Datamatics Global Services Limited (DATAMATICS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Datamatics Global Services Limited Q4 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pratik Jagtap from EY LLP Investor Relations. Thank you, and over to you, sir.

Thank you, Manav. Good afternoon to all the participants in the call today. Welcome to the Q4 FY '25 Earnings Call of Datamatics Global Services Limited. The results and presentations have been already mailed to you, and it is also available on the website of Datamatics. In case anyone has not received a copy of press release or presentation, please do write to us, and we will be happy to send you all. To take us through the results today and to answer your questions, we have with us the top management of the company represented by Rahul Kanodia, Vice Chairman and CEO; Ankush Akar, SVP and Chief Financial Officer; Mitul Mehta, EVP and Chief Marketing Officer. Rahul will start the call with a brief overview of the quarter on business, which will be then followed by Ankush, who will take us through the financials, then we will open the floor for Q&A session. I would like to remind you that anything that is said on this call, which gives any outlook for the future or which can be construed as a forward-looking statement must be viewed in conjunction with the risks and uncertainties that we face. These risks and uncertainties are included, but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual reports, which you can find on our website. With that said, I now hand over the call to Rahul, sir. Over to you, Rahul, sir.

Thanks, Pratik, and a very warm welcome to all of you. And thank you for joining us for the quarter 4 FY '25 earnings call. I will begin by sharing key strategic highlights from our quarterly and annual performance, after which, Ankush will provide a detailed overview of the financials. We will then open the floor for questions. We delivered a steady performance in quarter 4 FY '25 with a revenue of INR 497.2 crores, which is up 20.5% on a year-on-year basis and an EBITDA of INR 74.5 crores, reflecting a 15.3% year-on-year growth. Of course, this includes quarter 4 revenue contribution from TNQ Tech, which we acquired on the 31st of December 2024. For the full year, we achieved revenues of INR 1,723.4 crores, representing a year-on-year growth of 11.2% over 20 -- over FY '24. On an overall basis, 3% of our growth came from organic performance and the balance came from acquisitions. This year, we have seen an unexpected dip in volumes from our tax business due to the tax volume shifting to in-house captive centers. And we are seeing some slowness in pipeline velocity and decision making due to the tariff uncertainties. Going forward, we will continue to focus on our strategic accounts to expand our presence in the U.S. and European markets and drive cost optimization to achieve this. We are -- to achieve this we are aligning our teams around strategic and key growth accounts. AI remains a cornerstone of our strategy. We believe that AI is transformative potential and remain committed to delivering impactful business outcomes for our customers through our AI-first approach. We are seeing more proof of concepts being done in this space and some of them converting into projects. The Board of Directors has recommended a final dividend of INR 5 per share, which translates to 100% of the face value, which is a INR 5 face value, reaffirming our commitment to shareholders. In closing, I would like to express my sincere gratitude to our employees, customers, partners and shareholders for their continued trust and support. With that, I'll hand over to Ankush for the financial update.

Thank you, Rahul. Welcome, everyone, and thank you for joining us in quarter 4 FY '25 earnings call. Let me start with financial performance for the quarter 4 FY '25. And then I will take you through the full year FY '25 financial performance as well. Our quarter 4 FY '25 revenue stood at INR 497.2 crores reflecting growth of 16.8% on a quarter-on-quarter basis. Our EBITDA for the quarter stood at INR 74.5 crores, reflecting a 36.6% growth compared to previous quarter. Our EBITDA margin for the quarter was 15% compared to 12.8% in the previous quarter. Our EBIT for the quarter stood at INR 54.5 crores, reflecting a 21.9% growth compared to previous quarter. Our EBIT margin for the quarter was 11% compared to 10.5% in the previous quarter. Our quarter 4 FY '25 performance includes full quarter numbers of PNQ Tech acquired on 31st of December 2024. Our other income for the quarter was INR 8.1 crore as compared to INR 10.7 crores in the previous quarter. The decline was due to the utilization of funds for the acquisition, reflecting in lower income from investments. Our PAT after a noncontrolling interest was at INR 44.9 crores, down by 39.6% on a quarter-on-quarter basis. The decline is due to an exceptional item onetime gain in quarter 3 FY '25. In terms of segment, our digital operations revenue for the quarter was INR 266.4 crores, which is up by 49.7% on a quarter-on-quarter basis. Digital operations EBIT margin was 16.4% for the quarter. Digital Technologies revenue for the quarter was INR 159 crores, which is down by 8.3% on a quarter-on-quarter basis. Digital Technologies EBIT margin was 1% for the quarter. Digital experiences revenue was INR 71.7 crores, a decline of 3.3% on a quarter-on-quarter basis. Digital experiences EBIT margin was 13.1% for the quarter. Talking about FY '25 financials, our revenue stood at INR 1,723.4 crores, reflecting growth of 11.2% on Y-o-Y basis. Our EBITDA for the year was INR 229.3 crores, and EBITDA margin was 13.3%. Our EBIT for the year was INR 181.2 crores and EBIT margin was at 10.5%. PAT after noncontrolling interest was at INR 205 crores, and PAT margin was 11.6%. For the financial year, if we see the segment, our digital operations revenue for the year was INR 785.8 crores, which is up by 13.2% from previous years. Digital Operations EBIT margin was 14.9% for the year. Digital Technologies revenue for the year was INR 655.9 crores, which is up by 7.3% from the previous year. Digital Technologies EBIT margin was 3.6% for the year. Digital experiences revenue for the year was INR 281.7 crores, which is up by 15.4% for the previous year. Digital Experiences EBIT margin was 14.3% for the year. We continue to maintain a healthy balance sheet despite utilization of funds for 2 acquisitions during the year. Our cash and investments net of debt remained strong at INR [ 453 ] crores. Our billed DSO was 57 days as of March 2025 as compared to 67 days as of March 2024. In terms of geographical footprint, U.S. remains our largest geography with 54% of the business coming from here, followed by India at 21%; U.K. and Europe at 15% and rest of the world at 10%. In terms of industry footprint, technology and consulting was the largest segment for us, which constitutes 26% of the revenue, followed by BFSI, which stood at 21%, then education and publishing stood at 18%, manufacturing and logistics, which stood at 13%, nonprofit and nongovernment organizations at 10%, retail at 8% and rest of all are 4% of the revenues. Our client concentration remain healthy with top 5, 10 and 20 clients contributing to 20%, 33% and 48%, respectively. With this, I will now pass on the call to operator to open the floor for questions. Thank you for your patience and continued interest in Datamatics.

[Operator Instructions] We have a first question from line of Mihir Manohar from Carnelian Asset Management.

Sir, largely I wanted to understand on the digital tech part of the piece. I mean, so when I go through the presentation and through the website, broadly, I mean we are doing managed services, sales force implementation, Microsoft-related work and Automotive Fare Collection also. If you can throw some light here as to what exactly are we doing here in Digital Tech? Because of the reason I wanted to understand is that the margins are in the 4%, 5% EBIT margin range 4% to 6%. So why is it that our EBIT margins are in this band versus when we see for other IT companies, they are in the 11% to 15% brand depend on the company that you select. So just wanted to get a sense as to what are we doing exactly here? And how -- we know why our EBIT margins are in this 4% to 6% range?

Sure. So if you look at the core IT services, they are in the range of about 15-odd percent in EBIT terms. That has impacted for 2 reasons. 1 is that we -- all our investments in the product development and the R&D that we're doing in AI is going into this bucket. And the second is the business that we do with Automatic Fare Collection is also not a very healthy margin business, plus it has a large component of hardware, since we are not a hardware company, it's basically a trading margin that you make on that. So the AFC piece and the investments in products is what is eroding the margins. If you look under the sheet, basically, the core IT services is running at about 15% margin.

Okay. So this 15% you are mentioning is EBITDA or EBIT?

15% is EBIT.

Okay. If you can quantify the impact of -- I mean, both AFC as well as investments that could be. I mean, so AFCs how large for us. I mean, out of INR 700 crores of INR 650 crores to INR 700 crores.

AFC, it is about the INR 85 crores, INR 90 crores roughly, ballpark.

On a quarterly basis?

No, no, no. On annual basis, but that's a very low margins.

Understood. Sure. And these investments that you were mentioning about these are the company-level investments or only the segment level investments?

So all the investments on technology fit into this. So no matter where in the company, we do R&D, all of it comes into the IT bucket.

We have our next question from the line of Hemant Shah from Seven Island PMS.

Okay. Could you help me with the revenue contribution of TNQ in Q4?

Yes. TNQ revenue contribution in Q4 is about INR 74 crores.

INR 74 crores. And for the full year FY '25, what would be -- I mean, when we acquired the company last year it was around INR 290...

Yes. It was I think, at INR 287 or INR 290. [indiscernible].

And secondly, is there any one-off with respect to this acquisition? In Q3, we had INR 5 crore of one-off, I think you had mentioned. Do you had any one-off in Q4. .

We have -- one-off expense you mean?

Yes, one-off expense.

Yes, we had a one-off expense for the acquisition of TNQ, which so Ankush, you want to say something?

Yes. So we had one-off expense in last quarter, quarter 3, which was for the acquisitions. For this quarter, there is nothing as one-off in this quarter.

So basically, the depreciation and amortization, which has gone up from, say, almost INR 7 crores to INR 20 crores, this is going to be the new normal?

So basically, when we do the acquisition, there is an intangible assets as well will get generated. So there are 2 basically intangible asset, the goodwill and customer contracts. So this is basically amortization of the customer contracts, which will continue for the few quarters basically till it is amortized.

Okay. So this includes goodwill amortization as well?

So goodwill is not amortized. Only the customer contracts, which we have created. So the INR 7 crores will continue for a few quarters until it is amortize fully.

Could you quantify how many quarters?

It will be roughly over 3 years.

Over 3 years. All right, all right. Okay. So my next question would be, after this P&Q this is the first full quarter, correct?

Q4 was the full quarter. This will be the first full year.

Yes. So FY '26 will be the first full year of TNQ numbers, correct with respect to -- I mean consolidated numbers. So if you see, we have done INR 17 crores, INR 23 crores of top line. And I think TNQ anyway is going to have a top line of INR 300 crores. So technically, we should do around INR 90 crores, INR 50 crores of sales going forward in FY '26 comfortably without assuming any growth in the normal businesses, including the Lumina as well as Datamatics standalone.

That is correct.

Okay, okay. And where do you see the margin expansion scope, I mean in terms of digital operations, we have done in Q4, 16% but if you see yearly, it has declined. And even in digital experiences, Q4 has done okay, but yearly, I think it has declined. And digital technologies, I think, has done really a bad margin on EBITDA margin.

So yes, it appears bad because of just a spend that we have, point #1. And point #2, in technologies, we did have a little bit of a dip in revenue in Q4. Having said that, the measures that we've taken to control costs should show us a significant change across the board. The maximum change should be in the digital technology area that you'll see. But even in digital experiences, we'll see an improvement in margin. So we will see a margin improvement more so in these 2 pockets, but you will see it across the board.

Okay. Even in digital operations, we will also see some improvement because of TNQ?

No, that is correct. Partly because of TNQ partly, partly because of some cost-cutting measures that we've already taken care of.

Okay. So if you just analyze this, I mean, for the next year, can we comfortably expect 150 to 200 bps of margin improvement? I'm not talking about the guidance of course, this is pure mathematics.

Yes, yes. I expect that.

Okay. Okay. Okay. Great. And lastly, could you throw some idea on deal wins Rahul. You have mentioned 4, 5 deal wins in the presentation, is the size is about INR 20 crore annually or below INR 5 crore annually?

So these new deals or new logos that we win typically always start small in the scale. So there are some very good logos that we've acquired, but we will always start within the range of $200,000 $300,000. It's about INR 1.5 crores to INR 2.5 crores. But then they scale depending on how the performance goes here.

But is there any deal we have won over, say, INR 10 crore or even higher?

Yes, there are and there are some in the pipeline as well that we will close hopefully very soon.

Okay. Great. Sir, lastly, I think, if you can throw some light on AI-driven revenues in FY '25, I think you had mentioned around $40 million in Q3, previously?

In -- $40 million of AI?

For the year.

Our total top line roughly is INR 200 million. So it's INR 40 million and it's just pure AI would be very heavy.

Okay. So what would be the AI-driven revenue...

Right now we are not tracking specific AI-driven revenue because we are injecting AI across the board in multiple areas, every project is with some [indiscernible] AI, that's coming in. It's very difficult to track the pure AI revenue. Having said that, there have been a few POCs that I mentioned in my address, there are a few pure AI proof-of-concept projects done, and they are now converting into live projects.

Okay. So every year, we spend around INR 40 crores to INR 50 crores with respect to the R&D and the technology spend, right?

That is correct.

Which is going to continue even in '26, '27 as well?

It will continue. We are realigning some of that from some product investments that we were making towards AI. So we are sort of reallocating some capital. But yes, fundamentally, that will continue.

Okay. Okay. Fair enough. And lastly, sorry to take so many questions. Thank you for this INR 5 dividend. This is a very good gesture. And I just wanted to know, I mean, there is one competitor likewise competitor in the market in the stock-listed space, so which is MPS Limited. I mean, if you see the financials of NPS, I think it has steadily grown in terms of volume and even in terms of margins. If you see 3 years back, the size of the company was almost half the size, which is today. And the margins have already expanded from, say, 18% to almost 23%, 23.5%. I mean can we see this kind of trajectory with Datamatics Lumina, Rahul. Because we have acquired so many fantastic assets and so many beautiful companies?

Yes. It would not be correct to compare all of Datamatics with MPS. MPS is 1 component of what we do. TNQ for an example, fits into that space, but there's a lot more than Datamatics that's point #1. Point #2 is that the margins in that space is similar for our division that's into digital content as well as TNQ is similar to NPS and the third is the growth rate that you've seen in NPS has largely come through acquisitions. It is not in an organic growth. So yes, if you consider acquisitions, then you will see that. But right now, we've already this year, done 2 acquisitions. So coming financial year, we are not looking at any significant acquisition.

Okay. Okay. But I mean margin expansion, as you rightly mentioned, around 150 to 200 bps is on a consol basis, data metrics all inclusive is visible, right and possible?

Yes.

Next question from the line of Hemant Shah from Seven Island PMS.

Sorry, I think it seems a one-on-one call Rahul. Thank you for taking 1 more question. Are this with respect to the interest cost and the debt what we have taken, around INR 150 crores in the balance sheet in FY '25. So how would the repayment would be doing. And this is for the TNQ acquisition I assume?

That is correct. This was a TNQ acquisition. See we are cash [indiscernible] so we can't pay. So I don't think we have any concern from our payment. We will pay down those from future revenue accruals and profit accruals. That's the plan. And it's always good to remain liquid, and that's the reason why we did take some debt.

Fair enough. Fair enough. But we'll be repaying it in the next 2 years or so from our internal cash flows.

3 years. We generate on a yearly basis, we are generating almost INR 200-plus crores of operating cash flow. So I think the borrowing is not issue as of now.

Correct. I think with TNQ, we can generate even 20% to 25% more Rahul. If I'm not mistaken. Fair enough. And I think, since it is a one-on-one call. I think, you've done a fantastic job. But as a shareholder, we would like to see margin improvement in all 3 segments, Rahul. Technologies, operations as well as experiences. Since you're spending so much on R&D and automation, I think the fruits are still not visible. I mean, is there any reason or it's the -- still, I think the business is asking for more spend.

No, I think the spend in the business will be at a steady state. So it's not asking for increasing the spend. I think now the spend has to be more in some solutions that we take to market. So it's more from a take to -- go-to-market kind of thing. But -- so I am confident that we will see an improvement on the bottom line across the board in this kind of new financial year.

Because we have, I think, almost spent maybe INR 250 crores or INR 300 crores in last 5 or 6 years, right?

That's correct. That's correct.

I think it would not be fair to assume 20% ROI for this investment.

Some of them have an opportunity potentially to give us some very good returns. So yes, let's see how that goes. We're still bullish.

And you mentioned some slowdown in terms of intake of the orders and some slowdown with the U.S. market. You can throw some light?

Yes, we are seeing some of our customers go slow or pause some projects given the uncertainties around tariffs and given the possible inflation that they are talking about in the U.S. some [indiscernible] and we also see that impacting the pipeline a little bit. However, in the last week or 2 weeks, we've seen some easing off with the U.S. administration as far as China and Turkey and Serbia and Saudi, maybe all these countries that we talk about. So if there is a little -- if some of these things settle, then we should see an uptick hopefully. So...

Fair enough. And lastly, we have 20% of our business from India.

Yes.

So where do you see the potential of Indian market going on 20% is almost roughly INR 350 crores of business.

So India is a tricky one because India is a very good market, but it is a price-sensitive market. So from a cost perspective, India looks good. However, from a margin perspective, India will always be a little compressed and that doesn't have with India.

But do you see the products you are offering, I think no other companies are offering to the MSME sector or maybe a small company. I mean do you see that kind of potential as in, I think India is growing. I don't know how far the market is growing in terms of the products, what you're getting.

No, the product we are selling, we sell in India as well as the Western market. In the Western market, of course, we get much better margins. So -- and a large part of it is also digital operations, which is -- so digital operations, hopefully will get a flip, but we're able to implement some AI solutions. Although having talked about AI, again, right now, the pricing structure of AI for India is still a bit of a challenge. The cost is not as cheap as India would like it to be as a geography that is because labor cost is quite cheap here. So once that matures, then we can deploy it and try to reduce the cost in India. But right now, the Indian customers are a little wary, when it comes to deploying AI because it does not give them a financial game. It gives them automation, but not necessarily a financial game.

We have our next question from the line of [ Reuben Matthews ] from Equity Intelligence India Private Limited.

I just had a quick question. I believe you recently met with Google. I'm just trying to understand how does that meeting going on? And maybe, if you can give a little bit more. Can you give us some information on what exactly would you be doing with Google?

So we had a good meeting with Google. It's about a joint go-to-market. So we are taking some of their solutions, particularly using AI to the market, and they are taking us to their customer base as well. So we are -- it's a joint initiative to deploy AI solutions to the customer base that we have and that they have. Yes. We're building some of the solutions on top of their platforms.

Okay. So is that one of the deals that you said that you want? Or is it still under discussion?

No. No, we've not yet closed any deal with Google. Those are still in the pipeline.

We have our next question from the line of Mihir Manohar from Carnelian Asset Management.

Pardon for my ignorance, sir. I broadly wanted to understand this AI investments that we are making in -- what are these towards exact too? I mean, I know that we have TrueBOT, TrueCAP, LUMINA, different category of products. So I mean this investment that you are making in what exactly are they into?

So they are in building these products, and now we've been putting a lot of Gen AI into these products. And now we've got something that we're developing is Agentic AI. So we are building solutions around Agentic AI. So all of that is where the R&D is going around the latest technologies around AI, the whole pace of AI is moving very, very fast right now. And therefore, it means that we are on our toes constantly doing R&D and implementing the latest solutions available. So that's -- yes, so these products are around automation -- around information intelligent document process extracting and interpreting information and around business intelligence.

Okay. Understood. Sure. And these products -- will these products will be sufficient itself for us to. I mean, in the future revenue generation becoming directly possible only from the sale of products or subscription of products -- or will it be a part of managed services and product by services kind of a thing going ahead?

It is both. It is both. So we are selling these products as licenses, and we are also using these products as part of our managed services. So it's both.

Okay. Understood. Out of INR 1,700 crores, how much will be pure product revenue?

So that's a tough one because we are not -- because those that go as part of managed services, we are not able to track that revenue specifically to the product. And the cost of the R&D and product building is all put into the digital technologies bucket. Therefore, you see the technology bucket having a little depressed margins, but yes.

Understood. Sure. What will be the annual investment that would be towards the Agentic AI investment?

That's hard to say. AI, in general, AI and all the products together is about INR 40 crores to INR 50 crores, but I can't slice it out, break it up and to give you these slides because there's a lot of internal relationship between them. It's hard to say what is what.

Sure. Sure, sure, sure. Second question was on the comment in the start you made. I mean, there was some deepen volumes, because of the shift to captive centers, I mean, is this happening in your top 10, top 20 clients, how to see this and how important -- I don't know how significant it is? Or in which area is this happening?

Yes, it did take place in some of the -- in the top customers. And you see -- if you see the top 5 customers that we've had, we see a dip in percentage of revenue that we get. But generally, in the industry, one does see a trend towards captive centers, and we see growth in the captive units and companies preferring to -- or slowly moving in that direction. However, the current customer base that we have, I'm not seeing too many shifts. So I'm not worried about that. But yes, some of the larger customers do explore having their own operations in India. Although I do see very often captives and vendors coexisting in an enterprise. So they have a dual model where they do both.

Understood. Sir, just one last question on the capital centers. We have seen capital centers built up in the last 2, 3 years. From a broader revenue thought process perspective from an industry perspective, I mean, vendors captives have to start getting importance versus outsourced players, I mean, at what stage of industry does that happen? How does the industry valuation happen, I just wanted to understand that? Is it that when a new technology comes in, people take to a more captive sector and slowly, gradually, eventually as and when it gets more used, it start shifting to outsourcing. How does that happen?

No. So there is no pattern in the industry, and we've seen it across the board. Large companies have captives, which they've divested small companies have started captives, so this is all over. There's no pattern as such. Typically, they don't do it for new technology. New technology is easier with vendors because vendors service many more customers and therefore, more exposed to technology. So that is certainly not a trigger, but there's no pattern in the industry as to who is inclined to go with a captive versus who is inclined to go with the vendor.

Okay. Understood. And [indiscernible] I mean, the capital centers here, which we saw. This was in BFSI or taking contracting part of the piece?

BFSI.

We have our next question from the line of Sahil Jain from Enigma Investment Partners.

Yes. So with the increase in TNQ revenues, will we see a shift in the geographic concentration, like will the U.S. and the Europe concentration increase from the pie?

You will see and you have seen some of it already. But yes, you will see that piece increasing more in Europe than in the U.S. because Datamatics ratio in the U.S. and TNQ's ratio in the U.S. is roughly the same. So you won't see too much impact on the U.S. But yes, you'll see a growth in Europe.

So that will automatically transfer into higher margins, right? And what we are currently in [indiscernible] .

That is correct.

Understood, sir. And sir, what -- can you just give an outlook of how the [ Dextara ] business is performing? Is there any sort of tariff impact or anything that is affecting that business [ hyper scale ]?

No, no, no tariff impact on that. I think that the whole tech and BPO industry is right now insulated from the tariff force. We know what comes in the future, but as of now, I think it's okay. Dextara has been a little soft in performance, but this year, we should have an uptick. In fact, I mentioned in the last call that we have got 5 logos from data manage customer base, where we successfully cross-sold Salesforce services.

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

Thank you, everybody, for being on this earnings call for the year ending '24, '25. I look forward to talking to you once again as we enter the new year in the next quarter. Thanks, once again, for your time with us.

On behalf of Datamatics Global Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.