Mphasis Ltd (MPHASIS) Q2 FY23 Earnings Conference Call Transcript

Mphasis Ltd (NSE:MPHASIS) Q2 FY23 Earnings Concall dated Oct. 20, 2022

Corporate Participants:

Nitin Rakesh — Chief Executive Officer And Managing Director

Manish Dugar — Chief Financial Officer

Analysts:

Nitin Padmanabhan — Investec India — Analyst

Mukul Garg — Motilal Oswal Financial Services — Analyst

Mohit Jain — Anand Rathi — Analyst

Sandeep Shah — Equirus Securities Private Limited — Analyst

Dipesh Mehta — Emkay Global Financial Services Ltd — Analyst

Venkat Samala — DSP Investment Managers — Analyst

Ashwin Mehta — Ambit Capital — Analyst

Vibhor Singhal — PhillipCapital — Analyst

Sameer Dosani — ICICI Prudential AMC Ltd — Analyst

Abhinav Ganeshan — SBI Pension Funds — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and thanks for joining the Mphasis Q2 FY 2023 Earnings Conference Call. I am Aman, your moderator for the day. We have with us today Mr. Nitin Rakesh, CEO of Mphasis; and Mr. Manish Dugar, CFO.

As a reminder, there is a webcast link in the call invite mail that the Mphasis management team would be referring to today. The same presentation is also available on the Mphasis website, www.mphasis.com, in the Investors section under Financial & Filings as well as on both the NSE and BSE websites. Request you to please have the presentation handy.

As a reminder, all participants’ lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

Before we begin, I would like to state that some of the statements made in today’s discussion may be forward-looking in nature and may involve certain risks and uncertainties. A detailed statement in this regard is available on the Q2 results release that has been sent out to all of you earlier.

I now hand over the floor to Mr. Nitin to begin the proceedings of the call. Thank you, and over to you, Nitin.

Nitin Rakesh — Chief Executive Officer And Managing Director

Thank you, Aman, and thanks everyone for joining us today. Apologies for a late start. We were waiting for confirmation on the upload of the deck to the exchanges.

This is a unique and dynamic environment represents both challenges and opportunities for all of us. Regardless of the circumstances, we continued to move forward from a position of strength. We have a foundation of strong industry solutions, market client base, and earnings and cash flow. All of this will help us continue to execute our growth strategy and insulated from market challenges.

Let me start by sharing some insights that we witnessed from our vantage point. As per a recent expanding survey by Bain, two-thirds of surveyed enterprises expect to increase IT spends in 2023. Tech spends appear to be more resilient related to the volatile macro conditions compared to the behavior in the past. Furthermore, signing deal constructs and managing flexibility in fixed costs favor tech spends. Top client priorities continue to be leveraging the cloud for digital transformation and leveraging data and analytics for decision-making and customer intimacy. Nearly two-thirds of surveyed enterprises expect vendor consolidation to be a priority area. We still believe this is likely to play out with greater vigor in 2023 as enterprises contend with difficult macro conditions.

Our Q2 FY ’23 revenue represents a 16.8% Y-o-Y growth in constant currency terms. Direct revenue grew 2% quarter-over-quarter and 19.2% year-over-year in constant currency. In second quarter FY ’23, we experienced a furlough impact from a key client. Together with slightly greater than expected ramp down in our mortgage BPO LOB, this impacted our sequential growth in second quarter FY ’23. Our direct business accounted for 94% of revenue in this quarter. DXC’s contribution to our revenue is 4.6%, given the low and declining contribution of DXC to our overall revenue, direct business strong growth reflects in our overall growth.

Regarding geographic growth, our anchor geography Americas has fared better with an overall growth of 20.4% in constant currency terms. Excluding DXC, the US growth is marginally higher at 21.4% in constant currency terms. From a services perspective, our application service line has been a driver of our growth with 34% growth in direct apps in this quarter, thanks to the secular themes of digitalization and transformation. We believe that continued strong growth in apps is a testament to our continued investment in the right service areas using our unique tribes and squad-led competency development model as well as our ability to leverage the repeatability that comes with this highly efficient model.

All our verticals saw double-digit year-over-year constant currency growth in this quarter. Our anchor vertical Banking and Financial Services, which saw impact from a decline in the mortgage LOB, nonetheless grew 15.3% in constant currency terms. Direct BFS grew 15.7% in constant currency terms on a Y-o-Y basis. We continue to enjoy market share gains with our key BFS customers. Direct TMT grew 33% year-over-year in constant currency terms. This is a focus vertical for us. Direct logistics and transportation business grew 16.5% in constant currency terms. Our smaller verticals such as healthcare clubbed in the other segment continue to grow faster, registering 34% year-over-year growth within Direct. This robust growth of smaller verticals reflects the success of our new plant acquisition strategy. I will speak more about it in a few moment.

Contribution from fixed price as a percentage of revenue has risen by 410 basis points on a year-over-year basis. FY ’23 builds on our client mining improvement in FY ’22. As we said before, we continue to consolidate our good standing with our key clients resulting in continuing market share gains. This is borne out by our client metrics. The middle of the chart of this slide shows that our top five and top 10 clients have grown consistently, registering 28% and 29% respectively growth in second quarter FY ’23 in constant currency basis on a last 12-month basis.

Our top three clients contributed $150 million plus each in last 12 months with our top client LTM revenue contribution exceeding $200 million. The average LTM contribution of our top five client exceeds $150 million. All of our top six clients are greater than $75 million, which we continue to believe is quite unique for a company in our category. Our top six to 10 clients grew 30% constant currency on a last 12-month basis. Notably, 11 to 20 clients grew 35% LTM constant currency, indicating the increasingly broad-based nature of our overall growth. Our new client revenue continues to grow rapidly, growing at 53% constant currency terms on a year-on-year basis in second quarter ’23 over second quarter ’22.

In particular, we are pleased with the results of our new client acquisition engine. We have reinvigorated this program with dedicated leadership, as we’ve called out before. We carved out five well-considered select verticals to focus on for NCAs, as we now call them Enterprise 5, namely BFS in which our positioning and track record is already solid. This vertical is large enough to continue to provide growth runway in the long-term. Second, insurance, logistics, TMT and healthcare, each of these five NCA verticals has its respective client acquisition strategies led by dedicated sales, delivery, domain and technical leadership. We have an elaborate operating model in place to transition clients to a strategic status with the client engagement structure and investments defined through the phases of the transition. As clients move through the transition phase and become strategic, we progressively bring the full force of our engagement model, dedicated client resources and GTM motions in engaging with such accounts.

Three of our five NCA verticals have become $100 million verticals on a run-rate basis within three years of setting up the NCA architecture, the fastest growth in smaller verticals such as healthcare and travel. NCA has almost doubled in revenue over a two-year period on a LTM basis and now constitutes almost a quarter of our direct revenue. This growth is reflected across our NCA verticals as shown here.

What’s behind our strong TCV track record is our evolving Tribes & Squad model. This which has helped us scale our ability to service the growing pipeline and close many more deals, continues to mature. The portfolio squads within each tribe continue to ensure that we can constantly evolve our solutions, adopting the newer tools and methodologies. To cater to our customers’ need for speed, the tribes have evolved a compassable approach to our offerings. This enables us to combine offerings from multiple tribes effectively to address the typical requirements of our customers. We have also identified over 40 solution archetypes that are typically needed, thus allowing us to build frameworks and accelerators that facilitate faster deployment. This architecture then contextualizes to the needs of specific domain or even specific client by our deal squads.

We have also updated the definition and content of our tribes recently based on key trends and customer needs. In addition, we’ve constituted a transformation program office with a team of seasoned large program management execs, who helped in crafting large transformation deal constructs, post-deal governance models and to ensure lessons learned with each such program are templatized and carried forward in additional programs. Almost all of our pipeline is tribe driven and is up 18% quarter-over-quarter, despite record conversion from pipeline to new sold TCV in the last four quarters.

We recorded TCV of $302 million of net new deals, one in second quarter FY ’23. On average TCV is trending up over time and is now about $300 million plus. 81% of the TCV is in NewGen areas. Our deal wins in this quarter include two large deals of cumulative $110 million in TCV. While we retain our market share with BFS clients, our large deals are increasingly coming from other smaller verticals as well outside of BFS and we continue to generate a high percentage of our TCV through proactive deal pursuits where win rates are materially higher than in competitive RFP situations. As we reported our TCV on a net new basis excluding renewals, we find the correlation between our direct TCV and revenue growth to be reasonably high, exceeding 0.8.

Coming to our client metrics. Our track record in migrating clients from one revenue bucket to the next continues to be healthy. In this quarter, we sequentially added to our count of $5 million and $20 million revenue categories while our larger $50 million plus category relationships continue to deepen further as discussed. In this quarter, the LTM contribution of our top client crossed $200 million. As mentioned, we won two large deals in the quarter, taking the total number of large deals in the last four quarters to 12, double of what it was in the prior period.

Coming to our financial metrics. Our margin philosophy affords us the flexibility to manage our profitability in a volatile environment. EBIT margin of 15.3% is fairly stable and within the stated band of 15.25% to 17%. In keeping with this margin model, we were able to absorb the rising personnel costs by tightly managing the SG&A and other levers as we intended to. Operating profit grew 3.3% quarter-over-quarter and 24.5% year-over-year to INR5,376 million in second quarter of FY ’23. Our EPS for the quarter at INR22.2 grew 4% quarter-over-quarter and 22% year-over-year. Our cash conversion measure as operating cash as a percentage of PAT stays at near 100%.

Factors of our growth strategy aligned around the core themes of tech capability expansion, vertical focus and geography expansion. Under technology capability expansion, we are investing in accelerating our hyperscaler strategy in refining our GTM approach and increasing our repeatability of deal archetypes using the Tribes & Squad model, which we have discussed earlier. On vertical focus, we are focused on improving our end-to-end solutions in BFS and insurance, while investing in developing our technology points of view in other verticals under the NCA program as I just discussed before.

Our geo expansion strategy sees us making investments in the smaller geo such as Europe and Canada, and expanding our core vertical strength in BFSI to clients in the geography. We have conceptualized and are well-positioned to execute against our playbook in the current environment depending on how the macro pans out. The key ingredients of our playbook include propositions for consolidated cost takeout, accelerating the transition from run to change, [Indecipherable] and tuck-in M&A. The actions have also been customized with in-account action plans, keeping in line with our account-centric GTM motions.

Some of our key clients may embark on vendor consolidation exercise in the response to the macro economy. We are confident that we will be strong net gainers in such scenarios based on our positioning and track record with them and prior outcomes in such scenarios in the past.

To sum-up, I’ll leave you with a few points. Our direct growth at 19%-plus in constant currency terms in the second quarter despite headwinds from mortgage LOB in earlier than expected furloughs. Two, our KPIs are moving in the right direction, namely our consistently improving track record in large deals, our TTM TCV at $1.29 billion speaks to our rising run rate from a TCV standpoint. Improving client mining metrics across revenue buckets continues to strengthen our diversifying growth. As I previously stated, our average top five client last 12-month contribution has crossed $150 million. Our top six to 10 clients continue to grow well above our direct revenue growth with 30% LTM growth, while the 11 to 20 clients have also grown very strong. Our pipeline has grown 18% on a quarter-over-quarter basis. Our talent strategy is on course. Our utilization reflects our efforts to infuse our talent supply chain with more freshers and optimize the pyramid. Our overall utilization in this quarter was impacted by furloughs, however, Q2 ’23 exit utilization was 4 percentage points higher, suggesting an improving exit run rate on this parameter. Three, investing for growth by using operating leverage and operating in a stated target operating margin band, we believe that our margin stance ensures margin stability in a volatile environment. Our EBIT margin of 15.3% lies in the stated band and our adjusted EBIT margin of 15.9% is stable sequentially and on a year-over-year basis.

To be sure, we are operating in an environment of increasing macro uncertainty which potentially affects decision-making of clients, potentially requiring them to repurpose their spends, causing supply chain uncertainty, all of which can alter the complexion of near-term growth, while making sure that we are well-positioned to gain through the uncertainty.

Coming to our FY ’23 outlook. We continue to maintain our growth focus, given the uncertain macro environment. Our account-centric strategy to see the accounts of the value chain is working. All of our core areas are growing across the diversified industry client base. We are seeing some seasonal weakness in select clients, but a strong order book in the quarter, an 18% increase in the pipeline would help us navigate this going forward. We also feel confident of mitigating any headwinds in the mortgage business and actually see this LOB to be a growth driver as the macro turns stable. Given the consistency in outcomes from executing our strategy, we are confident of maintaining our EBIT margins in the stated band. Given our actions and operations efficiency, we also intend to continue to invest in growth accounts to consolidate our position with key customers and a stable margin outlook gives us that flexibility.

With that, I’m going to open-up the line for question-and-answers. Operator?

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Nitin Padmanabhan — Investec India — Analyst

Yeah. Hi, good morning. Thanks for the opportunity. The first is, Nitin, how do you see the demand environment sort of evolving? I am sure the deals that you have closed this quarter would be the ones which you have been chasing for a while now. So incrementally, are you seeing any slowness in decision-making that worries you in terms of closures that could impact next year in some form?

The second is, considering the furloughs that you’ve seen this quarter, how do you see for furloughs going forward in Q3? Do you expect it to be higher than the previous year? So that’s the second.

And finally, on the logistics vertical, if you could just give some color on how client spend is evolving? Because there have been news reports of some logistics players in the US suggesting weakness. So just wanted your thoughts on all three. Thank you.

Nitin Rakesh — Chief Executive Officer And Managing Director

All right. Sure. Thanks, Nitin. I think let me take the first one, which is the demand environment. I think uncertainty is obviously not good because it creates all sorts of chaos when it comes to whether it’s an in-account actions and so on. I think despite that $300 million plus TCV in quarter is actually a fairly satisfying number. We are very happy with the fact that we were able to close two large deals, both meaningful. And I think there is definitely additional opportunity that has been thrown up as well through the environment. So that’s the reason pipeline has actually gone up and all the actions that we talked about from a playbook perspective are also going to continue to lead us to a higher pipeline environment and I think our focus really is now on making sure that we continue to find ways to close. So while there has been some, I would say, uncertainty-driven decision-making reactions, I think for the most part, given that we are playing more on the transformation and change side impacting fairly large programs such as data center exits or data migrations, data engineering, new platform build, I think those continue to get fairly stable funding. Of course, there are other parts of portfolios that are paying the price for it because clients are relentlessly prioritizing which programs to keep going and which programs to deprioritize. So I think from that perspective, being on the right side of that portfolio has definitely helped us and will continue to help us in winning deals. I think as the macro pans out when we get a better idea of the 2023 budgets in Q4, we probably have a better sense of real impact, but at least, at this point given our TCV velocity, given our pipeline, which definitely, to me, is the lead indicator for what happens next. I think we feel pretty good about where we sit from a deal closure, deal origination standpoint. I think not only are we closing, but also originating, which is kind of extremely important.

I think your second question was around furlough. I think it’s really, if you ask me, a very client-specific issue that happened. This definitely is a seasonally weak quarter, not only because of the furlough issue but also because of the just the holiday season and the number of working days issue. I think that’s an industry phenomena that you’re well aware of. At this point, I think it is hard to say whether the impact will be higher or lower. I think at this point, visibility-wise, we are not seeing that level of uncertainty that it’s going to drive it materially higher compared to prior years. But at the same time, I think we have work to do over the next eight to 10 weeks. But at the same time, Q2 was not supposed to be a furlough quarter, but it was. I think there are puts and takes that will come through.

On the third point around the logistics and transportation, I think I will guide you back to the comment I made on my first answer, which is that if you’re on the right side of the portfolio, if you’re in programs that are strategic, if you’re in programs that are getting funded, no matter what’s the in-account action is, we will find and we have found ways to continue to expand our wallet share. So while there may be short-term fluctuations in client actions, I think pipeline action deal closure and ability to win wallet share is actually going to — is helping us drive through that uncertainty as we speak.

Nitin Padmanabhan — Investec India — Analyst

Thank you, Nitin, and all the best. I’ll fall back in the queue.

Operator

Thank you. The next question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Yeah. Thank you. Nitin, just two quick ones from my side. First, given the diminishing —

Operator

Can you please use the handset? It’s not very clear.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Is this better now?

Nitin Rakesh — Chief Executive Officer And Managing Director

There’s a lot of crackling, but go ahead, Mukul.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Yeah. Is this better now?

Nitin Rakesh — Chief Executive Officer And Managing Director

Yes, much better.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Yeah. So Nitin, basically given the diminishing contribution of mortgage business to your overall revenues, it would be helpful if you can just give us some sense of how the ex-mortgage core business grew during this quarter even qualitatively that would at least give us some sense of how to look at the direct business.

And second, on your top client, the growth was quite good, but we have been continuously hearing from them about increasing concern from their business literally almost every month. How do you see that? And is that something which can kind of act as a risk to our growth?

Nitin Rakesh — Chief Executive Officer And Managing Director

So Mukul, I think the first question, the answer is that the core business, and I mean there are some data points in the print that you can see. The Americas applications, both of those metrics are a good indicator of how the core business growth has been. I think 34% application Y-o-Y growth and applications now — the highest it’s ever been at 67%, 68%. I think those are two metrics that will give you a sense that outside of the mortgage LOB, the business has actually been fairly robust, both in terms of other metrics that I’d point to is the Top 5, Top 10, by the way, that kind of growth is after the impact of mortgage as well. The next 10 NCA, I think the core business continues to be in great shape. We are very confident that we’ll continue to actually gain share through the uncertainty.

The second aspect of the issue around mortgage itself is that it is a very key part of the US banking industry. We took a very forward-leaning stance in the last cyclical downturn that happened in ’18, ’19, when the interest rate tightening cycle was on. We added new service lines besides origination and refinance. That diversification has really helped us to some extent, but the pace of change has been so rapid in the last two quarters that the diversification can only work to appoint because you’re sitting at record rates over 40 years right now. So I think that definitely has had an unprecedented impact greater than imagined. From that perspective, we also think there is an opportunity for us to further consolidate our position in that segment. There are some active conversations with very large customers existing and potential, which basically give us the ability to really become very, very strong and adding additional service lines that we don’t do today. So I think from that perspective, we are still taking a view that we have to be present in a very key segment of the US banking industry and we will continue to find ways to find growth in that segment the moment macro turns stable. So I think to summarize, overall core business is strong. Client segments, verticals, core geo, new client, the strategy which we detailed out in the last few minutes, so that gives — and of course, not to forget the TCV and the pipeline commentary.

Around the top client discussion, I think rather than getting into a specific discussion around the top client and the weather forecast from their business guys, I think the best thing really is to stay focused on where the spend is going, where there’s opportunity and how do we expand the target addressable market in account, which is exactly what we’ve done in the last six months. We’ve added a few things. One, we’ve added new service lines, for example, the Blink acquisition gave us a whole new market segment within all our top accounts, including the one you’re referring to. We were able to actually go in and open new deals that we never did before. Second, we continue to actually gain from wallet share. Very, very strong gainers in wallet share. Thirdly, our capability-led model, especially around cloud and data is actually opening up a whole new set of spends that even if they re-purpose other spends, this is not going to get cut. So I think positioning the portfolio in the right areas of spend and having the right differentiated capability is what’s driving that growth.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Great. Really helpful. Thank you.

Operator

Thank you. The next question is from the line of Mohit Jain from Anand Rathi. Please go ahead.

Mohit Jain — Anand Rathi — Analyst

Sir, I have three questions. One is that TCV sort of possess higher growth for us, but last quarters volumes has been low —

Nitin Rakesh — Chief Executive Officer And Managing Director

Mohit, can you pick up the handset, please? The speaker is creating some noise I think for everybody.

Mohit Jain — Anand Rathi — Analyst

Can you hear me now, sir?

Operator

Yeah.

Mohit Jain — Anand Rathi — Analyst

So compared to the TCV wins that we had, the growth reported in the direct business for last two quarters is relatively slow. So should we expect while numbers suggest, there should be a pickup in the next two, three quarters and the correlation also reflect that. So is that a fair assumption or you think despite TCV is in the pocket, we may still see slower growth over the next six, nine months? So that was one.

Second related is on TMT decline, like what happened in that particular segment quarter-on-quarter, how is the deal flow, and what kind of outlook do we have there?

And last one is related to utilization and margin. Now we are at 68% headcount, addition has also sort of declined as far as IT services are concerned. So how should we read that improvement of 400 basis points and the impact on margins?

Manish Dugar — Chief Financial Officer

Hi Mohit, this is Manish here. Taking your first question, as Nitin was mentioning, there is an impact of furlough and there is an impact of mortgage business, which is contributing to TCV not translating into revenues as much as it should have. Even though, if you look at it the correlation coefficient of TCV conversion to revenue has remained steady. From a going-forward basis, TCV and pipeline growth gives us confidence that our conversation with the customers and our ability to convert deals continues to be good, including large deals, having won two large deals adding up to $110 million in the quarter.

So far as TMT is concerned, the furlough impact would have impacted the TMT numbers and I don’t think it is any indication of a directional movement. It is a specific impact in the quarter and Q3 being a seasonally weak quarter anyways, I think we should be able to tide over that as we get to Q4.

Utilization, as you rightly said, the exit utilization has improved by 4 percentage points, given that the IT and apps headcount gradually grew over the quarter. On an average basis, it has not improved so significantly. And furlough would have impacted it any which way, so reported basis the average utilization looks almost flat. To your question on gross margin, utilization improvement, offshore increase, and our ability to make sure that we continue getting price increases partially got compensated by furlough and some of the investments we’ve made in accounts that we are focused on trying to gain share as well as to grow the wallet shares.

So on an overall basis, the gross margin this quarter continues to be in line with what the gross margin for the same quarter last year was. And keeping to our philosophy of investing for growth and having levers to manage profitability within that narrow range, we were able to use those levers and offset the downfall in the gross margin percentages with the adjustment that we did in the sales and marketing and G&A. As we have maintained, we continue to be confident on maintaining the margin in that range of 15.3% to 17%. If we are able to get tailwinds as we go forward on margin, we would like to continue investing especially given in this environment where customers are looking at partners, who can help and who can kind of accelerate their requirements of cost takeout and consolidation.

Nitin Rakesh — Chief Executive Officer And Managing Director

Just one more point to that. I think from a pipeline perspective, TMT is actually fairly strong even today. So I think this was a very specific client [Technical Issues] that disruption.

Mohit Jain — Anand Rathi — Analyst

Okay. And on headcount, sir, there was this headcount reduction quarter-on-quarter in tech services offshore.

Nitin Rakesh — Chief Executive Officer And Managing Director

Yeah. Again, I think there is a slightly mixed impact of furlough plus in-account actions, but at the same time, the deal wins that we talked about will actually start ramping up offshore as well. So from an overall standpoint, I think the story of offshore-led growth will continue to happen. As you know when we have large lumpy deals that ramp up the on-site portions first, right? That’s kind of a little bit of what you saw towards the end of this quarter in the IT business.

Manish Dugar — Chief Financial Officer

Just to add Mohit, the billable headcount has actually grown by 700 people. What has reduced is the overall headcount.

Mohit Jain — Anand Rathi — Analyst

Sir, I’m looking at offshore billable technology services. This is on page number 11.

Manish Dugar — Chief Financial Officer

Yeah. I understand. I think the way to think about it is the overall headcount because we would like to make sure that beyond a point, we also look at profitability and utilization. I think we are sitting on a pretty comfortable levels of utilization. So if we don’t have a challenge in meeting our demand, we would not like to continue increasing that bench. So I don’t think overall headcount should be seen especially given the lower levels of utilization we are at.

Mohit Jain — Anand Rathi — Analyst

So therefore, coming back to the previous point, there should be margin tailwind because you have given a band and most of the times, we are at the lower end of the band.

Nitin Rakesh — Chief Executive Officer And Managing Director

Yes, there should be margin tailwind, as long as we make sure that we don’t — the decision-making process is really around do we need to invest with a customer in a deal in a particular capability. So I think as the utilization improves, as some of the tailwinds from supply [Speech Overlap] yes, offshore tailwinds. We definitely see a bias on the upward side with the margin. But again, we will make a decision depending on what the business needs because I think at this point in time, having a forward-leaning stance in helping finding growth with customers is going to take priority.

Mohit Jain — Anand Rathi — Analyst

Great, sir. Thank you and all the best.

Manish Dugar — Chief Financial Officer

Thank you.

Operator

Thank you. We have the next question from the line of Sandeep Shah from Equirus Securities. Please go ahead. Request you to use the handset.

Sandeep Shah — Equirus Securities Private Limited — Analyst

Yeah. Thanks for the opportunity. Just in terms of the client in which we witnessed the furlough in this quarter, is it that client is back in terms of normal operations or there could be some further impact in this quarter as well?

Nitin Rakesh — Chief Executive Officer And Managing Director

I mean, as I mentioned, it’s too early to talk about client-specific impacts in Q3, but again, keep in mind, this is a client that has a pattern of year-end closures and I think that impact might continue this quarter as well, but we will obviously try to mitigate as much as we can if we think it is doable.

Sandeep Shah — Equirus Securities Private Limited — Analyst

Okay. And Nitin, can you throw some light in terms of how the mortgage business one should look like going-forward basis? Is it now bottomed out or there could be further headwinds as a whole entering into second half?

Nitin Rakesh — Chief Executive Officer And Managing Director

Yeah. Unfortunately, I think it’s very hard for me to give you a forecast because all said and done, as I mentioned, it is a key part of our portfolio, it is a key part of the US banking industry. There are parts of that business that actually have grown in the last three quarters because that was the whole countercyclical investment we made towards other lines such as home equity, diligence and servicing. There are still parts of that business that we haven’t yet invested in. As I mentioned, right now, our stance is to consolidate our position because we are one of the leading providers. We’ve obviously also integrated tech with it. So there are customers where we might actually end up taking a big role in rolling out a whole new service line for them, build the platform, then run the operation, use offshore as a leverage to lower the cost, and so on. So I think there is a lot happening in that vertical. It’s very hard for me to give you a specific answer on when it’ll bottom or what the outlook will be. I think we just have to deal with that uncertainty for a little while longer until we see some stability. But I am 100% convinced that there is a lot of growth to be had in the business in all the medium to long term.

Sandeep Shah — Equirus Securities Private Limited — Analyst

Okay, helpful. And just last bookkeeping question. What is the difference between adjusted EBITDA margin of 15.9% versus reported 15.3%?

Nitin Rakesh — Chief Executive Officer And Managing Director

EBIT, not EBITDA. Manish?

Manish Dugar — Chief Financial Officer

So the primary adjustment that we are sharing with you is, if you remember when we did the Blink acquisition, we had talked about the fact that there are charges that will continue for a period and then stop, and these are mostly intangible amortization. So the adjustment is only for that and as the quarters progress, it continues to decline both in absolute terms and in percentage terms.

Sandeep Shah — Equirus Securities Private Limited — Analyst

Okay. Thanks, and all the best.

Nitin Rakesh — Chief Executive Officer And Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.

Dipesh Mehta — Emkay Global Financial Services Ltd — Analyst

Thanks for the opportunity. A couple of questions. First, just want to understand the correlation decline now from deal win to revenue conversion. Earlier correlation needs to be 93%, 94%, now it came down to 85% odd, when growth rate also moderates, while deal intake remain more or less about $300 million. So can you help us understand how it plays out?

Second thing is about the deal pipeline Q-o-Q growth. If I look for last two quarters, growth remained healthy but deal intake is not showing that kind of sustained trend. So if you can provide some sense whether we are seeing elongated sales cycle or if you can provide some color on it, what is playing out there?

Third thing is about the revenue growth. For last couple of quarters, we are growing lower than some of your peers, which eventually we’ll translate it into obviously Y-o-Y growth. Currently, we are doing well on Y-o-Y because of healthy trajectory in FY ’22. How do you expect the trajectory on Y-o-Y to evolve over next few quarters? You think Q-o-Q-wise, we will see acceleration playing out in H2 or it is more in FY ’24? Thank you.

Manish Dugar — Chief Financial Officer

Dipesh, hi, this is Manish here. I’ll take the first question and probably Nitin will take the subsequent one. While you are right that the coalition coefficient is looking like 0.9% going to 0.8%, the primary reason for that is the impact that we saw because of, on one side, mortgage business slowing down, on the other hand, furlough, both of which impact the run rate revenue, which as you know that our cyclical and hopefully, will correct as the interest rate corrects. But for that, the correlation coefficient of TCV conversion to revenue continues to be in that 0.9% range.

Nitin Rakesh — Chief Executive Officer And Managing Director

I think on the second point around deal cycles, I think the fact that we did close $300 million plus in TCV despite a segment of our business actually not seeing any large TCVs on the mortgage side should tell you that I think in the core side of our business there is ability to convert and close deals and move forward with customers. I think there is some degree of uncertainty for sure in client execs especially as they are busy finalizing their FY ’23 budgets, which is why we had to kind of lean in on some of the survey results to see what stance we should take, what services we should strengthen and all of that went into the decision behind creating the playbook that I shared with you earlier today.

On the third question of the sequential versus our Y-o-Y growth, I think you’re absolutely right. We obviously have paid the price for the cyclicality playing out. I think the focus really is on making sure that through the remainder of the year, we are able to continue to take a forward-leaning growth stance and convert as much of this TCV into revenue and as much of the pipeline into TCV. I think if pipeline and TCV continue to operate, I think the sequential growth and the Y-o-Y growth will both come to where we need it to be.

Manish Dugar — Chief Financial Officer

Just to add to that Dipesh, on your last point [Technical Issues] has been at such a fast pace that the counter-cyclicality has not played on as much as we would have expected, causing a surprise on the impact of mortgage business because of the interest rate. And add to it, the surprise that we got of furlough in quarter two, which was again typically not a trend, it would normally be in the quarter three.

Dipesh Mehta — Emkay Global Financial Services Ltd — Analyst

Understood. Thanks.

Operator

Thank you. Our next question is from the line of Venkat Samala from DSP Investment Managers. Please go ahead. Venkat, your line is unmuted.

Venkat Samala — DSP Investment Managers — Analyst

Hello. My question has been responded to. Thanks.

Operator

Thank you. Our next question is from the line of Divyesh, as a text question on the webcast. What is the reason for decline in non-billable workforce?

Manish Dugar — Chief Financial Officer

So utilization was probably at a level where there was opportunity to improve. And as we had more people deployed to billable projects, we did not necessarily need to recruit people to fulfill that requirement. We could use the people who were in the bench to do the fulfillment and that led to a reduction in non-billable.

Nitin Rakesh — Chief Executive Officer And Managing Director

By design.

Manish Dugar — Chief Financial Officer

Yeah.

Operator

Thank you. Next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.

Ashwin Mehta — Ambit Capital — Analyst

Yeah. Hi. Thanks for the opportunity. One question in terms of like our onsite headcount seems to have gone up by almost 9%, while our onsite revenues are down. So what explains that? Is it the transition for the new deals that you’ve signed in? And has that had an impact in terms of your margins as well?

Manish Dugar — Chief Financial Officer

Hey Ashwin, Manish here. As you know, most of the mortgage revenues are onsite and a large part of the furlough impact was also onsite. So you are right that while the headcount increases happen onsite, it is not showing up in terms of revenues because of these two large primary factors.

Ashwin Mehta — Ambit Capital — Analyst

No, Manish, I was talking about the tech services headcount. So tech services headcount is up 9% for you sequentially, the BPO headcount is actually down onsite. So what explains the substantial increase in onsite headcount, utilization seems to have dropped onsite, and our onsite revenues also seem to have dropped.

Manish Dugar — Chief Financial Officer

The headcount increase, Ashwin, is a period end point in time data, while the utilization is an average through the quarter. So you are right that headcount as we look at as on the September 30, looks like an increase but the billability came in only towards the last month of the quarter, which is why we actually shared the fact that our utilization is actually 4% better when we look at it at the end of the quarter versus when you look at it through the quarter. So furlough would have impacted the onsite revenues in tech services, but the headcount increase did not translate to billable headcount during the quarter because addition happened mostly during the quarter.

Nitin Rakesh — Chief Executive Officer And Managing Director

But that is in the run rate for Q3.

Manish Dugar — Chief Financial Officer

Yeah, it should come in as a revenue in the Q3 run rate.

Ashwin Mehta — Ambit Capital — Analyst

Okay. Understood. Thanks. And just one more question. In terms of insurance, that’s been a segment that’s been kind of sluggish for us for a while. So what’s the outlook in terms of insurance and any signs of pickup there?

Nitin Rakesh — Chief Executive Officer And Managing Director

I think Ashwin, good question. If you look at the NCA chart that I shared, I think ideally what we want to do is to create a few anchor clients in each of the segments of insurance, life, P&C and brokerage. I think we are at a point where we’ve made a lot of investment in the last two to three years in strengthening and broadening that client base in insurance. There’s still work to be done and I think again, it’s a privatization of investment dollars, sales dollars, account coverage both in the US and in Europe, especially UK. I think we do see that there is runway for us to continue to grow that business line. At this point, I think the — at least, the NCA side of the house has grown well and we do see a potential to add new large marquee names, but it’s a motion that is driven primarily by addition of new logos because we do need to expand our client base. We’ve done some of that in the last two years. We’ve added some marquee logos in those three segments, but there is more work to be done there.

Ashwin Mehta — Ambit Capital — Analyst

Okay. Thanks, Nitin. All the best.

Nitin Rakesh — Chief Executive Officer And Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Vibhor Singhal from PhillipCapital. Please go ahead.

Vibhor Singhal — PhillipCapital — Analyst

Yeah. Hi, good morning everyone, and thanks for taking my question. A couple of questions from my side. I’m sorry if I missed that somewhere in between, I got dropped off. Can you just provide us the broad range as to how much of percentage for revenues today would be the mortgage centered business and how much of that would be interest rate sensitive? I know you mentioned it’s hard to give an outlook, but as a percentage of revenue, how big could it be?

Nitin Rakesh — Chief Executive Officer And Managing Director

We started clubbing it in the direct business two years ago and I don’t think we want to break it out separately at this point. I think all I’ll tell you is the interest rate-sensitive piece of the business is kind of low single-digit percentage revenue but that’s kind of where we will stop with the disclosure.

Vibhor Singhal — PhillipCapital — Analyst

Got it. Also, Nitin, I just wanted to basically dig a little bit deeper into the margin trajectory. I think last year when I think the entire sector had tailwinds from lower travel cost and facility expenses and all, you had mentioned that we are utilizing that [Indecipherable] into the business towards your peer group. But I mean in FY ’22 also, I think we’ll probably be as par in terms of growth with some of the similar size peers. This year, of course, as I think a couple of participants earlier mentioned, our Q-o-Q growth has been [Indecipherable] of course, it’s been impacted by a couple of headwinds and all. But net debt I think we haven’t achieved anything on the growth front, which is remarkably different from some of our less similar-sized peers and despite the fact that we let go of the margin expansion opportunity that we had in FY ’22. So how do you see that playing out ahead? I mean, is the margins going to remain the same margin band that we are operating right now at around 15.5% plus minus some range, and probably the similar kind of growth. I’m not talking about the near-term, I know it’s volatile times ahead. But on a longer-term perspective, do we have a target to maybe take margins north of 15%, sustainable growth kind of target or do you think this is the comfort band that we’re kind of operating in right now?

Manish Dugar — Chief Financial Officer

Hi Vibhor, this is Manish here. A few things. First of all, unlike what you said, last year was actually an industry-leading growth for Mphasis, 34% organic and 36% inorganic in the direct side of business. We have stated that our philosophy will be invest in growth while maintaining margins in a narrow band, and we have consistently followed and executed on it. There has been an increase and a decrease in margin in the peer group, but we have remained nearly flat. In many cases, actually, there has been a decline from pre-pandemic margin levels versus where the peer group is today, while we have not seen that happen. Even now, there are significant opportunities for investment and some of those investments are impacting the reported numbers and some of those are baked into our reported numbers. The ones which are impacting the reported numbers we have called it out earlier, the charges for M&A and stock compensation that we have given to our leadership team.

Having said all of that, I think we continue to have significant [Technical Issues] margins. We have talked about utilization, we have talked about price increase continuing to come in, we have talked about the continuing reduction in stock compensation and M&A charges, and we keep making sure that if there are opportunities to invest where the returns are more than what we would do with the cash generated in our balance sheet, we continue making those investments. What you see today is a confluence of quite a few things coming together, leading to the softness in revenue. I don’t think it should be seen as an indication of a directional change. Like Nitin mentioned, everything that relates to our strategy to growth, whether it is account-centric growth, whether it is absolute [Indecipherable] growth, whether Top-5, Top-10, Top-20, whether it is vertical expansion, whether it is making sure that competency-led and NewGen proactive deal wins, I think we are seeing significant positivity in all of those metrics as it relates to our core business. And we feel confident that our strategy of continuing to invest in growth while maintaining margins in a stable range is the right strategy to adopt.

Having said all of that, we have also said before that we believe there should be a northward bias to the margin. It’s a question of when and not if, and the reason why it’s a question of when is because there is uncertainty in the macro both in terms of what we see happening from a geopolitical perspective as well as what we see happening from a supply perspective. So as some of those things become clearer, we will have a better view of when that margin expansion will start becoming visible, but otherwise, the strategy continues to be investing for growth while maintaining margin in a narrow range.

Vibhor Singhal — PhillipCapital — Analyst

Got it. Thanks a lot for answering that question in great detail. Really glad to say that we maintain that northward bias in the margins. [Indecipherable] Thank you so much for taking my questions and wish you all the best.

Manish Dugar — Chief Financial Officer

Thanks, Vibhor. Welcome.

Operator

Thank you. Our next question is from the line of Sameer Dosani from ICICI Prudential AMC. Please go ahead.

Sameer Dosani — ICICI Prudential AMC Ltd — Analyst

Thanks for the opportunity. Just to understand this headcount tradition in onsite, is it fair to assume that the going forward onshore revenue would increase and that could have a margin impact? And also just to understand the likes of, so when would be ramp-up starting for the newer deals that you have one because these are fairly large deals and will take time, and whether initial period would be an onsite role because that would then again also have a bearing on the margins? Thanks.

Manish Dugar — Chief Financial Officer

So Sameer, first of all, the headcount addition on the IT services, IT and apps business happened towards the end of the quarter, which is why it did not reflect in revenue in the quarter. And like Nitin mentioned, it should come-in in the run rate revenue in quarter two — quarter three. From a profitability perspective, as we had talked about in our previous calls, margins are not measured based on offshore, onsite, etc. I mean means, typically we try and make sure that the delivery assurance and the quality of delivery is primary and then we decide how much should be onsite and offshore. And given most of what we do are proactive and value delivery rather than cost takeout and when I say cost takeout, it’s not an input cost conversation. Clients are more than happy to make sure that irrespective of the mix of onsite, offshore, we are able to get the margins that we desire, right? So even if it is onsite-centric revenue, which comes in because of onsite addition, we don’t think that has any impact on the margin, so to speak, as we go forward. And the revenue for that headcount addition should start showing up in quarter three.

Nitin Rakesh — Chief Executive Officer And Managing Director

And also there will be pull-through revenue offshore because these are deals that will effectively have a pretty healthy element of offshore as well so that offshore tailwind will help mitigate any margin impact that you’re worried about from an onshore expansion perspective.

Sameer Dosani — ICICI Prudential AMC Ltd — Analyst

Okay. And also the new deals, right, these ramp-ups, so when do you expect a ramp-up to start on these deals because [Technical Issues]?

Manish Dugar — Chief Financial Officer

Yeah. So Sameer, these are not any different in terms of tenure, these are typically the same three to 3.5, four years kind of life of deal, and if you consider a ramp-up period of 1.5 to two months, we should start seeing the run rate revenue starting to flow in 2.5 to three months. So depending on when the deal got closed like when we did the last earnings announcement, we had talked about the fact that we had already won $60 million deal. So technically that revenue should have already started coming in as we speak in October on a run-rate basis. And then some, what we won in August would come in a little later and September may be a little bit more later.

Sameer Dosani — ICICI Prudential AMC Ltd — Analyst

Thanks. And last question if I may. So if I look at, this is an industry phenomena, right? Funnel or the pipeline is expanding on a Q-on-Q basis for all the companies, but the deal wins have remained more or less flat. Do you think this is an indicator that the competition is increasing in the industry and how should we look at that? Thanks.

Nitin Rakesh — Chief Executive Officer And Managing Director

Yeah. I think again, comparability-wise, each company declares a different construct of TCV. So you have to look at their own trend and apples-to-apples comparison of how the trajectory has been. We don’t need renewals and it’s I think for us, we are focused on constantly making sure that we have enough deals in the pipeline for us to get a sustainable level of growth, especially as we described in the core business in the last few quarters. We’ve taken up that number quite consistently, it used to be sub $100 million a few years ago, then it was $200 million plus, $250 million range and now $300 million plus quite consistently. So I think our effort will be to make sure that we are consistently taking that number higher. This industry has always been, I mean hypercompetitive because it’s not unlike many other industries, there is a large-scale consolidation. So I think we are used to the competitive intensity. That’s the reason why we have to focus on finding our own specializations, differentiations and positioning in each market that we operate in. So I don’t think I would read more than that into the TCV metrics.

Sameer Dosani — ICICI Prudential AMC Ltd — Analyst

Okay. Thanks. Thanks a lot, guys.

Operator

Thank you. We’ll take the last question from the line of Nitin Padmanabhan from Investec. Please go ahead.

Nitin Padmanabhan — Investec India — Analyst

Hi, thanks for the opportunity. I just wanted your thoughts on if you could give some context on what’s driven the drop in S&M expenses, and how we should think about that. And same thing on the gross profit line as well. So if you could give some context on both, that would be helpful.

Manish Dugar — Chief Financial Officer

Sure. So furlough and the investments that we make in making sure that we are proactively working with the client for large proposals and consolidation initiatives, those are primarily gross margin and COGS-related costs and they impact the gross margin. From a gross margin to gross profit, I think that’s primarily a numerator and a denominator change because of currency movement. And as you know, the currency moved significantly. So while the gross margin moved by [Technical Issues], gross profit moved by 3% primarily because the translation led to a movement in the percentage higher than what the gross margin percentage movement happened.

And to your question on S&M and G&A, we have talked about the fact that there is an investment that we make which are short-term and which are long-term in nature and we have an ability to flex them up and down. So we did take some of those costs measures, which we could avoid spending on. Also, remember that same quarter last year, the percentages were almost similar to what it is now. 26.5% versus [Technical Issues] S&M and G&A were also in the 0.1% to 0.2% variance versus the same quarter last year. So I don’t think any of that action is a cut that we would have liked to avoid. It is just that we prioritized investing, which had an impact on gross margin and deprioritize the investment which was going into S&M and G&A.

Nitin Padmanabhan — Investec India — Analyst

So perfect. That’s helpful. Thanks a ton and all the very best.

Manish Dugar — Chief Financial Officer

Thanks, Nitin.

Operator

Thank you. Sir, we have one more question in the queue. That will be our last question for today. It’s from the line of Abhinav Ganeshan from SBI Pension Funds. Please go ahead.

Abhinav Ganeshan — SBI Pension Funds — Analyst

Thank you to the management for taking my question. I just had a couple of questions. First one is that if you can just help me how are we going to do things differently in Q3 and Q4, so that we can get a double-digit run rate growth?

And the second point is what would be a comfortable level of utilization that we are looking at going forward? These are the two questions that I wanted to know. Thank you.

Nitin Rakesh — Chief Executive Officer And Managing Director

Sure. Abhinav, I think we — I mean I’m a little confused because we are already at healthy double-digit levels of growth in direct business that is close to 20% growth. I think again our business is fairly straightforward in terms of how we think about the health of the business and the future prospects. Lead indicator is pipeline, second indicator is TCV conversion and then everything follows from there, right? Pipeline to TCV, TCV to revenue, revenue to margin. Of course, there are lots of other moving parts in the process that we need to manage on a pre-dynamic basis, but that’s really the way we think about the business. I think we’ve very transparently given you a fairly significant breakdown of the growth dynamic, especially driven by what we saw in Q2 and what we think is likely to happen in Q3. But given just the strength of the core business, the in-account model, client category growth, new client growth, application-centric growth, multiple verticals starting to come together, I think the core business continues to be in great shape. And if we just keep executing on that model of TCV — pipeline to TCV, TCV to revenue, I don’t think we need to worry about the double-digit growth metric that you talked about.

Second, I think on the utilization front, again, we are operating in a — when we had a little bit — more visibility, we brought the utilization down because we wanted to make sure that we have enough flex to find room to grow and to build a pyramid. We’ll be a little bit more nimble and probably make a little bit more dynamic decisions. So we do expect the utilization to continue to trend up. I think it probably will get into the historical ranges that we will probably have another 3 to 4 percentage points to go up over the next couple of quarters.

Abhinav Ganeshan — SBI Pension Funds — Analyst

I think that was really useful. Thank you so much. And one last question if I may. Sir, can you just throw some more color on this $200 million client that you’ve added, which segment it is from, if you could just enumerate? Thank you, sir. I missed that. I’m sorry.

Nitin Rakesh — Chief Executive Officer And Managing Director

No problem. Thank you so much for asking. We can’t name a customer, but it is a long-standing relationship of over 20 years, and it has constantly grown with us and it is a banking customer.

Abhinav Ganeshan — SBI Pension Funds — Analyst

Okay. That was really useful. Thank you.

Operator

Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Nitin Rakesh for closing comments. Thank you, and over to you.

Nitin Rakesh — Chief Executive Officer And Managing Director

Thank you, Aman. I think we’re living through some interesting times. So overall, I’m pleased with how we are navigating through this. We continue to focus intensely on executing our strategy and while supporting our clients in this complex environment. We will continue to actively invest capital into our business to meet our customer needs and drive organic, as well as inorganic growth. Thank you all for your continued interest in Mphasis and your sustained investment intact. Thank you. Wish you guys all a very Happy Diwali.

Manish Dugar — Chief Financial Officer

Thank you.

Operator

Thank you very much. Ladies and gentlemen, on behalf of Mphasis Limited, that concludes this conference. If you have any further questions, please reach out to Mphasis Investor Relations at investor.relations@mphasis.com. [Operator Closing Remarks]