Updater Services Limited (UDS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 FY '24 Earnings Conference Call of Updater Services Limited. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on date of this call. The statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Raghunandana Tangirala, Promoter, Managing Director, and Chairman from Updater Services Limited. Thank you, and over to you, sir.

Yes, thank you. Good afternoon to all of you. Warm welcome to everyone present on this call. I have with me Amitabh Jaipuria, Non-Executive Director; P.C. Balasubramanian, Executive Director; and Radha Ramanujan, CFO. Thank you for having all of you on this call. I hope you have all reviewed the investor deck by now. And for those who have not had it, you can view them on the exchange company or the company website. Let me give you a brief [indiscernible] of UDS. UDS evolved today into our leading integrated business services platform, present across the country, which have been Pan-India for the last decade or so and servicing customers across all industries, very diverse industries. We've got a very well experienced professional management team running each of our business services sector, I mean, services and verticals. All of us have been industry leaders, all our services have been industry leaders in whatever we do either in the IFM space or in the BSS space. IFM is the Integrated Facility Management and the BSS is the Business Support Services. I'll come to that in a moment. During the last quarter, IFM has contributed, which has generally been the trend for the last 2, 3 years, roughly about 65% of revenue. And balance 35% revenues from the BSS segment, at an overall very high level. However, when Radha is taking you through the numbers, she'll give you the details. As you know, IFM is basically on the soft services like cleaning and support and the hard services like engineering and electrical, water and MEP services. What we do at IFM, just to brief you, is manage these facilities, could be an IT park, could be a hotel, could be an airport, could be a commercial building. That's what we do at the IFM space. In the BSS space, we have largely sales enablement, employee background verification, audit and assurance and mailroom management, largely 3 business verticals. Okay. In all these business spaces, whatever services we've done, we are holding market leadership with a market share approximately in both sales enablement and the audit and assurance about 20%. All our businesses are being B2B, and that's what we would want to be, a B2B services platform. In the mailroom and niche logistics, we have roughly about 18% market share. All our customers have been -- we've been able to retain customers at about 90%, 95% customer retention across all businesses. Coming to the IFM piece, which is largely 65% of the overall revenues. We have had a fairly good uptick in terms of the industry growing, infrastructure growing fast, commercial space and then our office retail space growing at about 50-odd million square feet per year. We see there a large uptick. However, this quarter, it would look at marginal growth of 6% because we had exited certain unviable businesses in the IFM space. Otherwise, the IFM entire scenario looks good in terms of market growing, and we also wish to grow along with that same line. We also have a large manufacturing presence or manufacturing customers in the IFM space, which is largely automobile and other manufacturing. That is also growing at about 15%, 16%. And we try to -- we'd want to capitalize there on the manufacturing space in the IFM. Lastly, on the acquisition, we have raised money for acquisitions. We haven't done any acquisition as of now, but we are seriously working on that. We would look at targets which will complement our businesses, either directly or add capabilities to our existing service lines, which is what we'd hope to want to do it at least this year. So this is what roughly the whole business is today. And I would hand over to Radha to -- our CFO, to give us the details on the financials. Thank you.

Thanks, Raghu. Good afternoon, everyone. I'll first share the highlights of Q3 FY '24 and then take you through the 9 months ended FY '24. The overall revenue from operations grew by 18% year-on-year to INR 6,404.54 million. The IFM segment grew 6% year-on-year to INR 4,278 million, and BSS segment grew by 55% year-on-year to INR 2,288 million. During December '22, we acquired Athena and the reported number for last year has only 8 days of revenue. So hence, excluding Athena for a like-for-like comparison, the BSS segment grew by 33% year-on-year. The revenue split between IFM and BSS segment stood at 65% for IFM, 35% for BSS, compared to 73% IFM and 27% BSS last year same time. BSS segment gives us higher margin compared to IFM segment, and increasing the revenue share is showcasing a strong improvement in our margin. EBITDA grew by 97% to INR 393 million, whereas the adjusted EBITDA grew by 69% year-on-year to INR 446 million. As some of you may be aware, the adjusted EBITDA is excluding certain one-off expenses like ESOP cost. It excludes the fair value changes in liabilities payable and paid during the quarter to the promoters of acquired subsidiaries. To give a brief, in Q3 FY '24, our ESOP cost is INR 22 million. The fair value changes in liability on account of the acquired subsidiary is INR 32 million. This is primarily interest unwinding respect to the liability payable to promoters of Denave and Athena. By FY '25, we would become 100% -- Denave would become a 100% subsidiary of the company. And by FY '27, Athena would become 100% subsidiary of the company. Adjusted EBITDA margin stood at 7%, which was 4.9% last year, partly due to the acquisition of Athena also, which is a high-margin business. And this is in line with the commentary of further scaling margins on account of providing integrated and specialized solutions yielding higher margins. Adjusted PAT again witnessed a sequential growth at 122% year-on-year and stood at INR 274 million. Cash profit again grew by 110% at INR 408 million. Coming to 9 months FY '24 financials, the total revenue from operations grew by 19% to INR 18,242 million. EBITDA grew by 56% to INR 1,048 million, and adjusted EBITDA grew by 23% to INR 1,251 million. In the 9 months ended FY '24, our total ESOP cost was INR 82 million, and we hope to close the year with INR 110 million or so hopefully paid-out ESOP cost. Similarly, the 9-month FY '24 fair value changes, which is recorded is INR 121 million. Adjusted PAT grew by 6% year-on-year to INR 675 million, and the cash PAT grew by 31% year-on-year to INR 1,073 million. Our adjusted ROCE on an annualized basis stands at 23.2%. We are a net cash positive company and our debt-to-equity ratio is negative at 0.32x as on December '23. And now we open the floor for question and answer.

[Operator Instructions] And the first question is from the line of Sanjay Shah from KSA Securities.

Sir, my question was regarding to have more understanding of our business. And going through Slide #36, can you highlight upon and make us understand what is this IFM business work that is in-house, outsourced? So what is -- how it works and what are the potential over there on that vertical?

Good questions. I'll give you a very small brief. IFM is Integrated Facility Management business. What we do here is to manage facilities, a facility could be a building, could be an airport, could be a hotel, could be a hospital. We do all the back-end maintenance of the building, which could be soft services, could be engineering services, could be support, mailroom services, hygiene services, all these to manage these facilities. So that's largely the integrated. Why? Because we combine everything and give it as a one-stop solution. This is what we do in the IFM segment. Did that answer your question?

Yes, yes. But what is that in-house we do and what outsource we do? How -- what is outsourcing means?

Yes. We have always been following a model of self-managed, which means everything is in-house. All services are specialized services done in-house. There is minuscule, nothing we outsource.

So Raghu, may I? I'll just...

Yes, please. Please, Amitabh.

Yes. So when we say outsourced services, the customers are the ones who are outsourcing these services. So whether they are soft services or cleaning services, as Raghu mentioned, or the services where we are more strong, which is like production support services or engineering services, which means that we help them maintain their gen-sets, power systems, lighting systems, HVAC systems and all of those. So -- and also administer all the annual maintenance contracts, the AMCs that they have. So that is the services that they outsource to us. Now we don't outsource anything almost, as Raghu mentioned, because we do almost everything in-house. So all the people that are deployed are people that are on our payroll. All our technology is largely in-house technology and all the processes, et cetera, that we deploy are all our own. So that is how it works. There are many other companies, for example, who would outsource parts of their operations, maybe even take some people -- a large number of people on subcontracting and those kinds of things or have payroll -- outsource their entire payroll. We don't do any of that. Yes. So all the value add that we do is in-house, and we serve -- as you have seen on one of those slides, almost 1,700 customers now in IFM and almost an equal number of customers also in BSS. So together, it's almost 3,000 customers-plus that we and [indiscernible] names, as you can see. I hope that helps understand it.

Very helpful. Now it's very clear, which was creating doubt in our mind. My next question was our supporting services and IFM in -- for airports. What is -- how many airports right now we are doing and what job we do over there? And what is the scope of growth in that vertical?

So we do 2 things at airports. One is the provision of engineering services. For example, we do Delhi Terminal 3, we have been doing for a long time. We do their air services building, et cetera, et cetera. We do many other airports as well. So Goa, for example, the new terminal is ours. Guwahati is ours. We also do other terminals with...

So basically, what we do there? There are different many things but what we do?

So similar, as we mentioned for the buildings, so we help maintain their HVAC systems, we help maintain their power systems. They are lighting the entire other equipment that they may have, the AMCs that they have. We are also now doing some services on the air side as well. The terminal building basically is what we handle largely. So that is what we do for airports. The other business that we have for airports, which is centered around airports is what is called airport ground handling, which is what you see separately. Airport ground handling is all the set of services that are provided once an aircraft comes into the gate. So once you land, once the aircraft lands, it comes to the terminal, correct? Now once the aircraft stops, everything that happens to that aircraft from that point on until the aircraft is ready to take off again is handled by us. So for example, the baggage handling, for example, the entire provision of ground power, of ground air through machines called AHUs and ground power units, GPUs and those kinds of machines, including the pushback. Once the aircraft is ready, there is something that makes the aircraft go back, right? So that is called the pushback. So including all of that, including the passenger movement, baggage movement, all of these services, these are what is called airport ground handling. So that is the business that we have on the -- that is part of BSS, part of Business Support Services.

Comes into BSS, right. That is correct. And the building comes into IFM, right?

Yes, that is correct. Absolutely correct.

Good. Sir, my next question was regarding our subsidiary, that is acquisition what we have made is in Matrix, Denave and even Athena. So now how the valuation will derive? When we'll achieve up to 100%? So what are our -- whenever we acquire, whatever our terms and conditions and what cost will be involved to acquire them?

It's a great question. I will request Raghu and Radha to add color, but I will start by telling you that our method of accounting is such that the consolidated value of 100% of the acquisition is baked in into the numbers. Because the way we do the accounting, because our share purchase agreement has a 100% commitment to purchase the shares except for A1, which is a very small company. In all the others, since there is a 100% commitment to acquire, the overall cost of acquisition is accounted for upfront as a liability. Because these companies are doing very well and they are above the assumptions that we had made when we acquired these companies, that is why you see this adjustment to our EBITDA and to the PAT number that we have talked about because of the fair value change. So supposing -- I'll give you an example. Supposing they were supposed to deliver INR 100 crores of EBITDA when we bought the company, right? Now they are delivering INR 120 crores of EBITDA. So the way we do the acquisition is that if they do better, then we pay slightly more. And because instead of INR 100 crores they are doing INR 120 crores, so obviously, you have to pay more, right? The multiple will apply to the INR 20 crores also. That extra is routed through the P&L, which is a good thing for the company and for shareholders because the company is doing better, right? So now 100% of Matrix is accounted for because as you will see on one of the slides, 99.99% of Matrix is already acquired, Slide #17. And you will see that Denave, we are at 57.52%, and Athena, we are at 57%. And the next tranche will be going now, so we'll be at 74%, 75%. And Athena will be, as Radha mentioned, will be 100% owned by us by the time we get to FY '27. So -- but for the derived value that you talked about, 100% of the current value reflects the inherent business, the full acquisition of the inherent business.

Right, right. Very helpful, sir. Very helpful to understand. Sir, my last question was regarding how we can see this company in the next 2, 3 years after acquiring this all 100%, even airport business growing. I feel -- we feel that margins must be better on that side. And which are the other verticals do you see opportunities?

Raghu, may I start with that or would you like to start?

Yes, yes, you can.

Okay, thanks. So the way we look at the business, our business is tied, to a very large extent, to the economy because what happens is as construction goes up and we can all see new buildings, new warehouses, new factories coming up all over the place. In fact, a statistic that I have given very often is that 50 million square feet of office space is coming in, almost 50 million square feet of warehousing space is coming in. Almost about 7 million to 8 million square feet within the top 6, 7 cities of residential, this thing is coming in. So all in all, a huge amount of constructed space is coming into the market. Every square foot of constructed space that comes into the market is a potential market for us because you have to maintain that building, you have to provide soft services, engineering services and all of that. And also in industrialization, you can see that our industrial activity is picking up significantly. Every day, we are hearing about new FDI and about new capital expenditure that is taking place. What that does is that it gives us opportunity to operate in the market where we are the strongest, which is industrial and production support services and engineering services. Also, we are seeing new airports come up. Airport is a big part of our business as well. So we are seeing that, in fact, the government has been putting on a lot of statistics where now we have 147 airports when earlier we used to have only about 60, 70 -- 60 to 65 airports just 10 years ago. So therefore, all of these are providing new opportunities for us. Also, on the BSS side, there are some businesses where we have international customers. For example, in audit and assurance, we have international customers like P&G. On the Denave side, which is sales enablement, we have customers such as Microsoft and we've very recently now opened an office in Korea, in South Korea. So all of this is sort of talking about new avenues of revenue and growth for the company. At what can we grow at, the historical rates of growth are given in one of the slides, you can see those. And I think it is Slide #25, you can see the historical rates of growth. We believe that these rates of growth can be higher than what we have achieved in the past. Exact numbers, of course, forward-looking numbers, we will not be able to give you. But we believe that we can grow at roughly about 3x the rate of growth of the economy. So if the economy grows at 7%, we should be in a position to grow at roughly in the position of -- in the region about 20%, 21%. That is what we are doing our internal modeling on, and we believe we can get it done.

[Operator Instructions] The next question is from the line of Balaji from IIFL Securities.

Congrats on a good set of numbers. I had a few quick questions. So the first one is on the IFM revenue growth. You did mention that there were a couple -- a few unprofitable contracts that you exited, and that in the medium term, you should revert to something like mid-teens growth level on the revenue front. So how long should one expect fairly modest revenue growth numbers? That is number one. Number two pertains to the BSS segment. So here, I can see that your sales enablement numbers, when I calculate based on what you have provided in the PPT, it seems to have done a quarterly revenue run rate of close to INR 174 crores. So may I know how much of that is Athena and how much of that is Denave? And a related question would be on the recent curves by RBI on NBFC lending. So do you see any adverse impact potentially coming on Athena from this? So those would be my 2 questions.

So I'll take the Athena question upfront and then I will let Radha handle the breakup between Denave and Athena, that will give us the time to do that number as well. See, on Athena, to your question about NBFC curves and how does that impact our business, that does not impact our business at all. So our exposure to NBFCs is very, very limited. Our exposure to the financial market is mainly through the banks because we do selling for banks. And therefore, any curves on lending by NBFCs impacts us to a very small extent, in fact, negligible. Radha, over to you for the breakup between Denave and Athena.

Yes. In Q4, we had INR 135 crores of revenue coming from Denave and INR 37 crores of revenue coming from Athena.

Yes, And to answer your first question. Yes, we did come out or consciously exited certain unviable businesses in last 2, 3 quarters. So that's why IFM growth will be slightly muted at 6%. We would recover this to get back to the high teens over the next 3 quarters. So that is the medium term.

Okay. And I just had a quick follow-up. So from the subsegment-wise breakup within BSS, I can see that you have done really well in sales enablement, mailroom management and niche logistics and airport ground handling. So congratulations on that. But on audit and assurances and employee background verification checks, there seems to be a significant Q-o-Q decline. So I'm not very sure what exactly is causing the weakness in the audit and assurance segment. So is it something one-off in nature or are we seeing some general slowdown? And when do you see the employee background verification checks to normalize? I do understand that IT hiring is a little weak, but when do you see this bottoming out?

Raghu, you want to take that or should I?

You can either or even Bala can take this.

Sure. It's a good question. And we are all aware that I'll first talk about background verification business. This is Bala. EBITDA slightly down, the IT hiring is massively down, and predominantly for Matrix, the customers are from IT industry -- IT and the IT industry. So hopefully, when the employment picks up in that space, the business will automatically grow. And when it grows, it actually grows very significantly. I don't see such a major problem in the audit and assurance space because actually we have done well in the audit and assurance business this year. So I don't know from where...

For the audit and assurance, 2.2% growth and employee background, 1.7%. The revenue share is [indiscernible].

No, audit and assurance business is better -- looking better this year, 2% growth over last quarter.

The share of...

The share of business -- yes, if you are talking about the share of business is always like that. But in terms of absolute growth, audit and assurance business has grown better this year. If you want the...

Audit and assurance roughly grow at about 20%, whereas your employee background [ grow ] at 20%. However, we made a [indiscernible] with different customers from different segments other than IT only dependent on IT. I think IT hiring will not take up or pick up pace at least the next 2 quarters, that's what we hear. However, we have just kind of filled that up with non-IT. It would take another 2, 3 quarters to normalize. So the progress will be towards BFSI and other segments who are still hiring reasonably well. So IT will take another 1 or 2 quarters and we're ready willing to wait for.

See, the other way to look at this, if I may add, Bala, Raghu, is also to give perspective to our analysts is that we believe that while it will take time to come back, we do believe that we have pretty much hit rock bottom. So the other way of looking at it or asking that same question would be that do you see further downside? So we don't see further downside on IT hiring. But at what pace it recovers really, I know you all will have a better sense because all of you track the IT majors also. So you all will have a good sense of when it will come back. But we do believe that the downside is over, and we have hit...

You are absolutely correct. The downside is over but the -- what we call upside will progress gradually is what we said.

The next question is from the line of Nitin from Investec.

I had a couple of quick questions. So one is the airport ground handling this quarter, could you give us some sense on how much incremental revenue target on a sequential basis? Because overall, it looks like BSS has added some INR 30 crores. Just wanted your thoughts on how big a contributor was airport ground handling this quarter?

Radha will give you the exact number, Nitin, but airport ground handling is not a very major contributor to our revenue right now. And at this particular point in time, it is also a negative EBITDA. So it's not a contributor in that sense. However, we believe that as we go forward, not -- because this year, not only will it turn positive, which is what we had also mentioned during our roadshows. So it will -- we are sticking to that deliverable and it will turn positive. However, [Audio Gap]