Datamatics Global Services Limited (DATAMATICS) Earnings Call Transcript & Summary

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 made 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 quick overview of the quarter on business, which will be then followed by financials, which will begin 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 statements must be viewed in conjunction with the risks and uncertainties that we face. These risks 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.

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 have a great Diwali, and I wish you a very happy and prosperous new year. We announced our Q2 results on October 28th, 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 3 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 our large shrinking account, growth in new customer acquisition, renegotiating prices, and [ deweeding ] 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 into retaining, training and upskilling key talent, as well as the market environment is cooling up a bit. We expect this to further come down in the coming quarters. While there are recessionary [ 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 have signed 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.

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 2 FY '23 revenue stood at INR 343.4 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 INR 51.7 crores, which is up 8% on a sequential basis and 3.6% on a Y-o-Y basis. Our EBITDA margin for the quarter was 15% compared to 14.6% in Q1, which is a price increase from the last quarter. Our consolidated EBIT for the quarter was INR 42.9 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 the coming quarters as well. Our other income on a consolidated basis stood at INR 9.6 crores compared to INR 13.2 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 changed in profit mix of various legal entities. However, we expect our tax rate to be in 20% to 22% range on a yearly basis. Our quarterly PAT after NCI was at INR 40 crores, which is a growth of 13.2% on a Y-o-Y basis. However, there is a decrease by 7.5% on sequential basis. When we come to our segment-wise performance, we have 3 segments which is Digital Operation, Digital Experience and Digital Technologies. So our Digital Operations revenue was at INR 143.2 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 INR 52.4 crores which is up 13.4% on sequential basis and 39.9% on a Y-o-Y basis. Digital Experience EBIT margin remains very healthy at 25.4%. On Digital Technology revenue, we are at INR 147.8 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 Technology segment in this financial year. Now coming to half yearly financials. Our revenue was at INR 670.3 crore for this half, which is a growth of 14.2%. Our EBITDA was at INR 99.5 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 INR 82.1 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 INR 22.8 crores as compared to INR 8.5 crores last year, which is a significant growth of 168%. This is primarily due to increase in investment income, [ exchanging ] and export incentives. Tax rate for H1 was at 20.6% compared to 20% in H1 of previous year, which is -- so our tax rate is stable at 20%, 22%. Our PBT before exceptional item was at INR 103.1 crores compared to INR 82.8 crores, which is up by 24% -- 24.5%. Our H1 PAT after NCI was at INR 83.4 crores compared to INR 74.9 crores, which is a growth of 11.3% over previous year. If we see segment-wise results, the first half of FY '23, our Digital Operation revenue was at INR 290.6 crores, up 16.3%. Operations -- Digital Operations EBIT margin remained healthy at 23%. Our Digital Experiences revenue was at INR 98.7 crores, which is 29.2% growth over the 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 INR 281 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 [ for ] current investment, net of debt stood at INR 375.9 crores. On talking about DSO, as of 30th September, we were at 62 days compared to 74 days as of 30th of March in previous year. In terms of geographical footprint, U.S. is the largest geography with 54% of our business coming from the 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 segment for us, which is 24% of our revenue, followed by Education & Publishing which is 23%, then Technology & Consulting, which is 18%. Manufacturing, Infra & Logistics is at 13%, non-profit or non-government organization at 11%, Retail at 7% of our business. Rest all are 4% of our total revenue. Our prime concentration remains very healthy with top 5, 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 the company. Okay.

[Operator Instructions] Our first question is from the line of Yash Patel from Choice International.

Just a small book reading question, sir. Can we know the total number of headcount for this quarter or any net addition for this quarter?

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

May we know the total headcount for this quarter or any net addition for this quarter?

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.

[Operator Instructions] Our next question is from the line of Pavan Kumar from RatnaTraya Capital.

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

Yes. So I had mentioned in the earlier call that we have recently been awarded 2 contracts, one is Kolkata Metro, which is -- has been kicked off. The other one is NCRTC, which is a Delhi Merit segment. Both these contracts have been awarded to us. We've started work on it, however, we've not accrued any revenues because we're 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 early pipeline. We've bid for several projects. But obviously, we cannot talk about them until we don't win them or lose them or till there's 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 2 large contracts recently which have just about started.

And how would the accounting be, in the sense -- I'm assuming the expenses part until now for the work on projects would already have been done through P&L, right?

Yes.

But the revenue is not recorded.

We account for the revenue. There's one percentage completion method, which is basically markup over costs, so estimated cost and estimated revenue. And whatever is the markup, basis 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.

From which quarter you said, sir?

From this October quarter. Q3.

And once the particular the revenues start kicking in, is there a chance that the global revenue growth also remains [ confidence ] that we might overshoot our growth and revenue?

As explained in last call also and -- we are maintaining our guidance for revenue growth at about 15% as of the moment, because of -- many uncertain customers 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 a guidance of 15% revenue growth.