R Systems International Limited (RSYSTEMS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the R Systems Q4 and FY 2020 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kumar. Thank you, and over to you, sir.

Thank you, Rithija. Good morning to all. I hope you and your loved ones are safe and in good health. On behalf of R Systems, I welcome all participants to quarter 4 and year 2020 earnings conference call. We have senior management of R Systems with us in this call. We will start the call with the opening remarks on the performance of the company by Mr. Rekhi our financial overview by Mr. Nand and business over by Mr. Avirag. Thereafter, we will have a closer statement by Mr. Rekhi. Subsequently, we will open up for a Q&A session. Before I hand over, let me read out the customary disclaimer statement on behalf of the company. Investors are cautioned that this presentation contains certain forward-looking statements that involve risks and uncertainties. Company undertakes no obligation publicly to update or revise any such statements. These statements may undergo revision because of new information, future events or otherwise. Actual performance, results or achievements could differ from those expressed or implied in such forward-looking statements. Now I pass it to Mr. Rekhi for this opening comment. Thank you. Over to you, sir.

Thank you, Kumar. Good morning, everybody, and thank you for being part of this investor call. I trust all of you and your loved ones are safe and keeping well. The pandemic has reinforced that technology forms the core of every business, whether traditional or born digital. The businesses have accepted this new normal and started exploring new products, business models to convert these challenges into opportunities. I'm extremely proud to say that R Systems team, I want to say they have -- their commitment and efficient working in these times. The company has continued to work-from-home operations to ensure the safety and health of our associates, while we continue to provide seamless services to our customers. We are working closely with our customers and other business associates to handle our challenges together. Being the year-end, we will emphasize more on yearly performance. During last year, we reported record revenues of INR 880 crores, that is USD 119 million. The year-on-year growth was about 9%. This growth has been moderate amid the pandemic, which impacted most of half -- first half 2020. The revenue growth is primarily on the back of digital and technology services, along with rupee depreciation. We reported strong yearly EBITDA margin of 13.3% compared to 9% last year. The margins were benefited by revenue growth, efficient work-from-home operations, rupee depreciation and improved utilization. This has also benefited by close to 1.2% due to accounting reclassification as per the new lease accounting standard. Profit after tax was INR 82 crores as against INR 58 crores last year. The year-on-year growth of more than 40%. For the quarter 4 2020, we reported revenue of INR 236 crores with 16% EBITDA. We have a strong balance sheet with shareholder funds of INR 427 crores and net cash balances of INR 303 crores to support liquidity and growth. We serve 30 million-plus customers, including 5 customers contributing USD 3 million plus revenues. We added 28 key customers, including 8 customers having good potential to become USD 1 million. Digital continues to contribute over 40% of our revenues. We added net 330-plus associates during second half of the year to support our strong sales funnel. I will now hand over to Nand, our CFO, to provide a detailed financial analysis.

Thank you, Mr. Rekhi. Good morning to all. Hope all of you are keeping safe and healthy. Thank you, everybody, for attending the call. The presentation gives detail of both quarter 4 and year 2020. I'll quickly cover quarter 4 and then move to yearly numbers. As Mr. Rekhi said, revenue for the quarter was INR 236.6 crores or $32.1 million, quarter-on-quarter increase of 5.5%. It is mainly due to volume growth. On annual run rate basis, we are at USD 130 million now. The gross margins are also strong at 37.6% and resulting into a robust EBITDA of 16%. Net profit after tax was INR 29.4 crores or $4 million compared to INR 27.1 crores or $3.7 million last quarter. Now I'll give a detailed overview of yearly numbers. Revenue for the year was a record INR 880.6 crores or $119.2 million compared to INR 809.4 crores or $115.2 million last year. Revenue has grown 8.8%. This is due to business growth of 3.4% and rupee depreciation of 5.4%. This growth is primarily on the back of technology and digital practices, especially in U.S. and Canada markets. Now digital contributes over 40% of our revenues and is helping us keeping the growth momentum. We added 28 key accounts during the year and full impact of these clients will come next year. Getting down to gross margin, it was at 36.6% in the year 2020 compared to 34.46% last year, an improvement of 200 basis points. Improvement in gross margin mainly due to cost savings from work-from-home operation, increasing utilization and rupee depreciation as offset by impact of salary raises. Despite moderate growth, the quality of revenue has helped us in reporting better margins. Getting down to SG&A expense line, SG&A expenses have reduced by INR 1.6 crore. It is INR 205.8 crores in this year as against INR 207.4 crores last year. In percentage terms, the SG&A were 23.4% this year compared to 25.6% last year. The main reason for decrease in SG&A are saving in travel, office maintenance and utilities due to work-from-home operation. Now rent is also reclassified into depreciation and interest due to adoption of Ind AS 116. Further, we have also invested in various digital tools to provide secured and seamless work environment to deal with work-from-home challenges. We continued our investment in sales and marketing activities to support the future growth. EBITDA in this year was INR 116.8 crores or $15.8 million compared to INR 73.1 crores or $10.4 million last year. As a percent of revenue, EBITDA was 13.27% in this year compared to 9.03% last year. This year, EBITDA margin has improved significantly constituent to improvement in quality of revenues from technology and digital services. Cost savings mainly in travel and transport, improved utilization along with rupee depreciation. It has also been benefited by 100 basis points due to rent reclassification on the new accounting standard when we compare with last year EBITDA. We are committed to upscale our investment in expanding digital competencies, along with sales and marketing activities for future growth, but we are still confident of further improving this yearly EBITDA numbers during 2021. Getting down to depreciation, the total expense was INR 25.6 crores compared to INR 14.9 crores last year. Increase in depreciation is due to reclassification of rental expenses between depreciation and interest due to adoption of Ind-AS 116. Interest expense is INR 5.7 crores in 2020 compared to INR 1.57 crores last year. Increase is due to reclassification of rental expenses between depreciation and interest due to adoption of Ind-AS 116. Other income in 2020 was INR 12.9 crores compared to INR 15.3 crores last year. This year, we had an exchange gain of INR 3.3 crores compared to INR 5.7 crores last year. Further, the other income includes interest income of INR 6.6 crores this year compared to INR 7.8 crores last year. During the year 2020, the average rate for USD and euro were INR 76.90 and INR 84.34 respectively, as against closing rate for USD and euro of INR 73.07 and INR 89.74. These are the 2 main currencies for R Systems. As at year-end, we have a total forward cover of $26 million with average rate of INR 76.97 and euro cover of INR 2.35 million with average rate of INR 88.82, which have already been marked to market at closing date of 31st December. Our tax expense was INR 14.4 crore in 2020 as against tax of INR 13.8 crore last year. Effective tax percentage for 2020 is 14.9% as against 19.2% during last year. The effective tax rate is reduced mainly on account of higher contribution from SEZ units and profit from subsidiary subject to lower tax rates. Net profit after tax was INR 82.2 crores or $11.1 million compared to INR 58.1 crores or $8.3 million last year. EPS for the 2020 was INR 6.87 compared to INR 4.82 last year. Getting down to asset side in the balance sheet, total receivable at the end of December 31 were INR 131.3 crores compared to INR 132.4 crores at the end of last year. The receivable in terms of DSO over 53 days as at December '20 compared to 61 days last year. Our net cash and bank balance as of December 31, 2020 is INR 302.8 crores compared to INR 198.6 crores at the end of December last year. We have been constantly generating cash from the business. Also, we are still showing financial streamers, mainly by U.S.A. government as a loan until we kept the confirmation on forgiveness. Our shareholder funds were INR 426.6 crores at the end of December '20 compared to INR 338.2 crores at the end of last year. With that, let me hand over to Avirag Ji for a review of operations. Avirag Ji?

Thank you. Thank you, Nand Ji. Thanks, everyone, for being on the call. Hope everybody is doing good. Our investment over the last few years in digital technology helped us to get momentum with our existing client and with our new clients. I would like to give you a brief flavor of global operations for digital transformation that continues to be our focus, those are at key verticals like technology, telecom, finance, insurance, health care, licenses, retail and e-commerce. On digital transformation, sectors include cloud, analytics, machine learning, artificial intelligence, data and speech analytics, the robotics process automation, Salesforce. These continue to be arrowhead for our growth. On the cloud side, we work on all the leading platform, Amazon, Microsoft Azure and Google. We are advanced partner with Amazon and gold partner with Salesforce, major -- we see major traction in the cloud space. On analytics, we see good demand in machine learning, AI, speech and data analytics currently serving many key clients in this space. And these clients continue to grow business with us. On mobility, we work with a wide range of technologies and devices such as android, iOS, hybrid, Webex. There are 8 key wins during this quarter. These are the key wins. A Canada-based innovative software solution provider for locomotives, modernization and industrial IoT has partnered with R Systems to digitize and enterprise-level automation framework with -- along with maintaining their cloud-based device management platform. Another client is one of the largest provider of laboratory techniques and engaged R Systems to build a new automation testing framework for their order entry system for release and time to market, shorten time to market. A Romanian government agency has engaged R Systems, European arm to digitally revamp their existing customer management solution to the AI platform and converting unstructured meta data into actionable inside using robotics. Under the solution side, for our Singapore sector, the Singapore-based supply chain solution provider has with operations across North America, Europe, APAC has engaged our Singapore division to implement pipeline cloud suite industrial ERP solution for its China operation to streamline, automate various operations. Another one is Philippine based audio and music product distributors engaged, awarded R Systems to implement D365 business central of Microsoft to streamline automate their retail and supply chain operations. In terms of our head count, added about 300 associates during the year. The increase was mainly in the second half 2020 to take care of a strong funnel, especially towards digital offering. Utilization, we have launched one of the peak utilization level, while handling the challenges around virtual work environment. IT utilization has increased from 78.6% to 79.5% in Q4. For BPO, we have slightly decreased from 81% to 79.8%. On yearly basis by geography, North America contributes 68%; Europe 13.2%; Southeast Asia, 16.3%, the rest was about 2.5%. On yearly client concentration, top 10 contribute 28.5% and with the largest client, 7.7%. With this brief overview, I will hand over back to Mr. Rekhi for his closing comments. Over to you, sir.

Thank you, Avirag. Let me sum up. We have regained momentum to report revenue growth with strong margin improvement in financial year 2020. Digital and technology services have helped in the past recovery as businesses have shown renewed interest to align themselves in this new normal. We continue to work from home, except for essential services to meet customers' expectations along with safe work environment for our employees. The continuous financial stimulus by various governments, U.S. and Singapore is also helping the demand. We remain focused to partner with customers in delivering successful digital transformation solutions. I'm quite optimistic for next level of revenue growth with strong margin for coming quarters. We endeavor to utilize strong balance sheet to support operations and growth. That brings us to the end of our presentation today, and I will hand you back to the organizers for your questions. Thank you.

[Operator Instructions] The first question is from the line of Jagdishwar Toppo from Japa Investment Adviser.

Is it audible?

Yes.

Yes. Congratulations for the good set of numbers. I have 2 questions. One is timing of the analyst meet or analyst call as well as with respect to cash payout policy or investor -- rewarding the investor in terms of timing and uncertainties. So first of all, why can't we keep a conference call post result, which would ensure good participation and wider discussion. That is one question. And second question is, do we have a proper plan on dividend distribution or cash reward policy for the investor because in terms of payout or in terms of timing, I mean, there is no sort of certainty or it is quite unpredictable. So in view of that, it's very difficult to time our investment as far as R Systems is concerned despite we being the long-term investor and remaining with the company for its commitment and performance and delivery. So I think these 2, if you could address that would be great.

Thank you, Mr. Jagdishwar. Both are good questions. So first to answer your question on the analyst call. See the press release we issue and the investor presentation, which is actually a summary of the press release only is quite detailed. To be honest with you, the details we give is self-explanatory. Having said that, I take your point, and will take your feedback and we'll try to do the investor call soon after the results. So it's a good feedback. I will keep in mind. Coming on to the cash policy and the dividend. The last dividend was paid in January 2020, which was close to INR 1.5 per share. So that was our last dividend paid. We have a plan to do a dividend or a buyback depending upon the tax efficiency. Actually, cash has also significantly increased as you would notice. Actually, we are -- I mean, it's a balance between growth and rewarding the shareholders. We are keen to acquire a few companies and keeping the money reserved for acquisition. But I take your feedback and we'll try to be more predictable and maybe announce some kind of a policy in times to come with respect to rewarding the shareholders. So it's a good feedback. Thanks.

It will set a new standard. The standard of dividend payout is only for the large companies, but I think a company like yours should stand out. Thank you so much.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to Mr. Rekhi for closing comments.

Thank you. I want to thank everybody for joining the conference call and for your questions. And I would like you to -- I want you to keep safe in this challenging time, and thank you very much.

Thank you. On behalf of R Systems, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

Thank you.