Hinduja Global Solutions Limited (HGS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Hinduja Global Solutions Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. R. Ravi, Vice President, Head of Investor Relations. Thank you, and over to you, sir.

Thank you, Lisan. Ladies and gentlemen, I R. Ravi, Head of Investor Relations at HGS, wishing all a very good evening and a warm welcome to the Third Quarter FY '21 Results Conference Call. To discuss the third quarter results and the 9 months FY '21, I'm joined by Mr. Partha DeSarkar, Executive Director and Chief Executive Officer; and Mr. Srinivas Palakodeti, the Global CFO. Before we begin the conference call, I would like to mention that some of the statements made during the course of the today's conference call may be forward-looking in nature, including those related to the future financial and operating performances, benefits and synergies of the company's strategies, future opportunities and the growth of the market of the company's service and solutions. Further, I would like to mention that some of the statements made in today's conference call may be forward-looking in nature and may involve risks and uncertainties. Before I hand over the call to Mr. Partha DeSarkar, I would like to mention that if there is a call drop during the course of the conference call, please bear with the management. Because of COVID-19, all of us are taking our call in different mobile from different locations. Hence, call drops are proving to be a recurring problem. Now I would like to invite Mr. Partha DeSarkar to provide his perspective on the performance of the third quarter and also for the 9 months. Thank you, and over to you, sir.

Thank you, Ravi. Good afternoon to all of you, and thank you for joining us on the call today to discuss our third quarter and 9 months of FY 2021 financial and business performance. Hope you had an opportunity to review our earnings press release and the attendant fact sheets of the reported financials, which are available under the Investors section on our website www.teamhgs.com as well as on the BSE and NSE website. As always, I would like to begin the call with a brief overview of the financials for the quarter under review followed by the strategic initiatives and operational performance. After that, I will hand over the call to our CFO, Mr. Srinivas Palakodeti, to discuss the financial performance of the quarter under review and of the 9 months of the financial year in greater detail. We will then open up the conference call for Q&A session. Before I dwell into discussing the operating performance of the quarter under review, I would like to bring to your attention that HGS U.K. limited, a subsidiary of HGS, which held 85.66% of the equity stake in HGS Digital LLC, U.S., formerly known as Element Solutions, as of September 30, 2020, has acquired the balance 14.34% in 2 tranches between November 2020 and January 2021. Thus, HGS Digital LLC is now fully owned by HGS. The revenues of HGS Digital stood at USD 9.4 million in CY 2017 prior to the acquisition. This is now nearly doubled to USD 18.4 million in FY 2020. For the 9 months of FY 2021, the revenues from HGS Digital were at USD 15.6 million. Our investment in HGS Digital LLC reflects the ever-growing importance of digital capabilities for our clients as well as for our in-house team. I am delighted with our operating and financial performance for quarter 3, FY 2021 and 9 months FY 2021. Our quarterly revenues of INR 14,568 million, that is USD 197 million are within striking distance of USD 200 million per quarter. This quarter, our EBITDA has crossed INR 2,000 million mark. On a like-to-like basis, quarter 3 FY 2021 revenues have grown over quarter 3 FY 2020 by 15.2%, comprising FX impact of 3.1% and a very strong volume growth of 12.1%. We have seen strong volume growth in our healthcare businesses as well as our CES business in U.K. and Canada. We had some key new wins for the U.K. business, leading to a revenue growth of above 47% over Q3 FY 2020. This steep growth has resulted in substantial costs such as training in quarter 3 FY 2021, but the -- the benefits of those training costs would accrue in subsequent quarters. Our margins have also kept pace. The EBITDA margin for quarter 3 has expanded by 20 basis points over quarter 2 and 240 basis points over quarter 1 FY 2021. We exited quarter 4 2020 with an EBITDA margin of 13.8%. And now at the end of quarter 3 FY 2021, we are at 14.2%. This margin expansion has been achieved with higher operating efficiency. All our continuous cost rationalization and optimization efforts, like divestment of unprofitable contracts and the divestment of low-margin businesses, are having positive impact on these EBITDA margins. On a YTD December basis, the EBITDA margins for the 9-month FY 2021 has expanded to 13.4%. The strong operational performance has percolated to the bottom line as well. For the first 9 months of FY 2021, our net profits are up by 35% over 9 months of FY 2020. I also want to add that the profit after tax for the first 3 quarters of FY 2021 of INR 2,056 million has already equaled the full year profit after tax of FY 2020. I've assured many of you in the previous conference calls and in the investor conferences the focus of management is to grow profitably and increase capital efficiency. I'm glad to share that we are on our course. Though the impact of COVID-19 may be showing the first signs of waning in some countries, we are yet to come out of the pandemic-led disruptions in the global economic activity. The recent sharp spikes of COVID cases in many countries in Europe and in the U.S. continue to remain a concern. Nevertheless, HGS had a better-than-expected performance in quarter 3 and the 9-month period in terms of revenues, profitability and cash flows, despite the financial year being marred by this pandemic. The strong growth in quarter 3 has been driven by revenues from our health care vertical as well as strong revenue growth achieved from our U.K. business. I'm glad to share our U.K. business is well with strong performance. We have won several deals originating from the public sector verticals, and the sales pipeline is strong and promising. I'm really happy with the way we have swiftly realigned and restored our operating model to the new normal, and the financial results have shown HGS team has resilience and agility and adversity. The pipeline of orders from the health care as well as consumer products clients are looking very promising to sustain the current growth momentum. In order to adjust the new normal, we've managed to map majority of the workflow processes from the beginning of the current fiscal year. Everything from hiring and training to engaging with clients and associates and delivering high-quality services, so how-to-sell and transition report has been redesigned for a sustained and firm and distributed operating model. The growth in quarter 3 revenues can be attributed to the following reasons: All our top clients aided the quarter 3 revenue growth; health care vertical continues to report good growth rates; in Philippines peso terms, the Philippines has aided the growth in a big way; and the COVID-19 support services in U.K. are also helping it increasing its contribution. On top of that, we have also been awarded a new contract to provide support to the [ U.K. ] government for Brexit, and that is also one of the major contributors of revenue for U.K. The global demand environment for BPM services has greatly improved since the beginning of the pandemic. From our regular interactions with our clients across geographies, we are reasonably confident that this trend will continue for the foreseeable future. Our investment in sales and business development efforts are paying off. We've been able to garner significant incremental orders from new and existing clients. The key driver for growth has been the number of new logo signings this year and the strong pipeline conversion. Overall, in quarter 3 FY 2021, we added 14 new logos for core BPM services and 5 for HRO payroll services and quality. We signed 45 new opportunities for expansion of businesses with existing clients in the quarter. We signed engagement with 17 clients, new and existing, for HGS Digital services, for robotic process automation, digital, analytics and social care services. From these data points that I've shared, our sales pipeline, therefore, will continue to be healthy, led by our domain expertise and execution capability. We are in the middle of our open enrollment season that is going well. We are also looking to sign up many digital-led transformation projects in the coming quarters. Operationally, we are operating at about 95%-plus service levels across our geographies and continue to support majority of our clients with work-from-home model. This work-from-home model has also enabled us to quickly ramp up our capacity in the U.K. to support the new project wins that we have had for COVID-19 support and Brexit support. However, a few thousand employees across India, Philippines, Jamaica and the U.K. are delivering essential services from few office locations in a safe and socially distant environment. I want to reiterate that HGS' exposure to the verticals like hotel, airlines, car rentals, timeshare, et cetera, are very limited. Our core verticals like health care and insurance, telecom and technologies, consumer and public sector are growing better than expected. Many of our recent BPM deals in the BPM space do come with automation, analytics and high-end insights as embedded component. It is a trend that we are seeing as the clients look for partners who can enable them to win in an ever-changing market. Clients want the access to combine new technology and domain expertise to deliver enhanced customer experience. To sum it up, the overall state of our core business continues to be very strong and will further strengthen the divestment of the India domestic CRM business last year. On a like-to-like basis, we have been able to report strong revenue growth for the past 3 quarters. We will continue to review our business portfolio and take appropriate actions to improve the overall profitability of the business. Looking ahead, the uncertainties relating to COVID-19 are likely to persist until the first half of the calendar year, for sure. And we believe that the work-from-home model will continue into the foreseeable future. It gives us tremendous flexibility for short-term projects, and we are leveraging that in the U.K. We are making investments in increasing our work-from-home and digital capabilities, but some of the wins may be offshore projects types in nature. We do expect several of them to convert into long-term contracts as well. The demand for our services from the health care vertical remains strong, and we see demand to continue into the first half of the next fiscal year. With that, I will now hand over the call to Pala to walk us through the numbers of quarter 3 FY 2021 and 9 months FY 2021 in greater detail. Thank you once again for being with us on the call today.

Thank you, Partha. A very good afternoon to all the participants on the call, and thank you once again for joining us for our Q3 FY '21 earnings discussion. . As in the past, we would like to start by stating that, for this discussion, the EBITDA and EBITDA margins have been computed after excluding ForEx losses and gains, which have been considered part of the other income. As required by accounting standards, we have published our financial results comprising continuing operations and discontinued operations. The discontinued operations refer to the India Domestic CRM business, which we exited in January 2020. For the purpose of this discussion, however, revenues, profits and margins will be mentioned for the company as a whole, i.e., aggregating continuing and discontinuing operations. Stand-alone financials: I will start with an overview of the stand-alone financials. The stand-alone operations comprise the operations in India and the branch of HGS in Philippines. On a like-to-like basis, stand-alone financials show total revenues of INR 6,285 million and a revenue growth of 11.2% over Q3 FY '20. It may be noted that Q3 FY '20 included INR 709 million of revenues of the India Domestic CRM business, which we exited in January 2020. Hence, the reported revenues have dropped by 1.1%. On a sequential basis, revenues have grown 6.6%. The stand-alone EBITDA margins for Q3 FY '21 were 25.8%, up by 320 basis points over Q2 FY '21 EBITDA margin of 22.6%. On a year-on-year basis, EBITDA margins have improved by 300 basis points from 22.8% in Q3 FY '20 to 25.8% in Q3 FY '21. Under other income, in Q3 FY '21, there was an FX loss due to appreciation of the rupee and the peso of INR 94.5 million. This was offset by interest income on treasury surplus of INR 86.6 million and other items of INR 16.7 million, resulting in overall other income of INR 9 million for Q3 FY '21. PAT for Q3 FY '21 was INR 725 million, an increase of 86% on a sequential basis. Compared to Q3 FY '20, PAT is marginally down by 1.2% as compared to the PAT of INR 734 million of Q3 FY '20, and this is primarily due to drop in other income by about INR 200 million. Now I will turn to discuss the consolidated financials for Q3 FY '21. On a consolidated basis for Q3 FY '21, HGS reported total revenues of INR 14,568 million. And on a like-to-like basis, the year-on-year revenue growth was 15.2%, comprising 3.1% due to exchange rate variation and a very strong 12.1% volume growth. You may recall that in Q3 FY '20 had revenues of INR 709 million of the India Domestic CRM business, which we have exited in January 2020. Hence, the reported revenue growth in Q3 FY '21 is 9.1% over Q3 FY '20. EBITDA margins for Q3 FY '21 were at 14.2%, an increase of 20 basis points over Q2 FY '21, but lower than 15.5% reported in Q3 FY '20. It may be noted that we have incurred significant ramp costs relating to our -- the open enrollment season for our healthcare business and for the public sector contracts won in U.K. The benefits from the ramps are expected to approve in the subsequent quarters. In the consolidated financials under other income in Q3 FY '21 shows FX loss of INR 17.86 million. This was offset by treasury income as well as other items, resulting in overall other income of INR 81.5 million for Q3 FY '21. Please note that the other income of INR 81.5 million in Q3 FY '21 is significantly lower than other income of INR 198 million in Q3 FY '20. Coming to PBT and PAT. PBT For Q3 FY '21 was INR 1,105 million, an increase of 22.1% on a sequential basis and 6.6% over Q3 FY '20. You may recall that Q2 FY '21 had certain one-off items in the deferred tax line, which gave a boost to Q2 FY '21 PAT. These one-off items are not there for Q3 FY '21. As a result, PAT for Q3 FY '21, which came in at INR 752 million, shows an increase of 5.6% over Q3 FY '20 of INR 712 million and a drop on a sequential basis of 7.5%. For Q3 FY '21, the Board has approved interim dividend of INR 6 per share, which from a payout perspective, that comes to 16.7% of the consolidated Q3 FY '21 profit. Coming to YTD financials. On YTD December 2020, on a like-to-like basis, HGS has recorded revenue growth of 10.5% over YTD December 2019 due to the revenues from the India Domestic business and some pass-through revenues which ended in July [ 2019 ], but were part of YTD December 2019 numbers. The revenue growth on a reported basis is 2.8%. EBITDA growth on a reported basis is up by 13.5%. Depreciation, interest cost and other income were broadly in line with YTD December 2019, while PBT is up 28% over YTD December '19. PAT is higher due to lower taxes on account of changes in deferred and current taxes. Total dividends for YTD December 2020 comes to INR 80 per share. From a payout perspective, it was [indiscernible] to around 18% of consolidated YTD December 2020 PAT. We are pleased to share that in the first 3 quarters of FY '21, PAT of INR 2,057 million is at par with the full year FY '20 profit after tax. Coming to forward covers. For Q4 FY '21, we have forward covers of INR 27 million at an average rate of INR 74.9, higher than the current spot of around INR 73. We also have forward coverage for about INR 23.9 million on -- in Philippines for the U.S. dollar-PHP, and these forward covers are at rate of INR 51.7 significantly higher than the current spot of USD to the Philippine peso of 48.08. During Q3 FY '21, HGS incurred capital expenditure of INR 510 million. And YTD December 2020, the CapEx comes to INR 1,167 million. This CapEx is higher than the Cap YTD by December 2009 CapEx of INR 799.5 million, and this increase is primarily due to work-from-home specific CapEx incurred in the earlier part of the financial year towards headsets and other IT communications equipment required to get work from home going. During the quarter ended December 31, 2020, gross debt reduced from INR 5,454 million to INR 4,944 million, a reduction of INR 510 million over the previous quarter. Debt of INR 4,944 million comprises INR 3,568 million of debt in our overseas subsidiaries and INR 1,376 million of debt on the India balance sheet. The India debt comprises INR 1,186 million of external commercial borrowings and INR 190 million of working capital demand loan, which was due on end Jan 2021 and which has been since been repaid. Cash and cash equivalence has dropped from INR 6,078 million as of September 30, 2020, and has seen a drop of [ INR 67 million ] from the levels of 30th September. As on December 31, 2020, HGS has net cash position of INR 467 million. Taking into account INR 4,619 million of treasury surplus deployed in the form of loans, the net cash position as of December 31, 2020, is INR 5,087 million. During the quarter ended December 31, 2020, there was a reduction in the loans given by INR 303 million and the total outstanding loans given by the company stands at INR 4,619 million. Collections are as per target and DSO days stand at 77 days for the first 9 months as compared to 71 days at the end of Q2 FY '21. EBITDA to free cash flow conversion continues to be strong and stands at 44% for the first 3 quarters of the financial year. As on 31st December 2020, [indiscernible] suites stand at 38% of total suites as compared to 39% as on 30th June -- September 30, 2020. Revenues for the health care vertical grew 10.4% on a year-on-year basis and accounted for 55% of total revenues. With strong growth of our U.K. business, our share of our U.K. business has increased from 5.4% in Q3 FY '20 to 7.6% in Q3 FY '21. With the divestment of the India Domestic CRM business, the India originated revenue comprises HRO payroll and some interactive services business and accounts for 4.3% of total revenues as compared to 10% in previous years. The drop in revenues from telecom and banking and financial service verticals is primarily due to sale of the India Domestic CRM business. Our efforts to increase productivity continue. And at end of Q3 FY '21, our average monthly revenue per employee stood at INR 1,20,369, up from INR 99,328 in Q3 of FY 2020, an increase of 21.2%, highlighting the change in the mix of the business as well as the exit of the India Domestic CRM. Sequentially, revenue per employee grew by about 4%. I now conclude my section, and now we'll open the floor for the question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Siddharth Oberoi from Prudent Equity.

This is regarding the EBIT margin reduction from last year. Last year, the EBIT margins were about 16.7% and now it's 14.7%. So what is causing this change?

So Siddharth, this is Pala here. As I mentioned in Q3 of FY '21, we have seen significant growth -- we have incurred significant ramp costs for our open enrollment season for the health care sector and for the U.K. business. So the costs have been incurred in the quarter. We benefit through revenue and would come through in subsequent quarters. So there is a bit of timing difference, given most -- a lot of this growth has -- our ramp costs have incurred -- been incurred in overseas locations.

So what are these mainly into -- is it into employee cost?

They are primarily in the form of employee costs.

All right. Okay. So your tax rate for this quarter is again 35%. I mean, if you exclude the onetime tax related to prior years, so what is the tax rate going forward? Is it going to be 30%, 35% ballpark?

Yes. I mean, if you remove the -- I mean, there's also, of course, the component of deferred tax. But if you see, on a consolidated basis, the current tax is in the range of about 33%. So we expect it to be in that range.

Okay. But is it that there are some geographies that you're working on which are higher taxed in India, and therefore, the mix is on the higher side because India is like 26% after surcharge?

Sure. They vary from geography to geography. So -- but they would be in that range. Average would come to somewhere in that 30%, 31% rate.

All right. Also, sir, you have this -- so the revenue run rate is very strong, averaging about 8% -- 8%, 9% per quarter. So do we expect the same run rate or more in quarterly growth?

So as Partha mentioned, we have a pretty strong pipeline and demand continues to be strong. . Partha, if you want to add anything more on -- specific in terms of revenue growth.

Some of the wins in quarter 3 and quarter 4 are going to translate into full year revenues next year. So that's going to drive some amount of the growth that we can see next year, yes.

So on an annualized basis, somewhere about 15%, 20%, can we expect that much for FY '22? Given the large orders that have been packed.

We don't give revenue guidance, unfortunately, Siddharth.

Okay. All right. Okay. Also there is margin profile. So you said that there was a one-off because it is ramping up. So do we expect that in the subsequent quarters the EBIT margins would probably inch higher from 14.5% to somewhere about 15%, 16% range?

Again, we can't give specific guidance. But typically, we have seasonality in our business. And in general, second half of the year is better than the first half of the year. Having said that, as I mentioned earlier, we have seen significant growth in offshore locations. So which has had -- then the cost of the ramp has impacted Q3.

All right. So you have mentioned in certain notifications that large orders has impact Q3 and Q2. How large are these -- are there -- can you give us any amount in maybe like $50 million, $100 million accounts? How big are these accounts?

Yes. These would -- I mean it would vary from contract to contract, but they would have potential to generate 5 to -- let's say, $8 million to $10 million additionally.

Per quarter?

Yes, this is just in the U.K. market in [indiscernible]. Each of this contract would generate $8 million to $10 million in the U.K. market.

Okay, okay.

No. And because some of them are still pipeline. So there's potential to -- it's a bit of a moving target, but some of them could scale up even higher.

Okay, okay. And what about the restructuring of the business? There has been no further progress on this?

So there is work in progress. We are basically restructuring all our health care subsidiary into one unit. If you've seen our corporate structure, it's there in our annual report. It's a fairly complex structure driven by a lot of acquisition components that were put in by the banks who finance those acquisitions. So we are simplifying the Healthcare holding structures to bring them under one operating unit. That makes it administratively convenient for us. It also helps us in our taxes. Some of those units are marginally loss-making as others are profitable, so you can club the incomes to get to a lower operating tax level.

Okay. So it is not that you would probably be hiring off the healthcare and listing it separately or something like that?

No, no, no. We don't comment on those kind of speculations.

Okay. So basically, the objective is probably tax rationalization or something of that sort?

I told you have a look at our annual report, you'll understand what I'm saying. Our healthcare operating -- operations are different operating units, many of them are acquired entity. And they are held under different subsidiaries. And that was done at that point of time because we had some financial covenants from the banks that provided acquisition financing. That made it administratively quite inconvenient, and that's what we are trying to tell you.

Okay. So also regarding the loan to the promoters, so exactly, in your last notification of INR 330 crores, it's gone to INR 461 crores now. So is that -- how much of...

No, I think the numbers you are referring to are incorrect. We stand at INR 4,619 million as of December, and they were higher by about INR 303 million or INR 30 crores as of 30th September. So there's been a reduction between September and December.

Okay. So are you saying -- okay, maybe, it's not INR 461 crores?

Yes, total is INR 461 million. It was about INR 491 crores. Please see the notes on the publishing page. You'll see it on the consolidated one, you'll see these numbers.

Okay. So INR 491 million has come down to INR 461 million?

Roughly, yes.

Yes. So what about this INR 461 million? Because if it gets rolled over, then it's no more short term.

I think. So as you've seen in our publishing page, these are scheduled to have to be repaid before 31st March.

Okay. So -- but we are already in -- So I have the promoters, any given -- any indications that they will be returning this by March 31? I'm sure you must have that. That had to work with them?

Yes. Arrangement is that they will all be repaid before 31st March.

All right. Okay. All right. Also one thing. So the dividend has been last year INR 15. This time, it is INR 6 in Feb. So why the change?

You need to look at it in entirety. The first 2 interim dividends in the previous financial year was INR 2.50, INR 2.50, which brings up a total of INR 20 for the full financial year because there's no final dividend. Against full final year dividend of FY '20 dividend of INR 20. In first 3 quarters, we have INR 18 of dividend declared. You need to -- if you want to average it that way, you can -- it'll probably be a better one. It will come to INR 5 per quarter for the previous financial year and INR 6 per quarter for the current financial year. So actually, there's an increase in dividends in the hands of the shareholders.

All right. Also this quarter, the CapEx was very large, actually. So is this because of onetime ramp-up? Or is it written in nature?

See, the -- one of the implications of work from home, and clearly, all the growth is happening from work in home, it also adds a little more to the CapEx. In -- when people come to a delivery center to work and depending on how the workload is, but you can definitely use 1 machine or 1 desktop for more than 1 employee, right? I mean we may have 14 employees using 10 machines. This is an example, right? But in the work-from-home scenario, each of the 14 employees would need to have a computer at home to work. So some of it is coming from work from home as well as other IT equipment required to get work from home going, which was in the -- especially in the initial part of the year.

Yes. Okay. But I was referring to the last quarter's CapEx, it was like INR 597 million or so.

Yes. Yes, but some of it is -- if I'm going back, we've added a lot of employees in U.K., et cetera, I think it's on work from home.