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Edited Transcript of KPIT.NSE earnings conference call or presentation 8-Aug-19 4:30am GMT

Q1 2020 Birlasoft Ltd Earnings Call

Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Birlasoft Ltd earnings conference call or presentation Thursday, August 8, 2019 at 4:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dharmender Kapoor

Birlasoft Limited - Former MD, CEO & Director

* Rajeev Gupta

Birlasoft Limited - CFO

* Samit Deb

Birlasoft Limited - Chief People Officer

* Vikas Jadhav

Birlasoft Limited - Head of IR

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Conference Call Participants

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* Abhishek Shindadkar

Equirus Securities Private Limited, Research Division - IT Analyst

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Rahul Jain

Dolat Capital Market Pvt. Ltd., Research Division - VP of Research

* Rohit Balakrishnan;Vrddhi Capital;Analyst

* V.P. Rajesh

Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Birlasoft Limited Q1 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Vikas Jadhav, Head Investor Relations. Thank you, and over to you, sir.

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Vikas Jadhav, Birlasoft Limited - Head of IR [2]

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Yes. Thanks, Raymund. Good morning to all, and welcome to Birlasoft's Q1 FY '20 Earnings Call. I'm Vikas, and I head Investor Relations. And joining us today on this call we have [Ashu Ladein], Dharmender Kapoor, [Bakil Repose], (inaudible), (inaudible), (inaudible) and we also have (inaudible).

Please go (inaudible) the first outlook for the future recording forward-looking statements and will be read in conjunction with the disclaimer, which is there in our press release, for which we've mentioned some of the risks the company faces

So with this, I hand over the call to (inaudible). Over to you.

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Unidentified Company Representative, [3]

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Yes. Good morning, everyone, and welcome to the Birlasoft's Q1 Financial Year [complete] Earnings. Q1 is the first fully independent quarterly results that we are publishing as new Birlasoft. As you will have seen from the report that our Q1 revenue stands at $111.7 million, which are -- which are -- with an unanticipated decline of 1.2% quarter-on-quarter. This quarter [saw we had an] reversal, why I call it unanticipated was because this is coming from one of the issues that we saw in the previous delivery, and we had to reverse the revenue for about $1.2 million. Other than that, I believe that we were very close to the expectations that we have set internally for ourselves. We did not anticipate this reversal the year.

Outside this, we had a very stable growth of which in my opinion is giving us the confidence that we have a good handle on the operations. Because when we run our internal guidance, we came very close to that but for that one issue. Now besides the revenue reversal, we managed to almost to maintain the EBITDA at 10%. In fact, if you look at our margins, they have improved from the previous quarter, and we continue to see that we will improve our margins going forward as well.

A significant positive is that we continue to maintain our wins in the market. Last time, we talked about our wins in the Q4 as $55 million. And this quarter, we have $58 million worth of wins for us. This does not include the revenue that we signed up with our existing customers. So any renewal is not included in the $58 million.

When I look back at the quarter gone by, I feel extremely satisfied from the margin perspective. And that also shows [this is] that now we have good handle on our operations, we are able to anticipate our margins very well. And at the same time, we continue to see that we have bottomed out. We detailed that last time. And apart from this one surprise, I think it confirms that we have bottomed out on our revenue side, and you should see growth from here going forward.

Now on the harmonization and integration front, I would like to give an update that the team is working on unifying the processes on the fees and the system. I believe that most of the integration is already done and only minor elements with respect to some integration is in progress. But other than that, I think we have achieved most of it what was planned as part of the integration.

One of the key elements going forward is that we need to bring our focus on developing our leaders, managers and employees who should be better equipped in supporting the Birlasoft direction. And we have launched multiple development program in that direction because this is one thing that we talked last time is going to be one of our priority, and we have started working on that very well.

And from that perspective, last year [who was] sitting with me here, he joined us as the Chief Delivery Officer from Accenture. And before Accenture, he has worked with Infosys and Cognizant and have had very rich experience in the delivery in all these organizations. So we wanted to really bring the delivery rigor so that we do not go wrong with our margins, we do not go wrong with the client experience. And from that perspective, [SK] has made great contribution to the company.

Going ahead, our priorities would be that how do we continue to stabilize because it is not about running a sprint right now. It is about running a long race for us, and we want to catch the speed at the right time. And it is very necessary that we create the right foundation, and we will continue to work through the integration to create the foundation on which we can actually build the sustainable growth.

We will have to continue to look at the traction that we are getting in some of the businesses. We are seeing very positive traction coming our way. And we want to take the full advantage of that traction so that we continue to maintain our win ratio in the market and continue to bring more and more business both from the existing clients and from the new clients. And of course, the capability development, we'll continue to focus on because with the whole change in the visa policy it is very necessary that we shift our focus on developing capability not only in India but also in U.S. and the other markets. And there is a significant focus in that direction, and we'll continue to do that.

With that, I'm very optimistic about the quality extent of the merger entity and expect good traction going ahead. With this, I'll hand over to Rajeev for providing more color to the financial.

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Rajeev Gupta, Birlasoft Limited - CFO [4]

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Thanks, [Vikay]. Good morning to everyone, and once again, welcome to this Q1 Birlasoft's analyst call. Vikay already mentioned (inaudible) the key growth. From a constant currency perspective, we did not see much impact this quarter. So constant currency revenues is almost similar to the reported number of $111.7 million, while this (inaudible) impact of $1.2 million, as mentioned Vikay mentioned. Our focus on making operating decision has aided in maintaining the EBITDA margin at 10% level.

Our reported EBITDA was up by 200 basis points quarter-on-quarter. However, on an adjusted basis, EBITDA adjusted from merger and integration costs, the Q1 EBITDA was at $11.2 million. That is 10%, lower by 60 basis points quarter-on-quarter. While we saw operational stability at EBITDA level, our adjusted tax was at $6.1 million versus $12.5 million in quarter 4. The growth of 6.5 [in tax] was due to several reasons. One, Q1 we had a full tax rate of 31% compared to Q4, which was at a lower rate. And of course, because of the merger and demerger, most of our resident units have now moved out. We had a onetime gain in quarter 4 due to a sale of U.S. subsidiary, which was $2.5 million, a gain which was on account of the merger and demerger practice. The accounting standard 116, which has come in to effect on April 1, had an impact. We saw overall an impact of $1.5 million on EBITDA. Of course, $1.2 million of that has been accounted under depreciation, $0.4 million of that in finance costs. As a result also, we saw other income lower by $1.2 million quarter-on-quarter. The good news is we saw debt completely replaced [in this] quarter, which is $5.5 million. It has to be noted that post the merger we paid debt levels of close to $25 million and completely debt free on our books as of 30th June.

I would also like to address the concerns on the promoter's pledge, which some of you may have. Although we believe promoter of [DELOCO] that is the national engineering (inaudible), NEI, would will be better a place to comment. However, as I understand, the pledge of the local shares was made by NEI and [REPA] short-term bridge financing in relation to some transaction plan at the promoter's vehicle. The financing does not involve the lessor. As for my understanding, the pledge is only temporary. And a large part of it is expected to be released shortly.

As Vikas mentioned, and I feel so, we remain optimistic on improving our performance metrics through optimization initiatives across the operations. And we will likely see improvement from here on.

With that, I now open the floor for 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 [Anul Jain] from Globe Capital Markets.

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Unidentified Analyst, [2]

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Sir, I want to understand about our industry verticals, different verticals which we are having. This industry has the highest margin. Out of the industries in which we are operating, which industry has a better margin?

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Rajeev Gupta, Birlasoft Limited - CFO [3]

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So I would say that to probably our BFSI will be having the highest margin in comparison to all the industries, but they are all in the ballpark range. It is not as if there is a significantly different from the other, but BFSI is one, which are having higher margins.

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Unidentified Analyst, [4]

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Okay. And it is going down. I mean from 20.2% we are at 19.3%. Is it company-specific orders that the industry right -- we don't reiterate the meter of the industry?

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Rajeev Gupta, Birlasoft Limited - CFO [5]

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No. I think what we have to look at is that the revenue that you see today from the percentage perspective also it is in the combined company. So some of the programs that got finished and became time one particular client ask for the discount. It is just that temporary effect that we have. But other than that, I believe that there is no reason for us to see that if there'll be any decline in the BFSI.

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Unidentified Analyst, [6]

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Okay. And my next question is like what is the -- how things are shaping up in the retail and automotive segment?

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Rajeev Gupta, Birlasoft Limited - CFO [7]

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So automotive segment, if you look at -- is in fact one of our larger manufacturing play. There are a couple of industry verticals that are part of the manufacturing play that we have, and we have significant [shift] in that direction. If you look at one of the splits between the Birlasoft and the KPIT Engineering is the one which is actually in the other sector. And this is probably one vertical which is going through a lot of integration and consolidation. So I believe that in the automotive we will continue to grow. In fact, in this quarter also we grew very well in the automotive sector, and we have some very significant clients and significant programs in the pipeline with them. And I believe the automotive will be the one which will continue to show up the growth going forward as well.

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Unidentified Analyst, [8]

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Second, can you give some color on the retail side-- the retail industry? Because actually from -- (inaudible) from 15.2 in [Q2 FY '19] to 13.5% and now it is going to take like (inaudible). Particularly, of the industry we have seen that the retail sales (inaudible) but there's not going very well. So how things are shaping up in the retail segment? Can you please guide me?

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Rajeev Gupta, Birlasoft Limited - CFO [9]

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Well, I believe if you look at (inaudible) on the vertical side, this vertical another one which have grown well for us quarter-on-quarter. At the same time, I do see that with our larger presence in the digital space, this is one vertical and industry which has been showing good demand on the digital initiative. So that is the reason that we see that this particular industry will continue to grow on the digital initiatives side, and we are putting a good amount of focus behind this so that we continue to ride the wave that is there from digital perspective and this particular industry sector.

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Unidentified Analyst, [10]

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Okay. So one last question. Our average revenue per employee is somewhere around 7.8 lakhs, would be right?

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Rajeev Gupta, Birlasoft Limited - CFO [11]

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Yes.

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Unidentified Analyst, [12]

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And whereas the industry average is somewhere around in excess of INR [29], if I'm right, the major IT players? So any color on that, how we are going about in case we have to [get new employee]?

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Rajeev Gupta, Birlasoft Limited - CFO [13]

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So I would -- it would be a little bit difficult for me to answer immediately on that particular piece. But what we can do is that if we can take that question offline, I may be able to give it a better color because I do not have the ready answer for that particular question. But I don't think that we can be significantly off. Because if you are making the right margin and if we are having the right set of volume on people side, I don't see why it should be very different from the industry, but I would like to give it a detailed look and we can come back with the answer later.

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Unidentified Company Representative, [14]

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I can answer that, [Vikay]. So our margins, as Vikay mentioned, are conservative as to the standard. So from that standpoint, we don't see that our average revenue per employee would be far off, but we could also question of (inaudible).

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Unidentified Analyst, [15]

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So my main question is like how we are planning to go about the EBITDA margin? We are operating at 10% odd level. So what kind of guidance we are expecting going forward for the full year.

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Unidentified Company Representative, [16]

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So [Vikay] highlighted earlier, we saw Q4 bottom out in terms of the decline that we had in the IT segment of revenue. Q1, of course, barring that onetime revenue reversal, we met our internal expectations. So actually, if you look at it, we bottomed out from a revenue decline standpoint. We expect quarter-on-quarter growth from here on. While we will refrain from giving specific guidance, we feel fairly comfortable that some of our initiatives in terms of setting up the right organization structures, having the right leaders in place, we should be able to see traction in terms of quarter-on-quarter growth from here on.

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Operator [17]

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(Operator Instructions) 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 [18]

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So just on the capital allocation. So how was the cash movement? I think last quarter I remember we had INR 520 crores of cash. So what is the net cash position? And what is the CapEx commitment for this year?

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Unidentified Company Representative, [19]

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So our net cash has slightly come down rightfully so because we had 2 -- maybe the best is quarter 1. We completely paid off our debt. So $5.5 million of our debt is paid off. And second, you have variable compensation that gets paid out in Q1. So those are the effects as a result of which we saw slightly lower cash levels in this quarter. We've answered this earlier as well. From a capital allocation standpoint, we have 3 clear initiatives on line 1 in terms of the dividend payout. We improved the dividend payout compared to last year. It was at 22%. We're at 28% for last year as well. So we improved the dividend payout. The second will be we consistently invest in large deals, and that we believe should give us good returns in -- going forward. And the first, we need to look at deals in terms of acquisition over a 12- to 18-month period. So these are some of the thought processes that we have at this stage, but we can keep adding color to that as we go on.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [20]

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So it is like INR 460 crores is the net cash on balance sheet as of now?

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Unidentified Company Representative, [21]

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So yes, $67 million.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [22]

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Yes. That's what is shown in the presentation. So what is the CapEx guidance for this year?

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Unidentified Company Representative, [23]

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So from a CapEx standpoint, we anticipate or rather we budgeted for $20 million of spend. However, in Q1, we did not have a major spend. We barely spent about $0.4 million. The CapEx spend also that we budgeted for this, keeping in mind this is (inaudible), one, is going to be on account of the integration on IT side. Second is on the account of HR integration. And third, as part of the merger-demerge process, we need to build our Bangalore facility. And then on proved assets, (inaudible) on the AU CapEx. These are the areas where we'll be investing.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [24]

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Well, INR 140 crores is the CapEx. Got it. So $20 million?

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Unidentified Company Representative, [25]

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Yes. That is what you'd budgeted for.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [26]

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Okay. So can we grow asset-light models like because of softer growth is there? So can we like [double even model] or not for the campus? Is that possible...

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Unidentified Company Representative, [27]

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We are conscious about how we spend. And as I mentioned, Q1 we have hardly spent in terms of the CapEx. It has been just about 0.4 million in terms of spend in Q1, and we will be conscious in terms of where we spend going forward.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [28]

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So would you look at the buyback? I mean because the valuation of the stock has come down significantly, and the net cash is decent. Would that be any consideration in the near term?

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Unidentified Company Representative, [29]

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So from a capital allocation standpoint, clearly, 3 areas of investment would be: one, dividend payout; second, investing in large deals. We've seen good traction and, hopefully, so that should give us better return going forward. I'm [encouraged] to look at is there potential opportunities over a 12-month period, 12 to 18-month period to even grow inorganically. From a buyback standpoint, this is one area that we will continue to look upon. But we have to come back as is stands to be over a period of 6 to 12 months, how widely we are able to invest in the earlier key areas that I talked on.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [30]

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And secondly, how is the cross-sell initiatives started to play out in terms of the domain competency in the vertical? So where are we investing? At least we have multiple verticals, so within that which are the 2 verticals may be very good in the next 12 months, looking at it more on the domain side?

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Unidentified Company Representative, [31]

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So I believe that the manufacturing as well as life sciences are the 2 top priorities. Of course, we have to continue to invest in other verticals as well. I would -- if you would have asked me third, then I would have add BFSI. But the manufacturing, because of -- if you look at the amount of revenue that we get from our clients, almost about 50% would be in the manufacturing category, manufacturing in one form or other in different industries. So we have to continue to build our capabilities in that direction because we believe that, that's going to be one of the major (inaudible) area for us going forward as well. Life sciences we will continue to see good traction, and we are already seeing a good traction on that. So life sciences, and health care is the second area where we will continue to invest and then followed by the BFSI.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [32]

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Okay. And the cross-selling?

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Unidentified Company Representative, [33]

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Cross-selling is a cross because cross-selling doesn't depend really on the industry alone. This is across all the verticals that we have to continue to go through our addressing customers because they have good confidence in us. We have been delivering it for many years. It's just that now we have larger set of offerings that we need to take it to them. We are already seeing the benefit of cross-selling already. You would have seen the Q1 win ratio going up than the Q4. And in fact, in Q4 also we had somewhat very good costs in the wins that happened. So I believe that we continue to see the benefit cross -- selling across all the industry verticals.

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Operator [34]

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The next question is from the line of [Saren Vikaria] from Lucky Investment Managers.

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Unidentified Analyst, [35]

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Is it safe to assume that the CapEx plans for this year can be met from the internal cash flow generation itself?

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Unidentified Company Representative, [36]

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So we would look to do that. So that will be minimized in terms of utilizing our net cash position.

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Unidentified Analyst, [37]

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Because it would be logical also because that is the amount of free cash flow that you make every year anyways.

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Unidentified Company Representative, [38]

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Yes, we would look to do that.

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Unidentified Analyst, [39]

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Sir, I understand that you can't always have a certain amount of (inaudible) issues when we have such a large acquisition and there is a merger. While -- (inaudible) has categorically said that we are confident of growing from here. The Street is very nervous on this aspect. Can you give slightly more confidence or more color on the ability of your organization to grow and also to report higher EBITDA margins than at 10%, which is substantially low for an IT company of your quality?

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Unidentified Company Representative, [40]

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Correct. So let me first address the EBITDA margin. I am definitely very, very confident that, that will happen. Because even if we look at from Q4 to Q1 position, we have improved on that front. If you look at the history of the (inaudible). We have delivered much higher EBITDA margin than what -- where we are today. So I don't see any reason why we would not be improved from here going forward because our internal expectations are also high than this. So that we continue to improve on that. So now have we identified the initiative to which we will be able to improve? Yes, we have identified those initiatives. We have started reviewing each and every element of the business and the operations so that we know where we need to optimize and we know where we have to improve our productivity in order to deliver better margins. So I'm very, very confident on that.

Now when it comes to growth side on revenue, I believe that I would have been worried if the wins were not coming out of it. But if you look at, we have maintained the win ratio in the Q4 and in the Q1 as well, and it is only improving from here. So I don't see any reason why we should not grow from there. Now one of the key things that we have look at is that currently we do a lot of transformational program. And we need to really look at how those transformational programs are much longer term rather than the shorter term. Because from -- we talked about this earlier also that in the Q4 we finished a very large program, and it was giving us significant quarterly revenue, and that program got finished successfully. And we had to go and covert that into longer-term sustainable revenue and continue to maintain that part of the portfolio that we deliver for our customer. And we did win that also.

So I believe that there is a significant focus on bringing in our focus on sustainable revenue and the [NAT] revenue. So sometimes, you will see that some programs are finishing, but those are not the panic button for us because that doesn't mean that we are going down for a particular client. We continue to deliver well to those customers. It is only that through the cross-selling now we are making the -- we are reducing our risk for a particular client because it's a wholly transformational program. We could go finish the program and come out. But now we are looking at cross-selling so that we are able to have much more sustainable revenue with our existing customers who have offered (inaudible). So I am pretty confident on that perspective.

There are 3 or 4 levers that we need to apply, and we are well aware of that, and we are working in that direction. And you could see that how we have structured the team now going forward. We are also looking in that line because you cannot grow until you are structured to grow also. And I'm very happy that our change in the structure has gone very well. People are accepted it very well, and we are getting stable on that direction also. We can see that from the (inaudible) and coming from the pipeline also. So I am pretty confident that we should be able to grow from here.

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Unidentified Analyst, [41]

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Sir, if you grow your top line quarter-on-quarter from your -- supposedly make up minor 1.5%, 2% quarter-on-quarter constant currency growth from here, will that also directly reflect an improvement in your EBITDA margins?

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Unidentified Company Representative, [42]

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Of course. Of course, yes, yes...

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Unidentified Analyst, [43]

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Are we reasonably confident that we will grow at least at 1% to 1.5% from here quarter-on-quarter?

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Unidentified Company Representative, [44]

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So I would refrain from giving you the guidance because we said that we would not. But I would definitely say that we grow from here. And you are absolutely right that it will automatically -- you can imagine that -- we have the team in place. So we will definitely showcase the higher EBITDA margin when we start growing the top line as well.

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Operator [45]

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The next question is from the line of [Elroy Lobo] from Kotak Investment.

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Unidentified Analyst, [46]

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First question is on attrition. Could you just give us some color as to where this attrition is emerging from? Is it from the senior employees or from the junior employees?

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Samit Deb, Birlasoft Limited - Chief People Officer [47]

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This is Samit. I take care of the people function. So attrition overall for us on a last 12-month basis is 21.7%, which is probably if you go by industry within the industry numbers that we are seeing. We are not obviously comfortable with this. Specifically, our numbers are higher in the junior level, the 2 to 5 years bracket, experienced bracket. And we have a great opportunity because we are in the middle of the harmonization exercise from the people practices perspective. And some of those harmonization efforts are now coming to fruition. As part of that, we are looking into the compensation structure. We are looking into the grade structure. We are looking into compensation grade.

And we believe that we'll be able to take care of the junior level, which is the 2 to 5-year bracket, efficiently, as I said it is higher in our overall mix going forward. We are doing many steps also to ensure that we keep these numbers in check. [Vikay] mentioned that we reorganized the organization to make it more industry and domain specific, vertical specific. That comes with a little bit of an impact at the top level, but I'm happy to let you know that the transition has been extremely smooth. And we've not had any surprises or major impact from leadership level exit. We've strengthened our structure with [SK] coming in.

We are further strengthening our leadership structure with more market-facing leadership coming in. We are very confident that our investment level at the top is strong. We are doing things which will ensure the investment levels (inaudible) the top. And as I said, at junior level, we've got specific initiatives in place to connect, to do things, including on the compensation side.

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Unidentified Analyst, [48]

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So my second question is on the margins, 2 questions actually there. One is, if you were to utilize (inaudible) without the IndAS impact of 1 month, what would be the EBITDA margins, number one? And number two, if I were to look at your financial managers on EBIT margins by geography, clearly Americas is giving you the highest margins, whereas if we look at Europe and rest of the world the margins are not [well]. Just want to understand is this because of scale in these 2 other regions? Or inherently are these markets more profitable markets for you?

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Unidentified Company Representative, [49]

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So let me take the first one and -- to answer in terms of how the revenues are [trending] across the key geographies. On the first one, if you were to look at the EBITDA margin and exclude the IndAS 1-month fixed impact, in fact it could only improve our reported EBITDA margin. So if I were to really pull up the [chart] which is comparing Q4 in terms of EBITDA, we'd see a few exceptional items that were there in Q4. Of course, we don't have them in that same -- it has improved. R&D has 1 month (inaudible) reported EBITDA level, so it is an improvement. But if you would take that of (inaudible), at the look at the adjusted EBITDA margin level, there's an adverse impact of $0.4 million on account of IndAS 116. So on adjusted EBITDA margins level, we will remain the same as previous quarter.

And as far as the revenue split by geography. I think what you -- what you are trying to understand is how the margin by different geographies, was that your question?

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Unidentified Analyst, [50]

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Yes. And if I just look at your (inaudible) analysis for unlimited expenses, and it clearly shows that America is the most profitable. And then the other 2 geographies are less profitable. I just wanted to understand whether that is structurally in terms of the geography? Or the businesses you are in -- you are less in Europe and rest of world? Or is it something that you can see an improvement where it catches up with the America margin?

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Unidentified Company Representative, [51]

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So America really is one of our largest markets where we see almost 76%-plus revenues coming from America. And rightfully so, our margins are better effective in that geography. However, we constantly want to grow the revenues in Europe and U.K. and also in the Asia regions. These are 2 geographies we feel are high-growth geography, and our investments are also stacked accordingly by building leadership in both Europe and U.K. region and in Asia region. But you're right to say it is most structural at this point in time because the majority of our revenues are coming from America region. At the same time, there is a possibility that we will have to also invest more in Europe and APAC. Because if you look at the retail studies that have done -- have come from ISG and other adviser is that the growth is going to be significant in Europe and APAC. So -- but we will have to look at from that perspective also that we'll continue to make investments to grow there as well.

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Unidentified Analyst, [52]

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And you also mentioned that life sciences and manufacturing are your domains where you see a better potential for growth at [mixed] BFSI. Just wanted to know when you say you're strong in these areas are you running businesses against the larger companies? Or are there businesses which you're dealing with some of the second-tier companies value [proposition] contracts?

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Unidentified Company Representative, [53]

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So it is in both, but we continue to gain in the larger companies also, and that's the reason we said that the cross-selling is going to give us the advantage because, one, that we have to look at whether the client is significant for us or not. But even for the significant clients, we want also to be significant to them. And that's the reason this whole approach about cross-selling that we talked about. So we continue to win from the larger peers. At the same time, we are bringing in more focus on the mid-segment also because we definitely will continue to see a growth coming from that segment of the industry as well. So if you look at our wins, they are for both. But cross-selling, a lot more happen with our larger clients with whom we are already present and delivering well.

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Operator [54]

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The next question is from the line of Abhishek S. from Equirus.

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Abhishek Shindadkar, Equirus Securities Private Limited, Research Division - IT Analyst [55]

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I know you're saying that from a revenue standpoint you have bottomed out. And you talked about other metrics as well. But just to kind of rephrase the question asked by another participant. Could you give us or highlight the revenue and the EBITDA margin markers for year 1, 2, 3 that you may have set internally, which probably we can or you can evaluate subsequently?

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Unidentified Company Representative, [56]

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So as we earlier said that we are not giving any guidance for the year coming, as you talk about year 1, 2 or 3. But we are already undergoing our long-term planning within the organization both for the 3 years and 5 years. So we definitely want to have our internal expectations set and what was next, and our internal expectations are definitely going to be that we will continue to grow quarter-on-quarter and year-on-year. So I would just like to retain that position and not give any guidance for the future in terms of numbers.

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Abhishek Shindadkar, Equirus Securities Private Limited, Research Division - IT Analyst [57]

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Okay. And from a growth -- from a revenue growth or a customer challenge -- customer challenges perspective?

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Unidentified Company Representative, [58]

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On the revenue growth, I definitely said that. On the customer side -- also, we talked about that we are looking at who are the customer with whom we have to work much more deeper because our strategy is to cross-sell the offerings that we have in our portfolio. So we continue to look at and evaluate our current customers. So our current customers, R&D ranges of $400 million. And this is sustaining for quite some time now. So I don't see any significant change that is coming not until we find that some of the customers are not going to be strategy for us and we are too small for them. And we try to cut retail if it is not really growing further. But there are customers who might be small for us, but there is a bigger opportunity for cross-selling. Those are the customer we continue to focus on. But if there's not the customer we can look at, it has been very sustainable with our customers that we have for quite some time.

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Operator [59]

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The next question is from the line of Rohit Balakrishnan from VRDDHI Capital.

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Rohit Balakrishnan;Vrddhi Capital;Analyst, [60]

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I had a couple of questions. So in the balance sheet of FY '19, there is an advance that you've given to I think KPIT of around INR 180 crores. I just wanted to understand as of -- so one, what is the nature of that one? And two, what is the outstanding amount? And if you sort of when do we expect it to sort of recover?

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Unidentified Company Representative, [61]

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So that advance has already been recovered between KPIT and the last call. Because of the mergers, demerges, we had a situation where certain contracts were not weighted. Any intercompany transaction as of 30th June is only on account of an original contract. But those as well have been addressed. As of 30th June, most of the contracts have (inaudible) for. And in Q2, you would see very few intercompany transactions between KPIT and Birlasoft. It would only be on account of some transition services that they would pay so much. Other than that, all the amounts should be settled.

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Rohit Balakrishnan;Vrddhi Capital;Analyst, [62]

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Okay. So you're saying so it's already been received?

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Unidentified Company Representative, [63]

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One issue is already received for, and it's collected and [serviced].

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Rohit Balakrishnan;Vrddhi Capital;Analyst, [64]

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So in that context, just -- I mean so if you would look at the balance sheet of FY '19 and compare it to the Q1 balance in that respect, so I mean cash and cash equivalents were about INR 520 crores if I'm not wrong, if my numbers are right. And they've declined to about INR 460 crores. Now if you were to sort of look at this advance as well and then -- and [see the cash numbers] because I'm assuming this was a cash settlement that happened. So I mean I just wanted to reconcile those numbers, if you can just help me.

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Rajeev Gupta, Birlasoft Limited - CFO [65]

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So the INR 180 crores that you talk of was settled as of 31st March. We did not carry it into Q1. So when you're comparing the position of 31st March and 30th June, from a like-to-like basis, we need to take that INR 180 crores outside. It is already part of 31st March. Now to your point, the cash level that was there on 31st March and that you see as of 30th June, the reason I've already mentioned. There were 2 items. One, we paid off our working capital loan, which was, of course, taken out [earlier] prior to the merger, about $5.5 million of working capital loan was paid off. And the second is our variable compensation that gets provided for throughout the year -- or rather the second half of last year got paid out in Q1. Barring those 2 items, we continue to be at the same levels of cash as of what it was in 31st March.

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Rohit Balakrishnan;Vrddhi Capital;Analyst, [66]

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Okay. So actually, if I can just sort of understand this a bit better. Because as of 31st March, the number -- I mean it was not on the -- it was not as a part of cash. It was coming as a part of loans and advances or other financial assets. So this is -- still not here. Maybe I'll take it off-line with you.

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Rajeev Gupta, Birlasoft Limited - CFO [67]

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Yes, you could take it off-line. I think what you're doing is just looking at it as an advance. There is also a risk when you have an advance, and we also have a table. That is a net situation that would be as of 31st March. So when you net that out, there is a certain lower number. As I said, that number has come down quite significantly between 31st March and 30th June. And going forward, we would not see much of in the company transaction, barring the transition services that we will have between KPIT and Birlasoft. But we can take that more specifically off-line if need.

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Operator [68]

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The next question is from the line of V.P. Rajesh from Banyan Capital.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [69]

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I joined the call a little bit late. But I was just trying to understand, you mentioned, DK, that there was onetime revenue hit. And if you can just repeat that, that will be just helpful.

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Dharmender Kapoor, Birlasoft Limited - Former MD, CEO & Director [70]

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Yes. So this was -- this is with one of the customers where before the merger we have had some delivery issue. And that continued for some time. And as you know that -- the revenue recognition, it would have happened, then we need to reverse that, while we are still working with them and negotiating the payment. But as a good accounting practice, we do not carry any unpaid revenue. Hence, we have to reverse $1.2 million in this quarter. But in parallel, we continue to work with the customer and negotiate on delivering and/or getting paid for what we have already delivered to them.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [71]

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And have you booked anything from that particular client in Q4 which also needs to be reversed? Or what was the situation in Q4 with respect to that client?

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Dharmender Kapoor, Birlasoft Limited - Former MD, CEO & Director [72]

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No, no, no. So we have reversed whatever we had taken earlier in our book. We have already reversed that because we do not take anything beyond the set number of days. So that's the position that we have or the accounting principle that we have that we continue to follow.

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Rajeev Gupta, Birlasoft Limited - CFO [73]

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Yes. And to add, this was revenue recognized prior to the merger. With the reversal, there is, of course, a delivery issue that continued post the merger. And after our deliberation, we have consciously and conservatively reversed the revenue in Q1 while the negotiations continue trying to collect this money.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [74]

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Understood. So let me just repeat first so that I make sure I get it. There were some revenue collected from this customer, let's say, a few quarters ago, not Q4. And that is being reversed in the Q1 quarter because of the conservatism in the accounting principles, and you're still negotiating if that can be recognized in the future quarters once you get the money from them.

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Rajeev Gupta, Birlasoft Limited - CFO [75]

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Hopefully, so that's under negotiation. So whatever revenue was recognized prior to Q4 and because of that delivery issue we have reversed in Q1, our negotiation with the client continues. So if and when we collect this, we should likely be able to recognize that revenue.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [76]

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Understood. My second question, DK, I think I heard you say that manufacturing is 50% of your business. Is that correct? Or did I mishear that?

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Dharmender Kapoor, Birlasoft Limited - Former MD, CEO & Director [77]

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Correct, correct. Because manufacturing is not only part of one vertical. Manufacturing spreads across the industries. So from the focus point of view I talked about that is the largest set of capabilities that we have, and we want to continue to be known for providing good services around the function of a good manufacturing asset base.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [78]

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Okay. So when you talk about the industry verticals in your deck, which are these 6, so clearly, there is discrete manufacturing, which is approximately 20%. And even CPG, retail is around 14%. So the remaining 35% (sic) [15%], are you including energy and utilities and automotive? I mean how should one think about that 15%?

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Dharmender Kapoor, Birlasoft Limited - Former MD, CEO & Director [79]

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Correct. Correct. If you look at -- manufacturing cuts across -- and manufacturing as a discipline, okay? I'm not talking about the vertical, the way industry is seen, but the manufacturing as a discipline is into the DHM, then it is there as part of the process manufacturing. Then it comes also around automotive because that also is part of the -- there is a larger portion of work that happens it is around manufacturing. So I include all those to really talk about what is the strengths that the company has. Because when we go with that discipline, there is an advantage that one industry can take from the other. While they are seen as different industries, but underlying processes are very much closer to the manufacturing, and we must continue to take the advantage of our larger presence in that domain.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [80]

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I see. Okay. And just quick question on the balance sheet. Your unbilled revenues grew almost 40% over the last quarter. So can you just give some color as to what you are putting in this line item on the current assets side?

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Rajeev Gupta, Birlasoft Limited - CFO [81]

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So the unbilled revenues grew this quarter on account of one that we had certain novation of contracts pending between KPIT and Birlasoft. I talked about it earlier as well. As part of the merger and demerger process, the contracts continue to be primed by respective companies, and we did not want to impact this line, and we continue to do business. So those novation of contracts, large part of them concluded in 30th June. We've seen some impact on account of unbilled because of that novation of contract. And the second is, of course, we've -- there are certain statements of work and purchase orders that we await from the customer while we have a verbal go ahead from them. Those generally gets collected by middle of July. So this why an increase in unbilled, but we see that to be a normal practice, and it should come down as we see some of the processes [terminate] quarter-on-quarter.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [82]

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Okay. And this is primarily, I should assume, is the AMC revenues, would that be the right assumption?

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Rajeev Gupta, Birlasoft Limited - CFO [83]

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It could be a mix. It could also be a mix of [DM and NM], and it might be across both projects and AMC kind of revenues.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [84]

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So roughly what will be the split between AMC and non-AMC?

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Rajeev Gupta, Birlasoft Limited - CFO [85]

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So at the organization level, if you look at our AMC revenue, it would be in the range of about 65%, and 35% comes from the larger programs or the projects.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [86]

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Okay. So that's sort of sales ratio. I would think that here in this particular line item you will have more of AMC because people are paying in advance. So that's why I was just trying to understand if that's like 80%, 90% of this or there is project-related unbilled revenue also.

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Rajeev Gupta, Birlasoft Limited - CFO [87]

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You could have a high percentage of AMC. I think your point is right. That's how it could be.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [88]

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Okay. And then the -- on the margin side. Again, I think if I remember correctly on the last call the expectation set was that we will probably have bottomed out at 10.6%, which is adjusted for merger and integration costs. And now this quarter, we are lower than that. So could you just help us understand that? Where is the bottom in the business as far as the margin is concern? Because I would assume that majority of the integration is now behind us. And if you look at as a -- going forward, what is just -- if you can do a level set, that will be very, very helpful.

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Rajeev Gupta, Birlasoft Limited - CFO [89]

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Sure. So if you look at our adjusted EBITDA margins at 10% compared to 10.6% last quarter, there are 3, 4 impacts that I'd like to explain so that we understand that from a margin standpoint also we continue to maintain, and this is sustainable margin. One deal had an IndAS impact, which is an adverse impact of 0.2 million, and that almost establishes that from a margin standpoint we are almost like-for-like. We saw a higher tax rate in this quarter compared to previous quarter, while that explains the tax part. But as I said, if I were to just look at the IndAS impact and then compare it to previous quarters, we are at a sustainable level of 10.6%.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [90]

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Okay. And is the expectation that from here on we should improve? Or do you think this is going to be the case for the rest of this financial year?

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Rajeev Gupta, Birlasoft Limited - CFO [91]

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With quarter-on-quarter growth, as we've talked about earlier, we should see our EBITDA margin also improve.

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V.P. Rajesh, Banyan Capital Advisors Private Limited - Managing Partner & Portfolio Manager [92]

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And DK, finally, are you -- see any demand challenges in the -- in your largest market in the U.S.? Or if you could just give some commentary around that, that would be very useful. And that's my last question.

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Dharmender Kapoor, Birlasoft Limited - Former MD, CEO & Director [93]

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No, I don't think that there is any demand challenge that I could see in the market. So we -- as I earlier said that we have continued to maintain our win ratio. At the same time, our pipeline continues to grow. And we are seeing more and more traction over the offerings that we have in the market. So I don't see any negative impact or anything negative around the demand coming from the market that we operate in. Okay. V.P., I'm just hoping that as we continue to work with the advisers that Europe should start picking up also in the demand from IT side, and we should take advantage of that.

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Operator [94]

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The next question is from the line of [Sachin Kasera] from [Swend Investment].

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Unidentified Analyst, [95]

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A couple of questions. One was you mentioned that you may also look in terms of investing the cash flows towards deal wins. So if you could highlight is it that you need to make strategic investments? Or what is the type of (inaudible) it will involve? Because you already have a 20 million CapEx program this year. So with that, we may have to utilize some of our cash [reserves] also for the deal wins?

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Dharmender Kapoor, Birlasoft Limited - Former MD, CEO & Director [96]

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So this is only to really look at what are the possibilities. We have said that, that we believe that tomorrow we are just going and hunting for the deals where we have to spend our cash flow. It's only that what are the possible options that are there on the table. Do we have very clear deals on the table where we can say that this is what we are committing? Right now, no, because we are a lot more working on creating the right foundation rather than really looking at should we go for a deal or should we go and pick up another company for the acquisition. I think those are only the options that we are talking right now. But how that will get factored by the opportunity that we see coming, it will be only at that profile we will really look at that whether it is meeting our long-term strategic objectives or not. And at that time, we'll take those procedures.

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Unidentified Analyst, [97]

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So sir, in that case, if you could tell us what exactly are the key financial metrics you will look at before you would deploy any large sum towards deal wins?

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Dharmender Kapoor, Birlasoft Limited - Former MD, CEO & Director [98]

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So very clearly, what growth that is going to bring us, how it is going to improve our sustainable revenue, then is it going to give us stable profitability, that would be part of the deal that we look at. But at the same time, you have to look at that if we are going after something, is it repeatable or not? We do not want to go after anything that is a onetime blip, okay? We want to really look at how it will strengthening the overall packaging and proposition of service offerings and will we be able to repeat that success with the deal or not. And whether that actually [in the case] for us to go after the market. I'll take an example. There is one deal that we are working with a customer, and we are going through that process. Now to build that product, it would have to be applicable to the entire industry, if we build it jointly with them. So there's a little bit of investment we may end up doing there, but the objective should be that overall we should still be able to grow, and at the same time, we should be able to get our margins that we want from [such deal].

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Unidentified Analyst, [99]

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Sure. Sir, just one data point. I believe you mentioned that the net cash is $67 million. Is that number correct as of June?

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Rajeev Gupta, Birlasoft Limited - CFO [100]

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That's correct.

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Unidentified Analyst, [101]

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And what was the net cash number, net of debt, as of 31st March?

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Rajeev Gupta, Birlasoft Limited - CFO [102]

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INR 530 crores was the net cash as of 31st March.

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Unidentified Analyst, [103]

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Okay. So basically, the net cash has seen a little bit of reduction, right? Is that fair, correct?

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Rajeev Gupta, Birlasoft Limited - CFO [104]

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Yes. Slightly a reduction because we also paid our debt during this quarter. And we had a onetime impact of paying variable payouts in this quarter.

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Unidentified Analyst, [105]

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No, sir. But from what I understand, when we say net cash as of last month that was the net of the debt, no? Net cash is basically cash less debt here. So how does the debt reduction led to any change in the net cash, that I'm not able to calculate the math.

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Rajeev Gupta, Birlasoft Limited - CFO [106]

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So we don't have any further debt now as of 30th June.

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Unidentified Analyst, [107]

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That I understand. What I'm saying is that when you were telling the net cash as of March was INR 535 crores, which is now roughly $67 million, and you say that, that has got reduced because of the debt repayment, I am saying when recording the (inaudible) just wanted to clarify the figure as of March 31st INR 535 crores is net of cash? Net of debt? Or it is a gross level? That's where there's some confusion.

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Rajeev Gupta, Birlasoft Limited - CFO [108]

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Okay. So there are also areas where we have settled payables, and these are on our balance sheet. So from a quality or balance sheet standpoint, we paid off our vendors. We've settled a lot of those areas, and you see some impact on account of that. But from the $76 million of debt levels to a $67 million debt level, there is also the variable payout impact that I talked about.

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Unidentified Analyst, [109]

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Okay. I'll take it off-line for more details.

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Operator [110]

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We take the last question from the line of Rahul Jain from Dolat Capital.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [111]

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Sir, I have a couple of questions. Firstly, if you could give some insight in terms of what is the growth of PC on a Y-o-Y basis on a like-for-like basis? I know this isn't really comparable, but anything that you could share there. And what is the average tenure for [us] on these deals. And any color that you can give on the renewal rate because you are sharing only the net new and year-end kind of deals. So basically, I'm trying to derive the right way to look at these PC metrics to understand the growth momentum in the business. So if you could help me bridge that gap.

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Dharmender Kapoor, Birlasoft Limited - Former MD, CEO & Director [112]

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Rajeev.

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Rajeev Gupta, Birlasoft Limited - CFO [113]

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So you were referring in terms of a guidance on a year-on-year basis, but a lot of that we've already responded to. See that -- we expect to see quarter-on-quarter growth this year. And from a year-on-year standpoint, we would look at, at least over the next couple of years to grow at market-leading growth rate.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [114]

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Yes, sorry, but actually, I was asking the same number on a historical Y-o-Y basis, how it could have looked on a like-to-like basis. And basically, to understand the gap because you give only the new deals. So how one should read in terms of what are the typical retention on the historical revenues or the renewal rate or the project basis kind of a deal mix so that this number should be rolled in the transaction of our total revenue in that way?

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Vikas Jadhav, Birlasoft Limited - Head of IR [115]

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Vikas here. I mean if you really look at the total deal wins, they will be, say, at about $88 million, so that includes renewals. If you exclude renewal, they are about $58 million.

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Rajeev Gupta, Birlasoft Limited - CFO [116]

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Correct. The $58 million that we said, it doesn't include the renewals.

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Vikas Jadhav, Birlasoft Limited - Head of IR [117]

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And last year this time -- I'm sorry. I must say that I don't think so because when you're starting the [task], you won't have that. If you want, we can answer that off-line.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [118]

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Okay. Okay. Secondly, what is our typical positioning at client vendor pool? Are we one of the larger vendors on the IT side? Or we mostly exists along with one or more large peers? And if answer to the second part is yes, then what are the risks from a vendor consolidation perspective?

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Vikas Jadhav, Birlasoft Limited - Head of IR [119]

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So your question is that what is the positioning that we have in front of our clients, is that right?

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [120]

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I'm trying to understand what is the typical mix we have as a vendor pool? Are we one of the larger vendors to our clients? Or we are typically along with 1 or 2 Tier 1s which are also present in those clients?

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Dharmender Kapoor, Birlasoft Limited - Former MD, CEO & Director [121]

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So generally wherever there's a larger client, you would always see that there are a mix of vendors of people clients that are there. And there are cases where we are along with another competition serving to our customers. But these are generally typical, very, very large customers who have very large IT spend, and they try to split it among multiple vendors. But then there are others who are smaller in nature where we are having a significant revenue. So there are both kinds of customers that we have with that. And it will all generally depend upon what is the size of IT spend that our client had.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [122]

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Right. So the point is do we see any risk from a vendor consolidation perspective? We are winning market share in those clients?

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Dharmender Kapoor, Birlasoft Limited - Former MD, CEO & Director [123]

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No, I don't see any risk. So far, if I look at the last 2 quarters, have I seen any clients dropping us and moving to somebody else? No, we haven't seen that. In fact, there are good renewal that have happened in the last 2 quarters also. In fact, even just before the merger also I could see that very clearly if I look at the historical data that is available for the larger clients. And while looking at the account plan, we have looked at that. So those are all renewed. So I don't see any risk with my -- any of the customers today where I would expect that in the renewal process we will not get selected or if there's any larger renewal that is just coming in the next couple of quarters.

From a growth perspective, I don't see much of a risk anywhere. At the same time, we always continue to watch for what are the renewals that are coming up. And the objective is always there, how do we get a larger share of the pie by now bringing in other service lines into the portfolio as well. So from that perspective, I think we are safer. At the same time for the larger customers, we are actually supporting them in a very significant part of the portfolio, which is ERP. And it is not easier for them to shift the -- or transition that to the other vendor because in term of peripheral services it is easier. But when it is core of the business, they generally try to remain with their existing service provider because there is a good amount of dependency that gets built over a period of time. So from that perspective also, I believe that the risk for us to getting eliminated in any larger deal is very, very negligible. So we have continued to do a good job in front of the clients so that we continue to win and continue to renew.

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Operator [124]

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Thank you very much. We take that as the last question. I would now like to hand the conference back to the management team for closing comments.

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Dharmender Kapoor, Birlasoft Limited - Former MD, CEO & Director [125]

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Okay. No. I thank you very much, everyone, for joining. As I talked earlier, why we are 1.2% down from Q4. But I'm very excited with the way we have started approaching and how do I look in the future because one of the key expectations that I had from myself was that how are we going to stabilize the operation. And we are doing very well on that direction. At the same time, the biggest goal that we have is that we create the stronger foundation. Because if we try to just run after the market without having a stronger foundation, we may get the -- a blip of the success, but it will not be sustainable. Our objective is very clearly that we structure organization in such a way, we defined our service offering in such a way that we continue to go after sustainable growth and sustainable profit. So from that perspective, I believe that we are in the right direction, and I'm sure that you'll continue to see that we are moving forward with a lot more confidence.

Thanks. With that, thank you very much.

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Operator [126]

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Thank you very much. On behalf of Birlasoft Limited, that concludes the conference.

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Vikas Jadhav, Birlasoft Limited - Head of IR [127]

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Thanks, Raymund.

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Operator [128]

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Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.