Datamatics Global Services : Transcript – Q2FY23 Earnings Call - 31 October 2022

"Datamatics Global Services Limited Q2 FY23 Earnings Conference Call"

October 31, 2022

MANAGEMENT: MR. RAHUL KANODIA - VICE CHAIRMAN & CEO -

DATAMATICS GLOBAL SERVICES LIMITED

MR. SANDEEP MANTRI - EVP & CHIEF FINANCIAL

OFFICER - DATAMATICS GLOBAL SERVICES LIMITED

MR. MITUL MEHTA - EVP & CHIEF MARKETING

OFFICER - DATAMATICS GLOBAL SERVICES LIMITED

MODERATOR: MS. ASHA GUPTA - EY LLP, INVESTOR RELATIONS PRACTICE

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	Datamatics Global Services Limited
	October 31, 2022
Moderator:	Ladies and gentlemen, good day and welcome to Datamatics Global Services Limited Q2 FY23
	earnings conference call. As, a reminder, all the participants' lines will be in the listen-only mode
	and there will be an opportunity for you to ask questions after the presentation concludes. Should
	you need assistance during this conference call, please signal an operator by pressing "*" and
	then "0" on your touch-tone telephone. Please note that this conference is being recorded. I now
	hand the conference over to Ms. Asha Gupta from investor relations, EY LLP. Thank you and
	over to you, Ms. Gupta.
Asha Gupta:	Good afternoon to all participants in the call today. Welcome to the Q2 FY23 earnings call of
	Datamatics Global Services Limited. The results and investor presentation have been already
	mailed to you and it is also available on our website, www.datamatics.com. In case anyone has
	not received a copy of the press release and presentation, please do write to us and we will be
	happy to send it out to you all. To take us through the results today and to answer your questions,
	we have with us the top management of the company represented by Rahul Kanodia - Vice
	Chairman & CEO, Sandeep Mantri - EVP & Chief Financial Officer, and Mr. Mitul Mehta -
	EVP & Chief Marketing Officer. Rahul will start the call with a brief overview of the quarter on
	business, which will be then followed by financials which will be reviewed by Sandeep. We will
	then open the floor for Q&A session. As usual, I would like to remind you that anything that is
	said on this call which gives 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 have mentioned in the
	prospectus filed with SEBI and subsequent annual report which you can find it on our website.
	With that said, I now hand over the call to Rahul. Over to you, sir.
Rahul Kanodia:	Thanks Asha. Welcome and thank you everyone for joining our Q2 FY23 Earnings Call. We are
	glad to have you all with us on this call today. I hope each and everyone of you had a great
	Diwali and I wish you a very happy and prosperous new year. We announced our Q2 FY23
	Results on October 28th detailing out our operational performance. I will touch upon some of
	the key business performance and Sandeep will update you on the financials, and post that, we
	will get into the Q&A.
	On the business front, I am happy with the overall performance of the business. We have
	continued our revenue growth momentum from Q1 FY23 and saw a growth of 14.2% on a year-
	on-year basis. The year-on-year growth was broad based across all the 3 segments of Digital
	Operations, Digital Experiences, and Digital Technologies. Our EBIT margins on a year-on-year
	basis reduced marginally from 12.8% to 12.3%, primarily due to the increased cost of salaries
	and some cyclicality in our business. We are seeing a drop in margins across the industry this
	quarter; however, we are confident that our margins will be stable during the rest of the financial
	year. Our margins in the Digital Operations and Digital Experiences for this quarter remain
	healthy at 22.7% and 25.4% respectively. We expect these operations to continue giving healthy
	margins in the same range. Our margins in the Digital Technologies improved marginally from
	a negative 4.3% to a negative 2%. This improvement was driven by stabilization in a large
	shrinking account, growth in new customer acquisition, renegotiating prices, and de-weeding

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Datamatics Global Services Limited

October 31, 2022

low-margin customers. In parallel, we continue to focus on the US and European markets. We are confident that we will further improve our margins in this financial year.

Our attrition stood at 20% which is in line with the industry. This is the result of efforts we have put in into retaining, training, and upscaling key talent, as well as the market environment is cooling off a bit. We expect this to further come down in the coming quarters.

While there are recessionary feelers on the horizon, we are not experiencing any shrinkage in demand. In Q2 FY23, we signed a new business worth $29 million which is about 50% more than Q1. In H1, we have signed a total contract value of $48.3 million and our deal pipeline remains healthy.

In conclusion, going forward, we are optimistic about our overall demand environment and are confident of maintaining a growth of 15% in the coming year.

With that, I will now hand over the call to our CFO, Mr. Sandeep Mantri. Sandeep over to you.

Sandeep Mantri:Thank you Rahul. Welcome everyone and thank you for joining us in the Q2 FY23 earnings call.

I hope everyone had a wonderful time during the festive season.

Let me take you through the financial performance for the quarter ended September 30, 2022. Our Q2 FY23 revenue stood at Rs. 343.4 crores which is up by 5.1% on a sequential basis and 14.8% on a year-on-year basis. Our consolidated EBITDA for the quarter was Rs. 51.7 crores which is up 8% on a sequential basis and 3.6% on year-on-year basis. Our EBITDA margin for the quarter was 15% compared to 14.6% in Q1 which is a slight increase from the last quarter. Our consolidated EBIT for the quarter was Rs. 42.9 crores which is up 9.1% on a sequential basis and 2.4% on year-on-year basis. Our EBIT margin for the quarter was at 12.5% compared to 12.1% in Q1 and we aspire to maintain this double-digit healthy margin in the coming quarters as well.

Our Other Income on a consolidated basis stood at Rs. 9.6 crores compared to Rs. 13.2 crores in the last quarter. The primary reason for drop in Other Income was a one-time export incentive which was booked in the last quarter.

Our tax rate for this quarter was at 23.8% compared to 17.3% in the last quarter. The primary reason for the increase in tax rate during this quarter is the change in profit mix of various legal entities. However, we expect our tax rate to be in the 20% to 22% range on a yearly basis.

Our quarterly PAT after NCI was at Rs. 40 crores which is a growth of 13.2% on a year-on-year basis, however, there is a decrease by 7.9% on a sequential basis.

When we come to our segment-wise performance, we have 3 segments which are Digital Operations, Digital Experiences, and Digital Technologies. Our Digital Operations revenue was

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Datamatics Global Services Limited

October 31, 2022

at Rs. 143.2 crores which is down 2.9% on a sequential basis but has grown 12.6% on a year- on-year basis. Digital Operations EBIT margin remains very healthy at 22.7%.

Coming to our Digital Experiences, the revenue was at Rs. 52.4 crores which is up 13.4% on sequential basis and 39.9% on a year-on-year basis. Digital Experiences EBIT margin remains very healthy at 25.4%.

Our Digital Technologies revenue was at Rs. 147.8 crores which is up 11% sequential basis and 9.8% on a year-on-year basis. Digital Technologies EBIT margin for the quarter remains negative at 2% compared to 4.3% negative in Q1. Hence there is a recovery in profitability. As explained by Rahul, we are confident that we will further improve the margins for the Digital Technologies segment in this financial year.

Coming to the half yearly financials, our revenue was at Rs. 670.3 crores for this half, which is a growth of 14.2%. Our EBITDA was at Rs. 99.5 crores which is up by 9% compared to H1 previous year. Our EBITDA margin for H1 was at 14.8% compared to 15.6% in H1 of previous year. Our EBIT was at Rs. 82.1 crores, up by 9.2%. Our EBIT margin for H1 was at 12.3% compared to 12.8% in H1 of previous year.

Our Other Income was at Rs. 22.8 crores as compared to Rs. 8.5 crores last year, which is a significant growth of 168%. This is primarily due to increase in investment income, exchange gain, and export incentive. Tax rate for H1 was at 20.6% compared to 20% in H1 of previous year. So, our tax rate is stable at 20% to 22%. Our PBT before exceptional item was at Rs. 103.1 crores compared to Rs. 82.8 crores which is up by 24.5%. Our H1 PAT after NCI was at Rs. 83.4 crores compared to Rs. 74.9 crores which is a growth of 11.3% over the previous year.

If we see segment-wise results for the first half of FY23, our Digital Operations revenue was at Rs. 290.6 crores, up 15.3%. Digital Operations EBIT margin remains healthy at 23%. Our Digital Experiences revenue was at Rs. 98.7 crores which is 29.2% growth over the half of previous year. Digital Experiences EBIT margin remains healthy 24.4%. On Digital Technologies revenue, we were at Rs. 281 crores which is up 8.7% on YoY basis. EBIT margin for the H1 remains at minus 3.1%.

Coming to the balance sheet, our balance sheet continues to remain at a very healthy position. As on September 30, 2022, our total cash & cash equivalents plus current investment (net of debt) stood at Rs. 375.9 crores. Talking about DSO, as of 30th September, we were at 62 days compared to 74 days as on 31st of March in the previous year.

In terms of geographical perspective, US is the largest geography with 54% of our business coming from the US; India is 28%; rest of the world including the UK and Europe is 18%. In terms of industries, BFSI continues to remain the largest segment for us which is 24% of our revenue followed by Education & Publishing which is 23%, then Technology & Consulting which is 18%. Manufacturing, Infra, & Logistics is at 13%; non-profit or non-government organization at 11%; Retail at 7% of our business; rest all are 4% of our total revenue. Our client

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	Datamatics Global Services Limited
	October 31, 2022
	concentration remains very healthy with the top 5, 10, and 20 clients contributing to 26%, 35%,
	and 50% respectively. We added 26 new clients in this quarter.
	With this, I will now pass on the call to the operator to open the floor for questions. Thank you
	for your patience and continued interest in Datamatics.
Moderator:	Ladies and gentlemen, we will now begin the question & answer session. We will wait for a
	moment while the question queue assembles. Our first question is from the line of Yash Patel
	from Choice International. Please go ahead.
Yash Patel:	May I know the total headcount for this quarter or any net addition for this quarter?
Rahul Kanodia:	Total headcount for this quarter - we are running at about 11,300. Last quarter we were at
	10,900. So, we have had a net increase of about 400.
Moderator:	Our next question is from the line of Pavan Kumar from RatnaTraya Capital. Please go ahead.
Pavan Kumar:	Sir, how is the progress on our ticketing project revenues from Indian Metro? And what is the
	kind of scale-up we can expect in terms of domestic revenues going forward?
Rahul Kanodia:	I had mentioned in our earlier call that we have recently been awarded 2 contracts; one is Kolkata
	Metro which has been kicked off, the other one is NCRTC which is the Delhi-Meerut segment.
	Both these contracts have been awarded to us. We have started work on it. However, we have
	not accrued any revenues because it is still in the initial phase. But certainly within this financial
	year, we will see an uptick in the revenues from the AFC business. We have got a healthy
	pipeline. We have bid for several projects. But obviously, we cannot talk about them until we
	don't win them or lose them or until there is a clear decision. As those contracts materialize, we
	will certainly bring it to the notice of all the investors and analysts. Right now, the pipeline is
	looking healthy and we have got 2 large contracts recently, which have just about started.
Pavan Kumar:	How would the accounting be? In the sense, I am assuming the expenses part until now for that
	work on project would already have been done through P&L, right?
Sandeep Mantri:	Yes.
Pavan Kumar:	But the revenues not recorded?
Sandeep Mantri:	We account for the revenue based on percentage completion method, which is basically mark
	up over cost. So, estimated cost and estimated revenue and whatever is the markup, basis that,
	we recognize revenues. There is a very insignificant recognition as of this quarter, but from, I
	think, this current quarter, we will start accruing revenue for NCRTC as well as Kolkata Metro,
	both the projects.
Pavan Kumar:	From which quarter you said, sir?

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