BSOFTNSEQ2 FY23October 25, 2022

BIRLASOFT LIMITED

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Management on call

Dharmender Kapoor

- CEO AND MD, BIRLASOFT LIMITED

Chandrasekar Thyagarajan

CFO, BIRLASOFT LIMITED

Roop Singh

- CHIEF BUSINESS OFFICER, BIRLASOFT LIMITED

Shreeranganath Kulkarni

- CHIEF DELIVERY OFFICER, BIRLASOFT LIMITED

Arun Rao

- CHIEF PEOPLE OFFICER, BIRLASOFT LIMITED

Anirban Thakur

HEAD, TREASURY & INVESTOR RELATIONS

Key numbers — 40 extracted

148.8 million

'22-'23 earnings call. We continued our steady performance in the second quarter with revenue at $148.8 million, registering a sequential growth of 0.1% and a year-on-year growth of 8.7%. Sequential growth in

0.1%

formance in the second quarter with revenue at $148.8 million, registering a sequential growth of 0.1% and a year-on-year growth of 8.7%. Sequential growth in constant currency terms is at 1.1% and ye

8.7%

h revenue at $148.8 million, registering a sequential growth of 0.1% and a year-on-year growth of 8.7%. Sequential growth in constant currency terms is at 1.1% and year-on-year terms to constant curre

1.1%

wth of 0.1% and a year-on-year growth of 8.7%. Sequential growth in constant currency terms is at 1.1% and year-on-year terms to constant currency growth is at 11% for Quarter 2. New deal momentum c

11%

th in constant currency terms is at 1.1% and year-on-year terms to constant currency growth is at 11% for Quarter 2. New deal momentum continues to be good with new deal wins at $138 million in quart

138 million

ncy growth is at 11% for Quarter 2. New deal momentum continues to be good with new deal wins at $138 million in quarter 2, up by 32.6% on a year-on-year basis. In fact, this quarter is probably the best qua

32.6%

. New deal momentum continues to be good with new deal wins at $138 million in quarter 2, up by 32.6% on a year-on-year basis. In fact, this quarter is probably the best quarter in the last 4 or 5 qu

166 million

uarters that we have seen from the wins perspective. The TCV for the quarter was also healthy at $166 million. EBITDA margin stood at 14.8%, up 9 bps quarter-on-quarter. Chandru will provide more color on

14.8%

s perspective. The TCV for the quarter was also healthy at $166 million. EBITDA margin stood at 14.8%, up 9 bps quarter-on-quarter. Chandru will provide more color on the margins later. In Quarter 1,

9 bps

ive. The TCV for the quarter was also healthy at $166 million. EBITDA margin stood at 14.8%, up 9 bps quarter-on-quarter. Chandru will provide more color on the margins later. In Quarter 1, we had sw

27.9%

y. The good news is that we have seen a further drop in our LTM attrition number, which fell from 27.9% in quarter 1 to 27.4% in Q2, a drop of 50 bps. While it still remains elevated, we expect to see

27.4%

at we have seen a further drop in our LTM attrition number, which fell from 27.9% in quarter 1 to 27.4% in Q2, a drop of 50 bps. While it still remains elevated, we expect to see further improvement go

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Guidance — 20 items

Dharmender Kapoor

opening

“While it still remains elevated, we expect to see further improvement going ahead, this will help to support our margins in the future.”

Dharmender Kapoor

opening

“We have hired 253 freshers in Q2 and plan to hire approximately 500 in the next half of the financial year '23.”

Dharmender Kapoor

opening

“However, we expect opportunities in the digital and cloud ecosystem to remain very resilient.”

T. Chandrasekar

opening

“We expect the steady state ETR to be between 25% and 26%.”

Shradha Agrawal

“And also, do you expect the usual seasonality of 2H to play out?”

Dharmender Kapoor

“That means that they are not dropping the project, but they may take longer to finish the project so that the outflow in the cash is lesser, but they still have to continue to go ahead with the initiatives that they planned.”

Dharmender Kapoor

“At the same time, they are saying that can we finish the project in a longer period of time so that then their cash outflow is planned accordingly.”

Dharmender Kapoor

“But that is the case that would mean that we will be able to realize our revenue in a much better way than what we have been able to do in the quarter 1 and quarter 2.”

Dharmender Kapoor

“And I think that quarter 3 from that perspective will be better.”

Dharmender Kapoor

“And the support revenue will be lower than the revenue that was there in the project execution.”

Risks & concerns — 15 flagged

If I look at the demand environment, so far the discussions that I have been having with our clients and the response that we have seen so far, I would say that the clients are being cautious, I would say that.

— Dharmender Kapoor

And likewise, we saw a decline in Life Sciences.

— Shradha Agrawal

But if I look at the conversation that we are having with our customers, I don't see if there's any impact on the demand or any challenge with the sector per se.

— Dharmender Kapoor

And I don't think that this is going to be the case where we'll continue to see the decline.

— Dharmender Kapoor

But then there are some of the other accounts where, yes, we have moved the services to offshore in order for us to address the margin-related issues also because at the onsite, it is becoming difficult to have people as employees, more and more contractors are joining.

— Dharmender Kapoor

And that does impact us a little bit on the top line, but it does help from the bottom line perspective because as you know that we had to go through the increments and everything and the impact of that was about 2.1%, whereas we were able to really claw back approximately 1% to 1.2% from the operating levers, the margin improvement levers and that required us to move away from subcontractors moving work from on-site to offshore as well.

— Dharmender Kapoor

Is there any headwind ahead in terms of margins, which we are missing?

— Mohit Jain

The only headwind that I'll see will be in the quarter 3, if there is any furloughs that come up, okay?

— Dharmender Kapoor

So, if that happens, then that would mean that we will end up taking a little bit of hit and that definitely a headwind on the margin side.

— Dharmender Kapoor

Then the other headwind that I talked about that happened was furlough, okay?

— Dharmender Kapoor

So, that is the challenge that is the top most in our mind.

— Dharmender Kapoor

Is it fair to say it may remain flat or may not decline or there could be an upward bias?

— Sandeep Shah

Given the headwinds that we have in the quarter 3, I believe that we should try to maybe move up a little bit, otherwise, even if I am flat quarter-on-quarter, I'd be very happy because if I'm flat quarter-on-quarter, that means they are taken care of the increment headwind or any of the shorter quarter headwinds successfully.

— Dharmender Kapoor

One small query that I have is that it is very clear that situation has become uncertain, especially for us, maybe.

— Debashish Mazumdar

So, for us to even cross 10%, it seems difficult.

— Devang Bhatt

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Q&A — 7 exchanges

The question was given the demand environment that we are in, how do we look at the revenue trajectory in the second half? And also, do you expect the usual seasonality of 2H to play out? And if that is the case, then we might fall short of doing double-digit growth in '23 versus earlier expectations of doing 15% growth. So, of your comments on demand environment and how do you see 2H stacking up?

Dharmender Kapoor

Yes. Thank you, Shradha. If I look at the demand environment, so far the discussions that I have been having with our clients and the response that we have seen so far, I would say that the clients are being cautious, I would say that. They know that the initiatives that they have to take, those are very, very important initiatives for their business. So, they are not saying that they are going to drop those initiatives. But very clearly, I can see the trend where they are taking longer than before to decide and take a decision on awarding the projects. At the same time, they are extending the

Sir, just a follow-up on the previous one. Sir, I'm not clear why we are not seeing growth in health care vertical or Life Sciences vertical for many quarters now. It has been, I think 4, 5 quarters. So, how should we see growth in that vertical? And what is causing the stagnation in the health care life business?

Dharmender Kapoor

So, I would not say the stagnation. If you look at traditionally, and I think we have to look at the vertical presence that we have in the light of the horizontal work that we have been doing for both customers. If you look at in the Life Sciences, we were very strong in the enterprise solutions, okay? And we have started growing on the digital direction there. If you look at in the Life Sciences vertical because of the presence in the enterprise solutions or the ERP, those are the nature of the projects that will eventually finish at some point of time. And the support revenue will be lower t

Just want to get sense about the quarter 2 performance. Whether it played out in line with your expectation at the beginning of quarter, if better or weaker than what you expected. Can you help us understand what sectors played out? Second thing is about what areas of weakness or pocket of weakness, if you can help us understand where you are seeing signs of weakness emerging?

Dharmender Kapoor

It was lower than our expectations because I expected it to be much better, okay? Because when I look at the wins, okay, we were confident that I think we'll be able to realize the revenue, but we have not been able to realize as much as we would have liked it to be, okay? For example, I talked about 2 programs in the quarter 1, which got delayed. One of the programs started in the middle of the quarter 4, quarter 2, but the other one did not, okay? So, our expectation definitely from the quarter were high. Then the other headwind that I talked about that happened was furlough, okay? Then ther

Just wanted to understand, DK, what is the definition of our double-digit growth aspiration for FY 2023? Would it be close to 10%? Or will it be less than 15% as a whole?

Dharmender Kapoor

Yes. I mean I believe that it will be higher than 10% and lesser than 15%. They are looking more and more apparent there, okay. While it may appear that it will be closer to the 10%, but we are really pushing hard as to how do we recoup the lost ground that we had in the quarter 1 and quarter 2 so that we can inch towards 15%. That's the way I look at current view with respect to our annual growth where we will see ourselves. And can you share what was the subcontracting cost in this quarter and the last quarter? Chandru, do you have that data handy with you if you can share that? Yes, I do. T

Wish you all a very Happy Diwali. So, most of my questions have been answered. One small query that I have is that it is very clear that situation has become uncertain, especially for us, maybe. And in this scenario, how the pricing thing is moving for us? Are we able to pass on the prices? I understand because of offshore shift, we are not able to improve realization in this quarter. But is the rate card improvement or COLA adjustments are happening or we are facing difficulty there also?

Dharmender Kapoor

Yes. So, it is happening. In fact, with a very large client, we just finished our negotiation on that front. And then we will be getting the price increase and all that very soon. So, all that negotiations are happening. The clients are agreeing also. There are other cases where we are getting the pushback also because clients say, they also have challenges on their side. So, if I look at from that perspective, I think it is still moving up on the existing engagement, okay, in a manner that we are tracking it and we are taking it up with the client so that we continue to sign up for the better

Sir, this is regarding our aspirational target of $1 billion. Is there a shift in it? And second would be on the acquisition plans. Is there any update on that?

Dharmender Kapoor

No. There is no change in our plan for being $1 billion. We continue to keep that as a call because 1 quarter here and there can always happen. And that doesn't mean that we have to change our goal. So, right now, we are keeping that goal to become a $1 billion at the time that we decide it. And regarding the acquisition, sir, any update on that, sir? On the acquisition side? Is there any update on that, sir? There's no new update as of now. I mean the only thing that I can say is that the hunt is on for the right candidate, but there is no update worth mentioning where we have moved forward i

Sir, sorry to prod you on the same thing. But since there are macro headwinds, there is challenges in life science, E&U and furloughs in Q3. So, for us to even cross 10%, it seems difficult. So, what gives you the confidence that we would be able to manage?

Dharmender Kapoor

No. See, despite having the number of wins and the visibility that doesn't mean that I don't have to call a headwind a headwind, okay? There are headwinds that are there, but at the same time, we continue to work on the plans that how do we significantly improve on our top line as well as on the bottom line. So, headwinds are supposed to be there and they are there. But to have plans, the objective should be that when we are hit, okay, a dapple of time, do we stand up and make a plan in order to correct the situation? And I think we are in control, and we know what action we had to take. For t

Speaking time

Dharmender Kapoor

Mohit Jain

Moderator

Sandeep Shah

Duby Rex

T. Chandrasekar

Shradha Agrawal

Dipesh Mehta

Anirban Thakur

Debashish Mazumdar

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Opening remarks

Anirban Thakur

Thank you, Faizan, and welcome, everyone. This is Anirban from Investor Relations team. And joining us on this call, we have our CEO and MD – Mr. Dharmender Kapoor, DK as we call him; our CFO – Mr. Chandrasekar Thyagarajan; Chandru as we call him; Mr. Roop Singh – joining from U.S., our Chief Business Officer; Mr. Shreeranganath Kulkarni, SK, as we call him – our Chief Delivery Officer; and we also have with us Mr. Arun Rao – our Chief People Officer. We will begin the call with opening remarks from Mr. Kapoor and then Mr. Chandru. 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 Q2 FY '23 investor update, which has been sent to you and also uploaded on the stock exchanges. I now hand over the call to DK. Over to you, DK. Thank you.

Dharmender Kapoor

Thank you, Anirban. Good evening, everyone, and welcome to Birlasoft's Second Quarter Financial Year '22-'23 earnings call. We continued our steady performance in the second quarter with revenue at $148.8 million, registering a sequential growth of 0.1% and a year-on-year growth of 8.7%. Sequential growth in constant currency terms is at 1.1% and year-on-year terms to constant currency growth is at 11% for Quarter 2. New deal momentum continues to be good with new deal wins at $138 million in quarter 2, up by 32.6% on a year-on-year basis. In fact, this quarter is probably the best quarter in the last 4 or 5 quarters that we have seen from the wins perspective. The TCV for the quarter was also healthy at $166 million. EBITDA margin stood at 14.8%, up 9 bps quarter-on-quarter. Chandru will provide more color on the margins later. In Quarter 1, we had switched to reporting attrition, which is more in line with the industry. The good news is that we have seen a further drop in our LTM att

T. Chandrasekar

Thank you, DK. Good morning, good afternoon, good evening, everyone. Hope you're doing well. Let me take you through some financial highlights for the quarter Q2 FY '23. Revenue, as DK said, was at $148.8 million, growth of 10 basis points quarter-on-quarter, 8.7% year-on- year. In rupees terms, the revenue was Rs. 1,192 crore, a sequential growth of 3.3% and a year- on-year growth of 17.8%. Our constant currency revenue growth was at 1.1% for Q2 sequentially. Year-on-year, the revenue growth was 11%. EBITDA for Q2 was at $22 million versus $21.9 million in Q1, which resonated growth of about 70 basis points quarter-on-quarter and 7.2% year-on-year. In INR terms, EBITDA was Rs. 176 crore versus Rs. 170 crore in the prior quarter, and that's a growth of 3.9% quarter-on-quarter and 16.2% year-on-year. EBITDA margin stood at 14.8% as DK said, and that's an improvement of 9 bps on a quarter-on-quarter basis. Margin improvements were aided by lower cost of service delivery, lower travel cos

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