TeamLease Services Limited (TEAMLEASE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to TeamLease Services Limited Q2 FY '22 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sudheer Guntupalli from ICICI Securities. Thank you, and over to you, sir.

Thank you, [ Inba ]. Good evening, ladies and gentlemen. Thanks for joining us today for the Q2 FY '22 earnings call of TeamLease. I would like to start off by thanking the management of TeamLease for giving us the opportunity to host this call. On the call, we are pleased to have Mr. Ashok Reddy, MD and CEO; Ms. Rituparna Chakraborty, Executive Vice President, Staffing; Mr. Sunil Chemmankotil, Senior Vice President, Specialized Staffing; and Ms. Ramani Dathi, Chief Financial Officer. We'll start off with the prepared remarks from the management, thereafter, we'll open the floor for questions. Thank you once again for joining us. Over to you, Ashok.

Thank you, Sudheer, and good evening, and thank you all for joining. I think we have had a very strong organic growth in the current quarter. We've added over 25,000 headcount across various businesses. I think general staffing has added over 14,000 associates while there have been headwinds around markup and aspect of CAPM negotiations and stuff, I think the fact of what we have done in the past has enabled growth and hopefully, we'll continue to enable growth in volumes. Specialized staffing has grown with nearly headcount and has been gaining market share. We've also had a strong rebound in NETAP. NETAP was impacted in Q1 on account of the second wave and they have had a good strong rebound and have added nearly 10,000 trainees in the last quarter. I think on the back of that, coupled with the HR services, business is also delivering to growth. Our operating EBITDA and PBT absolute numbers and margins have improved overall. We've also effectively focused on continuing the aspect of growth across these businesses while we maintain all the other parameters of operating cash flow and productivity and all of those. While Ramani will detail a little more from the provident fund perspective, we have had a settlement in DHFL and follow through on that. We have taken a provision in the books for the investments made there, but we will cover that later. But I think overall, from an operating perspective, it's been a very strong quarter, and hopefully, it is a reflection of the rebound in the market that we will continue to play to as we go forward. Ritu will give a commentary on staffing, and then we'll take it forward from Sunil.

Thanks, Ashok. Good evening, everyone, hope Diwali was fun-filled and joyous. We did remarkably well with a net associate growth of 9% over the Q1 base. Each of the 6 business cohorts in staffing came together to deliver a noteworthy performance. Of course, based on the economic recovery indicators, few cohorts did better than the others. The key standout for us has been, a, differentiated hiring across the 6 cohorts has led to a high volume of temp addition, hired bias across diverse profiles for the quarter, kind of bettering our best. Sustained aggression in new logo sign-ups and focused target segments, and finally, meaningful investments being made in talent and product keeping the long-term resident road map in mind. I think the upside of the reorganization of the staffing business, which we did at the beginning of the financial year, is evident in the performance of the 6 business cohorts. We witnessed the most aggressive net positive headcount growth in BFSI, consumer, e-commerce and the [ tele tech ] cohorts. We had 59 new logo sign-ups during the quarter, as against 47% in the previous quarter. Hiring contribution to gross additions continued to improve and was at about 31% in Q2, clearly signaling departure from our past wherein most of our addition used to come through client-hire associates. Also, contribution of hires through non-recruiter-led channel stayed strong at about 60%. Our FTE productivity ratio for staffing alone improved by about 7% this quarter as against the dip we witnessed in Q1, largely on the back of a robust net associate additions for the quarter. We also managed to improve our associate markup in absolute rupee terms marginally through the quarter. Barring 1 account, all one-off discounts to clients on account of COVID have stopped. The impact of this 1 account would remain in Q3, however, stops completely thereon. While there has been a robust increase in associate headcount, our margins are under pressure, given the impact of some COVID-driven price reduction that we had to absorb, one-time payouts like bonus, which does not attract markup. Given all past furloughs for associates have done away with and then they are back on full wages. Given associate increments and incentives are back again boosting our gross revenues. Given the investments we are making in sales, hiring capabilities and leadership. Given we had to incur a higher recurring EDLI cost, which we have chosen not to pass on to our customers. We are expecting, of course, continued positive momentum on associate additions for the next quarter given the pipeline and strong hiring performance. However, for the above stated reasons, our margins are likely to remain flattish for the next 2, 3 quarters. However, the annuity kicks in and productivity improves, we will definitely see our margins improving. A little bit on the employment outlook. I think based on our recent employment outlook report, which we do every quarter, there has been an improvement in Q3 by about 3% in terms of intent to hire. Some of the key takeaways, obviously, shows that IT education services, health care, Pharma, BFSI, e-commerce and FMCG are the top sectors with the highest intent to hire. Metro cities and -- metros and Tier 1 cities are bouncing back much faster than the rest. Bangalore and Delhi is leading the pack. I think entry-level hiring intent outpaces every other category as business looks to optimizing cost, sales and IT, some of the key hires in functions at this point. But side-by-side, attrition definitely has gone up, whether it's IT, educational services, KPOs. One good thing is laggard sectors those worst affected by the pandemic, like hospitality, aviation, lifestyle, retail, are making a comeback. I'm showing marginal yet positive hiring intent. On the regulatory environment, I think the subsection 3 of section 1 of the Haryana State Employment of Local Candidates Act of 2020 is an unpleasant move and contrary to the spirit of ease of doing business and meritocracy. While representations have been made by the various industry bodies to prevent this from coming into effect on 15 Jan 2022, we're not really sure of the outcome. Given elections are round the corner, it's safe to assume the motivation behind such a move. We'll have some disruption in hiring of candidates with monthly wages below INR 30,000, but we are, at the moment, trying to kind of assess the extent of it. Meanwhile government continues to maintain an uneasy silence over the implementation of the 4 labor courts, the deliberation and the alignment with the states being cited as the primary cause for the delay. So while we have executed on our objectives of the reorganization, a spring boring scale, differentiated hiring and improving productivity. However, the future direction for us and staffing now lies in developing stronger contextual mastery across the 6 business cohorts, create differentiated servicing and differentiated product stack as per the future needs of each customers in each cohort. Thank you.

Thanks, Ritu. Good evening to everyone on the call, I hope you and your families continue to stay safe. We are delighted to share with you that we had yet another exceptional quarter with increased market share gain. The digitization super cycle post-pandemic has led to huge deal wins for our customers, and the same translated into a healthy pipeline for us. Despite a huge talent work leading to skill shortage, we focused on addressing the supply side challenges by offering hire, train, deploy solution in collaboration with our in-house TL Edtech company. Our state-of-the-art solution has helped our customers to meet their talent needs on time. Our strong hiring capabilities, coupled with hire, train, deploy solutions across skill levels, particularly in the new age skills like digital skills, have ensured our customers place more trust on us to fulfill the increased talent demand. These efforts have translated 11.5 percentage growth of our consultants headcount over the previous quarter. We closed with a headcount base of 8,713. Our sales engine continued to fire on all cylinders resulting in 42 deal wins in Q2. In the last quarter, we did 27, but we did a 42 deal win this quarter. New deals, coupled with phenomenal growth in existing clients due to increased fulfillment of demands, helped us to grow the revenue by 36 percentage year-on-year and 17 percentage quarter-on-quarter. We have been focusing on fulfilling high-value mandates and hire, train, deploy solutions, which has helped us to improve our gross margin substantially. We increased by around 400 basis points year-on-year and 50 basis points quarter-on-quarter. Current quarter, we have maintained a gross margin of 19.75 percentage. PBT grew 41 percentage year-on-year and 20 percentage quarter-on-quarter. We improved our PBT margins by 17 basis points despite investments towards creating additional capacity, capability, teams, leadership and long-term incentive provisions for our employees. We are confident of maintaining the PBT margins in the same range. I would like to thank my team for a customer-centric approach, which made us partner of choice across the segments. To summarize, I would say that the demand environment continues to be very strong, and we are confident of continuing the current performance trends in the coming quarters, backed by well set execution engine. Thank you.

Good evening, all. This is Ramani, hope you're all doing well and safe. So let me first talk about the exceptional item that we have accounted this quarter. As you know, TeamLease PF Trust has made about INR 173 crores of investments in DHFL and ILFS. So since they have maturities going up to financial year 2027, we plan to realize gains on other investments over the next 6 years to offset the loss. However, with the recent development on DHFL, which got crystallized, and we received 48% recovery as full and final settlement, we have taken a prudent call to make a provision of INR 75 crores in TeamLease books towards the investment loss in PF Trust. And this also factors for any potential interest shortfall in future at the Trust level. So there is no immediate need for TeamLease to transfer this INR 75 crores to the trust because the trust is having sufficient reserves to maintain positive balance. On a need basis, we will be taking a call on how much of the INR 75 crore provision has to be translated into a cash transfer. The second element on overall cash flow front, we have maintained 100% conversion of EBITDA to the operating cash flow. Our funding exposure and DSO levels remain same as last quarter. And on overall margin front while staffing margins have remained flattish on a quarter-on-quarter basis, at a group level, our margins have improved at both EBITDA level as well as PBT level. So this trend would continue even for the coming quarters with majority contribution coming from specialized staffing and HR services. As we mentioned earlier, in our previous quarter, HR services has broken even in this quarter, and it will start making meaningful contribution to the bottom line going forward. Thank you.

So we are open to questions now.

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

Yes. Ramani, probably we can start addressing the elephant in the room, which is the PF Trust issue. So since this issue was first disclosed in September '19, I think we maintain the same stance, which is we have a net surplus and we have an unrealized mark-to-market gain, both of which will more than cover for any potential shortfall because of the, let's say, haircut in these 2 instruments. And we have -- at one point in time, we have also gone to the extent of saying there is an unclaimed fund in the PF Trust, which can also be adjusted for liquidity needs. And at multiple instances, I think we have maintained the same stance that an item of provisioning or the scenario of provisioning will only get triggered if and only if there is a liquidity crunch in the fund. In that backdrop, I think even when it is -- the same issue came for auditors have qualified this at one point in time, proxy advisory firms have suggested to vote against this. All those instances, we have maintained the same stance that there will not be any liquidity crunch in the fund. Accordingly, there will not be a scenario of provisioning to be made. So what has changed now, if I understand it right, let's say, from the previous 3 months or last 1 month, 2 months to now, what has changed now? I understand that DHFL, there is a resolution. In fact, it's a pleasant surprise for me because the expected recovery earlier was lower than what you are able to recover now, so that should be a logically positive development. So what made you change the stance and kind of go for this provisioning at this juncture?

Sure, Sudheer. So firstly, 2 elements to this. So one is the DHFL crystallization that has happened in this quarter. Because, as I mentioned earlier, we have maturity of DHFL going up to year 2027. And our plan was between the reserves that we already have on the balance sheet of PF Trust plus the future gains that we plan to realize on other investments over the next 6 years, between these 2, the plan is to offset the investment losses of DHFL and ILFS. So that's one element. And that got crystallized now, and we have upfront book for the investment loss in the books of PF Trust, not in the books of TeamLease. The second element is, as I mentioned, this is more of a prudent decision taken by the management to make this provision of INR 75 crores. This is mainly on account of any potential interest shortfall that might happen at the PF Trust level in future because our liability to PF Trust, PF account holders is 8.5%, while the average yield is currently standing at 7.5%, again, because of the shortfall happened with the DHFL and ILFS not making any yield for it. So with this 1% interest shortfall, we -- on a prudent basis, we want to create this provision. But however, there is no need to make any actual cash transfer to the PF Trust immediately. So on a quarter-on-quarter basis, we see if there is any shortfall happening at the results of PF Trust level only to the extent we take a call if the cash transfer has to be actually made.

Just to add to that, Sudheer, I think the aspect of what we said earlier about they're being reserved, and they're being unclaimed accounts, and they're being no liquidity issue at the trust continues to play out. I think the settlement of DHFL, which was maturing to 2027, is really what prompted the management to take a view that making a provision with the known aspect of the settlement and the aspect of how it has played out would be the prudent thing to do. Doesn't have an immediate cash flow impact, that would only happen on a basis of requirement, if need be.

Sure, Ashok. No, I understand the fact that there may not be an immediate cash flow impact, but my only humble submission here is that for 5, 6 quarters, we have been maintaining the stance that there are X, Y, Z events. If and only if those X, Y, Z events happen, the provisioning will get triggered. Now, none of those X, Y, Z events happened and only another event, which is DHFL settlement happened, it was a positive...

That was the main one.

Yes, but that's -- actually, if I look at it, we were able to recover around INR 55 crores, and there is a realized loss of around INR 58 crores. In June -- as per June '21 financial results of TeamLease, I can see roughly there is INR 120 crore unrealized surplus plus mark-to-market thing. So which is your realized loss of INR 59 crores is still lower than whatever your MTM unrealized gain plus net surplus of the pension plan. So just -- I'm a little confused as to what triggered the provisioning event now?

So this is because of the early settlement of DHFL because as I mentioned earlier, we thought the maturities going up to 2027, we have another 6 years to realize gains and offset this. And also, as you mentioned in your question, so there have been queries from the proxy agents and few other investors on the audit qualification. So it's more of a prudent call taken by the management to also get the qualification remote and take this onetime exceptional hit of INR 75 crores.

Yes. Sure, sure, Ramani. Sorry for stating this again. But my earlier question holds on and it remains. Actually, when we were saying that we don't need provisioning for the last 5, 6 quarters, and we were saying based on the fact that there is a good amount of unrealized MTM gains plus unrealized surplus in the pension plan. We were not really betting on the fact that in the next 6 years, we will make some excess income and that excess income will be able to offset the loss realized on these 2 instruments, right? We were only betting on the unrealized gain, which we are seeing in the plan at that point in time. I mean, whenever Ravi was there, whenever this issue came up in questioning in the calls also, we were maintaining the same stance that we have a particular MTM unrealized gain plus there is a net surplus in the pension plan, and we were only betting on that. We were nowhere betting on the future expected gains on that plan to be able to offset the losses. So just because of the conclusion of this DHFL NCLAT proceedings, I'm just a little unclear as to why that should prepare logically. The theoretical framework remains the same, why that should trigger a provisioning event at this juncture?

So Sudheer, there is a difference between MTM gains and actual results. So because of settlement of DHFL, we have to upfront recognize the loss, investment loss on DHFL. So that gives the result, so -- but we cannot completely realize the MTM gains that are there in the trust because majority of the MTM gains are on equity. And after selling those equity, whatever proceeds that we get, 85% of them have to go into bonds and other securities, nonequity investments. So that would further bring down the trust's 7.5% yield to maybe 6%, 6.2%. So we have to balance between the year-on-year yield rates as well as maintaining the reserves positive.

Fine, fine, Ramani. But again, if this is the case, obviously, we were not expecting DHFL issue to go on till FY '27, right? Settlement will happen sooner than later, so probably, if not in September this year, probably it would have happened in December or next March. Then this should have happened earlier itself, right? The provisioning should have happened when auditors have flagged off this issue or when proxy advisory firms have flagged off this issue for the first time. That is point number one. And then based on your response, I have a follow-up question on this.

I mean, historically, we have said that we wouldn't be taking the element of the provision, and we did have the reserves. But I think the qualification has been in our books and so has the call out from the proxy agencies being there. I think it's also a call with the settlement coming into play that it would just be a more prudent element to get the provision taken and offset it with the element of the qualification being removed and take it on from there.

Sure, Ashok. One last question on this aspect before I move on to the next topic. Any future -- any further provisioning on the lines of the same that we may have to anticipate based on what exactly is the recovery rate on ILFS instrument?

So I don't think we would have additional provision required. I think we have factored for the element of ILFS recovery also into the overall provisioning that has been taken. So we don't see any future addition to these provisions.

Sure. And just if I understand it right, this is a trust and TeamLease is a trustee, right? So logically speaking, there is no need to make the shortfall good unless and until there is a liquidity event. Again, do we have any liquidity event now? Or are we foreseeing any liquidity event in the next few quarters, which is why we have now taken a call to kind of make this provision?

No, not at all, Sudheer. So there is no liquidity crunch at the PF Trust level, and even the INR 75 crore provision that we have created, can be written back subsequently in case if the trust makes additional gains or in case if the ILFS recovery is slightly higher than what we have estimated. So this INR 75 crores can be written back. So that's why we said this is only a book entry, only a provision entry made in TeamLease books without no actual cash transfer to the trust.

Sure, Ramani. And Ashok can -- you could probably may answer this question. Ashok, worldwide, we are seeing this phenomenon, the theme of great resignation playing out and especially those developed economies like U.S. and U.K., which religiously give out employment data, we are actually seeing that the number of job openings should be higher than the number of unemployed people in many economies. And even in India, we are anecdotally hearing that, but just that we don't have solid data to kind of understand what exactly is happening in the job market. So any insights on how do you see this kind of either positively or negatively? However it is impacting your business, the theme which is playing out worldwide?

Yes. Sudheer, I think one of the most important aspect is that this term rate resignation is kind of floated around in countries where there are huge government bailouts at an individual level to people during the pandemic, right? So what one is noticing is that because of that, a lot of resources now are refusing to come back to the job market and they prefer to lead the kind of life that they got used to during the pandemic. So I think that is definitely something which is very different from what's happening worldwide, especially in some of these developed countries in India. I mean this trend is widely seen right now in U.S. and in U.K. and a bit of Europe as well. But thankfully, in India, we have not -- we -- of course, there was no such government pandemic-driven pensions or subsidies that have been given at an individual level. That's one huge difference. The great resignation obviously is happening, or rather, the attrition is happening in the IT sector. But the reasons in that sector are obviously, varied and maybe different from what's happening in other parts of the country. In India, again, a lot of individuals, especially in the tech sectors, are preferring to either have the flexibility of choosing the kind of work that they want to do. They want the flexibility in choosing the location. They would like to continue to work on a remote. And if that becomes a deciding factor on somebody's employment, then they are choosing to opt out because they clearly know that there is a demand that exist in the marketplace. There is a lifestyle choice that is being made by people, candidates in that sector to kind of move to more freelancing rather than having a permanent kind of a job so that they can pursue activities, vocation, interest of their own in their free time. So that's why you must have seen that there are some start-ups were coming out with innovative ideas of 4-day weeks, 3-day weeks, permanent pay for their employees. So I think there is a difference with what's happening in some of the developed countries and India. But in India, the impact is widely being seen in the tech sector or the knowledge-driven sector. But in the other sectors, no such trend. I mean, as a matter of fact, people are as hungry as ever now more than before in terms of wanting to get themselves a job and get back into the job market. I don't know whether that answers your question, but that's what's happening.

Sure, Ramani -- sorry, sure Ritu. One last question before I actually leave the floor open for others is -- actually, your commentary on margins seem to be a bit self-contradicting, for the lack of a better word. On one hand, you are saying that the pressure on markups is kind of behind us. Or maybe, only in one particular account, it may spill over to the next quarter, but in most other accounts, the pressure on markups kind of behind us. But you are also saying that we may not see such a margin expansion for the next 2 to 3 quarters despite headcount going dramatically this quarter and in the future also, we are expecting strong headcount addition and -- despite markups remaining stable. So what exactly -- if you can delve deeper a little bit, that would be helpful.

Yes. Let me just address that, Sudheer. So I think in absolute terms, there is a marginal improvement in the PAPM realization despite the fact of discounts and renegotiation on pricing that has happened and so on. However, like Ritu mentioned earlier, there has -- the top line billing from a wage perspective has gone up higher than the element of the growth on this front. And hence, that kind of reduces the percentage realization from which their costs are further reduced to come at the profit margin for the staffing business. So I think one is the aspect that the wage cost and the pass-through costs have increased. Our PAPM in absolute terms has actually gone up marginally. And the other element is what she called out at the stock level at TeamLease and the element of the structural strategy that we adopted in terms of verticalization, the hiring focus, the elements that have enabled and driven our growth and will play out for the future are investments that we would continue to make. Over and above that, obviously, there have been some cost increases that have hit us on account of COVID, one of which is the huge hike in insurance cost. Those effectively will put the pressure on the margin being flattish while growth will continue. In absolute terms, the profits will go up.

[Operator Instructions] Our next question is from the line of Manish Gupta from Solidarity Investments.

I just wanted to understand how your PF Trust structure works. Is there a return that you are guaranteeing to your employees under that scheme?

So 8.5% is the statutory requirement as a return to the PF account holders under that. So it is guaranteed, 8.5%.

The government announces annually the rate of credit to be given to the provident fund contributors, and that is currently at 8.5%.

And is there -- so how do you intend to generate 8.5%? Because that would assume that you would need to take certain equity exposures, right?

So the corpus of the trust can be invested in percentage terms across central state government bonds, across corporate bonds and across equity-linked investments. And effectively adhering to this, the element of the return plays out. So then...

What is -- Yes, sorry, I interrupted you. Please go ahead.

Yes, so -- and these are dictated by the government in terms of what categories and what percentages can happen, and those are effectively looked at before making the investment.

So do you have internal guidelines at present on what is the equity exposure?

Yes. So currently, we have a capping of 10% on total equity exposure, while the statutory limits allow us up to 15%. So again, on a prudent basis, we have internally capped it to 10%. And also under equity, we are only investing in index funds, not direct equity.

And currently, the exposure is around 6% in equity.

Also my question is that if, let's say, long-term and index fund returns 11%, let's say, 12%, right? And you are saying you are capping that exposure today at 10%, and you want to return 8.5%. That means that on the rest of your debt portfolio, you would have to -- if I do the math, return something north of 7, 7.25% on your debt portfolio while a 10-year GSEC today is roughly 6.5%. So I don't understand the math of how you will manage to return 8.5%, by taking only 10% exposure to equities? And hence, is it that you would have to keep funding your provident fund trust from your core operating profits in order to bridge the deficit?

So currently, this 10% equity limit, we are also deliberating to take it up to the maximum levels in future, but as of now, we would like to stick to the 10% limit that we set internally. Also, there were a few indications that EPF guidelines also increased the exposure to equity limits from the current 15% to 20%, 25%. Because as you rightly said, otherwise, it's impossible for any PF Trust, including the EPFO also, to manage this 8.5% yield.

So I think currently, there are some investments that have been made historically that are giving higher yields. Obviously, the current yield portfolio has reduced. So at the balance level is what we would be looking at. The 8.5% is not something that necessarily also has to hold forever into the future, and in the past, even at the rates that were indicated, we had reserves built over the past few years. So one is the element of the EPFO reviewing the 8.5% on the realizable yield. Part of the weighted portfolio of the earlier investments also contributing and balancing the realization is where we would approach it from.

Yes. But sir, I'm sorry to labor this point, but if I just take the last 24 months, my point is that incremental contributions that you have made over the last, say, 12 or 24 months, if you assume that long term, the equity return on those investments will be 11% to 12% because you're investing in an index fund. And if 90% will be in debt instruments, which will be, say, in the range of 6.5% to 7%, I just don't think the mathematics works to get you to 8.5%. So that means would on the last 12- to 24-month investment, are you on a long-term basis actually carrying a deficit?

So currently, there is few basis points of deficit in the PF Trust yield rate. And also what we are petitioning to the government is to give a temporary holiday, interest holiday on the government accounts, which they have done in the past. So in the past, for unclaimed balances, they have given interest exemption. And out of the INR 1,400 crore of portfolio that we have under PF Trust, almost INR 500 crores comes under the unclaimed government accounts. So if there is an interest exemption to the extent of that INR 500 crores that would completely offset the shortly yield rates.

No. I understand that, ma'am, but this is luck siding in our favor. I'm saying on a run rate basis, we are carrying on a run rate basis, assuming everybody claims what is due to them, we are actually carrying a deficit on a run rate basis...

And we had called that out -- yes, I agree with you, Manish, and we had called that out earlier saying that it is at a few basis points less than the realized required rate to be given...

And we will be revisiting the equity exposure policy on a quarter-on-quarter basis, whether we have to increase it managing for the risk and yield rates.

And ma'am, there is no other option for you but to follow this 8.5% guaranteed return? I mean, you can't make it a managed contribution plan which is invested based on risk -- certain risk profile that people choose?

No, Manish. It can't be done. So the long-term plan is whether we can consider transferring the PF Trust to the RPFC but that takes some time. So it takes at least a few years, 4 to 5 years' time frame to get that on system. But that plan is there in the long term.

[Operator Instructions] Next question is from the line of Sachin Shah from Emkay Investments.

Sorry, I'm a little naive on this PF thing. So continuing with the previous questions, if that 8.5% guaranteed, for whatever reasons you are not able to earn from the investments that you made, you will have to make it up from the core business profit. Is that a correct understanding?

Yes, that's right.

Okay. And why would we do this? I mean can't we just put it in the government EPS where we don't have any liability or anything?

No, that would be our long-term strategy if this were to continue to play out as -- appeal to what has to be credited. But at this point, I mean, from a servicing perspective of the employees, having our own trust has always been better in the past. And that is really where the element of setting up the trust and managing it had played out. We were also in surplus over past investments to returns to be given. This has been impacted by virtue of the 2 stress assets and the current yield rate, while the government has not revisited the 8.5%. But if over the coming years, this element of differential between yield and what the government is asking to be credited continues to play out, and as our reserves get depleted if on that count, we would explore the aspect of moving to the RPFC.

Yes. And not only I'm saying -- suppose, understanding that why should we distract ourselves from the core business?

I think this was primarily done from a servicing of the employees' perspective. I think the historical element of service around the PF claims and transfers has been quite bad from the EPFO, and as our employee base has grown, our ability to give them comfort and confidence on servicing has been tremendously high by having our trust. But obviously, we don't intend to do that if there is continued stress from a financials asset, so we would relook at this as we go forward.

Yes, because in a VUCA kind of a world where everything is volatile, uncertain, complex, it's going to be like this, right? I mean, whether at this time it may be government, next time, it will become global, X, Y, Z something or the other, so why did we distract ourselves? I'm just wondering. But anyways...

I mean, I totally take the point. I mean for 15 years, we've had no problem in administering the trust and ensuring better service to the associates. Obviously, the last 2 years have changed that, and we would relook as we go forward. We are open to that.

Our next question is from the line of Mukul Garg from Motilal Oswal.

I just wanted to check up on the initial commentary around the government plan to hire locally. Is that something which will be more from a nuisance perspective for you? Or do you think there can be a meaningful impact in our business because there is a requirement to hire locally and maybe you are -- you will not be able to find enough people under that INR 30,000 per month category.

I mean it's more nuisance at this point, Mukul, rather than actually impacting the business. I think some of the governments have been approaching this reservation for local jobs in the past, even Andhra Pradesh has done this, and the throwback from industry has been where is the local talent to master the jobs. So they have been a little flexible on not following it through and so on. So I think to some extent, at this point in time, it is more a nuisance value rather than impacting any of the growth aspect, but I'll have Ritu also add into that.

I completely agree with what Ashok said that it's more an irritation. And finally, the reality on ground in Haryana is that local talent, they are not available for the said jobs. And the thing is, if you look at the wage level of INR 30,000 and below, this essentially covers even call centers -- domestic call center, international call centers. It also, at one hand, covers all the delivery agents, sales profile. So I think sooner or later, I'm sure prudence will shine upon us, especially the government of Haryana. There is an election around the corner, so one can totally understand the need for making such a move. However, from some latest reports that have come in, industry bodies have chosen to contest it at the court level, so we'll have to wait and watch how this essentially goes. None of the existing business obviously gets impact. We believe that employers will come up with -- and so shall we probably of ways and means of ensuring that these candidates are routed to the appropriate states like Delhi or UP given that there is free mobility available across NCR.

Understood. But like if we assume that this thing kind of get passed, how should we look at the different businesses in terms of exposure, both the general staffing as well as an IT staffing? How much is at exposure from our end?

I think it's more than our exposure. We have to think about the reaction from the industries per se, because there has been a very aggressive pushback that has come through from NASSCOM, CII, the Automotive Association, the Industrial Association of Haryana. I mean, it's like -- I think it is completely contrary to what they set out to do and why Haryana became attractive for them. So I guess, from our perspective, we feel that, yes, it is a little bit of a hiccup in the short run. But I'm sure it's more than us, it's not gone well with the industries per se. So the industries choose to move actually, and some of them are considering their base, and thanks to the pandemic where remote work, hybrid work, the fact that you can easily be location-agnostic has been exposed to us, I think industry will avail of all these options.

I mean just from our perspective, I think, yes, if it were implemented strongly and enforced, they would be the challenge of ensuring we only find local candidates for the local job. So it will put additional pressure on the hiring on that front. But I think we'll have to take this as we go forward because it also concerns industry per se about them being able to find the talent even if they had much more stringent standards or let loose the standards to find only local people for the jobs and more so in the knowledge industry.

Understood. The second question was on the associate additions. This quarter, 25,000 was a very, very strong number. You -- I think your comment imply that you will continue to see strong additions in the next few quarters. Will they be on similar scale? Or like is there some -- was there some seasonal factor which helped Q2? And again, I think I will just kind of try to merge this with Sudheer's earlier comment. Is there -- Is there some sort of pressure on the non-IT general staffing side, whether in terms of salaries or availability you are seeing on supply end?

So I think I will refrain from giving any guidance for the future in terms of exact ballpark that we are looking at. But yes, we expect good, strong performance for the next few quarters based on the pipeline that we have. Now availability of manpower, whether that is pandemic or not, is always a tricky thing for an organization like us, but we need to figure out ways and means of succeeding and solving for customer requirements in spite of it. And I think we've established a track record. Given the contextual mastery, especially around hiring, the differentiated hiring capability we've developed across the 6 business cohorts, which is playing through. So we've been able to come out with the right kind of mix, and we feel that will help us maximize our conversion ratio. Our conversion ratio actually to clients' requirements has been extremely good off late which is almost at the 60% level. So I think all of -- I mean, there are challenges which we narrated around the margin side. But on the associate growth and addition, we feel that we will continue to maintain positive traction into this...

I think if we were to break it down in general staffing, clearly, we've called this out in Q1 also that the feedback from customers when Wave 2 hit was that they were putting their plans on hold and deferring them rather than canceling them. And I think as the unlocking has happened thereafter, customers have come back strongly on their demand for headcount. And it's twofold. One is that we have been adding headcount to existing customers, and we have been adding new logos across verticals. Coupled with the fact that our hiring delivery has improved substantially and a large number of the open positions that are coming in, we're able to deliver, too. And I think when we look at the coming few quarters, the element of the stated demand from the customer side is still quite strong. So I think on the back of that, we are quite confident that growth in headcount should continue. They -- in normally in Q2 and Q3, there is a seasonal element that comes into play, but we are talking about growth net of seasonal element. In specialized staffing, obviously, the demand for the IT skill sets have been tremendously large. We have been making continuous investments in improving our delivery to the customers and beefing up the teams given the growth in number [ ops ] they have. And I think from that perspective, growth on that front also is something that we would continue to see. Similarly, in NETAP, which was the business that got hugely impacted on the negative in Q1, we have seen a strong rebound from customers. And I think the element of the rebound existing customers wanting to fill up open positions and we being able to sign on a lot more new logos is what will sustain the growth for the future quarters.

Ashok, sorry, just again, a bit of a clarification here. This quarter, is it possible at all to kind of separate out qualitatively or quantitatively the impact which came in because of a seasonality and the unlock happening, which obviously was paused last quarter and the new logos, which you are winning and new spend which is happening? Is there a way to kind of proportionate out these 2?

So we could give the breakup between new logos and existing client growth, but it would be impossible to differentiate between seasonal element and continuing element because, frankly, attrition still continues. So it's not that the -- we have a differential between gross growth and net growth and the stated numbers are net growth. So element of seasonal up and down and natural attrition and forced attrition is factored into the element of the differential between gross growth and net growth. So difficult for us to quantify the seasonal element of it, but we can clearly call out the new to old client growth.

If I may add to that, perpetuity has never been the pillar on which temp staffing has been built on. So which means that one of the reasons that an option like temp staffing has become attractive is its ability to handle -- seasonality to handle projects, to handle ups and downs essentially. So for us, this has always been the case that the Q2, Q3 are essentially the quarter where the max -- there's always a spike in demand, and pretty much reflects the domestic consumption pattern and what happens overall in the GDP of the country. So I guess, like Ashok mentioned, is very difficult to unpack the impact of it. So some of the gains which we see in Q2 and Q3 actually has a longer yield. And some of the gains, we kind of end up losing probably towards Q4, but that's how this business works.

But overall, I think Mukul, we do expect a net -- as we have had a net growth in Q2, we expect a net growth in the coming quarters.

Mr. Garg, I'm sorry to interrupt, may we request you to return to the queue? In the interest of time, ladies and gentlemen, we will take our last question that's from the line of Susmit Patodia from Motilal Oswal AMC.

My first question is despite the very healthy growth quarter-on-quarter in general stocking revenue, the EBIT has actually declined in the segment results. I'm sorry I joined in late, you could throw some light on that?

So we had called that out earlier in the call where we said that as -- PF, in absolute terms, the realization and the profits have improved, but the headline billing number has grown more rapidly than the realization and that kind of contributes to the lower return. And also, there have been some element of costs that have come in incrementally around insurance and otherwise that have given to the lower yield per se. And we expect this to kind of hold out in that manner as we go forward.

Okay. So the new margin that we see is what we should assume because of the increased insurance cost?

Yes, yes. But at the portfolio level, we believe that we would be able to improve the margins because the other businesses would start contributing more as we go forward.

And just one thing, Ashok, just to clarify, while you're saying in absolute terms it has increased quarter-on-quarter, in absolute terms, it has not increased, right? General staffing. While top line has gone up 10%?

The PAPM has risen quarter-on-quarter in absolute rupee terms, about INR 13.

I'm just referring to the presentation, you have said INR 23.8 crores general staffing EBITDA, the same number as Q1 and Q2 FY '22.

Yes. On a quarter-on-quarter basis, it has remained flattish.

While the top line has gone up by 10%? That's what I was referring to. So...

So that's with a combination of 2 things. So one is the margin pressure continuing at PAPM level, and some investments made at back -- like in terms of our leadership pipeline, hiring capabilities, marketing in those areas.

And the insurance cost.

Yes. And the insurance cost, which Ritu has explained.

Is there -- I mean, the operating level that will kick in at some point, you think? Or this business has become a little -- it's got cost and it grow as well, which was not envisioned...

Yes. So the operating leverage will kick in after a couple of quarters, Susmit, because as Ritu had mentioned earlier, so we will continue to make investments in some of these areas, which is reflecting in our strong headcount addition, sales and growth. But for a couple of quarters, the margins would more or less remain at this rate.

Right. And just as a long-term shareholder, I just want submission on this whole PLA thing, which is the -- in the past, you have called out that there is no issue, and then there is an issue. And this is quite significant, right? It is nearly 4 quarters of cash flow for our shareholders. So I was just wondering to know when was this decision taken? How was the -- I hope you appreciate that there was also some change in promoter shareholding during the quarter, so if you can just help us how was this decision taken?

I mean, firstly, the change in promoter shareholding has nothing to do with this decision. So this is mainly triggered by crystallization of DHFL and also at the new Board level, we have -- I mean the Board of Directors, they have taken a call that we should go with the clean audit report without any qualification. So it's more like a prudent call to make a provision and get the qualification remote.

Or what is the shortfall, really? What is the real shortfall that we have? And as somebody asked earlier as well, is this a treadmill that we are running where we will obviously behind the race?

So at current loss of DHFL and ILFS, the real shortfall is about INR 20-odd crores, but there can be interest shortfall year-on-year because of the gap between the yield rate of 7.5% and our liability rate of 8.5%.

I would now like to hand the floor back to Mr. Sudheer Guntupalli for closing comments.

Yes. Thank you, management team and all of you for joining us. Ashok, I'll leave the floor open to you if you want to make any closing remarks.

Yes. I think in terms of the operating element, we believe our investments in the team structure and the sales and hiring are paying off, and we believe that the growth that we have seen will continue to play out into the coming quarters. And the element of the HR services also having gotten into the positive will play to the aspect of -- at a consolidated level margin improvement that we can showcase as we go into the year. Obviously, as has been called out, the provident fund provision is something that was the white elephant in the room, and I think it's something that has been a conscious debate with the Board and with the auditors and view that going prudent and going with a provision and an unqualified report would be the right thing to do, and I do believe that we will not have any further surprises coming in from that side. But I think with that behind us, the continued focus on operational growth and margin improvement with the fiscal discipline otherwise that we had is what we would be focused on. With that, thank you for participating in the call.

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