Zensar Technologies Limited (504067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Zensar Technologies Limited Q1 FY '21 Results Conference Call hosted by HDFC Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Chandra from HDFC Securities. Thank you, and over to you, sir.

Thank you, operator. Good afternoon, everyone. On behalf of HDFC Securities, let me welcome you all to Zensar 1Q FY '21 Earnings Call. So we have with us Mr. Sandeep Kishore, MD and CEO; Mr. Navneet Khandelwal, CFO; and other senior management team members. So without further delay, I would like to hand over the call to Mr. Sandeep Kishore to give us an introduction of the rest of the management team and a brief update on the 1Q FY '21 results. And then after that, we will open up for questions. And thank you, and over to you, sir.

Thank you, Amit. Hello, and good afternoon, everyone. First and foremost, I hope and pray you and your families are doing well keeping healthy and safe. Thank you for joining us today to discuss Zensar's financial results for the first quarter of fiscal '21 ended 30th of June 2020. On the call, I have with me from the Zensar management team, Navneet Khandelwal, our CFO; Vivek Ranjan, our CHRO; Prameela Kalive, our COO; Harjott Atrii, Global Head, Digital Foundation Services; Venky Ramanan, Global Head, Hi-Tech and Manufacturing; Shirshendu Deb, Global Financial Controller; and Rishabh Mishra, Head of Corporate Development. The world, as we know, it has changed massively since we last spoke. Our thoughts and prayers are with everyone who has been impacted by COVID-19, especially those who have lost loved ones or their livelihood. While the pandemic has posed challenges, both medically and economically, humanity is putting its best foot forward. We would like to thank all the essential workers on the front line of this crisis. We are and will be forever grateful. Back in the quarter ended March 2020, we at Zensar were swift in our response to the crisis. We instituted the COVID Nerve Center, which focused on 6 broad themes: associate wellness; business continuity; client engagement; cybersecurity and data privacy; business opportunity; and cash, liquidity and cost management. We continue our effort by focusing on our associates' wellness through our digital-native platform that we had built back in quarter 4 of fiscal '20 to monitor and provide 24/7 support in the system. In the current quarter, quarter 1 fiscal '21, most of our Zensarians worked throughout from our respective homes. While we witnessed an all-time increase in the employee productivity, the agility and responsiveness demonstrated by our entire organization has also helped in preparing to seize business opportunities in the new normal. We also launched the Zensar Associate Assistance program to provide counseling support to our associates as needed. We entered quarter 1 fiscal '21 with a lot of uncertainty. However, we ensured business continuity and robust client engagement through unparalleled rigor and upbeat cadence and discipline, which helped our clients-facing and enabling teams to exceed the overall expectation. This was all achieved while ensuring high standards of cybersecurity and data privacy. We have reported a revenue of USD 130.8 million with a 7% sequential decline in quarter 1 fiscal '21 in dollar terms. On a constant currency basis, the decline is about 4.8%, which was primarily due to ramp down on accounts of some of our clients undertaking immediate cost-cutting measure due to COVID 19. On margin front, our strict cost optimization measures have put us in a much better position compared to the past quarter. Our quarter 1 fiscal '21 EBITDA margin has attained quarter 1 fiscal '20 level at 14.4%, which is a 50 basis point increase over quarter 4 fiscal '20 and 20 basis points over quarter 1 fiscal '20, which is a solid 760 basis point increase over quarter 3 fiscal '20. This was led primarily by direct and OpEx cost optimization effort which is expected to continue. Core business EBITDA was 14.6% in quarter 4 and is now at 14.9% in quarter 1 fiscal '21. Even with an impact of approximately $10 million on top line on sequential basis, we managed to keep our profit after tax at $9.7 million with 0.07 -- 0.7% sequential growth. While Navneet will talk more about our cash status, our collections have just been phenomenal, thanks to our teams and our clients. We have managed to bring down our DSO by a whopping 29 days over the past 1 year. This last quarter alone, we have pulled down our DSO by 12 additional days compared to quarter 4 of fiscal '20. This has also helped us in improving our cash position to an all-time high. Our order booking in quarter 1 was a solid $150 million TCV with some very impressive wins, both net new and new wins in existing clients. We continue to see traction in the demand-side environment with an increased demand for digitization across our clientele. Needless to say, we have been extremely empathetic to our customers' need to have focused effort to provide tailor-made solution for their evolved requirement focused on cost conservation and rapid digitization. All our efforts in this regard have also helped us pull up the pipeline to $1.5 billion with $1 billion which constitute from $5-plus million TCV. South Africa region has done very well for us in the last quarter with 19.8% Y-o-Y increase on constant currency basis. It absorbed a major chunk of the foreign exchange impact. In constant currency terms, the decline in South Africa business was limited to minus 0.5% during the last quarter. U.S. and Europe declined sequentially by 4.8% and 8.1%, respectively, on constant currency basis. In dollar terms, all 3 geographies have witnessed a decline of minus 4.8%, minus 11.4% and minus 15.9% on a Q-on-Q basis for U.S., Europe and South Africa, respectively. Our cloud infrastructure business is now branded and positioned as Digital Foundation Services, which is reflective of the strategic impact that we aim to deliver through our renewed DFS service catalog. DFS is able to connect with our customers better and is helping them in their journey towards digitalization and adoption of Enterprise 4.0. Apart from that, there is no change in business structure, service line structure and any financial reporting. DFS has also built a very credible market-facing solutions and delivery team to win against global and Indian competition. It has shown sign of early success due to recent wins at managing cloud infrastructure operations for a large medical devices company, a U.S.-based payer company and a leading global pharma distribution company. The feedback from DFS launch events at Evanta, ISG, Gartner have been very positive and encouraging. DFS grew by 7.6% quarter-on-quarter in dollar terms and 8.5% on constant currency basis. Next-generation infrastructure services grew at 22.2% sequentially on constant currency on account of few major ramp-ups. Our digital revenue continues to grow as a percentage of total revenue and now stands at 59.5% of total business. Quarter-on-quarter, it declined by 3.3%. For us, client centricity always forms the core. We institutionalize an extensive client connect process to ensure that we work very closely with them to address and help them in other areas that we could in these difficult times. We have left no stones unturned to be relevant and value-accretive in every conversation that we have with our customers. We continue to consolidate our relationship with larger and growth-oriented clients. 65.2% of our business now comes from our top 20 clients compared to 60.4% in quarter 4 fiscal '20. Our $5-plus million per annum clients on an LTM basis remained stable at 24. As a testament to our operational agility and responsiveness, we pioneered and launched a 100% work-from-anywhere model. We've onboarded 112 associates across 8 Tier 3, 4 and 5 cities in India under this model. We are leveraging our in-house living digital technologies built over the years to the fullest. They are being deployed across all our operations and most importantly, has helped tremendously in training, upskilling and reskilling our associates. We also conducted a first of a kind 4-day 100% virtual and immersive training workshop for our client-facing associates globally that saw 50-plus business sessions from 60-plus industry experts, including CXOs from our top customers. Our global head count at the end of quarter 1 fiscal '21 was 9,027. Our attrition has reduced to 13.5%. It was 16.3% at the end of quarter 4 fiscal '20. We continue to bring new solutions to the market in our effort to proactively recognize our clients' need. As part of Zensar's enterprise resiliency framework, which defines 3 impact zones where Zensar offers end-to-end assistance in reducing COVID-19 impact, expediting recovery and transforming overall business for our clients, we released several propositions, including: ZenCare that empowers end users to access the virtual workplace and collaboration tool in a secure environment from any remote location; Humané, an enterprise-grade solution to help organizations create impact by augmenting their current talent systems and processes with a digital-native platform that transforms the employee experience; Everywhere Experiences, an end-to-end virtual experience service offering that provides immersive and virtual experience engagement; Infinity CRO, a conversion rate optimization product focused on helping businesses improve their digital real estate, focus marketing spend and make significant returns on digital; ZenTrust allows enterprises to optimize in-flight and planned project costs, ensure business continuity, secure business application and digitally enable stakeholders; and digital assurance testing, a powerful managed services that allow brands to rapidly deploy test and certify their applications, platforms and websites across a multitude of endpoints. Our pipeline is proactive, proposition is robust, and we have won several deals in some of our top clients transforming their businesses and helping them cope with COVID situation. We undertook multiple initiatives where we contributed to local community in these trying times. We've also donated corona testing booths to the Pune Municipal Corporation and distributed over 115,000 meals to local communities. Further, our employee contribution initiatives were launched in India, U.S. and South Africa to support local community initiatives, respectively. Despite the challenging environment, our confidence in opportunities and growth remain intact. We are absolutely committed to deliver value to our clients, associates and shareholders. With that, I will now invite Navneet Khandelwal, our CFO, to provide update on key finance data, after which we will open the floor for questions. Navneet?

Yes. Thank you, Sandeep. Good day, everyone, and welcome to this call. In addition to Sandeep talking about the business, I will take you through some of the details on financials. In the first quarter of fiscal '21, we have reported revenue at INR 9,912 million, which reflects a sequential decline by 2.6% and a decline by 7% in rupee terms on a year-on-year basis. In U.S. dollar terms, the reported revenue is $130.8 million, reflecting a decline by 7% sequentially and 14.7% on a year-on-year basis. In constant currency terms for the quarter, this decline is 4.8% sequentially. And on a year-on-year basis, it's 12.1%. The U.S. dollar realization during the quarter has been INR 75.8 per dollar against INR 72.4 in the previous quarter. The year before in the same quarter, it was INR 69.5. Our gross margin for this quarter was 28.8% as against 28.9% for the previous quarter. For the quarter ended June 30, 2020, the billed DSO has reduced as compared with the previous quarter and stood at 49 days against 54 days while DSO, including unbilled, reduced by 12 days to 75 days as against 87 days in the previous quarter. This also represents a reduction in our DSO on a year-on-year basis by 29 days. The effective tax rate for the quarter ended June 30, 2020, stood at 26.2% versus the ETR of 27.3% in the quarter ended March 31, 2020 and 28.4% in the quarter ended June 30, 2019. Cash and cash equivalents, including investments in mutual funds, net of the borrowings, increased from $59.7 million in the previous quarter to $101.1 million in the current quarter. Our gross cash position has increased by $26 million quarter-on-quarter despite repayment of a borrowing by $15.5 million during this quarter. The total amount of outstanding hedges as of June 30, 2020, was equivalent to USD 152.6 million against USD 163.1 million in the previous quarter. With that, I come to the end of my presentation and open the house for questions and answers.

[Operator Instructions] First question is from the line of Mukul Garg from Haitong Securities.

Sandeep, good performance on both top line as well as on margins, and I especially wanted to focus on the cloud infra piece where you guys saw very impressive growth and something which you highlighted last quarter as well. Can you help us understand was there a portion of this opportunity which was from a near-term reaction from clients as against long-term revenue stream? How should we read the near-term versus long-term opportunity in the cloud infra space?

Yes. Thank you, Mukul. I will make some opening comments and then I will ask Harjott to add some very specific color. So we now actually call it Digital Foundation Services. The CIS has actually morphed into Digital Foundation Services because we've added several new service catalog. For example, we've added Digital Engagement Management, Workplace Management, Cybersecurity into the erstwhile CIS, which was Digital Operations and Digital Infrastructure. So we have broadened the competency and the service catalog in line with where we think the next-generation investment among our customers are happening. That's one. Second, most of the contracts that we see and what we execute are long-term contracts. So we do expect the robust growth for a period of time to come. Third, the pipeline in DFS, as we have mentioned, and we've been calling this out pretty consistently over the last few quarters, is a very focused effort to build us as a next-generation cloud infrastructure and Digital Foundation Services company. So our pipeline looks very good right now. As you called out, we had some very impressive wins. We won 3 net new deals in our DFS business in quarter 1. And that is coming at the back of a very impressive performance even last year. So from where I see today, I do believe that given everything, our pipeline is, given that we have won some pretty significant, we should expect to see robust performance in our DFS business as well. Harjott, do you want to give any specific color?

Yes. Thanks, Sandeep. So Mukul, just to -- I think Sandeep answered the question. But just to add to what he mentioned, this is not a onetime short-term projects. These are all long-term projects, which will have a lot of downstream revenue and impact as well. What it is -- what has happened is because of COVID, the spend in certain projects we were expecting in 2021 to '23 has been pulled forward. So we expect this trend to continue and in fact expand. Thank you.

Got it. That was quite helpful. Sandeep, one question on the margin performance. And again, the margin performance over the last few quarters, again, has been ahead of, I think, even your expectation. Just on this, the workforce reduction, your workforce has declined almost 12% over last 3 quarters. Which all areas have you optimized the workforce during this reduction? And does this elevate the risk on the execution side once the growth is back?

Yes, Mukul. First and foremost, there is no execution risk at all. There is no supply side risk that we see based on everything that we track. We track this, as you can imagine, pretty much on a daily basis. The reason workforce reduction actually happened is we took a conscious decision in quarter 1 not to replenish the normal attrition. I also called out that our attrition itself went down, from give or take 16.5% to it went down to 13.5% or so. So this is a pretty good churn out there. And because of the softness in retail and in some part of the financial services business, we took a conscious decision that we are not replenishing. I do expect our head count to actually start growing up in the latter half of the year. So we have enough capacity to execute right now. You saw our utilization is about 82.2% in quarter 1. It is down 130 basis points sequentially. So we have enough firepower to execute. There is no supply side risk at all.

Understood. And which areas were you able to kind of optimize or not back sell? Was it mostly on the legacy side or on the sales side? If you can just give us some color on that.

Largely on the legacy side, Mukul, if you do -- if you check the sector reporting, you will see our digital application legacy business has declined about 12% sequentially and 34% on an year-on-year basis. So most of the decline -- because that's also where the client investment stops. As Harjott called out, you will see increase in the Digital Foundation Services. Also, there is increase in our digital services on an annualized basis in the application business by about 7.3%. So you're right. The decline is actually in the head count of legacy business.

[Operator Instructions] Next question is from Madhu Babu from Centrum Broking Limited.

Sir, Hi-Tech has been a bit strong and top account appears to have grown. So could you talk more about what are the opportunities in the top account and what has led to the growth there?

Sure, Madhu Babu. I mean I'll again, I'll make some opening comments and then I'll ask Venky Ramanan, who heads our Global Hi-Tech and Manufacturing business, to add some color on it as well. I think our Hi-Tech growth is broad-based. It's not just on account of the top account. That's first. The second call out there is, as in the last earnings call also, we had mentioned about that much the way we are seeing growth and investment in Digital Foundation Services, there is another track which is driving growth in Hi-Tech, which we call virtual systems of engagement. There's a lot of experience-led and collaboration-led investment, which the tech companies are doing. And based on both the acquisition that we had done, Indigo Slate in the U.S. and Foolproof in the U.K., I mean we are positioned excellently to deliver experience-led collaboration platform build and development for the tech company. And that's the reason for that growth that you see on Hi-Tech which is 3.5% on a sequential basis. Venky, do you want to give some quick color in addition to what I said?

Sure. Thanks, Sandeep. Sandeep did allude to the areas or capabilities and scope of work where we saw growth. Answering your specific question, we held steady in the top account, and our growth in Hi-Tech primarily came outside of the top account while the top account really we held and we are seeing good amount of pipeline, and we hope to continue the trend. Thank you.

And sir, secondly, on retail, I mean, it's been a continuous downward spiral. So currently, even now it is 12% of revenue. So would you [indiscernible] further decline will be there in retail? And one more thing on hiring and work-from-home, that's very interesting. I mean so how do you plan to -- can you give us more details about the people you're hiring in these Tier 3, 4 and 5 cities and how the execution will be there?

Yes. Sure, Madhu Babu. I will answer the retail one, and then I'll ask Vivek, our CHRO, to give you more color on a completely new work stream that we have onboarded, the talent of 100% work from anywhere. So retail call out and the retail drop was, in my view, pretty much on the expected line. When COVID hit in the latter half of quarter 4, we knew that the first impact zone from our point of view at Zensar is going to be retail. We are not that much in travel, hospitality or aerospace. Those are the other big impact zone as well. We do no business there. So we were quite prepared that the retail is going to be very soft, and it came pretty much on the expected lines. I should also call out that I do believe we are pretty much at the bottom level in retail. And in the second half of the year, you should expect to start seeing some growth into -- we now call it, consumer services. So the pipeline has started building back up. There are investments which are going in into the new area, as Harjott called, in our Digital Foundation Services. And also, we are seeing a lot of investments into experience-led analytics, data, the full -- the CRO proposition that I called out earlier. It's pretty much aligned for consumer services. Now that everybody has no option but to engage more with the digital and mobile and web platform, we think that our CRO proposition is very well-timed to drive higher conversion once the traffic comes on our customers' native platform. So that is a quick call out on retail. Work from anywhere, Madhu Babu, we've been very pleased. We planned this pretty much for about 3 months before we launched. We launched this literally a few weeks ago. And Vivek, can you just throw some more color on that, please?

Yes. Thanks a lot, Sandeep. And thanks, Madhu Babu, for the question. Yes, indeed, in fact, as all of us know that the world is moving and shifting towards remote work and virtual workplace, we have taken the lead, and we have pioneered what we call it as permanent work from home where we have hired more than 100 associates on a permanent work-from-home basis. And they have been hired from Tier 2, 3 and 4 cities. And in many ways, what we are doing is path-breaking. While industry is talking about virtual workplace and permanent work-from-home, the associates we have hired on remote working perspective and permanent work-from-home perspective are going to take lead for us from a company point of view and also from an industry point of view. And as Sandeep mentioned, extensive work was done before we launched it. And also, we are engaging very comprehensively to ensure that our clients are very well supported and also everything which we do from the perspective of learning and engagement, all those initiatives are taken care of.

Sir, are these freshers? Or are these experienced people? And have the clients given approvals and -- because this is something new and actually, we are interested in knowing because every firm is talking but at least we have been the first to call out that the permanent work-from-home force has been recruited. So just, I mean, on the client approvals. And what is the profile of these people? That's it from my side.

So let me add and Vivek, you can then add on to this. The first is we've been very open and transparent with our customers. They're very open to onboard a new talent. See, this is -- it's the right thing to do for the long term of our industry and the business. For the first time, we are taking jobs to where people reside rather than people coming to job in bigger cities. This is not going to be an India-only phenomena. This phenomena is going to be worldwide. We are piloting it in India in 8 cities that we've on-boarded with 112 freshers associates, and they have been distributed across the 2 service lines between Digital Application Services and Digital Foundation Services. We're going to put them through 8 weeks of training and then they're going to get deployed into specific customer programs. Anything else, Vivek, you want to add?

No. Thanks, Sandeep. You have covered everything. Thank you.

[Operator Instructions] Next question is from Pranay Jhaveri from JNJ Holdings.

I just wanted to understand how would we -- how would our margin profile look maybe down -- a year down or 2-year down as this work-from-home concept, you will add more resources in that. I'm just trying to understand your margin profile.

Yes. So Pranay, if you recollect, we have given the guidance that latter half of the year we should be getting at 15% EBITDA. We are pretty much there, 14.9% earlier quarter -- core business EBITDA. Earlier quarter, we were at 14.6%. So our first focus is that we get to 15%, which I had committed in the earlier calls as well. And I do believe it's going to be a sustainable level. There are some savings which will happen because of work-from-home, but you will also see some additional investments on training, additional investments on the deal pricing itself which will come because the new talent pool which is going to come in Tier 3, 4, 5 cities are at a differentiated price point. And some of that benefit, we would want to pass it on to the customers, particularly in specific large deal situation. So we don't call out specific margin guidance, but I think 15% EBITDA is a pretty sustainable level that we expect. Navneet, are there any specific call-outs you want to do on margin?

Yes. Sure. In terms of this quarter performance on margins, since the question has come on this, let me just call out a few components on this. So basically, there are 3 principal components to our margin expansion which has happened in current quarter. One is the strong control in our operations where we focused on aligning our costs in line with our revenues. You will see that the total head count has gone down by approximately 500 people quarter-on-quarter. And we did a very good job in terms of managing our workforce to our requirement in an environment where revenue was highly uncertain. Our efforts in increasing fresher availability, increase internal fulfillment, lean and automation too have started giving results. Also, over the last few quarters, you would see that there is an increase in trend of offshoring, which we believe will continue in the medium term. Second is we get a very tight watch on every spend that we do. We also looked at controlling our costs with a zero-based cost approach, which has given results. The previous quarter also had certain higher charge on account of doubtful debts, which is no longer there in the current quarter. Thirdly, travel costs which have come down in these times have also helped us. So we believe that even after all travel resume, the cost will not go back to the pre-COVID levels, and a good chunk of savings on this will continue on a sustained basis. And as Sandeep called out in terms of the work-from-home perspective, yes, it also happens at a differential cost point and a differential price point. But our focus on margin stays and the target which Sandeep talked about is where we will always focus to be there at, and that should be the long-term view on our margins.

[Operator Instructions] Next question is from the line of V.P. Rajesh from Banyan Capital Advisors.

On the margin side...

Sir, sorry to interrupt you. May I request you to speak a little louder, please?

Yes. Can you hear me now?

Yes.

Okay. So my question was regarding the margin. You were just talking about that 15% is in the shouting distance. So what is the long-term plan? And I'm not looking for guidance, but I'm generally asking to understand what is the potential margin that you expect in the business, let's say, 3 to 5 years out?

See, Rajesh, as I mentioned in the earlier response as well that our first priority and the commitment that we had given and a soft guidance was to get to 15%. Based on everything that I see right now, we do feel pretty good of getting that 15% done in the -- in this fiscal in the latter half of the year. Once we are there and how the business environment evolves, we are going to revisit it. But for now, we are staying with the 15% guidance at EBITDA level.

Okay. And the second question on the wins that you have had this quarter, congratulations on that. I'm just curious whether these were more penetration in your current accounts or you took market share from somebody else or it was captives being transferred out to Zensar? So if you can just give more color on the type of wins that you had, that would be helpful.

Sure. Sure. Happy to, Rajesh. Thank you for your compliments. Yes, we're very pleased with the $150-plus million of TCV. Also, we are pleased that our pipeline is very strong, as I called out at $1.5 billion. You will remember that the last time we spoke on this forum, the pipeline was about $1 billion. So not only we won $150 million during the quarter, we also increased the pipeline. The win specifically has come, as I mentioned, from both categories, net new and the DFS, which is our best-in-class proposition, the Digital Foundation Services, won 3 net new logos against global Tier 1s and Indian Tier 1. So we are very, very good and very sharp in uniquely positioning our digital workplace, digital engagement and digital operations business. We -- so to give you a rough thought, about give or take, 30% of the win is in net new and about 70% of the win is expanding our footprint into existing accounts. And that also is the reason why our revenue from top 20 accounts has gone up. You would have noticed when I earlier called out that the top 20 accounts has gone up from, give or take, 61% to 65% of the revenue. So it's a clear strategy which we have been talking about on this forum many, many times, that we want to work with fewer customers, growth-oriented customers. We are investing our client engagement teams. We have trained them. In quarter 1, we invested close to 12,000 person hours of training to train our client engagement team to have a sharper proposition. We've launched 8 new propositions. So I think it's a balanced growth between net new and the existing account, both.

Great. And if I can slip in a quick question, given the net cash that we have on the balance sheet, how are we looking to deploy that?

Sure. Navneet, would you want to take that, please?

Yes. So till the situation on COVID relaxes, yes, we are clear that we want to continue deploying cash conservation measures and ensure that we have got sufficient liquidity available with us. In the past, as we have always maintained that we are an acquisitive company and the -- we are going to be using this cash primarily to look at targets in line with our strategy to fuel the growth, which we have consistently called out in couple of areas which is the digital software engineering area and the second is on the cloud and infrastructure area. So we will continue to look at potential targets in these areas from a growth perspective, and that's where the cash would largely be used.

Next question is from the line of [ Karthik ] from Unifi Capital.

I'm curious regarding the explanation for the core application, which has almost reduced to $40 million of our top line revenue. So could you explain me more on why it's almost decreased from $63 million maybe 4, 5 quarters back to $40 million right now? And do we expect it to keep going down further?

Yes. Karthik, I think the -- as I was mentioning in one of the head count questions earlier, the decline is largely on account of the legacy work where particularly in COVID, this was anyway a less focused area of our client investment for long time. And that trend, I do believe, is going to continue. So the decline actually has happened there. That is number one. Number two is also the retail impact that have taken place. So combined, both of them is the impact on the core application services. Retail, as I mentioned, I do believe it has started to stabilize. And you should see stability in the medium-term and medium to long term, I think that business will grow up as well. So it's a temporary phenomenon. The investments into the applications for our customers will continue. But you will see larger growth happening in the digital services in applications than the core services as well. Let me call Prameela also to see if she wants to add anything on this. Prameela?

Yes. Thank you, Sandeep. So Karthik, that's right. All of our customers who in the past have been investing in keeping their lights on their core legacy systems have anyway started shifting their investments into digitization of -- and modernizing their own core business. So while the legacy investments, and hence, what we do for customers in the legacy side is declining, they're shifting the funds and the focus to digitization, and that's where we're already working with them. So while it may bring down the revenue from the core services, what we will see increasing in the same client accounts is the digital business from the same customers as we run all the modernization programs for them.

Yes. Just to ask from an estimation point of view, so when do you probably see the growth exceeding the decline or more like -- now we have almost decreased to USD 130 million in USD terms from $150 million, so do you see it turning around and going forward to hit $150 million? Like do you have any estimation any time?

So Karthik, of course, we give no guidance, but the entire endeavor has clearly been to stabilize the business, be very strong on operation, which is what the entire focus was in quarter 1. I think we have done an excellent job, as we've called out. The business, depending on how the Phase 2 and Phase 3 of COVID pans out, the pipeline looks very good, as I've mentioned earlier. So we should start to see some stability. And as we had mentioned, later half of the year, you'll start to see some moderate growth coming back in as well.

[Operator Instructions] Next question is from Madhu Babu from Centrum Broking Limited.

Yes. Sir, just on the business -- sir, I mean, how much could be attributed to like a project-based business and how much is for annuity because there is always a project-based completion and some backfilling [Technical Difficulty] backfilling the revenue. So the directional growth is picking up one must say. Any metric on that synergy?

It was very difficult, Madhu Babu, to probably clearly hear, but if I understand the question, you are asking for outlook on project versus time and material. Is that right?

The project-based business versus annuity business because project-based business...

Yes, yes, yes. So I think it's fair to assume that majority of our DFS business is going to be an annuity business. As Harjott was calling out earlier, in the Digital Foundation Services, we are very focused on signing long term, almost committed contracts because that's the right business model. It's also a part of our overall strategy to increase the annuity component of our company's overall business by signing close to 75%, 80% of the DFS business as annuity. That's first. The second is specifically into the DAS, the Digital Application Services business, the annuity business is currently largely into the tech sector, particularly, we have a pretty strong annuity from our Tier 1, Tier 2 customers there and also the insurance -- sorry, the banking sector. The banking sector also has a good amount of annuity. Insurance, because of Guidewire, and retail has its own nuances, they are pretty much on the project. Guidewire is a project implementation which gets done different modules. But overall, strategically, I must tell you that our focus is to increase our annuity business over a period of time. If you take another look at the data, you will see that trending, Madhu Babu, coming in reasonably clearly. What we call out as fixed price versus T&M, fixed price has actually been going up. It's gone up by, I think, about 2 percent points, even on a sequential basis, largely driven because of the DFS growth. So it started to show up there. It's also gone up by close to 400 basis points on a yearly basis.

Yes, sir, 1 more question. Earlier, we were acquiring to boost the horizontal capability. So now I think with a very large cash balance, would we look to add any vertical capability? Because retail assets now has become very smaller. So on DFS side, would you like to add any capability because DFS has been subscale for us?

All options are on the table. I think we are looking to acquire competencies that we don't have. The clearly called out areas are cloud infrastructure, the DFS business as we called out. And the Digital Platform Engineering, which can play into the technology sector as well as the DFS sector. The enterprise CTO as what the industry calls it. So we are looking to acquire unique and differentiated capabilities that can help us into Tier 1 accounts, both in technology as well as in DFS. And I must also call out that during the quarter, in quarter 1, we have onboarded a new business head for our Global Financial Services business who's joined us in the middle of June. So we are redoing a very aggressive go-to-market strategy in the global FS segment.

[Operator Instructions] Next question is from the line of Devang Bhatt from ICICI Securities.

So when you say the revenue growth will improve, so is it on a Q-on-Q basis or a Y-o-Y basis? And do they -- I mean, positive...

Sorry to interrupt you. Sir, your [Audio Gap]

Okay. Okay. Can you hear me now?

Much better.

Yes. So when you say revenue growth will improve from here on, are you talking about Q-on-Q basis or a Y-o-Y basis? And would you be Y-o-Y basis positive in this year? Do you expect that? And the second question is that you have reduced your debt by a good amount. Are you planning to further reduce the debt?

So on the revenue growth, we're talking about Q-on-Q basis. We gave no guidance on forward guidance. However, based on all the pipeline and trajectory, you will start to see stability in the near-term and growth also in the latter half of the year. So overall, it's very difficult to predict where we will land from a yearly basis. But we're pretty committed to convert the pipeline into deals and wins. Usage of cash, Navneet also called out earlier, is more towards M&A. We are watching the COVID situation very clearly, and it's a very conservative approach to make sure we have cash needed for both growth of the business as well as for M&A capability.

Yes, sure. So in terms of the debt that we have in our balance sheet as of June 30, half of that is actually a long-term debt which has its own repayment plan and will get repaid in line with that plan and the balance half is more a short-term or a working capital kind of borrowing that we have kept. And that is just to ensure that we conserve cash during these times of COVID. And we are prepared at any point in time to be able to raise any quantum of funding we need to fuel our ambitions on acquisition. So that's how it is kept. And we'll keep reviewing it accordingly and take a call. Right now, we don't have any specific plan to make all the debt 0 at this moment. And you will continue to see some component of debt in our balance sheet on a go-forward basis.

Next question is from the line of Amit Chandra.

So my question is related to the banking and the insurance vertical. So specifically on the banking vertical, we have seen some softness in the last 3 quarters. And particularly, if you can give some more color on what's happening on the insurance side? And how the Cynosure has been performing because we had expectations from that acquisition. And also, any particular reason for the drop in banking in this particular quarter? Was it any client specific? Or it's just the impact of COVID?

Thank you, Amit. I think the last question first, it's largely a COVID impact. That's first because the projects which get over normally gets renewed, but because of the COVID customers who want to preserve cash they delay the onboarding of new programs, the new modules and new systems. So that's what has happened here. The first couple of questions that you asked, the Cynosure acquisition is actually doing very well. And we are winning -- even in the last quarter, we won both in existing accounts as well as 1 net new account with our Guidewire competency. As we had earlier called out in the last quarter itself, we have improved our partnership level with Guidewire. So that is another very good sign because we have won new businesses. We have also increased the architect and solutioning capability with Guidewire. Third call out, I mentioned in the earlier question that was asked by Devang is that we are very serious about increasing our footprint into global financial services and insurance market. And with that in view, we have hired Nachiketa Mitra which is now public domain knowledge from Cognizant to lead our Global Financial Services business. He's here in New York, and we are redoing our entire BFSI strategy. So you will start to see -- it will take us a few months, but you'll start to see a very renewed and a differentiated focus coming in, in Zensar on the global BFSI.

Okay. And sir, my second question related to the on-site/offshore mix. As you said that there is a chance of increase in offshoring. So structurally, if you see our business model has been on-site heavy. So over several years, it has been in the range of 65%, 35%. 65% on-site, 35% offshore. So what factors will actually lead to offshoring apart from COVID? Or is it a change in -- change in the delivery model or achieving the client requirements? So what are the factors structurally that will drive offshoring?

Yes. Sure. Absolutely. So I think if you've seen the trending, Amit, even in the year-on-year basis, our offshoring revenue has actually gone up from, give or take, by 3 percent point -- 300 basis points or so. So we are driving more and more work offshore by design to improve the stickiness of the business and, of course, margin of the business as well. That's one. Second, the broader commentary on this is based on the U.S. immigration situation. You will see, I mean, there are 2 points of view. One is, of course, as a company which does 75%, 76% of the business in the U.S., we are very committed to hire in-country, U.S., U.K., South Africa. But the talent supply which is needed for our customers to deliver what they want will need the customers to leverage more offshore as well. So there is a structural shift which is happening. And hence, over the earlier call out that we had done that we really need to get ahead of the curve and start investing into onboarding and creating a new set of talent pool, which is what we call work from anywhere, and that's why we've onboarded pretty much on an experiment basis 112. And as soon as that settles down and they get productive, we are going to speed that up and scale it up. So I do believe, given everything that I see offshoring will actually increase.

Okay, okay. And sir, on the -- the last question on the margin split, so you suggest that around [Audio Gap] the margin, the EBITDA margin [Technical Difficulty] 15%. So in terms of the component [Audio Gap] and also in terms of subcontracting review because still we are -- the subcontracting is at a higher level for us versus peers. So is there any visibility to cut the subcontracting down? And with this immigration issue, so can we see the company's structural dependence on subcontracting to increase?

So let me call Navneet to answer the margin questions and also the subcon and maybe Prameela can then add on that. Navneet, first, over to you.

So, so far as on the margin piece, I had called out the various levers that we have worked on and we continue to work on. So we believe on a steady-state basis, in the long term, 15% is a EBITDA that we will hit. And largely, it's being done through various levers that we are working on in terms of pyramid correction, lean and automation and ensuring that we are using internal fulfillment as one of the levers and increased offshoring which also Sandeep called out. In terms of subcontracting mix, if you will see, in line with the decline that you have seen in revenues, the subcontracting costs also went down on a quarter-on-quarter basis. We keep on looking at that cost to see how there are ways of optimizing it, and we'll continue to work on that. And this should, in view of the visa regime and everything else, should move in some kind of a narrow band. But from a margin perspective, with all the levers that I have already called out, we should be able to sustain the level that we have set for ourselves. I'll let Prameela add more on the subcontracting piece.

Yes. Thank you, Navneet. So like both Sandeep and Navneet has called out, as we are working towards shifting our on-site/offshore mix, driving more of offshore, also shifting our business mix from now reducing the dependency on projects and increasing the more annuity businesses. We will, see the dependency on subcontractors also come down. Also the third element we're beginning to see now our customers are more open because COVID has been a catalyst for them to be more open to allowing us to drive more offshore. So that trend also we see in the same term, it will help us in driving the subcontractor costs down. So that's -- I think it's a trend that we do see. In the medium term, we will see the shift.

Next question is from the line of [ Deepak Mehta ], an individual investor.

Hello? Can you hear me?

Yes, sir. Go ahead.

So my question is, as L&T Infotech as compared to big competitors such as Infosys, Cognizant and others is a small player, so there will be vendor consolidation at the client side. So how well the companies -- our company is planned and positioned? And my second question is that if we -- if you know that recently Cognizant has been attacked for ransomware. How prepared is our company?

Sure, Deepak. I mean, I assume you meant Zensar. So I'm going to answer this question on the Zensar's behalf. I think, look, vendor consolidation is as much an opportunity as it is a threat. It is a business reality. Our focus is very sharply in the existing -- we have 24 $5-plus million accounts. We want to grow that foothold. And these are all large global 1,000 companies, by and large. There are enough opportunities in those companies of the vendor consolidation of companies which are even smaller than us. Most of these are large Tier 1 banks or insurance or technology or even the retail companies. And we are seeing very good traction based on the digital work, the cloud infrastructure work and the experience work that we do. So currently, everything that I see, I think from a Zensar point of view, it is a significant opportunity for us to grow market share in all the 3 regions, in South Africa, U.K. as well as U.S. Navneet, you want to answer the -- maybe give some color on the work and the protective measures that we are taking on the cybersecurity and ransomware?

Yes. There is -- as you are aware, there is an increased level of attacks which are happening post the COVID crisis and this has -- the increase -- the risk around this has increased. However, we have also strengthened all our systems and processes around it. So we understand that there are challenges on account of insecure home networks or malwares and ransomwares, phishing e-mails and unauthorized access. So to curtail all of this, we have put up a complete comprehensive program to ensure that, number one, from a technical perspective, all our firewalls and our monitoring and is -- and the technological interface that we have is best-in-class. So that upgradation towards that has been undertaken. That's one. Number two is we continue to have a vulnerability assessment and penetrative testing of a server and network environment, both from a defensive and offensive security perspective where we use ethical hackers to hack particular systems and see whether there are any vulnerabilities and identify and fix them. In terms of -- also work-from-home, there are additional enhanced security measures and monitoring tools which have been introduced so that we are not prone to any such attacks. The third most important element is awareness, and that's what is also a big focus. From a personal awareness perspective that all the employees are aware as to how do you deal with particular e-mails you get and there are associated trainings which each of the associate is asked to go through and certifications associated with it which they have to necessarily take. So with this, we have done a comprehensive view of our entire security landscape. And we believe at that, we are -- we have a pretty robust system and mechanism. In addition to that, we always look at various external measures in terms of reviews from external agencies with respect to how our security protocols are and ratings which these agencies give which are also at par or better than the industry average, is what I would say.

Ladies and gentlemen, that was the last question for today. I will now hand the conference over to Mr. Sandeep Kishore for closing comments.

Thank you very much. Great to talk to all of you, and wish you and your family to be well and healthy and please keep safe. Talk to all of you again next quarter. Thank you so much for joining us today.

Thank you very much. On behalf of HDFC Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.