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Edited Transcript of QUESS.NSE earnings conference call or presentation 4-Nov-19 9:30am GMT

Q2 2020 Quess Corp Ltd Earnings Call

BANGALORE Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Quess Corp Ltd earnings conference call or presentation Monday, November 4, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ajit Abraham Isaac

Quess Corp Limited - Chairman & MD

* Subramanian Ramakrishnan

Quess Corp Limited - CFO

* Subrata Kumar Nag

Quess Corp Limited

* Vijay Rajagopal

Quess Corp Limited - Director of M&A and IR

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Conference Call Participants

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* Abhijit R. Akella

IIFL Research - VP

* Dipan Anil Mehta

Elixir Capital Limited - Chairman of the Board

* Kaustubh Pawaskar

Sharekhan Limited, Research Division - Senior Research Analyst

* Kuldeep Koul

ICICI Securities Limited, Research Division - Senior Research Analyst

* Mihir Manohar;CapGrow Capital;Analyst

* Nitin Padmanabhan

Investec Bank plc, Research Division - Analyst

* Prashant Tiwari

SBICAP Securities Ltd., Research Division - Research Analyst

* Pritesh Chheda

Lucky Investment Managers Private Limited - Analyst

* Ravi Menon;Motilal Oswal;Analyst

* Sandeep Baid;Quest Investment Advisors;Analyst

* Sandesh Shetty;PhillipCapital;Analyst

* Saurabh Ginodia

Stewart & Mackertich Wealth Management Ltd., Research Division - Associate VP of Research and Strategy

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Quess Corp Limited Q2 FY '20 Earnings Conference Call hosted by ICICI Securities Limited. (Operator Instruction] Please note that this conference is being recorded.

I now hand the conference over to Mr. Kuldeep Koul from ICICI Securities Limited. Thank you, and over to you, sir.

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Kuldeep Koul, ICICI Securities Limited, Research Division - Senior Research Analyst [2]

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Thanks, everyone, for joining us on the call. And thanks to Quess Corp, for giving us the opportunity to host this call. We have with us the senior leadership of Quess Corp. Mr. Ajit Isaac, Chairman and Managing Director; Mr. Subrata Nag, Group CEO and Executive Director; Mr. Subramanian Ramakrishnan, Chief Financial Officer; and Mr. Vijay Rajagopal, Director Corporate Development and Investor Relations.

I will hand over the call to Vijay, who will run us through the mandatory regulatory disclosures, and he will then hand over the call to Ajit, who will walk us through the highlights of the quarter, which will then be followed by a Q&A. Over to you, Vijay.

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Vijay Rajagopal, Quess Corp Limited - Director of M&A and IR [3]

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Thank you, Kuldeep. Good afternoon, everyone, and thank you for joining our earnings call today. Please note that these results and the press release have already been uploaded on our website. Anything we say, which refers to our outlook for the future is a forward-looking statement, and that must be read in conjunction to the risk that the company faces. These uncertainties and risks are included, but not limited to what we have already mentioned in the prospectus filed with SEBI.

With that said, I'll now turn over the call to our Chairman and Managing Director, Mr. Ajit Isaac. Over to you, Ajit.

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Ajit Abraham Isaac, Quess Corp Limited - Chairman & MD [4]

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Good afternoon, and a very warm welcome to all of you. Thank you for joining us on today's call, and I'm sure that you would have reviewed our latest quarterly earnings presentation financials. This was a quarter we saw delivered successfully in multiple fronts, where we showed robust revenue growth despite the economic slowdown, demonstrating our all-weather business model.

Let's begin by giving you a brief overview of our financial performance, followed by key corporate and platform-wise update, post which, we would be happy to give you -- to take your questions. We crossed revenues of INR 2,750 crores, a growth of 27% year-on-year with our EBITDA reaching INR 161 crores, an increase of 44%. We achieved a net profit of INR 65 crores, which was a growth of 5%. Without the Ind AS accounting adjustment, net profit was INR 70 crores, which was a 13% year-on-year increase.

Cash flow from operations stood at INR 117 crores for the first half of the financial year '20 as against INR 72 crores in the previous year, which was an increase of 62%, much driven by our continued focus on collections.

EBITDA-to-OCF conversion reached a new milestone of 49%, up from 36% in the previous quarter last year, thereby placing us in a comfortable position to achieve integrated target of 30% for this full year. Significant debt reduction of INR 375 crores was achieved during the quarter. And our gross debt at the end of this quarter stood at INR 920 crores, while net debt stood at INR 272 crores.

Moving on to some other key corporate updates. In the Ahmedabad smart city project, we have pending dues of INR 179 crores, which has been stuck since our JV partner, Trimax IT went into bankruptcy. I'm happy to inform that we have now completely resolved this issue by acquiring Trimax IT's 49% stake in the JV, which we now own 100%. All current deals and future payments will flow exclusively through us. INR 21 crores has already been received as on 30th of October, while another INR 81 crores is expected to be received by March 2020.

Demerger of Thomas Cook India is expected to be completed by December '19. Post this, Quess will be directly held by Fairfax Holdings, who will hold about 33%, and public shareholding will go up to about 45%, up from about 28% currently.

Our strategy is to simplify the overall group structure and reduce number of entities from 45 to 30. In line with the strategy, 4 subsidiaries are being merged into the parent. Additionally, a few other Indian and overseas entities are either being merged or converted to branches.

We initiated an exercise to rationalize intercompany loans and advances, which stood at INR 560 crores in the previous quarter, with INR 117 crores that has already been reduced and multiple efforts underway, these balances are expected to come down to INR 95 crores by December of '19.

We also issued 7.54 lakh shares to Amazon at a price of INR 676 per share amounting to an investment of INR 51 crores by way of preferential allotment. These investments are now being utilized towards the business expansion of DigiCare. In Allsec Technologies and Terrier, our statutory auditors have been changed to Deloitte Haskins & Sells. This is in line with the growing operations of these companies, while also complying with the SEBI guideline of covering 80% of consolidated revenues by our statutory auditor.

I would now like to move on to some key platform-wise updates. Workforce Management. Quess became the undisputed leader in the staffing space some time ago and continues to gain market share and surge ahead of its competition.

Revenues increased by 38% year-on-year, driven by strong head count growth. We added a record 66,000 associates over the last 4 quarters. General staffing head count crossed a new milestone of 240,000, with collect and pay contract improving to 72% from 60% on a year-on-year basis. Core to associate ratio improved to an industry-leading efficiency of 1:333, up from 1:290 the same quarter last year.

Logistics business Dependo touched a new peak of 1.5 lakh deliveries per day against a previous high of 1 lakh. Overall training targets in our skill-relevant business for the year, for H1 of 2020, was 52,000, which is 67% higher than the previous year.

In our operating asset management platform, overall revenues remained flat, around INR 432 crores, while EBITDA saw a marginal decline from the previous year, mainly on account of onetime provisions and a loss that we booked on the sale of assets in our industrials business.

The platform was driven by -- is essentially driven by the operations of the facility side of the business, where revenues increased to INR 335 crores, up 8% year-on-year. EBITDA in this business grew 30% year-on-year to 34% -- to INR 34 crores. Associate head count also increased 78,000, while total square feet under management improved to 254 million square feet, both increasing by about 6% year-on-year. The proportion of higher-margin SLA business versus head count went up to 26:74 as against 22:78 in the same quarter last year.

In Tech Services, revenues increased 23% year-on-year, with a 20% increase of revenues in Conneqt and 27% growth in the number of payroll slips processed at Allsec. EBITDA increased 125% year-on-year to INR 69 crores, while EBITDA margin increased from 9% to 15% on the back of the Allsec acquisition.

Among our emerging businesses, we have identified 3, which are in investment mode and have excellent growth potential, Monster, DigiCare and Dependo, on each of them, I'll call out some key operational metrics.

Monster. Sequentially, we've been able to reduce our operating -- our EBITDA losses by about INR 3 crores. We expect it to operationally break even in the next quarter. That is Q4 of 2020. Job views and site visits are up 53% and 54%, respectively, on a year-on-year basis. Our new mobile application is on par with industry leaders, whereas rating has improved to 4.4/5 from 3.8 in previous quarter.

In DigiCare, the service footprint has increased from 350 to about 600 towns across India. Quarterly EBITDA doubled on a year-on-year basis to about INR 1.9 crores, whilst store count saw a 130% year-on-year increase to 230 stores. At Dependo, our footprint grew from over 51 cities to 70 cities this quarter. Peak delivery capacity increased to 1.5 lakh packages in a day from a previous high of 1 lakh.

We've also had some senior leadership changes. We've appointed Mr. Suraj Moraje, as our Executive Director and Group Chief Executive Designate. Effective today, the 4th of November, he will take over from Subrata Nag as the group CEO when Subrata retires in 2020. Suraj was a senior partner at McKinsey and a leader in the Asia TMT practice. He has over 20 years of consulting experience across multiple sectors and his previous roles at McKinsey are included the establishing the African TMT practice and transforming the Philippines office as the managing part of the country. He also served at McKinsey's global new partner election committee and he holds a BE in technology and a PGDM from IIM Ahmedabad.

We also, during the quarter, appointed Ashish Johri as the CEO for Allsec Technologies. Ashish has an MBA from Purdue University in the United States and an undergraduate degree in architecture. And an outstanding entrepreneurial leader with 24 years of diverse experience in the BPO space across banking, analytics and other sectors. He has experience in companies like TCS and Capital One. All of the above summarize the slew of positive outcomes that we've achieved during the quarter. This has been a significant one for us in terms of many corporate actions, and in terms of achieving some of the milestones that we set for ourselves during our con call that we had at the end of the last quarter.

Now we should leave the floor open to questions. And I'm joined by my colleagues from our corporate office and finance functions to enter the same. Thank you very much for joining the call, and I look forward to your questions.

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Questions and Answers

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Operator [1]

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[Operator Instruction] The first question is from the line of Kuldeep Koul from ICICI Securities.

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Kuldeep Koul, ICICI Securities Limited, Research Division - Senior Research Analyst [2]

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I just want to understand the economic rationale for moving loans and advances to equity for your subsidiaries? Because to me, it generally has 2 negative connotations. One, equity in general, is an expensive form of capital related to debt for your subsidiaries. And second, and more importantly, it has a negative signaling in the sense that you are invariably telling us that it's unlikely for the subsidiaries to generate material internal accruals in the foreseeable future to repay principal payments that you have given to these particular entities. So if you can help us understand what is the key imperative of moving loans to equity?

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Subramanian Ramakrishnan, Quess Corp Limited - CFO [3]

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Kuldeep, this is Ramki here. So let me just give you a rationale. And most of the entities with whom we have the intercompany loans via entities that have been acquired recently are relatively newly or where they will have a balance sheet, which would probably have -- then have a credit line of their own. Under those circumstances, obviously, the model to be adopted is to give an intercompany loan from the corporate or give a corporate guarantee and that's the model we had adopted. Having said this, there is also -- we thought and which is discussed also with the market and also amongst the company, where it's a good idea to have this in the form of intercompany loan? Or what is the nature of some of these advances which are given?

So it came to conclusion that most of these advances would probably be more in the nature of equity. Under those circumstances, it was decided that we will move from an intercompany loan structure to another product structure and the options we had was to move to a CCD or a CCPs or an equity. In the event of the CCPs or an equity, it would be a case where the money would permanently be stuck at the subsidiary level or at the other entity level. And if we have to pull back the money later on when they had the financials of their own, then it should be either in the form of dividend or in the form of share buyback, some of which will have a tax implication.

Hence, it was decided to go with the CCD products. The CCD product would also continue to mean that the group can classify this entire structure, not as a loan, but as an equity from a console perspective, and however, still achieve this objective of having the money come back to us as and when the financials of the respective entity are able to pay back the money. And all the CCD continue to be at an interest rate just to allay the fears between loan versus risk, it continues to be at the interest rate which is exactly the same as was in the case of [loan]. So that's the reason we went for this.

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Operator [4]

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The next question is from the line of Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [5]

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First, I'd like to thank you for the additional disclosures this time around. And so just 2 specific questions. One is the people and services business continues to be doing exceedingly well despite the macro and what we're seeing around. I just wanted your thoughts around, one, what's driven the strength this time around? And going forward, how do you see things panning out based on what you see on the ground? Do you anticipate any weakness going forward? Or do you think that there should be some strength continuing in the market? And if so, what's driving the strength when everything else is actually materially weakening in this?

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Subrata Kumar Nag, Quess Corp Limited [6]

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This is Subrata here. I think the traction we are getting are coming from many fronts. One is definitely post the GST, there's a -- it's the -- the movement from the unorganized to organized sector has been increased. And being the largest in the segment, definitely, we are getting most of the benefits of that happening. Secondly, if you see our segment or its breakup, we are in the BFSI, IT, IT retail, telecom, logistic, e-commerce. So that spread across India and from the north to south and into west and our recruitment capability, okay, are helping us to get more market share and traction in the market. And the strategy we adopted, I think in the last quarter that to penetrate more in the Tier 2 and Tier 3, Tier 4 cities is also helping us to pick up more clients, and you'll see the number of clients we have been finding has been increased every quarter.

So all of this actually helping us to keep the momentum. And I don't think any immediate slowdown in the next 2 quarters. Maybe it not be the 40% growth, but definitely, it is 20%, 25% plus growth we can expect from the general staffing and overall Quess level also.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [7]

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Sure. So there's nothing that, at this point, is actually visible that impact the existing book of business? I think people are looking to sort of cut or anything. There's nothing visible as far as what you're seeing?

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Subrata Kumar Nag, Quess Corp Limited [8]

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No, no, I don't -- people may not add in the way they were adding, but the number of hiring may be coming down, but it's not that they are cutting down the current workforce, which is we are just incrementally adding the numbers, but the question is that, what degree of propensity we are adding, that may have come down a little bit. But still, we are adding. In the last quarter also, we added 17,000 people in general staffing itself. So that growth momentum is still there.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [9]

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Sure. The second one before I get back in the queue is, on the facilities management business. So the growth is down to 8-odd percent after the early quarter being around holidays and things for the hostels and so on and so forth. So I was just wondering, what's driving the relative softness here? And do you think this softness is here to stay?

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Subrata Kumar Nag, Quess Corp Limited [10]

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I don't think -- I don't think there is -- the growth is definitely little when compared to general staffing, it is overall, I think, year-on-year, the growth is around 8%. But I am confident that in the coming quarters, some of the contracts which came into the latter part in this year, will take some time to mature. And I think when we exit the year in FY '20, March '20. I think the -- overall, the annual growth will be more than, you can say, 15%, in that range. I think we will exit the year around INR 1,400 crores plus, I think, revenue per current going. And last year, we ended up year around INR 1,200 crores.

So that is -- and I think the most of the growth also we see in the EBITDA segment. I think this movement to the SLA, and going further, we are now going for the IFM basically integrated facility management and large contracts. So some of the -- is a smaller contract also, maybe we're not picking up just for the revenue. And I think in the EBITDA segment, you will see -- definitely, our growth will be 20% plus in this year also. So I don't think it's the most revenue -- rather than revenue focused, we are more in the EBITDA and cash flow focus as for the SLAs is concerned nowadays.

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Operator [11]

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The next question is from the line of [Amar Maurya] from AlfAccurate Advisors.

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Unidentified Analyst, [12]

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Sir, number one, if you can help us, like, your depreciation run rate going forward, it has seen a significant uptick in this particular quarter. So I mean, how we should read going forward about the depreciation?

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Subrata Kumar Nag, Quess Corp Limited [13]

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Yes, depreciation, if you look at it during the quarter has primarily got a big Ind AS kind of an impact on it. It's about a good [INR 28 crores]. The overall increase just in terms of depreciation line item alone is INR 435 crores, of which INR 28 crores is Ind AS impact. There is also an inorganic from Allsec, about INR 8 crores. So it's -- other than that, if you look at it from a capital additions perspective, last year, we had close to about INR 92 crores or INR 93 crores of capital additions as per the annual cash flow statement.

This year, we expect the capitalizations to be more in the range of only about INR 35 crores, INR 40 crores. So we don't expect any big dip in depreciation, you will look at it almost on a steady state from move on [some along]. But the Ind AS impact is what is creating the year-on-year blip, which you can see.

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Unidentified Analyst, [14]

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Okay. So basically, the current run rate, including the Ind AS impact of INR 66 crore in this particular quarter, is the steady-state run rate we should consider from here on?

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Subrata Kumar Nag, Quess Corp Limited [15]

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Yes, you can consider more like about, yes, because that includes the full quarter falls, and you can consider more like that, yes.

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Unidentified Analyst, [16]

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Okay. And secondly, sir, your interest cost, like, I'm assuming that the debt is going to reduce at the end of the quarter, I mean, end of the year. But then, how we should see the interest costs moderating? Because this quarter, including the Ind AS impact, it was round about INR 41 crores. And if I include the Ind AS impact of that call option, it is round about INR 4 crores. So INR 45 crores versus a INR 40 crores in Q1. So instead of reducing, it has increased slightly. So how we should see the run rate going forward for this?

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Subrata Kumar Nag, Quess Corp Limited [17]

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Yes. So again, on interest cost, I think we had called this out in June quarter call also. Our overall credit update went up because if you remember, there are 2 factors. We had to pay about close to INR 400-odd crores for the Allsec acquisition. We also had to convert our intercompany loan, which we had given to Quess Singapore for the purpose of Comtel acquisition about close to INR 107 crore, INR 108 crore from intercompany loan to a third-party loan. So obviously, our update on credit has gone up, which have pushed up our overall gross debt number if you remember from INR 784 crores, which was there as of March to more like about INR 1,294 crores, a good INR 510 crores increase was there as of June. However, that number has reduced by about INR 375 crores as of September. So our opening number, as of October, is coming down in terms of our debt utilization, which will mean that the interest cost outflow moving forward will come down.

Having said that, for the quarter, the interest utilization -- the utilization of the credit is much higher, which is why our interest cost was higher, like, you rightly pointed out that is an Ind AS impact of INR 8 crores, but given other than that, there is an additional about INR 8 crores or so, which is for the increased utilization. We also appreciate the fact that Allsec, which is their interest contribution to this about INR 1 crore. There is an incremental interest component. I mean, the interest rate per se had gone up by about 20 bps. That contributed about INR 1 crores, INR 1.5 crores. But moving forward, just to give a very high level number, I guess we'll move back to more like a Q1 kind of a number in terms of our interest outflow, if that may give you some indication.

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Unidentified Analyst, [18]

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Okay. And one last from my side, sir. The tax rate in this quarter was basically negative. I mean, the overall tax. I believe we got 80JJAA benefit. So how we should see the tax rate going forward for the next 2 quarters.

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Subrata Kumar Nag, Quess Corp Limited [19]

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Yes. So the 80JJAA benefit, if you look at it, is something which is a projection for the full year in terms of what we've already added and what we think we will add. And we assume a particular probability of achieving it. So we do expect the same kind of tax arbitrage to continue on the 80JJAA. Some of it is based on the preceding quarter, carry forward also coming to this quarter. Hence, you see about a minus 4.5% kind of tax rate. Moving forward may not be as a number of 4.5%, it could be more in the range of about minus 2% is what we feel.

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Operator [20]

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[Operator Instruction] The next question is from the line of Abhijit Akella from IIFL.

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Abhijit R. Akella, IIFL Research - VP [21]

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Thank you for the improved disclosures in the presentation. One question on the P&S segment. The growth has been really strong, but there's been a bit of a moderation sequentially in terms of the margins this quarter. If you could comment on that? And also, specifically on the IT staffing business where as the presentation mentions, there was a significant reduction in margins. So what's the outlook over there?

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Subrata Kumar Nag, Quess Corp Limited [22]

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Yes, Abhijit, there is a couple of issues. One is the general staffing margin is better than what we used to have like the previously last quarter. I think our net realization per person has also gone up a little bit. And if you see the core to associate ratio also has been increased. So that has a positive impact on the general staffing. But when I'm looking in the overall P&S, I think, 2 or 3 factors work there. First of all, the Magna's margin is that IT staffing is still under pressure. I think that margin came down a little bit further, so that has an impact. And also, you have to understand one thing that Coachieve, which is a part of the P&S business, that moved to general staffing around INR 60 lakh of, I think, quarterly impact is there, move to technology. So that has an impact.

And there was a slight EBITDA loss in the Dependo. So all these things are having, I think, subdued overall people and services margin. But I think that the Q3 and Q4, particularly, the Excelus, that training the 51,000 what we have mandate we got thus securing the end of the Q1. So that Q1 and Q2, mostly the entire benefit of Excelus will be coming in the Q3 and Q4. And I think while Excelus has a 20% plus margin business, when that will kick in, in the full force, I think that will take our margin, which is a slight drop, definitely, that will reverse. And I think we'll be -- cross the 6% margin, what we have in the Q1 -- in the Q3 and Q4.

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Abhijit R. Akella, IIFL Research - VP [23]

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Okay, great. That's helpful. And secondly, on the Industrial segment, just to clarify. So there are one-off charges worth about INR 7 crores this quarter. Is that correct?

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Subrata Kumar Nag, Quess Corp Limited [24]

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Yes, INR 7 crores.

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Abhijit R. Akella, IIFL Research - VP [25]

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So this is non-recurring going forward?

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Subrata Kumar Nag, Quess Corp Limited [26]

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This is nonrecurring going forward.

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Abhijit R. Akella, IIFL Research - VP [27]

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Right. And if you could also just talk a little bit about the cash conversion. So it's improved significantly this quarter. What's the full year target? And do you believe that the DSOs are sustainable at the current level of 34 days?

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Subrata Kumar Nag, Quess Corp Limited [28]

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So I think the company has been focusing very heavily on our collections. We put in a very strong collection units within the company. This is one of the main discussion points in the company almost on a daily basis, and that's kind of showing up in the numbers, which has -- it has helped us reduce our DSO numbers. It's helped us improve our OCF conversions. The first half of this year is more like 47% as against 36% last year first half. And with the current kind of focus we're having, we've continued to maintain our focus on DSO, and we are very confident of attaining our OCF target of 50%, which is what we had promised.

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Operator [29]

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The next question is from the line of Sandeep Baid from Quest Investment Advisors.

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Sandeep Baid;Quest Investment Advisors;Analyst, [30]

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You just talked about OCF-to-EBITDA ratio of about 50% towards the end of this year. And you also mentioned earlier in the call that your CapEx would be about INR 30 crores to INR 40 crores. So your free cash flow to EBITDA ratio would be pretty similar to OCF-to-EBITDA?

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Subrata Kumar Nag, Quess Corp Limited [31]

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It is marginally over, but it is pretty strong.

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Sandeep Baid;Quest Investment Advisors;Analyst, [32]

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Okay. It will be in the INR 40 crores?

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Subrata Kumar Nag, Quess Corp Limited [33]

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We can forward -- get back to you on the exact number on free cash flow side.

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Sandeep Baid;Quest Investment Advisors;Analyst, [34]

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Okay. And can you give some color on how the revenue for Monster has moved since you acquired this company?

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Subrata Kumar Nag, Quess Corp Limited [35]

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I think the revenue of the Monster remain more or less, I would say static. No, it has not been increased substantially. The improvement in the EBITDA, the loss what you are seeing basically is coming from the rationalization of the cost rationalization. And we think that the revenue pickup will start when the product will be absolutely ready. For the time being, I think revenue what we are getting are more or less stable, but it's not increasing as such.

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Sandeep Baid;Quest Investment Advisors;Analyst, [36]

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When do you think the product will be fully ready as you said?

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Subrata Kumar Nag, Quess Corp Limited [37]

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I think end of the Q3 or beginning Q4, the first set of the -- most of the product will be ready. And entire thing -- their product there is stage 1, stage 2, there are a couple of stages, but the [Farsinghging] and other things will be ready January onwards, but entirely unique products will be coming maybe end of say, in March, sometime in the March, when we get into a New Year.

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Operator [38]

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[Operator Instruction] The next question is from the line of Kaustubh Pawaskar from Sharekhan.

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Kaustubh Pawaskar, Sharekhan Limited, Research Division - Senior Research Analyst [39]

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Yes. Sir, my question is on the industrial. In the presentation, you have mentioned that the business has actually about INR 97 crores of revenues and things have almost bottomed out and you are expecting this particular business to deliver better performance in the coming quarters. So can you throw some highlight on the same, what's your perspective or view on this thing?

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Subrata Kumar Nag, Quess Corp Limited [40]

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If we analyze the industrial result this quarter itself, we had a INR 5 crore loss after taking a one-off cost of around INR 7 crore. So if you take out the one -- the INR 7 crore loss, onetime expenses actually basically we are too close in the positive. That is the #1 on a going basis. Second thing, we have been doing a couple of restructuring in the industrial. First of all, one thing that is facing the infrastructure in the telecom segment, what needs to do. We -- that was a loss-making venture. So we stopped that thing. Smart City, we scaled down the adjusting of doing the last finishing part of the Ahmedabad project. In the Hofincons business, there are a few contracts which are loss-making or just breaking even, we came out from that. So overall, all these things are helping us to regain our ground there. And I think going forward, we will be seeing positive results once this one-off will go up. And some of the measures have been taken when the full impact of those levels will be coming into the Q3 and Q4.

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Kaustubh Pawaskar, Sharekhan Limited, Research Division - Senior Research Analyst [41]

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Right, sir. Sir, On the EBITDA front and the consolidated level. Considering this one-off in the industrial as well, your operating margins were at about 30, 40 bps lower on a Y-o-Y basis, so on the comparable basis. So the consolidated operating margins, should we expect it to be better in the second half?

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Subrata Kumar Nag, Quess Corp Limited [42]

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Yes, Q3 and Q4, if you see historically are the best quarter, end of Q3, and ultimately, the Q4. And I see that there's no reason why this will not happen this year also. In starting with facility management business and currently the annuity kind of business. So whatever Q1 with the new clients you add as a business you add, the benefit is -- do not slowly get that mode that you go by the quarter. And particularly understand one business, as I told you just now the Excelus business, which give a substantial profit in the P&S business. Most of the Excelus profit will come in the Q3 and Q4. And one, in case of -- in our BPM segment, Conneqt and Allsec, particularly in the Allsec in HRO space, Q4 is the best way of business because of the IT return there. So instead of 3 months, we will get a 4-month benefit and Allsec that -- as far in Conneqt, Q4 the last 2, 3 months because of our collection business, we get a jump in the profit. So overall, if you see the last 2 years, if you analyze, I think this is with -- Q3 and Q4 will be much better than Q1 and Q2.

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Kaustubh Pawaskar, Sharekhan Limited, Research Division - Senior Research Analyst [43]

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Because the understanding was acquisition of Allsec, the overall operating margins were expected to be better. And considering most of the business segments are doing well, and they have better margins than the base business. The ideal scenario would be that FY 2021, at the consolidated level, operating margins would be much better than what it was in past 2 years. So is it the right understanding?

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Subrata Kumar Nag, Quess Corp Limited [44]

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It is absolutely right. See couple of things will happen. First of all, as you know, that the margin -- the business, if you -- one thing is that if you understand the business of our BPM segment that is Allsec and Conneqt are doing very well, okay? And technology business, I think, today, almost 11% margin, and their revenue also have been growing. So that will have a positive impact in the overall Quess. Secondly, the loss of the Monster, in the last year, we have almost INR 20 crores, INR 30 crores, INR 25 crores loss, and this year, I think Q4, if we break even and we'll be breakeven, then that is also impact in that next year positivity. And the industrial, also last year, we had a loss, and this year also, we have loss. So that will also go up with the, what I just explained to you about the industrial. So all things together, I think in the FY '21 or '22, you should expect a much higher margin. At least, I'm not saying that we'll reach the 8% that margin aspirational, but definitely, we are slowly going towards that target. It will take some -- a few quarters, but the -- and the trend is towards that.

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Kaustubh Pawaskar, Sharekhan Limited, Research Division - Senior Research Analyst [45]

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Right, sir. And sir, one last one, what is your target of debt reduction for the overall year? Because this quarter, we have seen a reduction in debt, gross debt. So for second half, is there any target set for reduction of debt?

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Subrata Kumar Nag, Quess Corp Limited [46]

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Yes, I think the way we are progressing on our cash conversions and collection focus and with the overall strategy of making sure that we probably will not go for any further acquisitions, we expect our debt numbers to be more in line with our March '19 number versus in the range of about INR 784 crores.

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Operator [47]

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[Operator Instruction] The next question is from the line of Prashant Tiwari from SBICAP Securities.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [48]

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I think in the reported statements, the cash flow -- the operating cash flow was reported at INR 174 crores. While in press release, you were stating that it is INR 117 crores. What's the difference please?

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Subrata Kumar Nag, Quess Corp Limited [49]

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That is one with the Ind AS impact, and the other one is without the Ind AS impact.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [50]

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Oh, that's the only difference?

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Subrata Kumar Nag, Quess Corp Limited [51]

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Yes.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [52]

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Okay. And second one is, in integrated facility management, has the growth tapered regarding not adding enough clients, like in the first half, we have not seen growth more than 12%, 13% overall? What is happening there?

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Ajit Abraham Isaac, Quess Corp Limited - Chairman & MD [53]

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I think in facilities management, there are 2 points that you have to keep in mind. One is that as a business, we'd like to take more SLA-related business than the manpower-related business. So as we move to that structure, and we are seeing a better ratio of SLA-related business also in the pipeline, we've got 26:74 versus 22:78 previously. Second is, our EBITDA has also increased significantly. We are also in the process of culling out certain accounts, which we would not like to continue. So I think this process of cleanup will yield us on a long-term basis, with better client base using a better return on capital. So the growth in this sector as Subrata mentioned, pick up in the next couple of quarters.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [54]

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Okay. And with the higher proportion of SLA, can we expect EBITDA margins also to improve?

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Ajit Abraham Isaac, Quess Corp Limited - Chairman & MD [55]

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It's already improved this quarter, and we expect it to continue a better kind of progression over the next couple of quarters.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [56]

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Yes, I just wanted to think, because there's already 10% plus in integrated facility management, how high can the margins in this business go?

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Subrata Kumar Nag, Quess Corp Limited [57]

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See, as far the timing, I think we will be around 10%, 11% margin. I don't think it will be immediately because, let's say, today, it's an almost INR 1,400 crore business, okay? So any -- it will take some time to really see that margin. So for the time being, it will be around 10%, 11% margin. And overall, the growth, as Ajit said, that we will be around 15% to 16% of the revenue growth this year and around 20%-plus -- [30%] plus in the EBITDA growth in the IFM segment.

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Operator [58]

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The next question is from the line of Saurabh Ginodia from Stewart & Mackertich.

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Saurabh Ginodia, Stewart & Mackertich Wealth Management Ltd., Research Division - Associate VP of Research and Strategy [59]

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Sir, my question is pertaining to Allsec. How do you see growth planning out in Allsec in the next couple of years? And in the short term, are there any low-hanging benefits which Allsec can derive for the HRO segment from Quess?

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Subrata Kumar Nag, Quess Corp Limited [60]

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The first thing if you have seen, after we took over Allsec that we moved our compliance business to Allsec. So I think that is a good strategy move from -- for Allsec. Their HRO business, along with the compliance business, I think, they are in a well position to take the market, and they are seeing more traction there. That is the number one. Number two, we are trying to -- wherever we are present -- Quess has a presence, like, Southeast Asia and Middle East and Philippines to take their HRO business. We have already have some business in Philippines, but we're trying to take it to Malaysia and Middle East. So I think that will also help to -- in the HRO business. In the CLM space, our whole effort is to get dollar-based revenue. And Ashish has just joined and we think our whole focus in the Allsec to acquire clients in the CLM space is where we earn more dollars as revenue. We already have some clients in the industry -- Malaysia -- in the Philippines and U.S. where -- so that is the focus area. And I think we will be seeing -- we have revamped the sales team in the U.S. also very recently, and we'll see some traction there.

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Saurabh Ginodia, Stewart & Mackertich Wealth Management Ltd., Research Division - Associate VP of Research and Strategy [61]

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Okay. So is there any thought process to merge Allsec with Conneqt?

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Subrata Kumar Nag, Quess Corp Limited [62]

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Not immediately, nothing is there on the table as of now.

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Saurabh Ginodia, Stewart & Mackertich Wealth Management Ltd., Research Division - Associate VP of Research and Strategy [63]

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Okay. Are there any possibilities for EBITDA margin in Allsec to improve from the current levels?

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Subrata Kumar Nag, Quess Corp Limited [64]

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It depends -- definitely, now they are -- if you see 20% plus margin, but it depends on how well we play our international business. If we can increase our international business substantially, definitely that margin can go up. But we have to give a quarter or 2-quarter time to get our act together and do some business there.

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Operator [65]

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The next question is from the line of Ravi Menon from Motilal Oswal.

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Ravi Menon;Motilal Oswal;Analyst, [66]

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General staffing, the working capital seems to have come down and the realization per associate has gone up. Can you -- what step did you -- do you think this is sustainable?

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Subrata Kumar Nag, Quess Corp Limited [67]

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In which business are we talking?

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Ravi Menon;Motilal Oswal;Analyst, [68]

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The general staffing.

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Subrata Kumar Nag, Quess Corp Limited [69]

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If you see the general staffing, we have -- our collection base model has been growing and the year-to-date, 72. And I think it will improve further. And also our core to associate ratio also has been improving, and realization per person is also increasing. So I think the margin definitely will improve, but it will take some time because it's a large business for 240,000 business. So any increase and to feel that -- see that improvement, it will take some time. But on each front and parameters, we have been increasing every quarter. So I think that is definitely -- we'll be increasing in the couple of quarters down the line.

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Ravi Menon;Motilal Oswal;Analyst, [70]

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So is there any mix change or something that's led to this improvement?

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Subrata Kumar Nag, Quess Corp Limited [71]

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Mix change, primarily, our staffing business and where we are different from the others is that we always be more important in hiring and getting some managed services. We don't just do the payroll, we try to do in each product and our other products, what we bring to the customers and help in their hiring, their training process. So those are the things help us to get more revenue per person in the staffing business.

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Operator [72]

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[Operator Instruction] The next question is from the line of Dipan Mehta from Elixir Equities.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [73]

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My question is more of a macro nature, sir. And I have been there for a few con calls and where your investor releases also. And every time, the management are always painting a very positive picture of the business and very optimistic scenario for the year gone by quarter 1 or the year ahead. But actually, sir, if you look at the last 8 quarters, the PBT level, the company's profits are lower, like, just in September '19, we had INR 65 crores PBT and now in September -- sorry, September '17 was INR 65 crores PBT and 2 years in still INR 62 crores, the same level. In the meantime, revenue has gone up almost double. At the same time, debt is at all-time high. The term ratios are at all-time low, profit, PBT to net sales are at all-time low. So what exactly is going wrong, sir? I mean, I know that you are trying to present a optimistic picture, but something has -- I missed in the -- now when we look to the numbers on a historical basis for the last 3 years?

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Ajit Abraham Isaac, Quess Corp Limited - Chairman & MD [74]

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Let me kick this off and then I'll have my colleagues also join in. The first thing is that our revenue CAGR across the last 3 years is about 35%. So clearly, business is growing. And we -- the issue is not with either our market share growth or the fact that the opportunities that represent the market is sufficient to keep this growth long. I think the -- there are 2 or 3 points that have impacted us. One is the size of the debt, which we had, the interest levels that we had associated with it, which have impacted the PAT of the company because interest outflows have been substantial. Second is in our industrial business, we've had an impact of one of the projects which have not gone the way that we would have liked it to, especially our project with Sterlite in Tuticorin, which -- where we bought equipment was about INR 30-odd crores for the project, and then we had to shut it down because the plants shut down. So it was kind of act of god and we had little or no choices about having to sell some of the equipment and book a loss on it. So there are 1 or 2 one-off incidents that have impacted this. The third is, also, some of our acquisitions will take a little longer than we had anticipated in terms of turnaround, one of them being Monster, and second one is Vedang. In the case of Vedang, when we bought it, it was a business that could sustain about 10% EBITDA margin. However, over time, what happened is post the meltdown with telecom industry, margins in this industry have completely come down, and that's also impacted that business. But what remains to be seen is at the core of our company, which is basically 3 businesses. That's the staffing business, our facilities management business and our BPO business are all in good shape. All of them will deliver more than INR 100 crores of EBITDA each. They are growing in double digits and they have healthy return metrics. We have areas or red flags on 2, 3 businesses, one of which was Trimax, which we've now turned around after the acquisition of the balance equity there. Monster, the losses have come down. We expect to break even in the next quarter. And in Industrials, we've gotten past the breakup. So I think the heavy lifting in the company is done. And I think right now, which we are prepared to see some better-quality return metrics as we move forward.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [75]

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And you're shunning all acquisitions, at least for the near future, considering that we have had so many challenges assimilating all these acquisitions and the effects are on the balance sheet?

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Ajit Abraham Isaac, Quess Corp Limited - Chairman & MD [76]

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Well -- so I have 2 parts to your answer. One is that, one of the reasons why we've got the all-weather business model is actually because of our acquisitions. Some of them have taken a longer-than-anticipated time to turn around. But because the agency procures acquisitions and the multiple lines that we've got, we are still able to grow 20% when the market growth is 5% to 6% and when competition grows even less. When all of them do turn around and deliver to plan, I think, we would realize the full benefits of these acquisitions. Having said that, we do not anticipate any acquisitions in the next -- in the immediate future. Our sales of activity in the company clearly centers around consolidation. And I think you're beginning to see some of the results of that, especially represented in the cash that we are collecting quarter-on-quarter, which is increasing substantially over the previous year.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [77]

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Just one quick question, sir. This 80JJ benefit, have you completed any income tax assessments and the income tax assessing officer has accepted our 80JJ calculation and tax computation, and the assessment is over?

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Subrata Kumar Nag, Quess Corp Limited [78]

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Yes. So in fact, on the 80JJAA, this is the benefit which we've been claiming for the last about 1.5 years or more and our assessments are still underway. But having said that, the 80JJAA goes through multiple audits, both with the external auditors and also with the tax auditors. And it's part of our tax return. It's a very open and auditable process. So we don't expect any issues around this.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [79]

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But so far, no assessment is completed where income tax department has accepted your 80JJ calculation and your tax -- the liability calculation.

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Subrata Kumar Nag, Quess Corp Limited [80]

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Assessments are in progress.

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Ajit Abraham Isaac, Quess Corp Limited - Chairman & MD [81]

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Yes, I just want to add one point, which is, the answer is that I think you should also look at our returns ratios after factoring in the goodwill because goodwill is a substantial part of our balance sheet. So if you exclude goodwill, you'll find that the return ratios are substantially different than -- we can maybe have an off-line conversation too, about how these numbers stack up when you consider that a big -- significant part of our balance sheet is actually goodwill.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [82]

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Your sites are running just that you are having the turnover, but no profit before tax and the stock price is down 40% from its peak. And really, the story hasn't played out as we investors thought it would, at least, about a couple of years ago. So that's all my humble submission here, sir.

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Ajit Abraham Isaac, Quess Corp Limited - Chairman & MD [83]

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Yes. So there are 2 parts to the story. One is the risk in the business, and second is the volatility in the -- in market price. So market -- market price volatility, we don't have any control of but the risk in the business is what the management manages here. And that I can tell you, where we have things within our sites, and we know that some of the steps that we're taking in terms of turnaround in terms of the corporate taxes et cetera leading to the results that will add significant value to our shareholders.

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Operator [84]

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The next question is from the line of Mihir Manohar from CapGrow Capital.

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Mihir Manohar;CapGrow Capital;Analyst, [85]

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I just wanted to know one thing. What is e-commerce as a percentage of our overall workforce management revenue?

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Ajit Abraham Isaac, Quess Corp Limited - Chairman & MD [86]

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So out of a total of about 220,000 people, we have about 13,000 to 14,000 [feets] were involved in the e-commerce, right? So basically, that's the ratio of -- so it will be less than, let's say, about 5%.

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Mihir Manohar;CapGrow Capital;Analyst, [87]

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Okay. Okay. Correct. And are we engaging to foot delivery as well?

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Ajit Abraham Isaac, Quess Corp Limited - Chairman & MD [88]

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We don't do foot delivery right now.

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Operator [89]

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The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [90]

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Sir, in the staffing space, what would be outlook on growth and margin? And also, any changes in the business landscape there, either in terms of pricing or competition or market dynamics, if you could share your comments?

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Subrata Kumar Nag, Quess Corp Limited [91]

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In the staffing space, we don't see any major changes in the immediate future. I think we are well diversified as far if you are -- our segment-wise in our geography-wise, and as we had told that we are getting good traction, okay? We are signing more and more contracts every quarter. And also, the -- our current customers are also adding more numbers. So I don't see -- only thing as we are telling that with the collection percentage going up with the increase in the efficiency factor, we see the -- and the realization per person is going up also in every quarter, so that will help us to increase the margin going forward.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [92]

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And what would be your head count growth?

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Subrata Kumar Nag, Quess Corp Limited [93]

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See, this year, we already, I think, added almost 60,000 in first 2 quarters, I think, 59,000 or 60,000, we added in each one. So I think last quarter, 17,000. So we can definitely in Q3 and Q4 will have a healthy addition also.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [94]

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And any changes you've seen in the Industrial landscape in terms of pricing or competition or the nature of business?

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Subrata Kumar Nag, Quess Corp Limited [95]

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No, I don't think any major pressure on the pricing as such, okay? Our idea is to go in a more -- in a percentage basis than fixed fee base. We have been trying to do that. It's a difficult thing, but that is our focus area, and we have been working towards that. Our sales guys are always reaching for the percentage method. We would like to go -- the business into that direction. Otherwise, in the market, definitely, I think we are winning the contracts at much faster rate and much larger space than our competition. So we don't see -- there is a competition, but I think Quess is definitely much ahead of competition in general staffing.

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Operator [96]

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The next question is from the line of Sandesh Shetty from PhillipCapital.

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Sandesh Shetty;PhillipCapital;Analyst, [97]

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Sir, I just wanted to ask regarding the -- our investment in East Bengal FC. Is there any update on that? We were planning to exit the business. And...

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Subrata Kumar Nag, Quess Corp Limited [98]

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Yes, yes, we have already intimated, and they also accepted. So mutual exit by May 2020, when the season -- current season ends. So our current exposure with East Bengal up to that time. But we are -- at the same time, we have been trying to exit, if possible, before that time line also, but if the latest 2020, May 31 is our last day with the East Bengal club.

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Sandesh Shetty;PhillipCapital;Analyst, [99]

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And sir, if you can please share the top line and bottom line for the football club for the current quarter?

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Subrata Kumar Nag, Quess Corp Limited [100]

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There is no much top line. The season starts. So there are some sponsorship revenue just kicked in, but most of the things will come when the season starts and the ticket sales and other things. And overall loss, I think, this quarter, which is just not much. I think it is around between INR 2 crores to INR 3 crores to INR 4 crores in that range. INR 3 crores to INR 4 crores.

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Operator [101]

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The next question is from the line of [Ritvik Seth] from [One-Off Financial].

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Unidentified Analyst, [102]

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Sir, a couple of questions on the general staffing business. Sir, you've mentioned that out of workforce management, around 78% of the total revenue comes from general staffing. So could you guide us with the EBITDA margin for this segment, for the quarter? And how was it quarter-on-quarter?

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Subrata Kumar Nag, Quess Corp Limited [103]

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See basically, primarily, we give the workforce management on the overall stage and general staffing. And if you go people services, which is 5.6%. But general staffing, normally, we don't -- if you want, we can turn off-line, we can talk and give it to you.

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Unidentified Analyst, [104]

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Sure, sure. Okay. Okay. And what could be -- what would be the receivable days for this business, general staffing business? And what was it year-on-year?

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Subrata Kumar Nag, Quess Corp Limited [105]

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It is -- varies between, I think, 12 days -- around 12 days.

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Unidentified Analyst, [106]

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[Exceed] in Q2 FY '19?

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Subrata Kumar Nag, Quess Corp Limited [107]

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Yes, it is around 12 days.

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Unidentified Analyst, [108]

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Okay. Then flattish?

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Subrata Kumar Nag, Quess Corp Limited [109]

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It is not -- it's coming down because I think previously, to us, I think, nowadays because with more collection data, working cycle is saving. So currently, I think it is 12 days.

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Unidentified Analyst, [110]

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Currently, it is 12 days. Okay.

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Operator [111]

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

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Ajit Abraham Isaac, Quess Corp Limited - Chairman & MD [112]

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Sure. So I think it's been a strong quarter for us in terms of sales and continued results, especially in our staffing business. Our staffing business, led by Lohit and Guru have continued to deliver, and they have a strong market-leading position. Overall, our business model also shows the competitiveness of each of the business and the fact that we've been able to continue revenue growth at 20% in spite of market headwinds. One-off cost reductions in terms of reorganizing our business entities and in terms of reducing group debt, et cetera, is helping strengthen the balance sheet, overall governance and the operating structure for the long term. We've strengthened the leadership through the hiring of Suraj and Ashish at Allsec. Our digital transformation is also gathering steam, and our cash conversion, particularly is going up. The 49% price now is on track to achieve year-end numbers of about 50%. So we think that some of the changes that we initiated in the company post the last conference call in July, has helped us significantly. We will continue along this path of consolidation, and we believe we are well positioned to deliver on better results as we move along. Thank you, again, for joining this call and we look forward to meeting you again next quarter.

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Operator [113]

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Thank you very much. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.