MASTEKNSEQ1FY23July 28, 2022

Mastek Limited

12,099words

119turns

11analyst exchanges

3executives

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Management on call

Hiral Chandrana

GLOBAL CHIEF EXECUTIVE OFFICER, MASTEK GROUP

Arun Agarwal

GLOBAL CHIEF FINANCIAL OFFICER, MASTEK

Damini Jhunjhunwala

ASSISTANT VICE PRESIDENT, INVESTOR RELATIONS, MASTEK

Key numbers — 40 extracted

13.4%

“Business Update” and hand it over to Arun to give more details on the “Financials.” We delivered 13.4% year-on-year growth on revenue on a constant currency basis and it was flat on a quarter-on-quart

y deals and slower than expected ramp-ups in a couple of accounts. The currency impact was almost 7% to 8% for us from a GBP to US dollar. But having said that, we've got some really good leading in

s and slower than expected ramp-ups in a couple of accounts. The currency impact was almost 7% to 8% for us from a GBP to US dollar. But having said that, we've got some really good leading indicato

30%

e business. As you would have seen our backlog has continued to improve. We grew that almost over 30% year-on-year. Our pipeline has been growing steadily even through this last quarter. We have mult

19.2%

ly. This is again part of our strategy to look at more predictable revenue. We actually delivered 19.2% on the operating EBITDA in spite of some of the strategic investments that we continue to make.

25 billion

the customer 360 degree Platform. It's a very big economy where salesforce is going to go from $25 billion to $50 billion as a company and we believe there is significant synergies in our existing account

50 billion

360 degree Platform. It's a very big economy where salesforce is going to go from $25 billion to $50 billion as a company and we believe there is significant synergies in our existing accounts within Mastek

rs,

value that we provide to Mastekeers is paying results. As we look at the next three to four quarters, we have some recovery to do, but with the measures that we've put in place with the investments th

65%

has been led by a macro environment has also impacted our USD-INR revenue. It's basically because 65%-plus kind of a number for Mastek comes from UK as a market and hence optically in terms of US in

13.4 %

- on-quarter a little bit more impact. However, in terms of constant currency, we have delivered 13.4 % growth year-on-year while flat quarter-on-quarter, delivering Rs.570 crores for Q1 and the reason

Rs.570 crore

currency, we have delivered 13.4 % growth year-on-year while flat quarter-on-quarter, delivering Rs.570 crores for Q1 and the reasons for same mentioned before. EBITDA margin stood at 19.2% versus 20.7% in

20.7%

70 crores for Q1 and the reasons for same mentioned before. EBITDA margin stood at 19.2% versus 20.7% in the previous quarter. Margin was also impacted by the currency. GBP to INR, as I mentioned mor

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Guidance — 20 items

Hiral Chandrana

opening

“As we look at the next three to four quarters, we have some recovery to do, but with the measures that we've put in place with the investments that we have in Americas, with the continued focus on UK public sector, we believe that we can start looking at beating the industry growth quarter- on-quarter going forward.”

Arun Agarwal

opening

“Again, we expect in a quarter or two for it to streamline and we get back the same run rate with the same customer.”

Mohit Jain

“So, what is happening here and what has changed in last one year in terms of either deal pipeline or deals won and how do we see it going forward in terms of organic growth?”

Hiral Chandrana

“As we've communicated in the past, the approach that we had before in US was really a project-based approach and an implementation- based approach.”

Hiral Chandrana

“This is important because our stickiness of the account goes beyond just the project of implementation.”

Hiral Chandrana

“Of course, with the addition of MST, we expect that to take it to another level because it opens up another avenue for us, because salesforce is almost present in every existing account of ours in the Americas.”

Mohit Jain

“It was more like when should we expect organic growth to pick up, is it like are you guys likely to take two, three quarters, one quarter depending on your deal pipeline, how do you see it moving?”

Hiral Chandrana

“Based on this, I would say in the H2 timeframe which is really Q3 and Q4 timeframe we expect a decent jump both on order book as well as revenue growth, Mohit.”

Mohit Jain

“So, like are we done with it or should we expect something in 2Q and then you expect it to move up?”

Arun Agarwal

“We expect 24% to 25% for FY'23 is a good range as we go on a normalized basis.”

Risks & concerns — 6 flagged

So, was the management bandwidth involved in the acquisition process which led to some decline or declining in the revenues from the US side or the general macro which has impacted the growth over there?

— Nilesh Jethani

I understand it is difficult, but if that could be quantified.

— Mihir Manohar

So, with this spending coming down at an aggregate level, don't you see that the organic growth that we earlier thought of is at risk?

— Amit Chandra

So, it would be difficult really to quantify, but in the space of public sector as we answered in the previous question, most of the projects which we do for public sector are in the space of immigration, borders, customs which are very critical because as different countries are restricting their borders or making it much more pruned to avoid different kind of issues and with Brexit coming together those clearance becomes much much more critical and important.

— Arun Agarwal

So, it's a combination and sometimes informing on the real-time basis become difficult because some of the decision- making is always a part of more discussion to make things happen in a positive way from both sides.

— Arun Agarwal

The impact of the wage revision would be higher than the last year?

— Ashish Das

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Q&A — 11 exchanges

This is first of all related to US. Now, while our commentary is positive, but last three quarters or so, we have been more or less flattish in terms of revenue booking. So, what is happening here and what has changed in last one year in terms of either deal pipeline or deals won and how do we see it going forward in terms of organic growth?

Hiral Chandrana

Thanks, Mohit. There are three different parts to this. As we've communicated in the past, the approach that we had before in US was really a project-based approach and an implementation- based approach. So, what that means is we should deliver an implementation and move on. The change that we've made in the last six to nine months is really to put some structures when it comes to account mining. There are about 20 to 25 accounts where we believe there is significant wallet share increase that is possible. Now, some element of rationalization on the accounts has happened as well because there'

Just three questions from my side. First one is related to the healthcare clients that we are talking about. From the numbers it seems the healthcare clients is where we have seen the ramp down is from the private Europe side. Is my understanding correct?

Hiral Chandrana

Debashish, in UK we're not working with any private sector, it's mostly the government that runs the UK healthcare, so it's really in the overall public sector in UK, not necessarily private. Why I am coming to this conclusion is if I see my government and education performance is fairly well, whereas the UK, Europe as a market has come down. So, I thought that it may be a private client that you – Yes, yes, yes. So, you're right in terms of how we classify it. The government and education, the line item that we provided the spreadsheet does not include the healthcare account. That is a part o

My first question was on the UK political scenario currently panning out. So, how confident are we with regards to growth from a next 6 to 12 months perspective in UK especially we have a lot of orders coming from government?

Hiral Chandrana

Nilesh, a good question. We have been following that closely as you can imagine. We over the last year have been able to convert many of our engagements into a bit more longer-term predictable engagement particularly in our top four or five accounts, which constitutes in almost 80% of our UK public sector revenue. So, that gives us confidence that those programs are likely to continue irrespective of the government and the political environment. These are mission- critical infrastructure programs, where they seem to have visibility over the next 2 to 3 years at least. Having said that, any sor

I wanted to understand in your opening remarks you mentioned about the DSP program specifically in the UK public sector side which will give you the opportunity to participate in the multi-million-dollar deals. If you could throw some more light into this and what are the strategies specifically to grab this program, what is this program, in which area and how are you strategizing that? And second question was on cash handling. Now we are having Rs.650 crores of gross cash and we are supposed to make payment for Evosys and also for MetaSoft. So, how should we read this situation?

Hiral Chandrana

Let me answer the first and then I'll hand it over to Arun on the second. So, the DSP program and the framework is really about again like I said Digital Specialists and Programs, that's what it stands for. There are multiple phases here, what they call multiple lots. And the first lot will be about essentially key transformation initiatives and people and processes that they're trying to change. This is related to the mobile operations and mobile platforms as well as the e- commerce platforms that the government is funding. It cuts across multiple departments as well as in multiple phases. Th

My first question is regarding the impact that we had in the UK performance. You mentioned it was because of a large contract in the government which could not be rendered due to leadership change. So, is it that i we need to be going for re-bidding or is it that there's a temporary pause and maybe after a quarter or two this will start getting executed?

Hiral Chandrana

Sachin, just a small clarification. This particular account, we had already ramped up in Q4FY22 for this particular program. So, it was not like we could not ramp-up, we actually did a decent job in ramping up in Q4FY22. That particular program was paused and that's what led to like I mentioned the leadership changes and the consolidation of various departments. So, as of right now it's a pause which they have said is of six to eight weeks which sort of ends in the July timeframe. Having said that the way that particular program will come back will be in a different avatar if you will, right.

My question is on the UK government digital spend. Seeing the data, the government spend on a digital side has come down significantly over the last two quarters. So, is it only because of the political uncertainty or turmoil that is going there or is it because of the uncertainty in the various departments? And also our growth over the last two years has been largely driven by the traction that you've seen in the UK government side. So, with this spending coming down at an aggregate level, don't you see that the organic growth that we earlier thought of is at risk?

Hiral Chandrana

Maybe just to clarify a couple of things, our UK public sector, I'm talking again about secure government services, the non-healthcare account, the rest of the secure government business, that has actually continued to show some good momentum. Now if you remove the currency impact from that, the business actually has grown. You can see that reflected both in the government and education industry slicing as well as in the digital engineering slice that we provide. So, both ways, the digital engineering business that we do for the UK public sector has shown growth. Again, if you remove the curre

There's a couple of questions for you. First of them would be a clarification what you have mentioned in the introduction. So, did you mention quarter-on-quarter you're expecting industry- beating growth, is that from next quarter or you mentioned its normalization in the next three to four quarters?

Hiral Chandrana

The latter, next three to four quarters. So, post three to four quarters you're expecting industry-beating quarter-and-quarter growth? That's right. In the near term I am not pinpointing at the exact number, but just trying to understand what you're expecting in terms because obviously if you look at the past or two-year numbers, this is probably one of the weakest quarter-on-quarter for you and possibly year-on-year results. Just kind of your input in the next or 12-months timeframe if you were thinking that? We will be back to quarter-on-quarter growth. As we mentioned, this quarter had cert

Just a couple of points. One, on the MST transaction, did I hear it right that the margin profile of the company is similar to Mastek which is 18% to 20%?

Arun Agarwal

Yes. This earn out which is zero to $35 million is all going to be in cash only, right? Yes, it is in cash. This delayed large probability deals which we are mentioning, is it because of the pricing, is it because of the competition or is just a global recessionary fear macro issues? It's not the first or the second, I mean, really deals that we had high probability as it relates to early Q1FY23 closure, for example, in the April timeframe, many of them either got de- prioritized in terms of decision-making or some of them just moved and shifted, right.. Now we have won a couple of them in Jul

My first question is regarding the annuity business or managed services. Sir, in the earlier remarks you had mentioned that you want to focus more on expanding this annuity business. So, what is the current contribution to our revenue and what do we aspire to be in the future?

Hiral Chandrana

A good question, Mayank. Our annuity business relatively speaking to many of our competitors is very low and we've moved the needle on that in the last six to nine months. So, now we're hovering in the 30% to 35% range and our ambition is to move that more closer to 50%. What we've done is we've gone to each engagement in each program that we've done implementation. It could be an e-commerce implementation, it could be a cloud implementation, it could be a digital engineering program where we've developed the platform and converted them most of them into managed services engagement. So, that's

Sir, my question is to achieve our objective or vision of $1 billion in second half of this decade. This particular acquisition which you feel or you are saying in some interview that we can reach with integration maybe $150 to $200 million. So, no need of any adding or any new acquisition further or how to understand this?

Hiral Chandrana

As part of our three to four years strategy, we had created a roadmap for anywhere between three to five acquisitions. And of course, a lot of that depends on the size of the acquisition, the timing, etc., This was very, very consciously done in areas where we felt we needed to bridge certain gaps. So, the two other areas that we have identified is cloud platforms, this is in the Azure and AWS space and then in the data and automation space. The CX space that we've identified, we believe in that space this is the right acquisition and we were very consciously going after salesforce as an area.

Arun, just a question on EBITDA margin. The Q1FY23 EBITDA margin is below the company's aspiration level. Earlier you used to say that it would be around 20%. Now you will take the wage revision in Q2FY23. What is the outlook for the EBITDA margin for FY'23?

Arun Agarwal

You are right, but as we mentioned, our endeavor is always to maintain a high teen closing to 20% was always the direction. However, the currency has impacted something which was not envisaged, Ashish. I mentioned in my commentary because since we have significant exposure to GBP and significant portion of our revenue comes from GBP, negative movement in that section led to some of the depletion in our margin profile. But still, our endeavor is to maintain in high teens and depending upon currency to be closer to 20% EBITDA. The impact of the wage revision would be higher than the last year? A

Speaking time

Hiral Chandrana

Arun Agarwal

Moderator

D Mazumdar

Nilesh Jethani

Mohit Jain

Sachin Kasera

Zubeyr

Sunil Kothari

Amit

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Opening remarks

Damini Jhunjhunwala

Thank you, Neerav. Good day to all of you. Welcome to the Q1FY23 Earnings Call of Mastek. The Results and the Presentation have already been mailed to you and you can also view it on our website, www.mastek.com. To take us through the results today and answer your questions, we have the top management of Mastek, represented by Mr. Hiral Chandrana - Global CEO and Mr. Arun Agarwal - Global CFO. Hiral will start the call with the business update, followed by Arun providing the financial update for the quarter. As usual, I would like to remind you that anything that is said on this call that reflects any outlook for the future or which may be construed as a forward-looking statement must be viewed in conjunction with the risks and uncertainties that we face. These risks and uncertainties are included, but not limited to what we mentioned in the prospectus filed with SEBI and subsequent annual report that you can find on our website. Having said that, I now hand over the call to Mr. Hiral

Hiral Chandrana

Good afternoon, everyone. Thanks for joining us. I will take a few minutes and provide a “Business Update” and hand it over to Arun to give more details on the “Financials.” We delivered 13.4% year-on-year growth on revenue on a constant currency basis and it was flat on a quarter-on-quarter basis. It was a challenging quarter in some ways where we had a pause in a very large program healthcare account in the UK. There were a few delays in some decisions on some key deals and slower than expected ramp-ups in a couple of accounts. The currency impact was almost 7% to 8% for us from a GBP to US dollar. But having said that, we've got some really good leading indicators that demonstrate the confidence that we have in the business. As you would have seen our backlog has continued to improve. We grew that almost over 30% year-on-year. Our pipeline has been growing steadily even through this last quarter. We have multiple large deals that continue to be added to the pipeline. We've hired mor

Arun Agarwal

Thanks, Hiral. A very warm welcome to everyone on this call. I am going to share with you the key highlights of our performance for the quarter ended 30th June 2022. The investor deck has been circulated ahead of this call and contains much granular details about our financial and operating performance. So, I'm going to keep it quite crisp so that we can spend more time in terms of Q&A. To highlight, this quarter was a mixed bag as highlighted by Hiral. While we have successfully concluded acquisition of MST Solutions and signed the definitive agreement subject to certain closing requirements which team is working to close as early as possible, our quarter was a little bit muted than what we expected. As Hiral earlier mentioned, it was more driven by one of our clients in UK healthcare which has gone through certain reorganization between multiple departments which led to some pause in ramp which we anticipated. Again, we expect in a quarter or two for it to streamline and we get back

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