Sonata Software Limited (SONATSOFTW) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Sonata Software Limited Fourth Quarter FY 2021 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Srikar Reddy, Managing Director and CEO, Sonata Software Limited. Thank you, and over to you, sir.

Thank you, Lizan, and good morning, everybody, and welcome to the analyst meeting post the announcement of our results for Q4 FY '21 and the financial year ending FY '21, which we did yesterday. The financials are all on the website, and I hope you all have had a chance to look at it. And here today with me Mr. P. V. S. N. Raju, Chief Delivery Officer; Mr. Jagannathan Chakravarthi, Chief Financial Officer; Mr. Raganath Puranik, Chief Growth Officer; Mr Sujit Mohanty, Head of India Business and Director of ITL Mr. Sathyanarayana, VP and Head of Finance. Before I hand over to Jagan to take you through the details of the financials, I will quickly sum up the -- considering it's the year ending. Sum up the year. I think when we started or when we were at the same place last year around the same time, obviously, things weren't very clear of what the future held out for us. And we did make some, let's say, forward-looking statements of where we were, what we are going to do and what would -- we would hope to get to by Q4. I actually said that it is not to our profits of Q4 of last year, which was I think a consolidated profit of about INR 61 crores, I would be very happy. But very happy to see that we have had actually in the Q4 this year, we have a record high lifetime high profits of PAT of close to INR 83 crores. And this has been a result, I think, of a very focused execution on the various strategies, especially led by our Platformation strategy, focused on industry, focused on the alliance, converting our services to Platformation, digital services, converting our clients to digital clients, investing in IP, continue to invest in people, continue to invest in talent transformation. A whole arm, I think, 2 areas, I think, which have helped us despite, I think, some of the large clients who had, let's say, downsized their business with us, not even reached 40% of where they were. So overall, I should say, me and my team are I think extremely being pleased with where we have reached today as a company, both qualitatively and quantitatively. And if we see the results in Q4 too, I think we have shown secular growth across different business units of our geographies, verticals, service lines, especially their digital services. Our contribution to digital services are steadily growing quarter-on-quarter. Margins are improving because of greater level of offshoring. In the last quarter, as said in the previous meeting, we had also initiated a comprehensive compensation revenue, which has taken place effective January 1. So these results are after factoring in those cost increases. Our India business continues to do extremely well on all metrics and now we are publishing more metrics on that in terms of number of annual declines, number of clients with a gross margin of more than certain amount of rupees, number of years they have been with us and their figures in terms of their financial stability. So and then, of course, as I said, we have added some new alliances last year with Google and Amazon. We continue to see some promise, and we hope that they will start reflecting in the numbers in the current year. We are also looking at a broad-based system integration business in India that was started in a small way last quarter, and we expect that to also show some growth. So overall, very happy to see that what we have done over the year has brought us to this stage in terms of performance, stability and a very robust foundation for the future. So we do expect to continue to see this growth unless there would be -- unless there are some blips because of COVID, especially in India right now. And if things get worse, there may be some short-term impact, very marginal on the supply side. But the demand looks extremely robust. And then we are continuing to engage both with our current clients and continue access -- get access to newer clients. I think both look extremely robust as we sit here today. And so that's, I would say, where we are in terms of the company and what we do see going forward over the rest of the year. So that's, I would say, the overall qualitative analysis of the performance of the company over the last year and the current quarter and the state we are in and what -- how do we see the future as we go forward. I also like to mention that the acquisition we had made last year at the same time, GBW. That has now turned around and we see promise. They have signed some good marquee clients last quarter. So we are seeing promise there. So overall, I think we are seeing a very good uptick in our business across all segments. So I'll hand over the microphone to Jagan, and he'll take you through the detailed financials. And after that, we'll be very happy to take any questions you may have. So thank you all again.

Thank you, Srikar. Good morning to all. Thanks for joining for this quarter 4 2021 update -- financial update from our side. I'll start with the performance update now. As you see here, the consolidated financial performance continuously we have done quarter-on-quarter. The CQGR growth has been 4.5 percentage in terms of revenue and the EBITDA, EBITDA CQGR is about 4.1 percentage and the PAT is also continuously growing. This is in spite of the impact of COVID last year. All of you will know that last year, when we are closing the March quarter, we have updated that there will be an impact on our revenue and profitability. As Mr. Srikar was updating, we have done a record profit in this quarter at the consolidated level and a very solid growth in terms of revenue as well as in terms of the cash flow. Getting into the International business. The International business has done very, very strong, continue to have very strong revenue growth and very strong EBITDA growth. We have reached this performance. We have a CQGR growth of revenue of 2.2 percentage for multiple quarters. Last 12 quarters we are talking about continuous growth has been there. In spite of the major impact in our international business, our EBITDA has been -- having a CQGR growth of 3.5 percentage and PAT growth of 2.5%. We are a very, very profitably strong growth company in terms of international business. This quarter, our quarterly dollar revenue has grown 7% quarter-on-quarter. This is the industry-leading performance on 22%, which is also an industry-leading growth in terms of dollar performance. We have a very, very strong profitability growth in this quarter which has been highlighted to you by Mr. Srikar Reddy. We have -- our international business has continued to have a very, very strong pipeline and strong growth in this. As we said, we are expecting the strong performance to continue in the coming quarters also. The domestic business has been really a stellar performance from their side. In spite of all the COVID impacts and in spite of all the uncertainties, they have done a solid growth of revenue of CQGR of 5.7 percentage in the last 2 quarters. And EBITDA growth of 6 percentage in the last 12 quarters. And PAT CQGR growth is 9.3 percentage. There have been a very, very solid performance from their side, in spite of all the COVID impacting across the businesses. This one important point to be highlighted is in all the 4 quarters in this year, this business has turned out to be a positive cash flow and there is no 0 investment on working capital from our side in all the 4 quarters in this year. Very strong cash performance, very strong revenue growth and the profitability performance from this business. Now coming to the financial summary. If you see that, the international business has a solid growth. This is in terms of rupees. I have covered the dollar growth already. You have an EBITDA of INR 319 crores in this international business -- INR 90.5 crores and a PAT of around INR 60.5 crores. Compared to last year, the same time was only INR 45 crores. We have solid performance of 34 percentage growth in PAT in this quarter year-on-year growth. And the domestic business is having INR 22.6 crores compared to INR 16.6 crores last year. And the last quarter, after adjustment of the [indiscernible] also, it was around INR 18 crores. We have still solid performance of more than 25 percentage growth quarter-on-quarter also on domestic business. The consolidated profit has been a record high of INR 83 crores compared to the INR 61 crores -- INR 62 crores what we did last year. For the whole year, we have done around INR 244 crores of profitability in spite of all the COVID impact. We have -- our revenue has been INR 4,228 crores in consolidated compared to INR 3,743 crores, a solid 13% growth year-on-year. Coming to the operational performances. Our U.S. business has grown -- U.S. business has contributed 51 percentage. This quarter, we have 54 percentage contribution, 54 percentage of last year to 51 percentage current year. The U.K. has solidly maintained at a 25 percentage contribution and the rest of world is almost 24%. The revenue by industry, our ISV has continued to be at a good performance of around 33 percentage contribution -- 33 percentage has been contributed by ISV industry. And the travel continues to be at around 10 percentage after we see the impact from the second largest customer. The distribution and manufacturing has been solid performance from last year in fourth quarter to 8.5 percentage. Retail essential is about 8.5 percentage from 4 percentage. And our retail nonessential continue to do well this quarter. It has also performed well. Commodity business has contributed around 7% that is a stable [indiscernible]. The revenue by competency, if you take the various competencies, the digital services that you see here, the dynamics and the digital services are solidly contributing around digital platform, Microsoft Digital Platform. There is on the business, the other service lines have been mentioned here. You see here, we are continuing to have a solid contribution from open source digital platform services all the platform services were already there. The second has been the data analytics have grown strongly and the trend has been maintained from the last quarter compared to last year, 8.2%. But digital and data and analytics have grown more than 50 percentage in this period. The revenue -- key revenue metrics on site has -- offshore has the majority revenue become -- and knowing all this COVID impact of that. Offshore has become 68 percentage and on-site is around 32 percentage for us. The fixed price revenue has been going up for us, which is contributing to a larger profitability for us. Our IP-led revenue continues to grow at about 34 percentage in this quarter. The other operating metrics. We are continuing to grow our $1 million, more than $1 million client [indiscernible] as we have added 1 more client this time. Our $5 million and $10 million customer continue to be remain the same at $25 million companies here. But we are having a solid pipeline, and we are able to add the customers. We see the total number of active customers that have gone up by 10 clients we have added during this quarter. And the contribution by different total employee headcount is around 4,100 compared to 3,987. We are strongly focusing the definite mostly coming from delivery. We have also added in the [indiscernible] side of it. Yes, on-site and offshore headcount is the on-site is around 330. Offshore is around 3,125. This is reflected in our revenue share also. With this, my update on the financials are coming completed. I'll hand it over for the Q&A session.

[Operator Instructions] The first question is from the line of Baidik Sarkar from Unifi Capital.

Srikar and Jagan, congrats on an exceptional quarter. I hope the team is doing well. A couple of questions. First, what are your conversations with your European travel clients telling you on the demand environment today? And especially TUI, how much of the 20% would you reckon we've managed to claw back? And as things stand with TUI today, what's the outlook on their demand on IT spends for the year ahead?

All right. Thank you. So we -- they were expecting business to resume to some kind of normalcy by July, by this summer season. But I think because of continued, I think, lockdowns in some of the markets and then a [ nonpriority ] on travel restrictions and what are the rules on quarantine and what happens, do you need a vaccine or do you need a test, and all that and the cost of the test who's going to bear. So they, I think, are now looking at a more deferred business. I think they're looking for -- looking at a more later summer kind of thing, maybe September, October. So given that, their spend continues to be on the future right now. And we will see only an uptick on the volumes, when the business comes back because that's when the revenue from running the current system will bump up. Right now, otherwise, we are engaged with creating systems and platforms for the future. So I guess my feeling is that we could look at Q3, Q4 of this year before we see uptick coming from the -- running the operations of that business. So that's the overall view on that.

Sure. On Microsoft, Srikar, they had a very strong year especially on Dynamics and their own outlook going forward continues to be very strong. But as an OPD partner, I'm not sure if we've mirrored that rate of growth. My question really is, is it fair to expect us to mirror that rate of growth going forward? And what is your ramp-up with Microsoft on the OPD [indiscernible]?

So on Microsoft, as I said, there are 2 motions we have. One is on going to market with them. And the other one is providing services to them. So I'm assuming your question is aimed at the go-to-market, right?

Yes.

All right. Yes. So we continue to see traction, as I said last time on the Dynamics go-to-market side. Obviously, considering that these are project-based businesses and they are not annuity businesses. So you need to continuously get more projects kind of stuff and then the annuity out of that drops to a -- not a large sum of the original amount kind of thing. So we continue to see good traction in the market on the dynamics side as we engage in different industries, whether it's retail or service industry or agri business, manufacturing, distribution and the modernization, which I spoke about last time. So we continue to see good traction there. And not so -- so I mean -- and I think our growth is also aligned to -- in the dynamics side is aligned to the kind of growth which Microsoft is seeing on the dynamics side.

Sure. And lastly, how should we see your offshore metric progress from here on? Do you reckon on existing business, you might have lacked start? Or is there a scope for further offshoring given the environment?

As I mentioned it last time, too, I'm assuming that now that the markets are opening back in the developed countries, I would guess that means we should have maxed out. But I mean that's like -- I mean I'm just giving a very -- a reasonable view of what it can look like. Because in the past, it didn't matter where the person was. But now people are now a little bit more open to people coming and meeting and talking in the Western World. So I would think that we may have maxed out. But yes, I mean, that's where I'd like to...

So Srikar, should that worry us from a margin defense perspective? Or are we comfortable defending our margins, I mean, even if that were to come back?

I've been always talking about margin of whatever X percentage, so 1 or 2 percentage more if we are doing -- I mean, but the baseline margin I've been now talking about now over the last 5, 6 years. And we continue to deliver those margins, which is about 22%, 23% or whatever kind of thing. So I don't see a risk to that.

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

Sir, a follow-up to the previous one. So if I look at OPD segment, now OPD segment is doing very well for us for the last few quarters, and you are accelerating. So what kind of outlook do you have there? And in this particular segment, are you seeing that there's like -- because I'm assuming you are in May, so you would have more clarity on the budget, et cetera. But these trends are likely to increase for the rest of the year? Or how should we -- is it more like normalization and then you will go back to 3%, 4% kind of a sequential growth rate?

Yes. I think one thing I think we've also done was that reclassified some of the revenues, because I said some of the others were really platform development. And we said that that's more like akin to OPD kind of thing. So definitely, we would like to continue to see a steady growth in that, in the OPD sector. Because it's still very heavy unplanned. And so that won't go in the same proportion kind of stuff. So we will continue to see the same -- not the same, but a steady growth. I mean that's what would be more reasonable to expect.

So what is the concept of reclassification? Like did it happen in fourth quarter? Or was it happening throughout...

Q3 and Q4. When you -- there has been some reclassification of revenue from purely a platform development perspective. So that's, I think, would be one of the distinct. Otherwise, there is a fairly steady growth in that market.

Sir, how much -- like can you quantify? Could it be like $1 million? Could it be like $0.5 million?

I can ask my team to give you that.

The growth numbers will change depending on how much you're reclassifying from others to ISV, we believe.

Yes. We can ask the finance team to share that number with you. Jagan and others, can you share that?

Yes. It is around 1.5 percentage reclassification has happened in between Q3 and Q4 most.

1.5% of IT services revenues have been reclassified?

Yes. From the other industries to ISV industry.

For both third quarter as well as fourth quarter?

Fourth quarter, yes, yes, yes.

Okay. And sir, second is on the hiring plan, like last time you obviously shared our plan for the rest of the year. And now that you guys are turning more positive incrementally on demand environment. So from a full year perspective, FY '22, what kind of hiring are you looking at? And is it going to be like front-loaded or will you wait for the demand to actually materialize, and then what would be...

Now, we are looking at front loading. We are right now -- I mean, net at least right now, net, we are looking at net hiring at least another 300 people in the next couple of months.

So from a full year perspective, is that because your utilization was running high and there is an industry concern on supply side? So the total number for you, like is there a possibility for us to bring down utilization and hire a little more so that you can...

That's what I said. So that's why I said I'm looking at a net of 300.

For FY '22?

No, for the next quarter.

Okay. So that's why -- obviously be much, much, much bigger.

That's why I said I'm going to do front loading. So we want to do -- we're going to be fairly aggressive in the next few months.

Okay. And lastly, on your M&A side and dividend side, is there a change in payout now? Last year, obviously, we paid out a little less thinking that it was a COVID year. So what are your thoughts? Or do you think M&A will continue to be only [indiscernible]?

I'd say, we did 1 last year. We continue to look at M&A.

Similar size. So the payout is likely to be in the 65%, 70% kind of a range. Is that a fair assessment?

Correct. Yes. Even I think this year, the payout was about 60% of the consolidated profit. So we'll continue to do that. So that's not going to change. That we still have plenty of free cash but which is being generated year-on-year and from the past to support our M&A and other investments. So we'll continue with the same similar kind of a payout model.

All right. And last one on your second largest client. So you said in one of the questions that you expect 4Q to be similar to last year. Is that what you meant by them scaling up towards [indiscernible]?

The revenue uptick will happen when they come back to total business volume. Right now, the work is for investing for the future.

So the uptick that we are seeing right now, like I'm looking at Q2...

Yes. It's because they get -- gone down from -- they got down to 0, then they said, okay, let's invest for the future, right?

Right.

Let's create platforms, which will transform our business and implement new business models for the future, right?

Yes. So should we expect this Q2 investment into future platforms, et cetera, to continue? Or do you think it will play to and then see how the revenues will play out?

[Indiscernible] plateau. See, the investment in future will plateau. The uptick will come when the business will come back. And then the support of existing operations spend will increase, and that's how our uptick will happen.

So first half, we should expect more or less flattish and then depending on how things pan out, they may look at...

Yes. That would be a very good reasonable expectation.

[Operator Instructions] The next question is from the line of Madhu Babu from Canada HSBC.

Yes, congrats on a good quarter. Sir, just on this other income, which was strong this quarter, so what was the breakup because that has driven the PAT bit?

Okay. I don't know. Jagan, perhaps you can answer that question?

Yes. Other income for this quarter, INR 10 crores were account on ForEx, other thing is interest income.

Okay. So the margin -- adjusted margin in IT Services, which has declined quarter-on-quarter, that was because of the rejects?

There is a small -- no, no, there is a small drop in this -- this is also because of them and little changes in the year-end past, some cost catch-up is there, but it's a very, very small minute change. And this is also because of the other income.

Okay. But wage hikes were given, right, this quarter?

What?

Wage hikes, sir.

That's right, Madhu, wage hikes were given this quarter, correct.

Yes. Because if I remove that and see the adjusted EBITDA, I think we are almost like 500 bps drop quarter-on-quarter. And second, sir, in terms of the growth outlook for next year. So in terms of the dynamics and the implementations, et cetera. So I think there is some -- obviously, some travel restrictions still going on and India is facing its own issues. So any disruption because of that, which we are seeing on that dynamics implementation of those kind of service offerings?

No, not because of the travel restriction because we lived through last year where there were more travel restrictions kind of stuff. So that's not the thing. That's not going to be a consideration or a constraint, no.

Okay. And sir, how has been the acquisitions that GBW -- we have done this year? So how has been the cross sell? Because initially, we had faced some challenges. So how is it shaping up now? And are the acquisitions which we've done last year, so how are those synergies seeing growth?

So that's what I've said that the GBW has started turning around last quarter, and will continue to do so as we go forward. The same good large marquee clients in the last 2 quarters. We continue to invest in building the platform and offering newer services and the customer experience base and so on and so forth. So that looks extremely promising. The other 2, Scalable is showing up in our A&D business. So that's doing very well. [ Software ] by itself had a difficult last year because of the sector they were operating. But otherwise, that sector is now showing more promise the energy utility professional services sector. So we do think that, that should do well this year. But they're all like, as I said, I mean, the underlying promise of each of these things continues to be strong in terms of the segments we operate and the value they bring into that segment.

And sir, I think this year, I think is -- obviously, last year has been a low base year for us and across the industry. So this year, I think even large caps are looking at 15% growth. So on our base, would we be comfortable to see a 22%, 23% kind of broader term growth? Is it that you're gunning for?

Yes. I mean, that's what we are gunning for, absolutely.

The next question is from the line of Amit Chandra from HDFC Securities.

Sir, as you earlier have mentioned about the investment in sales and marketing, especially in the -- especially in the Microsoft channel. So what is the update there? So like what kind of hiring they have done in the sales and marketing? And also on the Microsoft channel, roughly the Microsoft direct billing plus the existing go-to-market revenue for -- with Microsoft is around -- now like 50% of the IDS revenue. So what is the growth visibility here, especially in the next 2 years? But here, we have seen an uptick in the last 2 quarters, especially. And also related to the opportunity that you already mentioned about the Dynamics separation program. And also if you can talk about the supply related concerns, especially in the Microsoft-related services.

Okay, a lot of questions, let me remember all of them. And so the first is on the Microsoft go-to-market. As I have told somebody earlier on, that looks extremely promising in terms of accessing new clients. New clients who are buying new dynamics or modernizing currency dynamics. As I said [indiscernible] currently still look very strong on the modernization that those people who have had past versions and who have to upgrade to the cloud, that looks extremely promising and across geographies, industries and so on and so forth. And pipeline looks good. We continue to find some good deals last quarter. And so that looks extremely good from a growth perspective. Obviously, the Microsoft [ sell-through ] is -- that's a different business, and we do different things there, IT, support and product development. That should, for my this thing shows steady growth kind of stuff. So the growth we expect is really in the go-to-market business, and that's, I think -- and that is looking good. Yes, supply is a challenge. But I think we haven't done any preparation at the beginning of last year. So we are playing catch-up. So that's what I was telling somebody is that we were now prepare in advance and create capacity. So while we may have a short-term stress on supply, and we are doing a lot of things to bridge that gap. But the plan we are making and made to ensure that we create sufficient capacity in advance should be okay. I mean, at least Q2, Q3 onwards.

The next question is from the line of Nishit Maliya from Mohan Dal Investments.

So my question is, I remember having met you in 2016 AGM. And my question, I mean you were suggesting that you want to get into alliance led business in a very big way. And 5 years down, it's playing out. So my question is a very basic one as to what's that unique thing that Sonata brings in, in this alliance level business, apart from being one of the preferred partners for Microsoft? So what's the unique thing about us and what's the entry barrier for others maybe? I wanted to get a sense of this.

Sure. many things. One is like we've had a relationship now for 30 years, number one. We have a fairly 360-degree model. We're one of the few partners with all of that [ in the ] geography selling their products and then who does product development and who also aggressively go to market along with them in that market. And if you take specifically the dynamics side, what we have done from 2014, I mean we started making investments. We led acquisitions in the dynamics space, we made 3 of them. I mean I don't think many people have many -- I don't think many Indian companies have done that, let me put it that way. There will be some international competitors who have done bigger things. But -- so we went and made those investments in acquiring these Dynamics partners in different geographies, mainly in the U.S. and Australia. We invested in creating our own products on Dynamics, so we, today, have the possibly the largest number of products on Dynamics across industries, whether it's retail, distribution, commodity trading, franchisee, selling, revenue accounting for service industry, connected fee services and so on and so forth. We've proactively gone and invested in all these IPs, which helps you differentiate yourself in the market. We have worked and created this whole very proprietary model for modernization that is moving customers from old versions to new versions. That's what we have invested in. So I guess, yes, it is our investment. It's our commitment, it's the foresight we had, it's going ahead in investing before the curve. I think this has created a fair amount of differentiation and uniqueness in the market as compared to a lot of people, and we continue to do that. I mean, we're not sitting on our laurels and saying that, but we continue to see what else can we do to keep the edge sharper.

Okay. Okay, yes. So every time I ask a basic question to you, I get more insights about Sonata. Yes, that more than answers my question. And Srikar, the second question is what according to you can derail your growth plans, what you have for maybe in the next 2, 3, 4 years, apart from the COVID waves that we've been having across the globe? What else you think can derail your plan? Like one of the things that comes to my mind as an investor is dearth of talent, especially in the digital and the cloud space. So can you give some sense of that too?

I answered -- you asked the question, you answered it yourself. So it's not dearth, but I think there is a hot demand for talent of a particular kind. So now everybody has to figure out their way -- own way to address that problem kind of thing. I don't think it's an insurmountable problem. So it's not like -- it's not going to derail anything kind of stuff. But obviously, one needs to be extremely clear about that, that is going to be a very fundamental requirement to finally execute even as one becomes more and more viable, visible and there could be automatic demand because of all that. So I mean, we've got our -- we've made our -- and we've done that now over the last many years because there was no Dynamics talent when we said that let's go and invest in this business kind of stuff. So we've now got a fairly good model of creating our own talent.

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

My question is, every time you all try to figure it out, the correlation between the Microsoft growth and your company's growth. And there are 2 segments in that. So is it possible for you to kind of give a breakup of these 2 segments so that it is easy for us to understand Sonata further?

No, good points. We'll get that done. So I mean in terms of what are the segments we operate in and how are they linked to the Microsoft growth and how much Microsoft growing? And what is Microsoft doing per segment? We'll share that going forward. That's a good point. We'll share that. Otherwise we'll share that going forward.

Great. Sir, within the Microsoft business, you said go-to-market and secondly basically services to Microsoft. What would be the current breakup will look like?

The breakup is one is shown up in the ISV business of ours, and the rest will show up in the other industry sectors. The go-to-market is not -- there are a lot of -- majority is not quiet. We will do industries, whether it is retail distribution, manufacturing, agri business, service industry and so on and so forth. So that's where we... [Technical Difficulty]

Understood. So the second part, which is the one is, of course, very high growth. And second part is basically the IoT kind of a thing. So what is when you say step growth in that segment, how much that growth is basically?

Sorry, I didn't understand the question. What is the...

What is the really go-to-market? Currently, where the growth is, of course, very high, as you've already mentioned, it's a very promising number. And secondly, we [indiscernible] to Microsoft slightly steady growth. So when you see steady growth, is it like what high teens? Or is it double digit?

Yes, it will be like not like IoT, but about 10% to 12%.

And last question is you mentioned about the margins earlier question, when you say 2022, something like that. So this is basically what you're looking at for the consumer margins we are talking about or...

Not consolidated margin, because this is industry margin. So we have always been saying that between 22% to 24% is where I think we are happy with. And then because of various mix changes and there are -- last year, there are some costs which were not there like travel, I think the margins can be a little higher and kind of stuff. So what I've been maintaining now, I've been maintaining this now for 5 or 6 years because that's how long or even longer we've had these kind of margins and have continued to maintain that. We are comfortable with these 22% to 24% margins. I mean it's not a statement I'm making today, but maybe [indiscernible].

Yes, I understand. So what is your FY '21 margin compared to this 22%, 24%?

What is the FY '21 margin on the services? Jagan, can you answer that?

Yes, sir. Yes. Super. We are -- one second I don't have the number with me for the whole year. The international business margin has been about 28.4 percentage.

Correct.

So are you still 20% to 24% for international? Because that's the reason I'm asking this question.

22% to 24% PAT margins for the EBITDA margin is for the international business, 22% to 24%.

But currently, we are at 20%, am I right? So that 20% to 22% there has no meaning, am I right? So I'm a little bit confused when you say that on...

I have been saying that the 22% to 24% margin is sustainable is what I've said for the last 5 or 6 years. But sometimes because there is a cost...

Srikar, the last 5 years is not only incorrect, we all are looking for the next 5 years, am I right? The orbit of the company, whether it is change...

Also to hold one second, I'm just clarifying that. Srikar also told that offshore is maxed out at percent, offshore percentage, and it will get -- it will get a little bit more normalized in the coming quarters. So that can, because of offshore the percentage is 68%, the percent on site is 32%. This is a macro situation. With the Western world of opening up and more and more, the offshore percentage can come down. And on-site can increase in the coming days. Is that the margin, we are talking about next 5 years, stable margin of between 22% to 24%. That's what we were highlighting. So you have to go back with a normalized pre-COVID period, it is talking about 22% to 25%. Consistently, we have done for last 5 years. That's been normal circumstances. That is what we are stating that if you are normalized at some point of time back to the pre-COVID stages, since the margins are will be in this range. At [ present ], they are very high because of our offshore percentage has grown up from 60% to 68%.

Understood. So basically, I think in next 12, 18 months if the situation was we'd be related like what the true margin, right? Because at least in the near term, you do not see any risk to these margins. The next 5 years I think at times it becomes too difficult to credit the [indiscernible], am I right? We'll cross the bridge as it comes, right? So I think 5 years that you would have never thought that travel becomes so big and then you probably not have that customer because it is lockdown. So the situation is still evolving, correct? It is actually very long term. I'm saying from the 12 to 24 months perspective, do you see any risk to these margins?

We are very confident even with the new changes coming in to defend the margin what we have set on a stable more margin. We are confident of defending that.

[Operator Instructions] The next question is from the line of Harit Shah from K.R. Choksey Shareholder Securities.

I just wanted to get your sense. So you had mentioned it in some time ago that going forward, perhaps your on-site share now will start to increase. Obviously, we've had a very, very good run in terms of offshoring in the last many quarters. So is this then [indiscernible] that we may expect some sort of a fall on that front maybe for the next 1 or 2 years, given obviously, what work from the time that you have existing maybe you might see some sort of start on-site how is that? [indiscernible] normalizing not necessarily a marking for a quarter-to-quarter perspective, but the next 1 or 2 years, what is the kind of broader trend we should see on this aspect?

Sorry, I didn't get the question, Harit. What are you saying?

Yes. Okay. So my question, first of all, obviously, the one [indiscernible] obviously, we've had a very stellar run in terms of demand increasing offshoring in your ICS business, right? So now going forward, is it now -- you had mentioned that possibly that I think that it will be on per share might increase going forward. So is that something at a rather broader level that we can expect over the next couple of years?

Yes, that's right. Because as I said, that the offshoring also increased because of the COVID because then the customers didn't see any difference between a person sitting next to them in their same city or somebody sitting far away. But from a time zone issue, this physicality issue was missing. So to that extent, if somebody said, hey, I can't send these 5 people to come and work on your location, but they can come and work from here. They said, that's fine. It doesn't matter for the time being kind of stuff. So that's why I say that it will -- it should go back to some a reasonable level of what it was. Because while customers have got used to this, I would say it should settle somewhere in between. They might still want a certain percentage of people still be to be in close proximity to them or in their own offices and so on and so forth. So that should -- will happen. But now that they're used to getting certain kinds of work done in a different way, it will not be in the same percentage.

Sure. That's very helpful. Then Secondly, maybe I missed speaking of this, but this quarter, I saw finally after a very, very long time that your nonessential retail business has started to see some sort of a growth. Sir, is this -- what would be [indiscernible] you just add some sort of a recovery there? Or you think that maybe you'll go back to volatile performances because your segment have obviously been under a little bit of stress for the last 20 quarters now. So how will you [ reflect ] on that?

So we are seeing the developed markets are opening up more. So these sectors are opening up more, and we should see a better traction in the nonessential retail as we go forward.

Okay. Got it. And one last question, so one of data points. So what is the IP attrition in the particular quarter?

Sorry, what was the question?

Attrition. IT services attrition in this quarter. It was about 14% last quarter.

Combined, I think, 18%, 19%.

Okay, 18% to 19%. And what are the debtor days for the IPS business? Do you have that available with us?

I think so. Can the finance guys share that? They're asking for debtor days for, I guess, the services business.

Yes, yes. So I [indiscernible] CapEx. 36 days, DSO is 36 days.

That's the same as the last quarter in this case.

Same as last quarter for international business, you're right. [indiscernible] Domestic business has come back on. Domestic business was 57 days last quarter, it has come down to possibly 9 days this quarter.

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

Yes, sir. So what is the hedge position and possible hedging over the next 2, 3 quarters, if you can give?

Then the -- Yes. Can Jagan...

One second, one second. I'm just following that. I will cover that. Just checking the data, one second. We have a data -- we have covered about 80 to 90 percentage for the last next 2 quarters and about 60 to 70 percentage for the next other 2 quarters and about 20 to 30 percentage for the 2 quarters after that. This is the kind of quality what we have. And our average rate looks like for the next 2 quarters, you will see, will be 77% plus and quarter 2 is about 76% plus, 76.5%, something like that.

Okay. Okay. And sir...

For the full year level, 77%, for whole year.

So we will have a hedge gains. We will have hedge gains in the coming quarters as well if the rupee still stays at the current level.

Okay. And sir, one more thing on the wage hikes. I think some of the mid-cap are willing to contribute to wage hikes to stem the attrition like L&T Infotech has given in January and again in April, they announced wage hikes. Even large caps are giving the second wage hike in a span of 6 months. So for us, how do you see that wage hike and whether how are we posed to end in that month ?

It's been a very large wage hike. I think all was on an average of, I think, 11% or 12%. Normally, it's about 6% kind of stuff. So I think we combined into 1. And we'll watch it closely. I think internally, we have now a very dynamic compensation revenue mechanism. So -- and we are not very large. So internally, we have said that we continue to review this on a monthly basis, and we take action as and when needed. So that's where we are currently.

The next question is from the line of Devang Bhatt from ICICIdirect.

Sir, in the previous question, you answered that you were aspiring to achieve 22%, 23% growth in FY '22. So what would be the growth verticals? And what -- in terms of geography you can [indiscernible]? And did you say that your sustainable growth is 10% to 12%? And my last...

I think answer that -- somebody said is there an aspiration to grow. I say, yes, that's what we are aspiring kind of stuff. The other question was on particular client where I said we could grow steadily. What does that mean so that I mentioned was 10% to 12%. Two different answers.

Okay. And sir, what would be, I mean, key growth driver in terms of vertical or geography going forward for you? And what would be -- since your domestic business margins have been volatile, what would be a sustainable margins for them?

Okay. See, the domestic business, as we said, we look at gross margins on an absolute sense, not as a percentage of margin. The percentage of margins can swing violently because of the size of the deal. And we can have extremely large deals. And the margins there are not very large. So we don't manage the business on absolute margins. We manage the business on gross margins. So I've said it in many listings. So we will continue to show extremely steady growth in that business from an absolute margin perspective, and then it's only control is that how much of capital we put into that business and that we've been managing extremely well. And so that should do very well going forward. Now the secular growth, I think, our plan is and our visibility is that we're investing all the markets we operate in. We are investing on the verticals we are operating in and we are investing in all the numbers we are operating in. The expectation is to see a very secular growth across all these segments. Now because of effectiveness of 1 or the other, if it gives a very -- a little different results, we'll take that kind of stuff. But our strategy and the opportunity is that to go in each of the verticals, geographies and the technology services we operate in, and we are making all the right investments across the board.

The next question is from the line of Abhishek Shindadkar from Elara Capital.

Congrats on a great quarter. Just alluding to some of the references you made that because of the work from home environment, offshoring has increased. And you also mentioned that post the pandemic, there could be normalization of the same. Could you just highlight from a services standpoint, which services would have seen a higher offshoring during the pandemic? And maybe they could go back to more an on-site nature as the pandemic closes?

I think one big service, which has seen that shift, is the Dynamics implementation services. Typically in that, customers would normally expect a certain percentage of the resources to be near them. And then as they -- in mind where they were kind of staffed. So because of this, that ratio has changed. So we will see that may not be shifting back to the same order, which it was, but we'll definitely see more upward shift in that particular service line.

The next question is from the line of Amar Maurya from AlfaAccurate Advisors.

So my question is on the 3 segments. If I see the modern validation and development engineering services segment and other ERP and other services. I mean consistently, there has been a degrowth. So I wanted to understand when we can see the turnaround in these 3 verticals?

No. In the other ERP services, that's not very big for us. That is like Oracle and SME and other things. But not on [indiscernible] and getting the engineering off-line. So that's a -- so that's not a strategic area. I mean it's almost by design that's going down. Modern validation and verification is what was called earlier testing and we see increase in that and getting replaced by more like DevOps kind of stuff. So that will take some time to pick up kind of thing because I don't think we go back to having the old kind of testing services, which were there. Yes. So that -- so it's almost the service itself was [indiscernible] going down and that's why the overall [indiscernible].

Okay. Okay. And secondly, sir, in terms of the growth vertical, if I look, the open source digital platform, Microsoft Dynamics and the data analytics. So primarily on the Microsoft Dynamics, the growth which is happening in the dynamic space, is it likely now going to get visible? So last quarter, 6% growth, this quarter, 11% growth. So should we expect this kind of momentum to continue from here on? Because as you indicated that normally there is a lag effect between our growth and the dynamic growth.

Other way around. Their growth and our growth.

Yes. So should we expect this trend to continue now?

Yes, that's a big focus area for us, and we see the traction very strong there. And whether it is 11% or 7%, but definitely, we should look at a 6% to 8% growth in that sector.

Okay, okay. And secondly, this open source digital platform will again be the momentum vertical for us, right? Because the shift is happening from the testing to this?

Yes. That should be the other one. And then the Microsoft Digital Services, which is the Microsoft Cloud and so on and so forth [indiscernible].

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Srikar Reddy for his closing comments.

Okay. Thank you, Lizan, and thank you, everybody, for joining the call and a very interesting discussion. So all of you have wished us, I think I'm also hoping and wishing all of you are well and your families are well and everybody is staying safe. So we look forward to meeting you in the next call. But in the meanwhile, please take care of yourselves. Thank you all.

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