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Birlasoft Ltd
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Ladies and gentlemen, good day, and welcome to Birlasoft Q3 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhinandan Singh, Head, Investor Relations, Birlasoft. Thank you, and over to you, sir.
Thank you, Aman, and welcome, everyone. By now, you have seen or received our results. Those are also available at our website, birlasoft.com. Joining me on this call today are our CEO and MD, Mr. Angan Guha, our CFO, Mr. Chandrasekar Thyagarajan or Chandru as we call him, Mr. Roop Singh, our Chief Business Officer; our Chief Delivery Officer, Mr. Shreeranganath Kulkarni, our SK as we call him and our Chief People Officer, Mr. Arun Rao.
We will begin the call with opening remarks from Angan and then Chandru. 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 is a forward-looking statement, and therefore, that must be heard or read in conjunction with the disclaimer that is appearing in our Q3 FY '23 investor update, which has been sent to you and also uploaded on our website as well as filed with stock exchanges.
With that, let me hand over the floor now to Mr. Angan Guha, our CEO and MD. Over to you Angan.
Yes. Thank you, Abhinandan, and good evening and good morning to everyone wherever you are. I'm pleased with the opportunity to be able to engage with all of you today for my first earnings call since I have come on board. As you're aware, I joined Birlasoft on December 1 and over the past 2 months, I've spent a lot of time meeting with our teams, the sales teams, the account teams, the delivery teams, our service line teams and also many of our customers. And I can tell you that I'm incredibly excited with the response and the welcome that I've received. I will share with you later in the call with some of the perspectives that I have picked up as we go along.
But before I get there, let me quickly share with you the highlights of our quarterly operating performance, after which I'll ask Chandru to share some details around our results and financial highlights.
So our revenues for the quarter stood at $148.4 million, representing a growth of 5.5% year-over-year and flat Q-over-Q in constant currency terms. This was despite the higher-than-usual furloughs that we experienced this quarter. And as all of you know, it is, by nature, a seasonally weak quarter. Our EBITDA margin performance for the quarter, excluding the one-time provision of $19 million that has been made is 13.4%. Chandru will explain to you in details the provision that we have taken. Our operating margin performance for the quarter also reflects the investments that we have done on some capabilities and the leadership hiring that we continue to do and these are just investments that will yield results as we go forward.
However, our deals have been very, very encouraging, our deal wins. Our TCV signings for the quarter is at $231 million, which represents a 39% growth quarter-over-quarter and 27% growth year-over-year. And I'm happy to state that this has been one of the best quarters in our history in terms of deal signings. On the people front, we ended Q3 FY '23 with a total headcount of 12,530, which is a growth of 5% year-on-year, but more importantly, our attritions have been improving. Our attrition in Q3 stood at 25.5% and this is an improvement of 27.9% in Q1 and 27.4% in Q2. As the attrition levels get better, we expect some of the benefits to accrue in margins as well as we go into the coming quarters.
As I deep dive into my business, let me share some initial thoughts that I gathered, right? As all of you know, there have been shifts in the external environment in the recent months due to the confluence of factors. These, however, are likely to be short term in nature. Customer organizations will continue to spend on IT, looking for better value from their IT spend and a much deeper relationship with their IT providers as we go forward. I strongly believe that the tech spends will continue to be strong and the spending will become more and more tuned towards the operational excellence, customer experience and cost efficiency.
At Birlasoft, we have built relationship with our clients who we have served for extended periods of time, and clients do see us as their strategic partners. From an organization perspective, we have been able to nurture great talent pool, build strong capabilities in very high potential areas, and we will continue to reinforce our leadership team as we go forward to sharpen the market focus for better growth. It is this fundamental robustness in our business and the investments that we are making makes me extremely confident of our outlook. With a longer quarter, no furloughs and some ramp-ups in deals that we have added, we believe, operationally, our Q4 will be stronger than Q3.
Operationally, we are confident of delivering this strong growth even for the financial year. Over the next few weeks and months, I will share with all of you a more sharpened go-to-market strategy as we streamline our organization structure, strengthen our execution and become much more predictable as a business. I believe that consistent and robust execution combined with the client-centric organization that we are building, it will take us to the next phase of growth in our journey.
At this point in time, I will ask Chandru, our Chief Financial Officer; to share his perspectives on the quarter. But before I hand over the floor to him, I would like to take a moment to thank him for his contribution during his time here. As you know, Chandru has decided to move on for personal reasons. I personally appreciate how he has built a strong finance organization and a sound layer of leadership under him and some incredibly mature processes. So Chandru, thank you for your contribution to Birlasoft and with that, I hand over to Chandru. Chandru?
Thank you for a kind word. Good morning, good afternoon, good evening, everyone. Hope you're doing well. It's a pleasure to talk to you again. Let me take you through some operating and financial highlights in some level of detail. Our performance for the quarter has been characterized by a higher-than-usual furlough, some project holds some investments that we made in the business, all of which Angan alluded to and also onetime impact from a provision that we've taken. At the same time, we've also had good deal wins. We've had strong cash flows and continued improvement in our attrition metric. As a result, our revenue in dollar terms stood at $148.4 million and INR 12.22 billion. We were flat on a constant currency basis sequentially. In INR terms, our revenues were up 2.5% quarter-on-quarter.
Our Q3 FY '23 consolidated financials, as you know, includes a onetime impact of $19 million. This provision hit on account of a customer calling, okay, that has filed a petition yesterday that is February 1 in the U.S. for relief on the Chapter 11 of the bankruptcy court -- in the U.S. bankruptcy court. In line with our accounting policy, we've created a provision against outstanding receivables and also contract assets as of December 31, 2022. We are taking legal advice to determine the future course of action. Our EBITDA margin, excluding the nonrecurring provision for Q3 stood at 13.4%. During our discussion on this call, we will be referring to EBITDA, excluding this onetime impact and that reflects our operating profitability.
Our operating margin for the quarter reflects the earlier mentioned factor with higher furlough, incremental investment in reinforcing leadership across our vertical, service lines and delivery and residual wage increases, which we had indicated, if you recall in our previous quarter as well. More than offsetting some gains that we got from currency tailwinds, as a result EBITDA margin excluding the onetime provision declined sequentially. We expect to bounce back into Q4 with some of the investments made in Q3 beginning to yield results.
From a vertical standpoint, our BFSI business continued to do well and registered a strong sequential growth quarter-on-quarter. The life sciences vertical also recorded growth on a quarter-on-quarter basis. The E&U and Manufacturing Vertical drove -- registered a sequential decline, mainly on account of the furloughs and some of the project whole impacts that I'm talking about. Our top accounts have done well with both the top 10 as well as the top 20 buckets delivering growth led performance quarter-on-quarter in what you know is a seasonally weak quarter.
Our top 5, top 10 and top 20 accounts now contribute 31.7%, 47.9% and 54.1%, respectively, to total revenue. The news on the cash flow front continues to be good. In Q3, we had the best-ever quarterly collection at $169.3 million, this is testimony to the quality of service that we've been delivering. Our DSO was down, was better as well at 55 days, and we continue to be best-in-class there. Our total receivables, including bill and unbilled, are down quarter-on-quarter, so the overall receivable position has improved noticeably. Our operating cash flow was $30.2 million during the quarter, and that was 154% of the operating EBITDA and by operating EBITDA, I mean this excludes the onetime provision. And our free cash flow was healthy as well at $28.9 million, which were 148% of our operating EBITDA.
The resulting strong cash flow generation has led to cash and cash equivalent crossing INR 10 billion mark back again as of 31 December. You'll recall that we had a share buyback with an outflow of about INR 4.75 billion earlier this financial year.
In conclusion, I believe that excluding the issues related to Invacare, we set for a growth-led performance in the coming quarter. We expect operating margin shift and quarter-on-quarter with impact from furloughs behind us. Our balance sheet is strong. We're generating robust cash and have made investments in building capability that will help us scale our business going forward.
With that, I'll open the floor for questions.
[Operator Instructions] The first question is from the line of Sudheer Guntupalli from Kotak Mahindra.
And then congratulations and all the best for your new innings. My first question is you've been in the system for almost 2, 2.5 months. Any preliminary thoughts on, let's say, the fine-tuning the strategy, be it on the GTM trend, sales spent or delivery side, so on and so forth. Of course, you mentioned that going forward, you'll keep interacting with us on that. But any preliminary thoughts on where do you think we'll have to do some bit more of strengthening? Where do you think it is all okay and status quo can continue?
Yes. So Sudheer, first of all, thank you, and thank you for your good wishes. So look, I'm in the company now for exactly 60 days, right? So it's a little bit early for me to give a detailed view. But like I spoke about earlier, we'll be investing in all sides of the business. We will be investing on the front end will streamline the organization to become more client-centric. We'll be investing in our delivery leadership. But more importantly, we will be investing in our capability as well, right?
Now not to say that we don't have great capability. In fact, I've met so many clients, and we've got very, very strong capability and deep relationship with our clients. I think if we can get sharper focus, I think we will be able to do very well. So you have to give me some time when I can lay out a formal strategy on all the 3 areas that I spoke about. And I will do it in the next coming 3 to 4 weeks.
Sure, that's very helpful. Second question is on this Invacare part. So just to -- just so that our understanding is correct. What is the run rate as per the latest quarter revenue run rate? What is the share that this client is accounting for in the overall scheme of revenue? And going forward, how much of an impact do you foresee given that in their bankruptcy filing also it is not the entire entity is filing for bankruptcy. Only a few subsidiaries are filing for bankruptcy. So currently, what is the revenue run rate? And to what extent do you think that gets impacted?
Yes. Sudheer, look, the bankruptcy notice came to us only last night, right? So our -- we are now looking at all the legal opinion to figure out exactly what the impact is. So it will be a little too early for me to talk about the impact. But I will tell you this, right? From a revenue standpoint, it only contributes to lesser than 3% of our revenue. right? So I would request you to look at our operational performance and keep Invacare outside. So like we talked about a little while ago, operationally, we will continue to deliver strong growth in Q4 both on top line as well as on EBITDA, right?
But what will happen to Invacare, it's hard for me to comment now because we are taking legal opinion. For now, based on what we knew, we have taken the provision, but we'll have to wait and see what happens.
Got it. Got it. My last question is to Chandru. Just this provision, what is the split between billed receivables, unbilled and contract assets? And an extension of that question is what is the nature of this contract assets? Is it some prior investment you had done with this client, which you are sort of noncash basis, you are knocking it off. Any further color on this will be helpful, Chandru.
Thanks for the question. First of all, this is, as you already alluded to a combination of billed, unbilled and contract assets. That's point number one. Point number two, the whole billing schedule is for the deal structure that we signed back in 2019, right? And we've been billing Invacare based on that structure. And really, what we've had to do is we decided that we will take the provision for all of the bill receivables as on date, right? So we bill them, we have a payment terms that was agreed on which basis we have been billing them. They've not been -- they've not paid us for the past couple of months, that was one.
Second, we also had unbilled receivables. And again, like I said, the billing were based on the deal structure that we signed up back in 2019. And as part of that deal structure, there were still some of the receivables that we had not yet billed as on yesterday, right? And that is one part. So -- and third element is the -- third element is the contract assets. Now the contract assets, nothing but our cost of third-party vendors and licenses and some of those costs that we incur specific to this contract that have been prepared for and are still lying in the balance sheet, right? So if you ask about the total quantum, right, roughly, it is primarily billed plus unbilled, that I would say, constitute about 80% and contract assets contributing less than 20%.
Sure, Chandru. I'm a little surprised as to just 2 months of billed receivables and, let's say, plus unbilled is contributing almost INR 120 crores. Given that the revenue share, as Angan pointed out earlier, is hardly 2% to 3%, how come 2 months of billed plus unbilled is resulting in almost INR 120 crore of provision here?
Yes. So like Sudheer, there's a bit of accounting nuance here so I probably not bore you with that, but you know that in a fixed price contract, right, the way you take the revenue is very different from the way you do your billing, right? So these are 2 separate -- these 2 separate streams, if you will, right? In the early part of the contract in any contract where you have transformation, you take more -- you spend more effort and therefore, take more revenue and then you bill it over a period, right?
So we are at a stage where the billing is roughly about 2x the revenue that we take, right? So the billing is obviously much larger than the revenue that we've been taking. So that's 1 of the reasons why the billed plus unbilled that you see is significantly larger than the revenue that you potentially are estimating.
The next question is from the line of Mohit Jain from Anand Rathi.
Sir, as a follow-up to the previous one only, when you say contract assets prepaid, this was money paid in 2019 or is it something which was paid in, say, 3 months back or something?
So Mohit, I'll take this question. This is money that -- it's like a continue Mohit, right? For example, I'll just give you an example here, right? If there is a certain third-party contract that we have been renewed as part of the deliverable say we renewed it in July 2022, and we did a renewal for a year, right? We would have consumed 7 months of it already and 5 months would still be remaining the balance sheet, right? So the contract estimated is sum of all of that Mohit, right? So it's not back in 2019. It's more reason than that.
Okay. And from a cash flow or revenue standpoint, what you're suggesting is that we should take this 3% hit immediately in Q4 and then on that base, you will possibly show some growth. Is that understanding correct?
That's correct. So if you knock off the 3% from both Q3 and Q4 and then do a comparison you will -- Q4 almost...
The platform will be automatically logged off, right? We will not book revenue here, going forward or will you book for the month of January?
Yes. Sorry, Mohit. We were talking over to each other. Yes, Q3, you will knock it off. And Q4, you will not have it going forward. So therefore, on that basis, if you compare, we do expect a quarter-on-quarter improvement, yes.
Second 1 was on the other current liability, et cetera, there was this increase on a quarter-on-quarter basis. What is the nature of this increase? And is this also something to be paid up in the short term? Or how should we read that?
Yes. So it is very unrelated to the conversation we're having around Invacare, we have a few customers that have given an advance and this is typical of the third quarter for Birlasoft every year where you have some customers that you [indiscernible] and get set off in the following quarters, right? So the [indiscernible] advances are mounting to about $12 million, that's gone into the current liability -- other current liabilities line item, Mohit.
Great. So that represents part of the growth that you are anticipating ahead?
That is representing part of the growth that we are anticipating. Absolutely right.
One more on TCV, like you guys spoke about higher TCV, but if I look at net new, it seems to have come off quite sharply Q-o-Q, Y-o-Y. So what is happening on the net new TCV, which you have given us $102 million?
Yes. So on the net new, we've signed up $102 million for the quarter. But what you should be also seeing is our funnel. Our funnel size is going up, right? So while we have a net new, which is a little lower this quarter, but we've renewed a lot of contracts, and that also shows the strength of our relationship and strength of our delivery. And we are confident that overall, on the TCV signings what we have delivered, it is a very strong quarter, and we hope to continue that in the future quarters as well.
When you say continue, we should look at $102 million plus kind of a net because net new will determine growth in terms as for FY '24?
Yes. So you should look at the past 3 quarters from a net new perspective. So it's a cumulative thing because we are measuring TCV as you can imagine. So some of the net new will only flow in revenue 2 quarters out. So you should look at it from that perspective.
Okay. And last is on the margin. You guys spoke about some margin expansion in 4Q. Is it possible to quantify because some of these costs appear like a one-off and then there is this moving part which is headcount? We were expecting some increase during the quarter. It actually came off when the cost went up. So is there some quantification on the margin front that you guys can give?
Yes. So we can't quantify it, but I'll tell you what. In Q3, our margins showed a decline because of 2 reasons. One is because of the unusual furloughs that we took which was not anticipated earlier. And second is the kind of investments that we are making. We've been making investment in sales. We are making investment in leadership hiring and some of it, when I draw out my strategy, you will see it very transparently in terms of the investments that we are making. Because of that, we have taken a little bit of a margin hit. But the reason why we feel confident of the margin clawing back is because of 2 reasons. One, it's a longer quarter, 4Q is a longer quarter. We will not have the furloughs and they will come back and because of the investments that we have made and the deals that we have won, it will obviously aid in some revenue uptick as well, which will also aid margins. But we can't really quantify an exact number, as you can imagine.
But when you say going back, you're referring to 2Q margins?
So we can't give you a forward-looking statement like that because we don't give guidance. But suffice to say that the margins will be better than Q3.
The next question is from the line of Dipesh Mehta from Emkay Global.
A couple of questions. First, just to complete on Invacare part. If I refer to Invacare release, they mentioned they have terminated MSA on January 27 with Birlasoft and they mentioned some of the reason right, not satisfied with the surveys and breach of some of the conditions and all those things. So just want to understand whether the intimation came on yesterday or January 27th?
So Dipesh, we've been having conversations with Invacare, as you know, pretty much for the last 1 month, right? And in the last 1 week, we've had multiple conversations with them, which ultimately culminated into the Chapter 11 filing, which happened last night, right? So I can't really comment exactly what happened because that is client confidentiality. But we've been having conversations with them for the past 7 days. And finally, we got the Chapter 11 notice last night, exactly 24 hours back.
Understand. Now if I refer to their MSA termination notice, it appears till January 27 billing may continue. So when we look Q4 revenue or whether we will see roughly a month billing happen in Invacare account or it could be practically 0 in Q4?
Yes. So Dipesh, I'll take that question. it will be 0 in Q4 Dipesh because the moment this is as per our accounting policy, the moment a customer moves into Chapter 11, we recognize revenue only on collection, so which means -- you should expect that we will not recognize any revenue in the fourth quarter unless we are paid for that revenue, right? And that would be a separate accounting treatment, but for now, we should assume that there will not be any revenue for [indiscernible]
Understand. And because, let's say, there would be no revenues or no incremental provision required in Q4 also?
Yes. So in terms of the incremental provision required there are 2 aspects to it, right? One is the revenue related aspect; and two, there is a cost-related aspect, right? So we have to get to that after the assessment we do based on the legal inputs that we're getting Dipesh as I'm going to say it's not even 24 hours, 22 hours to be precise and we got the notification. So we're still working through this. So we'll probably get a little more information in the next few weeks on what impact, if any, we will have in the fourth quarter.
Now coming to the business side. Now we indicated Q4 revenue growth to be better than Q3. Now in Q4, we have to take some hit because of Invacare, which is, I think earlier in the call, we indicated a quantum of that revenue. So it is including the Invacare. So on a reported basis, we will see improvement or it is adjusted for Invacare business. So the commentary just been made?
Yes. Sorry, Dipesh, like I said earlier, you should keep Invacare outside because we don't really know what is going to happen to Invacare based on the legal advice that we get. What we can say on state is operationally outside of Invacare, we will show growth in Q4, both on revenues and margins. But Invacare, we do not know. And so it is hard for me to comment in terms of what will happen or how much provisions we will need to take.
Understand. So revenue growth also it is ex-Invacare, the commentary...
Outside of Invacare. That is correct, yes.
Understand. And last part is about the EBITDA margin. I understand near term, some of the investment plan and obviously, S&M investment plus some of these one-off provisions, which impacted margins. But from aspiration perspective, I think earlier we have aspiration to have 15% and improving it to 18% over the next few years. So just want to understand your perspective, the way you plan investment to accelerate revenue growth in the next few quarters, what would be the range which you would consider as a flow beyond which you would not accelerate investment till the time results come from the prior investments. If you can give some sense about your thought process on margin trajectory?
Yes. So Dipesh, we still stay committed to delivering the 15% EBITDA margin that we have committed earlier. We are committed to deliver that. Now the question is whether we get there in 4Q or the first quarter of next year, we can't comment on that right now. But definitely, we will get to 15%. Now on the long-term trajectory to get to 18%, again, it will all depend upon the kind of investment we make. We want to build a long-term, strong growth-oriented business. And for that, we will need to make investments. But I'm equally aware of the fact that we need to deliver the margin. So we will say for now that our first port of call will be to get to 15%, but continue to make investments as we go along.
The next question is from the line of Sandeep Shah from Equirus Securities.
And congrats Angan on your joining and all the best. And Chandru also all the best for your new and the world as a whole. So just further to Sudheer's question on the strategy. I also wanted to understand, Angan, do you believe that Birlasoft has enough entry door openers or right to wins? Or you have to invest into that also before making a call in terms of sustainable, considerable -- consistent growth turnaround in the revenues? And second, the perception of the investor is Birlasoft also has witnessed a lot of volatility in the growth in the past because of the project completion, project-based nature of the business. So do you believe even your time is required in terms of streamlining the business to more sticky annuity-based revenue or those things are actually already there and time and investment may not be required much on that side of the business as a whole?
Yes. So Sandeep, first of all, again, thank you for your welcome and thank you for your kind words. So Sandeep, look, does Birlasoft have the capability, like I said right up front, we have got great capability, and we've got a great talent pool. We just need to sharpen our focus on the markets that we want to serve and the clients that we want to serve. Chandru also talked about the fact that our top accounts have started to turn around and are doing well. In fact, the top 20 accounts now contribute to 63% of our revenues. But clearly, we want to continue to invest over time to shift the trajectory to become more annuity-based. Am I happy with the situation that we are today from an annuity-based perspective, obviously not. We need to continue to invest not only in talent, our sales capability, but also our capability in terms of the offerings that we take to market.
But the good part though is all the clients that I've met all look at us as strategic partners. So back on the good client momentum that we have, we will shift our business and I will need time and investment to make that shift. And we will work on it. We will work on it as we continue to execute on our quarterly pitch.
And just further, in terms of client potential, do you believe enough can be done in terms of mining and driving the growth in the business? Or you have to do a well-balanced job in terms of client mining as well as hunting new must-have client addition as a whole?
Yes. So Sandeep, like I said earlier, our top 20 clients are growing. So that obviously tells you that we've got momentum in those clients. Now can all of those clients take us to the next level. The answer is mixed. Some of them will, some of them will not, right? So obviously, we have a good hunting strategy where we have a list of must win logos that we will build into this, right? So by and large, the confidence that we get as a management team is the fact that our top clients have started to do well. We are winning deals as you have seen. And as a part of the net new business that we have won, we've also won some marquee logos that we want to then invest and start growing.
Okay. Okay. And apart from Invacare, is there any other large client-specific issues? Because why I'm asking this is if I look at the margin x of Invacare provision for full debt, there is a rupee depreciation. There is actually a utilization improvement as well. I do understand the other headwinds you called out is investments. But is there any other write-offs which we might have done in terms of discontinuation of some of the low-margin business or deal accounts or you believe those things are not required on a going forward basis or not done in Q3 as well?
Yes, Sandeep, let me take this question in 2 parts. Part number one, are there other large accounts that are like Invacare account? The answer is an absolute no, right? I already told you that we've had a very strong DSO, we continue to have amongst the best DSOs across BPL Group as you can imagine one. Two, our collection for the past quarter, I also gave you the number. It's been the best ever, and we continue to do well on that front also.
So for us, clearly, that's an indicator of the fact that clients like the work that we do and pay us on time. That's point number one. Point number two, in terms of whether there are any other production provisions one time. There will be some little item that is coming on a quarter-on-quarter basis, sometimes plus some time minus, right? So we we're not measuring on minus here. But I can tell you that we have a very strong provisioning process. We have an estimated credit loss policy, on which basis we take our -- we take up provisions based on many factors that we consider, including the geographies that we operate, the kind of customers, the industries that these customers work in, the overall credit rating for our customers in our assessment and factors, which are payment -- are there any payment delays in specific cases based on client behavior and so on.
And on that basis, we take provisions as well in addition to specific provision that we've taken on Invacare this time around. So the short answer to your question is that there are no other significant onetime impact that we anticipate in Q4, except the fact that we need to assess what's going a bit Invacare, that's point number one.
Point number two, with the furloughs not being there, one, the project whole being lifted, two, and with some of the investments that we made in Q3, starting to yield results in Q4, we are confident that the uplift that we expect to see in Q4 will happen, Sandeep.
Okay. Okay. I have a follow-up. We'll come in the follow up.
Next question is from the line of Manik Taneja from Axis Capital.
Congratulations first of all to both Angan and Chandru for their respective pursuits. So Angan, I actually wanted to get your thoughts on the point that you made around sharpening our focus.
Manik, your voice is not very clear. Can I request to use the handset, please?
Sure. I hope I'm audible now?
Yes.
Yes. So my question was for Angan. You talked about sharpening our focus, both in terms of markets and clients. Now in this regard, in case of Birlasoft over the course of last 3, 3.5 years since this company was carved out through a merger of 12 Birlasoft business and KPIT IT services business. you guys have been pruning your long tail of accounts and trying to focus on a smaller set of customers and mine them better. So do you think we essentially continue in that journey going forward over the next 2, 3 years? That's question number one. The second thing is that in terms of building out additional capabilities to transform to or accelerate growth, do you think we look to leverage the cash on our balance sheet to build our capabilities?
Yes. So Manik, first of all, to answer your first question, we will absolutely focus on the top accounts, right? And again, if you remember what Chandru said, slowly, our share from our top 20 accounts have risen to 63%, and that is where our investments are going to go in disproportionately. We will disproportionately invest in our top 20 or top 40 accounts. But equally, we have a list of must-have accounts that will go in, and we will continue to focus on them, right? So that is point number one. On the capability side, right, I feel the capabilities that we have created, whether it's digital, whether it's infrastructure, whether it's data and analytics is actually world-class.
What we will do, though, is we will get more and more sharp focus around the verticals where we can take the capabilities on, right? And as you know, that clients actually buy business solutions and our technology solutions. So the verticals there in terms of what do we mean for the banking industry? What do we mean for the manufacturing industry is going to be crucial. So a combination of our vertical focus and the technology focus with our focus on the top 20, top 40 accounts, I think will be a big part of our strategy going forward, Manik.
Sure. And the question was around using acquisitions to essentially build capabilities or this would be an organic build-out?
Yes. So Manik, look, first of all, we will execute on our execute on quarter-on-quarter organically. That's the first thing we will do, and we will continue to do it for some quarters till we feel very confident that we have gone into a quarter-on-quarter growth mode. And once we have got there then we will look at if there is an inorganic necessity. We don't really know whether there is an inorganic necessity right now. Right now, our job will be to execute top line growth and margin growth and create positive cash flow quarter-on-quarter.
Sure. One last question. You spoke about the need to increase investments. So does this mean that from a -- while I do understand that you have an aspiration from a long-term standpoint to get to 18% EBITDA margins and probably pull back margins to about 15% in the near term. But do you think we should think about the next 12 to 18 months in terms of some dilution in margins as we meet the investments in terms of client relevance?
Yes. So again, I can't make a forward-looking statement, Manik. I can only say that we will continue to invest to build a long-term strong business. And equally, our aspiration will be to continue to deliver 15% EBITDA margins.
The next question is from the line of Ravi Menon from Macquarie Group.
Yes. So are there any strengths that you found at Birlasoft, especially in BFSI that you've been positively surprised by when you said that you will sharpen this go-to-market by industry, anything that you think we have some potential and already that make for some easy pickings?
Yes. So in Financial Services, obviously, we've got some very, very good clients that we are working on, and we are mining and we are growing them. And most of our clients, you've seen through the results have restored a lot of faith in us and are working with us to kind of very closely. So in my mind, financial services will continue to be very strong. We've got great capabilities in the banking sector. And within banking, a couple of very niche processes where we are very strong at, and we will continue that growth trajectory.
Great. And generally, it's been perceived at manufacturing because of, I guess, primary or at SAP work, it's seen as a laggard. Do you think that we now have a good cycle there in manufacturing or an SAP HANA upgrade or anything else that we can look forward to have this vertical growth in line with the...
Yes. So first of all, we have a new leadership. As far as manufacturing and high-tech is concerned, we are excited about the new leader who's coming in to grow this business. On the second part, the point that you made about S/4HANA creates a huge opportunity for us. We think the cycle is turning. We think the manufacturing sector in general will over the next few years will see an uptick, and we want to capitalize on that uptick. We are definitely very focused on that vertical. We are investing in that vertical. Like I told you, we have a new leader now and on the back of the new leader, we will see a lot of growth going forward.
And you mentioned the new leaders of manufacturing. Any other changes that you could mention that you made so far in the go-to-market as part of the strategy?
So we have a new leader for our life sciences business. We have a new leader for our energy utilities business. So yes, we are making a lot of changes as we speak. Some of the leaders are already on board. Some of the leaders are coming on board. So yes, we are making a lot of investments and which is why Chandru talked about an investment cycle through October, November and December.
Great. And 1 of those net new deal of $102 million, any particularly large deals or the long-term deals like the 10-year deal signed with Invacare.
No, we don't have a 10-year deal, right? But we have some -- we have 3 good deals. We can't talk about those clients because it's confidential. But I can tell you, we have 3 very, very good deals.
And last one to Chandru, when you spoke about the fixed price deal with Invacare [indiscernible]. One single spot that I think I have to stand still. Apologies for that. Chandru, you talked about the fixed price deal with Invacare where you were recognizing revenue I think according to what you had planned going by the milestones. So is that why this cash conversion of the billing has actually been lagging the revenue or was it like a particularly large milestone that we've not really been able to deliver or the client is not at all actually accepting.
No, so, -- so it's more of the former Ravi. The way the bidding schedule was agreed upon as part of the structuring was that the billing will lag revenue in the initial quarters and then the revenue will lag billing into later quarters, right? So we are in the phase right now where we have more -- we've had more billing than revenue. But yes, in the initial quarters when the maximum effort was being put into the transformation where we had more revenue than billing, right? This is part of the accounting policy, which we've been consistently applying across all of our fixed price plans.
And just to comment on, right? Because I think if I recall right, by the July 2022 calls if Invacare they, I think mentioned that they were pretty happy with the work that you guys have done, and they've managed to save a lot on the G&A side structurally billions of dollars in savings is, I think, what they called out. So now to move to a point where they are actually accusing you of contractual breach of MSA. Have you been appraised of what they are saying that you have breached?
Yes. So first of all, we don't know what they are accusing us off, right? Because it's been a string of conversations, Ravi and then it culminated into the Chapter 11, right? I can only tell you that we are executing flawlessly, and we were getting paid on time. So we are not aware what they are accusing us of and that is all under discussion.
The next question is from the line of Shradha from Asian Market Securities.
Congratulations and best of luck for your [indiscernible] couple of questions. Firstly, within manufacturing, we have good expertise in high tech. And that vertical seems to have done well in the previous few quarters. But with what we're hearing on the high-tech vertical from other larger vendors what is our outlook on this theme? And with respect to that, how do we see growth in manufacturing overall?
Yes. First of all, Shradha, thank you for your good wishes and thank you for your welcome. So yes, manufacturing has been a strong vertical for us. And like I said, we are seeing a lot of traction in manufacturing, both on the discrete manufacturing side and the nondiscrete side. High tech is a big focus area for us and though the high-tech companies are currently going through a little bit of a tough cycle because of everything that we are reading in the papers. But at least from our client perspective, we believe that, that business will turn around very, very soon as the cycle turns. So we are very confident we will continue to invest both in high tech as well as the same manufacturing, Shradha.
Right. And secondly, Angan, you have indicated that you are looking at improving margins, but it's been just 2 months that you've been around, but you must have identified by now some areas that we would focus on initially for driving improvement. So can you mention those improvement areas that you are focusing on at the first go?
Yes. So Shradha, can you wait for a couple of weeks to a month for me to outline my overall strategy. When I get an opportunity to meet all of you and outline my overall strategy, you will automatically see how we will save some cost to improve margins at the same time investing at the right places. It will be a little early for me to comment on that because it's a part of a much larger strategy, Shradha.
The next question is from the line of Abhishek S from InCred Capital.
Welcome, Angan and best wishes to Chandru, sir, for all the support. My first question is regarding your prepared -- comment in your prepared remarks. You mentioned about a legal opinion related to bankruptcy. Can you highlight what is this regarding the legal opinion is to? And is there any onetime settlement that are we kind of contemplating? That is question number one. The second is on the fungibility of the resources working on the Invacare project, what we wanted to understand is that how soon they would be deployed on the newer projects. And the third question is on the subcontracting number. Can you just highlight what it was for the quarter and the previous quarter as well? And would the Invacare contract or the closure of this contract, would that mean that there could be some savings from the subcontracting number or the subcontracting expenses.
Yes. So first of all, the reason we said that we are taking legal opinion is because as you can appreciate, and Chandru alluded to this earlier, we got the notice only 22 hours ago. We've looked at it and since we have filed for Chapter 11, we need legal opinion in terms of how do we need to proceed because as I'm sure you're aware, when any company files for Chapter 11 then the codes get involved. So it is important for us to take the legal opinion. Now, to your question, how many people can we redeploy, how quickly will all depend upon how this negotiation goes. So very, very early for us to talk about. But over the next 2, 3 weeks, we'll have a better situation. On subcon, I'll ask Chandru to talk about.
Yes, you had got a 2-part question on Sevcon, Abhishek, so let me take both of that, right? First of all, on Sevcon, we did see a slight dip in Q3 versus Q2. Also because as we got the furloughs, right, where we have the flexibility to put Sevcon on furloughs as well. So there was a slight dip, but it was not significant, to be honest, right? That is one. Second, you also talked about the Sevcon running Invacare account and the deployment, right? You additionally alluded to employees on Invacare account and redeployment of these resources, right?
So on both my response would be we will wait for the legal advice on the go forward with respect to the Invacare account because I'm sure there are do's and don'ts that we need to be educated on. we will get some more clarity on this Abhishek over the next several days. Before we can comment on what we build is going forward because we want to make sure that we are compliant with all regulatory requirements in the U.S., right?
That's very helpful. Just a last 1 from my side. Now given that you are saying that you're awaiting the comments from your legal side, I presume that the TCV number would not have been adjusted for on a go-forward basis for this client or it has already been in your press release?
So the way we report TCV signings are only new signings. When I say new signings. It could be renewals. It could be new signing from existing customers or new signing from new customers. So the numbers you have do not include any past information or negative Abhishek.
No, my question was not for us, but would you kind of readjust that and kind of highlight us in terms of on a go-forward basis?
So I'm not sure I understood your question. Our order book will have to obviously get readjusted based on how -- what kind of advice we're getting from the legal advisers, right? But that will still, like I said, depend on the clarity that we will hopefully get over the next several days.
The next question is from the line of Rishindra Goswami from Locus Investments.
Just the same, I think continuing on the Invacare legal issue there. I mean, are we obligated to keep providing the service or there is some kind of contract exit clause from our end as well? Just some clarity would be helpful.
Yes. So that is exactly what we are waiting for our legal lawyers to come back on because these are the questions that we also have that when a company files for Chapter 11 are we obliged to continue delivering the service. And even if we don't get paid for it, we don't know the answer to that question. Like Chandru said, over the next several days, we will know more. Once we know more, we will intimate you.
And will that mean that, I mean -- is there a possibility of us taking more provisions?
So, Rishi, I answered this question earlier in the call, but just to repeat. See, there are 2 parts to it, right? There's a revenue side. There is a cost side, right? On the revenue side, we believe we've taken all of the provisions. We still have to make an assessment of what the lawyers come back with, right? To Angan's point, do we have to continue delivering services, ECS for how long, how much, in what capacity? Again, there are [indiscernible] in the bankruptcy as well, right because at least the information that was provided to us says that the bankruptcy is in the U.S. only, not international operations, we support their operations globally. So we've got to get a lot more clarity on this, Rishi, before we can attempt to respond to you.
The next question is from the line of Chirag Kachhadiya from Ashika Institutional Equities.
My question vision to the previous participant question. In terms of provision on cost front, can you repeat what provisions is supposed to be taken going forward? If any extra amount will be required to be allowed?
Again, I would not speculate on this one, but I'll give you an accountant's answer to this with hypothetical information Chirag just for the benefit of you and the others on the call. Say, for example, I am told that I should continue services but I will not -- I will not get paid, right? I already said on this call that any future revenue will only be against actual collection. And there will be a timing difference to it, right? So say I provide services for February and March, and I get paid in April. I can only count revenue in April, but I'll have cost hitting in February and March as an example, right? So those are the kind of provisions I'll continue to carry because I'll have to group cost for the period, right? So that's just an example of the kind of provisions that we could be making. Now again, I'm not speculating that it could be that. I'm just giving you an accountant's answer on what could be coming, if at all, right? We don't know yet. We will know the form and shape that it will take as we get more clarity.
Okay. Sir, our aspiration or expectation in terms of -- better than the Q3. Does this include all these assumptions or the provisions which supposed to be there?
No, what we -- yes, just Chirag, what we have done is we -- when we said that our Q4 will look better than Q3, that is operationally, right? We have kept Invacare outside. Outside of Invacare, we will show better results and Q4 will be better than the Q3 quarter.
Shubham, your line is unmuted, please go ahead with your question.
So my question is around the provisions only. So we have created provisions for whole receivable, right?
Sorry, can you repeat the question again? Also it will be good to know who's talking, please? I didn't get the name.
Sure. This is Shubham from YJ Capital. My question is around our provisions only. So like we have created a provision for whole receivables, right?
That's correct. We have created provision for all of the receivables billed and unbilled and for all of the contract assets that we have been able to access in the last 22 hours.
And it's like 3 percentage of our revenue?
That is correct.
Yes. The impact on revenues around 3% going forward what the comment that we made, Shubham.
Okay. So our margins are largely impacted like from the other expenses like not from the provisions we have created?
No, the provision that we've created is sitting in the other expenses line item, Shubham. So the other expenses line item includes $19 million of provision.
The next question is from the line of Sandeep Shah from Equirus Securities.
Just 1 question in terms of enterprise solution. At the one end, one can be excited because that's a differentiated positioning and services for the Birlasoft through positioning in SAP and the Oracle within the mid-cap basket. However, at the other hand, it has been a growth decelerator for the Birlasoft as a whole. So when you are taking over this portfolio, do believe a huge task is required or the time has come where this could be a growth contributor rather than a growth decelerator. So what all things you plan to do in terms of enterprise solution as a whole.
Yes. So Sandeep, I definitely, for one, believe with the manufacturing turnaround over the next 3 or 4 quarters even the ERP solutions will get into growth. You're right, that has not delivered growth for us. But with S/4 HANA creating an enormous opportunity as well as even JDE continuing to be steady, not growing, but continue to be steady. I think there is an opportunity for us to show growth. But equally, what we are excited about is our new age services, our digital services, our data analytics services, our infrastructure services. They will grow far higher than the Enterprise Solution business.
The next question is from the line of Kartik Gada from Multipl Wealth Management.
Am I audible?
Yes, Kartik, go ahead.
Yes. Once again, on the provision number, I couldn't understand 1 thing. So you mentioned it's -- the exposure to revenue was 3%, which comes to around the same amount, INR 150 crores, right? So I just couldn't understand, is it like an annual provision, if you can explain? And related to that itself, would it be possible for you to provide a breakup not right away, but if it can be shared through the exchanges for the provisions, the breakup for the provisions?
Yes. So I did share the detail at least at the percentage level earlier on this call. But just to reiterate, there are 3 elements to the provision, right? There is a billed receivable, there is an unbilled receivable and there are contract assets, right, that are sitting in the balance sheet. And I also explained about how accounting treatment works on fixed price contracts and the fact that the revenue and billing are parallel tracks, right? They are not exactly the same, right? Unlike in our T&M contract where billing and revenue will, by and large be the same set of numbers. So revenue right now that we've been accounting for is much lower than billing that we've been doing.
And in the initial parts of the -- in the initial quarter into the contract, our revenue was greater than the billing. All of this has to do with the amount of effort that we provide in this particular month, right, based on how the contract delivery schedule happens, right? And the contract billing schedule was structured in a certain way. So that is why you find that the revenue and the provision are kind of asynchronous with each other, right?
There is also contract assets that I explained, which are predominantly prepaid third-party vendor costs that are amortized and were sitting in the balance sheet as of yesterday, which we have provided for as well.
Okay. Okay. So just a little bit more on this only. So would there be some element, which might be say, 6 months, 9 months aged also, and hence, a higher number of provision?
So I did explain this as well, right? We still need clarity on the go forward, right, before we can talk about what provisions, if any, or what costs, if any, we will incur in Q4 and beyond. And it will all depend on the legal advice we get like we've been saying, it's been very early days, right? It's not even a full day since this incident happened, but we managed to account for it in time for our Board meeting today. We will continue to work through this to understand what provisions, if any, we will be taking for the future. I thought you also talked about with any of these provisions recoverable, right? I can tell you that also is subject to the discussions we will have and the opinions we will get from legal advice as we work with them.
The next question is from the line of Mihir Manohar from Carnelian Asset Management.
Yes, so first of all, a lot of wishes to Angan and Chandru for both of your new roles. I mean, largely, I wanted to understand around the enterprise side of the thing. I mean we have seen enterprise business affecting us over the last 2, 3 quarters. So what is largely hurting us over there. I think the general market perception is there, Birlasoft has more of legacy business on the enterprise side of the thing. So if you could clarify, if you could provide an understanding on the enterprise side of the thing, I mean, what kind of capability building is required on that side of the thing. And how should one see this particular segment over the next -- I mean, from here on over the next 1 year? That was my first question.
And the second question, just a clarity on the provision part. I think so we have created a provision for all the money that was adjusting as on the balance sheet. So I mean, INR 150 crores is what was existing as billed receivables plus unbilled receivables for contract assets. Is that understanding correct? Or is there any more money pending on the balance sheet, which is yet to be provided. So that was my second question. And lastly third question, you mentioned that there is a good leadership hiring, which has taken place in life sciences, energy utilities verticals. So just wanted to get a clarity. I mean these organizations are these people coming from? And what is the overall thought process over the area.
Mihir, firstly, thanks for the good wishes. Second, thanks for the many questions that you asked, really happy about the interest and the passion that you show on Birlasoft. I'll take the question on the provisions, and I will hand it over to Angan for the rest of the questions. I hope we still remember the question, but we will try. On the provisions, like we said, we've taken all of what we had on the balance sheet as of yesterday, Mihir. That is all of the billed, unbilled and contract assets as of yesterday, right? So while we are still working with our legal counsels on exactly what this will mean to us in terms of implication, in terms of way forward, as a prudent policy, we decided that we will take all of it without waiting for the advice Mihir.
Yes. So Mihir, let me take the first question that you asked about the enterprise business, right? Like I was responding to an earlier question, the enterprise business which is so related to our manufacturing business will take a couple of quarters to turn around. But I strongly believe in that business. We will continue to stay invested in that business. And like I said, because of our relationship with some of our partners, the S/4HANA story, I think, is a great story for us. To your question whether we are a legacy player, and I'm not going to say that we will remain a legacy player. We are pivoting ourselves to become more digital, more data, more analytics kind of a player. But even the legacy business is not such a bad business because that will show growth considering the fact that even the enterprise business is now starting to move slowly to cloud.
So overall, in a nutshell, I feel very strongly about both the businesses, though our new age business will grow faster than our Enterprise Solutions business as we go forward. So that's one. In terms of the leadership hiring, we continue to hire from the best companies. I will not like to give individual examples because that will not be correct. But I can only tell you we are being able to attract top talent from the market, and they will help us deliver strong growth going forward.
Sure. Sure. That's really good to hear. Just on the legacy, I mean, new age part of the business. How much -- if I can get an understanding of what is the legacy percentage in your enterprise business?
So again, we don't report numbers like that, Mihir. It's very hard for me to give a number off the hand. But suffice to say that our new age business is growing faster than that. Now exactly what is the percentage of legacy business is very hard because even in the enterprise business, only a part of it is legacy, as you can imagine. Part of it is the new age because there are a lot of customers who are moving into cloud, and that is also an opportunity that we will bank upon.
Sure. Sure, sir. And lastly, I just had 1 question. I mean to Angan. Given the fact that you are having 25 years of experience at one of the large organizations handling more than $3.5 billion kind of an account. So just wanted to understand what is your thought process of joining a $500 million company from a personal career angle. I think that's the last question over there.
Yes. I mean, look, I mean, I feel -- I strongly believe, and I'm 60 days in the company that first of all, Birlasoft is a great brand. It's a great asset. Like I said, it is a great company and the people and the clients that have interacted are terrific. So for me, personally, it's a great opportunity to kind of build on what we have already built over the past so many years. It's a very good business. It's a clean business. Chandru has talked about the positive cash flow generation that we have done, the DSOs that we have been able to deliver, our top 20 clients are growing. So there is a lot of positivity around the company. And with sharper focus, I think we can only go places. So like I said, we will continue to invest, and we will invest for the long term, which is pretty exciting for me.
The next question is from the line of Dipesh Mehta from Emkay Global.
I think earlier in the comment, you indicated about some projects are put on hold. If you can help us understand what is the progress or whether those projects are coming back from a revenue conversion perspective? And second question is about slightly medium term. If you can provide, Angan, I don't know whether you would like to take it now or maybe a month down the line. From a vertical composition perspective, do you expect these vertical composition would give you enough comfort for growth sustainability over the next 3 years, 5 years or you intend to make certain changes in investment and accelerate investment in some of the verticals to make it more balanced compared to currently, it is more skewed towards manufacturing.
Yes. So the second question I would prefer to take later because that will inform a part of my larger strategy and where I'm able to talk, I will talk. On the project hold, that was a very Q3 commentary because it's a short quarter. It's a seasonally weak quarter. And some of our customers wanted to push out the start date to 4Q. We don't see that to be an issue. And all of those projects that got pushed out to 4Q will start in 4Q.
The next question is from the line of Anmol Garg from DAM Capital.
Congratulations Angan and Chandru for your new endeavors. I have 2 questions. So firstly, within our SAP practice, how much installation would be towards HANA? And currently, what percentage of revenue is coming from Oracle and JD advance? So that is one. And secondly, if you can highlight that how much portion of the Invacare deal has been executed as of now? Yes, that's it.
Yes. So I'll ask Chandru to talk about the second question. And I'll take the first question after Chandru comments on the second one.
Yes. So on the second question, the way the deal was constructed was a combination of implementation and application service application and infrastructure services, right? There were implementation of ERP in some of the geographies that we had concluded and a few more were in flight when this event happened yesterday. That's one. The application management and infrastructure management services are a continuum, and that has been continuing right from day 1. Hopefully, that answers your question.
Yes. And Anmol, on the first question, look, like I was saying earlier, we do not report numbers based on partnerships because that is -- that will be something that we will work with the partners. But our enterprise business is one common business. And like I have said earlier, that has not grown for the company but I'm confident that over the next 3, 4 quarters, that will be back in growth as the manufacturing cycle turns around. So that's point number one.
Point number two, in terms of what percentage of business is legacy and what is new, again, hard for me to comment because every partnership will have a legacy component and the new component. I can only tell you 2 things, our new component of our enterprise business is growing above industry levels. Our legacy business is flat, but our digital business, our data business, again, is growing at ahead of industry. And that gives us tremendous confidence that going forward, we will be able to be back at industry level growth or higher.
Okay. Sure. Sir, just 1 thing. If Chandru can quantify the number that how much of the deal has been executed as of now, if we are quantifying that?
It's kind of complex, [ Dipesh ]. When I say complex because, like I said, the application management and infrastructure management is an ongoing exercise, right? So I deliver 100% of that scope every month, right? That is one. Second, in terms of implementation, right, we have been doing implementation based on the contract deliverables and based on client requirements from time to time. So then again, whatever being given to us has been delivered 100% and there are some that are in flight, like I said. And I really don't know what exact percentage that would be, Dipesh. Sorry Anmol.
The next question is from the line of Anmol Grover from Albatross Capital.
Congrats on the new role and best wishes for going forward with [indiscernible]. My question is on the $1 billion vision that the Birlasoft had given before. So given Invacare was quite a big client for us and facing challenges on that, and there's a lot of uncertainty. So I wanted to know your initial thoughts on the $1 billion vision going forward?
Yes. So no, look, I mean, we are committed to growth, yes, and we are committed to build a long-term growing business. Now obviously, like you rightly said, with the Invacare situation, we don't know where that will land and that is a large portion of our business. But I would say that let's remove Invacare results, put it in a separate bucket, the management commitment to you would be that we will continue to sequentially grow our business and sequentially grow our profits as we go forward. Now when do we get to -- we definitely will get to $1 billion, but when do we get to $1 billion, et cetera, it's hard for us to say because of the Invacare situation at this point.
Okay. Can we expect anything in your -- when you're giving the go-to-market strategy in the future?
No, I will give you the strategy going forward. Invacare, depending upon what we get from the legal opinion, we will know where we stand on that one. I'm not too sure whether that we will be able to give in 1 month, 2 months, I have no idea. Like I said, we've just got the notice 22 hours back. But like I keep saying, I want to keep Invacare outside and operationally continue to grow the business as we go forward.
Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Angan Guha, CEO and Managing Director, Birlasoft, for closing comments. Thank you, and over to you, sir.
Yes. Thank you. So I once again want to thank all of you who have joined us on the call today. Your questions were -- have been very insightful, and I appreciate your interest in Birlasoft. As we shared, ours is a strong business with solid fundamentals and capabilities, and we will be building upon that. I look forward to speaking with you again next quarter. Meanwhile, please feel free to reach out to Abhinandan for any clarifications or feedback. Thank you once again. Have a great evening or morning, wherever you are. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of Birlasoft Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines. Thank you.