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Birlasoft Ltd
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Ladies and gentlemen, good day, and welcome to Birlasoft Q4 and FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vikas Jadhav, Head, Investor Relations, Birlasoft. Thank you, and over to you, sir.
Thanks, Mallika. So very good morning to all of you, and welcome to Birlasoft's Q4 and FY '20 Earnings Call. So today, we have with us our CEO and MD, Dharmender Kapoor, DK, as you know him; Roop Singh, our Chief Business Officer; Shreeranganath Kulkarni, SK, our Chief Delivery Officer. And this time around, we also have Arun Rao who has joined us as the Chief People Officer; and [ Shantanu Rudra ] who has taken over from Rajeev and is heading Finance for us. So please note that anything which we say and which refers to the outlook for the future is a forward-looking statement on this call and will be read in conjunction with the disclaimer, which we have put up in our last page of Investor Update, which mentions the risks that company faces. Now with this, I hand over the call to DK. Over to DK.
Thank you, Vikas. Good morning, and welcome to Birlasoft's Q4 Financial Year '20 Earnings Call. I'm very pleased to present the financial results for Birlasoft for quarter 4 and financial year '20. As we just concluded the financial year, I will also be completing a year as CEO of Birlasoft in just a few days on June 1. When I look back at the last 1 year, I look with a great sense of satisfaction at what we have achieved. It is the first full year of operations for new Birlasoft after the merger, and we had to wrestle with multiple challenges in putting together an organization that will have a strong foundation for growth. We took many decisions that were unpopular, but absolutely essential to create an organization that will be resilient and sustainable to changing market dynamics. We decided relentlessly to focus on our long-term goals, to create an organization that will be closer to quietly defined and implemented metric structure, consisting of industry verticals and technology horizontals. We knew that no strategy can be successful if it is not supported by a sound organization structure and capabilities. To ensure we achieve our goals of quality revenue and margins, we defined our qualities around sales incentives, grade harmonization and long-term ESOPs and LTI plan for our key leaders. The objective here was to promote right behavior and responsible selling and dependable execution. We have been very careful in optimizing our cost structure, where we continue to improve our profitability despite initial 2 quarters during integration showing the revenue declines. I'm extremely happy that we have shown robust quarter-on-quarter growth in the last 2 quarters, both in revenue as well as EBITDA.I'm happy that we did not waste time in putting a winning team together, which resulted in many enviable deal wins during the year. Within our first 2 quarters of coming together, the team did an exceptional job in winning a transformation deal of $242 million, which all of you know. This has been the largest deal in the history of Birlasoft. The winning spell has continued for Birlasoft during the year, as we signed record $669 million worth of deals, of which 64% are net new business deals. Let me take a few minutes to describe how our results for quarter 4 look. Our revenue for quarter 4 stands at $125.6 million. We grew 7.5% sequentially and 11% year-on-year for the same quarter. This also happens to hit the $500 million revenue run rate for Birlasoft. Our EBITDA margin for Q4 is at 12.9%, which is flat from the quarter-on-quarter perspective, despite some of the challenges that we saw in the month of March. I'm happy to mention that we performed 50 bps better than we internally expected.When I had this discussion in the last quarter, I did talk about that we may see some EBITDA pressure in the next quarter. But I'm very happy to state that, that we took the decision for the cost reduction and cost optimization, and we brought the efficiencies that were needed, and we have been able to post flat quarter-on-quarter EBITDA margin for us. It is heartening to see that Q4 growth across all horizontals and across all the customer segments was there. Our top 5, 10 and 20 customers grew 7.7%, 7.2% and 8.2% respectively. As you know that our focus was to cross-sell to our strategic customers. It is the result of that, that we've seen consistent growth in our top 5, 10 and 20 customers. Our active customer count went down from 401 in the beginning of the year to about 378 at the year-end. This is in line with the strategy to critically look at cutting the tail and nonstrategic accounts over a period. Our profit before tax was up 8.2% quarter-on-quarter. Our PAT, however, was at $9.6 million, it is down quarter-on-quarter by 6.2%. We had to take some of the onetime actions due to the tax, and I would request [ Shantanu ] later to give color to this number in his commentary. While working on our capabilities, we continuously improved the health of our balance sheet and other operating levers. For example, our employee cost as percentage of revenue came down from 63% in Q4 to 50 -- from the financial year '19 to 58% in Q4 financial year '20, a significant drop of 5% year-on-year, while we grew 11% in the dollar terms for the same quarter. This was possible due to our attempt on broadening the pyramid. We went ahead and hired fresh graduates. And we made them billable, so that our pyramid threshold lever continues to work. We are also inducting about 700 freshers from the schools in this year, and we are going to honor all those hirings that we have committed. Our utilization improved from 78% to 81% in Q4. In quarter 1, it was 78%. Our DSO improved from 79 days in March '19 to 72 days of March 2020. As you would remember that our DSO went down to 65, which is a very, very healthy figure in the last quarter. It has increased a little bit because of one of the accounts having a delayed billing, but that also after March has happened. So we still continue to work at the DSO lesser than 70 if you take out one particular account. So I believe that it is absolutely very, very best-in-class figure that we achieved. As you may remember, it was 85 days when we started the year. Our attrition that went up to 22.5% has come down to 18.9%. And we believe that it will further go down as we continue to work on the major -- to improve on our attrition. Our annuity revenue improved from 53% to 59%. We did talk about this in the last quarter also. We will continue to focus on this particular parameter because we want to look at improving our annuity revenue, so that our revenue quarter-on-quarter becomes far more predictable than it is today. Today, we have to work harder, and we had to -- in order to ensure that what our guidance would be, but we want to make it simpler for us to improving the annuity revenue, and we'll continue to focus on that as a parameter. Our cash and cash equivalent has gone up by $5.3 million during the year despite $26 million outflow on the account of payback, dividend and loan repayments. We increased the number of people in the organization, number of employees in the organization by 207, that was the net addition during the year. Our strategy of keeping focus on key accounts and optimizing the paid accounts, which I mentioned earlier, has worked very well. I talked about our top 5, 10 and 20 accounts how did they grow. But if you look at the contribution, the contribution from top 10 accounts went up by 36.2% in the quarter 4. And if you look at the top 10 accounts, it grew by 23% year-on-year. Similarly, top 20 accounts contribution went up from 48.8% in March to 53.3% in March '20 and saw a growth of 21.2% in our top 20 accounts. We will continue to put focus behind the strategic customers, and we will continue to improve on this as well. The year-on-year growth outside top 20 accounts in Q4 was 1.2%, and customer count fell from 407 to 378. I take pride in mentioning that our horizontal business units have continued to show their technical flair and have won multiple recognitions and awards from clients, partners and analysts, such as ISG, Gartner and Forrester. This brings a lot of credibility for us in front of our customers. In my last interaction with all of you in the call, if you recollect, I had mentioned that it is not about running a sprint but running a long race and laying strong foundation for us to catch up was a prerequisite. As the luck would have it, just when we are getting confident about our resilience and strong organization culture, we are facing this unprecedented situation due to COVID-19 pandemic. While it is not an encouraging situation for humankind to be in such a stressful environment, I am relieved that we have crossed over the hump of integration just at the right time. We were very quick in planning movement to work from home and enabled our employees to be productive. We ensured that our customers remained engaged and are served well during the time. I'm happy to mention that we have not received any escalation or issue in meeting our performance and productivity requirements. And that is evident from our quarterly results that we did not see any drop in revenue in the month of March because it was a very stressful month where we had to put people back to home to work from home. And it was expected that there could be a productivity loss or there could be a billing loss. But we were able to avoid that completely because we engaged with our customers very, very well. Today, we have 96% of our employees working from home. They are all safe and productive and well engaged to remain effective. Having said that, all of you know that the demand side has got impacted. And we will have to monitor the situation very closely as it unfolds. Our priority would be to continue to protect our revenue by stretching ourselves in delivering higher value to our customers. We are also working aggressively in expanding our revenue through very select and focus connects with our clients and prospects. I am continuing to see that, that not -- that there are only [ issue ] with respect to the cost reduction by our clients, I continue to see that they are still engaged on giving the opportunities also. The pipeline that we have had in the last quarter, it has slowed down, but it has not vanished. So we are still winning the business, and that is very encouraging. And it only tells us that the impact that would be there it will only be a short-term impact and not a long-term one. Going ahead, our priority will remain on growth. We will continue to strengthen our talent in the service lines, sales and delivery, to make significant improvements in our structure and finding key talent to our focus area during this quarter, and we'll continue to work on the same. We'll continue to improve the annuity revenue. I talked about it earlier also. And that all hinges upon the ability to cross-sell, and we are really seeing very good results due to that strategy. We will also explore and exploit our relationship channels, such as with BIS, IFMs, OEMs. We have very strong relationship with SAP, with Microsoft, with Oracle. And that has always given us an edge over competition when we go for [ very large deals or strategic deal ], and we want to continue to strengthen that further. Having said that, last but most important is our focus on the operational rigor. As you know that there will be pressure on the growth, we do not want us to be having surprises, both on the revenue growth as well as on profitability. So we will continue to work on our operational rigor and also on our cost-saving levers, so that despite having some of the headwinds during the integration process and now through the COVID situation, we continue to remain a robust profitable organization. With this, I will hand over to [ Shantanu ] for providing more color on our financials. Over to you, [ Shantanu ].
Thank you, DK, and good morning to everyone. Let me quickly run you through the financials for the company for Q4 as well as for the year. While DK has mentioned it, I'm just reiterating the fact that after a relatively sluggish start to the year in the first 2 quarters of the year, the company has made a very smart recovery in Q3 and Q4 of the year, thereby resulting in its highest quarterly revenues in Q4 of $125.6 billion (sic) [ $ 125.6 million ], which was a growth of 7.5% over Q3 and 11% over Q4 of the last fiscal. In terms of constant currency growth, the growth was at 7.65% quarter-on-quarter. We've also had some relatively strong results in the margin front. And the Q4 EBITDA at 12.9% of revenues was at $16.2 million versus the $15.1 million that we recorded in Q3, which basically resulted in a growth of 7.3% Q-on-Q and 81.4% year-on-year. The EBITDA basically was driven, as DK just mentioned, by a mix of areas like revenue growth, higher margins, cost optimization, rupee depreciation. And this result actually then translated into higher PBT for the quarter, which was at $15.3 million, up 8.2% quarter-on-quarter and 32.2% year-on-year. PBT was at 12.2% of the revenues. We also saw our PAT degrew by 6.2% quarter-on-quarter, fundamentally on account of a change in the mix of our profitability, with a bulk of the profitability coming from the Indian entity, which has a higher effective tax rate as compared to some of the other geographies that we operate out of. And that was the primary reason why our effective tax rate was almost at 37.7% versus 28% last quarter. However, I think we have done very well and grown quarter-on-quarter, both in terms of rupees and in terms of revenues and margins. And I think that's a trend that you would like to see ourselves go with in the next year. Coming to annual numbers. We recorded an annual revenue of $464 million, which was INR 3,291 crores, which was a decline of 2.2% over the previous year. However, in constant currency terms, the degrowth was -- there was a growth of 1.5%. So effectively, this is virtually a flat growth in terms of how we performed last year. The EBITDA at 11.9% of revenues was at $55.3 million, up 20% year-on-year. And the EBITDA percent actually went up from 9.7% to 11.9% for the year. The PBT was at 10.2% of revenues at $47.4 million, which was up $6.2 million (sic) [ 6.2% ] year-on-year. However, there was an exceptional item in the PBT for last year FY '19 of $2.5 million, which is the takeaway. The PBIT was actually up by about 12.3% for the year. We also had a small blip on our tax rate for the year as a whole with our effective tax rate at 33% versus 20% last year, primarily because of the tax dispensations that we did not have on account of SEZ operations as well as R&D operations this year. And therefore, the tax rate actually went up to 33%, and our PAT saw a small decline of 11.9%. And if we ignore the exceptional items of 5.3% at $31.6 million, which was INR 224 crores. So that in a nutshell is the profit and loss and the revenue and expenses numbers. We've also made a very strong attempt at improving the health of our balance sheet, all through the year. And I think several parameters, some of which DK mentioned, are all pointing towards it. We saw our DSO come down from 79 days to 72 days. We saw our unbilled revenues drop. We saw our cash balances and cash and cash equivalent balances go up to $88.4 million, up $5.3 million over the previous year in spite of having repaid all debt of $5.1 million. So we are debt-free right now. We paid dividends of $13.2 million in last year, and we also incurred CapEx of $7.7 million last year, adding up to a total of $26 million. So we've had a fairly effective cash generation -- a fair amount of cash generated last year in spite of taking care of all the operations spend. And I think what the other focus that we've had last year is also to make sure that we derisk our cash in terms of fluctuations and risks. And one of the things that we did early April after the COVID-19 situation broke out was move all our cash away from mutual funds into banks and fixed deposits in banks, thereby eliminating any market fluctuations to impact our cash at this point in time. Our hedge book has also gone up to $89.3 million in Q4 as against $82.8 million in Q3 and with a better average hedge rate of INR 73.7 to $1 versus INR 72.9 in Q3. Considering the healthy cash balance in spite of the COVID crisis, our Board has announced a final dividend of INR 1 per share over and above the interim dividend of INR 1 per share that we had already announced in Q3. And with a total dividend of INR 2 per share for the year, our payout ratio, including dividend distribution tax for FY '20, is 27.3% versus 26.9% last year. I think all in all, we have looked at the interim situation on account of the current prices, and we've looked at several costs measures that we've already initiated both for protecting revenues and margins as well as for cost containment at our end. And I think our strong growth in revenues and margins in Q4 and for the year only augur for better things going forward. On this positive note, let me open the floor for questions. Thank you.
[Operator Instructions] The first question is from the line of Nisarg Vakharia from Lucky Investments.
Congratulations to the team of Birlasoft for another exceptional quarter. Sir, my question is going to be something that everybody is going to ask. What sort of an impact do you think we will face in quarter 1 due to the disruption of COVID in execution? And secondly, do you think we can end with a 5% to 6% constant currency growth over the last year despite the COVID situation, looking at the order book at hand?
So if you look at -- for the financial year -- the coming financial year, as you know that we don't give the guidance to the market, but at the same time, it is very difficult for any company to determine as to how the entire year will behave because every single industry is impacted. Currently, everybody is going through the bad time, but it all depends upon how the recovery starts happening with different, different industries. So it is always yet to be seen. What we understood about the impact in the month of March was very different from what we saw in the month of April and what we see actually in May. So there is definitely going to be impact, but I believe that the impact should be a short-term impact. I expect that there will be pressure in the quarter 1 definitely, and it will get stabilized in the Q2. Because it is not that we are seeing only the delays or deferment of projects, but we are also seeing that there are clients who are giving the opportunities also. So both the things are happening. It is absolutely right that there is a more set of delays and drop in the projects than the number of opportunities, but the opportunities only gives me the green signal and the good signal that it is only going to be for the short term. The companies are not losing hope. And they're also finding it very crucial at this time that how do they improve their cost structure, how do they optimize their costs. And that is leading into more opportunities of outsourcing. So we are working on those. And I think -- I believe that the IT industry will definitely take benefit of the changing market dynamics in the longer run. If you look at the -- one of the very clear signals that we are getting from our customers is that they do not want to concentrate their risk, okay? And they are looking at having the mid-services company, mid-tier services companies in the mix because they found that they were very nimble and flexible and agile in making people work from home without any disruption. And I think that is giving them the confidence that how do we come into the mix where we were not there earlier. And we are already seeing some of the opportunities in that space. And that, in my opinion, is very encouraging. Again, the size of that may be smaller, but I believe that it is going to give us the advantage in probably a quarter down the line.
The next question is from the line of Shradha from Asian Market Securities.
Congratulations on a very strong quarter despite challenging times. Sir, the first question is the empowered growth this time around seems to be led by life sciences vertical, which I believe is in the back of -- is on the back of ramp-up on the Invacare deal. And the other verticals seem to have been flattish or have shown actually a decline in revenue. So your commentary on those lines will be really helpful.
Yes. No, I think -- yes, absolutely, Invacare definitely has given us a good advantage. But it is not that our growth is only because of Invacare. In both the quarters, we had grown without Invacare revenue as well. So that, in my opinion, is very positive for us because we are seeing almost every vertical and every horizontal for us growing. And that means that the whole team is coming together and is seeing the advantage of the strong foundation that we created. So yes, Invacare has given us the benefit, but we are growing even without the Invacare revenue also.
So would it be possible for you to break the revenue growth at Invacare in this quarter?
So last year, if I remember that we grew about 4% if we exclude Invacare revenue and the rest of the portfolio grew 4%. This quarter, we have grown approximately 2.7% or 2.8% if we exclude the Invacare revenue.
Okay. That's helpful. And also secondly, you did mention that we would face challenges in the first quarter. But any sense as to -- if you could just quantify, would it be a mid-single-digit, lower than that, higher than that? Any directional sense would be really helpful. And you did talk of stabilization in Q2, so Q3 onwards, do we see growth bouncing back to at least low single digits?
So we -- I believe that there will be definitely pressure. I don't think that there will be a growth in the Q1, okay? And we are only trying to look at how do we protect as much as we can and also try to expand with our existing customers, where we have a very clear sight of opportunities. So that anything that we do, we are able to gain it back. But I believe that the impact will definitely be there in the Q1. Q2 is still in the air because we have yet to see how these companies will resume their work in the U.S. and in the Europe. There are some who have started coming back, but there are others who are delaying. So it will all depend upon that. It will be too premature for us to really look at that. We believe that it should come up in the Q2, but we will get to know more closer to the Q2 as to how that is going to happen. It is very difficult to determine that right now. But we believe that stability should come during the Q2.
Right, sir. And just 1 last question from my end. As of date, do you see any challenges in terms of -- any systematic risk in any of your top 20 accounts? And has there been any material project cancellations from any of your strategic accounts?
Yes, both sides again, there are cases where there are project deferments and project drops that are there. But we have to understand that it is -- when it is dropping, these are those projects which are not absolutely essential today for them. But there are other things that are emerging, which are becoming very essential, and as I was saying in one of my discussion earlier that there are regrets that they have had in the last 2 quarters where they did not move to cloud or they did not put the -- a disaster recovery in place or they did not go for omnichannel. Those are the opportunities also that are emerging. It's just that there will always be a lag of opportunity drop and opportunity gain. And that's the reason I said that, yes, there will be impact. But I believe that as far as the sustainability of our top customer is concerned, I don't think this is in question anywhere.
Okay. And just 1 last thing. How should we look at the tax rate for the next year?
Yes. I would like [ Shantanu ] to answer that in more detail. But -- okay, let's Shantanu answer that. He has more details than me in his hand, yes. [ Shantanu ], please go ahead.
As per our present estimation right now, we seem to be looking at an effective tax rate of about 28% to 30% next year with MAT credit available to us. And I think if we use those, we should effectively be in that range, as it is the 33% that we ended up this year with.
Sorry, [ Shantanu ], your voice cracked in between. You said what range for the taxes?
Sorry?
[ Shantanu ], can you repeat? Your voice was not very clear. [ Shantanu ], are you there? Okay. Shradha, so let me answer.
Can you hear me now?
Yes, we can hear you now. Please go ahead.
Yes, sorry. As I was mentioning, as per our current estimates, we still will be looking at an effective tax rate of between 28% and 30% next year as against the 33% that we've encountered this year. And of course, a lot will depend on how our revenues and costs shape up over the next 3.5 quarters. And I think I'll be able to give you a better feel of that once we go down the line, at least by the end of the second quarter. But right now, effective tax rate will be around 28% to 30% for next year.
The next question is from the line of Rajeev Agrawal from DoorDarshi Advisors.
First of all, congratulations to the management team for a wonderful job. My first question is just carrying on from the previous questioner about the effective tax rate of 28% to 30%. You mentioned that in the previous year, financial year '19, the tax rate was lower because of SEZ and some R&D credits. So what is it that is causing those credits to go away for us in financial year '20 and '21?
As you're probably aware, Rajeev, that there was a demerger of the entities last year, whereby the erstwhile company actually took away the engineering business. And along with that, the R&D benefits were actually moved to the engineering business. So it is not available to Birlasoft at this point in time. The second part about the SEZ revenues is also on account of the fact that the SEZ benefits have completed their tenure, and therefore are not available to Birlasoft right now.
Got it. And we have not yet moved to the new tax regime, have we, the 25%? And what can you talk about what is our plans around that?
I think at this point in time, given the fact that there is MAT credit available, the chances are at this point in time and as per our current estimate that we will not move into the new regime this year. However, we are constantly evaluating based on, like I answered, our view on how our revenues and costs will turn out, and we'll take -- we'll make that decision a couple of months down the line.
Got it. Okay. So then moving on, the next question is, our revenues have grown nicely this year, especially in the second half. What is also interesting to see is that we have been able to improve our margin somewhat. Knowing that next year, as in financial year '21, is going to be a little difficult, should we expect the margins continue to improve? Or can you give some sort of color on how you see the margins trending going forward?
DK, would you like to take that?
Yes, yes. I believe that we will have some impact in the Q1. Because as we get the cost optimization levers into place, generally, as you know, that the benefits when it comes back, it takes a little bit of time. But I believe that Q2 onwards, we will be posting better margin than what we have posted earlier. So we'll be back to the normal. But I expect that Q1 may have some impact. It is yet to be seen, but we are working very aggressively on the profitability side that how do we continue to maintain the margins and the profitability.
Got it. And in the past, we have talked about EBITDA margins of 15%. Is that still an aspiration level we continue to have?
Absolutely.
Got it. Okay. And then the other question is we have significant cash on the balance sheet. I know the firm has distributed dividend. In the past, management has also talked about rewarding shareholders in various ways. Is there any thought around the buyback? And where do we stand with that?
So as you know, we were really considering all these options, as you know that I did talk about this in the Q3, but it is this situation on the COVID side that has really put the spanner in the whole wheel that we had to pause on that thinking. Because currently, the most important thing for any company right now is that how do we preserve the cash. Because we all need working capital for at least 2, 3 quarters in place, and there are other elements also where we need to continue to invest. So we are just pausing on that for some time, so that we are able to preserve cash in the shorter term. But of course, our philosophy that we had to continue to reward the shareholders, that will continue to remain, and we'll continue to find the opportunities to pay back to our shareholders in handsome way.
Great. And then just last question. In financial year '20, Invacare was a game changer for us. Are you seeing any such big opportunities? I mean knowing that COVID has created a lot of uncertainty, but what is the sense? Do we feel like there could be some big transformational deal again sort of in our sights in '21?
Absolutely. There is one that we signed yesterday. I'll not take the name here. Because I still have to get approval from the clients, but we signed one yesterday. Similarly, there are other couple of deals that we signed during this quarter also. So yes, those are there. It may not be at the same size of Invacare, but they are also good enough and they are big enough. At the same time, our pipeline does have items that are looking very encouraging. It is just that we are waiting for the clients to come back and action their decision. Some of the clients have started working virtually also on those planned RFPs and the deals. So the progress is there, but it is lower than before. So I'm very positive that we'll continue to show those kind of deals on the table.
Fantastic. And lastly, do you disclose the order book? And if you do, what is the amount that is there in terms of pending order book?
So we are relooking at the whole thing. But as I earlier mentioned, earlier, it used to be the -- our annuity revenue used to be in the range of 51%, 52%, and it has moved to 59%, 60%. So I will not give the exact number, but I'm sure that you'll be able to back calculate from there.
The next question is from the line Abhishek S from Elara Capital.
Thanks for the opportunity. [Technical Difficulty]
I'm sorry, Abhishek, we are unable to hear you?
Hello, can you hear me?
No, sir. The audio is feeble.
Can you hear me now?
Yes, thank you.
Yes. Congrats on a great execution. The first question, sir, is regarding -- you already made comments about any client-specific issues you don't see coming in the next 1 or 2 quarters. But what are -- based on your discussions in March, April and May with your top 20, 30 accounts, what is the feedback that you're getting?
So very good question, and I'll give some answer, and I'll then ask our Chief Business Officer, Roop, also to give an answer to this one. One that, I think we are very, very confident about our top 20 customers. When we had to work from home, we remain absolutely engaged with them. We ensure that there is absolutely no disruption to their business. We ensure that if we have to stretch anywhere to provide services more than what it is contracted for, we went ahead and provided that. So there is a good confidence that they have on Birlasoft. I got numerous e-mails from those customers thanking us that how quickly we really emerged from the situation and we have kept our people very, very protective. So I remain very, very upbeat about our top customers. But I would also like Roop to talk about it, as we continue to remain engaged with customers on almost every day basis. Roop, over to you.
Yes. Sorry, could you just repeat the first part of your question? I didn't hear that, sorry.
So based on your conversations with clients in March, April and May, what is the difference? Or what is the feedback from the ground?
Overall, see the customers actually have come away from the initial panic mode, right? And they are now looking at how they're going to operate in the constraints that they have. And bear in mind, there are also a fair amount of positives that we are seeing with the customers as we stay closely engaged with them. As they have seen cost reductions reflected in their own personnel, they are looking for partners who will continue to engage with them in a more effective manner. So while there could be some stoppage in discretionary spend, they're still looking very much at how their operational expense could be more managed tightly and opportunities in terms of how we engage with them more effectively going forward. So we have not seen too much of negativity within our client base, but more in terms of help from a partner as to how we could help them manage their expense better.
That's helpful. The second question is on the mix -- services mix. Sir, your growth was skewed towards health care vertical, but your services growth was not skewed towards SAP, which I thought could have been. So just any comments around the mix of growth in services?
No, on the services side, I think it is fairly balanced. Every horizontal has shown the growth. And I believe that we cannot single out one, which is giving lesser or more. But what is happening is that the interdependencies between various enterprise services or enterprise solution services, such as ERPs or other products and with the digital, have started happening more and more. So slowly, in my opinion, it is going to get difficult to say whether it is a digital deal or it is a enterprise solution deal because they are getting merged to a great extent. And if you look at from that perspective, we are seeing significant opportunities in the SAP as well. Invacare was all at the backdrop of SAP. Similarly, there are a couple of others that we hopefully will declare very soon is also on the SAP side. So SAP definitely is in a very good trajectory. On the Oracle side, the Oracle Cloud is taking good shape. We were even rewarded as a good niche player in that part of the work by Gartner. So that also looks robust, but the clients will have to look at when they move from on-premise to cloud. But those opportunities have started emerging. So I believe that we'll continue to see a good balance in the offerings that we have. When it comes to the industries, I believe that life sciences will remain robust because of the current conditions also, because the demand on the medical devices or the pharma companies will continue to improve for the next few quarters. So we should expect that, one, that there will not be as much impact on them, but at the same time, they may be the first one to recover back. So what we are looking at is that there might be impact, for example, for some of the demand and supply related to the other sectors, such as airlines or logistic companies, but we do not have very large portfolio there. We have a very small portfolio. And that would mean that it will not have a way too much impact on us.
Okay. Sir, I know you don't want to provide a guidance for the full year. But the strong exit momentum is suggesting growth for us in '21. I know Q1 and Q2 can be soft or there could be issues, but still with the strong exit rate, is it possible that we could be in the top quartile of growth from an industry standpoint in FY '21 or -- in FY '21?
So we have very strict guidelines that we will not provide the guidance. And I would maintain that, but I would see that as a good element of surprise. We have surprise in the last 2 quarters, and I hope that we'll continue to give good surprises going forward also.
That's helpful, sir. Just on the -- from a margin standpoint, I think, from an other expenses number perspective, the earlier commentary was suggesting that over a period of time, this number should moderate. However, in the Q1, obviously, the transition cost has elevated this number, but how should, I mean, we read or we should look at this number with 6 to 8 quarters down the line?
You're talking about the margin at the organization level?
Margin at the organization level as well as the other expenses as a percentage of sales is now almost 29%, again, what we've had in Q4 '19. And earlier, the commentary was that over a period of time, we'll see this rationalization in that cost item.
No, absolutely. I think, as we maintained earlier, I would continue to maintain that as our goal that we will be at par with our peers in the due course. And I believe that we should exit this year definitely at the level where we have the exit rate equivalent to our peers. That would be the focus that we'll keep.
Sir, sorry, I lost your comment. Can you just repeat that?
Okay. No -- Yes, I said that I would maintain my earlier comments on that. Yes, I know that there would be pressure on the margins in the quarter 1. But if I look at the exit rate for this year, we would like to continue to aim for getting closer to our peers. So that goal we are not dropping.
That's helpful, sir. And last one, just on the CapEx side. What should we build for CapEx for '21? And best wishes for '21.
Yes. So it is going to be much lesser than what we budgeted for in the last year. If you remember, we budgeted for about $20 million, and we spent about $10 million or so. And we are very careful even in the last year that we do not overspend anything where it is not required. We are extra cautious this year because of the situation that all of you know. So we have budgeted far lesser than what we budgeted last year. But at the same time, we expect that we will cut down on the expenses that are not absolutely necessary. So that goal definitely will be there. And none of the item, even if it is budgeted, goes without any approval. So we are very, very careful on that front. And you will see that there will be a drop in the spend on that front as well.
And DK, if I can add the fact that this year's budget for CapEx also has 2 dimensions. There is 1 dimension, which is absolutely necessary CapEx that we will do. And then there is another bucket, which is for discretionary CapEx, which we will only trigger off if and when actually required.
Correct.
The next question is from the line of Manik Taneja from Emkay Global.
Congratulations for the great performance that we've seen in Q4. DK, I just wanted to touch base on a couple of comments that you mentioned. First of all, with regards to a greater focus around annuity stream of revenues. If you could help us understand what proportion of our revenues today would you classify as annuity? And how much will be project-based here? And then I have some follow-on questions.
Yes. Correct. So if I look at our revenue from the projects would be anywhere from 25% to 30%, but annuity revenue would be approximately 59% to 60%. I mentioned that a year back, we had that at 52%. And I gave the update in the last quarter also that we have moved up from 52% to 58%. That means the visibility for our next year is far better than what it was when we merged, and it continues to improve upon. We are in the close range of about 60% annuity revenue already.
Okay. Okay. And then with regards to this initiative around cutting a long tail of accounts and deriving some leverage over there. Could you essentially help us understand where are we in that journey? And does that -- why you've not seen any impact from that initiative in the recent quarters on revenue growth? But do you think that would be a near-term revenue pressure as we cut some of these tail accounts?
So there are 2 things that we had to look at when we look at tail accounts. One is that what has happened to our top 20 accounts or top 30 accounts. When we go there, a lot of time, we see that growth come in by shifting our resources from tail account to those accounts. Because you do not want to cut the tail and lose the weight in the process. We have to cut the tail, but we have to look at that. The key resources who were locked in the tail accounts, we need to utilize those resources better, so that we can get better margins and we can get better opportunities. So we continue to look at what are the resources that are locked in the tail accounts who are not strategic for us, who cannot grow. We also continue to look at what are the opportunities on our strategic accounts, and we continue to shift them. That's how we are cutting the tail, okay?The process has slowed down a little bit because the demand has slowed down in the last 3 months. So that process has slowed down. But our strategy is in place. Our goals are in place. People know what behavior we have to display when it comes to fulfilling the demand. And we know and has -- here more of those resources that we can take out from the tenant accounts -- tail accounts. So I think that process is there, it's just that it has slowed down a little bit in the last few months, but we will eventually go by cutting down on all those accounts, which are not going to be strategic for us.
Sure. I have a couple of other questions as well. Some of our peers have alluded to suggesting that we could see more like mid-single-digit kind of revenue declines in June quarter before things begin to recover. Do you also have a similar sort of an outlook with regards to near-term revenue performance?
As of today, that's the outlook that we also see that there will be pressure. But at the same time, as I said that the situation continues to change, we are getting the opportunities also, okay? So our objective is that how do we continue to protect and expand. But yes, our outlook is very similar to what other companies are also providing.
Okay. And 1 last question essentially is that, in our case, we've seen that sales and support headcount essentially is significantly higher as a proportion of our employee mix as compared to what we see in the industry. If you could help us understand what's driving that? Is there a classification issue there -- which is there? Or is it that the sales and support headcount essentially is much higher here and thereby offers an opportunity for optimization?
No. So actually, there are both issues that -- one that, as you know, that we were going through the merger. And we still carry the 2 systems in which we operate. And these are going to get integrated next month. Earlier, we were getting integrated in the month of February. But we've got recommendations that we do not try to integrate the 2 systems closer to the annual closure. So we shifted it by a quarter. And we were going to do that in the month of May, but we again shifted it by 1 month because of the Board meeting getting delayed, then the COVID situation and people were all locked down. Now we are doing it from 4th of May to 12th of May and May 15 -- sorry June, and we will be having more system on 15th of June. That itself will help us optimize a lot on that front because there is always the redundancies that you have to continue to see because of the 2 large systems running in parallel, and you need the support to do that. When it comes to the sales side, we said that we will have to invest, particularly for us to be far more competitive. As you know, that our annuity revenue was at 52%. And if your annuity revenue is lower, you have to work harder to grow quarter-on-quarter. So we have to put additional efforts in selling the deals that we are selling. It is working very well for us. It is working successfully for us. Yes, we had to take a little higher cost for that. But we will continue to maintain that for some time before our annuity revenue reaches to a range where it becomes easier for us to grow quarter-on-quarter with lesser efforts.
Okay. Okay. So how much of a -- you said this is a significant scope for expansion or improvement here. So how much does this significantly contribute in terms of cost savings once this comes into play?
I'm sorry, I didn't get the question. If you can repeat the question, please?
Yes. So my question was that you said that there is an integration of systems that will come into place now in June and which will be a source of efficiency. So how much cost efficiencies are we looking at from a go-forward basis on this count?
No, I think we definitely believe that there were good optimization that we can do on our support costs. We have identified. We have absolutely crystal-clear plan that we are going to execute. And it is just that you may not see some of the benefits coming up in the month of -- in the quarter 1 because quarter 1 is completely mixed with the new realities, but I believe that some part of that will start showing the positive result in the Q2. So you will be able to see that in Q2, those benefits are coming up.
Next question is from the line of Madhu Babu from Centrum Broking.
Yes. So the project-based business is around 40% of revenue. So what are the deal tenures? And what is the kind of leakage we can see in that in next year?
Roop, you would like to take that question?
Yes. So in most of the project business, which relates to implementations of our ERP -- specifically alluded to ERP platforms, if you will, typical engagement size could anywhere between -- be between 12 to 18 months. Now while we are engaging on these projects, we are also actively looking at how can we cross-sell or upsell into these accounts, if you will, right, project-based business. Given that project-based business is also related to a discretionary spend, probably in Q1, we'll see some softness in this area, but we will continue to push to cross-selling these accounts specifically.
Okay. And second, the new deal we signed yesterday, so even just there, what are the -- is it the multi-service deal and whom we have competed against? Any idea on that?
So I think it will be wrong to take the name for the competition, but it was -- yes, it was for 3 years. It is a multi-year deal, it's for 3 years. And it is in the infrastructure space.
Okay. Infrastructure management?
Infrastructure management, yes.
Okay, sir. And last one on the -- you said that work from home has given us a separate advantage. I mean is it? And how do you see this work-from-home model evolving over the next 3 years, even post COVID? Whether that is the new normal? And whether CapEx will again sustain come down in the sector?
So yes, it will have the impact on the CapEx, and I'll come to that answer later. But if I look at very clearly, people are right now well settled and comfortable working from home. But this is also because our clients are comfortable in the current situation. When clients get back to office, they may have a very different requirement. So currently, our focus is to engage with the customers and determine what part of business they would like to work from office and what part can work from home without any disruptions or without any issue. The BFSI clients will behave very differently from the manufacturing client. So we have to be, particular to this sector as well, and we will be. At the same time, we also had to look at the roles. What are the roles, which are more conducive to work from home and what are the roles which need to be absolutely essential working from the office? So we are looking at that element also. So I believe that when we get back to office, one that we are not in a hurry to get back to office. First, the lockdown is going to open tomorrow. We are not running back to our office. We will take a couple of weeks more before we start putting our people back to office because we are more concerned about the safety of people. Because if they are safe, that means that they are productive and that means that our clients are happy. So we have to be more careful about that. But I believe that we would have identified definitely some percentage. It could be 15%, it could be 25%. Those are the people who continue to work from home for a longer period of time. So that is going to happen. Now if that becomes the new norm, then definitely, I do not want to give a large figure thing that, that is a goal that we had to have. I don't think that we want to keep that as a goal. We want to ensure that we are delivering well, and we are being senior, a dependable partner for our customers. So that is far more important for us rather than looking at whether somebody works from home or office. But already, we have taken certain decisions because we expect that despite a few people will continue to work from home. There was some additional facility that we were acquiring in Bangalore, then in Hyderabad and some part in Chennai, that all we have dropped. We were building up another floor in the Marda office, we have postponed that. So that one that, right now, we do not need that space because a lot of people are working from home, and many will continue to work from home. So we believe the requirements of seats will be much lesser than what it is today. So it is definitely going to provide help on cost reduction at the CapEx level.
Yes. That is useful. And just one last one on subcontracting, how much you say as a percentage of revenue?
So SK, maybe you want to take that answer because there are a lot of changes that SK has initiated on the subcontractor level because they're generally in the current environment, what's becoming a higher percentage, but we have taken a lot of steps in that direction. SK over to you.
Yes. Thanks, DK. So our subcontractor headcount is anywhere between 5% to 6%, and in terms of revenue, it's around 8% to 9%, right? What we have done is 2 aspects to it. One, based on the engagements we are trying to look at replacing those subcontractors with people are available at the non-India geographies. That's number one. The number two is we've also gone a little aggressive in trying to negotiate a better rate for subcons, which both of us should yield us some cost savings over a period of time.
Next question is from the line of Ashish Kacholia from Lucky Investment.
Congratulations to the management team on a great set of numbers. I have a conceptual question on the fact that customers have kind of gotten used to not going to office. So our company has a higher mix of on-site revenues. So does this provide an opportunity for us to structurally reduce the on-site percentage in terms of our efforts? So it doesn't really matter if the person is sitting in a -- at home in New York or in office in Noida or Pune. So is there any change in customer behavior or indications for customers....
Absolutely. Yes, this is absolutely a very relevant question because clients who thought that the person should be sitting next to me while working, I think that barriers are gone. Whether somebody is sitting 5 miles away or 5,000 miles away, I think it is the same thing. And what is happening is the point that estimation that we are replacing our subcontractor at on site, many of them are getting replaced actually by having that position at offshore. Because one that our clients are under cost pressure; second, they don't mind if the person is sitting next to them or sitting at offshore; third, we can better utilize our people who are coming on the bench from the other parts, okay? So it works all win-win for us, where we are able to provide much better cost structure to our clients by providing those or bringing those roles to be an offshore. So you're absolutely right. That has already started happening. We have also started looking at that if there are any other enabling roles that can be managed through the offshore and that also we are working in parallel.
Got it, sir. And any thoughts on our ability to reduce our attrition? If -- where are we on the attrition curve right now? And what are your thoughts on that going forward?
So if you remember that our attrition touched about 23%, okay, in the beginning of the year when we merged and all that. It reached to 20% to 23%. For -- and it has gradually come down from there. And it is at 18.9% as we close the year. In the month of April, we are seeing even lesser attrition, but one can say that there's also because of the situation that we have. But I believe that the employees are getting settled into the new structure and new ways of working. And that itself is providing us a benefit there where the confidence is vast, and we are able to retain people better.
Is this H1B problem going to be a footnote in the history at some point of time given the way the digital and the communications and Zoom? And is this -- the H1B thing going to be kind of irrelevant at some point of time?
Yes. If you look at some of the political news that comes, it definitely shows that there will be pressure on H1 availability and all that. But if you look at what is a report that I thought today that firms may need more H1s than before in order to sustain, okay? So people have views, but I continue to see that the demand is not able to go away because it is only a short-term blip that we will have. There were so many initiatives on the digital side that declines for not taking up. And there will be a much greater need as we come out because all those companies who are digital have been able to cope better to the current situation. For example, the retailing company who had online channel, they are able to open their business, but others are not able to do that. So even the smaller business will start becoming more and more digital. So the requirement is only going to go and increase and hence, that will bring the need for the H1 and the migration of these talents that will be required in the U.S. or Europe geography. So I believe it is not going to go down, but there are other political elements also that we have to continue to keep our watch on and ensure that we are always on top of those numbers that are happening. But I don't see any significant change that will happen.
Right. Okay. My last question, sir, is this entire ERP thing, ERP was written off has been done at some point of time that ERP is dead, long live digital. So can you just throw some thoughts on how do you see SAP, Oracle for the entire ERP game and how it is interfaced with digital? Is this a sustainable opportunity for us? Will plants continue to upgrade their ERP systems? And how does it interface with digital to kind of enable a long-term opportunity for our core competence? As I understand, ERP is our core competence. So what is the role of ERP and digital in the new world?
So absolutely one that ERP definitely is our core competence. But we also have to understand that the ERP is also core to any business. If you go today to any manufacturing company or any airline or any financial services company or any energy companies, ERP is a core solution that has been implemented there. And without that, they cannot operate. The only change that will happen is that, yes, some part of that may move to the cloud, okay? But ERP is still not going to go away. I know that -- and I remember that very well, 1 year back, I was given that statement that is ERP dead? And I said absolutely no because that will continue to form the biggest spend that these companies have. There will be a lot of discussion around digital. But it is not that ERPs are not becoming digital. Even ERPs are becoming digital. So digital is not a one solution whereas ERP is one solution. And when we put the ERP on cloud or when we change the interface for the ERP, when we integrate ERP through our integration over the APIs through the external entities, that becomes a digital solution. So digital cannot live without ERP, okay? So what we have to look at is that how do we digitalize the core rather than thinking that the core is dead and only digital will live. That's in list, no more in my opinion. Because the digital will have to be built on ERP, and that the reason the positioning that we took was being an enterprise digital company that we will not leave the core because that will continue to grow, and we have to build a digital on top of that. And we are seeing success in many such opportunities where we are telling the customer that don't throw away your investments, just optimize that, transform that, that is far more important.
Okay. Sir, and my last question, this entire ERP thing. What is the -- is there any chance of a further disruption in the ERP market, like once upon a time, there was SAP, which used to take a long time to implement and it gave long service revenue streams in the service partner or implementation partners like us. So is there any -- then SAP HANA came, and then they said that from -- or the cloud came, then they said, instead of 18 months now, the engagement is only 3 months. So suddenly, you found that the revenue of all the service providers dropped and the opportunity kind of reduced for some time until the demand caught up again. Are we seeing any disruption like this in the ERP market, which is kind of -- which can kind of give a sudden shock to our revenues?
So this is how I will take it. Disruption will definitely happen. And that disruption is in the form of how well are we available on the cloud, okay? So ERP on cloud would be much leaner and would be much quicker to implement. But that is also going to have only short-term impact because if you look at that standardized ERP, multi-tenured ERP that we put on the cloud is only good for the standard processes. Almost every company will have a need for differentiation. Because if every company says, every product is same, where would be the differentiation coming from, where would the innovation come from. So the companies would continue to focus on the innovation, they'll continue to focus on the differentiation. And that differentiation will push to have processes that are different from the standard. And that means that while the initial solution on the cloud may look simpler, and more standard, but people will have to build their own differentiation on top of that and the complexity will increase again. Case in point, if you look at how easy or difficult it was to implement salesforce.com maybe 5 years back or 7 years back, they used to go and sell it to the marketing head and the sales head that you can implement it on your own, you do not need to depend upon IT. But if you go today, it is, again, IT who takes the decision and also do the implementation and the implementation is far more complex than what it used to be 6, 7 years back and is far more expensive than what it used to be 8, 10 years back. So the complexity comes back because not that the products are complex, it is because the needs are very, very different from each client, and they want to differentiate their business from the rest. And they ask for more features, more details, newer elements, and that is where opportunity for us to go and build that and also grow along with them.
We'll be taking the last question from the line of V.P. Rajesh from Banayan Capital.
Congratulations DK and to your team. My question on the customer side. You have 1 client moving into $10 million plus segment. So could you just give some color on what service offering, what industry this client is from, the new one? Or they were moving from a lower segment?
Yes. So most of the clients that you will see moving from 1 segment to another is going to be the result of cross-selling. That means we are dominant in 1 particular service line, but we have started selling them more services. So what we are seeing is that there is a lot of traction that we are seeing in the infrastructure management services. We are seeing a lot of traction into the digital services. Specially into the analytics space or user experience space, we are seeing a lot of traction. At the same time, we continue to see that our CRM doing well. So when I look at those elements that were not sold to those customers earlier, we are going and selling the other services also. So most of those cases are becoming multi-services customers and not remaining 1 service customer. And that is a reason of their growth or our growth with them and moving from one category to the another one.
Okay. That's helpful. And then in terms of service offering, the SAP numbers were a little bit light in this quarter. So could you just give us some color around that?
Yes. So SAP, I believe that have started a business, we did have -- you know that we do have our challenges in the SAP immediately after the merger, okay? But we have started -- we hired the SAP leader [ Hitesh ] from Infosys, and he joined us almost now about 4, 5 months back. And he has stabilized this ship very well, and we have started seeing the opportunities again. So I believe that our momentum and growth on SAP will come back now because the opportunities were not going away. It is just that we had our own internal structuring that posed some challenges, but those are all behind us, and we are very comfortable now with the new leader coming in.
Okay. And then on the cost side, I just noticed that this quarter, our expenses were moving sharply higher, both on the weight side as well as on the other income side. So were there any one-offs because of COVID, you had to make some special arrangements? Or this to be the new steady state, let's say, $109 -- $109 million per quarter, that kind of a run rate of expenses?
Correct. No, absolutely. There were a few expenses that we had to take because, as you know, we were going through the transition for Invacare. And we had to do the infrastructure upgrade, we had to transition people from Invacare to us. At the same time, the transmission costs had to be taken upfront. We have taken those costs already in this quarter. And that's the reason that you see that the onetime jump onto those cost elements. But we believe that they are going to get normalized in this quarter very clearly, and we'll see the advantage.
Right. And finally, on the wages side, I know you will probably besides sometime in June, July. But any guidance as to how you -- or what you're hearing in the industry in terms of the increments of salary freezes or anything, if you can give some commentary on that side?
Yes. I think every company is considering multiple decisions and same is with us also that we are considering some decisions, but we will take those decisions in the due course of time. We still have time to decide because our increments actually start from the quarter 2. So we still have some time in our hands. But we are absolutely sensitive that now what is being done in the market, and we need to also continue to look at what are the decisions that we will take in order for us to remain very, very efficient. So absolutely, we are well aware of that, and we will be taking the right decisions at the right time.
I would now like to hand the conference over to Mr. Dharmender Kapoor for his closing comments.
Thank you very much, everyone, one that, of course, coming and joining the call, but also asking some very good questions to -- for us to give an opportunity to explain as to what is our strategy. I really appreciate the patience and perseverance that each one of you have shown in the last financial year, where we were going through the merger situation, and at that point of time, there are a lot of questions that can be there with respect to the performance and how we are bringing the stability and are we really becoming a resilient company or not. I would again assure each one of you that the integration is behind us. Just at the right time before we head upon the COVID situation, I'm very happy that we took those decisions right at the right time rather than delaying it for the later time. So we -- it is behind us, we are one Birlasoft today, having one set of processes and structures. That definitely gives us a good sense in terms of managing the current situation that we have. And I continue to hope that we continue to give you good surprises in the coming quarters also. So thank you very much for your confidence and patience with us.
Thank you very much, members of the management. Ladies and gentlemen, on behalf of Birlasoft, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.