Datamatics Global Services Limited (DATAMATICS) Q2 FY23 Earnings Concall Transcript

Datamatics Global Services Limited (NSE:DATAMATICS)Q2 FY23 Earnings Concall dated Oct. 31, 2022

Corporate Participants:

Asha Gupta — Investor Relations, Ernst &Young LLP

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

Sandeep Mantri — Executive Vice President & Chief Financial Officer

Analysts:

Yash Patel — Choice International Limited — Analyst

Pavan Kumar — Shree RatnaTraya Capital Partners — Analyst

Shreya Biwalkar — Individual Investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Datamatics Global Services Limited Q2 FY ’23 Earnings Conference Call. [Operator Instructions]

I now hand the conference over to Ms. Asha Gupta from Investor Relations, EY LLP. Thank you. And over to you, Ms. Gupta.

Asha Gupta — Investor Relations, Ernst &Young LLP

Thank you, Rohit. Good afternoon to all participants in the call today. Welcome to the Q2 FY ’23 earnings call of Datamatics Global Services Limited. The results and investor presentations have been already mailed to you and it is also available on our website, www.datamatics.com. In case anyone has not received the copy of press release and presentation, please do write to us and we will be happy to send it out to you all.

To take us through the results today and to answer your questions, we have with us the top management of the company represented by Rahul Kanodia, Vice Chairman and CEO; Sandeep Mantri, EVP and Chief Financial Officer; and Mr. Mitul Mehta, EVP and Chief Marketing Officer. Rahul will start the call with brief overview of the quarter on the business, which will be then followed by the financials, which will be given by Sandeep. We will then open the floor for Q&A session.

As usual, I would like to remind you that anything that is said on this call, which gives any outlook for the future or which can be construed as forward-looking statement must be viewed in conjunction with the risks and uncertainties that we face. This risk and uncertainties are included but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual report, which you can find it on our website.

With that said, I now hand over the call to Rahul. Over to you, sir.

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

Thank you, Asha. Welcome, and thank you everyone for joining our Q2 FY ’23 earnings call. We are glad to have you all with us on this call today. I hope each and every one of you had a great Diwali, and I wish you a very happy and prosperous new year. We announced our Q2 results on October 28, detailing out our operational performance. I will touch upon some of the key business performance and Sandeep will update you on the financial, and post that, we will get into the Q&A.

On the business front, I’m happy with the overall performance of the business. We have continued our revenue growth momentum from Q1 and saw a growth of 14.2% on a year-on-year basis. The year-on-year growth was broad-based across all three segments of Digital Operations, Digital Experiences and Digital Technologies. Our EBIT margins on a year-on-year basis reduced marginally from 12.8% to 12.3%, primarily due to the increased cost of salaries and some cyclicality in our business. We are seeing a drop in margins across the industry this quarter. However, we are confident that our margins will be stable during the rest of the financial year.

Our margins in the Digital Operations and Digital Experiences for this quarter remained healthy at 22.7% and 25.4% respectively. We expect these operations to continue giving healthy margins in the same range. Our margins in Digital Technologies improved marginally from a negative 4.3% to a negative 2%. This improvement was driven by stabilization in a large shrinking account, growth in new customer acquisition, renegotiating prices and de-weeding low-margin customers. In parallel, we continue to focus on the U.S. and European markets. We are confident that we will further improve our margins in this financial year.

Our attrition stood at 20%, which is in line with the industry. This is the result of efforts we have put in into retaining, training and upskilling key talent as well as the market environment is cooling off a bit. We expect this to further come down in the coming quarters. While there are necessary feelers on the horizon, we are not experiencing any shrinkage in demand. In Q2, we signed a new business worth $29 million, which is about 50% more than Q1. In H1, we assigned a total contract value of $48.3 million. And our deal pipeline remains healthy.

In conclusion, going forward, we are optimistic about our overall demand environment and are confident of maintaining a growth of 15% in the coming year.

With that, I will now hand over our call to our CFO, Mr. Sandeep Mantri. Sandeep, over to you.

Sandeep Mantri — Executive Vice President & Chief Financial Officer

Thank you, Rahul. Welcome everyone, and thank you for joining us in Q2 FY ’23 earnings call. I hope everyone had a wonderful time during this festive season.

Let me take you through the financial performance for the quarter ended September 30, 2022. Our quarter two FY ’23 revenue stood at INR343.4 crores, which is up by 5.1% on a sequential basis and 14.8% on a Y-o-Y basis. Our consolidated EBITDA for the quarter was INR51.7 crores, which is up 8% on a sequential basis and 3.6% on Y-o-Y basis. Our EBITDA margin for the quarter was 15% compared to 14.6% in Q1, which is a slight increase from the last quarter.

Our consolidated EBIT for the quarter was INR42.9 crores, which is up 9.1% on a sequential basis and 2.4% on Y-o-Y basis. Our EBIT margin for the quarter was at 12.5% compared to 12.1% in Q1. And we aspire to maintain this double-digit healthy margin in coming quarters as well. Our other income on a consolidated basis stood at INR9.6 crores compared to INR13.2 crores in the last quarter. The primary reason for drop in other income was export incentive, which was — one-time export incentive, which was booked in last quarter.

Our tax rate for this quarter was at 23.8% compared to 17.3% in last quarter. The primary reason for increase in tax rate during this quarter is change in profit mix of various legal entity. However, we expect our tax rate to be in 20% to 22% range on a yearly basis. Our quarterly PAT after NCI was at INR40 crores, which is a growth of 13.2% on a Y-o-Y basis. However, there is a decrease by 7.9% on a sequential basis.

When we come to our segment-wise performance, we have three segments, which is Digital Operation, Digital Experience and Digital Technologies. So our Digital Operation’s revenue was at INR143.2 crores, which is down 2.9% on a sequential basis, but have grown 12.6% on a Y-o-Y basis. Digital Operation EBIT margin remains very healthy at 22.7%. Coming to our Digital Experiences, the revenue was at INR52.4 crores, which is up 13.4% on a sequential basis and 39.9% on a Y-o-Y basis. Digital Experience EBIT margins remains very healthy at 25.4%. On Digital Technologies revenue, we are at INR147.8 crores in this quarter, which is 11% sequential growth and 9.8% on a Y-o-Y basis growth. Digital Technologies EBIT margin for the quarter remained negative at 2% compared to 4.3% negative in Q1 and there is a recovery in profitability. As explained by Rahul, we are confident that we will further improve the margins for Digital Technologies segment in this financial year.

Now coming to half yearly financials. Our revenue was at INR670.3 crores for this half, which is a growth of 14.2%. Our EBITDA was at INR99.5 crores, which is up by 9% compared to previous year. Our EBITDA margin for H1 was at 14.8% compared to 15.6% in H1 of previous year. Our EBIT was at INR82.1 crores, up by 9.2%. Our EBIT margin for H1 was at 12.3% compared to 12.8% in H1 of previous year. Our other income was at INR22.8 crores as compared to INR8.5 crores last year, which is a significant growth of 168%, which is primarily due to increase in investment income, exchanges and export incentives. Tax rate at H1 was at 20.6% compared to 20% in H1 of previous year. So our tax rate is stable at 20%, 22%. Our PBT before exceptional items was it at INR103.1 crores compared to INR82.8 crores, which is up by 24% — 24.5%. Our H1 PAT after NCI was at INR83.4 crores compared to INR74.9 crores, which is a growth of 11.3% over previous year.

Speaking segment-wise results, for this the first half of FY ’23, our Digital Operations revenue was at INR290.6 crores, up 15.3%. Operations — Digital Operations EBIT margins remains healthy at 23%. Our Digital Experiences revenue was at INR98.7 crores, which is 29.2% growth over previous quarter and previous half of the previous year. Digital Experiences EBIT margins remained healthy at 24.4%. On Digital Technologies revenue, we were at INR281 crores, which is up 8.7% on Y-o-Y basis. EBIT margin for the H1 remains at minus 3.1%.

Coming to balance sheet, our balance sheet continues to remain at a very healthy position. As on September 30, ’22, our total cash and cash equivalents plus current investment net of debt stood at INR375.9 crores. On talking about DSO, as of 30 September, we were at 62 days compared to 74 days as at 31st of March in previous year.

In terms of geographical footprint, U.S. is the largest geography with 54% of our business coming from U.S., India is 28%, rest of the world, including U.K. and Europe is 18%. In terms of industry, BFSI continue to remain largely segmental for us, which is 24% of our revenue followed by education and publishing, which is 23%; then technology and consulting, which is 18%; manufacturing, infra and logistics is at 13%; non-profit or non-governmental organization at 11%; retail at 7% of our business; rest all are 4% of our total revenue. Our client concentration remains very healthy, with top five, 10 and 20 clients contributing to 26%, 35% and 50% respectively. We added 26 new clients in this quarter.

So with this, I will now pass on the call to operator to open the floor for questions. Thank you for your patience and continued interest in Datamatics. Operator?

Questions and Answers:

Operator

Thank you very much, sir. [Operator Instructions] Our first question is from the line of Yash Patel from Choice International. Please go ahead.

Yash Patel — Choice International Limited — Analyst

Congratulations, sir, on the good set of numbers. Just a small book-keeping question, sir. Can we know the total number of headcount for this quarter or any net addition for this quarter?

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

Sorry, I couldn’t hear you. Could you say that again, please?

Yash Patel — Choice International Limited — Analyst

Sir, congratulation on the good set of numbers. May we know the total headcount for this quarter or any net addition for this quarter?

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

Total headcount for this quarter, we are running at about 11,300 odd. Last quarter, we were at 10,900. So we’ve had a net increase of about 400.

Yash Patel — Choice International Limited — Analyst

Thank you, sir.

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Pavan Kumar from RatnaTraya Capital. Please go ahead.

Pavan Kumar — Shree RatnaTraya Capital Partners — Analyst

Sir, how is the progress on our ticketing project revenues from Indian Metro? And what is the kind of scale-up we can expect in terms of domestic revenues going forward?

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

Yeah. So I had mentioned in the earlier call that we have recently been awarded two contracts, one is Kolkata Metro, which is — has been kicked-off. The other one is NCRTC, which is a Delhi-Meerut segment, both these contracts have been awarded to us. We’ve started work on it. However, we’ve not accrued any revenues because it’s still in the initial phase. But certainly, within this financial year, we will see an uptick in the revenues from the AFC business.

We are in — we’ve got a healthy pipeline. We’ve bid for several projects, but obviously, we cannot talk about them till we don’t win them or lose them or till there is a clear decision. So as those contracts materialize, we will certainly bring it to the notice of all the investors and analysts. So right now, the pipeline is looking healthy and we’ve got two large contracts recently, which have just about started.

Pavan Kumar — Shree RatnaTraya Capital Partners — Analyst

And how would the accounting be in the sense our — I am assuming the expenses part until now for the fact that work on projects would already have been done through P&L, right, but the revenue is not recorded?

Sandeep Mantri — Executive Vice President & Chief Financial Officer

Yes, yes. We account for the revenue based on percentage completion method, which is basically mark-up over cost. So estimated gross and estimated revenues, whatever is the mark-up, which is that we recognize revenue. So there is a minor — I mean, very insignificant recognition as of today, as of this quarter. But from I think this quarter, current quarter, we will start accruing revenue for NCRTC as well as Kolkata Metro, both the projects.

Pavan Kumar — Shree RatnaTraya Capital Partners — Analyst

From which quarter your said, sir?

Sandeep Mantri — Executive Vice President & Chief Financial Officer

From this October quarter, Q3.

Pavan Kumar — Shree RatnaTraya Capital Partners — Analyst

Okay, okay. And once these particular revenues start kicking in, is there a chance if the global revenue growth also remains constant that we might overshoot our growth projection?

Sandeep Mantri — Executive Vice President & Chief Financial Officer

As explained in last call also, we are maintaining our guidance for revenue growth at about 15% as of the moment because of many uncertain factors which are playing in the market. But having said that, it may grow beyond that as well. But as of now, we are mostly guiding — maintaining our guidance of 15% revenue growth.

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

But our confidence remains high.

Pavan Kumar — Shree RatnaTraya Capital Partners — Analyst

Okay. And what can be the incremental, what should I say, expense that should come on the cost structure going forward especially on the employee front from next quarter?

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

So on the employee front, the cost structure — okay, so one is that we do see the market cooling off a little bit. So we do really reduced attrition. I mentioned in my address that we’re driving at 20%, which is very much in line with the industry. Having said that, the attrition factor is still there. We have been able to renegotiate prices with several customers anywhere between 5% to 20% hike and that has offset some of the hike in salaries that we have had to give. So I don’t think the hike in salaries or the cost associated with that will be very high because we see the market cooling off a little bit and we’ve been able to adjust it with the price hikes that we have got from customers.

Pavan Kumar — Shree RatnaTraya Capital Partners — Analyst

And margin book, what would be our outlook in terms of margins going forward?

Sandeep Mantri — Executive Vice President & Chief Financial Officer

So our margin, as we explained in last call as well, our margins are likely to be remain in the same range, which is if we talk about EBITDA, which is 15% to 16%; if we talk about EBIT, it is between 12% to 13%. That’s what we are maintaining. And if you see last two quarters, we are in the expected range.

Pavan Kumar — Shree RatnaTraya Capital Partners — Analyst

Okay, fine. But we are not seeing any kind of deceleration there?

Sandeep Mantri — Executive Vice President & Chief Financial Officer

No.

Pavan Kumar — Shree RatnaTraya Capital Partners — Analyst

Okay. That’s fine. Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Shreya Biwalkar, an Individual Investor. Please go ahead.

Shreya Biwalkar — Individual Investor — Analyst

Yeah, hi. Hello everybody. First of all, congratulations on the good numbers. My question is about moonlighting. So I just wanted to know what are your views on moonlighting? As I see, industry views are kind of divided. So just wanted to know, did you allow it or Datamatics or how it is?

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

It’s a good question. Thank you. We do not encourage moonlighting as it is — there is a shortage of staff, attrition has been high, people are working extra hours anyway. Few occasions that have come to our attention, we have parted with those employees. We’ve had a honest conversation with them. And then when it was established that they were two-timing or three-timing, we did separate from them. So as a company, our policy does not encouraging moonlighting.

Shreya Biwalkar — Individual Investor — Analyst

Okay, okay. Thank you. Thank you so much.

Operator

Thank you very much. [Operator Instructions] Our next question is from the line of Asha Gupta. Please go ahead.

Asha Gupta — Investor Relations, Ernst &Young LLP

Hi. Thank you management for the opportunity. I would like to ask that given the macro level or macro concerns are going on, like in U.S. there is a fear of recession and Europe also is struggling on the macro level like energy and gas thing. So do we see any pressure coming on our business due to this macro issues in U.S. as well as in U.K. or Europe?

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

No, we don’t see any major impact. There is a Minerva [Phonetic] on the environment of the world. But as I mentioned in my address that our pipeline is very strong, the number of deals we’ve signed, we’ve signed $29 million in Q2, which is almost 50% higher than Q1. So we’re not seeing any slowdown in our business. Having said that, there is this uncertainty that remains with the war with Ukraine and the China economic war that you see, oil prices, fear of Europe going into a recession. America fortunately seems to have bounced back this quarter. They are showing a positive GDP growth. So that’s looking positive. So they seem to have turned the corner hopefully. Europe still is very uncertain and on a tight rope. But as far as our business is concerned, we don’t see any major impact.

Asha Gupta — Investor Relations, Ernst &Young LLP

Sure. Thank you. In terms of industry-wise, do you see any pressure or any of the industry like BFSI or education and publishing or technology?

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

We see an even growth across industry. No, we don’t see anything. We’ve not been very heavy in the hospitality and transport segment. And those were the ones that were hit quite bad by COVID. They seem to have bounced back, but it’s not impacting our numbers because those are not very large segments for us.

Asha Gupta — Investor Relations, Ernst &Young LLP

Sure. Thank you.

Operator

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

Rahul L. Kanodia — Vice Chairman & Chief Executive Officer

Thank you everyone for being on the call with us. I once again wish you a very Happy New Year. And hopefully, we will meet next quarter and share some good stories about our performance. I look forward to engaging with you again next quarter. Thank you again.

Operator

[Operator Closing Remarks]