MASTEKNSEQ2FY23November 1, 2022

Mastek Limited

9,696words

91turns

12analyst exchanges

3executives

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Management on call

Hiral Chandrana

GLOBAL CHIEF EXECUTIVE OFFICER, MASTEK LIMITED

Arun Agarwal

GLOBAL CHIEF FINANCIAL OFFICER, MASTEK LIMITED

Damini Jhunjhunwala

ASSISTANT VICE PRESIDENT, INVESTOR RELATIONS, MASTEK LIMITED

Key numbers — 36 extracted

10%

season. As you would have seen our results, we reported quarter-on-quarter growth of greater than 10% on constant currency and 20.4% year-on-year growth on the revenue, again on constant currency.

20.4%

n our results, we reported quarter-on-quarter growth of greater than 10% on constant currency and 20.4% year-on-year growth on the revenue, again on constant currency. We reported operating EBITDA of 1

17.2%

% year-on-year growth on the revenue, again on constant currency. We reported operating EBITDA of 17.2%. Arun will get into a lot more details on the key metrics and financials. Let me spend a few mi

rs,

e very deep rooted in some very critical areas of national infrastructure, particularly with borders, immigration, defense and security. While we understand there is a lot of flux in terms of the macr

9 million

e of the biggest areas where we would benefit. Salesforce as an ecosystem is going to be creating 9 million US jobs in the next three years. And they will be requiring about 250,000 more consultants in the

Rs.625 crore

ness intelligence. Key financial highlights for the quarter includes, we have reported revenue of Rs.625 crores for the quarter, up 20.4% year-on-year and 10.7% quarter-on-quarter in constant currency. During

10.7%

er includes, we have reported revenue of Rs.625 crores for the quarter, up 20.4% year-on-year and 10.7% quarter-on-quarter in constant currency. During the quarter, we have seen good momentum building

24%

th in order book and revenue terms. US continues to be an important market. In Q2, US contributed 24% of our group revenue, progressing in line with our Vision 2025, where we want 1/3 of our revenue

1 billion

uring the quarter and a point to highlight five clients of that 20 have their turnover more than $1 billion, which gives a significant opportunity for Mastek to do further account mining and make them a cu

19.2%

ther account mining and make them a customer for life. Our operating EBITDA stood at 17.2% versus 19.2% in the previous quarter, a reduction of 200 bps quarter-on-quarter. As I mentioned earlier, it's

200 bps

or life. Our operating EBITDA stood at 17.2% versus 19.2% in the previous quarter, a reduction of 200 bps quarter-on-quarter. As I mentioned earlier, it's primarily due to impact of currency and salary i

Rs.86.2 crore

some of this impact as we operated in this quarter, and move into future quarters. PAT stood at Rs.86.2 crores versus Rs.84.4 crores in the previous quarter, up 2.2% quarter-on- quarter. Our borrowing stood a

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Guidance — 20 items

Hiral Chandrana

opening

“I will also talk about how we are progressing on the strategic priorities and some flavor for what you can expect in the second half of the year and going forward.”

Hiral Chandrana

opening

“We have actually announced a few wins out there and some very large frameworks, which position us very well, particularly as the digitization continues, and we are working very closely with the top civil servants, as well as key programs and key transformation programs, which we expect to continue as planned.”

Hiral Chandrana

opening

“The private sector in UK has also continue to show momentum, and in our overall UK business, we are confident will continue to grow going forward.”

Hiral Chandrana

opening

“And they will be requiring about 250,000 more consultants in the ecosystem.”

Hiral Chandrana

opening

“And even though there will be some repurposing of budgets, the areas that we operate in as you know is all digital and cloud services.”

Hiral Chandrana

opening

“So, we continue to see customers investing in those areas going forward as they continue to modernize and move their on-premise workloads to the cloud.”

Hiral Chandrana

opening

“A bit about what you can expect going forward.”

Hiral Chandrana

opening

“The key will be to execute during the quarter both in Q3 and Q4 as we have multiple large deals and integrated deals, along with our joint activity with MST Solutions.”

Baidik Sarkar

“I may start with an update on when we expect some kind of acquisition in the UK public sector and the comments that you drew reference to a large or to a few large deals there.”

Baidik Sarkar

“By when should we back expect acquisitions there?”

Risks & concerns — 12 flagged

The demand is cautious, but we see some really strong momentum in larger integrated deals.

— Hiral Chandrana

While we have seen quarter-on-quarter and year- on-year growth in revenue led by both organic business and also acquisition of MST for part of the quarter, we witnessed decline in our operating margin, which is primarily because of increments, which we have done across all the geographies, and currency headwinds.

— Arun Agarwal

As I mentioned earlier, it's primarily due to impact of currency and salary increments.

— Arun Agarwal

So, we're seeing it as a challenge as well as an opportunity there on the commerce space, because now we have an additional stronger practice where customers are investing in.

— Hiral Chandrana

Normally, it would have been very difficult for us to get into state and local government sector.

— Hiral Chandrana

And would you reckon we have bottomed levels or should we wait for Q3 for the full impact of integration to play out?

— Baidik Sarkar

So, in a nutshell, the point I am trying to drive at is from a financial management perspective, buying back your own stock is something that should consider, because if you are indeed headed for a billion say by FY25, or FY26, the risk/reward your own stock offers is possibly better than the smaller back fledgling ones that you might be seeking to acquire.

— Baidik Sarkar

We are being cautious to be frank and not including them in our order backlog and order book, right?

— Hiral Chandrana

So, we're being very cautious in terms of qualifying certain new accounts and new logos as well.

— Hiral Chandrana

So, now bifurcating numbers is going to be much more difficult.

— Arun Agarwal

Whatever the situation is there in Europe and particularly UK, how we have protected ourselves from this because every day some news come from Europe geography and new countries, and particularly in last two days, the incident of UK geopolitical situation is very uncertain over there and ministers resigning and all, so, is there any alternative strategy we put in place to protect ourselves even in worst case scenario if anything happens?

— Chirag Kachhadiya

Now, having said that, right, we want to make sure that we continue to have a risk mitigation plan.

— Hiral Chandrana

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Q&A — 12 exchanges

I was wondering if you could just take a step back and throw some light on how the various acquisitions moving part under the top line number are doing. I may start with an update on when we expect some kind of acquisition in the UK public sector and the comments that you drew reference to a large or to a few large deals there. By when should we back expect acquisitions there? Followed by a comment on your order growth rate like, if you could please quantify a broad range about that? The commentary from Oracle itself has been so encouraging and aggressive so far will help us see how vendor eco

Hiral Chandrana

I know there's two or three parts to it. Just to clarify, your first point was on the UK public sector, right? That's right. Okay. So, if you look at it, outside of some of the large frameworks that we have ann ounced, and these are very competitive frameworks, right, and one of them, which is the technology services, TS3 were actually officially in the top two among the top 15 suppliers. As part of the data analytics framework, we are also expecting a significant amount of work in the medium term. Having said that, in terms of the near-term wins, and some of the key elements of the UK public

First question is, what was the MST contribution in the quarter in terms of the revenue because you're trying to analyze the organic versus inorganic growth?

Arun Agarwal

Again, very quickly, as we mentioned, against the acquisition which is done in the month of August, where we have consolidated numbers, we don't provide the breakups, but very high level, which you can take as a number, organic business have grown, quarter-on-quarter and year-on-year; quarter-on-quarter growth is in low single digit and year-on-year growth is in double digit as a reference. However, we are not providing a breakup, and hence, will not be able to give you a specific breakup of MST and organic numbers. But for how much time has it been consolidated; can you at least tell that? It

On quarter-on-quarter, has there been a reduction in headcount, net of MST because headcount moved up by net of 257 from 5,553 to 5,810 and MST brought in 325?

Arun Agarwal

Yes. The reduction in the headcount is because we have invested ahead of the curve, and we are doing very tactful hiring to replace the attrition and to hire for the future growth wherever we are seeing the pipeline. But we are not backfilling the attrition where it is not matching with the pipeline at the moment, right. So, this is a reduction other than MST. You had alluded to two large $30 million to $50 million deals in the previous quarter call that was on the verge of conversion to orders. Where do they stand now? And over and above this, there was a couple of more deals in the same rang

A couple of clarifications. On the MST, the margin we had mentioned earlier was 18%, 20%. This was after all the synergy benefits that will come in maybe a year down the line or was a trailing margin?

Arun Agarwal

As we mentioned, the margin is in line with what Mastek margin is at the moment. So, it's quite similar to what Mastek organic business was delivering. With synergies we believe, better progress, both in terms of top line and margin, but that's a that's a further development. But, as we speak, the margin profile is quite similar. This profit number that you mentioned of Rs.86 crores, I believe this includes exceptional items. Am I missing something here? That's right, there's an exceptional item both from the income and cost perspective. We have sold one of our non-core assets, which is a prop

Sir, I have just one question on the US side. So, while our commentary remains positive, but numbers do not move there. Like, if we remove the contribution for inorganic, this quarter also seems flattish. So, what is happening in US and this is not a quarterly question, but more from last five quarters perspective? And what challenges are there in growing in the US while our deal win, etc., remains healthy as far as commentary is concerned?

Hiral Chandrana

Mohit, let me start and Arun can add. The account mining strategy out there which we have shared in the last two, three quarters, is starting to now yield results. It has taken longer than we expected, to be frank, because when we structure our teams, we're looking at client partner, program management, delivery management, and different rhythm when it comes to some of these enterprise accounts and larger customers. Having said that, one of the metrics that we will start sharing going forward is our Top-25 accounts in the US. To give you some flavor, that top 25 accounts contribute to roughly

Two, three questions. One was on the leverage on the balance sheet. So, we have one more round of I think Evosys stake increase due in the H2.. So, will that increase the net debt on the balance sheet by end of the financial year?

Arun Agarwal

We will be using our cash and bank balance to acquire the balance 10% for this year, but there is no debt which is planned for this round. Because from what I could see in the presentation, net cash has more or less become zero as on September 4th with the current acquisition, isn't it? At the moment, yes, Sachin, but we have good healthy cash generation which we expect continue to happen, because the quality of revenue is good, collection timelines are improving, though there is a lot more work to be done in H2. We believe with those organic cash coming in will be good enough to take care in

Sir, my question is, Q2 employee cost rises by 10% versus Q1. While no revenue rises in UK, Middle East, USA only from 107 crores to 151 crores, then why the employee cost of Rs.31 crores rise so much in this Q2?

Arun Agarwal

Maybe it's not comparable apple-to-apple, because we have done the MST acquisition and all the equivalent lines in employee expenses and others have gone up because of MST inclusion as well. So, both revenue and cost has been changed accordingly. Sir, what is the target of the US top line in next three years in your mind? Ravi, we had communicated and we'll continue to drive towards that journey where we would like our US business to be roughly 1/3 if not more part of our overall business share. So, right now, in the latest quarter, we are at 24% or a little over that and we believe there is m

Sir, our margin has continuously declined. So, is it deteriorated due to the consolidation? If it is yes, then what would be the sustainable margin post consolidation for FY23 and going ahead?

Hiral Chandrana

Our margin, as I mentioned earlier, the reduction that you're seeing currently is a combination of two things. One is increasing cost of salaries, including the increments which we have done during the quarter, and also because the currency headwinds, how GBP, INR is moving along, it's also impacting our overall margin. However, we believe high teens has been our aspiration and our endeavor is to continue to build on that. And as I mentioned, Q4 onwards, you will start seeing the positive movements on the back of operating levers, and definitely subject to currency because currency is somethin

Sir, I have a few questions. Whatever the situation is there in Europe and particularly UK, how we have protected ourselves from this because every day some news come from Europe geography and new countries, and particularly in last two days, the incident of UK geopolitical situation is very uncertain over there and ministers resigning and all, so, is there any alternative strategy we put in place to protect ourselves even in worst case scenario if anything happens?

Hiral Chandrana

Chirag, let me maybe recap a couple of things out there in UK, because it will continue to be a very critical market for us. Clearly, we're observing some of the geopolitical scenario and some of that has been around for the last few months as well as you know. We work very, very closely with multiple levels of civil and senior services. And, while there might be some ministerial changes, the people that we've worked with and are working with, will continue to be doing critical roles in these transformation programs, right, whether it's national security, whether it is borders, some of the tra

I want to understand why there is a reduction in the client addition.

Hiral Chandrana

So, let me take that and Arun, if you want to add, please jump in. Parag, this is something that we've been very consciously been communicating as well as is part of our strategy. If you look at our size of business, the number of clients that we have is way too many, to be frank, right. Now, that's an advantage in some ways, but there is also a long tail of plans, right, where some of those customers may never grow beyond a particular point, right, where we have done an implementation or a project, and then it ends on. So, we're taking very consciously calls on deeper account mining, where we

This is regarding the $1 billion target. Now, you're saying it will be in the second half of this decade while investors are assuming it'll be in '25, '26. And the second part of that thing is, how personally interested are you in achieving this $1 billion target? As investors, we'd like to know, whether you're on our side of the table as far as your resource, etc., are concerned which are linked to achieving this $1 billion target?

Hiral Chandrana

It's a good segue for us to actually maybe make some closing comments as well, because it's a good question. Our executive leadership team and our management is very committed towards 1 billion vision, right? We have communicated that it is going to be in the early part of the second half of the decade, which is hopefully in the first two years of the second part of the decade. And we believe that there is going to be a lot of activity that we collectively need to do, right, because there are certain market factors we may not be able to control, but there are many factors that we can control a

Thank you, again. As always, we enjoy these questions because we learn a lot as well in terms of how our supporters, investors, analysts are thinking. I do want to once again wish all of you a very happy diwali and festive season with your families. The environment and the demand outlook is still strong in spite of some of the macro level uncertainty. And we will continue to make progress in our strategic priorities and continue to update all of you on specific areas of progress. But I want to re-emphasize the support and the commitment that all of us in making this vision possible. And again,

Management

Speaking time

Hiral Chandrana

Arun Agarwal

Moderator

Jay Daniel

Baidik Sarkar

Sarvesh Gupta

Sachin Kasera

Pratik Kothari

Mohit Jain

Ravi Naredi

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Opening remarks

Damini Jhunjhunwala

Thank you, Vikram. Good day to all of you and thank you for joining our earnings call today. Welcome to the Q2 FY'23 Earnings Call of Mastek. The results and 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 a 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 can 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 reports that you can find on our website. Having

Hiral Chandrana

Thank you, Damini. Thanks, everyone, for joining our investor call and analyst call. First of all, let me start with wishing all of you and your family happy diwali and best wishes for the festive season. As you would have seen our results, we reported quarter-on-quarter growth of greater than 10% on constant currency and 20.4% year-on-year growth on the revenue, again on constant currency. We reported operating EBITDA of 17.2%. Arun will get into a lot more details on the key metrics and financials. Let me spend a few minutes on some of the highlights of the business. I will also talk about how we are progressing on the strategic priorities and some flavor for what you can expect in the second half of the year and going forward. As there is a lot of geopolitical uncertainty in the UK. So, I wanted to spend a few minutes starting with the biggest business out there, which is the UK public sector. We've been in that geography for over two decades as you know and are very deep rooted in

Arun Agarwal

Thanks, Hiral. A very warm welcome to everyone on the call. While deck containing details have already been circulated ahead of the call, I will focus on key financial and business highlights on top of what Hiral has covered much more detailing about how our business are growing, and what key initiatives are being driven in Mastek. It was an eventful quarter on multiple fronts. While we have seen quarter-on-quarter and year- on-year growth in revenue led by both organic business and also acquisition of MST for part of the quarter, we witnessed decline in our operating margin, which is primarily because of increments, which we have done across all the geographies, and currency headwinds. We concluded our acquisition of MST in the month of August. And as Hiral alluded to, we are experiencing synergistic momentum in Americas as this acquisition has strengthened our integrated offering across cloud, transformation, architecture, customer experience, data and business intelligence. Key fina

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