U.S. Markets open in 1 hr 27 mins

Edited Transcript of CYIENT.NSE earnings conference call or presentation 20-Apr-17 11:00am GMT

Thomson Reuters StreetEvents

Full Year 2017 Cyient Ltd Earnings Call

Hyderabad Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Cyient Ltd earnings conference call or presentation Thursday, April 20, 2017 at 11:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ajay Aggarwal

Cyient Limited - CFO

* B. V. R. Mohan Reddy

Cyient Limited - Founder and Executive Chairman

* Bodanapu G. V. Krishna

Cyient Limited - CEO, MD and Executive Director

================================================================================

Conference Call Participants

================================================================================

* Ashish Chopra

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Gaurav Rateria

Morgan Stanley, Research Division - Research Associate

* Mohit Jain

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

* Nitin Jain

Crédit Suisse AG, Research Division - Research Analyst

* Ravi Menon

Elara Securities (India) Private Limited, Research Division - VP of IT Services and Internet and Analyst

* Sagar Lele

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Sandip Agarwal

Edelweiss Securities Ltd., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good day, and welcome to the Cyient Q4 FY 2017 Earnings Conference Call hosted by Edelweiss Securities Limited. (Operator Instructions) I now hand the conference over to Mr. Sandip Agarwal from Edelweiss Securities Ltd. Thank you, and over to you, sir.

--------------------------------------------------------------------------------

Sandip Agarwal, Edelweiss Securities Ltd., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Thanks, Denise, and good evening to everyone. On behalf of Edelweiss, let me welcome you to the Cyient Quarter 4 FY '17 Earnings Call. We have with us the senior management of Cyient headed by Mr. B.V.R. Mohan Reddy, along with senior members of the management team.

Without further ado, I will hand over the call to Mr. Ajay Aggarwal to start the proceedings. Thanks, and over to you, Ajay.

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [3]

--------------------------------------------------------------------------------

Thank you, Sandip. This is Ajay Aggarwal here. Good evening, ladies and gentlemen, and good afternoon, good morning in case there are people from [ Europe ] and (inaudible) from the call. We're here to talk about the results of fourth quarter as well as for the full year. Along with me on the call is also our Executive Chairman, Mr. B.V.R. Mohan Reddy; and our Managing Director and Chief Executive Officer, Mr. Krishna Bodanapu. As we all know that we have the confidentiality statements in front of us and I take it as read, and we can dig into the proceedings. May I request you, Mohan, to give us a brief overview and then we will follow the formal presentation.

--------------------------------------------------------------------------------

B. V. R. Mohan Reddy, Cyient Limited - Founder and Executive Chairman [4]

--------------------------------------------------------------------------------

Thank you, Ajay. Good evening to all of you, ladies and gentlemen. This is B.V.R. Mohan Reddy. I welcome you all to this conference call. We had a strong and well-rounded growth this year. For the financial year 2017, revenue grew by 16.3% in Indian rupees terms at INR 3,606 crores, which will translate itself into U.S. dollar growth of 13.7% at $538 million or [ 14.9% ] in constant currency terms. The operating profit is up 15.7% at INR 484.8 crores. The net profit is up 10.7%, excluding the exceptional items, we'll come to that a little while from now, at INR 369.9 crores. And the cash generation is up 30% at INR 371.2 crores.

As a part of the continuous improvement, it improved our DSO by 5 days and improved the utilization by 190 basis points (sic) [ 160 basis points ]. This year also marked the first year under the industry-focused organization structures. We gained significant benefits under the new structure in terms of increased momentum in the face of execution, resulting the current acquisition of ODS, Blom, Certon during the year. Our customer centricity has improved, resulting in a better customer satisfaction for the year. This year also marks 25-year completion of the company, and hence, we decided to share our happiness with our 2 key stakeholders who have been with us through this journey. Special dividend to shareholders and Restricted Stock Unit scheme to eligible employees or associates in Q2 was given in line with the announcement that we have made earlier. The RSUs included a cash-out option has been granted to 9,000 associates in Q4 of the financial year '17, and the expense of INR 26.1 crores has been considered as an exceptional item in the financial statement of FY '17. A new delivery center for Science Defense services has been set up in Florida. We have partnered with Liberty Global to support Gigaworld's broadband rollout. We've also signed collaboration agreement with AMDOCS for implementing GIS solution. With this, I would like to hand over this call to -- back to Ajay, Ajay Aggarwal, who is CFO, who will take you through the detailed financial performance of the quarter. Thank you.

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [5]

--------------------------------------------------------------------------------

Thank you, Mohan. Before I give (inaudible) excuse me, good quarter and year, 2 things are redefined. One is, as Chairman said, our performance has been very well rounded. The growth is on revenue, operating profit, net profit and cash, so all these are sort of -- these metrics are growing, that's very redefined. We have another very good news that happened. Many of you would have seen our Founder and Executive Chairman, Dr. B.V.R. Mohan Reddy, was honored with the prestigious Padma Shri award for his contribution in trade and industry. He received it last week. So we are all very honored for that. With those 2 comments, I start my formal presentation.

This particular year, we have seen a number of $557.9 million of revenue, or in terms of INR, INR 36,065 million, which is a growth of 16.3% in rupee terms, and in constant currency, it is a 15% growth, because 14% is in dollar and 1% is because the currency -- British pound and euro are -- had been at work, and that's how we take the 15% overall growth. I think it's also good to see that in line with our guidance that we are discussing services growth has been in double digits like 12%, which is 90% of our business. And DLM has posted 36% growth and still, there is room to go further.

Also, the growth has been wide across all the geographies. You can observe that the share of EMEA and Asia Pacific has almost moved by 50%. EMEA used to be 27% of our business, it's now at 30%. Asia Pacific had moved from 13% to 16%. So I think the geography expansion is also really helping. Another thing, if you see in terms of the 8 verticals that we operate in, 6 out of the 8 verticals have given double-digit growth, which is 10 percentage plus and [ 4 BUs ] has given 20% plus growth. That's really, really very nice. The view that you're given, double-digit growth, as you can see on the chart, are Aerospace & Defense, Communications, Medical & Healthcare, Transport in constant currency. Because if you see the dollar, it's 5%, but in constant currency, the growth in Transport is 11.6%. Again, I repeat that we do all our business in Transport in Euro and British pound, and also in U.S., these 2 segments have been impacted. So Transport is about 11.6% and U&G is at 15% and DLM at 36%. That's the 6 verticals, which have grown in double digit. We know in Semiconductors as well as in IENR, due to market facing issues, we did have a big growth, but as we are looking into the situation, Semiconductor already this quarter has shown growth. IENR also, we are seeing traction. So the worst is behind us on those 2 verticals also.

Next one. Quarter 4, I think it is in line with our expectations. If you see, we have $141 million or INR 9,410 million of revenue, and that's about -- this part of the game, as you see in this chart, we have a 15% growth on services. Year-on-year growth is 15%, quarter-on-quarter growth on services is 3.2%, 8.7% for DLM, that gives us a growth of 3.8% in dollar terms and about 3.6% in constant currency.

In terms of -- again, if you see the [ robust ] growth, all the geographies seen year-on-year has double-digit growth, North America is 10% plus, EMEA 18% and Asia Pacific 34%. So very wide and most of the BUs are doing well. And as I said, wherever you are seeing the negative number as of now, Communication is an aberration. You should not read too much into this minus 3%. We are very well on track to repeat another good year in Communications, similar to the last year's growth.

In terms of the income statement, I would say, while you see on the chart that our operating profit has grown by about 16% year-on-year, so that's a good gratifying thing that the top line has translated also into the bottom line. I again repeat, we had, in dollar terms, 15% growth, 16% in constant currency. Operating profit is up by 16%. While the margin is 13.4%, the margin for services is about 15%. And if you see, last year, we were about 14.4% on services. This time, we had the headwinds of wagers. Currency has taken away some of the margins, and off-shoring has also [ not held ]. We had a movement of about 2% and north of the off-shoring.

Despite that -- all these headwinds have taken away about 200 basis points. Despite that, we could increase the -- our margin by 60 basis points, which means in operational improvements we could get 260 basis points. Indeed, that's really, really very nice and distinct. And we've seen some of the initiatives that we've taken in terms of the way the organization is structured, in the way we are incentivizing people and the focus is on the profitability and operating margin, we will see this continuing.

DLM has been at its breakeven level. As we had said, that for sometime, it is equal -- at least up to financial year '19 for DLM, the uncertainty in mix, and so Krishna will talk more about it, but we are getting DLM breakeven margins in that time.

On profit after-tax, we will see we have done a profit of -- after the exceptional item of INR 3,699 million. While the reported profit is INR 3,438 million, the adjusted profit is INR 3,699 million. As Chairman explained, we had an impact of INR 261 million because of the fair valuation of the restricted stock unit that was given to the employees on the one-time occasion of 25 years celebration.

Quarter 2, we are now looking. Quarter 4, we have already been granted, and the necessary financial impact has been taken. So you can really see the profit growth, if you take out the exceptional item, it's 11%. On the tax side, we have done 24%, 50 basis point improvement is there. There's a good focus on special economic zones, and we are confident that we have similar reductions we can get in the next year as well.

Other income. While you will see, while other income has gone down, we'll talk about in the next chart. I just want to make a comment that from the [ bulk of ] treasury operations as well as from the -- our hedging policy [ in folders ] we are really gaining -- I think there's a substantial increase in both of them. What is impacting the other income is the link statement notion of foreign exchange impact is on the movement and how it impacts the statement of receivables, cash balances and foreign exchange liabilities. If you lean back, actually, we have a 25% growth on other income as well. So that's a comment and that should be indication of how could the things be for the coming year.

In quarter 4, I just say that while we have 13.3% margin for quarter 4, for the services, the quarter margin is 15%. This is despite the fact that we do have a number of things that come on in the quarter 4, which are basically the annual performance and that's why if you exit fourth quarter at 15%, there's a good chance of getting -- sustaining this momentum when we get into the next year. Another thing we should notice is, the year-on-year growth of operating profit is 18%.

In terms of the profit after-tax movement, we have 36.9% and 11% on year-on-year and quarter-on-quarter, exit tax rate is 23%, but as I said, we have took out 24% for the year and further improvement of about 50 to 100 basis points for the next year.

Other income, similar situation, as I explained for the year. Next one, please.

In terms of cash generation, as we have seen here, we generated INR 3,712 million of cash. This is the highest-ever cash that comes in [ here relegated ]. Also the conversion at 65% of EBITDA is also the highest and the cash generation is higher by 30%. The INR 3,712 million or $55 million is 65% of EBITDA.

In this particular year, we have done 3 acquisitions. We also invested in 2 corporate ventures. So overall, if you see at the bottom of this chart, right-hand side, INR 1,053 million above (inaudible) what we have made the investments. Even after making these investments, our tax position is about $150 million or INR 9,706 million. I think the cash flow momentum is continuing, and we will make sure that -- again, it is gratifying despite the growth of 16% in constant currency -- 15% in constant currency, I said it myself, we had been able to get this kind of cash flow. This is basically driven by a decline on DSO, we have reduced 5 days year-on-year. Also, the CapEX management, you will see that we are tracking below 3% for the quarter, for the year. So I think there is a lot of initiatives on CapEX management. That's helped us a lot with the (inaudible) focus and other initiatives on various different things like that.

Next one. Last one from my side on the hedge book, our position is extremely good. In terms of the total forward cover, our position is same. We continue to be 70% of the next 17 months -- next 12 months net inflow, which is $113 million.

If you look at our hedge positions at the bottom table on the left-hand side, we have a gain of about INR 5 at (inaudible) on U.S. dollars to INR, our position is 70. We have INR 10 position on euro and GBP. All this translates to about $11 million, or INR 710 million of other income.

If you look at last 2 years, we had INR 33 crores in financial year '16, INR 44 crores in financial year '17. And if current spot rates continue, we have a potential of INR 71 crores. Of course, this is, as of now, uncertain. But as things stand today, if there is a volatility on foreign exchange, at least from the other income side, some of these challenges can be mitigated. That is the point I want to make.

Next. With this I'll hand over to Krishna to talk more about the investment and the business.

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [6]

--------------------------------------------------------------------------------

Before I start off with the investment pipeline, I want to quickly reiterate what Ajay said. Overall, we're quite pleased with the kind of year that we had. From the commentary that we have been giving, from a year's forecast, we're pretty much where we said we would be. In terms of services, the growth was quite good at 5% year-on-year, a little bit more, I think 13.7%, if you get currency into account. But it was a good year.

DLM was a little bit disappointing in the end. The growth is still 36%, which is obviously a good number. But when we started the year, we thought it would be a little bit higher than that. But net-net, there was about $2 million of revenue that did end up coming in Q4, which would have put us over the sort of the 40% to 50% -- or put us in the 40% to 50% range, and that's where it [ is approximate ] and comes down again. I'd say, it is a miss on our part, but it's a small part of our business and it's really a $2 million difference that we will anyway make-up during the course of this year.

So as I said, I think the more important metric that gives us lot of gratification is the operating profit. Operating profit improved 15% -- 15.7% year-on-year, which obviously is a very robust number considering the current environment and also considering what's going on, generally, in the market. So therefore, I'd say, it's been a very satisfying year from that perspective.

The one issue is on DLM, and again, it's a $2 million gap, which we will fill up during the course of this year, anyway, and I'll talk about the forecast. And also on that note, I'll say, I want to thank all of you for your support because FY '17 wasn't a very good year, and you supported us -- sorry, '16, I'm sorry, wasn't a very good year, and you supported us and stuck with us through our tough year, and hopefully, you are happy with what is obviously a much, much better year.

Having said that, I will go into the investment pipeline focus for the next 12 months. The M&A pipeline continues to be quite good, at least in line with what we want it to be. There are these various stages of the pipeline and there are these various deals. And I'll leave it at this, I think we've talked about this multiple times, but the focus has been shifted, and we continue to look at various opportunities.

I will talk a little bit about Certon. Certon was an acquisition that we announced in January of this year. So it was after the last board meeting, and we (inaudible) have an opportunity to invest and talk about it. But it's a company that we are very, very excited about. It is a relatively small company with about $6 million of revenue, but also double-digit EBITDA. But what Certon essentially does is it gives us an automation platform that helps us to automate and take out roughly -- between 15% and 20% of [ MAC power ] in Aerospace verification and validation, which is essentially testing of complex aerospace-related electronics. So we believe that this is a very good example of automation coming into play, and especially, automation in a very safety critical industry-like Aerospace. It is a small impact for the quarter. It's about -- this whole impact will be about 0.7% for the quarter in terms of quarter-on-quarter growth. For the year, it could be even smaller. It could be 0.2% to 0.3%. So it's not meaningful from a financial perspective, but from a strategy perspective and sort of where the world is headed towards, it's a very interesting acquisition.

In terms of the industry outlook, a quick take into this, but Aerospace & Defense continues to do well for us. It was a double-digit growth year for A&D. It is the largest part of our business, and in spite of that, it grew well. After focus shifts on manufacturing, engineering and MRO-type of applications, our focus is also there. That's where the growth is coming from. We have really, really interesting opportunities, which we hope to talk to you through the course of this year on our investment strategy into Aerospace, and I think we're quite excited about where that business is going.

Industry, Energy and Natural Gas, again, there's still a lot of pressure in this market. There is focus -- our focus is shifting away from CapEX. There's very little CapEX spend going on. Of course, there's some -- there's a fair amount going on in some of the new technologies like electronics and IoT, et cetera, and we're trying to focus there. Again, it wasn't a good year for IENR. If you look at FY '17, it was a deep growth year for IENR, but we see the traction coming back and momentum coming back now. While there is pressure in the market, I'd say 2 things: one is the new technologies are doing well for us; and the second thing is, it is about a $50 million business, so investment scale is also helpful.

Transportation, which is very (inaudible), continues to do very well. This business was one of the most affected businesses because of exchange rate, but in spite of that, it grew pretty -- there was a small growth, I would say, because currency took away almost 10% of the growth here. But again, there's a lot of investments in rail. We're well positioned. As you know, we've worked with 4 out of 5 OEMs and we will continue to do well. And FY '18 promises to be a good year for rail again.

Medical Technology is a small part of our business. We have a -- sorry, we have a focus both on engineering and manufacturing. And the story is coming around nicely, given that it's a nascent industry. The story that we can help Cyient to build it, corporatize it, test it, and then transition it to some way for volume manufacturing. So that has played out quite well. And here, more than the revenue, the pipeline is what we look at, and the pipeline has almost grown 4x over the course of the last year and it continues to grow. So we're quite excited there.

In terms of Utilities & Geospatial, also, we see growth trends. The utility market is also adopting some of these new technologies and they're well placed to -- sorry, well placed to access them. Also, there is a lot of shift in the utilities market with new sources of generation that's renewable, et cetera. But new technologies in transmission, like the spot rates, et cetera. So we see some good opportunities to be another good year for the U&G market. The Blom acquisition helps the geospatial and data capture quite a bit. We have a unique proposition now that not many people have. So we are quite excited. (inaudible)

Comps, I'll just reiterate what Ajay said, we've got few [ global ] integral to the quarter for comps, but it is a point in time thing, it's just where some of the ramp-ups are and where we will catch up. But the comps will restart from -- sorry, during the course of the year in FY '17. And FY '18 looks in line with that. So from Q1 onwards, we're back on track. Q4 was just a point in time. But there's a lot of rollouts where acquisition, we actually -- our proposition is quite unique and is resonating quite well. We're taking market share from others, and I'm very, very bullish about this market, at least with what we have.

Our Semiconductor business, we renamed it and repurposed it as Semiconductor, IoT and Analytics. The intent behind it, there's a lot of the emerging technologies around IoT and analytics actually fit quite well with the semiconductor [ themes ]. So the way it works is, we design the chips that captures the data. It sends the -- sensors and the data capture mechanisms is really the semiconductor piece. The data that's captured has to be transmitted over the network, and that's the Internet of Things, efficiently transitioning the data and transferring it into a centralized database. That's where IoT comes in. And the next piece of this is the analytics because once the data is available centrally, we should be able to analyze data and create useful knowledge out of it. So the continuum of capture, transmit and analyze is what we're after. It also fits in very well with the SP strategy and designs were maintained as we talked about.

So patching them together really gives us the ability to do a unique solution around connected devices, right? And not just connected devices, but intelligent connected devices, and that's really what we're focused on here. Some people might call it digital, but we believe digital is just a very broad terminology. And we wanted this to reflect a lot more in terms of how we're focused, because, obviously, focus is what's made us successful so far.

So to bring in focus will now be down to what we do, which is the Semiconductor, IoT and Analytics. And again, that's work we will focus on. And this structure, again, or the 2 constituents that generate revenue there, that's semiconductor and analytics, are doing well. IoT is in the nascent stage, but we have a lot of good skills and we're doing a lot of proof of concepts and early-stage projects. But overall, I think this is another market that's doing quite well.

DLM is experiencing high traction because of the offset requirements that are there in India now [ Raffale ], which is the medium ranger -- medium fighter aircraft, MMRCA was what it was called, is now awarded. There's a huge order on Barak 8 missiles, which has a lot of offset. Indian Railways is doing some good stuff, so net-net again -- and while -- it's hard -- 36% growth is disappointing, but it's a little bit below what we've anticipated. So while it was a little bit disappointing, we continue to see very, very good traction. I mean, this business continues to show some very, very good promise, so we're quite bullish about it.

So net-net, I'll talk about what we see FY '18 to be like. We believe that there will be double-digit growth again in the services business, the 4 services business, similar to what happened this year. Again, not to play on words, but I'd say double digit is obviously anything between 10 and 99, but it's closer to the 10 rather than the 99 which I wish it was, but we'll still see double-digit growth in the services business.

DLM will grow by 20% or so. What I do want to say is 2 things. One, DLM will also get improved around margin. We want to make sure that we're creating more market for -- or we're creating more revenue from margin, i.e. we are more focused on margin than we are on revenue. That's why we're also committing to a lower growth because we want to make sure that growth comes in at a good margin. So there's a lot more growth that we can deliver. But we'll hit a good number in terms of scale. Now it's really about getting profitability also under control, which is what we will do.

Also, Q1 in DLM will just be a difficult quarter or will be a sort of a lower-revenue quarter just because of the technicalities. But I wouldn't read too much into it. I'm quite confident that we'll do 20% at least for the year.

Market expansion will be 50 bps. Most of it will come through services, and that's what will flow-through. We've also given you a little bit of more detail to it. But most of the margin expansion will come from services. This year, services expanded by about 60 basis points. We had said it will be between 50 and 100, but it was 60. Net-net, on a company level, flat because DLM was -- had a bigger loss, I'm sorry -- a lower margin than we expected, but net-net, next year, again, will see at least a 50 bps from a company level.

So net-net, we'll grow earnings at least in double digits, and that's where we stand as things are. I'll say I'm quite confident on where FY '18 is headed towards, based with the pipeline, based with the outlook, based with what our customers are telling us, with what our sales guys are telling us. There are macroeconomic challenges with various elements, including immigration, protectionism, et cetera, but we believe, in spite of all that, we are relatively well placed, because we've taken into account some of these things early and put mitigation into place.

So with that, thank you very much for the support in '17 and we're counting for the same in '18. And we're hoping to have a very good '18 in line with '17. Thank you. Also, I want to quickly say, we'll have our Investor Day this year on the 5th of May. I'm sure you've received the invite. And if you can make it, we will make it worthwhile your time. We'll show you some of the very cool stuff that we do. You'll hear from some of our largest customers this year and you'll hopefully gain some good insights out of it.

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [7]

--------------------------------------------------------------------------------

You can open for the questions now.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We take the first question from the line of Nitin Jain from Crédit Suisse.

--------------------------------------------------------------------------------

Nitin Jain, Crédit Suisse AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

So I have a couple of questions. The first question is on the Communication business. So the Australia has put -- recently put a ban on some of its visa. So how does this impact your business in Australia given that Communication business was growing very fast pace in Australia? So how does this impact the growth of this business and margins as well?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [3]

--------------------------------------------------------------------------------

So basically 2 things. One is that the -- there's also if you read the fine print, it's -- that only becomes effective in FY '18. So we have a 12-month runway to actually address some of the issues.

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [4]

--------------------------------------------------------------------------------

FY '19. March '18.

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [5]

--------------------------------------------------------------------------------

March '18. So FY '19. So it only after (inaudible)

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [6]

--------------------------------------------------------------------------------

FY '18, I mean, sorry.

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [7]

--------------------------------------------------------------------------------

So, yes, we have a 12-month runway to actually address the issue, so that's one. The second thing is, just like the U.S., we'll also localize our Australian business quite a bit. We have a -- quite a strong mechanism in depth recruiting people in terms of training, retraining, et cetera. Now it wasn't quite the U.S., let's say 15%, I think in Australia, immigrant visas still constituted to about 50%-or-so of our revenue. But for the last 6 months or so, we've been consciously moving away from that. So the fact that we've already put in a lot of effort to move away from that, and the fact that we still have a 12-month runway would, put together, we don't see any impact on us.

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [8]

--------------------------------------------------------------------------------

And I think, Krishna, they're also saying that they will start reissuing the new visas in smaller time. They're working on the new visa scheme (inaudible). And effective April 1, 2018, there'll be 2 new visas will come back. Currently, there's only a blanket 4-year visa. But then we'll have 2-year visa and a 4-year visa. So I don't anticipate any U.S. challenges.

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [9]

--------------------------------------------------------------------------------

There wouldn't be any major challenges there.

--------------------------------------------------------------------------------

Nitin Jain, Crédit Suisse AG, Research Division - Research Analyst [10]

--------------------------------------------------------------------------------

And not even on the margins?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [11]

--------------------------------------------------------------------------------

No, not even on the margins. See, realistically, the expat versus local, the margin has -- the salary has to be the same. And at least we, as a company, has always stated that view that, expat or local, the salary is the same. So in that sense, it doesn't really make a difference in terms of margins.

--------------------------------------------------------------------------------

Nitin Jain, Crédit Suisse AG, Research Division - Research Analyst [12]

--------------------------------------------------------------------------------

Okay. And my second question is on the DLM business. So your outlook for FY '18 of 20% growth and maybe breakeven margins seem to be lower than your earlier expectations, so what has changed in this business? And when do you think this business can generate 5% to 6% EBITDA margins?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [13]

--------------------------------------------------------------------------------

So I think on margin, I'll just say, it's just we're being prudent about it. We are -- we'll just look at what's the 100% commitment that we can make on the number, and that's why we're saying 20%. Margins, again, I will say that there are -- if you look at the stand-alone manufacturing business, it is making a 6% to 7% margin, it's just that we're still continuing to make the investments. So the way I look at it, is the Services business is also driving a lot of the DLM opportunity right now. So during the course of this year, we will have a much better outlook on how that works out. But I wouldn't write too much at this point about just the DLM business, because I think that the strategy is playing out very, very well at this point.

--------------------------------------------------------------------------------

Nitin Jain, Crédit Suisse AG, Research Division - Research Analyst [14]

--------------------------------------------------------------------------------

Okay. But when can this business -- so you said that FY '19 should be the year when we should see margin improvement. So do you think we can see maybe close to 5% margins in FY '19, but it might be longer?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [15]

--------------------------------------------------------------------------------

What we're working on is that once we get the -- these financial revenues to gain in an end-to-end orders, within financial year '19 and '18 for the orders, which are under exhibition on design and testing, et cetera, in financial year '18. The roadmap is 2 years from hence, we should be in the bracket of 5% to 10%. And this year, we are saying breakeven. And the next year, it should be somewhere between these 2. So I would say, if you let in (inaudible) you can look at breakeven this year, you can look at something like 7% in year 3 and you can look at something like 4% in year 2.

--------------------------------------------------------------------------------

Nitin Jain, Crédit Suisse AG, Research Division - Research Analyst [16]

--------------------------------------------------------------------------------

Okay. Got it. And just lastly, on your overall margin guidance. So does your guidance take into account the sharp INR appreciation in the last 1 month? Is that your constant currency guidance? Or you account for the currency headwind?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [17]

--------------------------------------------------------------------------------

Yes, so I think the current level of currency is already built in. But any further appreciation of rupee is not built into this. But as I said, that between the -- we are very confident of the earnings growth. There may be a play out between the operating profit and the gains from forward growth. Either way, I think at least for the 12 months, currency cannot impact our earnings growth.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Next question is from the line of Gaurav Rateria from Morgan Stanley.

--------------------------------------------------------------------------------

Gaurav Rateria, Morgan Stanley, Research Division - Research Associate [19]

--------------------------------------------------------------------------------

Couple of questions. Firstly, on the top 6 to 10 accounts, that number has been mostly flat line for last few quarters. If you can throw some light what really is going on, and why growth is not visible in those accounts?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [20]

--------------------------------------------------------------------------------

So Gaurav, I think it's just how we counted at which customers come in and out because it's 6 to 10. So current customers 11 to 12 also keep coming in and out. So just -- I mean, again, that the overall, there is growth in some accounts -- yes, so there is a good growth in some accounts. Some accounts may be flat or even little bit lowered. Again, I wouldn't worry too much about it, because, again, the mix itself changes just because there's a lot of customers that are bunched in that group, because if you look at 1, 2, 3 after are quite clear, which are the (inaudible) large ones, then 5 to, say, 5 to 13 or 14 are all $15 million to $10 million, somewhere in that range. So when you ask that range in companies come in and out because a good quarter, bad quarter can make changes if things move. I think what I can assure you is at least in our top 20, there's no customer that are -- have a red flag. All of them are performing to plan. Things are going according to what we anticipated. So I wouldn't be too worried about it. It is to plan. It's just a phasing issue.

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [21]

--------------------------------------------------------------------------------

If I may just add one comment, Gaurav, that if you look at the growth, which has come from the top customer has really given the growth of the current year. And if you see the share of the top 20 customers has moved to something like 71%, which means if you have services growth of 12%, the growth on the top 20 customers had been higher than that. And that is likely due there as what Krishna said, there are no red flags so this trend is likely to continue.

--------------------------------------------------------------------------------

Gaurav Rateria, Morgan Stanley, Research Division - Research Associate [22]

--------------------------------------------------------------------------------

Sure. Secondly, I see a disconnect between what you're guiding for next year in DLM business and order intake, which you have very strong for this quarter. So is it that the order intake -- some color on the order intake in terms of their tenure or the contract to kind of understand the revenue trajectory, how it grows into the revenues?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [23]

--------------------------------------------------------------------------------

So the order intake is a multi-year order intake. So for example, we have a couple of very large orders in the DLM business, but those orders were the back up by a [ fewer ones ], et cetera, are also for multiple years. So we're only taking into cognizance what can be built this year.

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [24]

--------------------------------------------------------------------------------

So that's why while the order intake is very strong and I -- I would also say there is other opportunity beyond. I'm just being conservative in the DLM business ultimately. But certainly, the reason for that is also some of this is once a year.

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [25]

--------------------------------------------------------------------------------

But the good news is it gives us a lot of, there I'd say 20% at least. It gives me 100% confidence that it'll be 20% because the orders are there.

--------------------------------------------------------------------------------

Gaurav Rateria, Morgan Stanley, Research Division - Research Associate [26]

--------------------------------------------------------------------------------

Krishna, some color on the kind of orders these $70 million are. These are typical orders with DLM order -- or erstwhile Rangsons had been doing in the past or there is a change in the mix of those orders towards more design to build kind of a contract? And is this $70 million a 1 or 2 big contract? Or is this spread across like multiple, several contracts?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [27]

--------------------------------------------------------------------------------

No, Gaurav. The $70 million is 2 contracts. And it's our traditional Rangsons business. There's other things that are coming in, which are the design and build, but those are smaller and those are not -- the $70 million is primarily [ through conference ].

--------------------------------------------------------------------------------

Gaurav Rateria, Morgan Stanley, Research Division - Research Associate [28]

--------------------------------------------------------------------------------

Sure. Last question on the Services margins. I know this year has been pretty strong despite lot of headwinds you talked about, but 2 or 3 key levers for you to be able to maintain margins for next year and some initiatives, which you'll be taking specifically for FY '18?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [29]

--------------------------------------------------------------------------------

Yes. Okay. So I think our -- a couple of things are happening. One is that utilization continues to look good. They're managing the business quite effectively. For example, if you look at this in Q4, though our revenue grew -- just quarter-on-quarter grew 3.8%, our Services revenue grew 3.2%, our net addition was only 2 people. And that was because we just got a lot more prudent on how we're managing that capacity, and we'll continue to do this. The second thing is, if I look at the backlog, the backlog has a lot more offshore work. I mean, it's higher than it has ever been in terms of offshore. So that's the second thing that we will also see this year is that the offshore is going to get a little bit better. Then, there are just some -- on-site, we see some improvements in coming in margin. And again, this is because of rate increases or because of the way that the efficiency is working out or we are able to do work in our own centers that usually ends up being higher margins. All put together, there's another, say, 100 basis points because of that. That pyramid correction and the usual stuff, like the SG&A absorption, which are just a -- to meet [ owners approval ] will get some absorption in SG&A, which we continue to beat. So all that is giving us the 390 basis points or so. Honestly, we just will take away about 180 basis points. We'll also set aside 1% or 100 bps for investments with something called the new technology [ axle rate ]. So net-net, it'll come to about a 50-basis-point number.

--------------------------------------------------------------------------------

Gaurav Rateria, Morgan Stanley, Research Division - Research Associate [30]

--------------------------------------------------------------------------------

So sorry, last question from me. So this margin guidance, just to kind of reconfirm, is at the current rupee rate of whatever the prevailing rates are, not on the last year average rates, right?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [31]

--------------------------------------------------------------------------------

No. But you're right, Gaurav. So it is based on the current levels of exchange rate around INR 65.

--------------------------------------------------------------------------------

Gaurav Rateria, Morgan Stanley, Research Division - Research Associate [32]

--------------------------------------------------------------------------------

And the wage hike will be as usual spread over the 2 quarters?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [33]

--------------------------------------------------------------------------------

Yes, right. Similar to the last year.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Next question is from the line of Ashish Chopra from Motilal Oswal Securities.

--------------------------------------------------------------------------------

Ashish Chopra, Motilal Oswal Securities Limited, Research Division - Research Analyst [35]

--------------------------------------------------------------------------------

Just a couple of quick ones from my side. Krishna, just wanted to know how would you characterize the North America as a geography in terms of opportunity and the way it should pan out next year considering this year, the growth was a little bit on the slower side? I understand it's probably a contribution of the business mix across verticals and how they shape up, but just a broad comment if I look at it by regions?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [36]

--------------------------------------------------------------------------------

I think North America continues to look quite strong. I think we have had some good wins over the last couple of quarters and good ramp ups. We'll see double-digit growth in North America also next year. So again, it's just a -- the problem with (inaudible) -- or not the problem. The good thing is also it's a large business for us. And actually, if you look at FY '16, North America grew quite significantly, whereas, both APAC and EMEA, they grew. That's why we ended up here. But this year was a little bit lower, but next year, we'll again be a little bit higher. So I don't see that will be an outlier. I mean, in either directions, things look quite good right now in North America in spite of all the sort of the noises coming through this.

--------------------------------------------------------------------------------

Ashish Chopra, Motilal Oswal Securities Limited, Research Division - Research Analyst [37]

--------------------------------------------------------------------------------

Sure. And just lastly, you did allude to both the bigger verticals IENR as well as semiconductors seeing some form of momentum and probably improving going forward. So would you be categorically very, very confident about all of these industries, the 8 industries that you report to be firing in the next year? Or would you really kind of keep under watch any of these segments for any potential risks? So maybe higher base of growth of Communications could slow down or anything that you may want to call out?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [38]

--------------------------------------------------------------------------------

No, not at this point. I think the -- I'll say the -- it's a double negative in some there's an IENR in semicons just because they're coming out of such sort of terrible years. They can only get better. But again, I think, we've also done a lot of good stuff there to make sure that we're positioned well for the future. If I look at IENR, there's a lot of order backlog, new customers and web signed on. That's where growth is coming from. I don't see that to be a big issue. That 1 risk in IENR still enriches a client called Westinghouse, who declared bankruptcy if you've sort of seen that. But then it covered them also in terms of how the -- how we're being positioned within the bankruptcy proceedings, et cetera. So I don't see that to be a big risk, because one of the key elements of coming out of bankruptcy for Westinghouse is dependence on Cyient. And Westinghouse ultimately just can't go bankrupt because they're the last of the major nuclear suppliers. So they have to be in business. For them to be in business, Cyient is a key part, so we're quite confident that the business will grow. Outside the semiconductor, again, as some of you know, we'll have a new BU Head. Suman has done a fantastic job in realigning and refocusing us there. We've had very, very good wins. We're expanding [ the build ] to focus on Internet of Things and analytics. All in all, that sounds good to customers. We're seeing traction. So at this point, again, I don't see an outlier in either directions. I.e., I don't see one vertical already sort of blowing out of the water. But I don't see an outlier in the other direction also. So again, as the year goes, we'll be as transparent as we can on how things do work, but right now things look pretty -- sort of -- pretty evenly spread out.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Next question is from the line of Mohit Jain from Anand Rathi.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I said that I was just curious to know on your planned tech, it looks like there's absolutely 0 impact last year versus this year?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [41]

--------------------------------------------------------------------------------

On which one?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Like this double-digit growth guidance in the coal business. It looks like there is absolutely no impact in the last 12 months, while the industry has -- in general, slowed down. So is it like based on the budgets that are already frozen? Or there's some element of expectation or anticipation on this?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [43]

--------------------------------------------------------------------------------

No. It's a combination of everything. I mean, it just sort of the tax knowledge that exists in our business on, deals that are already there. And that's actually a pretty decent number this year again. It's on what we know will come, et cetera. So it is -- I mean, again, when we're talking about the number for the year, we're quite confident that it's an achievable number. Based on [ peers' win ] conversations, et cetera, et cetera.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [44]

--------------------------------------------------------------------------------

Okay. Great. And secondly, on DLM. So I think you mentioned during your remarks that the DLM business should see some improvement in margins?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [45]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [46]

--------------------------------------------------------------------------------

That is why the growth outlook is 20% versus 36% this year.

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [47]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [48]

--------------------------------------------------------------------------------

So should we view that expansion in -- or you expect the margins to be at current levels and grow 22%, 20%?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [49]

--------------------------------------------------------------------------------

No. I would say -- right now, I wouldn't build that into our -- into -- or I wouldn't commit to that which sort of means you shouldn't build looking to your expectations, just because we're still -- we're not out of the woods yet. We are -- we've delivered a strong year on revenue, which will -- which obviously will translate to some good numbers going forward also. So just to start with this assumption, and like I said, as the year progresses, we'll be as transparent as we can in terms of how things are evolving.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [50]

--------------------------------------------------------------------------------

But is it safe to assume that growth is lower, and if you execute well on those [ 10 ] margins would actually be better on the DLM side?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [51]

--------------------------------------------------------------------------------

(inaudible) Yes, it absolutely did, but I think just -- err on the side of caution there just because that's -- it is a newer part of our business and so on.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [52]

--------------------------------------------------------------------------------

Okay. Third is on M&A budget like you -- is there anything which has increased or changed in terms of cash utilization? Or you think it is more like a [ tuck in ] of small companies [ awaiting inquiry ] based on letter of intent that you're...

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [53]

--------------------------------------------------------------------------------

No, I mean, it's a -- it's just a sort of what comes or what is available also because our intent is still to do a big -- or to focus on bigger deals, but again there are just few and far in between. And therefore, we'll continue to do [ the tax eliminate ] because that keeps our business going. It adds a lot of sort of punch to what we deliver to our customers. So we have to keep that going also. So in that content, the intent has always been bigger acquisitions and just that we need to find one.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [54]

--------------------------------------------------------------------------------

So is there any predefined size like to what extent would you like to occur? Or you're open to any sizes?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [55]

--------------------------------------------------------------------------------

We're really open to any size. I mean, we're open to up to 50% of our size is what we've broadly said. But again, it has to -- obviously, as it grows larger, the fit has to be better and better. We wouldn't take a risk. So it has to be something that we like, and we believe we can integrate into our business.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [56]

--------------------------------------------------------------------------------

Got it. Last is on the (inaudible). So have you recorded the quantum of it? And when will you do it? Or that is something which will come from a later on?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [57]

--------------------------------------------------------------------------------

So we're decided on it, but I'd rather not speak about it, because that's -- I'd say that's something that we want to keep confidential, because each group is doing a different strategy around how they're going to handle the wage hikes. But I think we've given a lot more freedom to the groups to decide on business, what they can afford, what the market is bearing, what they need from their customers, et cetera. So we've decided the wage hikes -- or actually, we haven't decided -- the groups have decided what they can afford. And that's what they're going to implement.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [58]

--------------------------------------------------------------------------------

For the number...

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [59]

--------------------------------------------------------------------------------

There's the cutoff by the number because I think that has other implications.

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [60]

--------------------------------------------------------------------------------

If I can just add to what Krishna said. As far as the financial impact is concerned, we have already outlined that in that outlook of financial year '18. That is the impact and that can be spread over 2 quarters.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [61]

--------------------------------------------------------------------------------

So like first quarter will be the main impact, how do you think that can (inaudible)?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [62]

--------------------------------------------------------------------------------

Let's just assume 50-50 for (inaudible)

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [63]

--------------------------------------------------------------------------------

Actually, distributed between...

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [64]

--------------------------------------------------------------------------------

Yes, broadly.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [65]

--------------------------------------------------------------------------------

Okay. Anything on the hiring front? So are you sharing at this moment?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [66]

--------------------------------------------------------------------------------

I'll just say if you know a good candidate, please send the resume.

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [67]

--------------------------------------------------------------------------------

(inaudible)

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

Next question is from the line of Sagar Lele from Motilal Oswal Securities.

--------------------------------------------------------------------------------

Sagar Lele, Motilal Oswal Securities Limited, Research Division - Research Analyst [69]

--------------------------------------------------------------------------------

Krishna, I was wondering what's leading to the spike in subcontracting expenses. Is it directly correlated to the kind of growth you're seeing or probably in association with a certain service line or a client or type of work? Because I have noticed that you also haven't factored any of this in the margin guidance that you've given, so wondering if you expect this to remain at current levels in the next year?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [70]

--------------------------------------------------------------------------------

Yes, Sagar, you are right. This is very specific to the mix of clients and the projects that we're executing. And in terms of what we drive, and we've said this many times, subcontracting is really not a tool for optimizing the costs between what we look at in gross margins, it could be the cost of being either direct costs or it could be subcontractor. So I would say, don't look too much into the spike of subcontracting costs. You should look at the gross margin. And we have already mentioned that what we are doing to improve the gross margins.

--------------------------------------------------------------------------------

Sagar Lele, Motilal Oswal Securities Limited, Research Division - Research Analyst [71]

--------------------------------------------------------------------------------

Sure, sure. Also wanted to get a quick update on Softential, has the situation there gotten better or stable in terms of both revenue growth and profitability?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [72]

--------------------------------------------------------------------------------

I think it's a -- it's capitalizing, it's -- the good tenure with [ Scott ] is quite integrated with the rest of the, what we call, CSIG, which is a communication solutions group. So again, they are also -- we're not out of the woods, we're still figuring out -- or not figuring out. We have a -- sort of a plan of how we sell the whole offering, not just the SMA and isolation. We'll continue to do SMA and isolation. It's a little bit of opportunity there that we'll continue to work on.

--------------------------------------------------------------------------------

Sagar Lele, Motilal Oswal Securities Limited, Research Division - Research Analyst [73]

--------------------------------------------------------------------------------

Good. Also, just lastly on the industry mix for Rangsons, I wasn't really sure about how to read into it. For instance, A and B this quarter was 9%, the last quarter was 46%. Does this at all imply short duration projects in this business? And if that's the case, how do you see movement towards the business getting a little more predictable on a short-term basis?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [74]

--------------------------------------------------------------------------------

[ So vast, but ] when you look at this, our quarter's number of 9 percent, you should not read too much into it. It's a one-off, adding to the fact the -- the historical average is more like 30%, 40%. And what we are targeting for next year is also in that range of 30%, 40%.

--------------------------------------------------------------------------------

Operator [75]

--------------------------------------------------------------------------------

Next question is from the line of Ravi Menon from Elara Securities.

--------------------------------------------------------------------------------

Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services and Internet and Analyst [76]

--------------------------------------------------------------------------------

So for the DLM business, you -- the 20% growth that you guided to, is that based on any long-term contracts that you have in the pipeline? Or is it just based on something for the next 1 year alone?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [77]

--------------------------------------------------------------------------------

This voice is breaking. If I may request the moderator to help, please? We can't hear the sentence clearly.

--------------------------------------------------------------------------------

Operator [78]

--------------------------------------------------------------------------------

Sure. Mr. Ravi Menon, if you could please repeat your question?

--------------------------------------------------------------------------------

Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services and Internet and Analyst [79]

--------------------------------------------------------------------------------

Yes. Hello? Can you hear me now?

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [80]

--------------------------------------------------------------------------------

Yes, Ravi, yes.

--------------------------------------------------------------------------------

Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services and Internet and Analyst [81]

--------------------------------------------------------------------------------

Oh, yes. And so I was asking about the DLM segment. This 20% growth, is it based on any long-term contracts or something that's just for the next 12 months? And any -- have you assumed anything to come from the offsets that Krishna mentioned?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [82]

--------------------------------------------------------------------------------

Yes. It is based on the growth in the backlog, what you see. The backlog growth at different points of time between 31st March of last year and 31st March of this year is more than 20%. Some of these contracts that have come in, how they are to be executed in the current year. And also, I think when we talk of those long-term contracts, they do the offset contracts. That's part of this 20%.

--------------------------------------------------------------------------------

Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services and Internet and Analyst [83]

--------------------------------------------------------------------------------

Sure. And secondly, you did mention about looking at direct costs and the subcontracting together. So would that be what we should look at going forward?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [84]

--------------------------------------------------------------------------------

Absolutely. I think you should look at this together. That's how we internally look at it and try to work on our gross margin [ dynamic ].

--------------------------------------------------------------------------------

Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services and Internet and Analyst [85]

--------------------------------------------------------------------------------

A third question here, as this [ environment change in ] manufacturing costs for the DLM business. What do you think will be a stable level where you get to the higher margin so that you are talking about, should that be what we should see reduce the percentage or peer issue? What would be really the aim? How would you really improve margins for DLM segment?

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [86]

--------------------------------------------------------------------------------

I think the way to look at it is when you look at the operating margin. It has 2 levels. One is that as we proceed year after year, the mix of the business is improving and the gross margin will improve. It is not really based too much on the material cost at a certain particular level, because that really depends on a particular job. What we should track is gross margin on the job. So what we are saying is, as we keep progressing, the gross margin should keep improving, let's say 2% year-on-year, and the SG&A absorption, if you look at our SG&A, it's almost 10%. That should also keep coming down by about 2%. So I would say this is how we talk of the journey of 0% to 4% to 7%, 8%. Material costs, you should not too much read into, just believe on gross margins.

--------------------------------------------------------------------------------

Operator [87]

--------------------------------------------------------------------------------

And that was the last question. I now hand the floor over to the management for their closing comments.

--------------------------------------------------------------------------------

B. V. R. Mohan Reddy, Cyient Limited - Founder and Executive Chairman [88]

--------------------------------------------------------------------------------

Thank you very much to all the participants on this call. As we've seen, 2016, '17 has been a very good year for the company. We [ wish ] that 2017, '18 on this momentum, as was pointed out by me earlier, the up structure that we have put in today, you could importantly believe that indeed at this point of time led by Krishna as the CEO, Ajay as the CFO, are all going to be [ based this in good resemblance ] at this point in that time with the rest of the team that they have. And so we're very optimistic that '17, '18 will be an equally good year as '16, '17. Thanks again for your interest in Cyient. I once again like to remind you that on 5th of May, we'll have an Investor Day in Hyderabad. Ajay has sent invites to most of you, to all of you, and we will look forward to seeing you in Hyderabad. Thank you.

--------------------------------------------------------------------------------

Ajay Aggarwal, Cyient Limited - CFO [89]

--------------------------------------------------------------------------------

And anybody who has not received, if I may add, Mohan. If anybody has not received the invite, please contact our Investor Relations team or anyone of us, could be Mohan, Krishna and myself.

--------------------------------------------------------------------------------

Bodanapu G. V. Krishna, Cyient Limited - CEO, MD and Executive Director [90]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [91]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, on behalf of Edelweiss Securities Limited, we conclude today's conference. Thank you for joining us. You may now disconnect your lines.