R International : Transcript of the Investor Call Q2-2022

"R Systems International Limited Q2 & H1 FY22

Earnings Conference Call"

August 24, 2022

MANAGEMENT: DR. SATINDER SINGH REKHI - MANAGING DIRECTOR

• CHIEF EXECUTIVE OFFICER, R SYSTEMS MR. AVIRAG JAIN - DIRECTOR & CHIEF TECHNOLOGY OFFICER, R SYSTEMS
  MR. NAND SARDANA - CHIEF FINANCIAL OFFICER, R SYSTEMS
  MR. KUMAR GAURAV- AVP (FINANCE & ACCOUNTS), R SYSTEMS

Page 1 of 12

Q2 & H1 2022 Earnings Call

August 24, 2022

Moderator:Good morning, ladies and gentlemen, and welcome to R Systems Q2 & H1 FY22 Earnings Conference Call. As a reminder, all 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 the conference call, please signal an operator by pressing '*' then '0' on your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Kumar Gaurav. Thank you and over to you, sir.

Kumar Gaurav: Thank you, Michelle. Good morning to you all. On behalf of R Systems, I welcome all participants to Quarter 2, 2022 Earnings Conference Call. We have senior management of R Systems with us in this call. We will start the call with opening remark on the performance of the Company by Dr. Rekhi followed by financial overview by Mr. Nand and business overview by Mr. Avirag. Thereafter, we will have a closer statement by Dr. Rekhi. Subsequently, we will open up for a Q&A session.

Before I hand over, let me read out the customary disclaimer statement on behalf of the Company: Investors are cautioned that this presentation contains certain forward-looking statements that involve risk and uncertainties. The Company undertakes no public obligation to update or revise any such statement. The statement may undertake revision because of new information, future events or otherwise. Actual results, performance, or achievement could differ from those expressed or implied in such forward-looking statements.

Now, I pass it to Dr. Rekhi for his opening comment. Thank you. Over to you, sir.

Dr. Rekhi Singh: Thank you, Kumar. Good morning everybody and thank you for being part of this Investor Call. I trust all of you and your loved ones are keeping safe and well.

The technology companies are continuing to be benefited by renewed focus towards adaptation of digital technologies, post the pandemic. Businesses have accepted this new normal and started exploring new digital products, business models to convert the challenges into opportunities.

With this, I would like to present an overview of R Systems for the benefit of all those who are joining us in this conference for the first time. R Systems was established in 1993 in California as a software engineering company and is now spread across three continents with 18 development and service centers worldwide.

R Systems delivers digital transformation services with new types of innovation and creativity to businesses in various industries, technology, telecom, digital media, healthcare and life sciences, finance and insurance, retail and e-commerce. Our deep industry domain knowledge combined with our expertise in big data, advanced analytics, AI, mobility, IoT, RPA, and cloud, help us in transformation of businesses in this digital age.

We have witnessed strong revenue during H1 2022, especially for digital and product engineering services. Our revenue grew year-on-year 38% to Rs. 718 crores i.e.

Page 2 of 12

Q2 & H1 2022 Earnings Call

August 24, 2022

US$ 94.4 million. The growth was backed by the strong demand environment across all business units. We added 20 new logos during H1 2022 with bigger deal sizes.

The EBITDA for the first half of FY 2022 was 12.6% as against 13% last year in the same period. The EBITDA margins were under pressure primarily on account of salary hikes and attrition challenges. Our efforts of rate hike and higher rack rates have started yielding results. However, the full impact of these initiatives will reflect in the next few quarters. We have on boarded more than 170 associates to cater to the growing demand.

During Quarter 2, the utilization has improved and there is further scope to improve offshore utilization. Profit after tax was Rs. 61.5 crores as against Rs. 71 crores in the same period last year. This was further impacted by mark-to-market losses on forward covers amid sharp rupee depreciation.

We continue to have a strong balance sheet with shareholder funds of Rs. 452 crores and net cash balances of Rs. 218 crores to support liquidity and growth. We serve 47 million $ plus customers as against 33 million $ a year ago.

I will now hand over to our CFO, Nand Sardana, to provide a detailed financial analysis.

Nand Sardana: Thank you, Dr. Rekhi. Good morning to all. Thank you everybody for attending the call. Hope you and family are doing fine.

Let me go into detail of each line item of profitability statement.

Revenue for the quarter was Rs. 375 Crore or $48.7 million, quarter-on-quarter increase of 9.3% and year-on-year increase of 37.1%. The increase is primarily on account of volume growth, impact of higher billable days and rupee depreciation. We witnessed good revenue growth for our technology and digital services. We are quite optimistic for coming quarters and strengthened our delivery team to cater to growth opportunities. There has been good growth from existing customers on top of adding 10 key wins during the quarter.

Getting down to gross margin - it was 35.3% in this quarter compared to 33.2% in last quarter, and 35.6% in the same quarter last year. Increase of 2.1% is on account of higher billable days, increase in billing rates and rupee depreciation as offset by impact of higher average salaries. We got rate hikes from existing customers plus improved rack rate for new customers over the last few quarters. To some extent, it helped us to offset the impact of salary hike. Still we are working on these initiatives to further improve margins in coming quarters.

Getting down to SG&A expense line - SG&A expense has increased quarter-on-quarter by Rs. 11.3 crores. It was Rs. 83.4 crores in this quarter compared to Rs. 72.1 crores last quarter. The increase is mainly due to addition of new sales and pre-sales staff, capacity expansion, increased marketing spends, and H1 Visa fee.

Page 3 of 12

Q2 & H1 2022 Earnings Call

August 24, 2022

EBITDA in this quarter was Rs. 49.1 crore or $6.4 million compared to Rs. 41.7 crore or $5.6 million last quarter, and Rs. 36.6 crores or $5 million in the same quarter last year. As a percentage of revenue, EBITDA was 13.1% in this quarter, compared to 12.1% last quarter and 13.4% same quarter, last year. Revenue growth has led the margin improvement quarter-on- quarter but was impacted year-on-year due to impact of salary hikes. We continue to witness strong pipeline for technology and digital services and are committed for further improving the yearly EBITDA numbers during second half of 2022.

Getting down to depreciation: The total expense was Rs. 8.2 crores compared to almost same last quarter and Rs. 6.3 crores in the same quarter, last year. Interest expense is Rs. 1 crore in this quarter compared to Rs. 1.1 crore last quarter. Interest expense is primarily due to adoption of Ind AS-116 and we are near debt-free.

Other income in this quarter was negative Rs. 56 lakhs compared to positive Rs. 5.1 crore, last quarter. Other income mainly consists of interest income and net exchange gains or losses. Interest income for the quarter was Rs. 1 crore. The exchange income during the quarter is negative Rs. 3.1 crore mainly due to mark-to-market on restatement of outstanding forward covers.

At the end of the quarter, we had total forward cover of US$ 38.95 million with average rate of Rs. 78.65 and Euro cover of 2.3 million with average rate of Rs. 88.93. This has already been mark-to-market as at closing rate of 30th June. Over the last three months, the rupee has depreciated sharply due to global environment and we have been taking forward cover as per our hedging policy. Our tax expense was Rs. 7.4 crore in this quarter as against Rs. 7.8 crore last quarter.

Our effective tax rate during the quarter is 19%, primarily due to SEZ benefits and lower corporate tax rate in European and Singapore subsidiaries. Net profit after tax was Rs. 31.8 crores or $4.1 million compared to Rs. 29.7 crore or $4 million last quarter. The resultant EPS for the quarter is Rs. 2.69/-.

Getting down to the asset side in the balance sheet - Total receivable including unbilled at the end of this quarter were Rs. 296.8 crores compared to Rs. 230.8 crores at the end of December quarter. The receivable in terms of DSO were 58 days at the end of this quarter compared to 52 days at the end of December quarter. This is mainly due to timing reason and our realization from the customer has been good.

Net cash balance were Rs. 217.7 crore at the end of the quarter compared to Rs. 277.4 crores at the end of December quarter. The reduction is mainly due to interim dividend paid, CAPEX for expense in SEZ facility and taxes paid during the first half of 2022. We have been constantly generating cash from the business.

Page 4 of 12

	Q2 & H1 2022 Earnings Call
	August 24, 2022
	R Systems shareholder fund were Rs. 452.3 crore at the end of the quarter compared to
	Rs. 460.3 crores at the end of December quarter. We have a strong balance sheet to support
	liquidity and growth.
	With that, let me hand over to Avirag ji for review of operations.
Avirag Jain:	Thank you, Nand ji. Thank you everybody for being on the call.
	We continue to focus on Digital Technology and Digital Transformation project. The strategy
	has continued to help us in growth and getting momentum. Now, we will give you a brief flavor
	of our global operation.
	Digital Transformation continued to be the focus for us in select key verticals like technology,
	telecom, banking and finance, healthcare and life science, retail and e-commerce. Our digital
	transformation offerings include cloud, analytics, machine learning, artificial intelligence, data
	speech analytics, robotic process automation, IoT, Salesforce. These continued to be our
	arrowhead for growth.
	On cloud, we work on all the leading platform such as Amazon, Microsoft, Azure and Google.
	We are advanced partner with Amazon and Gold partner with Salesforce. This is a significant
	traction in the cloud space. Most of our existing clients and all new leads that are coming our
	way are in the cloud space.
	On analytics side, we see high growth in ML/ AI, data and speech analytics. We are currently
	serving many key clients in this space.
	Mobility, we work on a wide range of technology devices such an Android, iOS, hybrid, and
	web app. We do right from app development to enterprise level application.
	We have 10 key wins during the quarter. The brief of few key wins are:
	Under product lifecycle management, a USA leading market insurance company has engaged
	R Systems to revamp its legacy platform to deliver operational efficiency and enhance user
	experience.
	Another customer from US based solution provider for energy industry has chosen R Systems
	to provide software development, automation testing, data engineering and support for its
	existing product.
	Another from US is a leading digital experience agency that has mandated R Systems to provide
	digital transformation solution and cloudification for its legacy application.
	Another client is leader in the electricity production in Eastern Europe. They have engaged
	R Systems, Europe to digitize their customer onboarding process for the household customers.

Page 5 of 12