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Edited Transcript of MASTEK.NSE earnings conference call or presentation 28-Jan-20 10:00am GMT

Q3 2020 Mastek Ltd Earnings Call

Feb 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Mastek Ltd earnings conference call or presentation Tuesday, January 28, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Abhishek Singh

Mastek Limited - Group CFO

* John Timothy Owen

Mastek Limited - Group CEO

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Conference Call Participants

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* Akshay Ramnani

Axis Capital Limited, Research Division - Senior Manager of IT, Internet & Telecom

* Asish Dash;Sharekhan;Analyst

* Kaushal Dedhia

Standard Chartered PLC - Associate

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Mohit Jain

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

* Nirmal Bari

Sameeksha Capital Private Limited - Equity Research Analyst

* Nisarg Vakharia

Lucky Investment Managers Private Limited - Analyst

* Sarvesh Gupta

Maximal Capital - Founder

* Asha Gupta;Christensen Investor Relations;Vice President

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Q3 FY '20 Earnings Conference Call of Mastek Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Ms. Asha Gupta from Christensen IR. Thank you, and over to you.

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Asha Gupta;Christensen Investor Relations;Vice President, [2]

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Thank you, Sanford. Good afternoon to all of you, and thanks for joining Q3 FY '20 results of Mastek. The results and presentation have already been mailed to you and you can view that on our website, www.mastek.com. To take us through the results today and to answer your questions, we have the top management of Mastek represented by Mr. John Owen, Group CEO; and Mr. Abhishek Singh, Group CFO. Mr. John will start the call with brief overview of the quarter gone past, which will be followed by Mr. Abhishek, who will be going into detailed financials. We will then take the Q&A session.

I would like to remind you that everything that is said on this call that reflects any outlook for the future or which can be construed as forward-looking statement must be viewed in conjunction with the risks and uncertainties that we face. This risk and uncertainties are included, but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual report that you can find on our website.

With that said, I would now like to hand over the call to Mr. John. Over to you, sir.

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John Timothy Owen, Mastek Limited - Group CEO [3]

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Thanks, Asha. Really appreciate it. Welcome, and thank you for joining our earnings call for Q3 fiscal '20. Let me start by wishing you a Happy New Year, and welcoming you to the new decade of 2020, one that I hope delivers success for us all, but forgive me for specifically thinking about Mastek. And I hope we start to deliver on the true potential as we come to the end of our phase of Vision 2020, which is -- it seems to have come around rather quickly from when I started 3.5 years ago.

On reflection, calendar year 2019 was a tough year for Mastek. And to be candid, we didn't make the progress we'd wished or planned for. However, as the military say, if it doesn't kill you, it must make you stronger. And that's how I look at this period of trading. I think we're a lot stronger, more resilient organization. In our core market of the U.K., which accounts for 75% of our revenue, we were once again impacted significantly by the political uncertainty of Brexit, which has been the major shadow and headwind for the U.K. economy throughout 2019.

Our other major exposure is the retail market, and that's also being challenging in both the U.S. and the U.K. For us, Q3 was dominated by U.K. general election. And when we spoke on our last call, the real-time news hit the wires that Boris Johnson had secured the deal with the European Union and the uncertainty on that issue was over. And there was -- that euphoria, unfortunately, was short-lived and gave way to a week of more political indecision, which culminated in a general election being called, which effectively closed down the government machinery for 6 weeks into December.

Irrespective of politics, a decisive win for Boris Johnson has effectively stabilized, which cautiously being optimistic, should now create some welcome tailwinds for Mastek through 2020 and get us back to our growth that we were enjoying in the earlier years. So when we layer in Q3, being: first of all, it was a seasonally softer quarter across the market; two, the impact of the U.K. being focused on politics and not economics; three, we have the usual shutdowns, particularly in our major account of the Home Office, which is a massive revenue generator for us; and also, you layer in the U.S. retailers focused on Black Friday and Christmas trading wind and not actually doing new initiatives and the fact that our new leadership teams in both the U.K. and the U.S. was settling in, I'm looking at this so Q3 should be seen as a turning point for Mastek.

And although the quarter-on-quarter revenue in constant currency declined 4%, primarily driven by poor performance from the U.S., however, a stronger U.K. performance and a favorable exchange rate enabled the group to deliver a flat revenue in rupee terms. This performance, hopefully, once again, demonstrates that we've strong operational control levers to mitigate external events that hit us. I should also note that the favorable exchange rate from the U.K. should yield better financial returns for Mastek in the future, given our significant U.K. business mix. However, our core focus is to grow, in constant currency, in every market as the new teams establish themselves and convert the pipeline into orders, orders into revenue.

The same visibility on our core fundamentals and the improved goal -- controls give me the confidence that the group will return to growth for the fourth quarter and maintain that trajectory into fiscal '21 with not only a more resilient business but a more experienced and balanced leadership team. I think I described last quarter as a lot of hard work and good work to essentially stand still, and it was rare for me to be pleased with the flat growth. But I, hopefully, have shared the drivers behind some of that underlying decision-making, and I hope you can see now that it allows us to manage the business in a more controlled way and we can control the events better. What we have to focus on now is accelerating our top line.

Our U.K. market delivered a modest growth of 1.4% in constant currency. So when you layer in the facts of the holiday shutdown in our biggest contract, the Home Office, the retail softness, government essentially shutting down through most of the quarter, I'm pleased we stabilized the U.K., and it should be seen as a fantastic platform for sustainable, profitable growth. As I indicated earlier, unfortunately, our U.K. business continues to struggle to break out of its core customer and capability set, which accounts for the 6% decline year-on-year. That being said, I am confident that our internal transformation in the U.S. will deliver the growth in Q4. And again, that will flow into fiscal '21, as we see the benefits of that increased sales investment and the more technology partnerships, which effectively extends our reach and coverage into the market.

We expect our first win for headless architecture contract in the Q4, and that is through a new channel, and that's going to be a new revenue stream for Mastek. India has been a real struggle in Q3 where we've been impacted in the near term by what feels like a perfect storm. Although India is small in our overall exposure, unfortunately, our largest historic customer, Cox & Kings, went bankrupt, which impacted both our cash and revenue, and we also continue to incur financial losses as we exit with grace our Indian government contracts. Those liabilities should roll off the balance sheet over the next 12 to 18 months.

So without levering the point, with a soft revenue performance and some external factors hitting profitability, I am pleased and encouraged that we've been able to protect our earnings quality and deliver an improvement, which, again, provides confidence that as -- we're managing the business better than we have done historically. I know predictability in controllers worried many long-term Mastek investors where they have historically felt exposed to and blindsided by operational downturns. As an external proof point of where we are, and our stability and our platform for strategic growth, I'm also particularly pleased to share the news that Mastek won the U.K. IT Vendor of the Year award in 2019, awarded by the British Computer Society and the Chartered Institute of (sic) [for] IT, which I think validates externally our delivery track record is valued by our customers.

So the start of calendar year '20 also signals the final chapter of our existing strategy for Mastek, Vision 2020, which will conclude at the end of Q4. Vision 2020 has provided a much needed focus and discipline to grow our business and provide better financial performance and transparency to our investors. Under Vision 2020, when measured over a 3-year window, I would argue, we've strengthened our business in every aspect from revenue, profitability, shareholder returns and cash generation. Under this strategic framework, I've consistently stated that we will dispose the noncore assets and reinvest those proceeds into building a cash-generative stronger Mastek that's more strategically relevant to our customers, our investors and our employees, and these are all key stakeholders we need delivered to and for.

I'm therefore pleased to report solid progress over Q3 against these 2 major assets that we've identified and agreed to divest. We've now successfully monetized 60% of our legacy shareholding in Majesco through 2 tranches of sales. And this program has generated $24 million of net cash to Mastek. We will continue to divest the balance of our 2 million shares at the appropriate time and the appropriate price, so we completely exit this investment in the near term. I also expect to complete the sale of noncore real estate assets within the next few quarters, again, to further balance our -- sorry, to further strengthen our balance sheet, and at the appropriate time, reinvest those proceeds into strengthening our business. This activity further strengthens Mastek's financial capacity to execute our inorganic growth strategy and ambitions that we identified in Vision 2020, which is intended to deliver a stronger growth engine and also diversify away from some of the market risks that we've experienced in the last 3 years, namely a predominant U.K. concentration.

On the strategic agenda, I'm also pleased to announce that we've further strengthened the Board of Directors with the appointment of Rajeev Grover as an Independent Director. Rajeev brings over 30 years of cross-functional leadership experience and particular expertise in operations and general management from global blue-chip organizations such as Hewitt Associates, GE, American Express and PwC. I welcome Rajeev to the Board and look forward to working with him to take Mastek to the next level of scale and performance.

So in summary, the internal cost out program that we initiated back in Q -- on the back of Q1 performance, I think, has enabled us to deliver on our quality of earnings commitments with softer revenue. We quickly realigned our cost structure to the softer revenue outlook, and therefore, as we've experienced improving marketing conditions in our core markets of the U.K., I expect that to return directly to modest growth in Q4. That momentum should continue and return Mastek to our previous growth rates as we enter fiscal '21. And given the improved cost structure and organizational flex and agility, I anticipate that accretive growth will expand as we -- sorry, will enable us to expand our earnings profile.

I'll now hand over to Abhishek, who will take you through the financial breakdown and hopefully provide a little more context, and then we're happy to answer some questions.

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Abhishek Singh, Mastek Limited - Group CFO [4]

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Thank you, John. My wishes to everyone on this call. I'm going to share the highlights of our performance for this quarter and then focus on the Q&A. We did circulate a deck right ahead of this call, so that contains a lot of details. We won't go through the page turn, but I'll just be focusing on some of the financial highlights.

So starting with total income. It stood at INR 253.2 crore for the quarter, just flat quarter-on-quarter. Operating income stood at INR 243.7 crore, again flat quarter-on-quarter. However, it is 4% down in a constant currency terms and possibly 7-plus percent down year-on-year, again, in constant currency terms. If I look at my geographies, U.K. -- our business in U.K. was up quarter-on-quarter in constant currency terms, as John alluded, 1% plus, as well as in INR terms. This was despite our largest customer experiencing furlough in the last week of December. It was further exacerbated by the fact that elections happened in U.K. and that led to the delay in the order closures, because U.K. government goes through what is called as purdah.

Just to explain it, it is a preelection period in U.K., specifically the time between announcement of an election and the formation of the new-elected government. And in this period, central and local governments are constrained from making announcements about any new contracts or initiatives that could be -- seem to be advantageous to any candidate or parties in the election. So this basically stops the adjudication of the bids that are in the process. And as a result, that had some impact on our order backlog. However, moving forward, that tap has opened, and we have seen some positive momentum postelection.

The U.S. market was impacted by the timing of the deal closure and seasonality. We had some of our projects that came to the closure, and we expected it to materialize into managed services that got delayed. However the strategy that we have been pursuing has yielded 5 new logos in the quarter, and we expect that these logos to ramp over a period of time and give us a stable performance going forward.

India business, as we alluded, had some major movement that impacted both the top line as well as bottom line and cash for the organization. Our largest and longest customer relationship in the geography, Cox & Kings, went into bankruptcy. As a result, the revenue for the quarter was impacted. It will be impacted going forward as well. We had to also make provisions for the bad debt on account of that. However, the addition that we have made in the geography by bringing in the new sales head, along with the team, has started to show some initial results. We added 3 new logos and specifically in the RPA space, which is where we want to build our differentiated capability.

In terms of revenue composition, application development as well as support and maintenance services line grew significantly, and this correlates with the growth in the government services vertical that we experienced for the quarter as well as 9 month of this financial year. As outlined earlier, we made provisions for the bad debt on account of C&K bankruptcy, and the impact of that was roughly around INR 4.5 crore for the quarter. The corresponding number in the prior quarter was around INR 2 crore.

As we look at operating EBITDA, it stood at around 13.8% for the quarter, a growth of right around 120 basis points quarter-on-quarter and 100 basis points year-on-year. The cost management as well as the operating efficiency initiatives that we have done as well as the right-shoring of the cost structure, all of these factors have contributed to this EBITDA improvement, which we expect to build upon and use as a lever to invest and grow the business moving forward. PAT stood at INR 26 crore in the quarter versus INR 24.6 crore last quarter, growth of 5.6% quarter-on-quarter, however a marginal decline on a year-on-year basis as last year stood at INR 26.5 crore.

The impact of purdah is amply visible in our order backlog, which stood at INR 471 crore or GBP 50 million on an aggregate vis-à-vis the prior quarter, though it is a seasonally weak quarter for us, and in prior years as well, there has been a softness in this quarter. However, this quarter was pronounced on account of the local factors in U.K. In all, we acquired 9 new logos during the quarter, and the LTM clientele stood at 143. Cash and cash equivalent is a very good story. The total cash stood at INR 435.6 crore on 31st December vis-à-vis INR 265.5 crore in Q2. Organic cash grew from INR 265 crore to INR 322 crore and change. And this was after accounting for the last tranche of TAISTech payout that we made in December and the dividend that we paid during the quarter gone by. INR 113 crore came in from the proceeds of Majesco share, the 2 million shares, that we sold before 31st December. And if you had to just draw a parallel, cash as on date would be close to INR 495 crore because we sold another 1 million shares of Majesco in January.

So summing up our performance, this was a tough quarter, which was impacted by holiday season, which was impacted by the seasonal softness, and the furloughs in our major geography accentuated the situation. However, we have steered the business, managed our cost structure and kind of gotten some kind of stability in our quality of earnings, which we look forward to building upon, as we get into Q4.

With that, I'll hand it back to the floor for question and answer. Thank you.

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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 Nirmal Bari from Sameeksha Capital.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [2]

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My first question is on the U.S. geographies revenue. So the revenues have been kind of stable for a few quarters, and then this quarter again it went down. So what was it that specifically contributed to it? And secondly, if I look at the revenues and the employee count over there, the employee count has been consistently going down from -- for the past 6, 7 quarters. So what is happening on that front?

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John Timothy Owen, Mastek Limited - Group CEO [3]

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Okay. So let me pick up the U.S. And I think you're right. It's stabilized, but it could go move plus or minus sort of 10%. I think Q3 has always been a seasonally weak and soft in the U.S. retail market. But I think, to be candid, we've not had that breakout that we talked about from the U.S. retail segment. So we are looking at our strategic options in the U.S. to solidify. So I think the good thing is it's a solid business, but it's not going to be a stellar performer, unless we do something to it. So how do we give it a bit of muscle? How do we give it some unique capability? And that's the strategy the team are building.

To your point about head count, earnings and such like, you're right, we've gradually become a lot more efficient and we've had stable revenue, and now we've got increasing revenue of lower head count, which means we're managing our bench better, we're managing our under deployment. But you're right, strategically, as we get an uptake in our order book and our revenue, I expect our head count to start to grow again from Q4 onwards, because it's not sustainable. I think you can get through building and taking your redundant and spare capacity out, and that's what we've done over the last 5, 6 quarters. And in the last 2 quarters, we've taken layers of management because it's a flatter organization. However, at the end of the day, we've got to put more engineering capacity back in. So I do expect our head count to start to pick up in Q4 and Q1. But back to Abhishek's point, that operational discipline has now given us the better of when we get our revenue right, we should be able to control our earnings and expand those and reinvest faster into the business. So hopefully that answers both the U.S. and the head count.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [4]

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So in U.S. -- and Mr. Abhishek did mention that there were some projects which got over. So as against that, what are we seeing now? Is there a slack or where do we expect the growth to come from in U.S.?

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Abhishek Singh, Mastek Limited - Group CFO [5]

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Nirmal, ours is a project nature work where you do a package software implementation. That's what Oracle Cloud Commerce is about in U.S. And what happens is once you have implemented, there's a logical conversion of that implementation work into managed services, and that's where you get some tail and some stability. So this is one part that got impacted. Though the project got over, the managed services did not materialize. Now if we triangulate this with the new logo wins, as I outlined, we have had few -- 5 new logo addition. And across all the 3 quarters, it has been a steady trend that we have added the logos. So it's the timing of it that the logos came in a little late, the projects came to closure, and it did not convert into managed services. However, from where we stand in the quarter, the wins that we have had should give us an upward trajectory moving forward in U.S. geography.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [6]

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Okay. And lastly, we had hired some senior management and built an entire team around TAISTech in U.S. So what would be the cost that we had incurred in TAISTech and -- except for the acquisition cost?

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Abhishek Singh, Mastek Limited - Group CFO [7]

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So the business has gone through many rounds of churn, Nirmal. I'm not sure exactly which costs are you looking for. But if you talk about it over the last 9 months of the fiscal year, we have added roughly around $1.5 million to $2 million worth of SG&A. And this is, in particular, the senior leadership and the sales leadership, both in U.S. and in U.K.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [8]

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Yes. That was what I was referring to.

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Abhishek Singh, Mastek Limited - Group CFO [9]

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Okay.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [10]

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And then this cash that we are sitting on right now, do we have anything on hand because of which we are selling it? Or is it that the price is good for Majesco and so we had started selling? Secondly, given our experience with TAISTech and with IndigoBlue as well earlier, do you still think that would be the best use of cash to acquire a company rather than do something on our own?

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John Timothy Owen, Mastek Limited - Group CEO [11]

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I think if you look at the strategic agenda we've got, digital is a growth market. We've got stability and better operational footprint. And we've learned a lot in 3 years. We have a very clear strategy that we want to invest in the growth of Mastek and make Mastek a more cash-generative business. So let me be clear. The preference of asset capital allocation is to make the company stronger, give it better coverage and give it more strategic relevance to our customers, our employees and, therefore, our investors. So the cash is there allocated for an inorganic strategy. That being said, we've also got a very disciplined view of how we look at what acquisitions we would or would not make. To be clear, they have to fit our operating footprint, so we get some synergies. Two, they have to have a cultural fit with us. Three, it has to be accretive in its growth rate. And four, it has to be accretive in its earning capacity and capability. And we look at lots of companies over the last 2 years, and we decided not because we get -- we -- it's easy to buy a company, but this company has got to be a catalyst to accelerate our growth and make Mastek stronger. We're not -- now we've got money. We're not just going to use it. But we have been reviewing what are those strategic elements, be it the U.S., where we are quite narrow, that would strengthen and deliver sustainable quality growth. So we're not here to spend it and let it go. It's about using it to invest in a platform that will make Mastek stronger in the next 2 to 3 years.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [12]

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Okay. And do we -- and is there any opportunity in the next -- yes. This was the last question.

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Operator [13]

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Mr. Bari, we request you to come back in the queue for a follow-up, please.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [14]

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Okay.

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Operator [15]

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(Operator Instructions) The next question is from the line of Nisarg Vakharia from Lucky Investment Managers.

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Nisarg Vakharia, Lucky Investment Managers Private Limited - Analyst [16]

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It's heartening to hear that you're reasonably confident on getting back on the growth path in quarter four. My question was that how have we managed a 13.8% EBITDA margin despite challenges and de-growth across various businesses?

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Abhishek Singh, Mastek Limited - Group CFO [17]

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So Nisarg, there are 2 parts to it. The first one is, obviously, the gross margin component of it between the quarters that has had a northward trajectory. And the second component of that has been on the S&M delayering as well as the reinvestment of that back into the business. So this trend of revenue and the key geographies where we had revenue pressures are not new. We saw the indicators ahead of time. So we've been working on this one through and through to kind of make that happen. And I would say that it's operating levers, it is workforce management, and it is about repurposing the S&M into where I could get the better returns and not cutting on those S&Ms because we can't cut our way to growth.

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Nisarg Vakharia, Lucky Investment Managers Private Limited - Analyst [18]

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So I'm referring to the question because we haven't seen these margins even when we were growing at 15%, 20% per annum constant currency. Does this mean and imply that once growth comes back, we will see, at least, sustainable EBITDA margins of 14% or higher?

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John Timothy Owen, Mastek Limited - Group CEO [19]

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So I think we had a very clear strategy when we started it. We will grow into our cost structure. And when you are growing your top line, with respect, you're probably not as focused on your bottom line making that transformation that we talked about. I think when you soften up, you do actually look, and we've taken a lot of cost out. But to Abhishek's point, we've not taken cost out at the expense of our strategic agenda. So we have invested over $1.5 million in SG&A. So that -- it got to give us a return to growth. How we then deliver our earnings? I think we've got more capacity to either take it to earnings or reinvest quicker in the business. But at least, we're managing on both the levers, not just revenue.

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Nisarg Vakharia, Lucky Investment Managers Private Limited - Analyst [20]

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So 14% EBITDA margin is more or less sustainable, at least?

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Abhishek Singh, Mastek Limited - Group CFO [21]

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We're not going on the numbers. We aspire. I mean I've always been as categorical as a management team that yes, northward trajectory is the requirement, and we'll work towards it.

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Nisarg Vakharia, Lucky Investment Managers Private Limited - Analyst [22]

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Yes. The reason why I keep insisting on this point, Abhishek, is because it's actually very heartening to see your margins inch up despite such challenging times. Because we've been stuck between 11 -- 11.5% and 12.5% for a long time. Hence, as investors, we were just hoping that you would sustain these margins, then the earnings will obviously be better.

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Abhishek Singh, Mastek Limited - Group CFO [23]

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True. That would be our endeavor.

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Operator [24]

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The next question is from the line of Sarvesh Gupta from Maximal Capital.

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Sarvesh Gupta, Maximal Capital - Founder [25]

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So first question is on the U.K. business. Sir, now that the Brexit deal is assuming to be done, are there some options that you have seen because we are already 1 month into the quarter? And if you can throw some more color as on the U.K. scenario, given that the clarity on Brexit seems to be of a higher order, at least, from what we -- out of here in India?

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John Timothy Owen, Mastek Limited - Group CEO [26]

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Okay. So I think the cause and -- the time line between cause and effect are not as quick as we would like or you suggest, but I do see 2 things. One, in the general U.K. market, I think there is more confidence because we have clarity we are leaving the European Union. Now that will throw lots of challenges as we go through the next 12, 18, 24 months. But one, it's going to unlock projects because now Brexit, from a government perspective, they have clarity of what flavor of Brexit they now need to build to. Up until we were exiting, we could have been staying in, there was no program. So you can see capital and people being reallocated. For example, the Department of Brexit has now been disbanded, and those civil servants have now gone back to their departments or the MOD or the Home office or HMRC or wherever, and they're going back with money to implement the exit strategy.

Secondly, as part of the Conservative manifesto, they have also signaled an end to austerity. So there is more money being spent on public services. So I think there's 3 things that I'm optimistic from the U.K.: one, from a government perspective, they're going to spend more, so they're putting more money into their budget; two, they've got clarity of what Brexit is, so they're now starting to implement it; and three, I think the general economic confidence in the U.K. is higher than it's probably been for the last 13 to 15 months. So I am optimistic about the U.K., and the platform we've got there is stable and is a source for profitable, sustainable growth.

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Sarvesh Gupta, Maximal Capital - Founder [27]

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Understood. And second question is with regard to the cash on the balance sheet. So at least, I, as an investor, completely agree with the fact that we need to spend on the growth with respect to our return on capital metrics. As long as we are getting good bang for the buck we should go for acquisitions, and I think we should definitely do it given the synergies that we can develop, et cetera, et cetera. So that -- all of that is fine, but given that the cash that now -- that we now have in the balance sheet is significantly higher, why is -- it has to be a case of either this or that? But we can do buyback and we can also go for the inorganic. I mean there is cash left for both of them. Why it has to be a question of either this or that?

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John Timothy Owen, Mastek Limited - Group CEO [28]

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I don't think it's this or that. I'm not saying it's either/or. What I'm saying is as we review as a Board our capital allocation, it will be what is the best use for the strategic agenda of Mastek and its shareholders. And you're right, it's not either/or. So please don't -- but everything will be reviewed. What I will say is, I've not seen many people do an acquisition. 5 small ones don't make the same impact as 1 bigger one. So I think the time, the risk and the capacity to execute 5 small ones and then have some cash looks good on a spreadsheet, but I think when you're trying to operationalize and grow in a market that's growing, that may not be the right strategy. But again, we've got a very disciplined process with the Board of how we would go with our acquisitions, what it's going to do and what the returns are going to be, and it will be looked through that filter.

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Sarvesh Gupta, Maximal Capital - Founder [29]

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Any range of numbers on the kind of deal that you are looking at in terms of inorganic?

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Abhishek Singh, Mastek Limited - Group CFO [30]

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So it's driven by our strategic objective. We've got requirement for assets, which drive our digital commerce agenda. We are looking for assets which are going to give us customer acquisition engine that could be of a larger size. So I would say, at this point of time, we have had multiple conversations, and the range is from -- all the way from $5 million to $50 million plus. So we're not constrained, but necessarily driving what the business needs.

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Sarvesh Gupta, Maximal Capital - Founder [31]

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Understood. And are we in an advanced stage in any of these inorganic -- possible inorganic opportunities?

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Abhishek Singh, Mastek Limited - Group CFO [32]

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I'll tell you what. These deals are never done until they are done, and advanced or early stage means nothing. But all I'll tell you is we are in continuous conversations and corralling the market for opportunities.

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Operator [33]

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The next question is from the line of Princy Bhansali from Anand Rathi.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [34]

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Sir, this is Mohit from Anand Rathi. So 2 questions, one is on U.K. visibility. How much do we have now that we are in Jan end, and hopefully the order backlog would have been better compared to what you have reported in December? So what is your visibility for this year on U.K.? And second, was there any tax benefit in this quarter? Or what is your outlook for full year tax rate?

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Abhishek Singh, Mastek Limited - Group CFO [35]

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To start with U.K. as a major market, Mohit, clearly, it was an artificially deflated quarter as far as order backlog is concerned, given the effect of purdah, as I outlined. So we have seen some momentum as we came into January. So we feel comfortable about that. But yes, it will build up, and that should reflect in the revenues as well. The fact that our largest customers went through furlough means that, that should be an add-back for us as well. So these are the indicators that tell us the January performance or the January indicators as well as a cleaner quarter from the working days and billing days point of view, both those indicators give us the confidence. And we are building on this further as the government's appetite to spend comes in and our reference ability and our credibility goes horizontal across the departments to land the new logos. So we feel fairly comfortable about moving in the right direction as far as U.K. is concerned.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [36]

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So the furloughs are all over and people are already deployed on these assignments or?

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Abhishek Singh, Mastek Limited - Group CFO [37]

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Yes. It coincides with the holiday season. So it's essentially your Christmas, New Year phenomena.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [38]

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Right. So what I'm asking is, in January, like as of today, they are already deployed? Or you are expecting some...

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Abhishek Singh, Mastek Limited - Group CFO [39]

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Yes. They are deployed. They're back.

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

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So it's already back to normal?

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Abhishek Singh, Mastek Limited - Group CFO [41]

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Yes.

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

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And how much visibility do we have? Like, inflow of orders has significantly improved versus last few quarters because you are guiding for growth in U.K. after coming off on a low base. And then obviously, we have been losing employees, total head count basis, over the last 4, 5 quarters.

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Abhishek Singh, Mastek Limited - Group CFO [43]

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So I would say on the employee front, Mohit, I won't say it's losing employees. It's about what I have in the pipeline. As I keep mentioning, RPA is a key agenda. So what of that can I transform, retrain and redeploy and if not, then I have to repurpose. So the gross addition is there. The net de-growth is visible quarter-on-quarter. But again, these are the quarter end numbers. I'm not worried on that front. As far as fulfillment is concerned, we've got to have the workforce, which can support and service the work that's coming our way.

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

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So the saturation thing should come down in utilization because it's at 77%. You are saying addition will -- or negative addition will reverse itself in 4Q, right?

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Abhishek Singh, Mastek Limited - Group CFO [45]

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That's a fair point.

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

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Lastly on tax rate. Any onetime benefit this time? And what is the tax that you're looking at for FY '21?

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Abhishek Singh, Mastek Limited - Group CFO [47]

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So ATR would be in the same range as we have had all along, Mohit.

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

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All along in third quarter or 9 months. What should we consider?

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Abhishek Singh, Mastek Limited - Group CFO [49]

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Take 9 month as a reference.

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

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9 month as a reference.

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Operator [51]

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The next question is from the line of Akshay Ramnani from Axis Capital.

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Akshay Ramnani, Axis Capital Limited, Research Division - Senior Manager of IT, Internet & Telecom [52]

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So congratulations on the margin resilience. So you mentioned that Q3 should be viewed as a turnaround quarter. But when we see the order backlog, it's at 10-quarter low, down about 30% Q-o-Q. So what is giving us confidence on near-term acceleration? So furloughs coming back is one of the factor. But apart from this, what are other fundamental factors that you see, which will help us accelerate in the near term? And specifically, which verticals and geographies would be driving this growth?

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Abhishek Singh, Mastek Limited - Group CFO [53]

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So Akshay, the order backlog, as I said in the last -- for the last question, was artificially deflated because the government -- the system does not allow you to adjudicate the bids that are in the process or for that matter even renew the contracts that are up for renewal with them. It's that clear. Purdah as a concept is clear. And the first 20 days of the month that we experienced in terms of that coming back into the business or those adjudications happening in our favor, that's what gives us the confidence. These are all the lead indicators that yes, are you winning? Yes. The furloughs have been over and people have been redeployed? The answer is yes. So we're basing it on the lead indicators as far as U.K. is concerned. If I were to just draw parallel for U.S. geography, the logos that we have added are in ramp, and that can help us stabilize the business and build on that to drive growth further. So all of it is based on lead indicators.

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Operator [54]

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(Operator Instructions) The next question is from the line of Madhu Babu from Centrum.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [55]

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Sir, on the U.K., any new departments we have entered under this quarter or any potential new departments, which we are going to add? And second, on the U.S., we added some new accounts, right? So is there multiservice or, again, it is just project-based work there?

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John Timothy Owen, Mastek Limited - Group CEO [56]

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Okay. I think there's 2 things. On the U.K., no, there are no new accounts coming through in this period, and that's based on purdah. So everything is moved to the right on that. But we do aspire and endeavor to get new accounts and basically do what we've done historically, which is NHS, build in, grow out; Home Office, build in, grow out; we've now got the MOD, build in, grow out; and we need to replicate that over the next coming quarters. So I am encouraged with the coverage. I'm encouraged with the projects, but we're not announcing anything at this stage.

Regarding the U.S., I think those projects are within the traditional Oracle space with the exception of one, which is a headless architecture project, and that is with a new channel. And I think that's when you start to build real sort of micro services. And that's how you get a lot more value as a retailer over a standard product. So there are new capabilities and there are new channels, but we're at the early stages of that.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [57]

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Okay. So just on the U.S., I think the leadership has settled on I think 6 months -- over the last 6 months. So do we see that this revenue trajectory improving? Because I think it is at a multi-quarter low, the U.S. revenues. The mining initiatives, do we expect it to cut it down by second half of next year? Or how is it going to?

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John Timothy Owen, Mastek Limited - Group CEO [58]

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Yes. So I think, in fairness, when you change your team, it takes time to build to do the transition. What I will say is the changes we've done, we've got more coverage in the market. We've got a healthier pipeline today, and we're going through multiple channels. So I think, factually, you are correct from a quarter low, but I do expect that to return to growth in Q4. And I think that team and the impact of that team flowing into fiscal '21 is -- it's an improving outlook. That being said, I don't think it's going to be a radical shift. We need to put more strategic assets around that capability. But the team is bedding down. But I think it goes down to that cause and effect. It's not going to be a 1 quarter impact, but I am clear the actions they are taking are correct and they will yield better results in Q4, Q1 and Q2.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [59]

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Sir, and last one from my side. The bad debt -- what is expected? Is there more write-off expected on the India side?

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Abhishek Singh, Mastek Limited - Group CFO [60]

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No. There will be something -- there's a normal course of business, Madhu Babu. But this was exceptional, and that we don't expect anything of that nature.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [61]

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Okay. So that is done as of 3Q, whatever is there, yes, okay. And we said that we are adding some new departments in India. Just if you can brief on that.

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Abhishek Singh, Mastek Limited - Group CFO [62]

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Yes, so these are logos in the private sector that we have won. They have requirements for robotics process automation and AI space. And that's where we have had -- we have built some credibility. So we're building on that as we land the customers through that channel of RPA or that delivery and then try to expand into the apps dev and app services space. These are essentially -- I know these are essentially your banks, your large cement manufacturers and the utility companies in India.

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Operator [63]

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The next question is from the line of Asish Dash from Sharekhan.

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Asish Dash;Sharekhan;Analyst, [64]

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Last con call, in Q2, you mentioned about U.K. offshoring projects and some minimal contribution in Q3. And you mentioned that the incremental revenue will come from Q4. Could you please give some updates on this U.K. offshoring projects?

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John Timothy Owen, Mastek Limited - Group CEO [65]

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Okay. So the -- we are in pilot with 3 projects with -- in the government space to offshore nonsensitive data. They're in the pilot. There are another 15 projects that are on the back of that coming in over the next 2 years. So yes, we're in the pilot phase. Yes, we see visibility. And at the moment, the customer, given this is an early insertion to offshoring, is just taking sort of baby steps with 3 projects. What I will say is those 3 are going well from our perspective. But there's a review on that in the coming quarter, but I do expect that to ramp over the next -- it's probably 6 to 8 quarters, and it will become a material contribution to Mastek's revenue line. So yes, very exciting, but I think it's too early to take it to the bank.

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Asish Dash;Sharekhan;Analyst, [66]

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I can see the margins in U.K. operations has improved, and it's back around 17%. Is this margin sustainable going ahead? Because see, why I'm asking revenue -- there are stress in U.K. revenue part, but we have done well in margin execution. So is it sustainable going ahead?

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Abhishek Singh, Mastek Limited - Group CFO [67]

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Yes. So the whole endeavor is the efficiency or the improvement initiatives that we have built in have to be sustainable. I mean you do not expect that to go down. Having said that, as we grow, there would be some timing issues when you have cost of growth or cost of ramp coming in. Barring that, we do not expect any major movement.

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Operator [68]

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The next question is from the line of Kaushal Dedhia from Standard Chartered Bank.

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Kaushal Dedhia, Standard Chartered PLC - Associate [69]

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Just 2 questions. One, on this exceptional item in 9 month of around INR 6.5 crores is entirely the Cox & Kings receivable write-off, if I'm correct?

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Abhishek Singh, Mastek Limited - Group CFO [70]

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That's right.

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Kaushal Dedhia, Standard Chartered PLC - Associate [71]

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So have the receivables been entirely written-off? Or is there something left now?

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Abhishek Singh, Mastek Limited - Group CFO [72]

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Completely written-off.

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Kaushal Dedhia, Standard Chartered PLC - Associate [73]

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Completely written-off. And secondly, on the TAISTech acquisition, I heard you were mentioning that some large tranche was paid in December. So how much was that, if you could give me a rough number?

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Abhishek Singh, Mastek Limited - Group CFO [74]

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Just around $1 million -- shy of $1 million.

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Operator [75]

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Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

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John Timothy Owen, Mastek Limited - Group CEO [76]

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Okay. Thank you very much. I think as you can see, as difficult market conditions, be it seasonality or some of the election things, what we have got now is control of our cost structure, and we understand the levers. I think as we're moving forward, yes, we're more optimistic into Q4 and fiscal '21. And it is about layering in cost, not just bringing it all in intelligently. We will invest where we can strengthen the business, and we can grow by that strategic breakthrough, particularly in places like the U.S., and we can build some capacity and capability around our U.K. business to give us strength. We'll also look to diversify. But I think for me, coming into the New Year, it is with optimism. And I think generally, if we get the top line working, everything else will fall in, and that's where the focus is with the team. So I appreciate your support. I appreciate we didn't deliver in Q1, Q2, but I think you've seen us be able to pivot the organization and get it under control and deliver consistency and predictability, This is all now about getting back down to the trajectory of growth that we enjoyed in the first 2.5 to 3 years. So I thank you very much, I appreciate your support, and I look forward to meeting you in the quarter.

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Operator [77]

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