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Birlasoft Ltd
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Ladies and gentlemen, good day, and welcome to Birlasoft Limited Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vikas Jadhav. Thank you, and over to you, sir.
Thanks, Nathan. Thanks, everybody, for joining us. This is Vikas from Investor Relations. And we have with us today on this call, Mr. Dharmender Kapoor, DK as we call him, our CEO and MD; Mr. Chandrasekar Thyagarajan, Chandru, our CFO; Mr. Roop Singh, our Chief Business Officer; Mr. Shreeranganath Kulkarni, SK as we call him, our Chief Delivery Officer; and Mr. Arun Rao, our Chief People Officer. So we'll begin the call with opening remarks from DK followed by Chandru and then move to the Q&A session. Please note that anything that we say on this call and refers to the company's outlook for the future is a forward-looking statement and must be read in conjunction with the disclaimer mentioned in our Q3 FY '22 investor update, which we have uploaded on our website and is also submitted to the exchanges. Now I hand over the call to DK. Over to you, DK.
Thank you, Vikas. Good evening, and welcome to all of you to Birlasoft's third quarter financial year 2022 earnings call. Thank you for joining us on this call. I wish you and your loved ones a very happy, healthy and safe New Year. We are pleased to report yet another quarter of strong revenue growth with improved margins. Quarter 3 revenue was at $143.4 million, registering a sequential growth of 4.7% and a year-on-year growth of 20.1%. Sequential growth in constant currency term was 5%, and year-on-year constant currency growth was 20.6% for quarter 3. Quarter 3 total contracted value deal wins of $181.5 million were also healthy, with the new business wins contributing $121 million. The quarter 3 YTD deal wins stood at $474 million, and the new deal wins were $319 million. As you can see, there is a clear difference that the ratio of [indiscernible] which is the new lease, has improved considerably. That would mean that the upcoming growth would be far more predictable in future. Net new wins contributed about 18% in the 9-month deal wins compared to around 3% in the previous financial year. In quarter 2 earnings call, we mentioned about good increase in the enterprise solution deals across upgrades, new implementations and transformational deals. While we saw some growth green shoots in the enterprise business in quarter 2, this quarter, it led the growth in the service line and delivered strong growth of 6.1% quarter-on-quarter and 8.1% on year-on-year basis. The other 2 service lines also posted good growth with business and technology transformational services growing 4.4% quarter-on-quarter and 31% year-on-year, while cloud and based services growing 2.7% quarter-on-quarter and 29.2% year-on-year. In verticals, the growth was led by manufacturing, which was up 9% quarter-on-quarter and 20.4% year-on-year. At the back of stable oil prices and few large deal wins in the previous quarter, energy and utilities vertical also posted strong growth of 8.4% quarter-on-quarter and 20.2% year-on-year. The good news is that growth continues to be driven by large accounts, with top 10 and top 20 customers revenue growing at 5.4% and 4.6% quarter-on-quarter and 21.4% and 22.9% on a year-on-year basis, respectively. This not only continue to improve our relationship with key clients, but also ensures better growth prospects. With the growth traction coming from the net new customers, the growth from ex top 20 customers was also up 4.9% quarter-on-quarter and 15.9% year-on-year. Our customer count of $5 million revenue improved by 1 this quarter. In quarter 3, the offshore revenue contributed contribution of 49.5% is also at an all-time high. EBITDA margin improved marginally and stood at 15.2%, which is despite high attrition, one additional month of wage hike impact and lower number of buildings and the furlough impact in the quarter. And this, as you know, is the very seasonal quarter 3 phenomena for IT industry. We have been able to maintain 15% plus EBITDA margin against unprecedented supply chain challenges in the financial year '22 until now. This is reflected in our LTM attrition number, which is at all-time high at 31.4%. The good part is we have seen some stability while we expect it to remain elevated for another quarter before pulling off from the beginning of the next fiscal. PAT stood at $15.1 million versus $14 million in the quarter 2, and it was up 9.1% quarter-on-quarter and 16.6% year-on-year. INR PAT was at INR 114 crores, up 10.5% quarter-on-quarter and 18.2% year-on-year. The manpower headcount at end of quarter 3 stood at 11,945 and saw a decline of 120 professionals quarter-on-quarter and the addition of 1,546 professionals on a year-on-year basis. Our headcount optically seems to have declined as it is reported on the quarter end basis. However, on an average basis, the billable headcount saw an increase during the quarter 3. We work well on optimizing our bench utilization during the quarter. We have started off campus hiring program and further 80 additional professionals have joined in January month itself. Coming quarters, we'll see higher profession intake and shooting skills to scale initiative in meeting the upcoming demand as well as optimizing resource costs. Birlasoft continues to get to various recognitions. It was renamed -- it was named our top 15 Sourcing Standout by ISG and among the leading providers in the Booming 15 category globally as well as for the Americas region based on annual contracted value won over the last 12 months. This is the 7th consecutive time that Birlasoft has been featured across new categories by ISG. Birlasoft was also named a leader in the SAP S/4HANA System Transformation, mid-market in the U.S. region by Information Services Group. Birlasoft project showed them a CSR initiative to stop crop residual burning bagged the Special Jury Award in the 7th addition of CSR Impact Award 2021. In conclusion, I would like to add that the demand environment continues to remain robust, although there is a lower number of large deals in the market. However, opportunities are multifold in nature of smaller deals, which orders well for Birlasoft. Demand surge continues in digital and re-initiation of transformational program, with customers looking at shorter and shorter returns and focusing on cost containment while improving their spend on value-driven initiatives. The deal pipeline stand at $1.2 billion, and this is despite the deal size is becoming smaller than before. And traction from both new and existing customers is better today. We continue to remain optimistic and are well positioned on capitalizing the growth opportunities. With this, I would like to hand over the call to Chandru for providing more color on our financials. Over to you, Chandru.
Thank you, DK. Good evening, good day, everyone. Let me take you through the financial highlights for the third quarter in a little more detail. DK spoke about our Q3 revenue, which had $143.4 million versus $136.9 million in the second quarter. This is up 4.7% quarter-on-quarter and 20.1% year-on-year. We did have a cross-currency headwind of [ 31 basis points ]. And therefore, in constant currency terms, the growth was at 5% quarter-on-quarter. In rupee terms, we saw a quarter-on-quarter growth of 6% and a year-on-year growth of 21.7%. And the revenue closed at INR 1,072 crores. The EBITDA for Q3 was at $21.8 million worth of $20.5 million in the previous quarter, up 6% quarter-on-quarter, 11.2% year-on-year. In rupee terms, EBITDA was at INR 152.8 crores versus INR 151.8 crores in Q2, and that translates to a growth of 7.2% quarter-on-quarter and 12.7% year-on-year. EBITDA margin went up marginally quarter-on-quarter by 18 basis points up to 15.2%, but it was down by 122 basis points year-on-year for the reasons DK spoke about. Margins were aided by volume growth. And also, there was a onetime contract spend in Q2 that did not reference in that as well. That was, of course, a small component of the improvement. There was some impact on the one additional month of wage impact, as DK spoke about. We also had an increase in our subcontractor expenses given the current surge in demand versus supply. Our PAT for Q3 was at $15.2 million versus $14 million in Q2. That was up 9.1% quarter-on-quarter and 16.6% year-on-year. In rupee terms, the PAT was at INR 114 crores, up 10.5% quarter-on-quarter and 18.2% year-on-year. Our DSO was at 55 days. We improved 2 days year-on-year. Of course, there was a slight dip of a 1 day quarter-on-quarter. However, we believe that this was a very optimized performance. Cash and cash equivalents stood at $152.6 million, INR 1,135 crores as of 31st of December versus $144.6 million, that is INR 1,074 crores as of 30th September 2021. Our cash was up $16.6 million or INR 124 crores on a year-on-year basis. CapEx for the quarter was $5.3 million, which is INR 39 crores. This included the renewal of a lease agreement of one of our [indiscernible] which led to an increase in our right-to-use effect by about INR 20.5 crores. The rest of the CapEx was related to IT and related assets. Our operating cash flow was at $16.4 million or INR 121.6 crore and stood at 74.7% of EBITDA. Our free cash flow was at $11 million or INR 82 crores, and that's 71.8% of our net income. We continue to see improvement in our financial metrics, and we will continue to strive to better them on an ongoing basis. With that, let me throw the floor open for questions. Thank you.
[Operator Instructions] The first question is from the line of Baidik Sarkar from Unifi Capital.
DK congrats on a good quarter and order intake. A couple of questions. In context to how buoyant environment has been for hyperscalers and on relationship with the [indiscernible], our performance in cloud and base seems a bit softer. Was that a one-off year? And how you see acceleration? And secondly, given how healthier order intake has been, would you reckon we will break out in growth rates starting now? Or would you advise caution in the absence of large deals per se, like you mentioned in your opening remarks, and the high contribution of packaging implementation, which could be a [indiscernible] event?
So thanks, Baidik. No, I think I would not bring any caution when it comes to the growth because we definitely are seeing good momentum, good pipeline, good input of the queries and the pipeline coming from the client side. So we are seeing definitely good inflow from that perspective. So there is no reason for having any caution with respect to the growth. Whether it is cloud and based services or it is any other service line, I think in all the aspects, we are seeing good set of momentum. Having said that, what we have to continue to watch is that the biggest constraint today that is there in the industry is on the talent supply because growth is not an issue. It is a talent supply that is a challenge right now as to how quickly can you bring it up and capture the growth that you want to do. I think that is the only challenge I see. Other than that, whether it is our larger customers or whether it's smaller customers or even the deals, which are -- we know that the deals are large, but the contracted value is going to be smaller because those are broken into the modular approach. All that is there, and that definitely gives us very good confidence going forward that we have a lot more predictability today for the growth in the upcoming quarters.
So on margins, DK and Chandru, most of supply chain issues might be behind us. And so keeping that in perspective, would have march towards a 16, 15.5 sustainable margin to be possible in the first half of '23? Or should be postponed that expectation as well?
So what I would expect is that we have started inching upward. We have addressed the call that was happening in the margin, okay? So that is a very positive sign. Now how much we really jump, okay, it is going to be like every week, every month that we continue to discover that where all the optimization opportunities are there, but the attrition, which I thought that should start getting stable in this quarter, it is not yet. So I would say that we had to keep our fingers crossed while we definitely are moving upward now, but I would stay away from giving any commitment on what it would be in this quarter.
The next question is from the line of Sandip Agarwal from Edelweiss.
DK and team, congrats on good execution. Happy New Year to all of you. Just 1 or 2 questions. DK, while you don't want to give any optimistic statement or something on the environment, but if you see the -- where clients are spending, the type of spend they are doing and what they spend accomplishes for them, how do you see this spend to be there for next 3, 4 years? Do you think them to be robust or it is hard for you to comment on next 2, 3 years? That is number one. Number 2, while attrition -- industry-wide attrition going up is always a good sign because it is a lead indicator of good demand, but the way it is going up now, do you see signs of attrition from there? Or you still think that there is a chance of it's not that -- there is a chance of it not falling any time soon?
Okay. So thank you, Sandip. And very relevant questions. So you said that I don't want to give the optimistic outlook. No, I'm absolutely optimistic, first of all. Whether it is revenue or whether it is margin, I'm absolutely optimistic because when will you ever be optimist -- more optimistic than when the demand is very good. I'm absolutely optimistic. However, we have the policy that we don't give the number, and that's the reason I'm staying away from that, but I'm absolutely optimistic. Having said that, I think the revenue spend, if you look at that, there are -- there is a marginal increase in the revenue spend that the clients are bringing up, okay, so which is a positive news. But we also have to look at that how the revenue or how the spend is shifting. So what they are looking at is that how do they continue to become more productive, more efficient in the run business, whereas they put more and more money on to the transformational programs. So the buckets will change, okay, that is one thing will happen. At the same time, there is definitely increase in the IT spend that a lot of customers are having, so which is a good news. Many of the other customers will actually start slowly opening up as we move forward. But I'm seeing the positive signals in the market definitely. So that is one aspect of it. Now when it comes to the attrition, yes, you are 100% right that it is a good news that it is a indicator or a leading indicator for higher momentum that we are seeing. So yes, attrition is high, okay? We might complain about the attrition, but we are not complaining about the growth. So yes, that will be there. My view is that if you look at carefully, most companies are somewhere around 27% to 30%, 31% of the attrition. Now there is at least about 10%, 12% of the people who are actually moving from one company to another company rather than that is the real growth-related attrition. So I believe that whether it is in 1 or 2 months or in a quarter or 2 quarters, it is going to come down because people are not going to continue to move, okay? So it is going to go and stabilize in the shorter or midterm. So I believe that somewhere, the attrition with the current level of demand should be in the range of about 18% to 19%. I think that is where it will stabilize over a period of time. We are yet to see that it starts stabilizing. There were a few days that we saw in the quarter 3 that it might be getting better, but then the Omicron came in, and then we have seen people getting back to home again and then there is -- this whole thing is continuing, okay? So I believe that as things start getting normalized, okay, start becoming more and more stable, the attrition will also stabilize with probably another few months to go.
The next question is from the line of Shradha from Amsec.
Congratulations to the management on a good quarter. DK, you did indicate that the deal pipeline number is close to $1.2 billion for us -- $1.2 billion, but would it be possible for you to say how much is it up on a Q-o-Q or a Y-o-Y basis?
Look, this is the pipeline for -- this is a sales pipeline that what are the deals that we are working on, okay? So I don't think that until we reach to the stage of the deal that we know how much it is going to be ACV or TCV, that will be yet to be seen. But a lot of deals are actually off a good number, a good size. That would mean that while it will increase a good ACV number, there will be some good amount of revenue that we will be able to win on the TCV perspective also.
So the sales pipeline of $1.2 billion that we are talking about in this quarter, what was that number last quarter? I mean any indicative number?
It was about $100 million lesser in the previous quarter. If you look at the same quarter last year, it was approximately $700 million or $800 million, if I remember right.
Okay. Got it. And you also indicated that ERP deals are back in the market. So last year, we have seen almost a flattish kind of a run rate in the ERP service line for us. So do you think going into FY '23, we can expect a good bounce back in ERP? And if not, higher than company average growth rate, it can still grow much faster than what it had done last year?
Absolutely, absolutely. And we definitely are already seeing that happening with most of the enterprise solution deals.
And lastly, on the life sciences vertical, we've seen some moderation in growth rate in this vertical for some time now. Are you...
Sorry, go ahead.
Some of it could be because of normalization of numbers in Invacare. But apart from that, is there anything that is happening in life sciences because on a Y-o-Y number also, we have come down to almost a 10% growth on -- in this vertical, which is now the market growing verticals for us 2 years after?
Yes. You're absolutely right. Your guess is absolutely right that it is because of the normalization of number from the Invacare because we have done a big relief in the previous quarter, okay? That was the first month of that. So for the quarter, we did not get the revenue for the transformation program. We are already defining the next set of scope for them, okay? And we hopefully will begin again on that side in some time in the month of February. And that would mean that some part of that revenue will start coming back. So yes, it is about the transformation program reaching to a particular milestone. And now there is a break in terms of defining the next set of scope.
And again, I think I missed you gave out the number of net new deal TCV contribution, what was that for this quarter?
For this quarter, it was about 7% plus of the net new.
Net new. But it has come up from last quarter. I think if I recall it right, last quarter was a higher net new contribution number?
If I look at the last quarter, we had total wins of about 121 million or 123 million. And this quarter, we are talking about 182 million, and 121 million are the new deals itself. So this quarter is far, far better. We are talking about the percentage because percentage is receptive generally, but the absolute number is higher in this quarter for the net new wins.
The next question is from the line of Mihir Manohar from Carnelian Asset Management.
First of all, congratulations on a good set of numbers, a good growth there. My question was on the pricing front. I mean how are you seeing pricing? I mean what kind of pricing are clients ready to give in this current environment given there is attrition and demand as well is also good?
Yes. No, I think there is a reset of pricing definitely happening, a bit slow or slower than one would like to have. But as I said in the previous quarter also that we have started discussions with many of our clients who revise the price, and quite a few of them had changed that in the quarter 3 itself. Then there are some who are changing it from the 1st January. So there are different dates based on the SOW and the contract date, okay, these prices are getting revised. It is a slow process because clients would like to delay as much as possible, and we would like to do it as soon as possible, so there's a negotiation that goes on. But the prices are getting refactored definitely, and clients are far more willing to have the discussion now.
Understood. Yes, sure. If you can give a number and indicative range as to what kind of pricing adjustments are the client ready to give.
So there are a couple of elements that are there, okay? There is a [ COLA ] element that is there or the revised pricing for the new demand that is there. So both the things are happening. Many of the clients who said that they will negotiate [ COLA ] at every year. And eventually, they will say that, no, no, we cannot take it up, okay? Now they all are giving us actually the [ COLA ]. Wherever we were not able to get it. I think the [ COLA ] is that far this year. That is one thing or anything around 3% to 4% that is happening. And then for the new demand that is there, it is easier to negotiate the higher price because you don't have to go and fight for the existing business. We have to only fight for the new business. And that also has started happening. And anything from 5% to 10%, depending upon what kind of role, what kind of profile, what kind of skill it is, you can go and attract 5% to 10% additional charges on those scales, actually?
Understood. Yes, sure. And just one more question. So you mentioned about the good demand environment being there. How should we see this demand environment? And would the current growth rates be there for the next 2 years? I mean any color on that would be really helpful. I mean we understand that demand environment is good, but I mean how is the sustainability of this growth rate? That would be good to understand.
Yes. See, it is also going to follow the pattern that it has followed always. That means that there are early adopters who have jumped the bandwagon and said that we need to transform. We need to digitalize. We need to move to the cloud. We need to have better security. So all that has started happening already, and these are mostly the early adopters and the people who are ready to pay a little bit of premium in order to get the access to the talent. So that has started happening. But then there will be others who will be the followers, followed by those who are laggard, actually. So in my opinion, for about 2 to 3 years minimum, that potential is there for the growth and for the momentum.
For the current growth rates to sustain, that is still 2 to 3 years of headroom.
Absolutely.
Understood. Yes, sure. And just one more question, if I can squeeze in. I mean how many professionals are you looking to add in next quarter and in FY '23?
So this year, by going by the -- where we have planned, we want anything around 1,500 freshers coming up and joining us.
Yes. And in next year?
Yes, I'm talking about it next year. This year, I think we should be able to go up to about 900 or so. We plan it for a little higher number in the midyear, but then there are dropouts also because of the whole demand suddenly picking it up, okay? But the next financial year, we are willing to add because we have given the offer in many colleges, so we expect that about 1,500 freshers will join. I think maybe he dropped.
We'll move on to the next question from the line of Mohit Jain from Anand Rathi.
Sir, I missed your opening remarks a bit. So you said there was this headcount decline. What was the reason for headcount decline during the quarter?
No, it is only the quarter end count that we had given because we had given it at the end of the quarter account. But overall, if you look at the build resources and build hours were far higher. And that's the reason that we are showing the growth also. So -- but it is only that at the quarter end the number is that, and there are multiple reasons, one that I talked about, our transformation program got finished. So we moved the resources, whereas the growth came, but not as many resources. We also optimized on our bench side, okay? At the same time, there are a few things that we have moved from time and material to fixed price, and that is also where we have optimized. So there are multiple small, small factors in the line of improving our margins. We have gone and looked at how do we improve our productivity and efficiency, and that is the reason that at this time, we are at this level of headcount.
Okay. So assuming people left towards the end of the quarter, that is what you mean to say?
Either left, okay? But we have kind of replaced the, what you call -- for example, in time and material to fixed price, we have reduced the size without reducing the billing, okay, in some of the cases. So that has happened. At the same time, there is a bench efficiency that we have improved, okay? So that is the other aspect of it, and that is how it is at the end of the quarter.
So what is the plan like for the quarter? Are you giving any hiring numbers or...
I am not giving you hiring numbers. But if we had to grow with the same pace, then we will have to have net addition from the point where we were in the quarter 2 because whatever efficiency that we wanted to gain, okay, that we gained here, now wherever we will improve the productivity, that much will be there, but there will be a net gain and net hiring that will happen.
Okay. And sir, second was anything on wage hikes for this calendar given that our attrition is also above the industry in some sense and you want to hire more. So from that perspective, should we assume that it will be as successful as this year?
The wage is, of course, a universal issue now that we have to continue to watch out, but we have to continue to attract the talent by ensuring that we are giving them the compensation that is in line with the industry norm right now. It is a new norm that has been set, but we had to remain competitive in that front also. So yes, that will happen.
So which quarter is it planned for like Q1? Or should we assume that it will happen throughout the year?
I'm sorry. What is the question again? Say that again.
The hike is planned for Q1? Or should we assume it will happen across quarters like -- based on...
No, no, It doesn't happen across quarter, one has to continue to balance. But we have to have the model that will really look at that what is that you're giving when you're hiring lateral, what is that you had to give it to your existing people so that you continue to keep the balance, okay? That is the model on which we work. And if we look at that, there will be some impact that will come in every quarter, but it has to match with the expectation that we had to set for ourselves on the margin front. So both have to go hand in hand, okay, rather than there's an abrupt jump in the compensation in one quarter and then abrupt jump in the margin and the other one. It doesn't happen that way. So we had to take both hand in hand. And in some cases, we commit today, but we stagger the benefit to the employees, okay, and the commitment. So all that we do so that we are able to gain the retention by giving the incentives for employees, that increases their compensation, but it doesn't have an immediate impact at that point of time.
Okay. Sir, two on the sales side, like one is on manufacturing. What kind of growth rates are you expecting? What happened during the quarter? And second was, there's this stagnation in $1 million-plus accounts, which is there for a few quarters. So how do you plan to sort of correct that? Or does it reflect new client addition as a little on the software side versus...
$1 million account, I think we increased by one this quarter, if I remember okay? So that is right, yes. Now we have 27, okay? So I don't see that as a concern. Top 5, we have also improved it by 1, okay? So before the $5 million account also, we have increased by 1. So I don't see that as a concern because $1 million accounts, the accounts also where there are a lot of transformational programs that are happening. And many times, these are the accounts where SOWs are signed in the series, okay, and not in the form of a TCV value. So at any point of time, we will not show that, that account is giving us a TCV of a very larger amount. So I believe that it is not too much of a concern for us. But yes, we would continue to look and hunt for the larger deal so that we continue to gain the presence in the top 30 accounts or top 38 accounts.
Okay. And sir, last on the manufacturing.
Sorry, I missed the question on the manufacturing.
What's manufacturing or vertical growth for the quarter? And what is the outlook going at?
I believe we grew manufacturing almost by 9% in this quarter. Chandru, do we have that number in front of us?
Yes, DK.
You're right. What I meant was, what is the nature of this growth? And are there some projects which will end? Or did you get some demand ahead of the time? Or should we expect strong growth to continue in manufacturing sector?
No, no, no. I think we should expect that growth will continue to go on. There's a lot of work that we are doing in the high-tech space, in the digital space where there are significant amount of opportunities that are coming on the platform side. I have spoken about our strategy moving forward going to be business-ready platform, okay, where we are going to bring about the benefit in the tech space in every single industry. And manufacturing, definitely, we have seen good benefit because we have some good present service offerings that are digital in nature on the business platform. And I think that is giving us good growth.
The next question is from the line of Sandeep Shah from Equirus Securities.
Congrats on a good execution. DK, when I look into your lead indicators, the 9 months new business, TCV has been gone up by 20%, you are saying enterprise solution likely to do better in the next coming year versus what we have seen in the last 4 quarters. Also, the deal pipeline on a Y-o-Y basis is up by 30% to 40%. So is it fair to say entering FY '23 or calendar year 2022, you are much more confident versus entering CY '21 or FY '22 and growth rate has a more upward buyers in terms of a growth in FY '23 versus FY '22?
The simple answer is yes. And it is very much clearly visible from any of the parameter that you talked about that it is giving the indication that the next financial year is going to be better.
Okay. That is helpful. And just on the fourth quarter margin because most of the wage hikes is largely done, you are also confident in terms of the pricing as well. You are also doing better in terms of productivity gains. So why are we shying away to at least give a flattish kind of a margin outlook in fourth quarter versus third quarter as a whole? And do you believe margin management could be better in FY '23 with attrition challenges may be slowing down and the pricing could have a full year benefit versus may have a part benefit in FY '22?
Yes. So the only reason that I don't commit -- actually, there are 2 reasons. One is that we don't give the guidance, okay, as per our policy. So that is the one reason, but I have indicated that I think we have addressed the fall in the margins, okay? And we want to continue to improve from here. So that is one thing. Second is that we are also looking to invest because if you clearly look at -- I talked about our strategy, our image that we are an ERP company. We have moved from there in the last 3 years and have become an enterprise digital company. Very good revenue, very good balance in the digital as well as in the enterprise solutions, okay? And ERP also -- now from ERP, have grown to enterprise solutions, and we have brought in multiple solutions into the portfolio. So from that perspective, I think we are far more confident on that perspective. But going forward, I believe that the reason there is a significant momentum in the market is that there is a spend in the tech sector, whether it is in manufacturing, whether it is high tech, whether it is banking and financial services like insure tech or fintechs or it is the medical device like MedTech. So there is a technology sector coming up in every single industry. Now how do we cater to that? How do we serve that? There are a different set of offerings that will be required for them, and we need to be prepared for that. And our going forward strategy will be that we want to be a business-ready platform company. Now to do that, we need to invest also, okay? So that means that while we continue to improve the efficiency and we continue to deliver the margin that we are committing that we will deliver, we ask have to look at how do we save some so that we continue to invest also because we don't want to squeeze every single penny and say that no, we will not invest because then that would mean that our story will be finished in the next 2 years or 3 years. So if we had to become a $1 billion company faster and become even bigger company, that means that we will have to also continue to invest in the newer offerings because more and more revenue will start coming from the newer offerings and newer set of the client in every single industry.
Okay. Okay. Okay. So can you throw some light in terms of your comfort range on EBITDA margin for the next medium to longer term?
I have always committed that I want to deliver more than 15%, and I have delivered even up to 16.9%. But even then at that point of time, I said that my commitment will remain that I remain upward of 15%.
Okay. And just last short-term question. There are no furloughs in the fourth quarter versus third quarter as a whole. Plus, new business TCV on a Q-on-Q basis also looks good. Is it fair to say we have a chance to do better growth momentum in 4Q versus 3Q?
Yes, it looks like, but let me tell that the number of days are not much higher than the quarter 3. And I'm sure that every IT service provider would have said the same thing because there are going to be weekends and leave and holidays even in this quarter as well, okay? That is there. But still, I don't think that furlough will be there because for furloughs, whatever happens, really happens in the month of December. We were able to address through a good action, but of course, some furloughs still happened. And that is the benefit in this quarter that we'll definitely get.
Okay. And last question, if I can squeeze. Just on enterprise solution, the kind of nature of demand, which witnessing, do you believe is it a short-lived or may have a life for medium to longer term where people are converting from -- or upgrading from on-premise to the cloud version where demand could last even more than 2 years, 3 years as a whole?
So I tell you the value is coming now at the next level of ERP. The value that was required and the business process level people have got it, okay? It is only at the next level where there is an intercompany exchange of the data and the intelligence. That is where the next value of ERPs or enterprise solutions is coming. So you will see that all the ERPs are going to grow in that direction. And that is what we have been calling for the last 3 years about enterprise or digital that how the digital will fit on top of the ERP and how even the ERP providers will become equally digital. And that is what is happening, and that is the reason that this is not a short-term phenomenon. This is going to be a long-term phenomenon because it is not about migration to the cloud. But what do we do when we move to the cloud? What benefit do we get? What extra value that I get by moving to the cloud? That is what the clients are looking for. And that's the reason I believe that our enterprise digital story sells very well on those places.
The next question is from the line of Abhishek Shindadkar from Incred Capital.
Congrats on a good quarter. My question is, again, on the ERP side. DK, can you just give us a color in terms of the order book that we are aiming? What's the mix on SAP or at the JV side? What are the kind of deals that we are signing? That would be helpful. A related question to that is, what's the fungibility of our existing employees? If we are seeing the higher attrition in the employee base, which is catering to the ERP demand, would that entail hiring of laterals? And will that have an impact on margins? And in case if we're trying to go ahead and deploy freshers on those projects, is there any difference in terms of training number of months for those freshers for those ERP programs?
Yes. I think on the ERP side, we are seeing growth in all the ERPs in the SAP side or in the Oracle side, okay? We are seeing growth in all the places. In fact, we are also looking at that the other enterprise solutions such as Salesforce or ServiceNow or many other niche solutions, the growth is there also, and it has started to pick up very well. So that's a very good news that is there. Now coming to the attrition, yes, wherever you will see more specialized growth, the attrition has picked up. But we do have the pipeline to grow and upscale our people also, and that is how we are managing that. In many of the cases, yes, we had to hire the lateral, and we have to really look at how do we go and has the discussions with the client to attract the better prices also because it is not only that we have this issue. Even our clients are facing the same issue because as I earlier said that the fight is about talent access and not about the rate. And when it is about the transformation program, the level of value that gets delivered is far higher than the price or the additional price that the clients pay. So we are seeing that yes, we had to hire lateral people also. At the same time, we are hiring junior people and upskilling them also. So cost definitely is increasing. But in many of the cases, we are able to attract better prices also.
Okay. That's helpful. And just the last question. In terms of define freshers on those projects, is there any difference in terms of training programs for the number of months?
Yes. So the skill to scale program that we have, that is precisely for that reason because we have started looking at various level of people that we hire either from the colleges or we hire laterally junior people who can be upskilled in order to play the larger role, okay? So both the things that we are doing, and there are training programs both online as well as offline that are being provided in order for them to get skilled, upskilled very, very quickly so that they can be deployed on the programs and the projects. So both the things are happening. In fact, what we are also looking at is the rotation because when you're increasing the compensation for people to retain them, you also go and negotiate with the client that how will you rotate those people out to the other engagements so that you can tag them with the other people who are coming from the skill to scale program. And jointly, they can build the team to deliver the engagement that is required. So there are 3 or 4 different strategies that we follow on that.
That's helpful. And just one last data point, attrition. Can you just help us understand what has been the quarterly annualized number both for last quarter -- or at least for how it is trending over the quarters? Because that could help us understand your comment on attrition.
Yes. Thank you. The attrition part was about 31% or so. SK, you have exact number in front of you? If you can give that.
Yes, the 31 is the right number that you mentioned, yes.
What was -- the 31% [indiscernible]
Sorry, is that the quarterly annualized attrition?
This is for the quarter 3, yes. 31.4% is for the quarter 3.
Okay. But does that mention -- in the investor relation is mentioned as LTL, right?
Yes. So quarterly annualized is 34%.
Okay. Perfect. And what was it the previous quarter?
Do you have that data with you?
Annual number [ 44 ]
The next question is from the line of Nilesh Jethani from BOI AXA Mutual Fund.
Congrats on a great set of numbers. So my first question was on the margin walk or margin bridge. So Q-on-Q, we have seen improvement in the margin despite attrition, et cetera, going up. So I wanted to understand if one wants to break up this growth. So what was benefit coming from operating leverage? What impact was due to wage hikes? What impact was due to currency depreciation? So any bridge would be really helpful.
I do have the bridge, okay, but it will be a more detailed answer. Let me just fetch that, okay, and provide that.
Let me take that question, DK. Is it okay?
Yes. Sure. Go ahead, Chandru.
Chandru is here Nilesh. So in terms of the margin improvement, they came from primarily volume growth and improved operating leverage and DK spoke about the work we have done optimizing our -- and optimizing utilization resources during the quarter. So those were -- roughly, we got about 90 percentage -- 90 bps on account of volume growth. We also got some improvement on account of the fact that on a quarter-on-quarter basis, like I said, there were some onetime contract-related spend that was about 50 basis points. Impact standpoint, there was, like I said, one additional month of wage impact that was negative about 70 basis points. And there was also an increase in our subcontracting expenses quarter-on-quarter. That gave us a negative about 50 basis points. So roughly, this was the bridge, Nilesh.
Got it. Really helpful. And second question was on the growth outlook. So historically, just to give our outlook as far as T 20, T 21 clients are concerned, the growth outlook on them. So wanted to understand where we stand today as far as growth outlook for the top 20 customers?
So if you look at even today, we are growing more than 20% for the top customers. So I think that definitely remains very, very robust for us. And that is because we have a very clear initiative and focus on growing with our top 38 accounts. And that the reason you will continue to see that we will bring more and more and better and better growth in the top accounts.
The next question is from the line of [indiscernible]
Just wanted to understand on the sales front, do you think over the course of next, say, next 6 to 1 year, do you think there can be -- there will be a substantial change required in terms of our sales effort? Or do we have to substantially change the incentive of the salespeople or hire aggressively on the sales front? Or you are currently satisfied with the pace we are going currently on the sales side?
So I don't think that efforts are going to change as much, but our strategy continues to evolve. And I have spoken before also how we moved from project-based company and move to become an annuity-focused company, and we had to change the incentives, keeping that in mind. Similarly, we said that rather than just being a project base, how do we do cross-selling, okay, because we wanted to become verticalized completely. And that we changed the incentive structure, okay? So that we looked at. And then we looked at that how do we go OEM-based net new selling as a separate initiative. And we did that in the 9 months as an experiment to create a hunting within the organization. That got successful, and we had kept separate focus on that front also. And that gave us the benefit and the incentive to the people that we kept it that way. Going forward, we are going to have a shared or you can say dedicated hunting engine, okay? And that will be on the commission base. Whereas there will be an account management, a deeper focus so that we continue to cross-sell based on the benefit that we saw in the last 2 years. So we continue to grow our larger accounts also by having a very stronger focus on the client relationship. So there will be 2 set of incentives that will come up. So our incentives have changed in the last 3 years, every year, and we have evolved to current stage. So yes, we absolutely have continued changing. And this year also, we will change. I don't know for the next year. We will continue to watch out because change is good and that change is the only thing constant, and we have to continue to bring the new changes in order for us to remain very effective. So we will do that. But I believe that when we are going to put hunting engine separate from the farming or from the account management, I believe that we are creating a path for becoming more focused on the platforms, okay. Because then, I will have to focus on lesser number of salespeople to train them on newer set of services and not to the entire set of the sales, okay? Not that everybody has -- is not supposed to learn, they will because we cross-sell also. But when you're going fresh in the market with the new offering, your hunting engine is the one who takes the lead. And that would mean that in the beginning, we will have to really bring them up to the same level. And that is what we will do. But I believe that 6 months down the line or 1 year down the line in the next financial year, probably, we will have to look at when we are ready for taking it to the farming engine also and whether we need to make it incentive based on the offerings as well. So we will continue to evolve, continue to change as far as the incentive schemes are concerned because market is changing very, very fast and we definitely want to continue to change the behavior in which way, we go and send it to our clients.
All right. Just a small observation or a request. In your KPIs that you disclosed, so you have this headcount in terms of disclose in terms of sales and support. So if you can bifurcate that between, say, within sales and the fourth quarter sales and what is support that would be really helpful because support is also really a very large number so that we can see that how the sales efforts are going specifically. Yes. So yes, I think that's it from my side. I think...
Arun, will you be able to answer the data with that? If you have alligned potential numbers...
Yes.
You have said that the sales and support today is 11 0 4, okay, in comparison to 11 20 in the quarter 2. So what is the shift? Because as far as I know, the sales we have grown a little bit. Whereas support, we have reduced. That's the assumption that I have. But if you have the break up, if you can give that?
I was not just talking about 1 quarter. I just wanted to see the progression for the last 2, 3 years. And from that perspective, I just made the suggestion that KPI can be -- disclosure in KPI can be between sales and support separately, that would be helpful.
We can definitely do that. But in the meanwhile, maybe I can definitely get you the answer on the sales side. Roop, you are there. Maybe you will know how people in the sales team has increased during the year -- previous year to this year and then quarter-on-quarter. Just to give the color to that. Yes.
I mean our sales headcount this year is up by between 8% to 12% based on -- from like-to-like last year.
The next question is from the line of [indiscernible] from BNP Securities.
This is [indiscernible] from BNP. So good to see that ERP started coming back for us. I have first question related to [indiscernible]. So the growth that we are seeing 6% sequentially and 8% Y-o-Y, can we bifurcate this, how much of this growth is coming from our traditional clients like [indiscernible]? And how much growth is coming from the new agreement that we have done with the new hyperscalers? If we can bifurcate even qualitative guidance will also be signed?
So [indiscernible], we have actually stopped tracking the bifurcation on the ERP basis for a simple reason that there is so much of revenue that happens with the shared service between all the ERPs. We have changed the model a little bit where there are shared services also between the ERP. For example, doing the testing or for example, doing the master data management. Now we have stopped tracking because it creates more and more confusion. And that is a reason that we said that we will look at the enterprise solutions altogether rather than try to look at every single piece. So I don't have the numbers as of now with me. But if you would like to know, maybe Vikas can provide you those numbers sometime later.
Sure, sure. And the second question is related to the attrition numbers that we are seeing. So we are currently, I think, one of the highest amongst peers, whether we compare with our larger peers or we compare with the smaller peers. So do you think that some policy level problems that has happened because trends of push attrition higher among all? Or it is like that the general sense that you were getting that the demand is so high that attrition for everybody is higher and it is expected to come down for us? And the related question is, do we have any growth sacrificed for the number of -- I mean for the supply constraint that we have seen in this quarter?
No, there is no policy-related aspects that will contribute to the attrition or something like that. It is just that I know sometimes a couple of percentages will be up and down for all the peers because, for example, last quarter, there were others who were showing higher attrition than us. So that was there. And most of the peers are in the 25%, 27% range, okay? And sometimes also, it has about the way the numbers get reported, okay? So that also -- I don't know whether it is consistent across the companies or not. So that is also I heard issues are there. But I think concern is there in every single company beyond the level of comfort, okay? So we have to look at how do we continue to change our policies, how do we continue to evolve our model so that we bring the attrition in control. 1%, 2% here and there, in my opinion, is less of a concern in the shorter term.
Okay. And about the growth sacrificed because of the supply constraint in this quarter?
So no, I think that we have been able to grow well, okay? And that means that we have been able to attract new talent. That remains definitely very, very positive. And I believe that, that is not changing much. And we are, in fact, only broadening our way to attract the talent further. So constraint definitely is there. Okay. I would not say that the constraint is out there. But are we able to track the talent? Yes, we are able to attract the talent. Will there be pressure on the cost? Yes, that will be there. But I also believe that soon, things should start getting normal because the 8% to 10%, that is the rotation between the companies, okay? At any point of time, people are roaming between the companies. And then that just stabilized, most of the company will come back to the level of about 17%, 18% of the attrition, which we have seen it multiple times in our career, and we know how to handle that very well.
The next question is from the line of Dipesh Mehta from Emkay Global.
First one, the data part. Can you say the number of fresher we added in 9 months?
Sorry, can you please ask the question again? Your voice drop for me?
The number of freshers we added in 9 months?
Approximately 900 that we would have added, okay, in the last 9 to 12 months, if I remember right, okay? And going forward, our plan is that the next year, we are planning to add 1,500.
If I remember our number correctly, in first 6 months, we added only 430. So do you mean we added around 500 in Q3?
No, no, no. In the quarter 3, we would have added approximately, if I remember, maybe 200 or so. Arun, do we have the number for the quarter 3, the freshers?
Quarter 3 will be close to about 300-odd, DK.
Okay. Yes. So that's what I said that last 3 to 4 quarters...
You mentioned the numbers, you spoke about 9 to 12 months.
Can you speak a bit louder? Arun, you were saying something? Can you repeat that?
No, no. I said -- can you hear me now?
Yes, yes, yes.
I was saying that in Q3, we would have had close to 300, but I was just pointing to the fact that when you spoke of 900, you were talking about time range between 9 to 12 months, the past 9 to 12 months.
Understand. And the second question, which I ask about annuity revenue mix. Can you say what number now we will be?
Last quarter, we were at 72%. We have not computed it this quarter. We will compute it again in the quarter 4. But we were at about 72% in the last quarter.
Understood. And last question is about considering the overall attrition and very strong demand. Are we seeing any revenue, which we are living on table kind of thing because of such a high attrition?
No.
Yes. And any slowdown you are witnessing, let's say, in terms of our new client? Because new client is also one of the good growth engine for us. Because of Omicron and surging COVID cases, any slowdown in new client-related interaction?
No, we are not seeing any slowdown, but there is definitely some revenue that now we leave it on the table where the margins are lower, and it is not a strategy customer for us. So earlier, we may be far more open to add a tail account, but now we have become far more careful. Because when the resources are limited, then you want to serve first to your strategic and important customers rather than trying to add nonstrategic tail end customer.
So because if I look at your $1 million-plus account, which we used to have, let's say, 85, 86 pre COVID era. Now that number is around 77, which is almost 10 or kind of decline. Do you think considering focus on strategic account, relatively large account, these numbers would be inch up faster in the next few quarters?
No, I expect that this number will go up.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Dharmender Kapoor for closing comments. Thank you, and over to you, sir.
Thank you very much, everyone, for joining the call and asking very pertinent and direct questions to understand one that what our near-term and long-term strategy is, but also understanding that how the momentum is really giving us the confidence, at the same time, also understanding that what all levers we are pulling in, in order for us to continue to provide predictable growth as well as the margins that are above 15%. So that is what will remain our focus going forward also. We remain committed to our $1 billion dream. It is not changing. By 2025, we want to be a $1 billion company. And I believe that as the -- as every quarter passes, our confidence in achieving that continues to increase. And with all your wishes, I'm sure that we will be able to achieve that in time. So thank you very much once again. Please stay safe and continue to remain in touch. Thank you.
Thank you. Ladies and gentlemen, on behalf of Birlasoft Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.