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Moderator
Ladies and gentlemen good morning and welcome to the call of Infinite Computer Solutions India limited to discuss their Q3
FY11 results and the recent monetary developments hosted by Emkay Global Financial Services. We have with us today Mr.
Sanjay Govil, Chairman, Mr. Upinder Zutshi, Managing Director Chief Executive Officer, Mr. Sanjeev Gulati, Senior Vice
President Finance and Mr. Sujay Kadalbajoo, EDP Corporate Affairs. As a reminder, all participant lines will be in the listenonly
mode and there will be an opportunity for you to ask questions at the end of today’s presentation. If you should need any
assistance during this conference call, please signal an operator by pressing * and then 0 on your touchtone telephone.
Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Anish Damania, Head
of Equities at Emkay Global. Thank you and over to you sir.
Anish Damania
Thank you. Good morning everybody. Thank you for joining us today. We would like to welcome the management of Infinite
Computer Solutions India Limited and also thank them for giving us this opportunity to hold this call for them. I would now like
to hand over the call to Mr. Sanjay Govil and over to you sir.
Sanjay Govil
Good morning everybody. Thank you very much for joining the call today. We really appreciate it. At this point I will hand the
podium over to Mr. Zutshi who can take it from here. Upinder?
Upinder Zutshi
Thank you Sanjay and good morning to all of you once again thank you for joining the call. As the moderator mentioned, in
addition to Sanjay Govil, we also have Sanjeev Gulati who is Senior Vice President, Finance on the call. We also have Sujay
Kadalbajoo, who is Executive Vice President, Corporate Functions. He has recently joined us, in fact he joined us about a
month back and he is also on the call. The way we have structured the call, I will start off with giving you the highlights of the
quarter and subsequent to that, Sanjeev Gulati will read out the detailed financials of this quarter.
As a start I am happy to inform you that Q2 has again been a good quarter for us. And it has been in line with our annual
guidance which was about, broadly speaking, 35% growth in both revenue and net profit in US dollar terms. Our revenues for
this quarter were about $49.2 million which is a year-on-year growth of about 43% and Q-on-Q growth of 4.3%. Our operating
margin for the quarter stood at 16.67% compared to 16.59% for the last quarter. It also represents a growth of about 24% on a
Y-on-Y basis and 4.7% on a Q-on-Q basis. Our Profit After Tax grew to US$5.99 million, as a percentage of the revenue it
grew to 12.17% as against 11.65% in the previous quarter. It also represents an increase of about 36% on a Y-on-Y basis and
about 9% on a Q-on-Q basis. Sanjeev, in his readout, will give you further details of the financial numbers. You will also find
the copy of our detailed tax sheet and the presentation that is on our website.
The growth in this quarter has primarily been broadly speaking across all clients. All our major clients continued to stay stable
and grow and what is heartening and encouraging is that we have been able to increase traction in some of the major clients
that we signed up in the last few years, most notably them being Motorola, iYogi, APDRP, and some of the newer clients that
we signed in this year. The growth has been broad based across all our top 10 clients and they continue to contribute over
90% of our total revenue. However, our top client although remained steady, its contribution as a percentage of the total
business dropped by about 4% to now 29% of the overall pie. We expect this trend to continue as the focus is on diversifying
and acquiring new clients and as we have done that in the last 12 months the contribution from some of the clients that we
acquired in the recent past has started to substantially grow and contribute to our revenue stream and we expect that
contribution to significantly grow over the next few quarters. So as result of that even though our top 10 clients may give us
about 90% of the business but the distribution of that across the top 10 clients is going to significantly change over the next
few quarters.
What’s also more very encouraging is the pipeline and status of the pipeline. Our current pipeline looks much stronger than
what it used to be few quarters back and there are a number of bits that are at a fairly advanced stage of negotiations, not
close as yet but at very advanced stages of negotiations which we expect at least some of them to close in the next quarter or
over a the next couple of quarters. In this quarter in terms of addition in clients we added three mid sized clients, no major
large clients added, but three clients were added in this quarter. In addition, as the strategy has always been, the whole focus
has been to ensure that our existing client base continues to grow, existing business with them continues to grow. So what we
currently pursuing, a number of cross selling opportunities within our existing top 20 clients and hopefully that should convert
into results over the next few quarters.
Our non linear revenue and R&D and IP leverage business has reasonably gone up as a percentage of our business, it stood
at 17.9%. Our infrastructure management business grew from 8.88% to 13.27%. Both of these trends in line with our long term
goal of having equal contribution from the three major service lines that we have and that is application management,
infrastructure management and R&D and IP leverage businesses. Our messaging business which is a very interesting part of
our business that we got into as a result of our alliance with Motorola is going quite strong. I mean that’s one line of business
that we are very bullish about. We started to seek a significant revenue and bottom line contribution coming in from that
business and we expect and hope that the contribution from this line of business is to significantly increase over the next few
quarters. One aspect of that platform that we had acquired the license so we support, I am very delighted to inform you that
the messaging platform that currently is licensed to us supports over 100 million subscribers and over a 100 billion messages
per year, which will give an idea of the robustness and the criticality of the platform that we are currently supporting and
enhancing and further building on. What we are trying to do is, in addition to supporting this existing platform and existing
clients that we have for that platform, we have started to build upon this platform to extend these functionalities and actually
transition it to a converged messaging platform that will support all network technologies like CDMA, GSM, Y Max, 4G and
LTE. In addition to revenue streams coming from the existing platform and the current clients, the goal is to make this platform
as a platform of choice for our customers, both existing as well as potential for LTE and 4G networking. And that we are doing
by enhancing the platform building premier features to attract new customers and also maintain current customer loyalty. So
as I said earlier we are and we remain very bullish about this business not just the messaging business but also our other IP
leverage projects that we have.
And finally a brief mention about our attrition rate. Our Q3 attrition on an annualized basis is about 12% which is significantly
higher than the attrition that we had in Q1 and Q2, but as I kept mentioning on my earlier calls, the attrition numbers that we
had for Q1 and Q2 which was less than 6% was really too good to last for too long. Having said that, it’s not that the attrition of
12% is bad, its still well below the industry average but we would have expected it to continue to be under 10%. With this, I
now hand over to Sanjeev Gulati and he will take you through the detailed financial numbers. Thank you.
Sanjeev Gulati
Thank you Upinder. Thank you for joining the call. Our Q3 highlights are as follows. The revenue for Q3 was 49.21 million
which is 222 INR crores. Y-on-Y USD increased about 43% and Rupee increased at about 38%. Quarter-on-quarter growth
sequential was about 4.3% in USD terms and 1.3% in INR terms. Operating profits was 8.2 million USD or about 37 crores in
INR. The Y-on-Y growth in USD terms was 24% and in Rupee terms it was 20%. The quarter-on-quarter growth stood at 4.7%
in USD terms and 1.7 in INR terms. The PAT for the quarter in USD terms is 5.99 million or 27.05 crores which is a Y-on-Y
growth of 36% in USD terms and 32% in Rupee terms. The quarter-on-quarter growth stood at 8.9% in Dollar terms and 5.6%
in Rupee terms. The EPS for the quarter was 6.15, a quarter-on-quarter growth of 5.8% and a year-on-year growth of 15.1%.
The EBITDA margins for the quarter stood at 16.67% compared to 16.59% for the previous quarter. By calculating EBITDA we
are excluding foreign exchange loss or gain and any other income. The PAT for the quarter was 12.17% compared to 11.65%
for the previous quarter. During the quarter we added three new clients. Our existing clients all remained. Our top client there
was a slight decrease by 4% in revenue, but our top 10 clients dropped marginally by 0.8%. Our top clients contributed 29% of
revenue for this quarter and the top 10, 91.5%. At the end of the quarter we had 47 active clients out of which on an LTM basis
we had 15 clients who are $1 million plus and three clients who were $20 million plus in revenue. Six clients had an LTM
revenue of more than $5 million on an LTM basis. We made an addition to our 1 million plus client by adding on two more and
grew from 13 to 15 in Quarter 3. The key revenue analysis, our telecom verticals contributed about 53% of our total revenue.
Energy & Utility is contributed about 5.94% in Quarter 3 which was increased from 0.09% in Quarter 2. Health care, the
contribution was 19.04%, R&D and IP leverage solutions was 17.9%. Infrastructure management is at 13.27% against 8.88%
for the previous quarter. Off shore revenue was 33.9% compared to 29.1% in the previous quarter. The global health count
increased to 4468 from 4178, as a result of a net addition of 290 employees plus contractors during the quarter. The attrition
for the quarter was 12.21%. Revenue per employees on blended terms $37. Our utilization was 82%, a small decrease of 2%
over the previous quarter. We have added another SEZ facility in Bangalore which will provide seating space for about 1200
people. The area of this new space is about 89,000 square feet. The cash equivalent at the end of the quarter stood at 103
crores compared to 127 crores in the previous quarter. The effective tax rate was 21%. Cash per share stood at Rs.23.42 per
share. So far as hedging is concerned we had range forward contacts at the end of the quarter of 41.7 million and as on date they are 51.25 million. Out of this about 34.3 million are the ones which will mature in the next four quarters. The net worth of
the company increased in INR terms to 368.46 crores against 374.67 crores of Quarter 2.
The DSO calculation which we explained in detail last time, I will do it again because it’s an issue which most analyst have
been raising in the past. The company does certain amount of business in the US which is pass through in nature that some of
these vendors need to route the business with one of our customers through us. These customers carry all the risk and
liabilities and this business is not core to our activities and it carries a very low margin. As a result of this, we recognize only
the margin from such business, as our revenue but not the consequent debtors and creditors but the consequent debtors and
creditors are reflected in the balance sheet. Consequently if one is to look at DSO as calculated from our financials, it will
appear to be high and is not a true reflection of efficiency of our people as it does not include the corresponding pass through
revenue. The DSOs calculated for this quarter is 146 days that is the DSO when calculated if one is to look at our financials.
However, if we include the pass through revenue and then calculate the DSO, the DSO is 95 days for the quarter. And if we
were to exclude both the revenue and debtors from a pass through, that is the DSO for a core business which is 102 days for
this quarter. Thank you. That is all what I have to say for the financials. We are happy to answer any question which you may
have.
Moderator
Thank you very much sir. Ladies and gentlemen we will now begin with our question and answer session. Our first question is
from the line of Chinmay from CRISIL. Please go ahead
Question and Answer Session
Urmil
This is Urmil here. Congrats on a good set of numbers. I wanted to understand the increase and the billing rates for the off
shore business on a Q-on-Q basis. What was that driven on the back of?
Upinder Zutshi
Good morning Urmil, this is Upinder. It is a combination of the different businesses in a particular quarter that will determine
what the average bill rate that we do in a quarter. So as a result of the shift in some of the low margin businesses coming out
of the system and contribution from higher margin businesses coming in, the effective average off shore rate goes up.
Urmil
Sure. And secondly, the decline in the IP leverage business, is it just a 3Q kind of phenomenon because when the decline had
been compensated by strong growth in IMS, apart from Q2, IP based business contribution has remained flattish. What has
that been driven on the back of?
Upinder Zutshi
Urmil as I mentioned in the last couple of quarters also, if you look at significant part of our IP business the revenue stream
has two components. One is what we call as the support fee which is fixed for a year and is fairly linear on a quarter-onquarter
basis. The other part of that revenue is coming from the license sales. On an annualized basis when we start the year
we are reasonably sure what that annual license fee revenue is going to be. However, on a quarter-on-quarter basis that
revenue could potentially vary. So in a particular quarter if there are more sales for the license, so the revenue will be up
whereas in another quarter the revenue potentially may come down. So the variation in the IP leverage businesses is
essentially coming from the drop in the license sales in Q3. Whereas if you look at the significant amount of growth that has
come in is largely coming from infrastructure management and some of the other clients that we acquired along with Motorola
last year, which is iYogi or to some extent APDRP, Western Union. So that is where the growth is coming from.
Urmil
Right. Mr. Sanjeev, needed a break up of the FX loss reported for the quarter?
Sanjeev Gulati
FX loss was as a result of a mark-to-market which is about 20 lakhs, otherwise if you see the FX loss or gain in the quarter is
almost flat. It is more or less flat.
Urmil
Okay. Thank you.
Moderator
Thank you. Our next question is from the line of Prem Chand from Axis Bank. Please go ahead.
Prem Chand
Congratulations on your good numbers. I wanted to know what is the inorganic growth plan that you are having at this point in
time.
Upinder Zutshi
Thank you. We have spoken previously also. Our strategy over the next 4 years is essentially have a significant growth and
focus on the two lines of businesses that we believe are a) our high opportunity businesses in the market place and also will
give us a much better differentiator in the market place than the classic application management. Now these two service lines
that we have been talking about and focusing on are the infrastructure management service as well as R&D and IP leverage.
That part of the strategy for growth over the next two three years has been a) to extend and continue to grow our existing
clients and acquire new clients and grow it organically. However, for each of the service lines depending on what the potential
need could be, we would be looking at specific inorganic opportunities. We did that last year with the messaging business and
going forward, a part of the goal at some stage we would like to supplement the infrastructure management business with an
acquisition that fits into our overall structure and strategy. Nothing specific has really started as of now but its not something
that is going to happen very imminently but definitely it is part of the strategy as we move forward. In addition to that, what we
are also doing is we continue to look at opportunities in the intellectual property leverage space where we can potentially
identify opportunities similar to lets say, Motorola, we did last year, which will not just enhance our revenue profile but
significantly extend our differentiator and leverage that we have in the market place specially in the telecom OEM space. So if
there any such opportunity that may come our way in the next few years or few quarters we would be definitely looking at such
opportunities.
Prem Chand
Which are the geographies where you are looking at expansion at this point of time?
Upinder Zutshi
Our major market is the US and would continue to be so because you know in our view the major potential is coming from that
country. However, having said that, and you can also see from the numbers of Q3 the focus is to extend other regions and
most specifically Europe and within Europe also it could be UK and northern region of Europe, as well as very specific
domestic opportunities that fall in our line of either the vertical strategy or our service strategy.
Prem Chand
Okay. That’s all from my side. Thank you.
Upinder Zutshi
Thank you sir.
Moderator
Thank you. Our next question is from the line of Nirav Dalal from Sharekhan. Please go ahead.
Nirav Dalal
Congratulations for the numbers. I had two questions. One is, the Motorola deal, how is the traction going on? Are you going
to hit the 20 million guidance that you have given at the start of the year?
Upinder Zutshi
As I said during my presentation I think that’s fairly in line, both from a revenue and contribution perspective and we would be
in line with what we initially guided for. If you look at that deal that was very significant and a very large and major deal and
more than the revenue and the contribution that is in line, what is also happened we are happy to share that is that transition
from Motorola to us was very seamless both in terms of infrastructure, people service levels. So that continued to be seamless
and, in fact, some of the comments that we have been hearing from the end client, is really been that the quality of service and
the service levels have dramatically and significantly improved than what it was in the preceding years. So it has turned out
quite well both from a financial perspective and as well as from an operational perspective. I just wanted to say what is also
given which is really an intangible is the significant opportunity that will allow us and enable us to operate and take advantage
of the messaging business worldwide, which in our view an area which is significantly going to expand both in terms of
subscriber base in the underdeveloped or developing countries as well as the usage of the messages all over the world
including the United States.
Nirav Dalal
Sir, how many people will be on Motorola, currently?
Upinder Zutshi
We currently have about 160 or so.
Nirav Dalal
Okay and the revenues will be curbed under ADM, right?
Upinder Zutshi
This revenue goes to R&D and IP leverage.
Nirav Dalal
Sir my next question was the IMS revenues have grown this quarter, reasons for that, client-specific, is it iYogi that is
contributing to those revenues?
Upinder Zutshi
It is a combination of iYogi and the infrastructure part of the tranche for the APDRP contract
Nirav Dalal
For the APDRP?
Upinder Zutshi
That is correct.
Nirav Dalal
Sir and last question on the APDRP, how is the traction going on there?
Upinder Zutshi
It is going on well, it is under control, overall programs schedule has slipped by a quarter.
Nirav Dalal
Okay, because the revenues for the quarter was about 13 to 14 Crores?
Upinder Zutshi
That is right, significant part of the revenue and contribution from that program is to come. So it has from a time line
perspective it is slipped by about a quarter. But outside that the major areas of activity, the major milestone that is part of that
program that we have to achieve this quarter is going on track and hopefully, we should be able to achieve that in this month.
Nirav Dalal
Right sir and how long is this deal fought, till when the system integration work go on?
Upinder Zutshi
There are two parts to this program. So, basically, one is the implementation and its acceptance and then next is the follow-up
support. And the major part obviously the revenue is in the first phase which is the implementation phase. Contractually, it was
supposed to be implemented in 18 months, which will end in October-November this year. So we expect that given the
slippage that will happen so far and most of the slippage really is coming from the client side, because there are certain
dependencies, so we expect this to be extended to and get over by the end of next financial year.
Nirav Dalal
So March 12?
Upinder Zutshi
Yes.
Nirav Dalal
Any further bidding in the APDRP space?
Upinder Zutshi
We are bidding there. We have been bidding there and we are bidding in other specific opportunities. We have not had too
much success after that and the major reason for that is that A) that opportunity has to be in line with what we're trying to do as
a long-term strategy and two, we have specific margin constraints, which stipulates our business deals that we can't really bid
for any opportunity that gives us less than a particular margin level. So because of that constraint some of the bids that we
participated, even though we have been technically qualified, we lose out on the price front because we don't want to make a
compromise on the margin levels.
Nirav Dalal
Right sir, thanks a lot.
Moderator
Thank you. Our next question is from the line of Amit Agarwal from SPA Securities. Please go ahead.
Amit Agarwal
Sir, good morning. Just wanted to know that incremental growth for this quarter has been around $2 million, 2.9 million of
which was contributed by energy and utilities. I guess mainly is APDRP project.
Upinder Zutshi
Right.
Amit Agarwal
And it was wiped out by the telecom and media degrowth of around $2.8 million, what was the reason the behind this slow
growth in telecom?
Upinder Zutshi
If you look at the overall growth from Q3 to Q2, the revenue drivers have been largely iYogi, APDRP and some of the newer
clients that we acquired. In terms of degrowth, some of the telecom clients there has been de-growth and also the degrowth
has been, in the T&M business, if you look at the nature of the month, December, it is a less productive month with holidays.
So the revenue typically for that month which is on a time and material basis comes down. So that has pulled the revenue
down into other three clients that I mentioned has hold it up, Motorola is more or less has stayed the same between Q2 and
Q3.
Amit Agarwal
Okay, one more question, sir. With the Motorola and Nokia Siemens network being handed over some of the platforms and a
pending case on those same lines are we affected in anyways?
Upinder Zutshi
Based on information and what we have the contract as well as with the working relationship we are completely protected both
contractual as well as from an operational perspective. The platform that we are supporting with the end clients is a platform of
choice and the end clients are committed to those platforms. So to answer your question both from a contractual perspective
as well as from an operational perspective we are completely protected. In fact, on the flip side, we are looking at it as a very
big opportunity for us. Because now we are partnering with, on one side, with the Motorola and there are certain areas of
engagements that we are talking to them for promoting this product. And with this acquisition if and when it goes through
which will also expose us to a much larger markets base that comes with Nokia Siemens. So the short answer to your
question is the current revenue stream that we talked about over the next 4 to 5 years is completely protected both
contractually as well as operationally and any change that is happening possibly could add to and help us in building
incremental revenue streams of that platform.
Amit Agarwal
Okay, thanks a lot sir, that was helpful.
Moderator
Thank you. Our next question is from the line of Nirav Dalal from ShareKhan. Please go ahead.
Nirav Dalal
Sir what would be your tax rates for ‘12 and ‘13?
Upinder Zutshi
We have guided for this year about 20% to 21% annualized tax rate. So for this year we are fairly in line with that. Next year
also, we have guided around that figure.
Nirav Dalal
Okay, what is the SEZ contribution currently and what are you expecting it to be going forward for FY ‘12?
Upinder Zutshi
From a tax perspective, if you look at our overall business structure, there are businesses that we do within the country, say
like US, which is a taxable entity and there are businesses that we do in India and we have different entities with different tax
status. Our main company which is there is Infinite Computers India with the STPI and which has been out of the tax window
for the last two years now. We have an STPI unit that is doing work for Fujitsu, which is enjoying the STPI tax benefit and
hopefully it enjoys it only till the end of this year, because the STPI is gone. In addition to that till now we have two SEZ units,
one in Gurgaon and the other one in Chennai. The most of the new business or the new client that we acquire, the
implementation, execution happens through the STPI. What we are also now in the process of building out right now and
hopefully, that SEZ facility will be up and now running by the end of Feb is a 1200 seater facility in Bangalore. So from an
overall taxation structure between various entities that we have, we are looking at to be same as we have it for this year. As it
is on a high tax burdens, we did not have a business where it is affecting our tax rate for 12% or 14%.
Nirav Dalal
Right sir, thanks a lot.
Upinder Zutshi
Thank you.
Moderator
Thank you. To ask a question please enter * followed by 1. Our next question is from the line of Chinmay Sapre from CRISIL.
Please go ahead.
Chinmay Sapre
Hi, sir, just wanted to get a sense and your view on the business environment from two points wherein first would be your new
client acquisition and also mining of your existing accounts?
Upinder Zutshi
Right, if you break it into two, if you look at the existing accounts as we all know, it provides a very large opportunity because
for the sheer size of the budgets that we're talking about for each of those clients for us to go and increase our share of the
overall spent. What we have been seeing over the last year or four quarters is two aspects that the budget squeeze that was
there and that results into the pressure of on the vendors, companies like ourselves has gone away. Second part that we are
seeing is there are multiple now at least discussions going on, and opportunities going on after the new budgets have been put
in place. So the level of traction and the health of the pipeline is definitely much better than what it was, say, 12 months back,
both for opportunities within our existing client base and also the pipeline of new clients. So that is a very encouraging sign.
The mood is definitely different than what it was, year or two years back. And the whole key is how many such opportunities
both within existing clients and the new clients get converted into real business over the next Quarter or two will really, we
achieve for our growth plan for year after next.
Chinmay Sapre
Sir, when do you see any possible uptake in the pricing, would it be on the later part of FY 12?
Upinder Zutshi
Good sign is that there is no pressure on the prices. People are not asking us to give the cut prices or give us more for the
same price. Now, the way our strategy is really to increase our margin is to do more and more of business that is either on a
fixed grade or SoW basis wherein really the bill rate goes out of equation as well as revenue share basis. So those are the
significant margin drivers for us. And as a percentage of overall these two businesses go up automatically, our average margin
should expand. Now in terms of specific bill rates, whether the increase going to be, so typically, those discussions happen at
the start of their financial year, in certain cases, which happens in January. So that is the timeframe that we possibly can be
looking at increase of bill rate from the existing clients. But what we're doing is wherever we are bidding for the new projects,
the average pricing that in our views for those rates is definitely higher than what we used to do for last year or period before
that.
Chinmay Sapre
Okay, sure, sir secondly, while we internally had also factored in a higher attrition rates over a medium-term, do you see a
pressure on employee cost?
Upinder Zutshi
From an employee cost of view, if you look at the business, the major component of the costs are really to the employee cost,
both in terms of the salary, the big end, and the attrition. Now what we have been doing over the past three years and having
including our business plan is for example, this year, we gave a 15% salary hike, last year also we gave about 13% to 14%
salary hike. So next year going forward, obviously, with the market turning around and there is more pressure so we will be
looking at similar increase in the salary cost. And from an attrition perspective, obviously, even though I may wish that it is less
than 10% but that is not really a reality. In reality, attrition is going to be high. Now, that is an additional cost into the operating
environment. If you have an employee cost that is going up every year and you have an attrition cost, that is a factor. Now,
how we take care of that and make sure that the margins don't get impacted are on two accounts; a) one is to transition the
business and continue to do more high margin businesses either in a fixed rate or revenue share or on offshore perspective.
Second thing is to change the cost structure of the employees, which is essentially to be done by changing the employee mix.
Typically, if you look at our past, we have been hiring people, all lateral hires with an average industry experience of about two
years to three years. So what we're doing is in terms of cost optimization is to change that employee mix and more specifically,
the areas where there are SoW or fixed grade basis and bring it down and start using employees either freshers or with less
experience. So that will help us compensate for the salary increase that we may have to give, that is two. And the third part
what we do is from a margin conservation and expansion perspective, as we keep growing big so you improve your
operational efficiencies and that is an area where we are very significantly and specifically looking at now. We look at areas where there can be cost structure that can be optimized and pursue that very aggressively. The other advantage that we have
is as we keep continue to go bigger so our fixed SG&A gets better leveraged. So as a percentage, it should come down as we
move forward. So those are some of the aspects both from revenue and growth perspective as well as from cost structure that
we are put in place and which will help us, obsess incremental salary cost and the inflationary inputs into the system and help
us to maintain the same margin level and in fact as a goal expanded as we go over the next three years.
Chinmay Sapre
Right sir, thanks for taking my question and all the best for the 4th Quarter and next year.
Upinder Zutshi
Thank you very much.
Moderator
Thank you. Our next question is from the line of Dipesh Mehta from SBI Cap Securities. Please go ahead
Dipesh Mehta
Congrats on good numbers. Sir I just want to understand the margin movements because if I see your fixed bid proportion
price increase by 5%, billing is also high, but if I see margin, it is almost flattish kind of. So what would be the margins are?
Upinder Zutshi
You're absolutely right. Those are the areas that have helped us in expanding the margin. Now, the areas that have keeping it
at the same level are, a) as I said the overall gross margin in December is traditionally lower because of the less number of
working days available. Two, in certain businesses like iYogi, there is a significant ramp up, those people have to go to a three
month training. So lot of employees both in Q2 as well is in Q3, more specific Q3, had been not billable. So the costs are into
the system but the revenue is not there in that quarter and the revenue will start growing in Q4.
Dipesh Mehta
These are the two main factors which impacted margins?
Upinder Zutshi
Yes and then the contribution obviously if you look at our businesses, there are different lines of businesses; we have the
energy, we have the government business, we have the time and material business, we have fixed grade, we have revenue
share. Each of those business lines have different margin levels. As an example, which is the government business, if it
increases as a percentage yet contribute that, so that will also to some extent decrease the margin because it is that business
at a margin that is lower than the company average. So the key to margin conservation and expansion is to make sure that the
mix of the revenue is such that overall it expands and look at the cost structure to optimize it better so that we are able to
maintain the margins.
Dipesh Mehta
You said about one specific plan, we have ramp up and revenues right now so you expect that to normalize in next Quarter?
Upinder Zutshi
The revenue has started coming in from Q3 itself.
Dipesh Mehta
We expect if the other players doing wherever improvement in margin?
Upinder Zutshi
We should expect that because the revenue from that client should be higher in Q4 than it was in Q3.
Dipesh Mehta
Okay and about guidance if I see our nine-month performance, revenue implies Q4 will be 4% to 14% and profit almost flattish
kind of thing at lower end. So any revision or anything of that sir?
Upinder Zutshi
As of now what we are reasonably sure that we should be able to achieve and be closer to the higher end of the margin on
guidance framework. So we should be able to achieve that and I don't think we are in a position to review, that is, we will be
staying with the guidance that we have given at the start of the year.
Dipesh Mehta
Okay. Thank you, sir.
Upinder Zutshi
Thank you very much.
Manik Taneja
Hi Upinder, just wanted to understand from you the kind of efforts you are making to reduce your client concentration. I think
that would be really helpful.
Upinder Zutshi
As I said at the start of the call and in response to one of the questions, the whole effort is to a) on one front is to distribute the
revenue across the top 10 clients, so that no one client is lopsided or very high. So that effort is already on and that is going on
and as we are adding new larger clients into our client base so automatically that starts to happen. And second part is what we
are doing is obviously, like most companies I guess aggressively look at start acquiring the new clients. Now, typically, in our
business model, as we discussed earlier also, the big focus is to acquire into large corporations. So there those kind of have
much longer sales cycles but the advantage is that once you acquire that client you have visibility over the long-term, typically,
multimillion dollar clients and multiyear engagements. So effort is definitely on, but as a strategy that I mentioned earlier also,
and as a result of that strategy the top 10 or top 15 clients so far will continue to be a significant part of our revenue. Because
of the nature of the clients that we are engaging with, because we have large clients, large budgets and we have to also make
an effort to have a reasonable share of that budget.
Manik Taneja
Sir, thank you.
Upinder Zutshi
Thank you very much.
Moderator
Thank you. As there are no further questions I would like to hand the floor back to Mr. Manik Taneja for closing comments.
Manik Taneja
Hi, everyone, on behalf of Emkay, I would once again like to thank you all for joining this call. Have a great day. Thank you.
Upinder Zutshi
Thank you very much. Have a great day. Bye-bye.
Moderator
Thank you. On behalf of Emkay Global Financial Services that concludes this conference call. Thank you for joining us and
you may now disconnect your lines.
Note: 1.This document has been edited to improve readability.
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Moderator
Ladies and gentlemen good morning and welcome to the call of Infinite Computer Solutions India limited to discuss their Q3
FY11 results and the recent monetary developments hosted by Emkay Global Financial Services. We have with us today Mr.
Sanjay Govil, Chairman, Mr. Upinder Zutshi, Managing Director Chief Executive Officer, Mr. Sanjeev Gulati, Senior Vice
President Finance and Mr. Sujay Kadalbajoo, EDP Corporate Affairs. As a reminder, all participant lines will be in the listenonly
mode and there will be an opportunity for you to ask questions at the end of today’s presentation. If you should need any
assistance during this conference call, please signal an operator by pressing * and then 0 on your touchtone telephone.
Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Anish Damania, Head
of Equities at Emkay Global. Thank you and over to you sir.
Anish Damania
Thank you. Good morning everybody. Thank you for joining us today. We would like to welcome the management of Infinite
Computer Solutions India Limited and also thank them for giving us this opportunity to hold this call for them. I would now like
to hand over the call to Mr. Sanjay Govil and over to you sir.
Sanjay Govil
Good morning everybody. Thank you very much for joining the call today. We really appreciate it. At this point I will hand the
podium over to Mr. Zutshi who can take it from here. Upinder?
Upinder Zutshi
Thank you Sanjay and good morning to all of you once again thank you for joining the call. As the moderator mentioned, in
addition to Sanjay Govil, we also have Sanjeev Gulati who is Senior Vice President, Finance on the call. We also have Sujay
Kadalbajoo, who is Executive Vice President, Corporate Functions. He has recently joined us, in fact he joined us about a
month back and he is also on the call. The way we have structured the call, I will start off with giving you the highlights of the
quarter and subsequent to that, Sanjeev Gulati will read out the detailed financials of this quarter.
As a start I am happy to inform you that Q2 has again been a good quarter for us. And it has been in line with our annual
guidance which was about, broadly speaking, 35% growth in both revenue and net profit in US dollar terms. Our revenues for
this quarter were about $49.2 million which is a year-on-year growth of about 43% and Q-on-Q growth of 4.3%. Our operating
margin for the quarter stood at 16.67% compared to 16.59% for the last quarter. It also represents a growth of about 24% on a
Y-on-Y basis and 4.7% on a Q-on-Q basis. Our Profit After Tax grew to US$5.99 million, as a percentage of the revenue it
grew to 12.17% as against 11.65% in the previous quarter. It also represents an increase of about 36% on a Y-on-Y basis and
about 9% on a Q-on-Q basis. Sanjeev, in his readout, will give you further details of the financial numbers. You will also find
the copy of our detailed tax sheet and the presentation that is on our website.
The growth in this quarter has primarily been broadly speaking across all clients. All our major clients continued to stay stable
and grow and what is heartening and encouraging is that we have been able to increase traction in some of the major clients
that we signed up in the last few years, most notably them being Motorola, iYogi, APDRP, and some of the newer clients that
we signed in this year. The growth has been broad based across all our top 10 clients and they continue to contribute over
90% of our total revenue. However, our top client although remained steady, its contribution as a percentage of the total
business dropped by about 4% to now 29% of the overall pie. We expect this trend to continue as the focus is on diversifying
and acquiring new clients and as we have done that in the last 12 months the contribution from some of the clients that we
acquired in the recent past has started to substantially grow and contribute to our revenue stream and we expect that
contribution to significantly grow over the next few quarters. So as result of that even though our top 10 clients may give us
about 90% of the business but the distribution of that across the top 10 clients is going to significantly change over the next
few quarters.
What’s also more very encouraging is the pipeline and status of the pipeline. Our current pipeline looks much stronger than
what it used to be few quarters back and there are a number of bits that are at a fairly advanced stage of negotiations, not
close as yet but at very advanced stages of negotiations which we expect at least some of them to close in the next quarter or
over a the next couple of quarters. In this quarter in terms of addition in clients we added three mid sized clients, no major
large clients added, but three clients were added in this quarter. In addition, as the strategy has always been, the whole focus
has been to ensure that our existing client base continues to grow, existing business with them continues to grow. So what we
currently pursuing, a number of cross selling opportunities within our existing top 20 clients and hopefully that should convert
into results over the next few quarters.
Our non linear revenue and R&D and IP leverage business has reasonably gone up as a percentage of our business, it stood
at 17.9%. Our infrastructure management business grew from 8.88% to 13.27%. Both of these trends in line with our long term
goal of having equal contribution from the three major service lines that we have and that is application management,
infrastructure management and R&D and IP leverage businesses. Our messaging business which is a very interesting part of
our business that we got into as a result of our alliance with Motorola is going quite strong. I mean that’s one line of business
that we are very bullish about. We started to seek a significant revenue and bottom line contribution coming in from that
business and we expect and hope that the contribution from this line of business is to significantly increase over the next few
quarters. One aspect of that platform that we had acquired the license so we support, I am very delighted to inform you that
the messaging platform that currently is licensed to us supports over 100 million subscribers and over a 100 billion messages
per year, which will give an idea of the robustness and the criticality of the platform that we are currently supporting and
enhancing and further building on. What we are trying to do is, in addition to supporting this existing platform and existing
clients that we have for that platform, we have started to build upon this platform to extend these functionalities and actually
transition it to a converged messaging platform that will support all network technologies like CDMA, GSM, Y Max, 4G and
LTE. In addition to revenue streams coming from the existing platform and the current clients, the goal is to make this platform
as a platform of choice for our customers, both existing as well as potential for LTE and 4G networking. And that we are doing
by enhancing the platform building premier features to attract new customers and also maintain current customer loyalty. So
as I said earlier we are and we remain very bullish about this business not just the messaging business but also our other IP
leverage projects that we have.
And finally a brief mention about our attrition rate. Our Q3 attrition on an annualized basis is about 12% which is significantly
higher than the attrition that we had in Q1 and Q2, but as I kept mentioning on my earlier calls, the attrition numbers that we
had for Q1 and Q2 which was less than 6% was really too good to last for too long. Having said that, it’s not that the attrition of
12% is bad, its still well below the industry average but we would have expected it to continue to be under 10%. With this, I
now hand over to Sanjeev Gulati and he will take you through the detailed financial numbers. Thank you.
Sanjeev Gulati
Thank you Upinder. Thank you for joining the call. Our Q3 highlights are as follows. The revenue for Q3 was 49.21 million
which is 222 INR crores. Y-on-Y USD increased about 43% and Rupee increased at about 38%. Quarter-on-quarter growth
sequential was about 4.3% in USD terms and 1.3% in INR terms. Operating profits was 8.2 million USD or about 37 crores in
INR. The Y-on-Y growth in USD terms was 24% and in Rupee terms it was 20%. The quarter-on-quarter growth stood at 4.7%
in USD terms and 1.7 in INR terms. The PAT for the quarter in USD terms is 5.99 million or 27.05 crores which is a Y-on-Y
growth of 36% in USD terms and 32% in Rupee terms. The quarter-on-quarter growth stood at 8.9% in Dollar terms and 5.6%
in Rupee terms. The EPS for the quarter was 6.15, a quarter-on-quarter growth of 5.8% and a year-on-year growth of 15.1%.
The EBITDA margins for the quarter stood at 16.67% compared to 16.59% for the previous quarter. By calculating EBITDA we
are excluding foreign exchange loss or gain and any other income. The PAT for the quarter was 12.17% compared to 11.65%
for the previous quarter. During the quarter we added three new clients. Our existing clients all remained. Our top client there
was a slight decrease by 4% in revenue, but our top 10 clients dropped marginally by 0.8%. Our top clients contributed 29% of
revenue for this quarter and the top 10, 91.5%. At the end of the quarter we had 47 active clients out of which on an LTM basis
we had 15 clients who are $1 million plus and three clients who were $20 million plus in revenue. Six clients had an LTM
revenue of more than $5 million on an LTM basis. We made an addition to our 1 million plus client by adding on two more and
grew from 13 to 15 in Quarter 3. The key revenue analysis, our telecom verticals contributed about 53% of our total revenue.
Energy & Utility is contributed about 5.94% in Quarter 3 which was increased from 0.09% in Quarter 2. Health care, the
contribution was 19.04%, R&D and IP leverage solutions was 17.9%. Infrastructure management is at 13.27% against 8.88%
for the previous quarter. Off shore revenue was 33.9% compared to 29.1% in the previous quarter. The global health count
increased to 4468 from 4178, as a result of a net addition of 290 employees plus contractors during the quarter. The attrition
for the quarter was 12.21%. Revenue per employees on blended terms $37. Our utilization was 82%, a small decrease of 2%
over the previous quarter. We have added another SEZ facility in Bangalore which will provide seating space for about 1200
people. The area of this new space is about 89,000 square feet. The cash equivalent at the end of the quarter stood at 103
crores compared to 127 crores in the previous quarter. The effective tax rate was 21%. Cash per share stood at Rs.23.42 per
share. So far as hedging is concerned we had range forward contacts at the end of the quarter of 41.7 million and as on date they are 51.25 million. Out of this about 34.3 million are the ones which will mature in the next four quarters. The net worth of
the company increased in INR terms to 368.46 crores against 374.67 crores of Quarter 2.
The DSO calculation which we explained in detail last time, I will do it again because it’s an issue which most analyst have
been raising in the past. The company does certain amount of business in the US which is pass through in nature that some of
these vendors need to route the business with one of our customers through us. These customers carry all the risk and
liabilities and this business is not core to our activities and it carries a very low margin. As a result of this, we recognize only
the margin from such business, as our revenue but not the consequent debtors and creditors but the consequent debtors and
creditors are reflected in the balance sheet. Consequently if one is to look at DSO as calculated from our financials, it will
appear to be high and is not a true reflection of efficiency of our people as it does not include the corresponding pass through
revenue. The DSOs calculated for this quarter is 146 days that is the DSO when calculated if one is to look at our financials.
However, if we include the pass through revenue and then calculate the DSO, the DSO is 95 days for the quarter. And if we
were to exclude both the revenue and debtors from a pass through, that is the DSO for a core business which is 102 days for
this quarter. Thank you. That is all what I have to say for the financials. We are happy to answer any question which you may
have.
Moderator
Thank you very much sir. Ladies and gentlemen we will now begin with our question and answer session. Our first question is
from the line of Chinmay from CRISIL. Please go ahead
Question and Answer Session
Urmil
This is Urmil here. Congrats on a good set of numbers. I wanted to understand the increase and the billing rates for the off
shore business on a Q-on-Q basis. What was that driven on the back of?
Upinder Zutshi
Good morning Urmil, this is Upinder. It is a combination of the different businesses in a particular quarter that will determine
what the average bill rate that we do in a quarter. So as a result of the shift in some of the low margin businesses coming out
of the system and contribution from higher margin businesses coming in, the effective average off shore rate goes up.
Urmil
Sure. And secondly, the decline in the IP leverage business, is it just a 3Q kind of phenomenon because when the decline had
been compensated by strong growth in IMS, apart from Q2, IP based business contribution has remained flattish. What has
that been driven on the back of?
Upinder Zutshi
Urmil as I mentioned in the last couple of quarters also, if you look at significant part of our IP business the revenue stream
has two components. One is what we call as the support fee which is fixed for a year and is fairly linear on a quarter-onquarter
basis. The other part of that revenue is coming from the license sales. On an annualized basis when we start the year
we are reasonably sure what that annual license fee revenue is going to be. However, on a quarter-on-quarter basis that
revenue could potentially vary. So in a particular quarter if there are more sales for the license, so the revenue will be up
whereas in another quarter the revenue potentially may come down. So the variation in the IP leverage businesses is
essentially coming from the drop in the license sales in Q3. Whereas if you look at the significant amount of growth that has
come in is largely coming from infrastructure management and some of the other clients that we acquired along with Motorola
last year, which is iYogi or to some extent APDRP, Western Union. So that is where the growth is coming from.
Urmil
Right. Mr. Sanjeev, needed a break up of the FX loss reported for the quarter?
Sanjeev Gulati
FX loss was as a result of a mark-to-market which is about 20 lakhs, otherwise if you see the FX loss or gain in the quarter is
almost flat. It is more or less flat.
Urmil
Okay. Thank you.
Moderator
Thank you. Our next question is from the line of Prem Chand from Axis Bank. Please go ahead.
Prem Chand
Congratulations on your good numbers. I wanted to know what is the inorganic growth plan that you are having at this point in
time.
Upinder Zutshi
Thank you. We have spoken previously also. Our strategy over the next 4 years is essentially have a significant growth and
focus on the two lines of businesses that we believe are a) our high opportunity businesses in the market place and also will
give us a much better differentiator in the market place than the classic application management. Now these two service lines
that we have been talking about and focusing on are the infrastructure management service as well as R&D and IP leverage.
That part of the strategy for growth over the next two three years has been a) to extend and continue to grow our existing
clients and acquire new clients and grow it organically. However, for each of the service lines depending on what the potential
need could be, we would be looking at specific inorganic opportunities. We did that last year with the messaging business and
going forward, a part of the goal at some stage we would like to supplement the infrastructure management business with an
acquisition that fits into our overall structure and strategy. Nothing specific has really started as of now but its not something
that is going to happen very imminently but definitely it is part of the strategy as we move forward. In addition to that, what we
are also doing is we continue to look at opportunities in the intellectual property leverage space where we can potentially
identify opportunities similar to lets say, Motorola, we did last year, which will not just enhance our revenue profile but
significantly extend our differentiator and leverage that we have in the market place specially in the telecom OEM space. So if
there any such opportunity that may come our way in the next few years or few quarters we would be definitely looking at such
opportunities.
Prem Chand
Which are the geographies where you are looking at expansion at this point of time?
Upinder Zutshi
Our major market is the US and would continue to be so because you know in our view the major potential is coming from that
country. However, having said that, and you can also see from the numbers of Q3 the focus is to extend other regions and
most specifically Europe and within Europe also it could be UK and northern region of Europe, as well as very specific
domestic opportunities that fall in our line of either the vertical strategy or our service strategy.
Prem Chand
Okay. That’s all from my side. Thank you.
Upinder Zutshi
Thank you sir.
Moderator
Thank you. Our next question is from the line of Nirav Dalal from Sharekhan. Please go ahead.
Nirav Dalal
Congratulations for the numbers. I had two questions. One is, the Motorola deal, how is the traction going on? Are you going
to hit the 20 million guidance that you have given at the start of the year?
Upinder Zutshi
As I said during my presentation I think that’s fairly in line, both from a revenue and contribution perspective and we would be
in line with what we initially guided for. If you look at that deal that was very significant and a very large and major deal and
more than the revenue and the contribution that is in line, what is also happened we are happy to share that is that transition
from Motorola to us was very seamless both in terms of infrastructure, people service levels. So that continued to be seamless
and, in fact, some of the comments that we have been hearing from the end client, is really been that the quality of service and
the service levels have dramatically and significantly improved than what it was in the preceding years. So it has turned out
quite well both from a financial perspective and as well as from an operational perspective. I just wanted to say what is also
given which is really an intangible is the significant opportunity that will allow us and enable us to operate and take advantage
of the messaging business worldwide, which in our view an area which is significantly going to expand both in terms of
subscriber base in the underdeveloped or developing countries as well as the usage of the messages all over the world
including the United States.
Nirav Dalal
Sir, how many people will be on Motorola, currently?
Upinder Zutshi
We currently have about 160 or so.
Nirav Dalal
Okay and the revenues will be curbed under ADM, right?
Upinder Zutshi
This revenue goes to R&D and IP leverage.
Nirav Dalal
Sir my next question was the IMS revenues have grown this quarter, reasons for that, client-specific, is it iYogi that is
contributing to those revenues?
Upinder Zutshi
It is a combination of iYogi and the infrastructure part of the tranche for the APDRP contract
Nirav Dalal
For the APDRP?
Upinder Zutshi
That is correct.
Nirav Dalal
Sir and last question on the APDRP, how is the traction going on there?
Upinder Zutshi
It is going on well, it is under control, overall programs schedule has slipped by a quarter.
Nirav Dalal
Okay, because the revenues for the quarter was about 13 to 14 Crores?
Upinder Zutshi
That is right, significant part of the revenue and contribution from that program is to come. So it has from a time line
perspective it is slipped by about a quarter. But outside that the major areas of activity, the major milestone that is part of that
program that we have to achieve this quarter is going on track and hopefully, we should be able to achieve that in this month.
Nirav Dalal
Right sir and how long is this deal fought, till when the system integration work go on?
Upinder Zutshi
There are two parts to this program. So, basically, one is the implementation and its acceptance and then next is the follow-up
support. And the major part obviously the revenue is in the first phase which is the implementation phase. Contractually, it was
supposed to be implemented in 18 months, which will end in October-November this year. So we expect that given the
slippage that will happen so far and most of the slippage really is coming from the client side, because there are certain
dependencies, so we expect this to be extended to and get over by the end of next financial year.
Nirav Dalal
So March 12?
Upinder Zutshi
Yes.
Nirav Dalal
Any further bidding in the APDRP space?
Upinder Zutshi
We are bidding there. We have been bidding there and we are bidding in other specific opportunities. We have not had too
much success after that and the major reason for that is that A) that opportunity has to be in line with what we're trying to do as
a long-term strategy and two, we have specific margin constraints, which stipulates our business deals that we can't really bid
for any opportunity that gives us less than a particular margin level. So because of that constraint some of the bids that we
participated, even though we have been technically qualified, we lose out on the price front because we don't want to make a
compromise on the margin levels.
Nirav Dalal
Right sir, thanks a lot.
Moderator
Thank you. Our next question is from the line of Amit Agarwal from SPA Securities. Please go ahead.
Amit Agarwal
Sir, good morning. Just wanted to know that incremental growth for this quarter has been around $2 million, 2.9 million of
which was contributed by energy and utilities. I guess mainly is APDRP project.
Upinder Zutshi
Right.
Amit Agarwal
And it was wiped out by the telecom and media degrowth of around $2.8 million, what was the reason the behind this slow
growth in telecom?
Upinder Zutshi
If you look at the overall growth from Q3 to Q2, the revenue drivers have been largely iYogi, APDRP and some of the newer
clients that we acquired. In terms of degrowth, some of the telecom clients there has been de-growth and also the degrowth
has been, in the T&M business, if you look at the nature of the month, December, it is a less productive month with holidays.
So the revenue typically for that month which is on a time and material basis comes down. So that has pulled the revenue
down into other three clients that I mentioned has hold it up, Motorola is more or less has stayed the same between Q2 and
Q3.
Amit Agarwal
Okay, one more question, sir. With the Motorola and Nokia Siemens network being handed over some of the platforms and a
pending case on those same lines are we affected in anyways?
Upinder Zutshi
Based on information and what we have the contract as well as with the working relationship we are completely protected both
contractual as well as from an operational perspective. The platform that we are supporting with the end clients is a platform of
choice and the end clients are committed to those platforms. So to answer your question both from a contractual perspective
as well as from an operational perspective we are completely protected. In fact, on the flip side, we are looking at it as a very
big opportunity for us. Because now we are partnering with, on one side, with the Motorola and there are certain areas of
engagements that we are talking to them for promoting this product. And with this acquisition if and when it goes through
which will also expose us to a much larger markets base that comes with Nokia Siemens. So the short answer to your
question is the current revenue stream that we talked about over the next 4 to 5 years is completely protected both
contractually as well as operationally and any change that is happening possibly could add to and help us in building
incremental revenue streams of that platform.
Amit Agarwal
Okay, thanks a lot sir, that was helpful.
Moderator
Thank you. Our next question is from the line of Nirav Dalal from ShareKhan. Please go ahead.
Nirav Dalal
Sir what would be your tax rates for ‘12 and ‘13?
Upinder Zutshi
We have guided for this year about 20% to 21% annualized tax rate. So for this year we are fairly in line with that. Next year
also, we have guided around that figure.
Nirav Dalal
Okay, what is the SEZ contribution currently and what are you expecting it to be going forward for FY ‘12?
Upinder Zutshi
From a tax perspective, if you look at our overall business structure, there are businesses that we do within the country, say
like US, which is a taxable entity and there are businesses that we do in India and we have different entities with different tax
status. Our main company which is there is Infinite Computers India with the STPI and which has been out of the tax window
for the last two years now. We have an STPI unit that is doing work for Fujitsu, which is enjoying the STPI tax benefit and
hopefully it enjoys it only till the end of this year, because the STPI is gone. In addition to that till now we have two SEZ units,
one in Gurgaon and the other one in Chennai. The most of the new business or the new client that we acquire, the
implementation, execution happens through the STPI. What we are also now in the process of building out right now and
hopefully, that SEZ facility will be up and now running by the end of Feb is a 1200 seater facility in Bangalore. So from an
overall taxation structure between various entities that we have, we are looking at to be same as we have it for this year. As it
is on a high tax burdens, we did not have a business where it is affecting our tax rate for 12% or 14%.
Nirav Dalal
Right sir, thanks a lot.
Upinder Zutshi
Thank you.
Moderator
Thank you. To ask a question please enter * followed by 1. Our next question is from the line of Chinmay Sapre from CRISIL.
Please go ahead.
Chinmay Sapre
Hi, sir, just wanted to get a sense and your view on the business environment from two points wherein first would be your new
client acquisition and also mining of your existing accounts?
Upinder Zutshi
Right, if you break it into two, if you look at the existing accounts as we all know, it provides a very large opportunity because
for the sheer size of the budgets that we're talking about for each of those clients for us to go and increase our share of the
overall spent. What we have been seeing over the last year or four quarters is two aspects that the budget squeeze that was
there and that results into the pressure of on the vendors, companies like ourselves has gone away. Second part that we are
seeing is there are multiple now at least discussions going on, and opportunities going on after the new budgets have been put
in place. So the level of traction and the health of the pipeline is definitely much better than what it was, say, 12 months back,
both for opportunities within our existing client base and also the pipeline of new clients. So that is a very encouraging sign.
The mood is definitely different than what it was, year or two years back. And the whole key is how many such opportunities
both within existing clients and the new clients get converted into real business over the next Quarter or two will really, we
achieve for our growth plan for year after next.
Chinmay Sapre
Sir, when do you see any possible uptake in the pricing, would it be on the later part of FY 12?
Upinder Zutshi
Good sign is that there is no pressure on the prices. People are not asking us to give the cut prices or give us more for the
same price. Now, the way our strategy is really to increase our margin is to do more and more of business that is either on a
fixed grade or SoW basis wherein really the bill rate goes out of equation as well as revenue share basis. So those are the
significant margin drivers for us. And as a percentage of overall these two businesses go up automatically, our average margin
should expand. Now in terms of specific bill rates, whether the increase going to be, so typically, those discussions happen at
the start of their financial year, in certain cases, which happens in January. So that is the timeframe that we possibly can be
looking at increase of bill rate from the existing clients. But what we're doing is wherever we are bidding for the new projects,
the average pricing that in our views for those rates is definitely higher than what we used to do for last year or period before
that.
Chinmay Sapre
Okay, sure, sir secondly, while we internally had also factored in a higher attrition rates over a medium-term, do you see a
pressure on employee cost?
Upinder Zutshi
From an employee cost of view, if you look at the business, the major component of the costs are really to the employee cost,
both in terms of the salary, the big end, and the attrition. Now what we have been doing over the past three years and having
including our business plan is for example, this year, we gave a 15% salary hike, last year also we gave about 13% to 14%
salary hike. So next year going forward, obviously, with the market turning around and there is more pressure so we will be
looking at similar increase in the salary cost. And from an attrition perspective, obviously, even though I may wish that it is less
than 10% but that is not really a reality. In reality, attrition is going to be high. Now, that is an additional cost into the operating
environment. If you have an employee cost that is going up every year and you have an attrition cost, that is a factor. Now,
how we take care of that and make sure that the margins don't get impacted are on two accounts; a) one is to transition the
business and continue to do more high margin businesses either in a fixed rate or revenue share or on offshore perspective.
Second thing is to change the cost structure of the employees, which is essentially to be done by changing the employee mix.
Typically, if you look at our past, we have been hiring people, all lateral hires with an average industry experience of about two
years to three years. So what we're doing is in terms of cost optimization is to change that employee mix and more specifically,
the areas where there are SoW or fixed grade basis and bring it down and start using employees either freshers or with less
experience. So that will help us compensate for the salary increase that we may have to give, that is two. And the third part
what we do is from a margin conservation and expansion perspective, as we keep growing big so you improve your
operational efficiencies and that is an area where we are very significantly and specifically looking at now. We look at areas where there can be cost structure that can be optimized and pursue that very aggressively. The other advantage that we have
is as we keep continue to go bigger so our fixed SG&A gets better leveraged. So as a percentage, it should come down as we
move forward. So those are some of the aspects both from revenue and growth perspective as well as from cost structure that
we are put in place and which will help us, obsess incremental salary cost and the inflationary inputs into the system and help
us to maintain the same margin level and in fact as a goal expanded as we go over the next three years.
Chinmay Sapre
Right sir, thanks for taking my question and all the best for the 4th Quarter and next year.
Upinder Zutshi
Thank you very much.
Moderator
Thank you. Our next question is from the line of Dipesh Mehta from SBI Cap Securities. Please go ahead
Dipesh Mehta
Congrats on good numbers. Sir I just want to understand the margin movements because if I see your fixed bid proportion
price increase by 5%, billing is also high, but if I see margin, it is almost flattish kind of. So what would be the margins are?
Upinder Zutshi
You're absolutely right. Those are the areas that have helped us in expanding the margin. Now, the areas that have keeping it
at the same level are, a) as I said the overall gross margin in December is traditionally lower because of the less number of
working days available. Two, in certain businesses like iYogi, there is a significant ramp up, those people have to go to a three
month training. So lot of employees both in Q2 as well is in Q3, more specific Q3, had been not billable. So the costs are into
the system but the revenue is not there in that quarter and the revenue will start growing in Q4.
Dipesh Mehta
These are the two main factors which impacted margins?
Upinder Zutshi
Yes and then the contribution obviously if you look at our businesses, there are different lines of businesses; we have the
energy, we have the government business, we have the time and material business, we have fixed grade, we have revenue
share. Each of those business lines have different margin levels. As an example, which is the government business, if it
increases as a percentage yet contribute that, so that will also to some extent decrease the margin because it is that business
at a margin that is lower than the company average. So the key to margin conservation and expansion is to make sure that the
mix of the revenue is such that overall it expands and look at the cost structure to optimize it better so that we are able to
maintain the margins.
Dipesh Mehta
You said about one specific plan, we have ramp up and revenues right now so you expect that to normalize in next Quarter?
Upinder Zutshi
The revenue has started coming in from Q3 itself.
Dipesh Mehta
We expect if the other players doing wherever improvement in margin?
Upinder Zutshi
We should expect that because the revenue from that client should be higher in Q4 than it was in Q3.
Dipesh Mehta
Okay and about guidance if I see our nine-month performance, revenue implies Q4 will be 4% to 14% and profit almost flattish
kind of thing at lower end. So any revision or anything of that sir?
Upinder Zutshi
As of now what we are reasonably sure that we should be able to achieve and be closer to the higher end of the margin on
guidance framework. So we should be able to achieve that and I don't think we are in a position to review, that is, we will be
staying with the guidance that we have given at the start of the year.
Dipesh Mehta
Okay. Thank you, sir.
Upinder Zutshi
Thank you very much.
Manik Taneja
Hi Upinder, just wanted to understand from you the kind of efforts you are making to reduce your client concentration. I think
that would be really helpful.
Upinder Zutshi
As I said at the start of the call and in response to one of the questions, the whole effort is to a) on one front is to distribute the
revenue across the top 10 clients, so that no one client is lopsided or very high. So that effort is already on and that is going on
and as we are adding new larger clients into our client base so automatically that starts to happen. And second part is what we
are doing is obviously, like most companies I guess aggressively look at start acquiring the new clients. Now, typically, in our
business model, as we discussed earlier also, the big focus is to acquire into large corporations. So there those kind of have
much longer sales cycles but the advantage is that once you acquire that client you have visibility over the long-term, typically,
multimillion dollar clients and multiyear engagements. So effort is definitely on, but as a strategy that I mentioned earlier also,
and as a result of that strategy the top 10 or top 15 clients so far will continue to be a significant part of our revenue. Because
of the nature of the clients that we are engaging with, because we have large clients, large budgets and we have to also make
an effort to have a reasonable share of that budget.
Manik Taneja
Sir, thank you.
Upinder Zutshi
Thank you very much.
Moderator
Thank you. As there are no further questions I would like to hand the floor back to Mr. Manik Taneja for closing comments.
Manik Taneja
Hi, everyone, on behalf of Emkay, I would once again like to thank you all for joining this call. Have a great day. Thank you.
Upinder Zutshi
Thank you very much. Have a great day. Bye-bye.
Moderator
Thank you. On behalf of Emkay Global Financial Services that concludes this conference call. Thank you for joining us and
you may now disconnect your lines.
Note: 1.This document has been edited to improve readability.
2. Blanks in this transcript represent inaudible or incomprehensible words.
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