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Edited Transcript of MPHASIS.NSE earnings conference call or presentation 15-Nov-19 4:00am GMT

Half Year 2020 Mphasis Ltd Earnings Call

Bangalore Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Mphasis Ltd earnings conference call or presentation Friday, November 15, 2019 at 4:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Nitin Omprakash Rakesh

Mphasis Limited - CEO & Executive Director

* V. Suryanarayanan

Mphasis Limited - Executive VP & CFO

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Conference Call Participants

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* Apurva Prasad

HDFC Securities Limited, Research Division - Research Analyst

* Dipesh Mehta

SBICAP Securities Ltd., Research Division - Information Technology Analyst

* Hiral Shah

Investec Bank plc, Research Division - Analyst

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Megha Hariramani;Pi Square Investments;Fund Manager

* Mukul Garg

Haitong International Research Limited - Research Analyst

* Neerav Dalal

Maybank Kim Eng Holdings Limited, Research Division - Analyst

* Princy Bhansali

Anand Rathi Financial Services Limited, Research Division - Research Associate

* Sandeep Shah

CIMB Research - VP

* Shiv Muttoo;Citigate Dewe Rogerson

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Presentation

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Operator [1]

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Good morning, and thank you for joining the Mphasis Q2 FY 2020 Earnings Conference Call. I'm Stanford, your moderator for the day. We have with us today Mr. Nitin Rakesh, CEO of Mphasis; and Mr. Suryanarayanan V., CFO. As a reminder, there's a webcast link in call invite mail that the Mphasis management team would be referring to today. The same presentation is also available on the Mphasis website, www.mphasis.com, in the Investors section under Filings as well as on both the BSE and NSE websites. I request you to please have the presentation handy. (Operator Instructions)

I now hand the conference over to Mr. Shiv Muttoo from CDR. Thank you, and over to you.

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Shiv Muttoo;Citigate Dewe Rogerson, [2]

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Thanks, Stanford. Good morning, everyone, and thank you for joining us on Mphasis' Q2 FY '20 Results Conference Call. We have with us today Mr. Nitin Rakesh, CEO; and Mr. V. Suryanarayanan, the CFO.

Before we begin I would like to state that some of the statements in today's discussions may be forward-looking in nature and may involve certain risks and uncertainties. A detailed statement in this regard is available on the Q2 FY '20 results release that has been sent out to all of you earlier.

I now invite Nitin to begin the proceedings of this call. Over to you.

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [3]

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Thank you, Shiv. Good morning, everybody. Thanks for joining our call early this morning. We appreciate your pristine interest in Mphasis. I trust you've had the opportunity to go through our Q2 FY '20 results and other operational performance information in our MD&A. I would like to start our discussion with showcasing what we are witnessing in the market and then proceed to showcasing our numbers from various vantage points, namely segments, channels as well as overall. This would hopefully help you understand us a little bit better.

Moving on to Slide 3. It's becoming apparent that there's an accelerated demand for agility as well as resilience by our clients. We have seen this trend being amplified and combined with the need for customer centricity, that is, better services by end consumers who expect highly personalized products and services. There has never been a better time for companies with the right proposition to find a willing set of ready buyers in the enterprise world. The rapid explosion of Everything-as-a-Service tie in clearly to this trend of swift deployment, changing consumption pattern by enterprises from multiyear CapEx cycles to on-demand implementation.

The changing consumption patterns for these segments are only accelerating with the adoption of cloud, which is nothing but compute on demand as well as rapid advancement in cognitive technologies as by applying rapid automation, we are seeing the further acceleration of the development cycles with collapse in traditional development techniques. This process, now commonly known as DevOps, is a great example of how new opportunities are opening across the enterprise IT value chain.

Moving to the next slide. Any time there are such tectonic shifts in market buying patterns, there are tremendous disruptions in established order of suppliers. This presents the best opportunity for companies that can take advantage of these changes, aligning themselves to the right products and services and continue to win wallet share in the market. We have made rapid progress in a short time towards this extreme specialization and are already seeing strong momentum in areas like DevOps, AppDev, legacy modernization and similar other areas that we'll talk about in a few minutes.

We also saw a swift expansion in our new client pursuits where such depth of technical competency combined with domain and design has enabled us to open multiple marquee new logos in the past 6 to 12 months, many of whom are Fortune 100 companies, banks, insurance players and others and the same names that were hitherto considered mature accounts by the industry.

Moving to Slide 5. Our numbers tell the story of consistency and transformation. In Q2 FY 2020 specifically, consolidated gross revenue grew 4.1% Q-o-Q and 10.2% Y-o-Y. And in constant currency terms, a growth of 3.1% Q-o-Q and 11.6% Y-o-Y. Direct International grew 5.5% Q-o-Q and 12.2% Y-o-Y on a reported basis and 4.3% Q-o-Q and 13.4% Y-o-Y in constant currency terms.

Direct Core, which constitutes 83% of Direct International business, grew 4.3% Q-o-Q and 15.1% Y-o-Y on a reported basis. In constant currency terms, Direct Core revenue grew 3.1% Q-o-Q and 16.4% Y-o-Y, aided by consistent deal wins. I would like to highlight that this has been the fourth consecutive quarter of 16-plus percent Y-o-Y constant currency growth for Direct Core, a testimony to the significant progress we've made in our sales and marketing efforts as well as our value propositions.

Growth in Direct Core has been broad-based across strategic accounts, Blackstone portfolio and New Client segments. Blackstone portfolio and New Clients continue to witness strong growth momentum with year-over-year constant currency growth of over 50% and 80%, respectively.

Digital Risk witnessed significant growth momentum this quarter with sequential growth Q-o-Q of over 14% in constant currency terms. We witnessed strong deal wins and created a strong pipeline in this business which should provide consistent growth as noted in our previous calls. We are confident of growing this business and operating comfortably in the stated quarterly revenue band of $28 million to $30 million in the near term.

Moving on to the next slide. We see continued strong growth momentum and positive outlook in our key focus vertical of banking and capital markets with a healthy Q-o-Q growth of 6.8% and 10% Y-o-Y in reported terms. The growth was broad based across banking and capital markets. We are also pleased with the robust growth in Emerging Industries segment at 3.1% Q-o-Q and 15.1% of Y-o-Y on a reported basis. While the industry narrative may be bearish for the BFSI segment, it is becoming apparent that there is accelerated demand for agility by our clients, translating into initiatives across consumer experience and data as well as core application transformation, DevOps revolution and cyber security, all areas that we invested in over the last few quarters. This is enabling us to expand our wallet share in new spend areas while also staying clear of pricing pressures that exist in areas of legacy ADM or IMS. The number you see here is testimony that we are winning in multiple industry segments including BCM.

What's interesting to note is that our micro verticals within banking and capital markets, such as consumer banking, wealth management, brokerage, corporate banking, investment banking, et cetera, are all growing well. Majority of our BCM segments are less prone to cyclical trends as they're B2C focused and digital disruption prone, for example, payments, retail, wealth, and almost all of them are riding a secular investment cycle in transformation and digital technologies.

Emerging industries such as logistics and transportation are growing at 18% CAGR over the past 8 quarters and comprise 50% of our emerging portfolio. Y-o-Y growth for the logistics and transportation subvertical has been over 40% with sequential growth of about 7%. This segment is also a healthy mix of longstanding strategic customers and new deals with potential for growth.

In the past couple of years, we have been relentlessly focusing on identifying, investing and nurturing these newer growth drivers to make it sustainable channels of revenue. The quality of deals that we're winning in this segment, too, is noteworthy as these are high-impact transformational deals that are core to the success of our clients.

Moving on to the Direct Core business. It's consistently been delivering strong growth, which is reflected in our deal win momentum as we won deals of TCV of $174 million net new deals in Direct International in the second quarter FY '20.

The deals have been broad based across Direct Core and other portfolios including Digital Risk. This takes our YTD deal wins to $325 million, a sequential growth of 28%. Strong and consistent deal win momentum that we've been witnessing has laid a strong foundation for future growth as well. 79% of YTD deal wins are in New Gen focus areas.

We saw broad-based growth across client segments within Direct Core as well with strategic accounts growing double digits and new client revenue growing over 80% Y-o-Y while our Blackstone accounts grew over 50% Y-o-Y.

In the recent few quarters, the quality of deals and logos we are winning is testimony to our clients' trust in our transformation capabilities and portfolio offerings.

As an example, we won a multiyear contract from a digital native European payment company to provide next-gen customer experience and omnichannel services across their fast-expanding global client base. This shows our ability not just to sell into established enterprise organizations, but also into digital native unicorns who are looking to scale, expand footprint and are very amenable to partnerships with firms like ours.

Moving on to the next slide. Direct Core growth is powered by our 3 pillars. To start with, they're leading with Next Gen Services. To enable rapid development and constant renewal of our offerings, we identified a set of 8 services to focus on as part of bringing the T back into IT: DevOps, cloud-native app dev, legacy modernization, enterprise automation, Next Gen data, application management, infra management and cyber security.

We have reorganized our competency groups to become more agile and created work flow trials around these services as cross-functional teams focused on developing, evolving and building Next Gen offerings.

Secondly, we are also proactively catching deals upstream. And most of the new deals are institutionalized with an early engagement sales process and a robust account planning in place.

FY '20 YTD, 82% of our new deals were proactive in nature. We also organized the GTM teams as squads on a need basis with each portfolio tribe having the squads come together to build, bid and deliver specific offerings or a cross-section of offerings in an agile manner.

This is a strong indication of our continued focus on building capability along these services, complementing them with strong industry domain as well as our market-leading agile methodologies using design thinking, architecture and engineering services to engage clients in a solution design and problem identification, prioritization and deployment.

New clients have continued to fuel our growth in Direct Core as well. Traditionally, while we focus on expanding our share of wallet with strategic accounts, about 10 quarters ago, we established a robust new client acquisition strategy. And this is paying good dividends as there has been significant increase in the number of new logos we are adding to our portfolio as well as the revenue contributions from those to the Direct Core business. As you see on this chart, the CAGR growth has been over 100% over the last 10 quarters in this segment.

Moving on to the DXC, Mphasis relationship, in the past, we've spoken about the 3 themes of our transformation as laid out at the beginning of this journey. We said we'll move away from traditional outsourcing supplier to a strategic partner, expand geographically and become a growth partner by being in the path of revenue for DXC.

Our strategic client engagement partnerships focusing on service transformation and the solutions-led approach to GTM, coupled with geography and industry vertical diversification focus to helping us maintain our growth consistency here. This business has grown 1% sequentially and 7.4% Y-o-Y on a reported basis and 9.5% Y-o-Y and 0.1% Q-o-Q on constant currency terms.

We continue to invest in client engagement and strategic partnership with DXC and are focused on further bringing New Gen services to the core. This marks the 10th quarter of consecutive sequential growth for us in this segment. While DXC has witnessed a change of guard, we continue to have a strong working relationship and are enthused to be aligned to the renewed strategy.

Moving on to the earnings growth and the cash position. Operating margin improved 60 basis points Q-o-Q to 16.1%, primarily driven by operational efficiencies. If you look at our operating metrics, we've added people in applications, and our utilization metrics continue to remain soft, especially in the apps business, as we continue to adjust the pyramid and in anticipation for additional capacity, capacity needed for growth. We hope to improve all these operating levers as we start converting some of our large deal wins and pipeline into revenue.

With a strong focus on revenue growth, coupled with cost optimization, we are confident to continue to operate in the guided band of 15.5% to 17% EBIT for FY '20, even after absorbing the upcoming seasonality cycles and any additional headwinds that we may face from things like wage or the softness of the quarter, primarily from a furlough perspective.

Our operating cash generation remains strong and total cash on the balance sheet as of 30th September stood at INR 18,022 million, approximately $254 million.

During the quarter, we paid out INR 6,065 million including taxes as dividends. And adjusted for this outflow, cash and cash equivalents increased by INR 2,507 million or approximately $36 million during Q2.

Finally, getting to our investment thesis, the core investments thesis for FY '20 Q2. We spent a lot of time at the company leadership level to debate about the exact dynamics and the stark reality is the true differentiation comes from having a superior service offering and by aligning them to the larger challenges that enterprise clients are trying to solve for. The market opportunity can easily be robust.

While we are focusing on growth, we're also operating within the stated band of 15.5% to 17% EBIT. In parallel, we continue to look for multiple levers for further expansion on our operating metrics, and we continue to execute against our plans for 2020 and beyond. Firstly, we continue to accelerate Direct Core, consistently outgrowing the market, witnessing strong growth of over 16% for 4 quarters in a row.

New Clients and Blackstone have both been driving the growth in addition to our strategic clients. We talked about the strategic partnership that we continue to drive with DXC/HP channel and the fact that we've seen 10 consistent quarters of sequential growth with compound quarterly growth rate of about 4.5% in constant currency terms.

Further, 58% of our revenue is now from service transformation as of Q2 compared to primary sources of revenue in the past being outsourcing. We also continued to see momentum in our deal wins with New Gen Services at approximately 80% driving bulk of those wins. We have continued to make investments in both talent, capability as well as constantly looking for inorganic opportunities.

Our acquisition of Stelligent in -- about a year ago has been core and central to our development of capability in cloud native areas.

Finally, we continue to have a strong cash flow generation and optimal cash strategy to maximize shareholder value, and we still have a fairly healthy cash balance of about $254 million. On that note, I thank you once again. I request the operator to open the line 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 Apurva Prasad from HDFC Securities.

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Apurva Prasad, HDFC Securities Limited, Research Division - Research Analyst [2]

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Congrats, Nitin, on the strong execution. My question on the DXC channel, I mean is there any change in strategy do you see from DXC more over a medium-term perspective to engage with Mphasis, especially in the light of recent changes that you mentioned and also some of the strategic decisions regarding a part of their portfolio as well as recent acquisition. So anything over medium term, how should we look at this portfolio since this has been a very strong growth driver for us over the past couple of years.

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [3]

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Apurva, thanks for the question. I know you've been fairly anxious to know about that since the announcement came out. So I think firstly, it is -- the performance we are seeing is very much in line with the guidance we gave and the expectation we set a couple of quarters ago that we would probably see a moderation in the growth momentum that we see from this channel. And that is partly by design and partly a strategic choice that we made to -- from the point of view of having the business mix and the metrics that we want to drive forward.

So by definition, the Direct business is getting a fair share of investment dollars as well as a focus on strategic conscious choices, but at the same time, we haven't taken our growth mindset away from this channel either. I think the guidance was to continue to grow this at market, and that's kind of exactly where we are as we speak. So I think from that perspective, we do expect to continue to have that at least for the remainder of this financial year.

In terms of the changes you talked about, as I mentioned in my remarks, the changes are across multiple levels. We're fairly closely engaged across multiple levels. So far, we think it is status quo. We haven't seen any indications of any major shift. That doesn't mean that things can't change over the next couple of quarters, but at least so far, we haven't seen any major shift.

And also keep in mind that the change really is fairly recent at their end as well. I think only a couple of days ago that there was some clarity on where they will focus. So far, it looks like they're fairly well aligned to their areas of focus, and we haven't really seen any massive shift in how that may impact us negatively. So I think my best guess answer right now is status quo. We'll continue to be growth focused. We'll continue to operate in the at market growth mindset, while we continue to see significantly above market growth in our Direct business.

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Apurva Prasad, HDFC Securities Limited, Research Division - Research Analyst [4]

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Sure. And Nitin, also top 6 to 10 continue to sort remain soft. So -- I mean, what's happening there? Anything which is dragging down, in particular?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [5]

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Not really. I think keep in mind, there's a fairly eclectic mix of clients in the top 10. Some of these are direct, some of these are not. I think the real metric to note is the fact that we've added significant number of clients in the above $1 million range that is all being fed through the hunting effort. A number -- and most of those have been added in the Direct Channel. So I think the focus should really be on how our metrics are improving, especially, in the Direct Channel and how we take these new accounts that we've opened and continue to move them up the chain when it comes to our wallet share within those accounts.

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Operator [6]

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The next question is from the line of Hiral Shah from Investec.

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Hiral Shah, Investec Bank plc, Research Division - Analyst [7]

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A couple of questions on DXC. Just wanted to know, if any of the changes which were announced by the new CEO hamper our expectations to gain in a major consolidation scenario? And also considering the weakness in DXC's own numbers, do we see any meaningful change in the trajectory of this account? And the last part is, does Mphasis has -- have any exposure to the businesses which DXC has decided to hive off?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [8]

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I mean, the first 2 questions are fairly standard and almost every quarter we address the same questions. So from my perspective, the answer is, we don't see any meaningful change, not yet, as I mentioned in the previous question. I think it's still, as I said, early days. It's only been 8 or 9 weeks since the change. We continue to follow our strategy. We continue to engage across multiple levels. And as I said, as and when things evolve and change, we will update you. So I think the mindset continues to be to find growth and make sure that this is -- this stays at least at market.

On the other question about do we have any exposure to the areas they announced, if you break it down, we don't really do anything in the BPS business with DXC. So the answer is no exposure. The healthcare business is fairly on-site-centric and was driven by an acquisition they made about 1.5 years ago. It's not a meaningful exposure for us. We have some exposure to the WPS business, but that has traditionally been the EDS, HP book of business, which we saw significant erosion already in that business. And at this point in time, we don't think there's any material risk to the overall numbers. Of course, as things change, as they progress on their actions, we will get to know more. All of this is 48 hours old. So from our perspective, as we say, at least for FY '20, we have no change that we can see.

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Operator [9]

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

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Sandeep Shah, CIMB Research - VP [10]

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Just, Nitin, wanted to understand. As you said on DXC, that as of now, there is no changes, but what could be those changes, if it happens? Can you elaborate or give some color?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [11]

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My friend, if I have a crystal ball and I could future guess, I would. The fact of the matter is we've built a fairly strong foundation over the last 3 years. We've gone across multiple units, multiple verticals, multiple geographies, multiple service lines. We have deep relationships with their end customers, we've driven deals jointly. So I think my only request to all of you would be to focus on opportunity, focus on the work that's gone into transforming the relationship. And of course, there are uncertainties, but that's the nature of the business. There are uncertainties with every customer we deal with. So from that perspective, I think there isn't anything more I can tell you that will give you any more comfort. I think you'll have to form that comfort based on our performance, both the past 10 quarters as well as obviously the next couple of quarters.

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Sandeep Shah, CIMB Research - VP [12]

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Okay. Fair enough. Just on wage inflation for the whole year, can you give some color? Because this time it looks like there is a bit of a distributed wage inflation. So can you give us some color how it has panned out in first half and what is the plan for the second half on wage inflation because you highlighted that could be the headwind in the coming quarter?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [13]

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I think we talked about the fact that we, instead of having one big chunk of inflation in one particular quarter, we took an approach that we linked it to our reskilling initiative and basically spread it across merit increases based on reskilling. Clearly, that's the strategy we're following, and that's the reason why you're seeing a little bit more smoothening of that.

Having said that, of course, the labor market, especially in the U.S. continues to be tight. And that does put pressure on not just hikes, but actually the inflation of wages as you try to hire laterally from the market. So having said that, I think we are still fairly pleased that we were able to optimize and expand the EBIT in Q2. And I think the reason we are confident of maintaining our EBIT band is because we know that we have initiatives underway to constantly improve using pyramid actions, rotations and, of course, the fact that we're operating in Next Gen services also gives us a little bit of pricing power.

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Sandeep Shah, CIMB Research - VP [14]

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Okay. Okay. So is it fair to say each quarter there would be some wage inflation which would be baked in?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [15]

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I think it's fair to say that we spread it across the quarters. So the guidance we are giving you is baking into that effect.

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Sandeep Shah, CIMB Research - VP [16]

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Okay. Okay. And just 2 to bookkeeping, Surya, if you can help us in terms of tax rate, this quarter it has been down. And second, in terms of hedge rate with rupee approaching INR 72, how to look at ForEx gain the next second half of this financial year?

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V. Suryanarayanan, Mphasis Limited - Executive VP & CFO [17]

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Yes. And so the tax rate, I think we've also mentioned this in the past. This is the various revenues and profits from various parts of the region across the globe, it will fluctuate in the band between 24% to 26%. On the hedge rate, I think we are -- we had mentioned also that we have hedged on an average hedge rate in the FY '20 around INR 71. So I think this is the current outlook of the spot. It looks -- we are well covered.

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Operator [18]

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The next question is from the line of Mukul Garg from Haitong Securities.

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Mukul Garg, Haitong International Research Limited - Research Analyst [19]

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Nitin, you mentioned -- and sorry to again push back on DXC. You mentioned that you have exposure to the workplace business. Now workplace and mobility is almost 15% of their top line. Is it fair to assume that your ratio of DXC business from this segment would be similar? Or is it materially lower?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [20]

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Materially lower. Materially lower.

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Mukul Garg, Haitong International Research Limited - Research Analyst [21]

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Okay. So that should not be a very major delta for you on divestment from their end?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [22]

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Materially lower is kind of what I mentioned in my answer as well. So the answer is yes. In the near term, no. As things evolve and change, we'll update you.

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Mukul Garg, Haitong International Research Limited - Research Analyst [23]

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The other part was, this quarter, DXC business was quite muted. And you have been delivering very strong growth in this vertical for a while. Now we have seen quite poor results from DXC a few days back, which included commentary from their end that there had been execution missteps from their end on specific client deals. Now is that something which has percolated down to you as well? Or do you think that's a big opportunity given that they are finding it difficult to optimize their deployment or delivery internally?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [24]

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So Mukul, I think the same question was asked in different ways over the last few quarters where I think the worry was as they ramp up their offshore efforts, they will in-source. The worry was why do they need you if they already have a few thousand people in India. And I think we've continued to be fairly consistent that the reason we win business from them is because we bring a certain complementary capability, whether it's on delivery or on solutions. So I think the mindset hasn't changed. There isn't -- from our perspective, there wasn't any significant -- or actually any project issues that we've been involved in. So I think that continues to position us very well when it comes to strong solutioning, strong go-to-market and strong delivery capability.

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Mukul Garg, Haitong International Research Limited - Research Analyst [25]

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Got it. And the final question was on the banking space. Now that vertical grew quite well this quarter. Any outlook? I know you guys have been commenting on micro verticals which are doing well. But on an overall basis, that is trending out quite starkly against the rest of the industry, which is talking about issues and especially in the capital markets. So any specific area which you think you are doing things a bit differently versus others, which is helping you win market share.

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [26]

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Yes, Mukul, I think I've talked about it in my remarks as well. The overall strength in banking is, while there is a tailwind, but a lot of that spend is not flowing through to third party providers. However, in that environment, where we have the opportunity is where we are able to actually go to the bank or a financial services company and provide a certain point of view or a certain solution that accelerates their transformation. So I think this is a very much differentiation story, very much a story that continues to work out well for us because we're investing in capabilities that the banks need to apply their transformation. And hence, we become a partner of choice and we start gaining wallet share from existing clients. And hence, we've also seen very good success in bringing new logos on board with the same mindset.

So I think the comment I made was that these were traditionally seen as mature buyers with very high competitive intensity and very difficult to break into these logos. And I think we've seen that with the right set of offerings, the right differentiation, the right value proposition, the right opinion, the right point of view and the right ability to deploy the solution, virtually any account is actually feasible to break into. So I think that's the playbook we're applying, and we're very pleased that we have seen double-digit growth in banking, where -- which is almost 100% higher than what anybody else is seeing across the industry.

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Operator [27]

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

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

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Sir, just to follow up you on your exist -- the earlier question. So when we break into some of these accounts which we're saying difficult to break even through solutioning, so would we able to even capture the traditional business in that because there could be a good number of increments there?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [29]

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So I think the entry point will never be the traditional business because that's where the competitive intensity is the highest and also that's where the pricing power is the at least, if anything, there is price destruction going on there. So I think the approach for us is to enter through transformation deals and find the right hooks to bundle transformation with run, and that's the progression that we talk about as we say that we'll mine into these accounts over the next 4 to 6 quarters.

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

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Yes. So that's what, when we enter to a transformational work, would we be able to even go and further get a traditional chunk later at a later stage? Would that be a possibility because that is very price sensitive?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [31]

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Absolutely. But not -- you cannot win that business on price. You have to win that business on the ability to transform. So an example of a deal is, I think we talked about it at our analyst event, where we were able to actually get a fairly long term, actually, in that particular client case, a 5-year deal, which we didn't start by actually running those applications. We started by having a point of view on how to transform and modernize them. But to fund that modernization, the client chose to actually transition the run to us, so we could apply the transformation while squeezing the run cost. And in effect, it became a 0-cost transformation play, but it gave us a long-term annuity contract, which -- with a bundle of transformation and run the business. So I think that's the playbook that we're applying. We call it 0-cost transformation. You can call it cost-neutral transformation. It depends on what environment, what industry you're in, but that's really the Holy Grail, and we've been able to demonstrate that across multiple clients. And I think that's the playbook we're applying across new clients as well.

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

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And just some of the clients -- I mean, companies have been saying that furloughs will be higher this year. So even earlier, we used to have a furlough impact on DXC a couple of quarters ago. So how do we see the furlough impact on growth for next quarter?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [33]

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I mean this is -- seasonal weakness is always there, less number of working days, client furloughs. But I think from our perspective, our trends have been fairly consistent, if you see over -- even over the last 2 or 3 years. And I think it's too early to say whether the furlough will be higher or lower. I think it's our job to manage as best as we can working with the clients to minimize any impact and at the same time make sure that we don't impact any client work as well. So I think -- I'm not calling anything out specifically. I think we continue to find ways to manage through and win wallet share.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [34]

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And last one, sir, on the BPO, there was a pent-up hiring? Is it just any single deal or related to what?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [35]

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No, I think we've also consciously focused on that business over the last few quarters, and we won some new deals. So what you're seeing is basically converting wins to revenue.

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Operator [36]

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The next question is from the line of Dipesh Mehta from SBICAP Securities.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [37]

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Congrats on good execution. A couple of questions about, first on DR. If you can help us understand how one should look Digital Risk and considering the mortgage-related pickup which we have seen, considering interest rate cycle and other, how one should look -- you indicated about $28 million to $30 million. Where we were in, let's say, Q2? And how you expect next few quarters?

Second related question on banking, capital market. If one adjusts for DR numbers increase, the rest of the BCM growth seems to be muted. If you can provide some color on that?

And the third question is about major account. If we look our top 5 clients and particularly top client, we are seeing significant traction over last few quarters. If you can help us, what is working for us? And if you can provide some more detail around it?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [38]

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Yes. So I think I lost track of the 3 long questions. Let me answer the first one, which is the DR question. I think we talked about bringing DR back into the stated revenue guidance band back in May. I'm very pleased that we are -- we finished this quarter at about $27 million. We're already guiding that in the short run we should be back into that band. So basically, you should see continued sequential growth in DR for the remainder of the year. Based on the cyclicality and the interest-rate cycles, what was a headwind for us in calendar '18 and first half of '19 is now clearly playing into our favor. Having said that, it's not just the volume recovery, we've actually also been selling into new clients and new deals because the capability and the differentiation we have is very, very strong.

Secondly, I don't think this is a 1 or 2-quarter phenomenon. We have visibility at least into the next calendar year, which tells us that there should be continued robustness in volumes. And of course, things can change with macro changing but as things stand today, I think there is -- at least for the medium term, there seems to be visibility into robust volumes in this business.

The second question was the banking and capital markets growth ex DR. I think the DR number this time last year was actually higher than the number in Q2. So on a Y-o-Y basis, BCM has grown at 14.4% constant currency minus DR in Q2. So that I think is -- actually makes that growth even more robust. And on a sequential basis, 3.7%, which is also fairly strong. So I think the BCM story is not led by DR -- or not led by the DR alone. Of course, sequentially it's helping. But on a Y-o-Y basis, I think our overall BCM business has actually done very well.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [39]

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Nitin, you indicated ex DR it is 3.7% quarter-on-quarter?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [40]

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Yes. And 14.4% Y-o-Y.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [41]

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Okay. And if you can address the last about major -- top clients?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [42]

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So I don't know -- can you repeat the last question?

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [43]

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So top clients, we are seeing significant traction over last few quarters, particularly top client and top 5 clients. So what is working well for us? And how you try to replicate into the remaining top 20 and maybe top 50 clients, if you can provide some color that will be...

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [44]

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Sure, sure. Yes. I think the traction really is coming primarily from the fact that we are winning significant market shares because we're applying the same playbook of gaining through transformation, entering through transformation deals and then expanding into adjacencies and near-neighbor deals. I think the simple answer across all of our top clients is, it's the same playbook. I think we talked about the fact that we've seen good growth across the top end of the top clients. I think there is still a segment within our top 15 customers where we need more wallet share gain, work to be done, which we are starting to see some traction, as we speak. And then, of course, the same playbook of applying that differentiation-led transformation capability and then expanding into adjacencies is also starting to play out in new wins. So I think it's the same exact motion. This isn't a client that is starting to spend more money and hence they're gaining. It's a client where we're starting to see more wallet share gains based on the fact that we become a lot more strategic in their transformation programs.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [45]

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And last question if I can squeeze. What would be the Blackstone portfolio revenue contribution, if you can say that number?

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V. Suryanarayanan, Mphasis Limited - Executive VP & CFO [46]

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It will be around 5% of our Direct Core.

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Operator [47]

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The next question is from the line of [Abhishek S.] from Elara Capital.

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Unidentified Analyst, [48]

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Congratulations on a good quarter. Nitin, you made an interesting comment about the spends not getting catalyzed to third-party vendors, especially on the BFS part. Can you elaborate what's happening on the ground?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [49]

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I mean, it's not a comment I made. I think it's the data borne out by all of the industry peers because they're calling for the fact that given multiple regulatory concerns, security concerns, control issues and, of course, the fact that money is getting diverted away from traditional areas into areas like cybersecurity and cloud, it's not a natural fit for flowing into the traditional partners who used to do traditional ADM and IMS and BPS. I think in that context, what the banks are looking for is a set of partners who are able to transition them into applying new tech with agility, speed, resilience and value. And that's really where we're gaining wallet share.

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Operator [50]

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(Operator Instructions) The next question is from the line of Megha Hariramani from Pi Square Investments.

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Megha Hariramani;Pi Square Investments;Fund Manager, [51]

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I have 2 questions. One is on the hiring side. How do we see the hiring trend at Mphasis? And how would it be like going forward? I think we just started one office at Hyderabad. Do we see more local hiring there? And second, on the export side, as you said that you would be focusing on exports, and as I see in the presentation also, the contribution for this quarter for America has gone down where rest of the world is picking up. So do we see the trend likely to continue?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [52]

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Sorry, I'm not clear about your second question, but I'll answer the first one. I think the strategy to create local hiring is primarily based on where best talent and the best location for the best project. So from that the perspective, clearly, 80% of our headcount continues to be in India. We have a pretty decent sizable presence in Bangalore, Pune and Chennai, and we added Hyderabad as the fourth location in -- about 2 years ago. And we expanded there earlier this year based on just the fact that we have more growth, and we probably will continue to find ways to tap into other pools of talent. So I think that is really a reflection of where we think we need to put work based on capability, competency, labor pool, effectiveness of price and value.

On your other comment about exports, I mean bulk of our business really is -- 80% of our revenues originated in the Americas. We continue to see fairly robust growth. We've added headcount. If you look at just sequentially, we added about 800 people in the U.S. in Q2. And I don't see any change in the way we run that business. So I think U.S. will continue to be the driver of growth. Europe has grown. We expect it to grow faster, and that's the effort. But continuously, between U.S. and Europe, it's 90-plus percent of our revenue. And of course, we have some small footprint in other parts of the world that represents the balance 10%, but I don't expect that contribution from overseas markets, which is the international markets, to change significantly. If anything, it will continue to grow.

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Megha Hariramani;Pi Square Investments;Fund Manager, [53]

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Okay. So this quarter we had higher contribution from rest of the world market. So will that continue? Or that's going to be stabilizing going forward?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [54]

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Actually, it has come down compared to last quarter. So I don't know which metrics you're looking at, but if look at the MD&A, it's 5% rest of the world versus 6% last quarter.

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Megha Hariramani;Pi Square Investments;Fund Manager, [55]

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I think there's one of the charts which shows a higher percentage where America is 71% and the rest of the world has, I think, a 10%-plus kind of contribution. Let me just check which slide is that. I think that's #10, geographical presentation -- or penetration that we show or maybe that's like higher Europe in that region.

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [56]

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One second. I'm just looking at. I don't think there's any change, maybe there is a misinterpretation of some data. Geographical -- that is only in the DXC channel you're looking at, Madam. That is not...

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Megha Hariramani;Pi Square Investments;Fund Manager, [57]

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Oh, okay.

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [58]

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That is only for DXC.

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Operator [59]

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

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Princy Bhansali, Anand Rathi Financial Services Limited, Research Division - Research Associate [60]

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Two questions from my side. Could you please tell me what will be the revenue contribution from your strategic clients?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [61]

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Not a statistic that we give out publicly, so we cannot answer that question. But you should be able to derive some of that from the client concentration numbers.

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Princy Bhansali, Anand Rathi Financial Services Limited, Research Division - Research Associate [62]

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Okay. So any way like we can -- like, what will be the number regarding that? Any, like, light you can throw on it?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [63]

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Unfortunately, no.

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Princy Bhansali, Anand Rathi Financial Services Limited, Research Division - Research Associate [64]

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Okay. My second question is like, we see a lot of client addition data that you display in your presentation, but like, in terms of the higher bucket clients, say, $20 million plus, $50 million plus, the data seems to be weak. Like, any color on that if you could throw?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [65]

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The bulk of the new client addition, there is a lag between client addition and ramp up. So if you see, there is a pretty significant jump, almost 9 new clients added in the $1 million plus category. And that's really how you will continue to see expansion up that pyramid. The other thing is there is an internal rotation between Direct and DXC clients, which basically means that as we get broader within DXC, our concentration there reduces. And as we get bigger within our Direct Clients, that number rotates within. So if you -- you may see the same number of clients in the -- at a headline number, but internally that rotation will happen. That's what happened in the $5 million and above category, if you look at over the last 2 or 3 quarters.

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Princy Bhansali, Anand Rathi Financial Services Limited, Research Division - Research Associate [66]

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So like majorly, the client addition that is happening at your side is in the buckets of $1 million or lower, right, if I'm not wrong?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [67]

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That is your interpretation. That is not what I said.

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Operator [68]

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

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [69]

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I had a question on the EMEA region. We've seen the revenue performance flatten out in that region over the last 4 quarters. So wanted your comments on it, how should we look at it going ahead?

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [70]

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I think the bulk of our business in EMEA is in U.K. And that hasn't been the best place to generate revenue given all the uncertainties that you've seen. But I think at least in the current quarter that went by, we saw some robust deal wins, which is a lead indicator for the fact that things would probably start returning back to growth. And that's kind of what is baked into our expectation for the rest of the year and for FY '21.

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Operator [71]

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

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Nitin Omprakash Rakesh, Mphasis Limited - CEO & Executive Director [72]

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Thank you, everyone, for your time and your interest. As we continue to focus on delivering value to clients and push ourselves to learn and adopt these new technologies at scale and speed, my strong belief continues to be that our offerings are our true heroes. Every day we ask ourselves, how can we enable clients to be nimbler, how can we accelerate their product development cycles, increase the velocity of their sprints, and above all, how can we help them to reduce their technical debt that comes with their legacy. We continue to be focused on being disciplined, sustain growth efforts above all and invest in people, process and technologies. At the beginning of FY '19, we emphasized our objective to deliver growth along the 4 key vectors, consistent, competitive, profitable and responsible. And we're happy with the execution along these vectors through the year. I thank you all for your support and interest, and I look forward to seeing you at the next call. Thank you.

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Operator [73]

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