BSOFTNSEQ1 FY23August 8, 2022

BIRLASOFT LIMITED

8,676words

94turns

12analyst exchanges

6executives

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Management on call

Dharmender Kapoor

CHIEF EXECUTIVE OFFICER & MANAGING DIRECTOR

Chandrasekar Thyagarajan

CHIEF FINANCIAL OFFICER

Roop Singh

CHIEF BUSINESS OFFICER

Shreeranganath Kulkarni

CHIEF DELIVERY OFFICER

Arun Rao

CHIEF PEOPLE OFFICER

Vikas Jadhav

HEAD, INVESTOR RELATIONS

Key numbers — 40 extracted

148.6 million

Q1 FY23 Earnings Call. We have begun the new financial year on a steady note. Q1 revenue was at $148.6 million, registering a sequential growth of 1.5% and a YoY growth of 15.8%. Sequential growth in consta

1.5%

ncial year on a steady note. Q1 revenue was at $148.6 million, registering a sequential growth of 1.5% and a YoY growth of 15.8%. Sequential growth in constant currency terms was at 2.3% and YoY const

15.8%

te. Q1 revenue was at $148.6 million, registering a sequential growth of 1.5% and a YoY growth of 15.8%. Sequential growth in constant currency terms was at 2.3% and YoY constant currency growth was at

2.3%

ial growth of 1.5% and a YoY growth of 15.8%. Sequential growth in constant currency terms was at 2.3% and YoY constant currency growth was at 17.7% for Q1. New deal momentum continues to be good with

17.7%

Sequential growth in constant currency terms was at 2.3% and YoY constant currency growth was at 17.7% for Q1. New deal momentum continues to be good with wins of $112 million in Q1, which is up by 19

112 million

onstant currency growth was at 17.7% for Q1. New deal momentum continues to be good with wins of $112 million in Q1, which is up by 19% on a YoY basis. The total TCV wins were also healthy at $185.1 million.

19%

7% for Q1. New deal momentum continues to be good with wins of $112 million in Q1, which is up by 19% on a YoY basis. The total TCV wins were also healthy at $185.1 million. EBITDA margin stood at

185.1 million

f $112 million in Q1, which is up by 19% on a YoY basis. The total TCV wins were also healthy at $185.1 million. EBITDA margin stood at 14.7%. We have seen margin getting impacted due to high cost hiring and m

14.7%

on a YoY basis. The total TCV wins were also healthy at $185.1 million. EBITDA margin stood at 14.7%. We have seen margin getting impacted due to high cost hiring and mid and junior level promotions

29.4%

attrition. The good news is that we have seen a drop in our LTM attrition number, which fell from 29.4% in Q4 to 27.9% in Q1, a drop of about 150 bps. However, needless to mention, it still remains ele

27.9%

good news is that we have seen a drop in our LTM attrition number, which fell from 29.4% in Q4 to 27.9% in Q1, a drop of about 150 bps. However, needless to mention, it still remains elevated and we ex

150 bps

n a drop in our LTM attrition number, which fell from 29.4% in Q4 to 27.9% in Q1, a drop of about 150 bps. However, needless to mention, it still remains elevated and we expect to see a further drop goin

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Guidance — 20 items

Dharmender Kapoor

opening

“However, needless to mention, it still remains elevated and we expect to see a further drop going ahead, which will help support margins going ahead.”

Dharmender Kapoor

opening

“We have hired 280 freshers in Q1 and plan to hire 500 freshers in Q2.”

Dharmender Kapoor

“And it is primarily due to the transformation that they are doing or undergoing in their organizations and they took more time than what we thought they will be able to do that.”

Dharmender Kapoor

“But I believe that it will be clearer in the Q3 for us.”

Dharmender Kapoor

“When that gets delayed, it hits your utilization and it increases your bench because we had hired the people to go ahead and start working on the project.”

Shradha Agrawal

“Would it be possible to call out the one-off expense in this quarter, consulting charges that is paid, which will probably not get repeated in the next quarter?”

C Thyagarajan

“To be honest with you, there will be some repeat costs which we will incur in the second quarter as well.”

Dharmender Kapoor

“That actually was going to be in the base services and that will be followed by cloud, but that will come later.”

Dharmender Kapoor

“But now we are putting a GTM focus, that means there will be someone who will be focused just on the cloud, because cloud doesn't come only in the cloud & base services.”

Dharmender Kapoor

“During the COVID time, yes, it became a binary situation where somebody clearly said that, no, I don't think that we should take up the project, and they kind of stopped it.”

Risks & concerns — 12 flagged

So, that is one challenge that was there.

— Dharmender Kapoor

DK, to you, our cloud services, though we have been talking very positively on this service line, but that saw a decline in this quarter.

— Shradha Agrawal

So, based on your assessment, and what you saw recently, you think that the enterprise projects that we had run a risk where some of them may be delayed or there could be some other instances, any color on that side could be really helpful?

— Abhishek Shindadkar

Actually, when we look at going forward, when the discussion is on the slowdown or on the recession or something like that, I always believe that there is always a blessing in disguise for IT services when we talk about recession, but at the same time, the sentiments also have their own impact.

— Dharmender Kapoor

On the margin side, very clearly there are headwinds and the headwind is about the increase that we had to give to our employees.

— Dharmender Kapoor

Let us assume the recession is there and from Q3, Q4, Q5 we see the slowdown, and it impacts everybody.

— Dharmender Kapoor

OCF remained weak this quarter, it was negative.

— Dipesh Mehta

But it is very difficult because people talk about different range and everybody has a jury that how wrong it can go.

— Dharmender Kapoor

So, it is very difficult to right now say how much will be the impact on us?

— Dharmender Kapoor

But it is very difficult to really put a finger on what figure that would be.

— Dharmender Kapoor

But on the traditional side, slowdown will always have an impact.

— Dharmender Kapoor

What could have been a quantitative impact of these two deals which got delayed, if they could have been realized on time?

— Sandeep Shah

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Q&A — 12 exchanges

DK, I think the Q4 results has come late on 24th of May and during that day, we were bullish both in terms of near-term growth as well as for FY23 kind of a growth. We were also expecting utilization to remain more or less stable. On all these counts, looking at the 1Q results again being soft, where are we going wrong in terms of execution and even predicting the near-term earnings visibility?

Dharmender Kapoor

Thank you, Sandeep. No, I don't think that we are going wrong anywhere, but I think there are a few reasons that are to be looked at considering the situation that is there. I think the first big reason was that there is a delayed start on couple of engagements that we have won in the previous quarter. It is not part of the wins that we have there, because one of the wins actually is part of the wins that we have shown, a part of $185 million. But the client wanted to start in Q1, but they delayed it because they are into a merger situation and they decided to delay it by a quarter. So, that r

Thanks for the explanation. So, what I'm asking me is all these three reasons which you have said was not known on 24th of May when we were already two months into the quarter?

Dharmender Kapoor

We actually started some discussions and plans already considering that the discussion on the contract will get finalized in a week or two weeks and we never knew that it will not begin. In fact, that is what has actually hit us on the utilization as well. When that gets delayed, it hits your utilization and it increases your bench because we had hired the people to go ahead and start working on the project. So, no, it was not clearly known, but we had already started, then we had to scale back because the discussion with the client was that we will have to move it by a few weeks before we sta

Hi, DK, a couple of questions. First, if I look at your other expenses, that have seen a significant increase of 10%. So, what has gone in the other expenses line item?

C Thyagarajan

The other expenses have a couple of components. One is the subcontractor payout that still accounts for a big portion of the other expenses. While we've seen a marginal reduction in subcontractors because we've started to replace them with regular employees, we still have to accelerate that bit as we are able to get more people, more regular resources deployed against subcontractors both onsite and offshore, primarily onsite. So, that is one area. Two, also as part of our growth strategy, we continue to invest in the newer areas. One of the things is around hiring talent, hiring capability. So

DK, you mentioned about the two engagements which got delayed in this particular quarter. If you could quantify them, and how should we see these accounts ramping back? And the second was on the Europe. We saw quite a sharper contraction in Europe. So, how should we read this and what is leading to this contraction in Europe?

Dharmender Kapoor

If you look at these deals, these are in the range of $15 to $20 million, both the deals are of that range. Hopefully we will now go and declare that in the Q2, and I wish it was started at that time, as it would have given some good revenue in Q1 as well. So, that's the size of the deal. Contraction on the Europe side is more towards when you look at, and Chandru, let me know if I am correct with that, we are actually flat, but percentage wise it looks smaller because the dollar has appreciated against the euro as well and when you convert that revenue into the dollar, the dollar equivalent b

I think I heard you say that one of the challenges in the customer impacted the cloud & base services business. If you can just highlight, was there any enterprise solutions related work there as well? From a vertical standpoint, is it largely reflected in the energy and life sciences vertical or the manufacturing piece is also witnessing the moderation because of these customer specific issues?

Dharmender Kapoor

I talked about the two clients. One of the clients is purely enterprise solutions. The other client has a smaller piece, because it is more into the kind of total IT outsourcing. So, definitely enterprise solutions is also a piece, but a smaller piece. The other engagement that I talked about, it is purely the transformation program on the enterprise solutions side. So yes, if I put both of them together, about 50% of that will actually be enterprise solutions. In the past, we've been highlighting that the enterprise recovery, which started in the H2 of fiscal '22 might continue in fiscal '23.

Just want to understand this $ 15 to $ 20 million deals that we have signed. Want to understand how big is the tenure of these two deals? And as you said, these got delayed in Q1 and as on date or in mid of this quarter, have these projects actually started ramping up in your view, if you can give color?

Dharmender Kapoor

On the two deals, one of the deals is about for about one to one and a half year, that's the timeframe that we see. The other deal which is total IT outsourcing is for three years. And second is on the margin. We have delivered 13% EBIT margins and Q2 would have some wage hikes where we probably are saying it would be flat or maybe some improvement. But to improve your margins on a YoY basis for FY23, you will have to substantially take up your margins maybe even more than 15% which you have delivered in last year. So, how do you think that journey will be for us… how confident are we around t

DK, a couple of questions. Starting with the deal pipeline, if you can help us understand how the deal pipeline is shaping up? I think earlier, you used to give some numbers. If you can provide deal pipeline number at the end of Q1 and give some comparable number maybe QoQ, YoY, whichever you're comfortable with? Second question is about the revenue normalization, which you earlier alluded, which partly experienced weakness in Q1. Can you provide some more detail on it, what you mean by revenue normalization and which vertical largely you refer to, whether life sciences is what you are referri

Dharmender Kapoor

Let me go one-by-one. If you look at our pipeline, I'm talking about the sales pipeline, that we continue to pursue with our customers, it actually moved up significantly. At the end of the previous financial year, we were at about $1.2 billion, we are touching already $1.7 billion. When it comes to the billing pipeline, I do not have the number upfront with me, but let me check and come back by the time I answer other questions. Let me come back to the revenue normalization. The revenue normalization as you know it is the same account that we talked about and the same vertical that we talked

So, how much utilization can improve in the next quarter based on your deal ramp ups? And what kind of subcon cost you expect to reduce? What kind of quantum of wage hike in Q2 will be there in the impact? And is there any transition cost in the large deals that would impact the margin?

Dharmender Kapoor

Sorry, just repeat the last line that you said? So, is there any transition cost in the large deals that might impact the margins in the near term? Utilization, I believe that we should be able to come back to the levels that we used to be anything between 84% to 85%. That is something we have delivered very consistently. So, I don't think that should be a too much of an issue for us. When it comes to looking at the quantum of wage hike, I expect that it will be approximately closer to 3%, average that we believe will be an impact due to the wage hike. There is some wage hike that we have done

Just on the previous question, for the two delayed contracts, as we are in the first week of August, you said, one of the delayed contracts has already started at the start of the quarter and another is yet to start, is it the right understanding?

Dharmender Kapoor

The other one is yet to start, yes, correct. DK, in terms of enterprise solutions, are you worried about your growth plans and the budgeting for the enterprise solutions if recession happens, because that could be termed as a discretionary IT spend for some of the clients as a whole? No, I don't think so. In my opinion, if you look at the enterprise solutions, slowly what is happening is that they are also becoming digital and hence their growth also is coming in the newer area of modernization. So, everybody's going up in the digitalization and when anybody is doing in the span of the enterpr

DK, in between the remarks, you mentioned you've started providing services to Microsoft as a customer and you are aspiring of roughly $100 million kind of partnership here. Is this $100 million number include the earlier Microsoft Cloud revenue that we were aspiring, because that target was also $100 million. Are both of them similar or different?

Dharmender Kapoor

$100 million is our revenue for that practice. It will include revenue being sold to Microsoft as a client, plus the revenue that we sell on the services on the Microsoft platforms to any other customer. It includes everything, yes. So, this $100 million number includes Microsoft Cloud plus Microsoft to the customer? That's right, yes. What kind of services are we giving to Microsoft, just any understanding on that? Most of these are actually either on the Microsoft Dynamics side. It could be CRM or it could be the other enterprise solutions that they have, and on the cloud as well.

Thank you very much everyone for your participation and the questions that you asked. Yes, we could have done better in the Q1, but there are always going to be some time where there are unforeseen items that come in front of us. But from the capability perspective, from the client perspective, from the way we are winning the deals and how our pipeline has increased, we stay confident that we are on the right track. And I believe that should give the confidence to us and to everyone around us that we will continue to do better. With that, I wish good luck to all of you as well as to us for the

Management

35 & 36, Rajv Gandhi Infotech Park, Phase – 1, MIDC, Hinjawadi, Pune (MH) 411057, India CIN: L72200PN1990PLC059594 www.birlasoft.com

Management

Speaking time

Dharmender Kapoor

Moderator

C Thyagarajan

Sandeep Shah

Shradha Agrawal

Sameer Dosani

Mihir Manohar

Devang Bhatt

Dipesh Mehta

Abhishek Shindadkar

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Opening remarks

Vikas Jadhav

Thank you, Tanvi. Good evening to everyone. This is Vikas from investor relations team and joining us on this call, we have our CEO and MD, Mr. Dharmender Kapoor, DK as we call him; CFO, Mr. Chandrasekar Thyagarajan, Chandru as we call him; Mr. Roop Singh, our Chief Business Officer; Mr. Shreeranganath Kulkarni, SK as we call him, our Chief Delivery Officer and we also have Mr. Arun Rao, our Chief People Officer. We will begin the call with opening remarks from Mr. Kapoor. Please note that anything that we say on this call on the company's outlook for the future is a forward-looking statement and must be read in conjunction with the disclaimer mentioned in our Q1 FY23 Investor Update which has been sent to you and also uploaded on the stock exchanges. With this, I now hand over the call to DK. Over to you, DK.

Dharmender Kapoor

Thank you, Vikas. Good evening, and welcome to Birlasoft Q1 FY23 Earnings Call. We have begun the new financial year on a steady note. Q1 revenue was at $148.6 million, registering a sequential growth of 1.5% and a YoY growth of 15.8%. Sequential growth in constant currency terms was at 2.3% and YoY constant currency growth was at 17.7% for Q1. New deal momentum continues to be good with wins of $112 million in Q1, which is up by 19% on a YoY basis. The total TCV wins were also healthy at $185.1 million. EBITDA margin stood at 14.7%. We have seen margin getting impacted due to high cost hiring and mid and junior level promotions, drop in utilization, investments and were aided by rupee depreciation. We have switched to reporting attrition, which is more in-line with the industry and factors early attrition. The good news is that we have seen a drop in our LTM attrition number, which fell from 29.4% in Q4 to 27.9% in Q1, a drop of about 150 bps. However, needless to mention, it still re

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