Zensar Technologies Limited (504067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Zensar Technologies Q2 FY '22 Results Conference Call hosted by Motilal Oswal Financial Services Limited. As a reminder, all participants' lines will be in listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Mukul Garg from Motilal Oswal. Thank you, and over to you sir.

Thank you, Vikram. Good morning, everyone. On behalf of Motilal Oswal Financial Services, I welcome you all to the Zensar Q2 FY '22 Earnings Call. We have with us today Mr. Ajay S. Bhutoria, CEO and Managing Director of Zensar Technologies; Mr. Navneet Khandelwal, CFO; and other senior management team members. Before I hand over the floor to Ajay, I would like to highlight that the Safe Harbor statement on the second slide of the analyst presentation is assumed to be read and understood. With this, Ajay, over to you.

Thank you, Mukul. Hello, and good morning, everyone. I hope you and your families continue to remain safe and healthy. Thank you for joining us today to discuss Zensar's financial results for the second quarter of the fiscal year 2022. Joining me on this call are a few others from Zensar leadership team. We have Navneet Khandelwal, our CFO; and Prameela Kalive, our Chief Operating Officer; Vivek Ranjan, our CHRO; Harjott Atrii, Global Head of High-Tech and Manufacturing; Chai Rajebahadur, Global Head of the Europe; Shirshendu Deb, Global Finance Controller; and Arjun Warty, Head of Corporate Development. Please note that the numbers reported include M3bi financials starting from July 14, 2021, the date we completed our acquisition of M3bi. This past quarter, we reinforced our revamped go-to-market focus by launching Zensar's first significant brand change in almost 20 years. Zensar's new brand positioning under the banner Think Velocity symbolizes the business value that we bring to our customers by integrating experience, engineering and data. It also signifies new resurgent Zensar that invests in innovation and an award-winning people-based culture and customer centricity. I'm pleased to announce that our growth momentum continues. Revenue for Q2 FY '22 stood at $141.9 million, which includes $7.9 million of revenue from M3bi. This represents a sequential Q-on-Q growth of 12.3% in constant currency and 11.6% in reported currency. We registered broad-based revenue growth across all verticals and geographies. The US region posted an 11.9% sequential Q-on-Q growth, driven by growth across all verticals. The European region also registered double-digit sequential Q-on-Q growth of 11.2%, driven by our experience-led engineering propositions. This year was a momentous year for us in South Africa, as we completed 20 years in the market. Our strong foothold in this fast-growing region continues to be with a sequential Q-on-Q growth of 10%. Moving on to our vertical performance, our growth in the critical banking and insurance market continues to be with a sequential quarter-on-quarter growth of 37% and 12.2%, respectively. Our high-tech vertical registered sequential Q-on-Q growth of 3.9%, while our manufacturing vertical registered 6.8% growth, indicating continuous momentum across clients. We are also pleased to report increased traction across our key clients in consumer services verticals, which registered a sequential churn to growth of 18.1%. Our gross margin stood at 30.6% in Q2 FY '22 versus 34.8% in Q1 FY '22. EBITDA margin for Q2 FY '22 was 15.4%, a sequential Q-on-Q decline of 309 basis points. This decline was primarily due to an increased cost of delivery owing to the higher cost of new hires and salary increments. PAT for the quarter stood at 9% compared to 10.8% last quarter. We ended the quarter with net cash position of $160.8 million. The quarter's order booking value was $187.5 million compared to 97 -- $96.7 million in the previous quarter, reflecting a positive business momentum client sentiment. We have added 2 clients to the $10 million plus category through scaling and existing clients, and adding one from M3bi, bringing the total number of clients in this category to 10. We are now a company of 10,375 associates with approximately 500 M3bi associates joining us in July. Our voluntary LTM or last 12-month attrition stands at 23.2%. In the current demand driven environment, the industry is facing supply side talent shortages. We acknowledge this and have been working on different levers to adapt to this environment. We have rolled out salary hikes effective in July, the second for the calendar year. We have strengthened our organic talent engine and have accelerated hiring of freshers, expanding our talent base to Tier 2 cities. We believe our talent transformation programs, employee engagement measures and differentiated 12-year road map will enable us to tackle the demand side pressure. At the start of the year, we launched a revamped Company strategy, focusing on five clearly defined strategic growth opportunities or SGOs. We are happy to report continued traction in our experience services, advanced engineering and data engineering and analytics SGOs, as well as our core application services and foundation services SGOs across all our key markets, with multiple net new logo wins. This growth momentum has been further bolstered by our acquisition of M3bi, which has brought greater depth and scale into our engineering and data capabilities. We are also witnessing good traction with cloud-related business opportunities in the cloud-native engineering, cloud migration and cloud infrastructure domains. To share a few examples, we signed a multi-year contract worth $122.2 million with the City of San Diego. We are proud to continue our participation in one of the most forward-looking cities in America. Our proposed integrated cloud-first enterprise compute solution and human centric integrated workplace solution will enable San Diego to achieve its smart city goals. We continue to meet the business transformation charge in the P&C insurance company through an active partnership with Guidewire, a leading digital insurance platform that has undertaken multiple implementation and cloud transformation projects. We are also seeing traction in the FinTech domain, where we are helping a leading financial services firm scale products across multiple geographies, amongst other transformational initiatives. We have partnered with leading cloud platforms to help a public sector client migrate from mainframe to cloud. In the retail sector, we are working on a strategic initiative for POS or point-of-sale transformation for a leading global specialty retailer that will enable the customer to expand from e-commerce to advanced engineering and experience services. Our traditionally strong experience capabilities now further enhanced with a cloud native advanced engineering and data practice has helped us create a unique experience-led engineering spearhead for new transformational deal wins. For example, we are helping a large UK-based regulatory firm transform its digital ecosystem to future state. This transformation project aims to create a road map of initiatives for the client that include redesigning journeys and services, moving to cloud native technologies, implementing enterprise applications and other chain management initiatives. Similarly, we have enhanced our relationship at one of the world's largest energy companies by helping them transform customer experience and workflows. Yet another example, we are helping a Fortune 500 payments organization develop new requirements for customer data management and product development, strengthening an existing strategic partnership. Zensar has continued building strong capabilities in experience-led engineering, with strong data and cloud foundations. These enhanced capabilities coupled with clear market positioning around business velocity has helped us achieve strong win momentum across all our business units. With that, I will now invite Navneet Khandelwal, our Chief Financial Officer, to provide updates on critical financial data, after which we will open the floor for questions.

Yes. Thank you, Ajay. Good day, everyone. Welcome to this call. In addition to Ajay talking about the business, I will now take you through some of the details on the financials. In the second quarter of FY '22, we have reported revenue of INR10,506 million, including M3bi, which reflects a sequential growth of 12.2% in rupee terms. In US dollar terms, the reported revenue is $141.9 million, reflecting sequential Q-on-Q growth of 11.6% and 12.7% on a year-on-year basis. Our organic revenues posted a sequential Q-on-Q growth of 5.4% and a year-on-year growth of 6.5%. The US dollar realization during the quarter has been INR74.1 per dollar against INR73.7 in the previous quarter. In the same quarter the year before, it was INR74.4. Our gross margins declined to 30.6% as against 34.8% in the previous quarter. The decline in gross margin is because of exchange impact, 0.3%, salary increments and higher cost of delivery as a result of supply side pressures impacting by 5.3%, which was partially offset by operational efficiencies in view of increasing utilization, volume and downside offshore mix improvement, impacting by 2%. The effective tax rate has decreased to 25.5% for the quarter against 26.4% in the previous quarter. This decline is on account of a one-time gain excluding which the ETR for the quarter would have been 26.1%. For the quarter ended September 30, 2021, DSO, including unbilled increased by 2 days compared with the previous quarter and stood at 82 days. This increase is on account of higher revenues in the current quarter, while the DSO computation is on an LTM revenue basis. Cash and cash equivalents, including investment in mutual funds net of borrowings, decreased from $183.2 million in the previous quarter to $160.8 million in the quarter ended September 30, 2021, reflecting a net decrease of $22.3 million. This decline is on account of the payout of the upfront consideration for M3bi acquisition and our annual performance bonuses for FY '21 being paid in the current quarter. The total amount of outstanding hedges as of September 30, 2021 was equivalent to $126.4 million against $136.1 million in Q1 of FY '22. We have significantly increased our efforts on sustainability in our operations and solutions. As part of this endeavor, we have recently published our first integrated report along with our Annual Report for FY '21, which captures our business model, material topics, risks and opportunities. We are aligning our initiatives with global reporting initiatives and United Nations Sustainable Development Goals. We are making focused efforts to reduce carbon emissions using greener energy sources, implement effective water utilization and wastewater management process, and are working with suppliers who have similar deal. We are continuously exploring ways to provide a better experience to our employees and are working to improve diversity and inclusivity in the organization. With that, I come to the end of my presentation and open the floor for questions.

[Operator Instructions] We have a first question from the line of Sandip Agarwal from Edelweiss.

Thanks for taking my question and congrats on a good execution. Ajay, I just wanted to understand little bit more on the supply side. While the lower level supply side issues may be taken care of with financial intervention which you guys are all doing across the industry and I'm sure you will be able to handle that in some time because we will start seeing a lot of supply coming in from the training -- as the training period gets over. My bigger question is that what is your strategy towards retaining the very senior resources, which are really in very high demand and...

Sir, I'm sorry to interrupt. Kindly stay connected. We've lost the line of Mr. Bhutoria. Please stay connected. Ladies and gentlemen, kindly stay connected. We have the line back in the conference. Sir, you may go ahead and ask your question again.

Yeah, hi Ajay, thanks for taking my questions. I don't know where I -- where the call dropped off, but I will repeat the whole thing. So my question is on the supply side, while I agree with you and I believe that financial intervention in some portion of discourses which are under training -- joining the industry in next few weeks will pull up the situation which is there right now in the attrition, at least at the middle and lower level to some extent. But what is your strategy towards, number one, acquiring the resources at the very high end, very senior management level; and also, how will you retain them? What is that we are going to do, because see, the challenge is we are seeing top talent leaving even the big -- large-cap also despite they being offered very high salaries, very good designations and also very good ESOP and still we are seeing that problem happening. So what is your sense? What will we be able to do? And how will you do? That is number one. And number two, given the demand situation on one side and the supply side issues on the other hand, what is your sense that -- are we right now in that scenario where we are cautious of taking these because we are not sure that we will have to get it exhibited through sub-contracting or through our own resources because the clarity on attrition is very, very low? So if you can add some color on those two things -- points, it would be very helpful.

Sure, Sandip. So Sandip, yeah, as you have rightly pointed out, right, that attrition is an industry-wide issue, so we are in an environment that is extremely demand rich and at the same time extremely supply constrained, right. And this is, by the way, a global issue, not just in India. But the Indian situation with attrition is very magnified, okay. And at Zensar, we have our own share of this, as in our last 12-month attrition was 23.2%. Now, what we are doing to address this is that we're making a massive effort across multiple levers. So, the first one is compensation. We did an unprecedented comp revision second time this calendar year. And this -- a good part of that is performance linked, a big part of it is based on skill-based differentiation. But there was a very broad-based comp increase, the second one this calendar year. Second lever we are using to address is we are seriously looking at an accelerated career [ correction track ]. The third lever that we are looking at is a very significant fine-tuning of how we engage with our associates, starting with the fact that we are doing top-down engagements, not just mid-level leaders but senior leaders within the firm including me are engaging with our associates. The next thing we are doing from an engagement perspective is that -- look, we are living in a world that is remote. Slowly over the course of next couple of months it will become hybrid. Remote is not going to completely go away and yet it will not be 100% remote as it was during most of the pandemic. What we have done is we have taken extensive measures to train our managers, as in we put them through boot camps, et cetera in terms of how to engage with people, how to engage with their associates, so as to ensure that the associates are engaged, the associates are connected and the associates [indiscernible]. Third one is we're taking a very flexible approach towards return to office and we're looking at striking the right balance between the need for getting people back to office because that enables the connected glue to re-establish and yet at the same time acknowledging the fact that work from home is not going to go away. It is here to stay. People have got used to it. [indiscernible] from that, right. So, that's the third lever. The fourth lever we are looking at is we are significantly cranking up our organic talent engine, and the engine that we use to largely infuse pressures into the Company. We are also, at the same time, in order to plug the demand supply gap, increasing -- significantly increasing our natural hiring process. And the third one, from a hiring perspective, that we are driving pretty hard and we've made some progress already on that counter, is we are increasing our catchment by expanding our delivery locations, both in India outside of our three key delivery sites, and overseas in near-shore centers. This is a very comprehensive, a hugely comprehensive effort that we are making to address the talent issue. And we have also devoted, we've also deployed one of our senior-most leaders out of her P&L role to manage this. So, that is one. The second part of your question is not just the junior and mid-level talent, but what are we doing with senior talent, right? So shifting perhaps into that. And as I shared with you in our past couple of calls indeed, right, so we want our strategy again strongly in the execution phase. We are continuing to strengthen the team and that includes sales, that includes delivery, that includes client partners, that includes subject matter experts and are expected to build a formidable team. And we have thus far been quite successful, very happy with the kind of people we have got today. And of course, we are providing for them. Industry today is competitive compensation, right. So, that -- I think we are real confident that we've provided them with industry standard compensation. As we discussed a couple of calls back, Sandip, in one of your questions in the prior earnings, is that comp is built of the basic comp, the variable pay and the stock options, right, the RSUs, et cetera. This is what both companies have. This is what we have as well. And I'm confident that the program that we have in place is effective, right. But then outside of all of this, what we have done as a firm in terms of how we have executed on our strategy, we are strongly executing -- how those can strengthen the team, how we have relaunched our brand and the kind of energy and enthusiasm that has launched in the industry -- within the Company from top to bottom gives us confidence that we will gradually get this attrition situation under control. And as we speak, I'm not terribly concerned about significant attrition at the senior-most levels.

So Ajay, thanks for that elaborate answer. I have another follow-on, and I know I've taken lot of time for you, but I will still request you to answer this question. See, I have this concern from last 2 to 3 quarters that this is one of the best times for the industry in the H&M vertical. And we are having substantial presence in that vertical and the demand for that vertical is I think through the roof and probably one of the highest in the whole industry. But we are not firing to our best in that segment. So, what are the gaps there? I believe that with such kind of huge segment, probably we have two, three very senior leaders desperately required to find those gaps in that segment, or you think that it is more sort of a supply side constraint, what is there? Because that is the segment which can really change our whole story because I'm 100% confident that high-tech and manufacturing is going to be the best-performing sectors for next few quarters, if not years, because of the mad race to upgrade the products to smart products or future products. And across Europe and across the manufacturing hubs in the world who are seeing through the demand for high-tech and manufacturing, but we are not able to post that kind of number in that vertical. And even some of our peers have done much better than us despite we've been so strong in that vertical? So, any thoughts on that side? Is it attrition-led challenge? Is it some slippage or you think that it will take some time to come back?

Yeah, Sandip, a very pertinent question, right. I mean, see, first of all, let me backup, we have seen growth across all verticals, across all geographies, across all service lines, right. Number one. Number two is that for us, high-tech manufacturing is basically three different sub-verticals, there is high-tech, it is manufacturing and there is emerging, right. If you take high-tech plus manufacturing plus emerging, we have done quite well. Individually, there are parts of the portfolio which will lock down, left right, agreed, but if you take this, which is high-tech, plus manufacturing plus emerging together, I think we have done quite well. And -- so that is one. Second thing is, you're absolutely right. High-tech is going to see -- continue to have increased traction as well. So, we'll see a little bit of an up and down movement basis -- based on projects starting, projects closing, et cetera. But overall, I think I'm feeling very, very good about what we are doing in high-tech manufacturing as I'm feeling about our banking, financial services and insurance verticals, and as I'm feeling about our consumer services vertical. So, that is what I can share, Sandip, right. And then overall, the supply constraint is an industry-wide constraint, right. And we have a plan to address that. What we're doing is we are not taking any short-term measures. We are not taking any immediate reactions. We're taking a very root cause, long-term view in terms of how we address this problem. And as we continue to address this problem, this will translate into even better business performance than we are delivering right now.

No, let me reframe that question. So if you -- will you be in a better position if we are able to find two, three very strong levers, more to add below the head level? Will we be in a better situation than what we are today, addressing all strategic gaps within high-tech manufacturing hub is already in place. That is what I want to know, because I think that it looks like from the numbers and when you dissect them that there is one or two leadership positions which are vacant -- key positions which are vacant in that vertical. Is my reading correct, or you have already done the -- you have already brought in people and it will just show up in the next few quarter numbers? What is the way to look at it?

You know what, we have the person on our call, Harjott Atrii. So Harjott, do you want to take that question?

Yes. Thanks, Ajay. So, we have redesigned and launched a new high-tech and manufacturing vertical with the new strategy, a new set of offerings, which are focused towards where the clients will spend for Enterprise 4.0. That strategy is getting validation at the ground level by the recent new wins we have, both in existing customers as well as new logos as well. And we have a very heavy pipeline as well. Now, we also are continuously looking -- you talked about the leadership team. So, the new structure is also ready and the new leadership team is coming on-board. So by Q3, we'll have the complete leadership team on the board and very dedicated, focused on the new logo hunting as well. So, they're all the pieces in terms of new strategy, offering, building in some very functional domains aligned to Enterprise 4.0 and leadership that all come together by end of Q3.

We have next question from the line of Mukul Garg from Motilal Oswal.

Thank you. I was just following up on Sandip's question. There was some softness in your top five accounts this quarter. If I combine that with the reduction in exposure in the high-tech space, is it fair to assume that part of this was on account of your top account? And how is the growth and opportunity pool kind of shaping up for us in our topline?

Sure. So Mukul, top five has been kind of flattish but the next 15 have done very well. So, that's the first one. The second point I'd like to make is that our largest clients, while -- as I've mentioned in the previous calls, right, suffered shrinkage of their own during -- and pressures of their own during the pandemic. Their businesses have stabilized and as well as this has stabilized, their -- the business we do with them has also stabilized. That's the second thing. The third thing is that within this group of accounts, within good group of top five accounts, there's always going to be a bit of an up or down going on between individual accounts. So, there will be of course some quarters where all of them will fire and we'll see good solid increase across both. But then across these five clients, there'll be up or down, some clients will go up, sometimes will come down. And that is what we saw this quarter. 2, 3 clients -- one or two clients were flat, one or two clients went up and one client came down, right, so which resulted in the flattish commentary for -- flattish performance in the top five accounts. What is very encouraging for us -- and like I mentioned, we are fiercely protective of our portfolio, we are fiercely focused on making sure we continue to deliver value to these clients and improve mind share and market share. What is also very encouraging for us is that the next set of 15 accounts and the following set of 35 accounts have grown and that gives us -- that puts us in a good place to track momentum. The last quarter we had strong momentum, this quarter the momentum has increased, and we feel good about business right now, Mukul.

Sure. The other question was on -- clearly the Q2 revenues was a little bit elevated if you compare them with what was reported for FY -- CY '20 while acquiring them. Is there a seasonality in the numbers or are you seeing a strong under-expected momentum in M3bi?

Short answer, stronger-than-expected momentum in M3bi. M3bi has been a very good acquisition for us, not just in the fact that it strengthens our capability in engineering and data. But overall, the business has been extremely well.

Great. And if I can just squeeze a final question on your sales and marketing spend this quarter. Is it possible to split out the impact of M3bi in this? How is the organic investment coming along? And where do you see that stabilizing?

Right. So I will start -- I'll give you a point of view and then I'll ask Navneet to check in. So Mukul, as I mentioned, right, we continue to strengthen our team, right. We put that in the first quarter of the year, we continue -- we are continuing the fact in the second quarter of the year, be it sales, be it delivery, be it client partners, be it subject matter experts, and we are bringing in world class talent, and we are very confident of the kind of people we've got in, right. A good part of the team is in place. We will continue to hire some more, but the rate of hiring at that level is going to diminish a bit. This particular strata of leaders within the firm is now beginning to take shape, and we are nearing the completion of the phase where we said, okay, we're going to hire within the SGO, within the verticals, some within the geography. We are now coming to a point where most of this hiring is nearing conclusion. So, that's my commentary on what's happening with hiring and sales delivery and plan partner as well as subject matter expert roles. Navneet, would you like to add to it?

Yes, sure. So actually, Mukul, I think we've called out separately the topline of M3bi, but it's not that at a line item level, we are disclosing the numbers separately. At the same time, yes, the consolidation brings in incremental cost in both cost of revenue as well as in SG&A. Directionally, I would say, in the past, from an OpEx perspective, M3bi was not so invested into sales and marketing and which is the area that we are putting as a part of what we are trying to drive through synergies and joint go to market. And to a certain extent, some investments we will be making will be to ensure that we are getting the right talent in place and we are able to utilize the capabilities that they have to expand our offerings much further. So, that's where we see we will be investing in. At the same time, directionally, I would say, from a margin standpoint also, M3bi margins have been largely in line with what we have. And so, there has not been any significant impact on account of inclusion of their numbers into our EBITDA, is another point that everyone should clarify, Mukul.

[Operator Instructions] We have the next question from the line of Sandeep Shah from Equirus Securities.

Yes, thanks for the opportunity. Just looking at second quarter where the growth on organic front is upwards of 5%, do you believe that now organic growth momentum can be maintained at least at the industry levels or do you still require some more time in terms of calling out the Q-on-Q sustainability of the organic growth? And also some color for the Q3 because generally in Q3 we have witnessed higher [indiscernible] from some of our top accounts, whether this time it will repeat as a whole or not? And in the order book, how much TCV we have counted from the San Diego deal?

Right. So Sandeep, I'll go first and then I'd like to invite Navneet to also chip in. So first of all is -- Sandeep, was that we had indicated -- I think we've started with the strategy refresh, right. So we had indicated that this strange refresh in the last quarter had shown early signs of success. That had given us confidence that we were heading in the right direction, right. So, we saw momentum last quarter. The last quarter for us was the best organic quarter for us in last six years. This quarter is even stronger than the last quarter and this reinforces that confidence. And this has added to our momentum, right. So these two things along with the fact that we are strongly in execution of this category. We have relaunched our brand, which has resonated extremely well with the market with our clients within the company with our associates, including the fact that we have strengthened our go-to-market teams, though the way we have crystallized our services, the way we are driving value proposition for our clients, we feel that we have been strengthening the franchise and we feel that we have -- we believe that we have become significantly more competitive when compared to what's happened in the market. So, that gives us confidence that we are on the right track, reinforces our momentum. So, that's one part of the answer. The second part is, yeah, next quarter is a holiday quarter. So, there is going to be some impact because of that, furloughs, et cetera. But overall, the momentum is good. Navneet, do you want to add?

Yes, sure, okay. See, like Ajay talked, Sandeep, I think the momentum that we are seeing from -- both from the deal side and how we are ramping up resources for the orders that we have is quite positive. At the same time, we know that the seasonality which happens is a phenomenon which is -- which has happened for us every year. So, there will be some impact on account of that. And hence, any way like we don't guide on our revenues, but you should assume that there will be some kind of an impact on our portfolio while we will also continue to drive our volumes up. That's how we look at it from the immediate third quarter perspective. With respect to your second question in terms of the order book value, I think City of San Diego, as we had announced earlier, is a full year deal along with two optional periods of two years each where the maximum value that we had announced was about $122 million. Since we adopt a much more conservative approach in our order booking values that we disclose every quarter, we have just taken only the initial period of the order in our order book reporting. So, in the $187.5 million that we have reported, roughly 50% of this order value that we disclosed is contributed by the TD -- sorry, let me just correct. When I said 50%, it was 50% other than $122 million is included, largely as a part of this sale. Balance is deals which are outside of the large deal that we signed.

Okay. And Navneet, now just question on the margins because the gross margin has slid significantly in this quarter. Even if we look at going forward with travel respecting going, there would be increase in travel and facilities related costs. So, do you still stick to your high teens kind of an EBITDA margin outlook or the outlook on margin has now changed? And what could be the range one can build for the near to medium-term...

So as a management, we are clearly focused on hitting the margin outlook that we have been talking of, which is trying to ensure that we go from, say, mid-teens to high teens level. Having said that, the supply side constraints that we have seen have been very magnified. And that really puts some kind of challenge in terms of the time frame within which we'll be able to book it. Of course, we are mindful of the fact that travel cost and facility costs will start coming back from the second half of this year. But we believe the operating leverage that we'll be able to generate on account of the momentum that we have built up should be able to negate the impact of certain things. In terms of margins, I would say, we are working in a very focused way on operating levers, which include how do we look at our pyramid, and there is a very high focus on getting significant under the pressure in as a part of our organic. At the same time, we are also working on aggressive cost optimization measures, which will help us combat the impact on margins that we see. And of course, we are also working towards how do we improve our effective rate realization. This could include a mix of trying to get some set of rate increases based on the value that we deliver to our customers, especially in high demand niche skills as well as how we are able to optimize on our fixed price productivity. So, those are the elements or the levers that we are working on. And we are confident that we should be able to hit the ranges that we have talked of. It's only that probably it will take some few more quarters to be able to hit that. And we are all working towards it. I would also ask Prameela to add further on from a perspective of operational efficiencies what we are actually doing at the Company.

Yes, thank you Navneet. Sandeep, to just add to what Navneet called out, we have a very clear, focused and concerted program on all the operational levers, given the margin impact. So, we are driving the three key callouts, Ajay briefly mentioned this at the start. The whole pyramid optimization is a very comprehensive program for us. We are addressing this from different levels. One is significantly expanding the bottom of the pyramid. In fact, the pressure infusion is what we added in H1, we're going to add 5x that number in H2 in terms of pressure. And our entire fresher program itself, we have really transformed it moving away from the traditional, let's go to the campus, get some freshers, train them internally, to now we have expanded this to look at off-campus freshers. We've got a very strong partner ecosystem now, partners who take the freshers, train them, and then we onboard them in Zensar. We're looking at non-engineering talent stream. Also our global fresher program, fresher program has gone beyond India. So we have freshers in South Africa, we're going to add freshers in Europe and in US. We will be in small numbers, we will scale it up. So, the whole fresher program itself is significantly expanded. The second thing is it's not just about on-boarding freshers. Our focus is on how quickly do we get them to build. We have a very strong metric, what we call as time to billability. We are tracking that. For this, we are proactively investing significant amount of freshers in our high-growth accounts because we know that will be a big lever for us for fulfillment. The other thing we're doing is really enforcing pyramid guidelines. As we're going and -- for new deals, both in existing client accounts and new client accounts, keeping the pyramid guideline as a lens as we start our projects. So, we start them with very fit and healthy pyramids. In fact -- and the third one is about the cost optimization, what Navneet called out, is looking at all our non-billing costs. As we're adding fresher, focus is on to quickly get them into billing roles. And on rate hike, as Navneet called out, we are looking both at the MSA level rate revisions for customers where predominantly they're doing work for them in the high-end skills and high demand skills. We are also looking at the resource level, there are resources who now come in with a lot of multiple skills and we are significantly investing in upping our organic talent. Massive drives on certification in new age skills like cloud and digital footfall, data engineering and other areas. In each of these cases, we're also going back to conversations with our customers about those divisions. But like Navneet called out, all of these will take a few quarters for us to really begin to deliver the impact. But we have a very Senior Vice President, Ajay called out the P&L leader who's driving all of these tracks. Entire focus is on rigorous execution all of these clients.

[Operator Instructions] We have next question from the line of Amit Chandra from HDFC Securities.

Thanks for the opportunity. Sir, my question is on the order book of the [indiscernible] that you announced. So as you have mentioned that you have taken 50% of San Diego, so I said that the 2Q number is still $130 million, which -- still on a Y-o-Y basis. And if you see on a first-half basis, it's still like lower than what we will do. And so, are you seeing significant pickup there? So -- because you have said that we have a healthy pipeline growth, when we can see an uptick there in terms of the internal TCV wins and what kind of engagements we are winning with declines? And what is the steady state like TCV number that we are targeting? And also, the second question is on the offshore. So we have seen 80 bps increasing the offshoring in the quarter but the San Diego deal which is largely on site. So ex that, I would see that there are headwinds that there have been in interior offshoring, much higher than what we reported. So -- and how we are seeing the offshoring trend in the new engagements that we are receiving?

Thanks. So Amit, let me go ahead -- let me go with one question at a time. The first question is, if you like -- if you look at the move that we announced for the quarter and that includes city of San Diego which is -- we counted about 66, $67 odd million. The first thing I would like to point out, and Navneet has mentioned this just little while back, is that overall we are taking a very conservative stance in terms of what we report as our order booking, much more so than we have done in the past, right. So, very scrub - very clean number and a very conservative number, including how we are reporting, for example, City of San Diego. If you compare this number with last quarter, it has doubled. Even if you exclude City of San Diego, it went up about 60%. So, this reflects increased momentum of our business. So, that's one. Second thing is that this quarter, we have added 14 new logos, and this is in addition to 8 new logos that we closed last quarter. So while some of these give us immediate revenues, there is a bunch of others who basically create an opportunity for future expansion of business. So, that is another thing that is firing very well. The third thing which does not get reflected completely in the TCV is our opportunity to expand within our existing accounts. So I mentioned, we're in a very demand-rich environment, demand with supply constrained, so a very demand rich environment. And as a part of that richness of demand, part of that amplification of demand is our ability to expand within our existing clients. And that's not entirely reflected in the PCB. We have three different metrics that we track in terms of looking at our ability to continue to drive momentum in the third quarter. So, that's the answer to the first question. Amit, can you repeat the second question, please?

Yes. So only on the offshoring part, so already we -- our offshoring number has been especially the lowest in the industry. But that's seen with the rise will be offshoring. And in this quarter, there was a huge increase. But in this quarter, we had San Diego which is an on-site project. So ex of that, the offshoring would -- have been on a -- much higher than what you have reported. And how you're seeing the offshoring trend in the [indiscernible]?

Yes, the point, right, so City of San Diego, the nature of the deal is such that it has to be delivered entirely from the local geography. So, that should be delivered state side. Despite that, our offshore ratio went up 80 basis points last quarter, well, the first quick data point that I wanted to give. And despite that, our offshore ratio went up by 80 basis points last quarter. The next thing I'd like to point out is that we continue to focus on right shoring and that includes continued thrust on driving up offshore presence. And I mentioned, right, in terms -- when I was talking about talent acquisition and talent catchment, et cetera, is our strategy to expand outside of our three key location [indiscernible] centers. So that aside, we are also looking to increase our footprint near-shore, right. So, we are already present in -- looking to expand that. We are present in South America, we will expand that. At present, we will continue to expand our delivery in Africa, right. And the way we are designing those are only for those projects where the cost of -- the slightly higher cost of a near-shore location can be met by our clients' expectation to deliver all the commercial locations, and we are watching over that commercial on our near short very, very carefully. So, it's a slightly more elaborate answer to your question, Amit, than you asked. So, that is how we are. It's a very comprehensive view that we are taking towards right-shoring.

Okay. And sir, my last question on the margin side, so obviously we had an impact of 500 bps on salary hike. So ex of that, the steady-state margin that we have earlier said, EBITDA margin would be in the range of 17% to 18%, so that is what we're targeting our -- with these new contracts coming in, higher cost of delivery, we see that contract into 15%, 16% on a statistic

Right. So the way we are looking at margins, Amit, look, we are in a supply-constrained market right now and over the period of next 3 to 5 years, not only -- so we have our own very, very specific company-wide initiative that Prameela so carefully elaborated a few minutes ago, right, which we are driving. And over a period of time, as the industry focuses on getting the supply to fulfill the current gap, the current bid cap between demand and supply, that pressure will alleviate over the course of next 4 to 6 years. This is the first thing, right. Second thing is that, look, for the right skills, we are obviously very, very focused on making sure that the right skills command the right commercials. So, that is number two. Number three is, in terms of how long will this play out, right, this effort that we are making towards cranking up our organic engine, towards continued focus on right-shoring, to expansion of delivery locations, so this will take 3 to 5 quarters, right. Now, the one thing that we are very clear about is that we will not take short-term knee-jerk measures. We are in a good place of growth, and that will continue to remain our top priority. And while we continue to drive our momentum Y-o-Y growth, we will fix the overall supply situation and thereby fix the overall margin situation over the course of next 3 to 5 quarters. We are confident of delivering that.

We have next question from the line of Alroy Lobo from Kotak Investment Advisors.

Yeah, thanks for taking my question. I just wanted you to comment on the cash flow profile of the Company this quarter and the first half. It's come up quite significantly when we look at the year-on-year comparison, I understand last year was a different year. But how are you looking at cash flows that you focus on getting the growth momentum back?

Yeah, Alroy, I'll request Navneet to answer that question.

Yeah, so if you were to see, I think for a period of time, our -- the way we realize effective cash has improved very significantly for us. And from a net cash perspective if you see, this quarter was a slight aberration where our net cash has actually dipped from $183.4 million to about $160.8 million. That was largely on account of acquisition-related payout and like I called out, the annual variable wages were paid out during this quarter. Our DSOs continue to be consistent. While it is currently at 82 days, that 2 days increase is largely on account of the higher revenues coming in because of which the debtors were higher and the numerator -- the denominator is actually the LTM revenue. On a like-for-like basis, our DSOs would be at par with what it was in the previous quarter. And the cash flow generation that we have exhibited in FY '21, we believe a similar momentum to continue for us as we have really tightened our ship in terms of how we realize our money effectively and what views we are putting up to it. And as has been called out consistently, from a perspective of cash management, we continue to prefer cash so that we can fuel it or any potential acquisition that we are looking for, which is an integral part of our strategy, which we have consistently called out.

Because I was just dipping at your first half number, which is before your acquisition, I'm looking at net cash flow from operating activities, that's quite meaningfully down from the first half of last year. And even if you were to even look at the last full year number of FY '21, the cash flows for this half have been significantly down, which is -- I'm talking about before your acquisition.

Yeah, so the decline in cash flow for our operations is on account of two reasons. Number one is, if you'll see, the debtors have gone up for us at this moment. And even as a component of a day, so you will see that the build DSO has gone up. And as they have built much higher right now, the collections will fall in line in the second half. So that -- we will see a good improvement on that. Second thing is like I called out, we -- there is a significant reduction in liabilities that you will receive. And that is on account of the fact that the annual variability got paid out in the current quarter. So these are -- I would say, it's not a very reputable event, which will impact in the coming next few quarters. And so, we will see much more improved cash flow generation in the second half of the year as opposed to what you have seen in first half and the first half impact is largely on account of what we have seen in -- happening in Q2. Apart from that, we see a healthy generation of cash at our end.

So there is no loosening of the terms of trade to get revenue. You're saying your terms of trade are more or less in the same line?

Yes, you're right.

We have next question from the line of Nitin Padmanabhan from Investec.

Yeah, hi, thanks for the opportunity. I had a couple. So first is on how is the -- how are you seeing subcontracting costs sort of increase for you? Not in the absolute terms that you report, but for resource, how would you have seen it maybe for the same kind of resource, maybe three quarters back and how is it now? On-site and offshore, if you could give some color there, maybe quantification is not required. Second is in terms of freshers, how many freshers are you looking to -- have you added in the first half and are you looking to add from a pyramid perspective? And lastly, in terms of -- do you think that the rise in attrition to maybe 23%, and maybe this is not going to cool off, I mean at least for another two quarters, if that's the assumption, do you think that will actually start impacting your ability to sort of meet growth? So, those are the questions.

Yes, Nitin, I'd like Navneet to answer the first question, start the second and then Vivek to answer the rest of the second question, and I'll pick up the third question. So Navneet, do you want to go ahead, please?

Yeah. So Nitin, as you said, this is a supply constrained market. So to that extent, yes, when we look at subcontracting particularly, a, the skills which are in demand like you have research in demand resulting in higher costs. Yes, in subcontracting also the cost of hiring in specific areas have also gone up. And if you would see, to a certain extent, the subcontracting mix -- cost mix also present are -- has gone up as is evident for our financials consequent of that. And all of this is anyways as a part of the operational measures that we are working on and which I think Prameela already elaborated much more in details. With respect to fresher hiring, I think our perspective is to ensure that we have a very good steady intake of freshers every quarter and which is how we have structured our hiring process on freshers. We normally do not disclose the hiring plans that we have and hence, I will not be able to share with you the exact quantum of pressures that we are looking to hire in the current year. But I would let Vivek add on qualitatively more with respect to the other two points which were related to fresher and attrition part.

Thanks a lot, Navneet. Navneet, you covered the point with respect to freshers very comprehensively and Ajay also spoke about the retention measures very comprehensively. And these set of initiatives, which we are talking about are the initiatives which will ensure that the while industry is facing a serious headwind and attrition, we will -- we are very confident that the kind of initiatives we have undertaken and we are going to undertake, we will bring this in control.

Right. And thanks, Vivek and thanks Navneet. And Nitin, just to cover -- close out on your last question, so just once again, we are in a very demand rich and supply-constrained environment. Is there a big gap between demand and supply? The answer to that is yes. Do we see that gap within Company between demand and supply? The answer to that is also yes. Are we focused on meeting as much of the demand as possible? The answer to that is also yes, right. For us, growth remains a top priority. We will continue to be very strongly focused on growth while keeping a strong eye on margins. And we just want to make sure that our momentum of growth continues while we do root cause fix around attrition and around supply chain over the course of next 3 to 5 quarters.

Sure, that's helpful. Just one last one, if I may. Within your portfolio, if you look at the MSA price increases that you spoke about, do you think that it will -- you'll be able to reflect some of those sooner or do you think it will take some time to reflect on a consolidated basis? I just wanted your thoughts on that.

Yeah, Nitin, so that is going to be ongoing. It's customer by customer, MSA by MSA, largely focused around the skills that are in high demand, the skills that are very inelastic. And that's an ongoing process that will continue -- that we're already on that journey, that will continue over the course of next 2, 3 quarters. So this is going to be incremental. You won't see a big bang, suddenly come March we raise across the board, that's not going to happen. But incrementally, over the course of -- it already has started the last quarter, in fact even the quarter before, and it will incrementally continue over the next months -- next couple of quarters, maybe even longer.

We have next question from the line of Kshitij Saraf from Tusk Investments.

I wanted to ask on the smart city San Diego contract and taking to -- on the pipeline from there, right, with regards to this contract, like are there specialized capabilities that Zensar is building for smart city? And how is this smart city and the whole connected ecosystem space shaping up globally and where does Zensar in terms of -- where Zensar is placed in terms of winning more large deals in this space and who are the competitors in this space?

Yeah, Kshitij, good question. I'm not sure if I can answer all the questions that you asked from a smart city perspective, but can I request Harjott just to address this question. He's right in the middle of our smart city engagement and portfolio.

Sure. Thanks, Ajay. So the capabilities you talked about, they're already existing within Zensar, which are largely around the digital transformation, laying the foundation for smart and secure cities. So, all these elements of digital experience management, digital operations, driven by automation, digital cybersecurity, journey to cloud, managed product cloud, cloud economics. What we're doing is we are bringing all these elements together, combine that with IoT and smart sensors for very well-defined use cases like City of San Diego is what we are rolling out. So it's a huge transformation, support and maintenance program. We see a pretty large market for this. There are a lot of -- post-COVID, there a lot of studies who are looking at becoming smart digital green cities. That's going to have a massive impact on the digital experience on the tax revenues, their ability to draw more business in. So we are engaged in multiple conversations. So, there's lot of cadence and actions we've seen in this space. And we don't see the traditional competitors, the traditional India original service providers, having a very focused option for smart city. We believe Zensar is the pioneer in that space. So, we have launched the reference architecture for smart city and we're implementing it very successfully. And a large part of this solution element is also system integration work with large tech OEMs whether it's Honeywell, GE, Cisco, and public cloud providers as well. So, there are lot of elements to this solution, there's lot of complexity around it. And we are in the middle of -- Zensar is kind of implementing that. So, that's where we are. We see a large potential as we go through the customer implementation. And we continue to work with our OEM partners to roll out the future offerings as well. I hope that answers your question?

Yes, absolutely. That's very helpful. And just a related one. So in terms of energy, automotive, like all the keys coming into the new age, the technologies for the next decade, what a consumer will need for the next decade, is there any bundling possible? For example, okay, we have smart cities, we are collecting data. At the same time, is Zensar looking to play in the automotive space as well as in the energy space as well, let's say, a lot of the elements which are not covered in the smart city, particularly?

Yes, Kshitij, that's a great question. This also goes back to the strategy question that Sandeep was asking. We have launched four offerings within high-tech manufacturing smart cities, basically which is aligned to how well these industries, how will the customers disrupt themselves to get ready to be successful in industry for that. And those offerings are all the elements which we discussed plus IP, EDGE, cost computing. And that's a combination of launches more about supply chain 4.0, which is a supply chain, connected operations, connected experience and privatization. So, these are the four large mega trends we have seen across multiple industries where they're using AI, data, machine learning, cloud to unlock the value through -- in their operations and create a very unique experience for the customers. So, the key vector of business [indiscernible] to experience, whether it's a citizen experience or a consumer experience remains central to everything we are delivering. And that's where our SGO story of end-to-end experience came through and also comes in very handy.

Ladies and gentlemen, due to paucity of time we will take the last question. We have the last question from the line of Sandeep Shah from Equirus Securities.

Yeah, just a question in terms of investment for the strategy refresh. Is it done over in terms of the talent recruitment in terms of the delivery optimization or restructuring as a whole? And one can say, incrementally, the operating leverage can play out more going forward versus what we have seen in last 2, 3 quarters.

See, Sandeep, we -- about April we launched our new strategy, right. It revolves around 5 SGOs, 5 strategic growth areas, [indiscernible] which influence talent, partnerships and M&A, right. So right now, we are in a very strong execution phase. And as a part of that, as I mentioned just a little while back, we have strengthened our teams. And this strengthening has happened across sales delivery, client partners is the less subject matter experts, right. Now this crystallizes services, the strong value proposition we are driving through these services and the significant first that we have on go-to-market is bearing fruit, right. And like I said, it has strengthened our franchise, it has made us more competitive, right. And we are working towards this -- to continuing the momentum that we have achieved in the last two quarters towards our goal of achieving creditable, sustainable and profitable growth, right. And I think we are tracking well on our objectives. This quarter, obviously, our cost of delivery has gone up. We created a very well -- like Prameela mentioned very elaborately, in terms of a very significant campaign to address that. And then that will play out over the course of next 3 to 5 quarters. And then on this side, on the strategy side, on the momentum side, on the growth side, we will continue to strengthen the team. A big bulk of the recruitment that we wish to do is over. We will continue to add to our talent pool, especially when it comes to client partners, sometimes people in the verticals, et cetera. And I think we will come within what we have guided, which is at the beginning of the year, I had mentioned that we'll take some money out of the EBITDA that we had at that point in time and reinvent back [indiscernible] growth, and over a period of time, we will deliver mid to high teens in margin. We will achieve that objective. We're confident of achieving that objective in the course of next 3 to 5 quarters.

And just a follow-up question. So what is our go-to model -- go-to-market model? Is it vertical base with whom the five factors SGOs will work or is it largely PML handle to 5 strategic, if you can call out separately for US and Europe and South Africa?

Yeah, so Sandeep, we operate through three geographies, which is US, UK ad Europe and South Africa, three verticals which is high-tech manufacturing that also increased emerging, banking financial services insurance and consumer services, supported by five service lines, which are our SGOs, which is experience services, advanced engineering services, data engineering services, application services, including our play in platform services and foundation services. So that is how we are structured. It's a play between geography, vertical and service lines.

So we would be handling so many P&LS within the Company or how the P&L across units will be handled or controlled?

Yes. Sandeep, this is very commonplace in the industry. I think the geography is vertically, and horizontal view and the corresponding P&L is a very common place in our industry. It's not unique to us. What is unique to us is how we have sharpened the focus, how we have chosen these SGOs and how we have sharpened the focus and how we are executing on it. So from a P&L perspective, how we manage the numbers, et cetera, this is not uncommon in our industry.

Okay. And just wanted to understand, the San Diego would have ramped up only for 1.5 months in the quarter. So we'll have a full ramp-up in the Q3 actually, right?

Navneet, you want to take that question?

Yeah, so we announced the deal in Q2, and yes, we had ramped up immediately after that. And your assessment on that is right. So, it had partial revenues in the current quarter, and our full phased ramp up will happen in the next -- in Q3.

Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to Mr. Ajay Bhutoria for closing comments. Over to you, sir.

Thank you. Thank you so much. It's great to interact with you. Thanks a lot for dialing in and listening in to our earnings call. I look forward to engaging with you separately and look forward to talking to you soon. Thank you very much. Be healthy, be safe.

Thank you very much, sir. Ladies and gentlemen, on behalf of Motilal Oswal Financial Services, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.