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Edited Transcript of CYIENT.NSE earnings conference call or presentation 17-Oct-19 12:00pm GMT

Half Year 2020 Cyient Ltd Earnings Call

Hyderabad Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Cyient Ltd earnings conference call or presentation Thursday, October 17, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ajay Aggarwal

Cyient Limited - President & CFO

* Bodanapu Ganesh Venkat Krishna

Cyient Limited - MD, CEO & Executive Director

* Bodanapu Venkat Rama Mohan Reddy

Cyient Limited - Founder & Executive Chairman

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Conference Call Participants

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* Harit Shah

Reliance Securities Limited, Research Division - Senior Research Analyst

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Mayank Babla

Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst

* Mohit Jain

Anand Rathi Financial Services Limited, Research Division - Analyst, Technology

* Neerav Dalal

Maybank Kim Eng Holdings Limited, Research Division - Analyst

* Prashant Kothari

Pictet - Indian Equities - Portfolio Manager

* Rajin Rajan P.

Geojit Financial Services Limited, Research Division - Research Analyst

* Sandeep Shah

CIMB Research - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Cyient Q2 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Ajay Aggarwal. Thank you, and over to you, sir.

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Ajay Aggarwal, Cyient Limited - President & CFO [2]

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Thank you. Good evening, ladies and gentlemen. I welcome you to the Cyient Limited earning call for second quarter of financial year 2020 ended September 30, 2019. I'm Ajay Aggarwal, President and CFO. Present with me on this call are our Executive Chairman, Mr. Mohan Reddy; and Managing Director and CEO, Mr. Krishna Bodanapu.

Before we begin, I would like to make the customary statement that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in the investor update and has been e-mailed to you and is posted on our corporate website as well.

This call is accompanied with the usual earnings presentation, the details of the same have already been shared with you.

I now invite our Chairman to provide a brief overview of the company's performance for the quarter ended September 30, 2019.

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Bodanapu Venkat Rama Mohan Reddy, Cyient Limited - Founder & Executive Chairman [3]

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Thank you, Ajay. Good evening to all of you, ladies and gentlemen. I welcome you all to this conference call. Let me take you through the highlights for the current quarter.

We posted a quarterly revenue of INR 1,158.9 crores. This signifies a growth of 6.4% quarter-on-quarter basis and a degrowth of 2.4% year-on-year. In U.S. dollar terms, we posted revenue of $164.2 million, which translates into a growth of 4.9% on a quarter-on-quarter basis and a degrowth of 2.8% year-on-year. Services revenue is at $140.4 million, which signifies a growth of 1.8% quarter-on-quarter and 2.6% in constant currency and a degrowth of 3.8% year-on-year.

The EBIT for the quarter stood at INR 1,110 million or INR 111 crores. The group EBIT margin stood at 9.6% for the quarter, which translate to a margin expansion of 35 basis points on a quarter-on-quarter basis and 169 basis points margin contraction on a year-on-year basis. Excluding one-offs and adjustments, our normalized margin stood at 12.3% for the group.

Net profit for the quarter stood at INR 98.5 crores, which translates to quarter-on-quarter growth of 8.8% and a year-on-year degrowth of 22.5%.

Now let me come to a few business highlights for the quarter. Cyient signed a memorandum of understanding with U.K.-based defense technology firm, QinetiQ’s Target Systems, QTS as it's called, to offer avionics products for its unmanned target systems. Cyient will provide advanced manufacturing and electronics engineering solutions to QTS' range of unmanned air, land and sea target systems from its facilities in India.

We also extended the CoE set up for John Deere in Hyderabad and Pune. We received Singapore Health Award 2019 for Cyient's efforts in promoting health and well-being of employees at the workplace.

Very briefly on the CSR front. We continue to support the 25 government schools. We provide education to over 18,500 underprivileged students. We continue to support 67 Cyient Digital Centres, CDCs, in and around Hyderabad, which cater to more than 25,000 children and 15,000 community members every year.

We completed a batch of 600 community unemployed women -- sorry, we completed training to a pilot batch of 600 community unemployed women in tailoring, bakery, beauty courses through Cyient Urban Micro Skilling Center for urban poor.

We also distributed and planted more than 7,000 saplings around Cyient-adopted schools and community as a part of the Haritha Haram a mega plantation drive in the state of Telangana.

With this, I would like to hand over this call to Ajay, who will take you through the detailed financial performance for the quarter and the year. Thank you.

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Ajay Aggarwal, Cyient Limited - President & CFO [4]

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Thank you, Mohan. Let me start with giving a color to the revenue. As you would have seen in the results, we got a nice jump in the revenue between quarter 1 and quarter 2. We have clocked $164.2 million of revenue. And also if you see from the cross currencies perspective, we had a headwind in the British pound, euro and Australian dollars. That has taken away about 80 bps of growth. So if you see in constant currency, comparable number to $156.6 million is about $165 million. That's the average for the last 4 quarters. So I think one of the concerns that are we getting back to growth gets addressed in terms of at least getting to the average. And now our endeavor is, in the coming quarters, to not only sustain the average, but also get back to higher growth compared to where we were in the last year. So overall, in terms of constant currency, our growth is 5.7%, 4.9% in dollars. And in terms of the quarter, for services, it's 1.8% in dollar terms and 2.6% in constant currency.

As you can see, we had good growth in Communication. It's about 3.3% in constant currency. E&U business, energy and utility business is showing good traction. We had in constant currency more than 10% growth there. In transport, in constant currency, we had more than 5% growth. Aerospace, we had a degrowth of 1.7% quarter-on-quarter. We did 46 -- $47.6 million. DLM has clocked $23.8 million, which is about 27.4% growth quarter-on-quarter. So overall, as I said, we have delivered a growth of 6.4%. Of course, we continue to be lower than where we were a year before. In constant currency, we are lagging by about 1.2% compared to the same quarter last year.

Before I move to the other statements, let me update you. We have been talking about this cost optimization exercise that we are doing with large consulting firm. And I'm happy to report that we have got good traction on this. This revolves around improvement in margins on a sustainable basis by improving the cost of delivery and also improvement on SG&A cost. We have set ourselves an internal goal and we have looked at our position for the full year, and we seem to be on track to achieve the full year target. And we are further working on some additional levers.

We have also setup a sustainable workforce management group and a process to make sure that we continue to do the efficient resource deployment, which is one of the important levers in this whole exercise.

We will be creating a sustenance center in the company, creating the KPIs and make sure that we have the necessary support system created both for the business units as well as in the corporate to sustain this in financial year '21.

In terms of the hedge book for quarter 2, I would like to highlight there is no change in the policy. We continue to be 70% 12 months. Our exposure is about $135 million. About a year back, this was $127 million. And if you see on the chart on the right-hand side, we have gains of about INR 8 to INR 9 compared to the spot rates today in British pound as well as on euro. We have about a gain of INR 4 in Australian dollars, about INR 3 compared to U.S. dollar and about INR 2.5 for Canadian dollars. That translates for the next 12 months about $8.5 million of ForEx gains at current spot rate.

So with this background, in terms of the other income, I would say overall, we have a change marginally of INR 18 million or about INR 2 crores. The treasury income is marginally lower. In terms of the ForEx gains, you will see that our position. If you look at the table below, for quarter 1, our gap on dollar, for example, was less than INR 1, and for the current quarter, our gap is about INR 3. So I think the forward positions have improved. And going forward, at current spot rate, as I said, the gap is nice for us, so we should be able to continue realized gains at current spot rate.

Export benefits, I would say we have been talking about them. We are accounting them on cash basis, and we were always anticipating them more towards H2, whereas, in case of really last year's quarter 2, we had some gains, which were recorded in H1 and quarter 2. So I think there is nothing to worry about it. For the full year, we are sure about having the other income equal to or marginally higher compared to last year.

In terms of the income statement, you have seen that we have a growth of about 10% in EBIT quarter-on-quarter, and our reported EBIT is INR 1,110 million, that's INR 111 crores. Our net profit is up by, again, 8% -- 8.8%, net profit is up by 8.8%. And of course, year-on-year, we're down by 22.5%. As I said, some of it is also impacted due to the timing of the other income, and there is no concern as far as full year is concerned.

Let me just explain to you on the right-hand side what has happened on the margin. Our cost optimization is working well. So between cost optimization and the gain in the volumes, we gained more than 200 basis points, another 50 basis point from the normal operational efficiencies. We gave our second tranche of wage hike, which was planned similar to the last year, which has taken about 107 bps. And we also, as we explained earlier, we have also incurred onetime restructuring cost, which is a combination of the consultation fee and the amount that you spend in terms of execution of the restructuring. That's about 85 bps for the current quarter. So you can just see, we are trying to explain on the right-hand side, while our reported EBIT is 9.6%, if we exclude the one-offs in terms of the onetime cost optimization exercise cost because we expect these benefits to continue into the coming year and the years thereafter, then our -- and also if you look at we continue -- despite some challenges in the current period, we continue to make our investments into NBA, which is charged off to the P&L, so if I add these 2 back, our like-to-like margin compared to the previous years will be more like 12.3% because a good growth of 105 bps quarter-on-quarter. And for services if you see, this number is much better because services margin is roughly 150 basis points higher than the group margin. And the same thing if you see quarter-on-quarter, excluding the one-offs for services, it is up by 158 bps.

So from that perspective, I think the growth focus as well as cost optimization focus is helping us. And on the ETR, we are in line to have 22% to 23% tax for the full year as per our original expectation.

And we've also provided a detailed bridge for your reference on what has happened in terms of the EBIT this thing. We had the headwinds in terms of the wage hike and onetime restructuring cost. We had the benefits of cost optimization, volume gains and operational efficiencies. Thereby, we have got almost 164 bps or about 1.6% improvement in the margin for the services level, which is a very good indication.

On the cash side, I think we are back to our good cash generation. We have generated a cash of -- the total cash available is INR 8,641 million. And if you look at our cash flow, we have given the number with and without one-offs. 42.9% is the conversion if we do not take out the one-offs. But if you see, whichever are the items which are special investments, they, according to us, do not represent the correct free cash flow from the operations and there the deployment of the free cash flow, that is in terms of the investments into the long term as well as the onetime restructuring cost, our conversion is 51%.

And if you see our DSO, especially from accounts receivable, has come down by about 10 days and overall DSO has come down by 9 days. And we still see in H2, we will continue a good traction on cash flow and DSO.

With this, I will hand over to Krishna for providing us the business update.

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [5]

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Thank you very much, Ajay, and good evening, everyone. And thank you for your time.

In terms of the business update, quickly on the M&A pipeline. It continues to be a focus area, and I will just say that we have -- nothing's changed in terms of what we're focused on. There's 3 deals in the pre-LOI stage, which we will continue to work on.

In terms of corporate venturing investments, we did close 1 deal, which we announced, which is a investment into a cybersecurity company, which focuses on cybersecurity technologies for rail transport applications specifically. So the intent is that we're able to take the technology and the platform, the algorithms that this company Cylus has and we're able to integrate them into our offerings and sell them to our customers, and we see some very good traction on that already.

In terms of the BU outlook, in aerospace & defense, the good news is there's still a lot of commercial aircraft backlog which is there with all the large OEMs and also defense is picking up because of the global geopolitical risks that are there. So as I've previously said, our focus on this market is really the aftermarket MRO type of engineering and services because while the demand is good, there's no new programs which contributes to design, so there's no new programs in the pipeline at this point, which means that the design piece is coming down and we're seeing that for us and we're seeing that in the market in general. But having said that, I think we've done a reasonable job in terms of building up capability on the other areas that we're able to leverage off of. And while we had a small degrowth this quarter, we believe that at least we're able to contain a lot of that, and we will see growth coming into the future here.

The Communication industry, we will see -- or what the industry is doing is there is growth in the industry. There is a lot of new technologies that are coming in, including 5G, but while 5G is coming in, we see that the deployment of 5G is going to be a little bit slow because I mean the costs that are involved with the 5G deployments are very significant. And what our clients are telling us is that they will do it in a little bit more of a phased manner than, say, they did 4G because they want to really look at the cost benefit of rolling out 5G because the 5G speeds are really beneficial only for certain applications, not necessary for all applications. So when we have a good offering and will continue to focus on it, we think the rollout will be a little tepid there is what we're hearing from our clients.

In energy and utilities, we believe that the industry is doing quite well or the commodity prices are doing well. Utilities industry is also doing well because there is a lot of investments in things like distributed grids, renewable energy, et cetera. Our outlook also there, if you see, remains quite strong and that's one of the big growth drivers for us this quarter was the services business in energy and utilities, and we believe that momentum will continue into the future.

Transport industry also is growing as an industry. Again, it's a very large industry, so the growth will be a little bit smaller just by definition. But we're also seeing -- transport has been a little bit of a static industry from a technology perspective, but we are seeing a lot of new stuff that is coming in and the investment in Cylus is really along these lines because we believe rail cybersecurity, for example, all of a sudden becomes very important. And therefore, with the new technologies being adopted, we have a -- excuse me, with the new technologies being adopted, we have a pretty interesting play in that market.

The portfolio BU remains quite tepid both as a market and also for us, while there is a lot of growth in geospatial applications where we play in that market has been a little bit of a challenge, and you will see that year-on-year, we've had a degrowth in that business. So we're trying to manage it as best as we can, but we believe that, that business particularly will remain a challenge for the rest of the year.

The semiconductor industry also from where we started off the year, the forecast then was the industry would degrow about 5%. Now the forecast is that the semiconductor industry will degrow 15%. We do see some impact of that on us, while we've been able to mitigate a lot of it because of the capabilities that we've built on currently analog design, which is essentially the company that we bought in Belgium, and we've been able to integrate it into Cyient. Overall, in the larger scale semiconductor space, we see some significant issues. We believe we will grow in that business this year. The pipeline and the order backlog is there, but it will be a tepid growth in that business because overall, the business obviously is under significant pressure with a minus 15% growth.

Lastly, medical tech and health care. That business is growing very well. There is a lot of new technology, again, just like rail that we have talked about that's been adopted into that business. And I believe we also have -- actually, we've had a growth story. If you look at this quarter, we had a double-digit growth both quarter-on-quarter and year-on-year. And we believe given that it is a smaller business, that will also continue to grow.

So net, net and if I may also sort of summarize what Ajay said, we -- the growth is back in the business, we are quite confident about the growth coming back into the business. Unfortunately, we did have, I would say, 2 down quarters, but we believe that having had those down quarters of -- at least Q1 was a tough quarter, we've had just flat 2 quarters, which is 3 and 4 and Q1 was a down quarter and -- but I believe that the growth has come back. We will continue to see this good growth momentum into Q3 and beyond.

Q3, we will see good growth in the services business in spite of -- I'm sure the question will be Q3 has the work day -- or the working day challenges. But in spite of that, we are actually seeing growth in the services business in Q3. It will be a small growth, but there will be growth quarter-on-quarter even in the services business, which I believe bodes very well for Q4 because once the capacity comes back in Q4, you will see that year-on-year Q4 will be a very solid year from a growth perspective. And what it will also translate to is from a margin perspective, we do see some good momentum because a lot of the restructuring cost come Q3 and Q4, especially that we will still have some restructuring cost in Q3, but in Q4, the restructuring cost will also come back.

So what I'd say is we've had 3 not the best -- not our shining moments for 3 quarters. Momentum is now back in Q2. It'll continue into Q3, but Q4 onwards, you will see some good change in momentum and direction for the organization.

So with that, I'll stop here, and I guess we'll turn it over to -- for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Harit Shah from Reliance Securities.

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Harit Shah, Reliance Securities Limited, Research Division - Senior Research Analyst [2]

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I just wanted to get a sense of the relatively weak order bookings for this particular quarter. So year-on-year, are you've seen any significant declines? So if you could just give some sort of incremental color on that, it will be quite helpful.

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [3]

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Sure. So year-on-year, there is a decline, but what also happened is Q2 of last year was a very good quarter in terms of the order intake. Now what we also need to look at is the -- if you look at it, there's a number of orders, almost $20-plus million of orders in Q2 of last year that were multiyear orders. So that order intake actually covered us for multiple years, which doesn't repeat by nature, it doesn't repeat, again. So while we've had a challenge in the order intake in Q1, we believe -- if you look at the quarter-on-quarter growth, there's a decent growth and that was reflective of the momentum that will carry in because that order intake really converts into revenue going forward.

So I think net-net, I'll say is that Q2 of last year was a very good year and also because of the multiyear purchase orders that were there. Therefore, not necessarily the best reflection of what the order intake should be, but if you compare it to Q1, we are quite confident that the momentum is there for going forward.

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Harit Shah, Reliance Securities Limited, Research Division - Senior Research Analyst [4]

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Okay. Secondly, I just wanted to get a sense of the outlook in terms of margins maybe in the third and fourth quarters. Third quarter, you did say that there'll be some further restructuring costs, although I think you could have the tailwind of no wage hike impact. So how is this overall likely to play out as far as the margins are concerned?

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Ajay Aggarwal, Cyient Limited - President & CFO [5]

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So as far as margins are concerned, Harit, as per -- in terms of the restructuring cost, they are -- the program is continuing from quarter 1 to quarter 4. So you will see the restructuring cost being incurred in each of the quarters. However, by the nature of these restructuring cost, you always will see that the costs will precede the benefits. So in terms of what you should expect, I think we should have a good margin in terms of quarter 4 to reflect the complete benefits that will start accruing in the next year. And to put it at a very high level, I would say if you remove the onetime restructuring costs and the investments that we are making, like-to-like margin from quarter 4 of last year to quarter 4 of this year, we expect 200 to 300 bps higher.

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Harit Shah, Reliance Securities Limited, Research Division - Senior Research Analyst [6]

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Okay. So that is adjusting for any onetime cost, right?

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Ajay Aggarwal, Cyient Limited - President & CFO [7]

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That is right.

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Operator [8]

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Next question is from the line of Sandeep Shah from CGS-CIMB.

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Sandeep Shah, CIMB Research - VP [9]

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Just wanted to understand, we had a lot of client-specific issue in the Communication segment. With the growth being at 3.3% in constant currency, is it in line with your earlier expectation and you believe that the growth could be further higher in the coming quarters as a whole? So what is the status update in terms of client-specific issue and the growth momentum going forward?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [10]

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So I think what I'd say is that the client-specific issues, I think, have been resolved. I think obviously, they're not back to the old sort of levels of revenue with those clients, specifically the client that we had an issue. But I think we -- all our large clients are now in a stable situation and have shown quarter-on-quarter growth. So we believe that -- we're not going to significantly accelerate the growth, but what I'm confident about in the comms business is now we will grow at this stage maybe a little bit faster for the rest of the year and into the next financial year.

So I think at least the good thing -- and this is what I said last time was the worst we'd hit in Q1 and that seems to be the case because in most -- I mean obviously there are always going to be some one-offs with clients where there will be a further decline or increase, et cetera, but leave those aside. But at least in all our large clients, I think we've had some good stability and growth and we see that continuing into the coming quarters.

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Sandeep Shah, CIMB Research - VP [11]

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Okay. Okay. And can you provide the same status update? Is there any other client-specific issue in any of the other segments, including aerospace, which we had 1 client-specific issue?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [12]

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No. I'd say we are -- there is a fair degree of stability in pretty much all our large clients. I think we've -- unfortunately, Q1 had -- came together with a number of specific issues with various clients and that led to the kind of quarter that we had, but we believe that we're out of all of them. Again, not all of them are back into a significant growth mode or growth mode, but even where we've had an issue previously, we're at least stabilized and we're seeing -- like in our aerospace business, we're seeing that we've hit the bottom in Q2, and we're seeing growth coming into Q3. And that's why I'm able to say that in spite of the challenges that we typically have with capacity in Q3 on the services business, still we will see growth because there is momentum behind these accounts.

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Sandeep Shah, CIMB Research - VP [13]

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Okay. Okay. Just a clarity in terms of restructuring cost. So I think, if I'm not wrong, the restructuring cost for the cost optimization is on a risk-reward basis. So why we are calling this out as a one-off? So there should be some gain also, right, when we have made the payments as a whole. So just some clarity on the same.

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Ajay Aggarwal, Cyient Limited - President & CFO [14]

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So if I can take that. I think you're absolutely right. There are 2 parts. I think one is that when you look at especially the severance cost and other elements of it, they are quite heavy and quite upfront, whereas the benefits are realized later.

Second, the whole program that we have run, as you rightly said, apart from having risk-reward model is also on sustainability of it. So we come out as a saving based on the annualized run rate and say for the cost on it. What we realize is over the quarters, and that's why I'm saying if you look at what margin will be available to us for the next year will be without any restructuring cost and the complete benefits of the exercise will accrue in quarter 1, for example. And they will reflect in quarter 4.

So quarter 4 will still have the restructuring cost whereas quarter 1 will not have the restructuring cost. So I think, you are right. You should look at the overall margin. However, for you to look at what is our sustainable margin or what is our comparable margin to our other players, I think we thought we will give you both the prospectus.

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Sandeep Shah, CIMB Research - VP [15]

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Okay. Okay. So Ajay, is it fair to say in 3Q and 4Q you will have restructuring cost, but there would be some benefits also and net-net impact of that on the margins will not be a negative, but could be positive? Because your presentation slide is saying that the benefits will start accruing from H2 of FY '20?

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Ajay Aggarwal, Cyient Limited - President & CFO [16]

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So you are right. I think we will have the net savings, which is the positive.

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Sandeep Shah, CIMB Research - VP [17]

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In 3Q, 4Q itself, right?

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Ajay Aggarwal, Cyient Limited - President & CFO [18]

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That's right.

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Sandeep Shah, CIMB Research - VP [19]

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Okay. Okay. Okay. And just based on the commentary on 3Q, when we say there would be a slight growth, are we saying on a Q-on-Q or on a Y-o-Y basis in the services business?

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Ajay Aggarwal, Cyient Limited - President & CFO [20]

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No. We're saying on a Q-on-Q basis.

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Sandeep Shah, CIMB Research - VP [21]

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Okay. Okay. Okay. I have more, so I will come in a follow up.

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Operator [22]

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The next question is from the line of Mohit Jain from Anand Rathi.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [23]

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First is on the free cash flow statement you've given on this slide. So you are saying free cash flow conversion for us now is 43% prior to one-offs. So this is now the recurring number that we should assume for '21 or how does this number work in terms of your targets?

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Ajay Aggarwal, Cyient Limited - President & CFO [24]

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So if you look at the number which is excluding the one-offs, which are not going to be there next year, all the benefits of those investments will also accrue in the next year. So I would say 51% is the number you should look at for '21 and not 43% or whatever is that number.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [25]

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51% is for services, right? So then you will have group conversion, which could be potentially at a lower number?

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Ajay Aggarwal, Cyient Limited - President & CFO [26]

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I think I cannot predict for '21, but I think, overall...

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [27]

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On a normalized basis, sir, Q4 will also help, but on a normalized basis what is this number going to look like?

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Ajay Aggarwal, Cyient Limited - President & CFO [28]

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So I'm saying for the overall group, we are targeting 50%. As for as services is concerned, that also depends on growth as we have discussed in the past also. I think if we have little growth, we are targeting 50% to 60% conversion. If we have high growth, we are targeting 45% to 50% conversion.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [29]

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Okay. And this normalized EBIT 12.5% (sic) [12.3%], I heard that you said 300 basis point margin expansion will happen once the exercise is completed. Is that correct?

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Ajay Aggarwal, Cyient Limited - President & CFO [30]

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I said -- yes, that since our baseline for this exercise was quarter 4 of last year. From quarter 4 of last year to quarter 4 of the financial year '20, we will have an improvement of 200 to 300 basis points on account of this exercise, and there will be restructuring cost, which will also be there. So net savings will be lower than 200 to 300 basis point, but sustainable savings will be 200 to 300 basis points.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [31]

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Sir, Q4 normalize margins...

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Ajay Aggarwal, Cyient Limited - President & CFO [32]

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I'm sorry?

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [33]

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Q4 normalized margin you're looking at 15% to 16% EBIT, right?

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Ajay Aggarwal, Cyient Limited - President & CFO [34]

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So I would not give the number on the margin because margin also has number of variables in terms of the volume growth what is happening on our investment, what is happening on exchange rates. So I would say that let's not talk of the absolute number. We are confident between quarter 4 and (inaudible). I think it is clear mathematics. The range of 100 is to take care of others variables.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [35]

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Okay. And that should be the starting range for '21 broadly because restructuring cost will go away, therefore, you will revert or your GAAP margin will be same as normalized margin, is that fair?

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Ajay Aggarwal, Cyient Limited - President & CFO [36]

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Correct. That is right.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [37]

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Sir, last thing is on NBA. How much investment are we looking for it in '21, any estimate?

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Ajay Aggarwal, Cyient Limited - President & CFO [38]

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So this year, we are spending about 1.5%, which is significantly higher than the last year. We have still not -- we are reviewing the projects and taking a call based on what benefits will come, so it is little early for us. So many of the projects, you're right, go into '21 as well, but right now, it'll not be right because we are keeping a very close watch in terms of the progress. So it'll be a little early for us to say how much is the investment next year, but there should be a good amount of benefit, which will also start accruing in financial year '21 so the net-net headwind from that should be lower.

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [39]

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So just to add to that, I'd say this quarter actually, if you look at the order intake from solutions as we define them which are really the -- sort of the newer types of businesses that we're going after, we actually hit our target. We had an internal target for it and we hit the internal target for the first time.

And I'll say more importantly, there were 5 new projects that we sold for the first time. And just to give you a flavor, we sold an IoT project to a major mining company, which is essentially to retool or rechip their existing platforms with an IoT solution and that will also turn into analytic solution for us in the due course. So that was a good example of taking an NBA project, an IoT device that was incubated in the NBA and monetizing it.

Or the second thing is we also won a deal and will start supplying those components this quarter on additive manufacturing. Again, the first deal is small because it's plastic components, but we're also setting up an additive manufacturing facility in Florida this quarter, which will again translate to recurring revenue. So additive manufacturing was something that was also incubated in the NBA.

We also have 2 other large deals that we won, which weren't incubated in the NBA, but directly in the businesses: one on intelligent distribution management systems for utilities where a lot of the data can be captured automatically; and the second is around a quality tool that we built for aerospace application, where a lot of things can be done automatically and workflow management, et cetera.

So to Ajay's point, I'd say for the first time, we are actually seeing some significant order intake from our solutions while we have invested a lot of money on those. We believe that the outcome is now happening, which is very, very gratifying.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [40]

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So 1.5% is the investment in FY '20, right?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [41]

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'20, yes.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [42]

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Okay. And anything on the CapEx, like setting up this facility and all, will it be like CapEx heavy, CapEx light? Earlier, we discussed, I think, few quarters back that it may involve some CapEx.

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [43]

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We will have some CapEx, but the good thing with additive manufacturing is the -- it's not intensive CapEx. I mean it'll be within our sort of normal CapEx. Anyway, the facility is already there in Florida, the building and all the associated stuff is there because we have the ability to make tools -- sorry, prototypes and quick turnaround engineering in Florida, anyway. So that facility is there, it's really the equipment. So you won't see -- I mean it won't be a significant amount in that sense.

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Ajay Aggarwal, Cyient Limited - President & CFO [44]

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If I can answer that too. Yes, so just to clarify on the CapEx. We have typically been talking of 3% CapEx, so I can tell you that CapEx, including any CapEx that is involved in NBA because most of it or almost all of it is OpEx being put on the P&L, still our CapEx for the year will be between 2.5% to 3.5%.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [45]

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Sir, last thing on DLM. Like, what is the kind of Y-o-Y growth we are targeting now? There is some change there?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [46]

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I think we were looking at it on quarterly basis right now, but we believe that we'll see some growth. We might not see the double-digit growth that we're originally anticipating, but we will see some growth in DLM. I think there's still some things that are evolving, so we're still trying to figure out where we will end up. But it's -- yes, the momentum is there. We're -- what we're also trying to do is manage through the kind of accounts that we want and we don't. So we're actually using this opportunity to give up some of the revenue that is not strategic or doesn't come at a high margin, so that's where we stand with DLM.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [47]

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And utilization here would be close to 70%, 80% of...

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [48]

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In DLM...

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [49]

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In relation with the manufacturing unit?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [50]

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It will be about 60%, 70%. Because I think the problem there is it depends on what we are manufacturing also, so there is a little bit of thing there, but we're at about 60% to 70%.

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Operator [51]

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The next question is from the line of Madhu Babu from Centrum Broking.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [52]

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Sir, so if we see a modest growth in services business in 3Q. So most likely for full year, services will see a decline Y-o-Y this year?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [53]

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I think we are still working on the Q4 numbers, but we think that we have with -- if we see modest growth also in Q3, that will give us some very good momentum into Q4. So we are still working towards a flat year. We have line of sight to that. So we're working towards mitigating -- I mean we want to make sure that we don't decline, that's the first sort of objective. We will need to have a strong Q4 for that, but we do see a line of sight for that.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [54]

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Second, sir, on Communication, was there traction in the Australian client this quarter or how is the Australian client faring?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [55]

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Well, we did -- we showed quarter-on-quarter growth there, which means that at least I think we're out of the sort of the low point over there. But I would say -- I don't want to say there's significant traction back because of what has happened there. We'll take it 1 quarter at a time. Q3 was -- Q2 was okay there. Q3 also looks okay. So we'll take it 1 quarter at a time, but at least, I think the worst is over, and -- but I don't want to say significant traction and growth because I don't think...

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [56]

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Because NBN, there is a lot of negative comments, so I mean, so would there be any leakage further there or are you just saying it will be more like a stable performance?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [57]

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No. Because the work that we're doing for our client is not NBN work anymore; it's for their own network.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [58]

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Okay. Okay. And just last thing on the New Business Accelerator. So would this be helping us to land in some clients because this is more of an IT kind of thing? So would we be able to win couple of new accounts because of this strategic initiative? I mean, it's more like a -- would that be enabling a perception premium and get into couple of new accounts in the railways or aerospace? Would that be a possibility?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [59]

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No. I think it would be like the -- so one thing I'll clarify is it's not necessarily IT, right? I mean there is a IT layer to it, but it's still premised on our ability to do product design and manage products and maintain products. So it's still engineering in that sense. I mean there is an IT layer, but also, obviously, what we're seeing more and more is there is a convergence. So there is some degree of convergence between pure engineering and IT, so that's something that we are cognizant of and working on.

Now the IoT example that I gave you of a mining customer is a good example because this client is brand-new for us. And the reason why we've been able to make the approach there is because we came with a pretty unique offering. So we believe, yes, absolutely, I mean, we will continue to focus on new clients there, not just the existing clients.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [60]

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Yes, that's what I was meaning in that because these are some of the innovative solutions on the engineering side. Would that help us get a perception premium and able to get a couple of new accounts and after that, we'll be able to cross sell and gain a more stable business? Is that a possibility?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [61]

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Yes, absolutely. I think that is the reason why -- again, you look at the IoT I talked about, IoT is just the first, but IoT is also one-off because you rechip the equipment then [worth] it. But where we believe that the stability will come is because IoT then parlays into analytics, and analytics is really around the maintenance and the management of the offshore rigs -- sorry, of the mining equipment, which is really where we believe it's a long-term stable engagement. So you're absolutely right. I think the technologies might give us the inroad, but then we will also figure out how to stay stable for a while there.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [62]

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Okay, sir. So then last one on the capital allocation. I mean, last year, we completed the buyback in February, if I'm right. So I think currently, the stock is at a very depressed valuation. So would you look at that as a option again in March or April? I mean any possibility on that?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [63]

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Yes. I think it's too early to look at because I think very honestly, we feel quite bullish about our business. I mean the stock is what it is, but we believe that there was a strategic intent or there was a intent of doing the buyback at that point. We did think that we had some excess cash that we wanted to return to the investors. That was the reason why we did the buyback. But at this point, we believe that there is a lot of momentum back in our business. We believe that both for existing customers, there's lot of things that we can to do, we need to add a lot more capacity in certain areas. M&A is another focus area, and we're back to making sure that there's good focus there. All those things coming together, I believe, yes, we will need the capital that we have.

So we will -- what you would have also seen is we've announced the sort of a regular dividend of INR 6 a share. So we'll do the dividend. At this point, I wouldn't go to the buyback out because I think there's good opportunities to deploy capital and there is need for capital, and we have that momentum back in the businesses if we want to go do those things.

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Operator [64]

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The next question is from the line of Prashant Kothari from Pictet.

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Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [65]

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This is Prashant. I have some questions. One is on the...

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Operator [66]

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Excuse me, this is the operator. Sir, may we request you to use the handset, please. Your voice is not very audible.

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Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [67]

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Sure. Yes, the first question is around the restructuring part. Can you share some details around what you've exactly done in there? What kind of employees have been let go? And if there's any numbers you could share around that?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [68]

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So if you look at the employee head count quarter-on-quarter, it is down by about 185 bp roughly. It's hard to get the exact number, but it's about that. Now that is the -- that's part of this because obviously, we have had growth quarter-on-quarter because there was also restructuring in the past, but we've had growth quarter-on-quarter and the fact that we've been able to do it with fewer employees and that will continue into the next quarter because even with the growth in the services business in the next quarter, we're not planning on large-scale additions because we will optimize the employees.

Who they are? Again, it's across the board. It's really we've looked at performance aspect. I think the HR team with the businesses, of course, has done a very comprehensive job of looking at where the value creation is happening, and therefore, we have looked at where there isn't value creation and not just from a delivery perspective, even from a sales and marketing perspective. I think we've had a very hard look at various things on what function, what value, what are the other ways of coming up with this value, so one is the people aspect.

The second thing is there's also a lot of other indirect costs. For example, we've been able to restructure our office in Melbourne in Australia. It was a large office for whatever reasons when the opportunity was there, et cetera. Now we have to scale it. Now the -- we've had a onetime cost, for example, of about USD 300,000 there, but the savings is really going to be about $1.5 million or $1.75 million over the next couple of years.

So then there is that second category, which is the indirect spend that we're focused on which is offices, leasing. We've done a lot around travel, auxiliary services like cabs and transport and all those things. So these are the 2 categories that we've actually done the restructuring, costs have come in. Of course, there's other things like we've started to disengage with nonprofitable customers or whether the profitability doesn't meet our expectations, et cetera. I mean there's another set but those don't necessarily have a restructuring cost. These are the 2 things, the people and the -- sorry, the indirect cost where we had to bear the cost of restructuring.

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Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [69]

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Okay. And just in case restructuring cost will continue in Q3 and Q4 also, so is there any kind of target there in terms of how big those cost could be?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [70]

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Yes. I think that Q3 will probably be in the same level as this quarter because we'll continue with some of the things. And we believe that Q4, it will start to come down. I think the full impact will be felt -- or the full -- sorry, the benefit, I'd say, will be felt only in Q1. So there will be -- Q3 will be at the same level, Q4 it'll come down a little.

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Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [71]

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Okay. Got it. And the other thing...

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Ajay Aggarwal, Cyient Limited - President & CFO [72]

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Add to that, just to clarify, it has 2 components. One component are consultant's fee, which is all across the quarter and stops after quarter 4.

Second element are restructuring cost in terms of the cost associated with the cost reduction. That's -- that was also the way Krishna explained, just to clarify that.

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Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [73]

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Got it. And the DSO has come down this quarter. Anything specific you have done to get there?

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Ajay Aggarwal, Cyient Limited - President & CFO [74]

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See, if you look at last quarter, we had said that we do have INR 100 crores plus of cash that we can release from our receivables, and our account receivables have come down. So if you see this reduction, most of it is from the receivables. We did have some spillovers in the last quarter. We also talked about some system issues. So I think that is what has been done, nothing extraordinary. So you should look at it, I think, H1 together then you will get a good sense of both the DSO and the free cash flow, and I can promise to you H2 will be better than H1.

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Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [75]

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So this is not the normalized level of DSO yet?

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Ajay Aggarwal, Cyient Limited - President & CFO [76]

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So I would say that there is still scope to further take it to 90 by the -- in the next 2 quarters. So we'll be working on that goal.

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Operator [77]

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The next question is from the line of Neerav Dalal from Maybank.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [78]

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Couple of questions. One is on the ETR. Obviously, one look at it, this quarter again, we were about to 22.5%. So what should be that number for the year and next year?

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Ajay Aggarwal, Cyient Limited - President & CFO [79]

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So if you look at the ETR, first, as far as current year is concerned, we had said it'll be 22% to 23%. So we are going to be in this range and you know some of the technicalities of computation, you should not overly worry about things between quarter-on-quarter, but it should be in this range. As far as next year is concerned, we are evaluating the new tax that has come. But obviously, on face of it, it looks like specially for the services business that the feature where we continue with the current incentives for the next few years will be better for us, which means that we will continue to be at the current rate, which are lower than that 25%, which is the other option company can adopt.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [80]

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Right. And in terms of subcontracting costs, how should one look at it?

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Ajay Aggarwal, Cyient Limited - President & CFO [81]

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I think we have been talking about subcontracting costs a number of times where it's all about the mix of the business. I would say that in some of our businesses, in Communication, we are trying to reduce the revenue mix more towards nonsubcontracting, U.S it continues. So I would say maybe marginally lower, but nothing significantly will change in subcontracting cost.

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Operator [82]

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The next question is from the line of Rajin Rajan from Geojit Financial Services.

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Rajin Rajan P., Geojit Financial Services Limited, Research Division - Research Analyst [83]

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My question is related to the employee count. Is it largely based on restructuring only or maybe any specific other reasons for that?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [84]

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No. It's mostly restructuring and just we're looking at the capacities that we have and the very capacity that we need and we figured that because of the whole exercise that we are undertaking in terms of efficiency, we were able to look at exiting a few resources. Of course, there is also attrition and we manage both of them together, but when there is attrition, we might not backfill. But the whole intent is because of the whole restructuring or so.

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Rajin Rajan P., Geojit Financial Services Limited, Research Division - Research Analyst [85]

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And when can we see the 19% kind of margin growth?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [86]

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Sorry, we can't hear you.

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Rajin Rajan P., Geojit Financial Services Limited, Research Division - Research Analyst [87]

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I mean the historical trend was 18% in 2014. So that kind of margin growth, when can we expect?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [88]

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I think that we'll have to look at things -- we've had probably like I said, coming off where we are, we're looking at things really from a 1 or 2 quarter basis at least from an operating level, obviously. From NBN and other things, we're focused on the longer term. I'd say maybe it's a good conversation to have in a few quarters once things stabilize a little bit.

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Operator [89]

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The next question is from the line of Mayank Babla from Dalal & Broacha.

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Mayank Babla, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst [90]

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Sir, I just wanted your view on what is going on with the Boeing hearings or -- that has been going on since the last 2, 3 months? And how is that impacting Pratt & Whitney and in turn is impacting our cooperations or our deals?

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [91]

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So I think what's going on with Boeing is obviously in public knowledge. So I think it's not right for us to comment as there is a hearing that. We had nothing to do with the particular program that's been the question at this point or at least nothing to do with the technology or the software that caused some problems in the program that's been talked about.

I think we've talked about the impact that we would -- we had because of just the refocus of going on some of the immediate term issues versus new designs, and I think the impact has been baked in. I think we don't see any further impact on either Boeing directly because they're also our client or some of the others.

So I think what's happened has happened. We don't -- we're hoping some of these things will get sorted out because, I mean, again, publicly they've said 737 will fly in probably Q1 of next year. We're just waiting for those things to stabilize because we believe that certain projects that have been put on hold will come back at that time.

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Operator [92]

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Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. B.V.R. Mohan Reddy for closing comments.

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Bodanapu Venkat Rama Mohan Reddy, Cyient Limited - Founder & Executive Chairman [93]

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Thank you very much for participating in our earnings call. We appreciate all of you taking time listening to us and asking questions. As Krishna and Ajay explained, I think looking at the future, it looks very bright. We think we'll probably have a lot more traction to our business in coming quarters. Thank you very much, again.

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Operator [94]

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Thank you very much, sir. Ladies and gentlemen, on behalf of Cyient, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

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Bodanapu Ganesh Venkat Krishna, Cyient Limited - MD, CEO & Executive Director [95]

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Thank you.