Updater Services Limited (UDS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Updater Service Limited Q2 and H1 FY '25 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantee of future performances and involves risk 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, MD and Chairman of UDS Limited. Thank you, and over to you, sir.

Yes. Thank you. Good afternoon, and a warm welcome to all of you present on this call. I have with me Radha Ramanujan, our CFO; Mr. Snehashish Bhattacharjee, our CEO for the BSS segment; and Amitabh Jaipuria, who is our non-Executive Director. Also we have SGA, our Investor Relations Advisors. I hope you all I have received the investor deck by now. And for those who have not, you can view them on the stock exchange or the company website. Let me begin with, our company continues to outperform the industry, not only in revenue and growth, but also in profitability. We have delivered exceptional operating performance and strengthened our market leadership, driven by our diverse range of solutions. For the last 4 quarters, we have been improving our profit every quarter, quarter-on-quarter. What sets us from our peers is our ability to consistently meet high expectations of large customers. Our commitment to exceptional services has allowed us to expand and enhance our service offerings, addressing to the evolving needs of our customers across multiple sectors. We remain focused on exceeding customer expectations, driving excellence in every area and solidifying our position as a trusted partner. We operate in the B2B services space, which can be classified into two major segments, which is the IFM segment and the IFM, Integrated Facilities Management and the BSS segment, which is the Business Support Services. Firstly, let me start with the IFM segment. During the first half H1 '25, our IFM segment contributed 65% of the total revenue. Within the IFM segment, we offer a comprehensive range of services such as catering to a diverse customer needs, which includes soft and hard services. Soft services include services like housekeeping, cleaning, pest control and support services, while the hard services comprises of production support, engineering, MEP and warehouse management. Our primary focus in the IFM segment is to enhance operational efficiency and drive improvements in operating margins. We've been actively optimizing our contracts and the strategy will continue to support better margins and performance and capital efficiency. As informed earlier, we are cautiously existing some nonviable and not very profitable businesses, and that share has come down to single digits now. I know this is a process which we started a couple of quarters back. It has trickled a little into this quarter, but I think more or less that is over of exiting nonviable businesses. As a result, the revenue growth in the IFM segment has been slightly muted, but this is intentional and we have prioritized long-term profitability at some areas. The benefits of these contract rationalization have already been evident as our IFM EBITDA margins have improved significantly, rising to 6.1% in H1. As of 30th September '24, we had about 826 customers under IFM segment and 26% of our revenues came from our top 10 customers, while 35% of our revenues came from the other top 50 customers. We had added a prestigious India International Convention Center, which I'm delighted to mention here, which is one of the largest convention centers in the country. Also, they would be in our top 25 list. We have taken certain strategic measures and have gone from merging StanWorth, which is our subsidiary, 100% subsidiary. And Tangy Private Limited with another 100% subsidiary into UDS and have opened up postal ballots and investors are requested to vote. Details of the sales have been shared. And if you still have any doubt, Radha, our CFO, can brief you during the Q&A session on this. During H1 '25, the IFM segment contributed 24% to the total EBITDA. EBITDA for the IFM segment grew by 57% on a year-on-year basis. EBITDA margins of the IFM segment stood at about 6.1% as of H1 '25, which was 4.2% last year, an improvement of about 190 bps. This is due to our focus on higher quality contracts and our operational efficiency and the business mix within us. We have been consciously focusing on improving PAT margins as that is what determines what we owe to our investors. And our EPS has moved from INR 7.9 is compared to -- INR 7.9 compared to INR 4.3 during the same period last year. Going forward to the IFM segment as for the motor intelligence and outsourced Indian facility management market. In FY 2023 -- sorry, in 2023 was USD 4.38 billion, and it is expected to reach $7.7 billion at a CAGR of about 10%. Currently, soft services account for 64% and hard and manufacturing industry services at 36%. The IFM industry in India is poised to grow significantly driven by increasing investment in the infrastructure and rapid development of large corporate parks, GCCs, industrial hubs and manufacturing facilities. As new factories and manufacturing factories are expansive and expansive office spaces emerge across the country. The demand for professional facilities management services is rising to ensure sufficient operations and maintenance. The southern market of the country market share for us has been around USD 1.6 billion, which is about 36% and UDS is extremely strong in South and quite positive of gathering our market share here. UDS also has a very strong hold on manufacturing services and growth in that segment is also expected to grow and add to our market share. Apart from the industry growth, corporates are increasingly outsourcing facilities management to leverage specialized expertise, allowing them to focus on their core operations while ensuring higher operational efficiency. This shift not only reduces overhead but also ensures optimized, highly compliant professional management of these facilities contributing to the growing demand of IFM sevices. Additionally, with businesses focusing on sustainability and operational efficiency, the IFM segment -- the IFM sector is becoming an essential partner in managing these large-scale developments effectively. This creates a promising growth trajectory for the industry. At UDS, we are committed to providing solution-based services with strong focus on hard services that contribute more to our margins. IFM offers a sustainable solution with strong ROCE profile, making it highly efficient and profitable area of growth going forward. Now moving to the BSS segment. Our BSS segment saw strong revenue growth of 27% in H1 FY '25. This is despite the challenges we witnessed in sales enablement business. We expanded into Korea with our own entities set up -- our own entity setup and our global physical presence has increased to 5 countries. During the year, we have added AI-enabled services as an offering, a new direction for services companies and got the first customer in, which is one of the world's largest software companies. We have started partnering with new customers in manufacturing segments -- sector, helping industry players in India towards digital onboarding of their retailers in India. We have also extended our reach in ERP segment, helping mid-market penetration in the Indian market through demand generation services. We have started virtual orders aided by technology in the FMCG and the mobile retail space. Our sales intelligence initiative prompt engineering is also -- has already helped us get about 15% Q-on-Q growth with our existing 5 large customers. I would like Snehashish to just add on to this, who is our CEO of the BSS segment just to hint on the -- how the BSS segment has been performing.

Sure. Thank you, Raghu. So on the profitability side, in Q2 FY '25, there was a substantial appreciation in Malaysian ringgit, which effected UDS margins and drop in volume from a key customer has affected Athena's growth. Global, our other subsidiary has expanded into 22 airports and turned profitable, and Avon is getting into INR 100 crores run rate. A good turnaround was witnessed in metrics. We are seeing strong momentum in the audit and assurance business and a sharp recovery in our EBGC business. Early signs of improvement in IT hiring are also encouraging. To further mitigate the risk, our endeavor has been to diversify revenue beyond the IT/ITS segment and expanding into sectors like finance and financial services. I'm happy to share that we are on track of achieving the same. We remain focused on solution-based offerings, which are high value-added in nature. With the government's push to create jobs, the rapid growth of global capacity centers in India and rising foreign investments, we are confident in maintaining our growth trajectory going forward, and this is something that we see as an opportunity in at least three of our BSS focus areas since enablement as well as EBGC as well as audit assurance. During H1 FY '25, the BSS segment contributed 35% to revenues and contributed 46% to total EBITDA. EBITDA for the BSS segment grew by 31% on a year-on-year basis, and EBITDA margins on the BSS segment stood at 9.5% as on H1 FY '25. As on 30th September 2024, we have about 242 customers under the BSS segment. Now looking at the way forward for BSS segment, the BSS market is projected to grow at 15% annually, reaching about INR 15,000 crores -- INR 14,478 crores to be precise by FY '28. The largest opportunity within this market will be sales enablement, audit assurance and employee background verification, all of which are asset-light and capital-efficient in nature. We expect to receive over 20% organic growth in the BSS segment, which will further improve our margins, our ability to successfully acquire and seamlessly integrate margin-accretive business is a key differentiator for us. All our profitable BSS businesses stem from acquisition we have effectively integrated as a group. We are planning a strategic acquisition in the BSS space. We'll talk about it probably a little more in detail as we concretized these discussions. There are a few organizations, targets that we've been discussing, primarily in the EBGC or retail and audits and assurance business as well as the sales enablement business. But nothing is concretized yet. So we'll talk about it as we move forward. With Denave, Athena and Matrix getting looked into by me individually now, which is coming under one umbrella, there is a larger synergy that we are also able to build between the three associated businesses. Furthermore, we are focusing on increasing cross sales between our IFM and BSS segments, which will create significant growth opportunities and unlock additional synergies, we are looking at which we've been doing for some time, and we see some early results leveraging the 2,200, 2,500-odd unique customers that we have between the two segments. I will hand over to Raghu to summarize taking forward. Raghu, would you, please?

Yes. Thanks, Snehashish. I would actually request Amitabh to summarize because on the both IFM and the BSS segment. Overall, the summary, Amitabh. Can you please.

Yes. So thank you for joining the call, everyone. So we believe we have delivered a very strong quarter in Q2. And if you look at our H1 results, especially compared to last year, there is growth across both IFM and BSS. IFM is coming out of a cycle where we have been rationalizing our portfolio, which we have been talking about for the last quarter as well and that is reaching its logical conclusion. We see our business poised very strongly, both on the IFM side as well as on the BSS side. We remain -- and that is why we are watching cautiously because there are risks in the environment...

Sorry to interrupt, sir. Your voice is breaking.

Okay. Is this better? Is this better?

Sir it's still breaking.

Yes now.

Sir, it's better now.

Yes. Okay. So as I was mentioning that while headwinds remain because of geopolitical risks as well as in many parts in terms of specific sector specific risks. So IT is coming back and Snehashish talked about the fact that EBGC's beginning to look up, and we are cautiously optimistic on that as well. But in all our businesses, whether it is in terms of audit and assurance, whether it is in terms of EBGC, whether it is in terms of sales enablement, this platform for future growth and to capitalize on an overall uptick in the economy clearly, clearly exists. We are also improving our play as we go forward in some segments of the IFM market, and including -- you all have been asking questions around acquisitions. So we will speak a little bit more about that as well. So far, we are in conversation with 3 targets, but we have not reached a stage of finalization as yet. We have not issued a term sheet but we are in close conversations with targets for a potential acquisition. We will be updating, of course, as and when there is concrete progress to report. But as we have said in our previous calls, and we would like to reiterate that we will make an acquisition, but at the same time, we are cautious and we will not make an acquisition for the sake of making an acquisition and therefore, not meeting our financial criteria as well as the criteria of synergy with our other businesses and the meeting of minds between the promoters of any acquisition that we make and the existing management of the company. Those would be the 3 most important criteria in terms of synergy with business, in terms of meeting of minds with the promoter and very importantly, meeting our fairly stringent acquisition criteria in terms of financial numbers. When we look at financial criteria, clearly, it is margin accretive. That is something that we will always look at. The business has to be defensible. We have talked about that. And it has to meet our ROCE numbers because our ROCE remains strong. And any new acquisition has to match or at least in the ROCE ambitions that we have. So that is how I would summarize it. I will not go into specific numbers. I'll wait for the questions for the team to then answer. But overall, we are very optimistic that we have the right ingredients and it is reflected in the numbers that we have presented to you and Raghu spoke about earlier. So I'll stop with that and hand it back to you.

Yes. Thank you. Thank you so much, Amitabh. Now I would request Radha to take over and then talk on the actual numbers and how we have performed.

Thanks, Raghu, and good afternoon, everyone. First, I will start with the Q2 FY '25 highlights, and I'll take you though the H1. The total revenue from operations grew by 13% year-on-year basis to INR 6,869 million. IFM segment revenue grew by 10% to 4,486 million on BSS segment grew by 20% to INR 2,383 million in Q2 FY '20. The revenue split between IFM and BSS stood at 65-35 compared to 67-33 same time last year. EBITDA for Q2 FY '25 grew by 57% to INR 468 million. The EBITDA margin stood at 7.4% versus 5.3% in Q2 FY '24, a sharp improvement of 210 basis points. Excluding other income, which most of you have been asking to report, our EBITDA grew by 66% year-on-year basis to INR 437 million. And EBITDA margin, excluding other income, stood at 6.4%, which was 4.4% same time last year. Close to 1% of our margin comes from other income, out of which 60% of it is financial income and the balance 40% is primarily the business-related expenses as a sale provision reversal, et cetera. In IFM segment, the EBITDA margin stood at 6.5%, while BSS segment EBITDA stood at 9.1%. And both segments, the margins have considerably improved compared to last year when compared to last quarter. PAT witnessed a growth of 205% and stood at INR 280 million and cash profit also grew by 18% year-on-year at INR 414 million. Now coming to H1 FY '25 highlights. The total revenue from operations grew by 14% year-on-year to INR 13,456 million. In this IFM segment, revenue grew by 7% year-on-year to INR 8,733 million. And BSS segment revenue grew by 27% year-on-year to INR 4,723 million. And the revenue split between IFM and BSS stood at 65-35 compared to 69-31 same time last year. EBITDA for H1 grew by 44% to INR 980 million. EBITDA margin stood at 7.3% versus 5.7% in H1 FY '24 or 1.6% improvement over last year. And again, excluding other income, our EBITDA grew by 43% year-on-year to INR 846 million. And the margin of EBITDA, excluding other income, is at 6.4%, which was 5% same time last year. IFM segment EBITDA margin stood at 6.1%, while BSS segment EBITDA stood at 9.5%. And PAT witnessed the growth of 149% and the PAT is at INR 537 million. Cash PAT again grew by 20% year-on-year at INR 797 million. The ROCE on an annualized basis to the 23% as of September '24, marginally less compared to 23.5% during March 2024. UDS is a net cash company and our net debt to equity stood at negative 1x as on 30th September -- 0.1x as on 30th September. Total headcount of IFM at 53,996 employees and the BSS at 14,609 employees. And during this H1 '25, we added 48 logos in IFM segment and 26 logos in BSS segment. And we keep talking about the clients who are more than INR 5 lakhs as a significant client. So we ignore new logos or clients at if the turnover is less than INR 5 lakhs per month. And I think now I open the floor for question and answers.

[Operator Instructions] We have the first question from the line of Deep Shah from B&K Securities.

The first question, sir, is around sustenance of margins. So I'll divide it in two subparts. First is, are these numbers sustainable? Is there a one-off? And if not, then should we expect margins to continue improving as we had guided earlier? And second, within this would be that, what are we doing about the Athena slowdown because we know that there have been some pressures there, but it's a high-margin business for us. So how are we combating that? And if -- as you said that other businesses are picking up pace, would it be more than enough to offset that margin compression? That would be my first question.

Raghu, you want to handle the -- Snehashish can handle the Athena piece, but for the margin piece, I'll also add a comment later.

Please go ahead.

Yes. So the question on margin and are they sustainable? See, our 9% plus margin in BSS and between 5% to 6% margin in IFM is what we have always targeted. And we are happy to see that we are in that range right now. They can fluctuate a little bit, but we believe that these margins are sustainable. Will they keep growing is a different question and we have always said that a 0.2% to 0.3% improvement in margins year-on-year is what we should be looking forward to on the organic side. Acquisitions, of course, can change the margin profile. Margins are sustainable. But at the same time, improvement, we are cautious to say that they will keep on improving. But 0.2% to 0.3% year-on-year is something that is possible. Snehashish, would you like to add some color on Athena?

Yes. Before that -- add to that, there are no one-offs. So we believe we will continue to show the same numbers in terms of profitability and growth, as we said, overall, what we guided for the year, we are confident of doing it. Just to answer that specific question, there is no one-off in these margins or in these revenues.

Okay. Thank you. Coming to the Athena question. Yes, there is a disruption there, and that disruption is primarily because of some changes in the BFSI segment and one specific customer moving their India plans. However, there are 3 things that we are doing here, and one of them is already underway. We are going back and looking at expanding within the BFSI segment, our existing customer base. And while I'm not at liberty to name the new sign-up that we've done, we've done a fairly large new sign up, which is not going to be large today, but over next 2 quarters, we expect that to fill a decent part of the gap that has come up Athena. However can we cover up what we've lost? Maybe not, but we will gain as we move forward. The second part that we're also doing Athena has been fairly focused on the BFSI segment and FMCG. We are now looking at expanding that base. So we are putting in our marketing initiative to increase our reach across larger segments we see hopefully that giving us results over the next 2 quarters and getting us new customers. Third, we are looking at potential synergy between our Denave and Athena offerings outside of India, while that is still an experiment and work in progress. We don't have yet any early indicators on what we can do. But we are looking at can we take the Athena business also outside of India using the Denave strength that we have outside. So these are the 3 initiatives we are putting in place to try and cover up over a period of time on the Athena drop that we have present. I hope that answers your question.

The second question is actually for Radha ma'am. So Radha ma'am, we saw cash conversion this quarter was 65% of EBITDA, OCF conversion. And I think it is a result of that and the payments that we made to promoters that we saw some increase in debt. So is it just a transient issue or because we've done 100% -- 95% and 98% cash conversion in the only two years. So is it a transient issue what should be the level of cash conversion that we should be thinking as we are now expanding and growing our top line.

Okay. There are two things. As we stated earlier, the IPO funds were to be used for the acquisition. Last December, we paid out some money for Athena share. And this year, we have purchased 100% for Denave, the balance 26% we acquired. And we also acquired another 24% shareholding for Athena. So we had to sell out the cash for the acquisition. A small dent in our working capital, the way we planned versus what has happened. We had a large client onboarded, and it took some time for us to stabilize the invoicing adjust to their way of loading it in their portal. A few things delayed that and since he was a large client that also has resulted in a minor distraction in our working capital. Beyond that, there is nothing which is different from the normal activities.

Okay. So if I could just have a follow-up. So say, for the full year basis or on a sustainable basis, about 85%, 90% kind of cash conversion. And as a result of that, lower debt levels as we go ahead. That would be a fair assumption to make.

That would be a fair assumption, unless we have another large acquisition, which makes us tomorrow.

We have next question from the line of Dhvani from Investec.

I have two questions. Starting with the IFM piece. I just want to understand how are the new contracts coming in, in terms of the margins and pricing? Considering this quarter, we saw a significant improvement in the margin. Going forward, is that sustainable at the same rate or there will be some dip?

We are confident of maintaining these margins going forward also with our new customers or the new acquisitions.

Yes. So Dhvani, just to add a little bit of color to that. See, when we take orders, right, and when we take -- enter into new contracts, the attempt always, of course, is to see that it meets our margin profiles and criteria. On occasion, however, whether in BSS or whether in IFM, the operating teams may decide to take contracts for strategic reasons. And they may be entered into at margins which are maybe a few basis points lower. So there is a mix of contracts that we have in terms of margin, and that will continue. But as we answered in the previous person who had raised the same question, that we are confident that we can maintain these margin levels, yes.

Okay. And within BSS. In this quarter, we saw some muted growth because of Athena. And given that you are still targeting a 20% organic growth, the implied growth for the next two quarters will be at least close to 6%. Just wanted to understand what would be the drivers for the same? And at the same time, can H2 margins be better than H1?

So H2 margins being better -- see, in many of our businesses, we have operational leverage. And therefore, if volumes go up or if revenue goes up, margins can improve. Will H2 margins be significantly different from H1? The answer is no. But we would not want to guide for any large improvement in margins in H2.

Understood. And just one last question, if I could squeeze in. Could you help us with the contribution from global side for the quarter for revenue and margins?

Global. You're talking about the -- our business, right?

Radha, do you want to take that?

See global. Q1, we had a revenue of INR 43 million. And we are -- we have included to INR 46 million in Q2. Am I audible?

Yes, Radha. You are.

Yes, you are. And as is the margin profile?

Sorry to interrupt, the line is very muffled.

Yes, I keep hearing some. Global gives us about 9% margin. We did a INR 12 crores revenue in Q1 for global with the 12% margin -- with the 10% margin. And we will be doing -- we have done INR 13 crores now, and we continue to do it better than this quarter-on-quarter. On the margin at the EBITDA level is around 8% to 10%.

We have the next question from the line of Balaji from IIFL.

I have three questions. I will take them -- I will ask them one by one. My first question is on the IFM segment. So if I see, in general, what I observed in this industry is that there is a trade-off between revenue and -- revenue growth and margin profile. So this quarter, you seem to be at a sweet spot where your revenue has also grown by 10%, while margins have also expanded. So assuming that you have to preserve your margins at this level. What revenue growth are you typically looking at?

So the answer to that would be that yes, you are right. There is a trade-off sometimes I alluded to in the previous answer that we may take contracts which comes below or higher. And -- but the conscious thing is not to take very low margin contracts. In fact, we have exited a large number of low margin contracts. So we are confident that the margin decline will not be because we are taking new contracts at much lower prices. So that is one thing that we are clear about. On the other piece, which is -- we have a target range of our margin, both in BSS as well as in IFM that we operate with internally. And we have also talked about externally the fact that IFM margins will be in the 5% to 6% range and that we are confident of maintaining. You are right. So we...

Sorry for interrupting sir, your line is getting muffled.

Yes. So what I had mentioned was that as we move forward, we are confident that we will maintain margins in our target zone. But there may be fluctuations -- minor fluctuations of a few basis points here or there, depending on the kind of business mix that we have for that particular month or for the particular quarter. Revenue growth range of between 10% to 15%, closer to 15% is something that we have always guided at least informally, not a formal guidance. And we are confident that we'll maintain that as far as the IFM business as concerned.

Okay. My second question is on the three potential M&A opportunities that you are evaluating. So while you've discussed the criteria, what area would these be in? You did mention that it would be complementary to your -- or synergistic with your existing businesses? But what areas will they be? Will they be in India? Are these in India or overseas? And what exactly are they into? Any color on that will be helpful.

So I think we are -- we have always said that we will buy synergistic businesses. So when we look at a business, it has to be in areas which we are already in or which adds a new area which we feel comfortable with in terms of adjacency. So -- and between India and overseas, preference is for India. But if we get -- and the proposals keep coming to us. So if we get a good proposal for an acquisition in a country which we are comfortable with, in terms of its regulatory environment and in terms of our ability to manage that business, then we may look at it. Our preference is for India. And in the past, we have also said that most of our acquisitions will be in the BSS arena and that continues as our area of focus because you are value-added services. But the other aspect that we must also keep in mind that is that even within IFM, the landscape is changing and there may be value-added service opportunities that may come up. And if they do, then we will look at those as well. But our financial criteria remains the same.

Okay. That is quite helpful. My final question would be a housekeeping in nature. So first of all, thanks for disclosing the margin, EBITDA margins and EBITDA for IFM and BSS. So could you provide the IFM and BSS EBITDA for FY '24, full year FY '24. I can see the 1H number, but full year number would be helpful if you have it.

Radha, would we have that?

Yes. Yes. Yes. You want full year FY '24, is it?

Yes, that is for IFM and BSS separately is what he wants.

You want full year FY '25.

Okay. Full year FY '24 expectations?

Not -- expectation will be good, but the historical also will be helpful, FY '24.

Radha, FY '24.

Okay. FY '24, the EBITDA margin for IFM -- just a minute, give me one second...

Radha, if you don't have it handy, we can lock the question and then revert it.

I will answer the question end of the session, while if you any other question, I have the number. I will just get back.

The next question is from the line of Heet Vora from Guardian Capital Partners.

Congratulations on a good set of numbers. So my question is largely on some of the BSS segment for say, Denave, we had seen some pressure in the margins last year. So how are they evolving? And could you give a bit more light on those, please?

Sure. Amitabh, should I take the question?

Yes, please. Thank you.

So the margin pressures were primarily because of two reasons. One, there was an AI-led disruption happening in the market because of which customers were looking at higher productivity, lower turnaround time and obviously, better cost. So the way we are addressing that is we are right now evolving some of our delivery models, primarily in the high-margin businesses, the demand generation businesses. We've already rolled that out for a couple of our existing customers, and we see already decent results. The impact of that, we'll probably feel over the next quarter or two. Second part that we are doing is we've added certain disruption appropriate services, namely one of them is sales intelligence, we've talked about in our deck already, which is aimed at leveraging AI platform and Generative AI specifically to help improve better conversion for sales processes, and we bring in the knowledge repository for that to help improve and we've seen some good early results. We've already acquired one of the largest software companies in the customer and a decent increase in that. Will it make a huge difference in the margin in the existing quarter, maybe not. Over the next couple of quarters, we will definitely see a larger impact on improving the margins there for that. The third area that we are obviously also focusing on is leveraging the marketing automation platform, the AI-enabled marketing automation platforms to improve our demand generation services. We are not yet very strongly progressed on that. It is still work in progress, and we expect that impact to also be felt probably by the second quarter. I hope I have been able to answer your query, unless you have anything specific that you would like to know.

So that was really helpful. Just one more thing is that post the measures that we've taken, do we see our margins going back to the normal margin, say, a few quarters down the line? Or we see some sort of impact, which will stay on the margins, if you could help with that?

A little early to state. The expectation is that we should be able to improve and go back to the same level. At this point of time, we do see an improvement day by day, but we are not yet able to assess. Will I be able to cross my earlier margins or will I be able to reach that margin. But the expectation and the plan is to reach and go beyond.

I'll also just add a little bit of color to what Snehashish just talked about, which is I see in our business model, the BSS business margins are pegged in the region of 9% to 10%, 10.5%, 11% in that ballpark, right, maybe slightly better. So in that -- as we execute that business model, if we find maybe Denave margins are under pressure, and we see a longer-term impact, then within the BSS business, we will figure out other business lines or product lines or service lines and other areas where we can bring the margin back. So individual businesses may have a few fluctuations, but the strength of the UDS business model is that there are countervailing forces that are available to enable us to stay track as far as the overall UDS business model is concerned, I hope that helps add a little bit of color.

Yes. And just one more follow-up on the M&A that you had talked about. What we've seen in the past is that UDS has been able to acquire companies at very attractive valuation. So the 3 M&As that the discussion are going on, will we see a similar sort of valuation or because there has been some improvement in the market environment? Are these expected to be a bit more expensive?

So our attempt is to acquire at fair value and -- because the promoters continue to stay engaged with UDS even after they have sold majority in the first tranche. So it is in our interest also to see that they get fair value and they stay motivated. The way we do the acquisitions is that we pay for performance. And so therefore, the opportunity to earn more as the performance improves, always exists for the promoter. Specifically, will we be able to repeat what we have done in terms of our margins. The answer is slightly complicated because the -- as the secondary markets do well, in India. The expectation of promoters for the valuation of their businesses keeps going up. So therefore, the recent runup, the bull run that we have had in the markets has definitely pushed up expectations that promoters have. But we will -- we are clear in our minds that we will not overpay. So if we have to walk away from a deal because of valuation, we will. Because in this sense, we are value-conscious acquirers. And that philosophy will remain.

Next question we have is from the line of Nihal Shah from Prudent Corporate Advisory.

Congratulations for the great set of numbers. So my question was on the IFM side. So we have exited a lot of contracts and entered many in these first quarter. So are those new contracts that we had running at a full fledge now? Or still we are ramping up our operations there?

I wouldn't say they are at full fledge right now, but I'm sure in the next couple of quarters. But next quarter and the next quarter, they will be an fully firing.

Okay. So from the next quarter onwards, we can expect the kind of a 10% growth from the IFM business if they ramp up?

Overall, for the year or overall for H2, we will do the same number. Overall, for the year, we will do between 10%, 11%, 12%, 13%.

Yes. But please don't take it as formal guidance. But yes, we do expect to be in that range.

Okay. And from the BSS side, so we've seen a significant 40 basis point jump in the margins -- EBITDA margin. So what would be the reason for that? And why will they increase around 20, 30 basis points more than we are informally guiding for in the coming year?

So why have they increased? I will leave to my colleague, Radha. But this 20, 30 basis points improvement we have said in the past as well is basically because of more operational leverage and better service mix. It is not because of price because we never factor price. If we get price, that's great, but we never factor price because it's a competitive market. So it's product mix, service mix, right? That's one aspect. Operational leverage is the second aspect. And we are clearly seeing operational leverage play out. Radha, you want to give some color on the improvement of margins in BSS?

Yes. See, BSS, we are not aiming at a 30 bps improvement in margin. Like we said in IFM segment, we are gunning for a higher improvement in margin. BSS' improvement on top line. BSS, we will also grow more than 20%, while IFM we said we will be between 10% and 15% range. Earlier, Balaji asked what was the last year number, we had 5.3% EBITDA reported for IFM and 9.7% reported for BSS. This year, we will be aiming more in terms of IFM going upwards of 6%. We are aiming for that, primarily like operational synergies, which are kicking in now, the unviable contracts which we exited, yes, it's dented our volumes in the first quarter, but we hope what we are doing now, we will maintain an IFM. BSS margins will not go substantially high. BSS margin will also continue to grow in the same way. Volumes will keep growing.

Okay. So this quarter, we've done around 6-point -- in this first half itself, we have done around 6.1% in the EBITDA margin for IFM, and we expect the contracts to ramp up in the second half. So 6% we've already done. So can it go up to 6.5% because many of those contracts will be giving us a larger chunk of the revenue in the second half.

Yes. We will not be able to really give such precise numbers because -- but yes, I mean, we are constantly working on improvement is all we can say, yes.

No, the 6% is without other income, right, Radha?

Yes. And since Q1 was 5.7%, and this quarter, we reported 6.51%. We will continue. So if we keep this, I said we will be upward for 6% by end of year, definitely.

Again, not formal guidance, please. This is not formal guidance.

We will take the next question from the line of Manoj Jethwa from KSA Shares & Securities.

So my first question is pertaining to BSS. So as you have recently mentioned in the con call that we are looking for the pre-targets, and our main focus would be on the value creation. So what would be the normal ticket size would we be looking for a pre-targeted opportunity in the BSS segment.

So across segments, whether BSS or whether value-added IFM across segments. When we look at acquisitions, the ticket sizes vary because there may be a strap on or a tuck-in acquisition, which could be -- the ticket size could be low as well. But our sweet spot, we have always said is in the enterprise valuation of roughly about between INR 200 crores to INR 300 crores is our sweet spot. But it could be -- depending on the opportunity that presents itself. So if there is a smaller revenue business, but which has great margins and a fit with our other businesses, we could look at that. But it's unlikely that we will look at a very large acquisition. So for example, it's unlikely that I will ever look at INR 600 crores, INR 700 crores enterprise valuation kind of an acquisition. That appears unlikely.

Sir, my second question would be pertaining to IFM segment and that also to production hard services and all that. Currently, the government of India is very humble about the Aatmanirbhar Bharat Make in India, and there are a lot of PLI and all that. So do we see a good growth opportunities in hard services as far as the manufacturing sector of India expenses.

Absolutely. So we are seeing already that manufacturing is growing, and we are strong there and we see good opportunities there. We also see good opportunities in other sectors of -- because we have all heard about the story of real estate doing very well, commercial real estate warehouse and doing very well. Infrastructure doing very well. So these are all segments, especially warehousing, infrastructure and industrial. These are areas where we are very strong. And therefore, any improvement here is a good order for us.

I appreciate to add some colors on the improvement or further improving margins areas of improvement that BSS should think it as far as BSS is concerned.

Yes. So I think margins -- we've sort of talked about that as our response. And I know I have an answer to many questions today. I would reiterate that, which is that our model is clear, and we expect to maintain these margins and improve marginally. But variations are always possible from contract to contract. I mean I think that really is where we are on margins because more specific color at this point, we may not have -- but the broad assurance that margins are the most important metric that we look at. And the model is clear in terms of BSS margin target and IFM margin targets.

Sir, my last question would be regarding the synergies of large mobile manufacturers, which you did mention in Q1. So could you please add some color on it, sir?

So the manufacturing units, whether it's from mobile phones or whether it's for any other, is part of the overall industrialization and the growth in industrial base and any such new opportunity that comes up is an opportunity which we look at very closely. But specifically, I mean we don't have a service or a product which is targeted only at mobile manufacturers but we consider that as part of our general manufacturing customer database, customer base.

Yes, I'm talking about the sales enablement services for the particular mobile manufacturer.

Okay. Snehashish, do you want to take that? Sales enablement for mobile phone manufacturers.

Yes. So there are basically already existing two line of services that we provide from a sales enablement perspective. One is in the Denave side. The other one is in the EBGC side. On the sales enablement side, we work on helping them activate the sales on the -- at the counter by increasing productivity. And there, we have an FSM model, presales marketing service using which we deploy salespeople toward these upcoming and growing. So some of our customers are growing telecom manufacturers, telecom handset manufacturing, and we are growing the market along with them by enabling the sales out of the store. That is the first part. The second part that we also do is improving their ability to quickly understand their marketing visibility through virtual audit and leveraging technology there. That's a new service plan that we've added, and we are now not only working with the telecom players, we're also moving into the manufacturing segment with that service line. The third area that we are working with, which is on the audit assurance side, where we help them understand the supply chain transaction through claim processing, partner processing and also some level of internal audit from audits and assurance business cycle. So these are the three areas that we are focusing on, and we do see a large opportunity in front of us on these two areas with the telecom manufacturers. However, it is an ongoing play. At one point of time, someone does invest more in that point of time. Someone else invests more as they keep on shifting market share with them. We try and keep track of them and then move along with the market accordingly. I hope that answers your question.

We have next question from the line of Naitik Mohata from Sequent Investments.

I'm very happy to value the team. So my question is on the guidance that we have given for both ISM and BSS. So we are looking at 15% growth in IFM segment and almost a 20% global BSS from this year. While from the numbers that are given in your presentation in H1, we have done almost 8% for ISM and 27% for BSS. So when customer back of the envelope calculation, we imply almost a 20%, 22% growth in the IFM segment in the second half and almost a moderate, 16% to 17% growth in BSS. Is that understanding correct? Or basically DSS, we do not see this curtailment of revenue.

Radha, I'm not clear where these numbers are coming from. Can you please shed light because I don't see where he's got the number of 27% for IFM growth for H2.

No. What he is asking about, please, you have mentioned 8% as of H1, and if you have to do close to 20%, then you may have to grow 22% in H2. We say IFM, we will not get into 20%. IFM, we will be around 10% to 15% growth. BSS we are at 24%, and we will continue to grow 20% in the next 2 quarters. also.

Yes, I understand, ma'am, but just in the IFM segment. So we have done almost 8% growth in the first half. And just maintained in the 15% not to 20% mark, we will have to grow from more than 20% to 22% in the second half?

Yes, that is for the overall year, we said we will not do 20% for ISM. The guidance given is 10% to 15% for overall year. So that means in the next two quarters, we may have to grow 13%.

We will take next question from Rushal Piralka from Pink Wealth.

Congratulations, sir, for the great numbers. My question is that in the sales enabled services, are we paid if the sales happen from the customer side or like we have probably paid based on the services?

Sorry, I didn't understand the question. Could you repeat that, please.

Yes, yes. And end sales enabled services, the segment. Are we paid like generally, we help the customers to generate their leads or to help them to grow their sales. So like how is the nature of the contract? So are we paid like if customers says, let's say, if I happen to do as much sales, I'll been you based on that? Or it's a fixed contract, like based on the pure services only will be paid, we will get paid.

90% of our contracts are fixed contracts where we have a predefined number and we have a month-on-month fixed payment. There could be variable components on top of that, but they are all fixed fund, right? There are approximately about 70% to 78%, which are part fixed and part variable where the mix could be between 80% to 20%, 80% fixed and 40% variable. And there will be about 3% to 4% of our overall contracts, which would be 100% variable, where we are fairly confident of what we can drive and we see a big opportunity but that can also be a strategic opportunity to move out competition. We leverage that for that. So that's the composition. 80% -- about 90% is fixed contracts, predefined about 7% to 8% is a mix, 80-20, and about 2% to 3% are where we do 100% variable. I hope I've been able to answer your question.

And sir, what is the duration of those contracts? Like generally, for how many years we entered into contract with the client?

So on an average, 80% to 85% of our contracts are annual contracts renewed every year. There are certain service lines, which is in the marketing services, which is also in the retail and also in offshore and services. There, we have quarterly contracts or project-driven contracts as well. And then there are some services like the intelligent database services, which are very instant based contracts. But about 80% to 85% of our contracts are annual recurring contracts. As of now, there are certain industries. We are also getting into 3- and 5-year agreements with POs getting renewed every year.

And sir, we have all the international clients in sense under the segments?

If you look at all the 5 entities within BSS, not all of them are making are international, but the sales enablement part under the name, we have about I would say 90% of our customers have MNCs, but working with us in the markets that we are presenting. This is India, which is APAC and which is Europe.

And sir, just one question, like what gives them confidence to outsource those services to us since -- and are we able to find those skilled person like who has them in generating the leads. So like why don't we do directly and why they come to us? And because is it because there is a lack of like people who are good in generating skills for sales? Or like how it works? Like what is the arbitrage? Just wanted to understand that.

Good question. I will give it probably a more simplified answer to that. It is like asking Apple to also sell Google AdWords while Apple has the technology power to do what Google is doing, but is it their core expertise now. So that is where we come into play. Sales now has become a process defined methodology and with the AI intervention happening. It is also becoming a very platform-enabled methodology. So an organization that is good at creating a product needs the sales support but they will not be very good at creating that themselves. And that is where we're coming. We've been doing this for the last 25 years. And I think we've established ourselves as a credible player, and this is why we get customers coming to us. We have active demand duration engines of ours. We use our own methods for our own selves to create customer outreach and collect customers from there. And I think the background and the credibility enables us to get those contracts. I hope I've been able to answer your question.

And sir, just a follow-up question that if, let's say, if India is like focusing on more on the manufacturing, and let's say, more foreign players also set up their manufacturing facilities here. So do we see that great opportunity in sales enabled services as well as in hard services, both can be cross sold?

Yes, we do see that. While IFM, I think you would have already got the answer from both Raghu and Radha from our sales enablement part. As we talk, we are also getting very strongly into the -- not strong, which is getting into the manufacturing segment, like I talked about, the telecom operators already our telecom handset manufacturer already. We also are talking to -- I mean, working with certain manufacturing organization where we are helping them digitally onboard their partners and then keep track of that. So that a process of enabling their sales process that we are working with them on. And also, like we said, the virtual audience. And we do see that as an opportunity.

And sir, last question regarding the soft services, like we are saying that commercial space is going healthy. So are we seeing that good traction in the soft services in the commercial space? And can we see that those growth in the next 3 years as the sector is doing really well?

So it will be an area of focus. But our strengths lie more in industrial, infrastructure and warehousing. But clearly, given the growth in the commercial sector, and in commercial buildings, that will be an area of some work and focus for us. Yes.

And sir, in audit and assurance segment under the BSS. Do we see any growth opportunities there since we help them -- if my understanding is right, we help them -- we are doing an order of the raw materials, all of the goods, how much they have, whether we tell -- whether that much supply has happened or not. So do we see there also a good opportunity since we must be giving hard services also to them. But under BSS segment, like do we see there also a good growth segment there?

The opportunity is definitely there. We need to work on it to make it land for us. So like Amitabh said, it is something that we see as a potential, but we need to land our capability, capacity and ability to convert the customer and focus on that.

Yes. I also see what happens is the buyers are different in some cases for these services. So therefore, while cross-sell remains an opportunity, but it's not one of the most important parts of our strategy. It is a part of our strategy, but not one of the most important.

So sir, how big opportunity do we see in this audit and assurance segment?

See, audit and assurance -- I'm sorry, go ahead.

So are you asking about the market potential? Or are you asking about our growth potential?

Sorry for interrupting sir, I believe the lines from this side got disconnected. Ladies and gentlemen, this was the last question for today. I now hand the conference over to management for closing comments.

I thought the question was still on. He's dropped, is it?

No. We've ended the call, I think, Raghu.

Okay. Right. Yes. Thank you, everybody, on this call, and thank you for joining us. I hope we've been able to answer all your queries. We look forward to such interactions in the future. In case you have further details or further queries, you may contact Deven of SGA, our Investor Relations Advisor. Thank you, everybody. Thank you for joining this call.

Thank you. Thank you, everyone, and I wish everyone a very, very happy Diwali.

Yes. Very happy Diwali.

Very happy Diwali to all of you.

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

Thank you.