Birlasoft Ltd

NSE:BSOFT

Earnings Call Analysis

Robust Quarter, Positive Outlook & Dividend Payout

This quarter showcased robust financial health with a 15.8% EBITDA margin, rising 50 basis points from Q1 and with the PAT margin growing to 11.1%. Impressively, the company achieved these margins despite salary increases and continuous investments geared towards future growth. They reported a notable collection above $150 million, leading to a strong operating cash flow at roughly 93% of EBITDA. Consequently, cash and bank balances climbed by $13.5 million, totaling $173.5 million. Reflecting their profitability and commitment to shareholders, the Board has proposed an interim dividend of INR 2.50 per share, with a record date set for November 8, 2023. Long-term projections aim to maintain EBITDA margins within 15.5% to 16.5%, to 17%, whilst pursuing more strategic investments.

A Quarter of Substantial Growth and Operational Efficiency

This quarter's results bring a tale of robust growth across the board, defying the macroeconomic headwinds and illustrating the company's resilience. Revenue saw a healthy increase of 3.1% quarter-over-quarter in constant currency terms, reaching $159.1 million. Excluding specific one-off fees from the previous quarter, this growth rate is even more impressive at 4.4%. The company's strategy of delving deeper into existing accounts and successfully ramping up new deals is yielding promising results, with the year-on-year revenue growth in rupee terms standing at an impressive 10%, or 13% after adjusting for certain disengagements.

Margin Improvement Amidst Investment

Even more noteworthy is the expansion of EBITDA margins to 15.8%, up 50 basis points from the previous quarter, demonstrating the company's ability to couple growth with profitability. This margin improvement was achieved despite salary increases and ongoing business investments, underpinning the company's operational efficiency. The commitment to maintaining margins within a narrow band of 15.5% to 16.5% balances growth expectations with the reality of necessary investments in domains and capabilities that promise further growth.

Deal Momentum and Pipeline

The quarter has witnessed a reversal in deal momentum from the previous muted first quarter, with total contract value (TCV) signings amounting to $271 million. This includes one notably large deal exceeding $100 million from a Fortune 500 company, underpinning the company's ability to craft and close complex, large-scale deals and reinforce long-term, data-driven customer relationships. The nature of the deal covers a five-year period with opportunities for extension and incremental business, reflecting the customer's confidence in the company's offerings in maintenance, modernization, and cloud migration. Such marquee deals should begin contributing to revenue growth starting from April onward.

Investing in Innovations and Emerging Technologies

With an eye on the future, the company has not shied away from embracive integrative AI and other emerging technologies. Establishing Centers of Excellence and investing in training for all 12,500 colleagues reflects a commitment to innovation, ensuring long-term competitive edge despite potential short-term muted performance due to macroeconomic conditions.

Dividend Declaration and Shareholder Value

The Board's decision to recommend an interim dividend of INR 2.50 per share signals confidence and a commitment to shareholder value, alongside prudent capital allocation for sustainable business expansions.

Prudent Acquisition Strategy

Future inorganic growth opportunities are on the horizon, but the company's leadership emphasizes the importance of demonstrating several quarters of consistent performance and strengthening the balance sheet before embarking on acquisitions. When the time comes, the focus will be on acquiring capabilities in high-growth domains or pivotal service lines like generative AI or engineering, and not merely on revenue aggregation.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Birlasoft Q2 FY '24 Earnings Conference Call.

[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhinandan Singh, Head, Global Investor Relations, Birlasoft Limited. Thank you, and over to you, Mr. Singh.

[Abhinandan Singh, executive]

Thank you, and welcome, folks. By now, you would have received or seen our results. Those are also available on our website, www.birlasoft.com. Joining me on this call today will be our CEO and MD, Mr. Angan Guha; and our CFO, Ms. Kamini Shah. We will begin the call today with opening remarks from both Angan and Kamini.

But before I hand over the floor to Angan, a quick reminder that anything that we say on this call on the company's outlook for the future could be a forward-looking statement. And therefore, that must be heard or read in conjunction with the disclaimer that appears in our Q2 FY '24 investor update, which has already been sent to you and is also uploaded on our website as well as filed with the exchanges.

With that, let me hand over the floor now to Mr. Angan Guha, our CEO and MD. Over to you, Angan.

[Angan Guha, executive]

Thanks, Abhi. So good evening and good morning to everyone, wherever you are, and thank you for joining us today as we share the perspective on our Q2 FY '24 performance.

But before I delve into our quarterly results, I would like to welcome our new Chief Operating Officer, Selvakumaran Mannappan to our leadership team. You would have seen an announcement on this earlier this month. Selva is a seasoned leader with over 29 years of experience in the IT services business. He brings with him a wealth of expertise and a global perspective to our organization. Thanks to the various pivotal roles that he has held over the years, including as the COO of several large units, while spearheading some numerous strategic initiatives at a Tier 1 tech services firm.

You will recall that I had earlier outlined the 2 dimensions along which we are transforming our company to become sharply focused on select verticals and service lines and to culturally become more nimble and execution orientated. Key to this has been a creation of a refreshed and reimposed leadership team at Birlasoft, most of which are already completed. And when we last spoke, there were a couple of open positions that we spoke about with COO being one of them. With Selva coming on board, we now have a unified delivery organization reporting into him closely aligned to the geography organization.

As the Chief Operating Officer of our firm, Selva will be at the helm of refining our operational efficiency, driving transformation initiatives, to enhance customer centricity and capability building for sustainable growth. He will oversee our global delivery and operations, our service lines, business excellence, along with our CTO and the CISO function. And this will ensure that Birlasoft remains at the forefront of IT services.

Now let me quickly come to our Q2 results. Coming to our Q2 results, which I trust all of you have seen, we are very pleased to report a very strong financial and operating performance, delivering robust growth on all 3 fronts: Revenue, margins and deal wins. Our revenue for the quarter has grown by 3.1% Q-o-Q in constant currency and 3% Q-o-Q on reported currency. Our reported currency figures are $158.3 million, whereas our constant currency figures are $159.1 million. This was possible because of great account mining and deal ramp-ups. If you take the $2 million disengagement services fee that we received from Invacare in Q1 out of the picture, then our growth in Q2 has been even stronger at 4.4% Q-o-Q.

In rupee terms, our revenue for the quarter increased to INR 1,399 crores, a growth of 10% year-on-year. Again, if you were to take Invacare out of the equation, this will represent a growth of 13% year-on-year. We also recorded an expansion in our EBITDA margins, and this is despite implementing organization-wide compensation hike and promotion that was effective 1st of September.

Our EBITDA margins expanded by 50 basis points Q-o-Q to 15.8% in Q2. We have also seen our cash flows and cash balances improve. These sustained improvements are an outcome of both of our operating leverage as well as our push to enhance our operational efficiencies. Kamini in her section will take you through a lot more details around those.

Now our performance comes on the back of a very strong first quarter, where we had recorded a 3.1% sequential growth in dollar terms and also a 170 basis point increase in our EBITDA margins. On the deal front, you would remember that our Q1 was a little muted. In Q2, we have reversed that trend. We have signed TCV deals worth $271 million, and this included one very large deal, which is a TCV deal of upwards of $100 million from a Fortune 500 company in North America.

As part of this partnership, the customer and Birlasoft will establish a strong foundation towards application maintenance, modernization and migration to cloud. Additionally, we will build capabilities around customer experience, enterprise data governance and management in our data and analytics practice. This contract is for a period of 5 years and includes renewal plus incremental business. And I'm sure you guess that,, that this is from an existing client. The milestone -- this is a milestone deal for us, which reflects our unwavering commitment to shaping a brighter data-driven future along with our customers.

Our ability to successfully go after and execute such large engagements also demonstrates our ability to create and close complex deals. But there is one more point I would like to draw your attention on. This deal will have a transition period of almost 6 months, and we will start seeing the revenue uptick only from April onwards.

On the capability front, we continue to scale up our emerging tech skills following the generative AI Centre of Excellence, which we established in the last quarter along with Microsoft. Our initial training included 500 of our colleagues, but as we go forward, we have now extended to cover all of our 12,500 colleagues to be trained on generative AI. This is a big investment from our perspective. We firmly believe in making these investments to reinforce and enhance our long-term competitive edge.

In terms of looking forward, we have had some good deals. We also have a very, very strong pipeline. But as you are aware, the macro environment is still very unfavorable. And the high interest rates that persist in the mature geographies and the economic deceleration that is happening in the West will have some impact on our business. The current quarter, Q3, as we all know, is a short quarter with a lot of furloughs. So I can say that the quarter, the Q3 quarter, will be a muted quarter for us. But obviously, we cannot give guidance. And like I've always said that we will focus on in-quarter execution to land where we have to land.

Our approach has been to stick and leverage to our strength and actively dive proactive deals. We have seen this play out in all areas where we enjoy strong competency, whether it's cloud, whether it's infra, digital and even the ERP business, which is now spanning out and starting to see growth. Our strategy of retaining and mining existing accounts with both cross-selling and upselling is delivering solid and positive results. And this is visible in our deal flows.

Our TCV in the past 9 months, which is 3 quarters, is 21% higher than the total TCV during preceding 9 months. Our [ effort ] to exit the financial year with a higher total TCV than last year and that should set us up for a good growth year even for next year. We intend to remain very focused on execution as we go forward.

With this, I hand it over to Kamini, our CFO. Kamini?

[Kamini Shah, executive]

Yes. Thank you, Angan. A very good day to all of you. I hope all of you are doing well, and thank you for joining our call. Let me take you through the financial highlights for the second quarter of the current financial year.

We have reported revenues of INR 158.3 million in Q2 '24. This represents a growth of 3% quarter-on-quarter in dollar terms. If you had to exclude the impact of Invacare, the inflow of $2 million that we received in Q1, our revenues would have grown at about 4.4%. On a constant currency basis, the comparative numbers are 3.1% quarter-on-quarter and ex of Invacare, 4.5%. This strong growth has been driven by a combination of sustained account mining and ramp-up in the deals that are already secured. We have seen growth across all our key accounts with our top accounts -- top 20 accounts growing higher than the company average.

Among the verticals, our growth during Q2 has been led by BFSI and Manufacturing that have grown by 5.3% and 4.2% quarter-on-quarter, respectively. From a service line standpoint, while the growth has been largely driven by digital and cloud, the ERP and infrastructure service line did not have any inflow from Invacare in quarter Q2. But adjusting for that, these 2 have also grown quarter-on-quarter.

Moving on to the margin performance. Our EBITDA for the quarter stood at $25 million versus $23.5 million in Q1. This implies a 15.8% EBITDA margin, which is an expansion of 50 basis points quarter-on-quarter. This margin performance has been achieved, even after implementing an organization-wide compensation and promotion increase, effective September 1, absence of the onetime Invacare disengagement fee flow and continuing to make the investments, which are necessary to drive growth in our business. These headwinds have been offset by sustained execution of multiple operational efficiencies that we have been driving, enhancing our utilization levels and optimizing our SG&A and discretionary spend. As a result, our PAT for the quarter increased to $17.5 million resulting in a PAT margin of 11.1%. Our effective rate for -- the tax rate for the year is expected to be at about 25%.

Let me briefly touch upon some of the key balance sheet items. We have seen a sequential improvement in our quarterly collection during Q2, resulting in better DSO days, which now stands at 52 days. I'm very pleased to share that this is the fourth time in 6 quarters that we have recorded a quarterly collection above the $150 million mark and our operating cash flow to EBITDA is at about 93%. As a result, our cash and bank balances at the end of the quarter have increased by $13.5 million to $173.5 million both compared to the first quarter.

As you would have noticed, the Board has recommended an interim dividend of INR 2.50 per share. This reflects our intention to reward shareholders for their ownership, while also keeping in mind our capital allocation requirement. The record date for this dividend payout is November 8, 2023.

In conclusion, I would like to [ reiterate ] that our performance during the quarter reflects our ability to execute with financial rigor as we navigate our ways through the macro headwinds that our industry has been facing. As I mentioned earlier, we have been making investments in our business, and we will continue to do so, which is required to create and scale up the capability that is required for long-term sustainable growth. We will be focused to win deals, generate cash flows, and we are also seeing moderating attrition levels. All of this gives us the confidence to deliver a healthy performance for the full financial year.

Thank you very much. Back to you, Abhi.

[Abhinandan Singh, executive]

Thank you, Angan and Kamini. Operator, we can open the floor for questions, please.

[Operator]

[Operator Instructions] The first question is from the line of Apurva Prasad from HDFC Securities.

[Apurva Prasad, analyst]

Congratulations on the strong execution in the current environment. Angan, my first question is on the $100 million large deal. If you could throw some light on aspects that led to this outcome, perhaps in terms of deal sourcing, the competencies that supported this win, nature of competition and the margin profile.

[Angan Guha, executive]

Yes. So Apurva, first of all, thanks for attending the call, and thanks for asking the question. So look, I mean, the large deal, like I said, is in one of our existing clients. So we know the client well, we worked with the client for many years. So we understand the client's landscape significantly well. So client has trusted our past execution capability and has given us an opportunity to do a large piece of work with the client. Now this has a combination of existing as well as net new. And I can only say that net new is significant. I can't give you precise numbers because as you can imagine, I'm under NDA from the client. And as a result, we can't talk about the client's name or which industry it belongs to. But suffice to say that it is a client we know of.

Now I feel the reasons, Apurva, why we won the deal is 3. One, we've executed flawlessly with the client over the last year or so. We were able to kind of gain the customers' confidence when it came to the application maintenance and the modernization bit of it and our ability to move the application on the cloud played a pivotal role. So from a combination of great execution in the past, great relationships that we have built with the client, and our ability to display some of the great capability both around the core modernization and the cloud migration helped us win the deal.

Now we displaced an existing vendor and the vendor is a Tier 1 vendor. Obviously, I can't give any more details around this. Now we don't talk about individual margin profiles, but suffice to say, the current deal that we picked up was higher than the current account margin.

[Apurva Prasad, analyst]

My second question is how should we look at the trade-off between growth in margins. And I'm asking this in terms of the room to expand margins further from here as you attempt higher end of industry growth, this is more medium term.

[Angan Guha, executive]

Yes. So Apurva, you would recollect that I've always maintained that we will exit this year 4Q at 16% EBITDA. Our 3Q will be muted, and I will admit 3Q is a shorter quarter. It has got furloughs and it's an industry phenomena. So 3Q will be muted for us, as it will be for the industry. But what we have committed as a management team is to exit 4Q with a 16% EBITDA. Now in the medium to long term, I would like to keep the company in that range of 15.5% to 16.5% EBITDA range as we invest for future growth. See, we are in still in an investment phase. We are going to hire more leadership. We are going to sharpen our domain. We are going to create newer and newer service line. And internally, we are also investing in our own tech transformation, which is investing in technologies and tech stack that we use to run our company.

And like I keep saying, we are here to build a long-term sustainable profitable business and not necessarily a quarter-on-quarter business. So my sense is if I can get to an industry level growth and keep the margin at the narrow band of 15.5% to 16.5% or maybe even to the 17% range yields, I think that will be a good solid execution on our part.

[Apurva Prasad, analyst]

Great. Congratulations once again, just one final bookkeeping one. On the other expenses side, what led to the 10% sequential increase?

[Angan Guha, executive]

So, Apurva, we will get back to you. I don't think we have a ready answer for it right now. We will come back to you.

[Operator]

Next question is from Krish from Nomura.

[Krish Beriwal, analyst]

Congratulations on a great set of numbers. My first question is on our new [ Unifi ] delivery structure...

[Operator]

Krish, sorry, can you please speak through the handset? Your voice is echoing.

[Krish Beriwal, analyst]

Is it better now?

[Operator]

Thank you.

[Krish Beriwal, analyst]

So my first question is on our new [ Unifi ] delivery structure. When should we expect the benefit from it to come in? And what kind of margin tailwind can we expect from this initiative in the medium term?

[Angan Guha, executive]

Yes. So Krish, like I said, we just have hired Selva as our Chief Operating Officer. But our Unifi delivery structure has been in practice right from starting 1st April, as I have said in the past. So some of the benefits have already accrued, which is why if you recollect, Krish, last year, our margins were at 14% EBITDA. And now we have almost touched 15.8% EBITDA even after giving salary hikes starting 1st September. So the benefits of Unifi delivery organization, some of the kind of work that we execute for our customers, are already in play.

As I've said, in the long run, we would want to report margins anywhere between 15.5% to 16.5% to 17% range, the EBITDA margins. Now we may make more money on that, but we will invest in our business going forward because we want to build a long-term sustainable business. So our investment profile will only go up. And while our investment goes up, we want to keep the margins in that narrow band, which I spoke about, Krish.

[Krish Beriwal, analyst]

Understood. That's very helpful. So Angan, we have now had 3 quarters of growth with consistent margin expansion now. Do you think it is the right time to maybe start looking for inorganic opportunities? And if yes, then what kind of capability vertical or maybe geography that you have in your mind where we can look to improve our positioning?

[Angan Guha, executive]

So Krish, there are a couple of things I would like to mention. So you're right, we've had 3 quarters of consistent performance, but we want to deliver consistency over a long period of time. So we are not celebrating victory just yet. So that's point number one. Point number two, as I've said earlier, and I want to mention that again, Q3 will be muted performance. Now I can't obviously say what exact growth we will deliver, hard to say. And of course, from an execution perspective, the management team will do everything to deliver strong execution-led performance, but it will be a muted performance. Just to bring that out on the table.

So if you were to take Q3 out of the picture, Q4 we should be back on good execution-led performance again. Our belief in the company is that we need to at least deliver 4, 5, 6 quarters of good performance, continue to generate positive cash flow as we've been generating, strengthen our balance sheet before we look for an acquisition. We will definitely get an acquisition done, but I can't tell you the time frame. And quite frankly, we've not even started looking at it because we are still building the organization, hiring leadership, settling down leadership, but my commitment to all of you is that we will focus on in-quarter execution even going forward. And then once we feel comfortable, then we will look at an acquisition.

Now acquisition, whenever we decide to do it, we will do it in a couple of areas. We will do it in a domain that we are comfortable in and a domain that we would see tremendous growth. We will do it in a technology or a service line that we feel can give us tremendous pivot. It could be a GenAI service line. It could be an engineering service line. And we will do an acquisition that helps us build capability. We will never acquire a company for revenue aggregation or revenue growth, but that has to give us solid capability around the 2 domains or the 2 service lines that I spoke about.

[Operator]

Next question is from the line of Dipesh Mehta from Emkay Global.

[Dipesh Mehta, analyst]

Congrats on a strong execution. A couple of questions. First, about the large deal. I think you've covered a multiple -- a lot of detail. But I just want to understand number of services or overall offerings are covered under it. Just trying to understand in terms of cross service index, what progress we are making, because this is a fairly large deal. So if you can provide some sense how we are able to cross-sell a number of services in our bucket. Second question is about utilization. Now we are already above 86 percentage this quarter. So how one should look utilization in over medium term, whether we are comfortable at this or you think further scope for expansion? And last question is I just want to get your sense considering overall macro uncertainty and different commentary which we heard from different management. So if you can provide some sense about vertical outlook for major verticals where we operate and geographically, Europe seems to be weak, but if you can provide some sense.

[Angan Guha, executive]

Yes. So Dipesh, a couple of things. First of all, the large deal that we have won from an existing client, like I've said. And like I talked about, we've been able to cross-sell a lot of our services. So this is application maintenance, which is a big service line for us. We are also participating in our clients' modernization effort. We are helping the client migrate to the cloud. So in many ways, we are touching all of our service lines, including data and advanced analytics. This is a combination of a multiservice line. So that shows our strength and our customers' confidence in us to trust us with work, which is cross service line.

In terms of our utilization, I think we are on the top end of the industry, and improving from here on is going to be impossible quite frankly. We would be happy to keep our utilization in a narrow band of 84% to 86%. And I think that is the right number to go with. You must also remember, Dipesh, we are continuing to invest, investing in talent for future growth, including training our people on AI, identifying leaders and resources and associates from the market to enable to funnel our future growth. So delivering better utilization I think will stutter our long-term growth, and we would like to keep it in that narrow band.

What was your third question? I couldn't get the third question. Can you repeat that, please?

[Dipesh Mehta, analyst]

No. Sir, just about the major vertical, if you can provide some demand trends and geographically, U.S., Europe...

[Angan Guha, executive]

Yes. Yes. Yes. Thank you, Dipesh. So look, we are seeing tremendous traction in BFSI. And like Kamini also called out, even in this quarter, the 2 verticals that led growth for us was Manufacturing and BFSI. Healthcare has been a little soft, but I'm very confident that healthcare will sooner or later bounce back. Energy utilities is our soft sector, but it's an industry trend. If you look at the industry in general, the [ AMU ] sector has been soft and has been soft for us. I can't really comment when that business will turn around, but that business is definitely a focus business for us.

From a geography perspective, Americas continue to deliver strong growth to the tune of the fact that Americas are now touching 85% to 86% of our overall revenues. But we are focused on the Europe market, as you know, and I've said this before, we are hiring a leader to lead our rest of the world business, not because of anything else because we want to diversify and grow the other geographies as well as America continues to deliver strong growth for us.

[Dipesh Mehta, analyst]

If I can squeeze one question. I just want to -- because I think you made 2, 3 comments about utilization and moderation, [indiscernible] 2 months incremental intake and then furloughs related Q3 mutedness. So whether these factors put together [ weigh ] on Q3 margin trajectory?

[Angan Guha, executive]

Yes. So I can't give exact guidance, Dipesh. As you know, we don't give guidance. I can only say that Q3 will be muted, but equally, the management team's job is to drive good execution within the muted quarter.

[Operator]

The next question is from the line of Shradha from Asian Market Securities.

[Shradha Agrawal, analyst]

Congratulations on a great quarter. Couple of questions here, Angan. First is we've seen very solid growth in our top 6 to 10 client's bucket. So was it led by some particular account in that bucket? Or was it some widespread growth that we've seen in that [indiscernible] band?

[Angan Guha, executive]

Yes. So Shradha, first of all, thank you for asking that question. So look, in our top 10 accounts, we see widespread growth. But what is even more heartening is that our top 20 accounts have also grown ahead of the company average, which is obviously very heartening because that tells us that our mining strategy of our top 20 accounts is working well. So there's no one particular account that is growing. I think universally, all our top 10 accounts have shown reasonable growth. In fact, all our top 20 accounts have shown reasonable growth as well, Shradha.

[Shradha Agrawal, analyst]

Right. And in terms of margins, if I look at the segmental margins, margins in life sciences have seen a sharp decline on a Q-on-Q basis. So barring the Invacare adjustment, is there anything else to read into it?

[Angan Guha, executive]

No, there is nothing else to read into it. It is basically the Invacare adjustment, right? But traditionally, if you look at our margin profile, our traditional margin from the healthcare business has been a little soft. But we are investing in the healthcare business. This is one of the called out verticals that we want to invest in going forward. We are doing well in manufacturing. BFSI, we are very small, we are still growing, and we want to invest in it, and we want to invest in healthcare. So it is because of the investment profile, you are seeing a little bit of a downtick on the margins, but I will not be too concerned about it because we are in the investment phase. And as you see the business turn around and get back to growth, you will see the margin also improving going forward.

[Shradha Agrawal, analyst]

Right. And just last question with the appointment of Mr. Selvakumaran, is our leadership team in place broadly? Or are we looking at more senior leadership hiring over the next few quarters?

[Angan Guha, executive]

Yes. So Shradha, like I said, we are very focused on the rest of the world geography as well. So we will hire a CEO for the rest of the world, that is pending. We made an offer and hopefully, the leader will join us towards the end of November, starting December. And when the leader joins, we will make an announcement. The only other couple of roles that we will hire, not at the CXO level, though, will be a Strategy Officer and a Growth Officer. The Growth Officer, like I have said, will be focused on partnerships, will be focused on marketing, will be focused on analyst relationship, and these are technology analysts, not financial analysts. And the strategy office will essentially help the CXOs to drive our long-term 3- to 5-year strategy. But outside of that, we have filled all the roles, Shradha.

[Shradha Agrawal, analyst]

And sir, just one last question, if I can. What are the trends that we are seeing in the ERP space? I understand that it was a flat quarter because of no revenues from Invacare, but otherwise, what trends are we seeing because last quarter we were sounding quite positive on the service line.

[Angan Guha, executive]

Yes. No, we are still positive, Shradha. So if you really take Invacare out of the equation, ERP has also grown, and I think they have grown at least about 2%, 2.5% quarter-on-quarter outside of Invacare. We are very bullish on ERP. And like I said, we have a leader that we have gotten for the ERP business. He's joined us about 6 months ago. He is rebuilding his organization. I'm bullish on 2 reasons. One is the entire SAP S4/HANA movement will happen by 2027, and that represents an enormous opportunity for a company like ourselves. Our capability around JDE, there are very few companies in the world who are still in the JDE business, we are one of them, and that is a big opportunity for us as well.

And the last opportunity that I spoke about in the last earnings call is the mid-tier manufacturing segment in North America. So these are our target markets. We strongly believe that over the next few quarters, we will see growth coming back in ERP. But just to mention, Shradha, outside of Invacare, the ERP business has grown this quarter. So we have bottomed out.

[Operator]

Next question is from the line of Manik Taneja from Axis Capital.

[Manik Taneja, analyst]

I hope I'm audible?

[Angan Guha, executive]

Yes, Manik. You're audible. Please go ahead.

[Manik Taneja, analyst]

So first question was for Kamini. Just to understand the extent of [indiscernible] in the quarter and what was the impact on margins due to the 1-month implementation? And the second question was with regards to the extent of furloughs for December quarter, if you could help us understand how much of do you expect normal furloughs or it will be much higher than normal? And how should we be thinking about the number of working days in December versus [indiscernible]?

[Kamini Shah, executive]

So thank you, Manik, for your question. Let me answer the second question first. See, as far as furloughs are concerned, we are not seeing an extended furlough request from our customers at this point of time. So I think it would be a range of the typical furloughs that we have seen at any point of time. So while [indiscernible] specific numbers, but we [ are not ] seeing anything exceptional from a furlough standpoint. As far as the impact on the increments are, our increments have been in line with the industry, wherever the companies have been doing. It's been about approximately about 90 basis points. This is the impact as far as the quarter 2 numbers are concerned. We will, of course, have the impact as far as next quarter is concerned, which will be about 2 months of the impact is concerned.

[Manik Taneja, analyst]

Sure. And the last question was for Angan. Angan, had Birlasoft focused over the course of last 2, 3 years was to reduce the long [indiscernible] accounts and some of it has continued even into your tenure. How should we be thinking about this on a go-forward basis and simultaneously the changes in terms of our client revenue bucket?

[Angan Guha, executive]

Sorry, what accounts? I couldn't quite get your question.

[Manik Taneja, analyst]

We've been continuing to prune a long tail of accounts...

[Angan Guha, executive]

Yes, yes. Sorry, sorry. Got it. Yes. So got the question, I'm sorry...

[Manik Taneja, analyst]

Also you could talk about the client metrics in terms of the high revenue buckets, the changes that you see in the quarter?

[Angan Guha, executive]

Yes, yes. So we continue to prune our accounts, and we -- like I have constantly said that we want to work with lesser number of accounts. So our accounts have gone down by another 50, if I remember right, even in this quarter. Our accounts have now come down to 271, right? 278 instead of 287. So the number of accounts are continuing to go down. We will clearly focus on our top 40, top 60 accounts and try and grow it from one bucket to the other.

Now we don't exactly report the bucket of accounts yet, and that's a best practice we want to get into going forward. But suffice to say that today, we have a couple of accounts which are above the $50 million range. We have at least one account, which is the above the $75 million range. But eventually, we will come back to you with reporting in terms of how many accounts are in what bucket.

We will continue to focus on our top 200 accounts for future growth. I think we have enough real estate in that to continue to drive a lot of growth. And as you saw in our results, and if you see our last 3 quarter results, our top 20 accounts have continued to perform better than company average.

[Kamini Shah, executive]

So maybe, I'll just take -- Nirav, I will just take this opportunity to clarify on Apurva's question, right, on other expenses that have increased. Apurva, this is largely because of subcontractors, and we have had additional working days as far as quarter 2 is concerned, and quite a few of niche skills is what we have currently staffed through subcontractors, which is why you're seeing an increase as far as business is concerned. So that's the reason behind it. So I just wanted to clarify that. So that concluded on this call.

Yes, please go ahead, Nirav, with the next question.

[Operator]

Next question is from the line of Mohit Jain from Anand Rathi.

[Mohit Jain, analyst]

One or 2 questions. One is on the TCV. Like, I think last time when you took over, there was this some change in incentive plan because of which TCVs were supposed to convert into revenues a little faster or better. Is that something we should expect in '24, '25? Or do you think that will take some time to reflect?

[Angan Guha, executive]

No, no. So our TCV will definitely convert to revenue, for sure, because at the end of the day, we are very closely monitoring in terms of the orders that we book and what is the correlation to the revenue number that has come up. As I started the conversation earlier, you would have noticed that I talked about the fact that our first 9 months TCV signings have been 21% over the last 9 months, right? It only says 2 things. One is we are signing deals. But equally, we are signing long-term deals. So that gives us a surety of revenue.

And our growth of 3%, 3.5% consistently for the last 3, 4 quarters is testimony to the fact that our order booking is getting converted to revenue. Now what can derail this is, of course, a leaky bucket. So if projects were closed or people get ramped down, the situation becomes hard to depend. But at least going forward, we are not seeing that situation as far as our company is concerned. Our order book will convert into revenue. It has converted into revenue in FY '24, and I don't see anything changing in FY '25.

[Mohit Jain, analyst]

Correct. And the second is related to your margin outlook, like 15.5% to 16.5% seems to be at the lower end of the industry, I think, from top 20 companies perspective, whereas [ wage hikes ] are behind, hiring may pick up, but [indiscernible] you have an opportunity. So is there a scope for this to sort of go more towards 17%, 18% rather than staying at 15.5% or 16%?

[Angan Guha, executive]

Yes. So that's a great question. And look, I mean, I'm not saying really at 15.5%. I'm saying it will be a range of 15.5% to 16.5%, and it could also go to 17%. I mean it's hard for me to commit on that today. But our endeavor will be to drive sharper execution. And you must also appreciate that it's not that we will not make more money. We will definitely make more money, but I'm a strong believer that we will invest 1 or 2 percentage of our margin back into the business because we want to create the long-term sustainability of our business.

Like I said, we are embarking on a huge debt transformation, which both Selva and Kamini will lead and that will need a lot of investments. We are creating a domain-based led sales organization that will need a lot of investments. And as I've said in the past that for us to build a long-term sustainable business, investments here and now are important. So I would suspect that in the medium term and the medium term could be a year, 1.5 years, we will be in that 15.5% to 16.5% to 17% range wherever you can call it out. But as our business grows beyond the $1 billion mark, and that is the $1.5 billion mark, you will see margins improving as well because again, all the investments will be behind us. But over the next 24 months, we will be on the investment mode.

[Mohit Jain, analyst]

All right. And last is on hiring, like if you have any targets to share the [ growth ] by utilization is already high. So what should we expect in terms of filing those in next -- so whatever you have '24 or '25?

[Angan Guha, executive]

Yes, yes. So you mean the leadership?

[Mohit Jain, analyst]

No, the employee headcount increase.

[Angan Guha, executive]

Employee headcount. So again, that's a little bit of a hard number to give because we are adding headcount. I mean, even if you see this quarter, we've added headcount, right? But equally, I want to drive a lot of automation and drive a lot of non-deal revenues. So headcount may not necessarily associate itself to revenue growth all the time, though, our endeavor will be to drive a lot of automation and try and get revenue on a non-linear basis, which we will continue to do, but we will continue to add employees. Now it is also a manifestation of the kind of deals that we win and the kind of deals that we are gunning after. So it's hard to give a number, but I can only tell you for this financial year, we will have a positive headcount add.

[Mohit Jain, analyst]

So that's FY '24.

[Angan Guha, executive]

FY '24. Correct. Yes.

[Operator]

Next question is from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

Congrats on a strong execution, almost on all the fronts. So Angan, the first question is after winning $100 million deal, which is a very sizable...

[Operator]

Sorry to interrupt you. Can I request you to speak through the handset, please?

[Sandeep Shah, analyst]

Hello?

[Operator]

Yes. Go ahead.

[Sandeep Shah, analyst]

Yes. So congrats on strong execution of almost all the fronts. In terms of after getting $100 million deal that too from an existing account and displacing a Tier 1 vendor, is it fair to say this can replicate in most of the other existing accounts? So my question is, how is our large deal set up? I'm not asking to close $100 million in each quarter. But is there a specific target to have a deal closure about 10, 15 [indiscernible] because that will check the growth profile in the medium to longer term?

[Angan Guha, executive]

Yes. So Sandeep that, again, is a great question, and thank you for asking that. Look, we are winning a lot of $5 million, $10 million, $15 million deals. That's our run rate, right? And even this quarter, outside of the large deal, we've still won about $140 million, $150 million worth of run rate deals. So that is now part of course as far as Birlasoft is concerned. Obviously, as a management team, we are gearing ourselves to close larger and larger deals. But that doesn't mean that we will not focus on smaller deals because, by nature, smaller deals are more profitable.

And with Selva coming on Board and our company now being able to attract great talent, I'm also very confident that we pick up large deals, we'll be able to execute those large deals and execute them profitably. So I'm very bullish around this. But you're right, we will still see a focus on a run rate basis on winning more $10 million, $20 million deals.

Now if you look at our funnel profile, our funnel profile is ever increasing. Even after closing a very large deal this quarter, our funnel is back up to one of our highest levels. And that consists of a lot of small and medium-sized deals, which we will be focused on. But like I've always said, Sandeep, we will have very superior focus on execution because if we can get execution right of large deals, then I'm very certain that customers will trust us with more and more large deals going forward.

[Sandeep Shah, analyst]

Yes, yes. And just a follow-up, it's a great execution on large deal as well as client [ mining ]. Angan, is it a result of change in the variable incentive program? And if yes, can you share what has been changed now versus what the structure was earlier?

[Angan Guha, executive]

Yes. So Sandeep, I think I've said this earlier also. So one of the big changes that we have made is we are now compensating our people on both profitability as well as revenue, right? Earlier, it was only revenue. Now we have got in the profitability angle, and I think that's important. We also have a hunting commission, which is very attractive. And the hunting commission, if leader opens a new account, the hunting commission is quite attractive, and we will follow through on that.

But more importantly, we are paying people for performance. We have an LTI plan that Arun, our CHRO, has institutionalized on meeting our long-term goals. So there is a short-term goal, and there is a long-term goal. The short-term goal is the bonus, and the long-term goal is the LTI. And LTI can be a combination of cash LTI plus ESOP plus stocks or whatever. So we kind of pivoted to a more performance-based compensation culture then -- rather than a fixed base compensation culture. And like I said, as we go ahead and open newer and newer accounts, our incentive will be tuned to take care of hunting commissions as well.

[Sandeep Shah, analyst]

Okay. Okay. And just lastly, bookkeeping. In terms of 3Q being soft, which is in line with what the others are saying, but is it fair to say with our stock...

[Angan Guha, executive]

You dropped. Sandeep, you dropped.

[Operator]

Sandeep, sorry, we are not able to hear you.

[Angan Guha, executive]

Can you repeat your last line, Sandeep?

[Sandeep Shah, analyst]

Yes. What I'm saying is on the 3Q...

[Operator]

Sandeep, sorry, but once again we are losing your audio. Can I request you to speak through the headset.

[Sandeep Shah, analyst]

Being carried out quarter after quarter.

[Operator]

Sandeep, sorry, but we lost your audio. Can you repeat your question once again?

Sir, the line for the participant dropped. We move on to the next participant. The next question is from the line of Abhishek from Incred Capital.

[Abhishek Shindadkar, analyst]

Congratulations on a great execution. My first question is regarding Q3. So you said Q3 will be muted due to furloughs. So do you expect a loss of revenue due to furloughs? Or that could bounce back in the Q4? I mean would Q4 be more as business as usual and that's [ closed ]. The second is, this quarter, digital and cloud service line saw strong growth both sequentially and year-on-year. Maybe any color could be helpful.

And the third question is, if I look at the growth of top 5, 6 to 10 and 11 to 10 -- 11 to 20, and also compare that with the client metrics for 1 million, 5 million and 10 million, the number of clients in those buckets, we have seen a decline in the buckets across the large clients, but the growth is very strong. So how should we read these 2 data points?

[Angan Guha, executive]

Yes, sure. So let me take the first question first. Look, Q3, we all know is a very short quarter, right? It's a short quarter, and on top of that, there are furloughs. So it is very hard for anybody to kind of comment in terms of what the revenue will exactly lie, right? But our commitment, as I've always said to all of you is we, as a management team, will be very focused on execution, right? We will be focused on execution. We will be focused on serving our clients. We will be focused on signing newer and newer deals and large deals, right? That's our job, and we will continue to do it.

Now where the revenues will fall, we will see. We can't give a guidance. We don't give a guidance, so I can't exactly tell you where our revenues will be. But Q4, we will be back on business as usual. You have seen our performance in 4Q, 1Q and now 2Q. And I think 4Q again of this year will be back at that level. But obviously, it will depend upon how we execute in Q3, which is why the execution in Q3 is important. So that's number two.

Number three, you must also appreciate that today, we don't know what we don't know, right? The situation in the market is very volatile. So it is very hard for me to give even a 2-quarter out view. But what I'm feeling good about is our pipeline, our execution rigor, and the fact that the customers are willing to talk to us on largish deals. And that gives me the confidence that, going forward, I think the situation will only improve for us as we look at the real medium term to the long term. But in the short term, because of the quarter, we will have issues.

Now on the account, you must also appreciate that in the large account we had Invacare last year, we don't have Invacare this year. And that makes a big difference because that shows one large account going away. But I can only tell you that the overall set of the top 10 and top 20 accounts, as we call it today, have all shown very, very good solid execution net growth.

[Abhishek Shindadkar, analyst]

Great. And if you can just comment on the service line. Is it Microsoft driven because last quarter, we talked about a lot about Microsoft. So I'm just trying to be curious to know the growth in the digital and the client service lines.

[Angan Guha, executive]

Yes. Microsoft is a large part of our business that continues to show solid growth. I can't give you exact numbers because we don't report numbers like that. But from our own service line perspective, like I said, digital has shown great growth. Our infrastructure is a growing business. The reason you don't see it show up in infrastructure and ERP is because it has the handover of Invacare. But if you take Invacare out, both of them have grown well. Our data business is also showing signs of revival. All service lines have grown reasonably. And I'm pretty confident that, going forward, all the service lines will do well.

[Kamini Shah, executive]

And Angan, if I may add to that also, I think our infrastructure business has been growing at a company average of growth that we have seen, and ERP has been in the range of about 1%. So I think we're confident that other service lines will also start picking up from a growth standpoint.

[Operator]

We have Sandeep Shah back in the queue. Sandeep, please go ahead and compete with your question.

[Sandeep Shah, analyst]

Yes. Can you hear me now?

[Angan Guha, executive]

Yes, Sandeep, please go ahead.

[Sandeep Shah, analyst]

Sorry for the network issue last time. My question was bookkeeping. On the third quarter, you did mention that it would be a soft quarter because of [indiscernible]. Because of strong execution, is it fair to say can we at least in a positive growth trajectory.

[Angan Guha, executive]

So Sandeep, that's hard for me to comment, number one, and we really don't give guidance. So I will not be able to answer that question specifically, but there are -- I was telling the other team, other folks on the call, that there are 2 things that I can commit to you, that we will continue to focus on execution. And execution is something that is [indiscernible] at Birlasoft now, and we will continue to focus on that, one. We will continue to serve our customers well. And we will continue to win more and more deals. Now exactly where the revenue falls, we will see. And it also, like you rightly pointed out, has a bearing on margins. And if we can execute well, I'm sure we can do well on margins as well.

But you know, Sandeep, I will really request you to look -- focus on a little bit of a longer term, right? Q3 is a seasonally weak quarter for the industry and for everybody and we are no different. So the muted growth that I talked about will continue in Q3. But while you were away, I was telling the other folks on the call that if we have a strong execution quarter in Q3, then Q4, we will be back on the kind of performance that we've delivered in the first 3 quarters.

[Sandeep Shah, analyst]

Okay. Fair enough, fair enough. And in terms of margins, in 3Q, we will have too much of additional wage hikes, we will have furloughs. We may have this large deal transition costs because you said it may take 6 months before it starts ramping up from April. Is it fair to assume directionally margin may decline in Q3 and then there could be a strong bounce back in the fourth quarter? And from there, you can actually lift the margin further?

[Angan Guha, executive]

Yes. So Sandeep, while you were away, I was also telling the team a couple of data points. So one is, look, our long-term goal -- and again, I can't comment on Q3 specifically, but our long-term goal is to keep the margin within the band of 15.5% to 16.5% to 17% EBITDA in that range. Now that doesn't mean we will not make more money, but -- we will definitely make more money, but we will reinvest that money into our business. We are building a business which is more domain orientated, and we are also embarking on a huge tech transformation within our company, which will have great benefits in the long term.

So I don't want to kind of be penny wise and pound foolish. I want to invest in the business because we are here to create a business for the next decade. So my suggestion and my request is look at us from a medium- to long-term perspective instead of a quarter-on-quarter perspective. But in the medium term, I can only commit that we will maintain the margins in that 15.5% to 16.5% to 17% range, in that range.

[Sandeep Shah, analyst]

Okay. And last question, Angan, is there any client-specific issue outside Invacare and...

[Angan Guha, executive]

No, we don't have any client-specific issue outside of Invacare. But again, Sandeep, it's a very difficult world. We don't know what we don't know. We don't know who files for bankruptcy when. But at least as far as we know, and I speak to clients every day. As far as we know, all of our clients are healthy, they are doing well, and we are serving our clients well.

[Sandeep Shah, analyst]

Okay. Okay. Congratulations on strong execution on [ every front ].

[Operator]

Next question is from the line of Jyoti Singh from Arihant Capital.

[Jyoti Singh, analyst]

Hearty congratulations to the remarkable achievement of securing TCV deal exceeding $100 million along with an impressive set of numbers. And sir, my question is following up on the other participant about the furloughs. So it will be quite high compared to last year Q3 or it will remain consistent?

[Angan Guha, executive]

Yes. So Jyoti, again, thank you for asking that question. That's an important question. Look, our BFSI business is only growing as you see. And I'm sure you know this already that the majority of the furloughs happen in the financial services space. And as our BFSI business grows, our furloughs, obviously, will grow. So to your question, our furloughs will be more than last year and only because the BFSI businesses are growing. But look, the kind of work that we are doing and with the clients that we are doing are very, very strong. They are big names, and we are executing very well for them. So even if the furloughs hit us, it is only a temporary thing, which is why I keep saying that we will focus on execution, and we will see where we land in Q3. But Q4, obviously, will be a much better quarter.

[Jyoti Singh, analyst]

Great. And sir, another question that on the -- like earlier last quarter, we had discussed that we will be focusing more on the banking side as we have more deployment on the insurance. So any update on that you can discuss with us?

[Angan Guha, executive]

Yes. Sure, Jyoti. So which is why you see in our results, right? Our BFSI business is continuing to grow and it is showing strong growth, right? And we are investing in that business, and I continue to see BFSI doing well. But again, Q3, because of the furloughs and shorter quarter, we may see an impact on BFSI. But overall, I'm very bullish on BFSI. And you will see many -- much more growth from us going forward.

[Jyoti Singh, analyst]

Okay. Okay. And sir, last question from my side. Do we have any plan in place for potential acquisition that is on cards or in discussion?

[Angan Guha, executive]

Yes. So we don't have any acquisition discussion going on currently. We are not even looking at it, and I think I was telling some other participants that we will focus on organic growth immediately for a couple of more quarters. We will look at strengthening our balance sheet, generating more cash. And then when the time is right, and we get the right assets, we will do an acquisition. But look, we will never do an acquisition for revenue aggregation. That we do not want to do. We will only acquire a company, which we find is a strategic fit for us, build some capability on us -- for us, either on the domain or the technology side and is culturally aligned to our culture. If we find an asset like that, we would definitely look at it at that point in time.

[Operator]

Next question is from the line of Anmol Garg from DAM Capital.

The line for the participant dropped. We'll move on to the next participant.

[Angan Guha, executive]

Yes. Just let me go to the next one, and we can wrap up after that.

[Operator]

Next question is from Chirag from Ashika Institutional Equities.

[Chirag Kachhadiya, analyst]

Congratulations on great execution. Sir, I have one question on the furlough side. So you mentioned that the growth on Q2 would be muted in third quarter. So when it will bounce back in Q4, is the trajectory remain intact to what we have experienced in the past 3 quarters? Or will it be -- or like due to the impact of the annual budget revision investment market and the incremental flow of growth will come? And second, on large deal pipeline side, are there any other engagements similar to what we have experienced in the quarter of $100 million plus kind of TCV there in the pipeline? Or we will witness some more announcement going forward?

[Angan Guha, executive]

Yes. So Chirag, first of all, Q4, we will definitely do better than Q3. First of all, I can't even say what Q3 will be. But Q4 will definitely be better than -- Q4 will be better than Q3. Now what we have experienced in the past is something that we will gun for, we'll attempt to get to. And it's too hard for me to say one quarter out only because the market situation is so volatile. But our endeavor will be to deliver sustainable growth as we delivered in 4Q, 1Q and 2Q, number one.

Number two, our large deal pipeline is only increasing. Do we have more $100 million deals in the pipeline? Well, yes, we do have $100 million deals in the pipeline. Now will it close in our favor or whether it will close in the next couple of quarters? Again, very hard for me to say, Chirag, because it's a manifestation of what the client wants to do. But I can only tell you, and I've said this so many times before, that as a team, we'll be focused on our execution, our rigor on serving clients, closing deals and helping our clients in their transformation journey.

[Chirag Kachhadiya, analyst]

Okay. And just one follow-up on the first question. What do you think about FY '25? Will situation revert and we move to optimize rather than what we have seen in the '23 or '24 or so? Your guidance or any comment would be helpful.

[Angan Guha, executive]

Yes. So look, I mean, I don't know. It's -- FY '25 -- in today's market, Chirag, as you know, it is hard to comment on 2 quarters out. So commenting on FY '25 is very, very tough. I can only say that based on what I can see today, it will all depend upon how things shape up in our clients' place. So we are staying very close to our clients. As you rightly pointed out, the budgeting exercise happens in January, February and March, and we'll have more color for FY '25 only then.

[Operator]

Thank you. Ladies and gentlemen, we will take that as the last question. I now hand the conference over to Mr. Angan Guha, CEO and MD, Birlasoft, for closing comments.

[Angan Guha, executive]

Yes. Thank you. So look, first of all, I would like to thank all of you once again for joining us on this call today and for your insightful questions. I really appreciate your interest in Birlasoft. We have had a very good first half of the financial year. As you have seen, we've grown our business, and the growth has been profitable. Our fundamentals are very, very solid. And we -- as we have a well incentivized team that is building a client-centric organization that can take us to the next phase of our growth journey.

Despite the challenges in our industry that our industry is facing, we will continue to be focused on execution. I look forward to speaking you -- speaking with you once again next quarter. Meanwhile, if you have any further questions, please feel free to reach out to Abhinandan for any clarification or feedback.

Thank you once again and talk to you very, very soon. Thank you.

[Operator]

Thank you very much. On behalf of Birlasoft Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.