TeamLease Services Limited (TEAMLEASE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the TeamLease Services Q1 FY '21 Earnings Conference Call hosted by IDFC Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rohit Dokania of IDFC Securities Limited. Thank you, and over to you, sir.

Thank you, Ayesha. Good afternoon, everyone, and welcome to the Q1 FY '21 results conference call of TeamLease Services Limited. I hope you and your near ones are doing well. I would like to thank the management for giving IDFC Securities the opportunity to host this call. The management team is represented by Mr. Ashok Reddy, MD and Co-Founder, Mr. Rituparna Chakraborty, Head of Staffing; Mr. Sunil C, Head of Specialized Staffing; Ms. Ramani Dathi, Finance Controller; and other senior managing persons. We'll start the call with the comments from the management and then move into the Q&A. Thank you, everyone. And over to you, Ashok.

Thank you, Rohit. So just as a update, I think we were expecting COVID to be a short-term pain and hopefully, short-term rather than long-term continued pain for industry and the economy. But I think companies have been resilient to the extent that they can have taken steps to survive the crisis and a lot of incremental decision points have been driven over the period faces realities that have been playing out from a lockdown perspective, extension of lockdowns or business continuity, getting back to work, employment, work from home and all of those options. I think one lingering image that people would have of the current pandemic situation is of the migratory population and workforce on the roads. And I think a large play of that focuses the attention as a difference between formal employment and informal employment. And I think it's something that has been a key focus area to drive the element of formalization in the Indian workforce, and it's something that we have been continuing to engage on to say that security net for employees at the end of the day will be formal employment because the employers to some extent do act honorably around the aspects of compliance, around the aspects of statutory payments, notice periods and all else. I think primarily from our perspective, we were expecting headcount reduction to the extent of about 18% to 19%, as indicated in the last call. But I think we've managed to come in at an aggregate of a 14% reduction in headcount. Active dialogue with customers for keeping resources, active dialogue with associates about being in employment, active dialogue across candidate pools to replace where requirements were coming in, a combination that has kind of been driving that element. There has been a top-line revenue dip, but I think we have been able to manage that some aspect of managing our internal costs to effectively improve on the EBITDA margin as a quarter-on-quarter and a year-on-year basis. I think the aspect that we have effectively been managed in -- especially in specialized staffing have managed to complete their integration and work to a shared service model has enabled economies of scale on the cost side. In general staffing, our productivity ratio has improved from 269 (sic) [ 264 ] to 283, which effectively has enabled the economies to kick in for -- on the cost side, while our realization has been kind of consistent. I think NETAP has had a huge hit on the associate trainee count. Largely given the exposure that it had to manufacturing and also to the aspect of automobile and all of that. But I think we've had some element of a positive claw back in numbers starting June. And there still seems to be an element of cautious optimism that is playing out on that front. So we are waiting to see. So I think we have -- as we had dialogued earlier also, we are looking to exit the government training business and in line with that, our revenues there have been lower and also, we have reduced our headcount substantially there. I think another business that was impacting, especially during this downtime was the permanent hiring aspect where clients aren't really looking to hire, a lot of them are backtracking on offer letters, backing -- backtracking on letting employees go and all of that. So we've decided to exit the [ firm ] business. So we had an impact of that in Q1. We will have a part impact in Q2. But starting Q3, we will not have that in our portfolio. So I think that's a conscious choice we've made, given the current situation and are driving it on that front. So I think, overall, while we have reduced on headcount, the margin improvement has been there. I think we will continue to focus on the cost front, the headcount front and seeing what else can be done on that side. While some costs will obviously come back as offices open up and all of that, general focus on productivity would be key. And I think overall, across all businesses, while there is a COVID effect. Overall, between the quarter and to the year, we would continue to strive for growth. I think that is primarily going to be the focus from our end. I think I'd also like to have Ritu comment a little bit specific to general staffing, Sunil will give a little bit on specialized staffing, Ramani will give a little overview on the finance side, and then we can [Technical Difficulty]

Thanks, Ashok. Good afternoon, everyone, and hope all of you and your families are safe and good. So under the circumstances as a team [Technical Difficulty] for the unpredictability, it drops with it. Given there was very little control over the external environment, we chose to focus inwards and chose to optimize, minimize and improve what is in our control, and we became leaner and more agile to respond to changes in external environment as and when it pays out. So some of the key changes and initiatives we have been working on since Q3 last financial year, clearly helped us in Q1 this year, which otherwise could have been a more difficult quarter. As against an anticipated loss of around 15% to 18% of our associate base, we were able to close at around 10%. And again, an expectation of more or less being flat on PBT as against the previous quarter, we were able to showcase an improvement on that front. We've been able to hold on to our PAPM with a marginal increase to around [ 751 ]. However, I think it's important to share that this does include a certain amount of discounts, which we had to pass on. However, we would -- we expect that most of these discounts are likely to go away during this quarter. Also, the marginal increase, which you see is largely on account of the fact that we've been losing more associates in our high volume, low-markup accounts. However, some of our client wins and associate additions that have happened during the quarter have been at higher markups. Our cost optimization efforts, which were on since Q4 continued to Q1, based on performance and of course, some redundancies. And coupled with going live with some of our stated automation projects from March end onwards enables us to improve productivity, wherein FTE ratio went up to about 283 as against 269 (sic) [ 264 ] last quarter. Our investments in automation and process improvements, we believe shall continue to help us on the productivity fronts. Within the restrictions, we did not allow ourselves of course to lose sight of growth. However, wherever there was a window of opportunity, and we have 87 new clients added during the quarter, and we have seen contributions from a few of our existing accounts as well. On account of the financial excellencies, I think many of our customers needed an additional support and hence, funding exposure, increased marginally. However, we believe that we've been able to keep it under reasonable control. I think the pandemic dispose -- pose an opportunity for us to make deeper inroads in all our external stakeholders. Customers, for example, our touch points and connect increased [indiscernible]. We could see it in a kind of proactive communication that we've been having with them and seeking advice and directions. I think we witnessed clearly -- witnessed clear acknowledgment of years of investment we've made in having a deep understanding of the law of the land and our ability to dive into the muddy waters. From an associate perspective, I think it'll be very proactive because a large base of our associates were in essential services. And from March onwards, I think we've started sending out profile-specific digital handbooks so that they can keep themselves safe and yet be at work. We also saw different kinds of devices emerging which earlier we never thought of essential services versus nonessential, mine workers versus hand workers, work from home workforce, home but not working workforce. So I think we saw a lot of these patterns and these devices emerging, and we had to approach each one of them differently. We have -- I think our engagement with government was quite significant. I think we made about 14 representations, and we do believe that the pandemic has clearly shown that formal employment is the best possible safety net during crisis of this nature and impact. And hence, it's important to press every button which enables this transformation. From candidate perspective, I think it's quite clear that there were a lot of job seekers. Suddenly, there were challenges faced by the migrant workers. And hence we'll try to use every possible means in communication channels, to stay in touch with them, have an active engagement. So as and when we can shift those opportunities and we should be able to get them engaged. Also [ across ] the constant dialogue with the investor community was also on. I think looking at the future, I'd like to share some insights we have. And I think we have this employment outlook report. And one notable change in this employment outlook report is that while so far, we've been talking about the net employment outlook, it was very difficult for us to get that assessment done. So we shifted back to [ intend ] to hire. And I think what we see is a measured green shoot visible. However, consumer demand side, manpower and resource supply, geographical presence and channels, will influence how demand for employment shapes up into the future. So we feel that there is a need for caution, and we really can't jump to one conclusion. We've also realized that most of the employment recovery, whatever little is happening is likely to happen in Bangalore, Delhi, Hyderabad, Chandigarh, Mumbai and Kolkata. Large chunk of the movement will happen in Tier 1 cities. I know this a little in aberration with the CMI data, but honestly CMI looks at completely different segments, and our segment is usually focused on the formal employment segments and intend to hire is largely centered around the metros and the Tier 1 cities. Not too much of a fresh news. But yes, our study also shows, it's done across 21 sectors that's health care, pharmaceuticals, e-commerce and [indiscernible] [ startups ], educational services, especially on the digital side, telecom, IT, KPO, agriculture and agrochemicals. FMCG are probably the ones, which are going to take off or is already in that trajectory. But even in that, we noticed that there are not 100% intent to hire across these industries. So like, for example, health care and pharmaceuticals, 3 out of 10 have an intent to hire. So I think we are approaching the future with caution. And yes, with ability to not miss out on any of the opportunities for growth. So our immediate focus would be to recover as much of the lost ground this year. And it's clear that economics is not of -- not out of the woods. And hence, we will take a measured approach into the future. Thank you.

Sunil will give you a quick update on the specialized staffing.

Thanks, Ritu. Thanks, Ashok. Good afternoon. The pandemic had posed challenges on supply and demand side, even for our specialized staffing. So in spite of that, we did not have a major hit. We had a 5 percentage dip on -- in our revenues. The good news is that we have been able to improve on our PBT. We moved from 5.2% to 7.6%, that's a significant improvement. A lot of this -- most of this had come through our cost optimization efforts, which we had taken in Q4. The benefits have started kicking in from this quarter. And this will have a good effect going forward. We had made a shared services unit, which will support all the 3 entities of specialized staffing, which is IMSI, Evolve, and IT staffing. And that's the benefit, which is being -- which is coming out. On the -- what we did in the quarter is that we're focused on acquiring more clients. So we were able to get 10 large logos, the benefits of which we'll see in the coming quarters. We are also seeing improvement in demand and supply, which will help us to give consistent results, and we'll try to maintain at 8 to 9 percentage margins. We will continue to focus on client acquisition, margin [ sustains ] and team productivity. We are trying to let go of few top -- few customers if the competition is willing to give us 50 percentage. But nevertheless, we'll try to maintain our business, our base, and we'll be able to give consistent results.

I think the key focus for specialized staffing is to ensure the maintenance of the margins, while they focus on an element of growth, clearly. But I think as we have done in the past, we will also focus going forward on letting go of mandates that are very low-margin or are being competed for by competitions at huge price reduction. So -- but I think the trajectory of margin improvement and growth will play out for the specialized staffing. Ramani, would you give a brief intro on the finance side?

So we had done some top-line growth due to lockdown in this quarter. We have improved our operating margins and cash conversions, both in absolute terms and in percentage terms. And this is driven through optimization of our costs, both the core employee costs and overheads and efficient working capital management. So one of the main aspects, which impacted our cash flows in the past is withholding taxes and the delay in obtaining low deduction certificates from the department, which we call as LDC. We being a 0 tax company at the beginning of every financial year, we have to apply for an LDC with the income tax department. Otherwise, we would be subject to 10% TDS on our invoices. Fortunately, starting this year, the department has allowed applying for LDC prior to 1st April, and that has helped us to reduce the cash outflow on higher withholding taxes. Our operating cash conversion stood at 80% of EBITDA and including the INR 8 crore of TDS refund, which we received for one of the subsidiaries, it is more than 100% for the quarter. We are anticipating another INR 30 crore of TDS refund in Q2 for which assessment has already been completed. We currently have free cash of about INR 70 crores as of 30th June, 2020. For this year, we moved to new tax regimes and no MAT tax is applicable, no minimum alternate tax is applicable under the new tax regime, and we will be saving cash outflow on MAT taxes too. So we have an opening balance of INR 160 crore of 80JJAA benefit of prior years, on which no deferred tax asset is recognized in the past. And hence, this INR 160 crores can be utilized to offset current year profit, and we would continue to remain tax-free for this year, too. In terms of cost optimization, we have rationalized our core employee headcount by over 20%, 24% during the quarter. And because of lockdown, some of our other overheads, like travel, maintenance, printing and other costs have come down. But we believe once the offices open and we get back to normalcy, at least a 20%, 25% of cost saving can be sustained. That's it Ashok from finance.

Thank you, Ramani. Rohit, we can open for questions.

[Operator Instructions] The first question is from the line of Sudheer Guntupalli from Motilal Oswal Financial Securities.

Congrats on an effective margin execution. My first question is for Ashok. The actual headcount decline of 10% in general staffing was much lower than what we anticipated at the beginning of the quarter. So you outlined some of the steps you had taken to limit the damage. But any specific sectors or factors, which have kind of helped you on this front. What I'm trying to understand is that if there is any technical or legal reason, which could have stemmed the decline now -- for now? And would that decline can come with a lag in the subsequent quarters?

So actually, there's no technical or legal framework with which to have carryback the employees. I think companies that had to make the decision to let-go or kind of layoff have all kind of taken those decisions on a recurring, continuous basis. Obviously, some of the companies in good faith, did try to hold on to employees for a period of time given hope of opening up or the aspect of recovery of system because, frankly, as all of us and as all companies are navigating in extremely uncertain waters. No one has been through this pandemic, no one has seen a situation of this sort. And I think to some extent, decisions are being made as and when and hence the situation is a little unmodelable, so to speak of. But I think while the government did give directives and indications to companies to hold employees and make salary payments, I don't think it was really binding in that sense. And companies did make decisions at their end. I think some element that has enabled us to reduce the quantum of reduction is also what Ritu mentioned earlier that we were able to add new clients during this period. So we added about 80 -- 70-plus accounts. That has given us a transition of numbers, consolidation of numbers, some of our existing clients have also added numbers from competition or otherwise during this period. I think however, net our attritions and layoffs were a lot more. And hence, we came in at that minus 10%. So our -- I mean we are optimistic. We believe that the largest pain would have been in Q1, and it should keep reducing as we go forward. And at some point, we flip to a more positive outlook of growth. So I think that's really where we are.

Sure. My next question is to Ritu. Thanks for giving the color on hiring trends and for the interesting report you had come out with. Your research and due diligence on this trend would have happened before some of the key south Indian cities had gone into a second round of lockdowns. So just trying to understand what part of the conclusions of this research will still be applicable after factoring in the recent situation? And are you guys seeing any trend of some of the permanent roles being converted into temporary roles given the uncertainty we are talking about?

Sudheer, the thing is that, interestingly, in spite of the lockdown, Bangalore still, by the way, continues to rank as one of the cities where demand is still the highest. And we are all aware about the spike in cases. So essentially, interestingly, the consumer demand and -- is at play. So while there is still a tug of war which is going on between the spread of the pandemic and the consumer demand but besides Chennai and Hyderabad, I think all the other cities will hold out. So which means Bangalore, Delhi, Chandigarh, Puna, will hold out is our -- at least from the demand that's now creeping in from customers is quite clear. So I think as open positions are coming in, yes, there are some ground level challenges in terms of how do we tap in and fulfill these demands. But yes, it's kind of interesting this tug of war which is going on right now, Sudheer. So...

But I think also just to add there, the reality is that it is a study, and it is estimation on the mood. But I think how it plays up, we'll have to wait to see. Obviously, it's an element. It's at least a positive aspect of optimism, I think the -- obviously, nuances around fresh lockdown or spike in cases will have impact. But I think what most -- what it tends to reflect is that corporates and individuals are now looking at getting back to work or getting back to some sense of normalcy with COVID being around. So I think that's really where it is. The cautious optimism is at play. But I think we'll wait to see how it actually pans out.

Sure. And any trend of the permanent roles being converted into temporary roles, given the kind of uncertainty we are looking at? And one last question on the margin front, for the full year, what is the sustainable level of EBITDA margins we should be looking at. I think last quarter, Ravi indicated that you are targeting to go back to FY '19 EBIT margin level. So any update -- updated outlook on that front?

So the conversion, like we keep saying there's a springboard in good signs and a shock absorber in bad times. Companies are clearly acknowledging the flexibility that staffing gives to them. So there is some element, I wouldn't say it's a quantum move of conversion of permanent employment to temp employment. But uncertainty does create an element of an optionality that corporates would like to have by adding a temp workforce. So like I said, we do have some demand that has come in is actually more than what was there last quarter. We are filling positions. We are rolling out offer letters. So there is an incremental take now, whether that's coming because permanent jobs are being converted to temp or just the demand per se for them is coming back or it is a shift from other vendors is difficult for us to quantify at this point in time. But I think overall, if demand goes up from where it comes, we are independent as long as we keep saying, as long as the cat catches the mice whether its black or white, it doesn't matter to us. The second element, I think, as we had said, we did miss on the EBIT margins last year. We had made investments internally in teams and in people and in businesses that we thought would play out had not happened, and we had taken a decision starting late Q3 to recorrect that element of the structure. And COVID or no COVID, we were looking to get back to the margins of the prior year. So I think that's clearly a focus area for us.

[Operator Instructions] The next question is from the line of Vidit Shah from IIFL.

My first question was around the General Staffing segment, where the number of employees has fallen by 10%, whereas revenue has fallen steeper, leading to a decline in average realization. So is this due to the fact that there's been a sharper bounce back in June? Or is there another reason due to the fall?

So 2 elements to the revenue that being higher than the associated one and our average PTC is also reduced from [ INR 22,400 ] to [ INR 20,800 ]. So there is a INR 1,500 (sic) [ INR 1,600 ] dip. Some of the higher cost resources, are the ones that have been attritted from the system. Also, given the current situation, we've had minimal-to-0 invoicing on reimbursements and incentive payouts. So that's another added billing that normally happens on the associate count. For last quarter, given the fact that nobody was really out there and performance wasn't really where it ought to be, reimbursement and incentive payouts were not there, and hence, billing was not there. And that's the gift that you get to see on that side. I think as businesses stabilize, some of that billing could potentially come back.

Understood. And my second question was around the employee cost as a percentage of revenue, somewhat gross margin. They have declined by 120-odd bps quarter-on-quarter despite improvement in productivity. So what could -- what caused that change?

Vidit, so the increase in core employee productivity is largely driven by headcount optimization in staffing. So while the associate decline is about 10%, the core employee reduction in staffing is close to 15%, 16%. So that has led to higher productivity. And in terms of the gross margins and markup, it is in line with the decline in headcount. So while gross revenue has come down by 15% in terms of the markup, it is 11% in line with the headcount drop of 10%.

Okay. Because when I calculated the gross margins were 5.2% in 4Q, which have come down to 4% for the overall -- at the overall company level and in spite of an improvement in productivity?

No, overall company level will not be comparable, but Ramani, you can continue.

Yes. So our improvement in productivity comes largely from the cost, which are below gross margin limits because the above gross margin line, the associate salaries, we don't have control. And where we have reduced the cost is largely under our core employee costs and other overheads and expenses.

Fine. Understood. If I may just squeeze a data point from you, what would be the total of employees of software companies, you disclosed the general staffing product, but...

Software employee headcount last quarter was about 2,022, now it is 1,544.

The next question is from the line of [ Parmin Javiri ] from DMV Partners.

I hope all of you are well. Just a quick question on any sector-specific trends that have been with [Technical Difficulty] have been ramping up collection infrastructure in a big way. Any such comments you could share thematically?

Yes. So from what I gathered, you're asking if there are some new emerging trends, right? That's the question.

Yes, absolutely and perhaps even [Technical Difficulty] specific banks and lenders who might be ramping up a lot [Technical Difficulty] structure?

Yes, I think, you're right. Collection is a profile that we have seen across different businesses have emerged as -- profile-wise as high demand profile. Besides that, I think what we are noticing is that in -- there are a lot of digital businesses which are picking up demand. But again, I'm not going to say that this demand is anywhere comparable to the loss of openings that we are seeing. But in education services, we are seeing that, in agriculture, there are a lot of e-commerce start-ups, which are emerging, which is an interesting trend. Testing labs across the country are becoming more prominent and there are plans of expansions. So I feel that from a new emerging sector, these are the ones that we should be watching out and looking out for. We are expecting much deeper play in e-commerce for sure for obvious reasons. Health care and pharma, again, for obvious reasons. Yes, I think this is where we are headed. But I think what essentially COVID will do is amplify existing trends and not so much about creating completely absolutely unknown trends. But yes, digital trends is one of those amplified trends where people notice across sectors. So even in the technology sector, we are noticing that there will be an uptake in terms of certain kind of profiles that so far India, probably, we're not focusing on like cybersecurity, drone technology, robotics, and so on and so forth. So yes, I think that's where we are looking at possible trends into the future. Do you want to...?

That's interesting. If I can squeeze a quick one. The general staffing productivity gains you just commented on a little while ago. How much of that do you think is likely to persist? And how much of it may roll back a little bit as you again invest in the headcount at a core level?

So I don't think there is a large investment of core headcount level as such planned. I mean there will be some marginal element that will come in because of -- as business kind of crawls back up. But some of the indirect costs might come back into the system as we open up offices and stuff of that sort. But I think some of the technology interventions that have a rollout in Q2 and Q3 should give some more productivity enhancement opportunity to the business. So at this point in time, there is no plan to increase the core headcount in any large manner in the foreseeable future.

The next question is from the line of Sandesh Shetty from PhillipCapital.

Am I audible?

Yes.

Yes, Sandesh.

Sir, you have released your annual report today. So in that, there is an element of international. So if you can elaborate on that?

We don't have any international business at this point in time. So we are focused on India. I believe the opportunity is tremendously large, and we will stay focused at this point.

So the thing is in the annual report, there's a mention of INR 8.7 crores of international revenues. That's why I asked this question. I wanted -- I was curious regarding that.

Sandesh, what happens a lot of -- a lot many times, we have Indian customers, but they -- because of their policy, they're paying you a foreign currency. So as a reporting format, we have to still go ahead and report it. But it doesn't mean...

This is not revenue from international operations, Sandesh. So this is the revenue received in USD, for the operations delivered in India.

Okay. That was helpful. And one more question I wanted to ask was the government has recently come up with New Education Policy 2020, which has an emphasis on vocational training that you have been talking about all around for some time. And how do you see these new changes impacting the staffing and the training business going forward? I know its directional thing, but still, if you can elaborate on that that would be helpful.

I mean, I think there's still kind of framing -- I mean, we clearly believe it's an opportunity play for the employability business. We have 4 classrooms at our end. We have online learning, on-site learning, on-campus learning, and on the job learning. Our belief is that -- and as we have always said, any reform, any change from status quo is for the better. But again, all of these will not be a flick of the switch kind of an event. They will be gentle sunrise. I think as things get notified, as things fall into place, clearly, the new education policy will be an opportunity for our employability business as we believe that the whole new labor code notifications, dialogue, informal employment focus to trying to shift to formal employment will be a key pillar for our employment side. And this whole element of the work from home, digitalization that has kind of happened because of the current pandemic will be an opportunity for our eWorkforce element of the cluster. So our belief is that the current situation crisis is also an opportunity for all our 3 clusters. None of it will be immediate trigger, but clearly will play out to the long haul.

The next question is from the line of Niket Shah from Motilal Oswal Asset Management.

And congrats on a very good set of numbers in a challenging time. A couple of questions from my side. The first is given the current pandemic that we've seen, do you think there will be a significant amount of shift from unorganized to organized players extremely? That's the first question. The second question is, why you did allude to the fact that there will be certain cost which will come back. But not -- so I'm just trying to understand how much of the saving is something that we will continue to save on a structural basis and over the 3- to 5-year period, where do you see [Technical Difficulty] on that? And the last question would be on cash flows. While you did highlight that your EBITDA to FCF conversion is extremely high for the first quarter and second quarter put together. If you can just give us some -- a little bit longer-term thought process on how do you look at EBITDA to free cash flow? Will we see a sustainable trend improving over the next 2 to 3 years?

Ramani will answer the cost and the cash flow part, but I'll just cover the informal-to-formal assets. I mean, from informal vendors or smaller vendors to the larger vendors. I think some of the clients that we have added during this quarter -- I mean, the last quarter and some of the growth that we have had in existing customers has come from competition. I mean some of it from the larger players, but a larger element of it from the smaller players. So I think in uncertain times, when liquidity is tight, when the asset of compliances are a focus, the support systems are essential, the ability of the counterparty to be able to deliver and give the element of comfort to organization matters a lot. And I think as we go forward, that will matter substantially. The -- I think we can say with confidence that while we had started planning for work from home prior to the lockdown, and we were in a test phase of work from home with 60% of our people under that model a week before lockdown happened end of March, we were able to move to work from home, and we've had actually a very seamless run for the last 4 payrolls, both from a technology perspective and the engagement perspective with customers and associates. So I think corporates start valuing that over a period of time. And I think some of the dialogues that we have today are reflecting of that element of a counterparty comfort that they have been able to build. So yes, I do believe consolidation is an opportunity that we would be continuing to pitch for.

I think one of the most important things we noticed which organizations value through the pandemic is deep understanding of the law of the land because what happened during pandemic, I think it's something which is unforeseen. And many organizations were really not planned to how to go about it. And I think the advisory role that we took on and the fact that they could come and approach an organization like ours to kind of seek advice and counsel in terms of giving them solutions and support, whether in terms of how to navigate through the regulatory environment as well as like Ashok mentioned, the working cap -- capital position. I think these 2 definitely were big levers for organizations to look or differentiate between established organizations and the follow-on.

[ Nikish ] (sic) [ Niket, ] in terms of cost, in Q1, our core employee cost has come down by about 15% and other operating expenses by over 40%. But we believe some of those operating expenses will be rolled back like the travel and other business-related costs would be rolled back. So we believe on a sustainable basis, a 20%, 25% of cost saving compared to Q4 can be maintained. In terms of cash flow conversion, as I indicated in my opening statement, starting this year, the income tax department has allowed applying for low deduction certificate before 1st April. So if you have noticed our past cash flows, the major impact was coming from higher withholding taxes. And that has been addressed in this quarter. And hopefully, the trend would continue in the future of maintaining 70%, 80% of cash flow conversion to EBITDA.

Sure. That's very helpful. If I may squeeze in couple of more questions. How are you seeing pricing in the current environment? While we were seeing some of your peers had underpricing sometimes or kind of using little more aggressive way of getting contract. Are you seeing in the current context, everyone becoming slightly more rational and hence, pricing becoming far better?

So I think the element of pricing, free differentiator or comparable [ statistics ] always existed and will continue to play out into the future. So I think the fact that we've been able to hold out at our average realization reflects that we haven't really dropped our prices that much. As I had also mentioned in line with our specialized staffing business, some of the mandates that competition is bidding for at a huge discount to a low markup or margins, we are happy to let go of rather than price ourselves too low. So I think a mandate that makes sense from a margin and a profitability perspective is really what we would focus on. Having said that, like we had mentioned earlier, there have been clients who have come back to us to help them and support them in these difficult times. We have had case-by-case dialogue with customers. And we have given elements of discount on the markup for short period and fixed periods of time, which we intend to roll back between Q2 and Q3. But I think that's a partnership aspect that we view in working with corporates and working with them for larger -- longer periods of time. But I think the price competitiveness will -- has been there and will continue to be there.

Sure. And final question on the government training business that you've exited, if you can just quantify the impact in the quarter and for the full year on the P&L as well as on the receivable side?

Okay. Ramani will give the numbers, but we have not exited yet because there is -- we are not taking any new mandates. And we have a sunset clause, which goes all the way into '22 on the government business with the various mandates that we are working with. So in a phased manner, we will deliver and exit on those mandates. Also revenue recognition in Q1 has been very low on the government training business, primarily by virtue of the fact that most of these mandates cannot be delivered to, since the students are not coming into the classroom. Ramani, you want to...

Yes. Yes, Ashok. So for comparison, if you -- I mean, last year, we booked a revenue of overall INR 55 crore in the government training business, whereas in this quarter, we did only about from INR 20.5 crores because of the lockdown and because -- and also due to the sunset mode that we are on and not signing up new mandates in IL&FS. We believe this year, we do at max about INR 20 crore of revenue in top-line.

The next question is from the line of [ Gautam D ] from [ Incarnation Investments ].

So I went through the annual report, which states that you have 1,517 employees at a stand-alone level. But historically, on the calls, we have heard had a number of 800 core employees. So could you just explain what is included in the core employees, what kind of roles? And what is -- what are the other big segments outside the 800?

No. So our staffing business had 800-odd employees, which has come down to about 640 this quarter. We have employed about 350-odd employees in the specialized staffing business. And the various other training businesses and, et cetera, account for the balance. So we have 3 clusters of business, which is the employment, employability, and eWorkforce. And we have got multiple P&Ls under them. The 800 that you're referring to is the general staffing head count. The balance comes from the other P&L.

Okay. And in the calls, it was mentioned that the average salary is around INR 20,000 per month for the general staffing core employee. So does this apply on the 800? Or does this apply on the 800 plus 400 [ on the level that you said ]?

The average salary is associate salary. That is employees who are temped out to organizations. The INR 20,800 that I referred to was the average associate salary, the one that we bill clients.

Yes. I understand that's the PAPM, but then what would be the average salary on the...

PAPM on the 750, Gautam. PAPM on the 750. The average associate salary is INR 20,800.

Okay. Okay. And one more question I had was, how is hiring generally done for the general staffing by the industry? Like who are the vendors? What role do they play? And how are they compensated? And does it flow through our P&L?

So we have multiple channels that supply resources for the client requirements. We have our own hiring team, which is part of this 640 headcount. They are located across locations, they do headhunting/field resourcing, all of that. We also have the digital platform of [ tl.com ] and freshersworld.com that provide us a data bank from which we are able to match to customer requirement. We also have multiple [indiscernible] that we use of training institutes, colleges, and multiple other vendors at locations paid or unpaid that are effectively delivering to these open positions. While we have delivered a lesser number of open -- I mean, we had lesser number of open positions per se in Q1, about 70% of the delivery happened through the digital platforms and through various vendor reference channel network worked on by the hiring team. So the hiring team is part of this headcount that we talk about and is completely costed into the P&L of the staffing business.

[Operator Instructions] The next question is from the line of Vidit Shah from IIFL. [Operator Instructions]

Can you hear me?

Yes.

Yes, sir.

Okay, that's good. I just wanted to understand how things are recovering from the month of July onwards, are we seeing any sort of growth across headcount or customers? Or is it kind of flattish yet?

Well, I think July is clearly better than June, but I don't think it's still -- we are not yet in a growth phase at this point in time. But I think like Ritu was earlier mentioning, there is an element of cautious optimism. We are adding clients. We are adding 2 clients' associate numbers. But I think in July, at least -- I mean, we are still in the process of July at this point in time. We would not see growth starting July. Our estimation probably is that we look at flattish to a marginal decline in Q2 overall and probably start the growth phase from Q3 and Q4.

Understood. Also, just I wanted some clarity across margins of various segments. So other HR services reported reaching a INR 30 million to INR 40 million crore loss -- sorry, INR 3 crores to INR 4 crores loss this quarter. You're saying that the permanent recruitment business is being discontinued from 2Q onwards. So where should we expect margins of this business going forward?

So I think Q3 onwards. So in fact -- in -- if you look at the largest fit in that number has come from the permanent business. So that's really the least that come because, like I mentioned, the challenges in the current times of clients not closing open positions, deferring offer letters, revoking joinees and wanting to take credit notes. So -- and we believe that will play out into Q2 also, and that's primarily the reason we exited. But the other large P&L in that portfolio is the compliance and payroll outsourcing business, which has actually been profitable this quarter, and we believe will continue to stay profitable going forward. I think that is one business that has consistently added customers during the last quarter, has migrated them, has gone into billing with customers. So I think we have the hit largely coming in from the firm business, which we intend to exit. But I think the effect of the play of the balance P&Ls effective Q3 should make the -- bring it near to breakeven model going forward.

Okay. That's helpful. And could you also just comment on the IT staffing. I think the margins have shot up to around 12.2% while being at around 8.5%, 9% basically. So just wanted an idea of what's happened?

Yes. So like we had mentioned, we had been consolidating the 3 staffing -- specialized staffing verticals and P&L. So we had IT staffing, we had the element of telecom, and we had network security as the 3 entities. We brought them all under the common leadership of Sunil and we've also create while sales and delivery will be dedicated to the verticals, the whole element of operations, financial control, quality mechanism, all of that kind have got integrated into a shared service. So there was a leeway for a huge element of team and cost correction that was enabled by virtue of doing that. Also in IT staffing, we had 2 entities. The eCentric was incremental entity that we had acquired year before. And in the last year, we integrated 2 entities in IT staffing also, which again gave us an element of leeway for the aspect of headcount optimization and cost controls. In addition to that, I mean, I think that team has been quite focused on new client acquisition at higher margins. And that has kind of been playing out quite well for that team to drive the margin growth.

[Operator Instructions] The last question is from the line of Garima Mishra from Kotak Securities.

I had a couple of questions. One for the [ Excellent ] business, I think I may have missed this if you spoke about it earlier -- could you please quantify the extent of EBITDA loss that you booked on account of this business for the winding down during the quarter? So that's question #1 -- and second...

Garima, could you hold your question #2, what is [ Excellent ] ?

For [ Excellent ], what is the kind of EBITDA loss that you may have booked in this quarter pertaining to this particular business?

No, no. But [ Excellent ] is not our company.

Sorry. I meant the government business.

Okay. [ DLA, ] I mean ILS as we call it, institutional learning solutions.

Yes, yes.

Ramani?

Also the firm recruitment business, you have mentioned INR 3 crore of loss that we booked for firm recruitment business in the quarter. So Garima, we have 2 businesses in our HR services, which are in sunset mode. One is the government training business and the other one is the permanent recruitment business. So between these 2 businesses, we have, in Q1, we have booked about INR 3 crore of loss that got contributed to EBITDA. So about 50% of the loss [Technical Difficulty] Q2 as well, and I believe from Q3, then, it would transit completely.

Okay. And just a follow-up on this. So see, essentially, you had this TeamLease Skills University, right, which you were also sort of leveraging in terms of imparting skills, et cetera. And I believe it was a part of this government skilling business only. So how -- I mean is that understanding correct? And are you winding down TLSU as well?

So we don't do any government training out of the skill university. So the skill university primarily has a small number of students on-campus, has distance learning platforms for different students across locations and has the NETAP deployment of trainees across customers. So all of that would continue. There is no phasing down on that front.

Got it. And last question, you reported a pretty steep sequential decline in your core employee count. So could you just highlight what functions have you seen this retrenchment happening? And is this employee count basically enough for you to sustain business for the rest of the year? Or you think there would be some trend reversal, and you would add more employees going through the year?

So some of it is structural change, which is effectively in the firm business, about 150 to 200 people come on account of the firm business reduction. We have also the institutional -- the government business rolling down has an impact out there. We have about 140 people reduction in the general staffing business. And that's really where the FTE improvement has come in. But to current volumes, we believe that this -- we can clearly manage with this headcount. And as our technology modules in work go-live, we would look at additional adjustments that could potentially happen. The other area that we have also had reductions in headcount of about another 70 to 80 people is in the specialized staffing side, which is really what I was mentioning about the shared service and headcount and cost optimization levers that they got. So I think at this point in time, to current business volumes, we would not be looking to add any large headcount per se unless the business demands it for growth.

Thank you. I would now like to hand the conference over to the management for closing comments.

Thank you. So I think as we have said, clearly these are difficult times and different times. If the pandemic that has been unmodelable, has been a challenge for people to make decisions and make long-term decisions. But I think we have been able to respond and react well. And I think we will stay focused in the aspects of trying to engage with customers with associates, candidates and the government to lay the way for the future. Our belief is that while it is a crisis, it is a sad situation to be in for a lot of people and for the economy. I think there is an opportunity from a long-term perspective, and we would make them -- we've been making the necessary investments, and we will continue to make the investments going forward to ensure that we focus on the 3 clusters of employment, employability, and eWorkforce as an enabling platform and support structure for the economy at this point in time. So the whole aspect of the principle that we had at the back end of, we are of course, as much as a company cannot be more relevant than at these times. So I think we will continue to chip away on this front. We assure -- as there might be more challenges and more difficulties as we go along. But we believe that staying focused, staying through to the long run will enable us to succeed. With that, thank you. Rohit?

Yes, great Ashok. Thanks a lot for the comments on the call.

Yes. Thank you all.

Thank you.

Thank you.

On behalf of IDFC Securities, that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.