Saksoft Limited (SAKSOFT) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome, and thank you for joining us today. First and foremost, I hope you're all keeping safe and healthy. On the call, I have with me Mr. Niraj Ganeriwala, CFO, from the team; and SGA, our Investor Relations advisers. I would like to begin by emphasizing that Saksoft is a digital transformation partner for its customers, whereby we help our customers both run the business and also assist them and change the business aspirations. The pandemic has underscored the need for greater efficiency, improved access and enhanced customer experience across all verticals. Organizations are increasing their technology spend in the new-age technologies like cloud, automation and analytics. We believe that companies that are in existence to address a specific purpose, like Saksoft, in providing solutions that facilitate the digitalization of companies are better placed to seize this opportunity. Our existing clients are well placed in discretionary spends, and with the organizations increasing their IT spends, we believe this is advantageous for us. I'm happy to announce that over the last 6 months, we have added 2 new clients in the USD 0.5 million to USD 1 million portfolio. We've added these clients in transport and logistics and health care verticals. Revenue contribution from top 10 clients has increased from 55% in FY '20 to about 60% during the current half year-end. For the first half of this financial year, on the geographical front, our key markets of U.S. and Europe are witnessing improvement. I'm pleased that we have been able to maintain our margins in this competitive environment on the back of our dedicated team model. We have been able to retain talent and generate superior people productivity to provide effective knowledge-based solutions that transform the business health of our customers. We will continue to invest prudently in the sales and marketing teams across the foreseeable future with regard to balancing the need to grow top line on the one hand and the need to report presentable quarterly performance on the other. I'm optimistic that given the company's long-term positioning in 2 of the most attractive markets and its verticals widening, we are at the cusp of generating outsized shareholder returns. We've been witnessing reasonable demand from our focused verticals of fintech, transportation and logistics, health care and e-commerce, renewing our confidence of a poised growth opportunity ahead. Our expansion into the infrastructure managed (sic) [ managed infrastructure ] space in 2019 was timely. With the pandemic, the relevance of cloud, remote working, virtual desktops have increased and is an enabler for the growth at Saksoft. I'm pleased to announce that the company has declared an interim dividend of INR 2.5 per share, 25%, on equity shares of INR 10 each for the financial year 2021. Now I will request Mr. Niraj Ganeriwala, our CFO, to take you through the financial performance for quarter 2 and for the first half 2021.

Thank you, Aditya. We will now go over the financial performance for quarter 2 and the first half of financial year '21. On the revenue side, quarter 2 FY '21 revenues were at INR 97.19 crores versus INR 87.19 crores in quarter 2 of the previous year, which registers a growth of 11.5% year-on-year and 3.7% on a quarter-on-quarter basis. The first half of FY '21 revenue is at INR 190.94 crores versus INR 178.39 crores during the first half of FY '20, registering a growth of 7%. Looking at the EBITDA. The quarter 2 FY '21 EBITDA is at INR 16.5 crores versus INR 16.16 crores in quarter 2 FY '20, having a growth of 2.1% on a year-on-year basis and 11.1% on a quarter-on-quarter basis. The Q2 FY '21 EBITDA margins stood at 17% vis-à-vis 18.5% in quarter 2 FY '20 and 15.8% in quarter 1 FY '21. The first half of the current financial year, the EBITDA stood at INR 31.35 crores versus INR 32.33 crores in H1 financial year '20. Despite the challenging environment, the margins of the company have been stable as a result of strengthening of niche capabilities in select industrial verticals. Coming to the profit after tax. The quarter 2 FY '21 PAT before minority stood at INR 10.73 crores versus INR 9.76 crores in quarter 2 FY '20, registering a growth of 9.9% year-on-year basis and 5.9% on a quarter-on-quarter basis. The first half of FY '21 PAT minority -- before minority is at INR 20.86 crores as compared to INR 19.27 crores during the first half of FY '20, registering a growth of 8.3%. This resulted in the earnings per share being at INR 20.98 during the first half of FY '21 versus INR 19.18 in first half of FY '20. The decrease in finance cost has also led to the improvement in the profitability. The impact of currency movement on our revenues for H1 FY '21 is about 3%. Based on the same, the pure volume-driven growth in revenues is about 4% as compared to the previous year. Looking at the revenue split by geography. Americas contributed 49% of our revenues, Europe contributed around 30%, while the remaining 21% was from APAC and other regions. The on-site and offshore revenue mix continued to be at 49:51 during the current half year. We expect the mix to be inclined towards the offshore in the subsequent quarters. The revenue split across verticals is fintech and telecom contributed about 28% and 23% to the total revenues, respectively, whilst logistics, retail and health care and public sector contributed 9%, 10% and 13%, respectively. Saksoft has 6 customers of $1 million plus and 9 customers of USD 0.5 million plus. The total employee count stands at 1,225, out of which 1,090 are technical and the remaining 135 are support staff. Utilization level of employees, excluding trainees, stand at 82% for the first half of FY '21. Now moving on to the balance sheet. As of 30th September, our debt position stood at INR 26.5 crores and cash position stood at INR 68.2 crores, which makes us a net cash company. We are a net cash company managing our growth from the annual surplus generation. Our renewed focus on collection of receivables has resulted in the debtors collection period reducing from 67 days in FY 2019, '20 to 59 days as on 30th September 2020. This has resulted in the improved cash balance as at the end of the current quarter. For H1 FY '21, the return on equity stood at 18.2%, and the return on capital employed stood at 22.7%. That concludes the update on the financials, and we will now open the discussion for Q&A.

[Operator Instructions] The first question is from the line of Vaibhav Badjatya from HNI Investment.

Congratulations for a steady set of numbers. Sir, I have 2 questions. So firstly, on the telecom vertical, we have seen growth continuing in telecom vertical. I understand that in 2019, it was due to under-consolidation. But post that also, the telecom vertical has continued to show healthy growth for us. So great if you can highlight actually what is driving this growth and what is the outlook for the same. And what are the specific activity at clients' end that drives our revenue? Hello?

Yes. Our telecom focus is not on the typical B2C telecom companies that you can relate to like Reliance Jio or Airtel.

Yes, I know that. Yes.

Our telecom customers are customers that provide cloud, data center [ usage ] as well as data bandwidth. So the potential for these businesses is high, and it continues to grow at a fast pace given the pandemic. So we are quite bullish about telecom in the coming years. Telecom is defined as -- I just defined, which is not the B2C, it's more the B2B business.

Right. So what kind of outsourcing work we are doing here for telecom? I mean is it related to the demand for data and that's why increasing activity, outsourcing activity to us and that drives our demand? Or what is the exact nature of activity that we are performing here for the client?

I'll give you an example. One of our telecom customers wants to digitize the -- their approach to the market, so the way they deal with their customers. So their customer experience they want to digitize. They want to make sure that their sales force uses digital products to prospect as well as acquire and onboard customers. For all that, they need IT. And that is where we come in and support them. So it's really digitalization of their entire business processes, which is where our specialty and focus is.

Okay. Okay. Got it. And secondly, on the subcontracting cost, there has been an increase in the first half as compared to first half of the last year. So just a bit of more details around what is driving the subcontracting cost. Is it something that is there to -- it will be at the same level going forward? Or it has to do with a particular contract that we are currently executing?

It's just a small -- something little abnormal, which will get evened out in the coming quarters. We picked up some business, which was at -- which required us to hire more subcontractors, okay? And this was typically unusual from what we typically do. And we didn't want to let go of this opportunity because we think that winning this customer or doing work for this customer will result in more business in the future. So that resulted in a little bit of a blip. In the coming quarters, this will get evened out.

So you mean to say in the coming quarters, it will get evened out, you mean to say that you -- I mean that portion of the work will be completed and that's why you will not need that subcontracting cost? Or you will convert that into in-house capability?

So I'm assuming that you're referring to the fact that employee cost is a little higher as a percentage of sales. Is that correct?

No. I'm not referring -- practically, I've not kind of given any emphasis to employee costs. I'm just focusing on the subcontracting cost, as you said, that going forward that will normalize. So I mean to say whether that portion of the activity that requires subcontracting will get over going forward? Or you will develop in-house capability and what we have thought we were originally subcontracting, we'll do it in-house and that's why it will reduce?

See, always, whenever we do subcontracting, it is for that moment because we don't have that capability or that same level of quality capability that is in-house versus outsource. So the idea always is that either we in-source this capability or we build -- we hire these people internally. So this will go away. So you're right when you say that this level of outsourcing will disappear.

[Operator Instructions] The next question is from the line of [ Ankit Agarwal ] from [ Arc Capital ].

Sir, I have a couple of questions, the first one being, do you see that the current digitization trend benefits in terms of like increased order book for us over the next couple of years?

Absolutely. That's where our growth is coming from, Ankit.

Okay. So I mean can you quantify something or like some outlook on the same?

As a rule, we don't give guidance. So focus is growth, and growth is coming from increased transformation in the digital space, which will continue. I don't see any change or any decline there.

Okay, sir. That's great. And sir, second question, there's a small amount of debt on your balance sheet of about INR 27 crores. And you did say that you are a net cash company. So any plans of repaying this debt?

We can repay this debt very easily. The only issue is that being a global company with 100% subsidies in different countries where we operate, very often, the cash gets locked in these geographies. So we might have cash in the U.K. company, we might have cash in the U.S. company. Now the debt is in the Indian books. Now to move the debt -- I mean to move the cash from overseas to India, we need to do it through dividends. So it sometimes might not be the most prudent. So we are looking at it. It's not a priority right now for us because we'd rather conserve the cash, given what's happening in the world and the uncertainty that the pandemic is presenting to everybody.

[Operator Instructions] The next question is from the line of [ Aarush Oberoi ] from [ Victor Delta Securities ].

Sir, a couple of questions. The first one is that, as you mentioned, the employee cost has been increased as a percentage of sales. So are we adding any professionals on the sales side or any other details you can throw?