a year ago on the back of strong efficiency measures taken in H1. With the lifting of loan moratorium, we hope we will be more or less back to pre-COVID levels in Q3 and return to healthy growth thereafter, especially as we see enthusiasm for our customer care in a box digital solution an appetite that we think is higher than the fore for shared services outsourcing. For Allsec, we saw revenues grow up 6% versus Q1 with EBITDA going up a little bit more than that. At this point, we expect Q3 also to be back to more or less pre-COVID levels. This business has 2 parts, the HRO business and the CRM business. The HRO business, especially continues to grow healthily. We had 30 new customer additions. As a matter of curiosity, by the way, and possibly a barometer for white collar employment in India, you'll be interested to know that on a same customer basis, our Indian enterprise customers saw the total number of payslips processed per month fall very marginally in the quarter, and overall down about 5% versus March FY '20, so Q4 FY '20. So we are -- we have seen overall in the white collar space maybe a 5% drop in employment. Although Q2 saw continued drops, especially in retail and FMCG, with increases in BFSI and e-commerce. I'll now move to Monster. Monster has seen traffic up by about 60% in Q2 compared to Q1. Recruiter search volumes increased by 30% versus Q1 after a 50% decline in the previous quarter. Job postings have increased by 69% in the quarter and 39% higher than Q2 FY '20 as well, with sales performance also up by 46% quarter-on-quarter. Renewals have shown significant improvement compared to last quarter and actually are close to all-time highs. The business had another positive -- had another positive EBITDA quarter, although we do expect Q3 to be slightly negative again given some planned investments. We continue to be optimistic about this business trajectory with this improved product performance, renewed recruitment enthusiasm and overall better operational tightness all around. The final part of our emerging businesses is QDigi, which has had a strong Q2. Operations are back to normal, and many new customer acquisitions. We actually closed Q2 in QDigi with our highest quarterly EBITDA ever. And, we expect to grow further in Q3 on the back of further festive season volumes. We've also launched our extended warranty product towards the end of Q2, which we hope will develop nicely. So that's an overview of the platform. So I'd like to close here by thanking each of you for being here today. Your support does matter to us. We can't choose the times that we live in. We can choose how we respond to them. We are excited about the choices we've made at Quess during the last 3 quarters to strengthen our institutions, operations and balance sheet. We're proud of our team for the resilience demonstrated in this time. We assure you we remain focused on our North Star of winning together with our customers, our people and with you, our investors. We are now happy to take any questions.

[Operator Instructions] The first question is from the line of Sudheer Guntupalli from ICICI Securities Limited.

Yes. Just wanted to know your thoughts on how this festive season is panning out. On one side, we are seeing few data points that suggest there might be trends of revenge travel, revenge shopping, et cetera, playing out. How real are these trends? And how do we see these impacting different business segments of ours, especially in the December quarter?

Sure. So I think the festive season has typically played out mostly for 2 businesses, our General Staffing business and our DigiCare business. I think in our General Staffing business, we're certainly seeing optimism come back to this, right? I think that it's clear that the economy is getting better day on day, week on week. I think that what we're going through right now, the pre Diwali period is also important to watch, right? Having said that, I think the reason why I said we may not see the spurt that we've seen in the past is that, now clearly, e-commerce is going up, and we've grown nicely there in General Staffing as well. But at the end of the day, physical retail outlets today, I think, will still, by and large, use their existing stock of employees as far as possible to manage the festive season. I think beyond that, once they get comfort that people are coming back to the shop to shop again, and the last weekend seems to have been better than the previous weekend from all reports. I think we'll start seeing further growth. But I think from our side, the real implication is we need to focus on the areas where there is growth, which is largely around the e-commerce space, around the industrial space and we'll keep doing that, right? On the DigiCare business, which typically has benefited from higher installation and servicing in the festive season, I think it's fair to say we've seen those volumes come in. And we do think that the DigiCare business will have a better Q3 than Q2. I think there, especially around the FMCG sector, Sudheer, we're seeing a lot of uptake and sustained uptake still, which gives us hope that -- I think a quarter ago when lockdown was over people said people are coming to buy, everyone is wondering, is this for a week or 2 and then people go back. I think now, hopefully, I think we are seeing optimism return. It's going to be key for us to manage these COVID numbers. I think part of what is giving the optimism at this point in time is that one week after Dussehra, we're still not seeing -- we're not seeing a spurt in COVID. If anything, the numbers nationwide seem to be managed, which hopefully means that as a community we figured out how to go about our business and yet still keep safe. So I think we'll have to keep watching that balance, but we're optimistic at this point.

Sure. And within General Staffing, Suraj, you were actually talking about a new line of gate workers, et cetera, which should see further traction under the new labor law regime. Can you kindly throw further color on that?

No -- sure. Look, I think globally, it's very clear that people wanting to work part-time and be paid part-time is a phenomenon that is here to stay. Here I think that is one thing that is established. I think the second thing that's established is Indian labor laws now acknowledge that gig platforms and the new laws, right, they brought them within the ambit of social security. And so we formally recognize in some shape of home that gig platforms are a real thing, right? Going forward, I mean, obviously, in the short term, with uncertainty, a lot of people are looking to say, can we actually, in addition to having permanent staff who manage the base load and temp staff who manage the, let's say, the gradual peak, can we also think about how we get sort of task-based staff who manage dramatic peaks for weekend, let's say, right? Like I want people only for a day, every Saturday, or let's say, I need to go and kind of enter a new city and I need a bunch of activities to be done in that city. I think these kinds of staffs lend themselves to people who will work on a per task basis, okay? And we think that given that this is now in the mainstream, we've always had a huge premium on being compliant as a company. I think the government has now recognized that this is something that is needed. We want to play a part in that in that space. We do have a couple of contracts where we're experimenting with this. I think it requires, let's say, slightly different technology, slightly different operating skills. So we will see how we can augment our strength and the experiment with the space. Guru, you want to comment?

Yes. Suraj -- so we -- I think gig has been in a way featuring here and there, though it's getting formalized now. The activities are there. There are weekend promoters activity which are offering. So this will only bring in more -- this is a value-add for us in -- as part of staffing to formalize this and get into the sector. So this will only help us to build more on this segment. I mean these are the activities which we are not probably catering perhaps to run a weekend promotion or a specific task-based project. So it will help us to play in that space going forward.

Sure. Last question to Ramki, sir. We have done a very good job on cost rationalization and cash conversion over the first half. Sir, from the current levels, how should we think about overall margins and segmental margins and cash conversion going ahead?

So look, I think Sudheer, in our own internal projections, we have assumed that for now that the EBITDA -- so first of all, we've assumed that over time what's going to happen is some of these IDC reductions, we will reinvest into other areas, for example, technology and so on and so forth. So I think what you should assume is that the EBITDA margins we had, let's say, last year, right, you should project them in your model and not use this year's EBITDA margins. And then any upside to that, we will communicate over time. But for now, just stick with last year's EBITDA and project those on an ongoing basis.

Sure thing. All the best.

I think overall, the way we've thought about this in this year, INR 70 crores to INR 80 crores permanent savings in IDC is sort of what we've built in, Sudheer.

[Operator Instructions] The next question is from the line of Divya Jain from ICICI Mutual Fund.

My question is more regarding the sector exposure in terms of General Staffing. Sir, if you could help which are the sectors are seeing more traction in the short-term? And which in your view...

I'm so sorry to interrupt to Ms. Jain. We can't hear you clearly. Please use the handset mode.

Is it better?

Much better.

Yes. So my question is more regarding the sector exposure in terms of general stocking. What are the traction sectors in the short-term? And in our view, which is the sectors which are most like a peak sort of -- in terms of growth and future on, it will just be like an organic growth of, say, 2% to 3% versus what you have been delivering for in the past. So I just wanted to understand in terms of the sector exposure, how do we stand?

Sure. Lohit, do you want to take that for GS specifically?

Yes, am I audible?

Yes.

Yes, yes.

Okay. So I think Suraj did allude to this, and I'll just elaborate a bit more in line to your question. If you really look at it, from a GS or Workforce Management perspective at Quess, in the last 2 years, we had taken a strategic punt and grown our BFSI segment. And that today, for us, is our largest, followed by Retail, Telecom, Industrials, FMCG, FMCD, IT, ITES and Logistics. Coming back to your specific question on where are we today and what do we see? And again, taking a leaf from what Suraj was initially mentioning, if you notice, e-commerce logistics has definitely shown stupendous growth. IT, ITES, as he mentioned, not just in India, but we are seeing growth across Middle East, APAC and Comtel, our asset in Singapore, as well. Industrial is something that we are growing as a complete segment. To give you an idea, Industrial used to rank the fourth largest segment for us and was only 11%. In the last 6 months, we've seen much more traction coming in Industrials. And all of us are reading it as to why that is happening across the country. It also feeds to the rural demand and the semi-urban demand. While Retail is the one big segment which is #2 in our segment list at the moment remains either flattish or de-growing. Retail also, predominantly, if you notice, our customers are finding better traction in rural and semi-urban. But it's the urban markets where there's still concern, there's still care and people are a little concerned about COVID numbers rising and hence not frequenting stores and malls the way we would have liked to see by Q3. So how we are looking at this is, we are growing where we see India is growing in terms of employability, which is Industrials, Telecom, Logistics and BFSI. We're also noticing that since September, which is the turnaround that Suraj mentioned, the BFSI segment has opened up a lot more than they did in the first 5 months. It also coincides with the end of the second moratorium. And that is one of the reasons why BFSI traction in Q3 and Q4 will start to stabilize and start to grow for us. Adding to that, we are definitely looking at newer markets for ourselves. We are definitely looking at newer customers. And as our disclosures give for this quarter, 80 new customers have been added in WFM, 23 of those have been added in general staffing. All of whom, if you notice, would either have come from the stable of Industrial, BFSI or e-commerce.

So just a follow-up to this only. I mean if you see e-commerce, this trend is -- would you extrapolate the trend for years to come because -- I mean because of COVID this has done, eventually, this might reverse back. So then what would be the growth pool for Quess in terms of General Staffing?

See, the interesting thing about Quess and the General Staffing portfolio is we're equally large as a market leader in retail as well as in online presence, which is e-commerce and logistics. And in a manner of speaking, great kudos to our teams, which have had that diversification strategy over the years, and it's paying for us today. So there are segments which are growing, like you rightly said, because of COVID and people are moving away from off-line to online. But as Sudheer also mentioned in the previous question and so are you alluding towards, there is a degree of revenge shopping, revenge buying which has been noticed in areas when things like pandemics do come to a stability. With more and more people now getting, let's say, stabler in their jobs, getting incomes which were deducted by their organizations, restated back to them, a period in front of us would possibly be for bonus and incentives. And thereafter, at some stage, next financial year, maybe even appraisals. I think that brings back the consumer confidence which is missing today. So from a Quess perspective, the way you have to look at it is even if Q3, we are not seeing the kind of retail traction we've seen in the prior years, we are very well placed between the 2 legs. E-commerce growth also lends to growth at Quess WFM level and General Staffing. Retail growth also lends to us in manners of speaking because the customer base in both categories is equally large for us. And if both grow, then it's overall absolutely wonderful circumstances.

Thanks, Lohit.

The next question is from the line of Aditya Bagul from Axis Capital.

Congratulations on good set of numbers amidst really challenging times. Suraj sir, I have 2 questions. One is more near term. We talked about some fixed cost reimbursements from the government in the Excelus business. So is there a chance you can quantify that number for us? That's part 1 of the question. And assuming that Excelus revives Q4 or Q1, do we expect Workforce Management to go back to the 5.1%, 5.2% margin trajectory? That's question number one. And if I may, I'll ask the second question as well. A lot has changed since 4th or 5th of March when we had our annual conference in terms of where we are both in terms of our assumptions and where we want to go. Though our target of 20% ROE remains very, very clear, I just wanted to understand the 2 or 3 blocks which are key to delivering that number and how are we placed given the last 6 months on those e-coms?

Sure. Maybe Guru, you can answer the question on Excelus.

Sure. Aditya, your first question was regarding the grant from source. We've been having a series of discussions at appropriate level in the government for the last almost about 60 days. Till date -- I mean we can't put a value to this at the moment. These are the cost reimbursement basically that we are asking for, for all the centers which have been shut for almost 6 months now. So while till date we don't have a denial on this, but if -- we have not counted in our projections. So if at all it comes, it's going to be an upside. So whatever comes it's going to be upside. So that's where I would leave this with. The second question that you asked will our margins be back at level of where it was pre-COVID in total WFM? So one thing that we have got in clearance rather in many places is that by mid of November the centers are going to open. I mean so that's a clear indicator for us. So it might be in few states when there might be a few lockdown that may continue in few states, but majority places we should continue. So by exit Q4, I think we'll be fairly back on to track with this business.

So Aditya, let me take the question on ROE and how we're going to get there. See, I think there are 4 buckets of work to get to 20% ROE from where we are today, okay? Two buckets fit into EBITDA, 1 bucket fits into sort of PAT and 1 bucket fits into the denominator of equity. Let me talk about each of these. So the 4 pieces of work, I think one is to make sure we're growing our good businesses at, let's say, 20% top line year-on-year and getting some operating leverage out of them in the process. And that's something which, I think, is quite easy to understand. The second part on the EBITDA side is just harvesting some of the streams that we don't believe will get to profitability or reducing some of the unprofitable businesses that we had. So if you take a look, Monster was at minus 24% last year. This year, we're at plus 6% so far. Let's see where we end the year. But some of those drains or dependo, which we've sold so you're just getting -- kind of getting some of those out of the picture already kind of adds on to the starting point EBITDA, if you will. So those are 2 on the EBITDA side. The third is then improving our PAT to EBITDA conversion rate and that is really around managing interest costs, managing our intangibles and managing our depreciation, right? I think we've -- interest costs, paying down our debt as quickly as we can, and you are seeing some of the execution there. On interest rate, it's really around -- so on depreciation, it's really around how can we manage CapEx better? Are there ways to optimize it? And we're looking at -- as we speak, we're looking at elements of that. And on the intangibles, kind of the Tatas do have a put option on Conneqt. As and when we do that, the NCI put cost will come down. So that should progressively come down also. So that's the third part, which is managing the PAT to EBITDA conversion. And the fourth part is just ensuring that we keep control on the denominator, which really means thinking through -- I think one of the things that we will think through once COVID is behind us and once we have visibility is, for example, we'll start thinking about our dividend policy to say, do we want to use that. We will be very careful in any capital that we raise to make sure that whatever we raise is clearly going to go into equity and ROE accretive ways. So that's the fourth thing, managing the asset base. At this point, internally, we are still targeting FY '23 to get there. And we're doing our damn best to run behind it, and we'll give you updates as and when we have them.

Yes. That's very helpful, Suraj. One last question. Kudos, on exiting dependo and Quess East Bengal Football Club. I just wanted your thoughts on any other businesses that you've had, wherein we are looking to have a strategic exit from?

There's nothing we're proactively looking at right now, Aditya. As and when we do, we'll come back with updates. At this point, I think no update to give.

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

I have 2 questions. One is on the General Staffing business, we have seen our revenue growth despite a drop in headcount. Is this because of the incentives coming back or how should one think about this?

Yes. No, absolutely. I think what's happened between Q1 and Q2 is some of our salespeople have actually gone back to work. And they -- many of these contracts are fixed-price contracts. And therefore, as we get incentives, it's pretty much [indiscernible].

Sure. Sure. And the second one was, in the first half, I think we have had a INR 50 crore impact on EBITDA from Excelus and the Food business. Do you think the second half you'll see recovery there with some at least INR 30 crores, INR 40 crores of additional EBITDA? Is that a fair way to think about it? Or it could take longer?

So I mean I don't want to give you a forward-looking thing, but I'll tell you, I don't think we will reverse all of it, right? I think for Excelus, for example, it starts -- the start-up has started, but we started up now with new SOPs, much more social distancing. So the profitability per site may not hold, right? On the Food business, I think we're really dependent on 2 things: education institutions starting up and we are seeing some start-up progressively from November 15, right? Question is how many kids will parents have -- actually, how many parents will allow their kids to come back? Of the kids who come back, how many will actually eat from the dormitory versus being told by their parents to hold themselves up in the room and make their own sort of food? I think all these behaviors have to play out. And for the part of food which is linked to IT services, those folks have to come back to work. So it will be progressive, Nitin. It will be progressive. We're hoping that the work from -- work to office at this point will go faster than everybody expects because once people come back to work we feel people like it, but we have to see.

The next question is from the line of Abhijit Akella from IIFL.

Congratulations on a good quarter.

Sir, your audio is breaking from your line. Please check.

Is this any better?

Yes, sir. Please go ahead.

Yes.

Congrats on a good quarter. My first question is with regards...

Sir, this is the operator. Again, the audio is breaking, sir, from your line.

Okay. I'll re-dial [indiscernible].

We'll take the next question from the line of Shariq Merchant from Duro Capital.

I had a very basic question on the DigiCare business. Could you help me understand the economics of the business and the opportunity that you see in the next 2 to 3 years? How should we be thinking about the business scaling up, the challenges that you face in the business and the margin trajectory as well?

Sure. Look, I think that this is a business which has traditionally been very brick-and-mortar business, right? It was driven by mobile handset servicing in brick-and-mortar service facilities. I think the breakout that the team has made in the last few months is that, at this point, the amount of activity coming from field services has actually equalized the amount in physical retail. So what we're trying to do is to variablize our cost structure so that we're not tied down to physical facilities. So I think that's -- so that's one way of movement. I think the other way we're moving the business is to move beyond mobiles into all kinds of consumer appliances. So at this point, for example, we're a very large installation partner for Amazon for anything that they sell off their website and many other consumer durable companies. If customers call for warranty or out of warranty, it's actually our people go and service. So the way we're thinking about this business is to kind of make it over time, much more sort of direct -- much more B2C rather than B2B direct linkages with the customers whose home we go to providing high-quality service. So I think we will see -- we should, therefore, see EBITDA margins expand gradually over time, and we should see continued growth. What we don't want to do is put in too many additional brick-and-mortar stores that are customer facing because there -- one of the realities of this business is highly, highly, highly seasonal. So air conditioning kind of spikes 3x, 4x around February, March. Installation spike in Diwali. So we want to make sure we keep our fixed costs low and have access to a variable cost of well-trained labor.

Sure. It will be helpful if you can maybe outline some milestones that you all are looking for in terms of number of clients, in terms of revenues, et cetera?

Sure. Why don't we take it off-line? I'm happy to set up a chat for you with the management team there as well.

Sure. That would be great.

The next question is from the line of Rajesh Kothari from AlfAccurate Advisors.

Congratulations for the good cash flow focus and more gross debt repayment, and I hope more net debt repayment also happens over a period of time. Sir, my question is very basic question. In terms of -- if I look at your first business, Workforce Management, and if I add back INR 17 crores to EBITDA to INR 63 crore EBITDA reported by you, but still it is 20% decline compared to last year or 15% decline compared to last year, INR 91 crores. So it means we have lost margins somewhere. So can you tell us that why it is reflecting like that?

I think one of the things, Rajesh, you should consider is that the couple of businesses in the Workforce Management, where the business was down, I mean, especially in the Excelus of the training and skill development, our margins are considerably higher compared to a General Staffing. So like Suraj mentioned, once we have our training and skill development business bouncing back, that should help us to kind of get the margins back in shape. That's number one. Number two, obviously, when we are -- I think we've discussed this in the past also, where we are signing up some large deals and eventually, starting off with maybe -- since the size of the deal could be large that could be a possibility. But we'll start off with relatively above margin and over a period of time catch up as we increase the scope of service. So that's the second thing. The third thing is, I think, during the festive season, generally, there's a lot of pass-through. So which means that the revenues would get pushed out but not necessarily the margins. So those are the 3 things which would happen. So as the pass-throughs come down over a period of time, because the festive season not there or we get past the festive season, then, I think, that will also help to contribute to get back to the original margin. So those are broadly, I would say, 3 probably tickers, which contribute to the margin.

The other way to think about it, Rajesh, is you need to take the INR 91 crores from the same period last year and you subtract INR 17 crores, you get to about INR 74 crores, right? To your point, that's about 14.8% lower delivered. But you also got 18% lower headcount overall. So, I think, if you look at the revenue per EBITDA per headcount, also it's gone up a little bit in my sense because of cost cutting. That's how I would think about it, Rajesh.

No. So INR 17 crores, is it your cost or is it EBITDA lost? When you're putting INR 17 crore as the number...

It's differential. If you take the EBITDA in the quarter last year minus the losses -- plus the losses this year, the differential EBITDA.

Correct. So it means we are not calculating the potential EBITDA loss. We are talking about the -- at the cost level. INR 17 crores EBITDA down because of the INR 15 crores is the cost that we are incurring into the training and skill development. Correct? So my question is that INR 91 crore compared to this year, is still 14% decline. I'm still not able to get the answer.

That's right, Rajesh. You're right, it's 14.8%. But the headcount -- so if you exclude the Excelus business, right, you get to a place where the margins are 14 -- EBITDA kind of absolute, is, let's say, 14% down, right? But the headcount is 18% down, no, versus the quarter last year?

Understood. Got it. And my second...

Mr. Kothari, this is the operator. Sorry to interrupt you. May we request that you return to the question queue for follow-up questions.

Rajesh, you could also take this off-line with Ramki in the next couple of days. Happy to give you more clarity on this issue.

We'll take the next question from the line of Jonas Bhutta from PhillipCapital.

Congratulations on the phenomenal cash flow performance. I have 2 questions. First, on the comment where you've seen growth in September over September last year. A, whether that sort of pulled through even in October? And digging deeper within that, just trying to understand whether this growth is coming back from existing clients returning to work on their existing sites? Or this is -- a bulk of this has come from new sites getting deployed from new clients? Just trying to get a handle on whether this is new business coming in or your existing clients just going back to the old bandwidth. That's the first question.

Sure. So, I think, it's too early to comment on October. And the numbers typically come towards like literally the first week of the following month. See, I think if you look at the headcount increase, right, I think it's largely come from -- in Q2, it's come from existing customers. So if you look at -- I think 1 in 3 customers has actually grown headcount, okay -- sorry, 2 out of 3 customers have grown headcount. And that's where really the kind of the losses have come from. I think, Lohit, if you want to give any more granularity into where new sales -- what role new sales has played in headcount, do you want to just launch right in?

Yes. Happy to, Suraj. So if you look at it from what we've been speaking about since the last hour, primarily, what happens is whenever you sign new relationships and new customers, it takes a few weeks and few months for the oil to get smoothened into the engine and the things to start reflecting in headcount in revenue and then fall through into EBITDA. Most of the customers, especially signed during this financial year have a large upside in future. However, they have been cautious themselves also and they are giving smaller mandates. So the recovery is primarily -- I mean what we spoke about was that possibly the worst for the WFM platform was somewhere in the mid of August. From the 3rd of August (sic) [ third week of August ] onwards, we've been seeing week after week performance improvement in the last 2 weeks of August as well as the 4 weeks of September and coming into October. This is encouragingly happening from 2 out of 3 customers, which are giving us growth existing as well as the new markets and as well as the focus on Industrials and Logistics that we are putting in because we feel that, that growth will continue to happen for the next couple of quarters till the time the retail and the other consumption pack comes back with a bang and comes back with a degree of revenge shopping. So how you have to really look at it is the corner hasn't turned in spite of the fact that the second largest segment, which is Retail, is still degrowing in spite of the fact that against a traditional year when Q3 would have seen huge offtake by Retail, FMCG, FMCD customers in malls and shopping outlet still being very subdued this year. In spite of that, the recovery has begun. As the recovery spreads through other segments, as we sign more customers and as we go deeper with the customers that we've signed, you will start to see more profound impact in terms of numbers.

Got it. Sir, my second question was more from sourcing point of view. While historically, the -- and I appreciate the initial comments that we made on QJobs and that's more derived from that, where the earlier understanding was that sourcing -- companies didn't really get remunerated by clients for the entire cost of sourcing and associate. With QJobs coming in, where do you expect that the cost per associate sourcing per associate comes down dramatically? And whether you can recover that cost now from the client? If you can elaborate on that, that will be great.

Lohit, why don't you go for that one, too?

Yes. So if you really look at it, the reason and purpose for putting technology together is, one, there is a disruption in doing things physically. In the past, if you walked across to any of the Quess branches, 65 branches, 122 training centers, I'm talking about Workforce Management and General Staffing, you always find those queues outside every branch where hundreds and thousands of people would line up to get jobs. We know, for a matter of fact, that customers are not going to walk into our branches as frequently as they used to do in the past. Candidates cannot come to our branches and stand in queues of hundreds. So, A, we'll have to provide for a digital way of increasing that. But what Quess did not want to do was just convert an off-line process into a digital process. What we wanted to do was morph that into productivity enhancement. So some of the leadership which has come in very recently, let's say, Sekhar up for that matter and the team under Sekhar and what Suraj is driving in terms of transformation of technology and processes, is primarily for what we just spoke about. The initial data points will reveal that we'll be able to garner greater market share for what is available when the customer throws an open mandate to anyone. The second data point will show us the productivity per recruiter per month, which eventually will translate into lower cost to serve. And thereafter, it's up to Quess or the business to either monetize that and start converting that from a revenue perspective also add an additional line of revenue and margin or to continue to keep it as a productivity enhancement tool, take business away from, say, others in the marketplace and disrupt using a lot of technology, the fastest fingers first and give 5x more than what anybody else would give. I hope that kind of articulates the vision -- I will not be able to go into specific matrices and numbers, if you understand, but we can always give you directionally, I mean, if you want to have a chat off-line.

The next question is from the line of Alok Deshpande from Edelweiss.

Congratulations on a great set of numbers in a challenging time. My first question is on the fixed cost. So in the first half, as you had mentioned, there is a fair bit of cost cutting which you guys have done. Just wanted to understand how much of that is likely to -- how much of those costs are likely to come back once things start to recover back and start going back to normal maybe this year and next year? Or do you think that this cost-cutting is more sort of structural now?

No. So look, I mean, that's a good question. Look, I think that if you look at our Q1 cost cut, right, a part of it -- so I think there's there were 2 non-sustainable elements of our Q1 cost cut. One was there were some salary cuts we passed on and the second, I think, in the time of COVID travel costs coming down and all such major costs come down, right? The employee cost, we've now -- cost cuts, we've now completely reversed and we got rental waivers in Q1 as well, which was just for the Q1 period. So those -- I think of those 3 elements, 2 elements are completely reversed in Q2, which is salary cuts and rental waivers. So at this point, the only benefit we're getting because of lockdown is really in our travel cost and related sort of, let's say, cost of business promotion, if you will. That should be about, let's say, INR 2 crores to INR 3 crores a month when it does come back, right? The question -- so I think in that sense, what we've gone about doing is very sustainable. I think the question is how much of this do we choose to reinvest in the business as we shift cost from, let's say, nonproductive to investments around technology and other areas to reinvent our business model. And that's a call we will make progressively as we get into next year.

Sure. Fair enough. And my second question was compared to last year, especially the first half of last year, which was FY '20, in the General Staffing business, has there been a sort of uptick in the realizations because even if you were to look at the General Staffing revenues year-on-year or quarter-on-quarter, we have seen this -- we've seen the revenue go up despite a fall in headcount. So especially after H1 of last year, has there been an uptick in realizations in staffing?

No, there hasn't. There hasn't.

The next question is from the line of Abhijit Akella from IIFL.

Am I audible now?

Perfect.

Okay, great. I just wanted to get your thoughts on one point. This is regarding the IT Staffing business, wherein you've talked about a very encouraging improvement in margins. And maybe somewhat similarly, in the North American IT services business, you've seen strong EBITDA growth along with a new service line. So if you could please just talk about what initiatives you've taken exactly and what's driving these improvements and what we should expect going forward?

Sure. Sure. Look, I think IT staffing -- around Q4 last year, we decided that we really wanted to focus our sales efforts on acquiring custom -- on acquiring more customers who had needs for, let's say, higher-end profiles, right? Over the previous year or 2, we sort of really grown headcount at the cost of EBITDA margin by going after BPO and Telecom sort of verticals. I think we made a call in Q4 to say we actually want to double down on other verticals. So customer acquisition has been very, very healthy. I think the team has completely internalized what we want to go after. And no doubt they've been helped in this time by the fact that there's that much more skilled -- demand for specialized skills. So that acquisition has been very encouraging, Abhijit. I think the second thing in IT staffing has been cost. I think the new CEO there, Vijay Sivaram, has moved very quickly to optimize our operating structure to get -- to kind of -- to just improve the tightness in how we work. So we've let go our some facilities there. We're kind of being much more technology intensive in how we conduct the business and that's bringing down our cost as well. And that should sustain. So that's on the IT staffing. On North American ITES also, I think we've had a few things. I think integrating our go-to-market under one brand outside of the government business has certainly helped to bring the heft of Quess to the market in North America. So we're growing at a $1.5 billion sort of company that with a presence in North America rather than many small subsidiaries. The customer acquisition has been positive. I think the management team, they have moved very quickly to introduce an end-user computing support product service in the middle of COVID -- at the beginning of COVID in Canada, and that's taken off very well also with a very attractive gross margin. So I think the collective investments over the last year in customer pipeline, developing the business, driving specific service lines is starting to pay off. I think that's the way I would put it, Abhijit.

It's very helpful. And just one other thing if I may and maybe Lohit might want to comment on this part. If I look at the percentage of revenues coming from 10-plus years...

This is the operator, sir. Sorry to interrupt you. Sir, the audio is breaking from your line.

Okay. Then I'll take off-line.

All right. Thanks, Abhijit.

Ladies and gentlemen, due to time constraint, we will take that as the last question. I would now like to hand the conference over to the management for closing comments.

Thank you. So as many of you would have seen, we have a number of irons in the fire. We've got QJobs as a project work, we've got market, we've got the turnaround of Monster, we've got the improvements at DigiCare, we've got the increase in payslips at the HRO business, increased sales funnel in the Industrials business because the return to office is progressively that will happen in the Workforce Management business and the same issue impacting also our IFMS business. And additionally, the improvements that we've already seen on the balance sheet and in our professional staffing business. Our management team is working consistently to ensure that from each of these things we derive as much value as we can. Second, the external environment is changing and is improving, we think so. And as much as we can do internally, the public health situation is very key to a lot of our business. This, we think, will improve. And as it improves, it will have a quantum impact on Quess. Our internal focus on goals is very sharp, issues like sales, technology, people and projects that are leading to a greater ROE. And we believe that we get out of this year -- we'll exit this year in a much stronger position than we were coming into it. Lastly, labor laws and the changes in it will present many opportunities to an employment every company like Quess. And Quess well placed to take as much -- leverage the opportunity that comes from the liberalization of labor laws in India. On this note, I'd like to thank you for joining us on this call. We look forward to speaking to you again at the end of Q3. We hope to continue the momentum that we've got in the business and the forward movement that the management has been able to put into the team. We will share more of this as we meet in the next quarter. Thank you for your time, and look forward to seeing you all again.

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