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Birlasoft Ltd
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Ladies and gentlemen, good day, and welcome to Birlasoft Limited Q4 and FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Vikas Jadhav. Thank you, and over to you, sir.
Thanks, Nirav. So good evening, everybody. Thank you for joining us. I'm Vikas from Investor Relations. And today, we have the whole CXO team of ours comprising of Mr. Dharmender Kapoor, DK, who is our CEO; Mr. Chandrasekar Thyagarajan, Chandru as we call him, who is our CFO; Mr. Roop Singh, our Chief Business Officer; Mr. Shreeranganath Kulkarni, or SK as we call him, our Chief Delivery Officer, Chief -- and Mr. Arun Rao, who is our Chief Peoples Officer. We will begin the call with an overview of the company's performance from DK first and followed by Chandru, post which, we'll move to the Q&A session.
Please note that Birlasoft does not provide any profit or revenue guidance and I really like to say on this call and refers to the company's outlook for the future is a forward-looking statement and must be read in conjunction with the disclaimer, which we've mentioned in our Q4 investor update which has been uploaded on the website and also shared with the exchanges.
With this, now I'll hand over the call to DK. Over to you, DK.
Thank you, Vikas. Good morning and good evening to all of you. Thanks for joining us for the quarter 4 and financial year 2022 earning call. Ever since I took over as CEO of managed our merged entity about 3 years back, I had been mentioning that our first goal was 15% growth and 15% margin and that had been the first strategy on which we started to put the organization together, which many of you would be aware of, which meant a goal to see that we will grow by 15% and we will deliver margin of 15%.
I'm very pleased to report this year, we have ended with a 15% revenue growth, over 15% revenue growth and 15% margin. For a negative annual revenue growth and from a negative annual growth and single-digit EBITDA margin back then, we have made a significant progress. This is despite the odds of merger and integration challenges in the first year of my tenure, the COVID-19 crisis in the second year and significant supply side challenges in the financial year which went by.
Coming to the financial year 2022 specifics, Birlasoft revenue was $555.2 million, a growth of 15.8%. In rupee terms, the annual revenue was at INR 14,304 million and grew by 16.2%. EBITDA was at INR 86 million, and EBITDA margin was at 15.5% versus 14.9% in the previous financial year, showing an improvement of 60 bps and a growth of 20.4% year-on-year. The profit after tax was at $62.3 million, registering a growth of 43.6% year-on-year.
We continue to witness strong deal wins and ended the year with the TCV wins of INR 696 million, of which INR 444 million work from new business versus INR 427 million in the previous year. Further, the wins from the new customers improved significantly to 15.5% in this financial year versus 3% in the previous financial year.
Growth was led by Americas, which grew 22.9%. In verticals manufacturing that growth was up 25.8% year-on-year. And in services, business and technology transformation and Cloud & Base Services grew 26.1% and 29.8%, respectively.
Enterprise Solutions also saw some pickup in growth with year-on-year growth of 2.5%, while it's year-on-year growth being in the high single digit in H2 financial year 2022. It's a clear signal that now the Enterprise Solution programs are coming back. The momentum is driven by additional on-premises or off-premises options, improving user experience and integrated environment and increasing demand for the as-a-service model.
Offshore revenue continued to gain momentum in financial year 2022 and the revenue share improved by 400 bps to 49.3% in current financial year versus 44.8% in the previous financial year. Similarly, the revenue from fixed price contracts stood at 58.6% versus 56.2% in the previous financial year.
Top customers continue to drive growth in the current financial year also. Our top 6 to 10, top 10 and top 20 customers grew 46.9%, 18.4% and 20.4% respectively. Top 5 customer growth was 7.6% year-on-year due to normalization of growth in 1 of our life sciences customers.
The active customer count was stable at 296 as of March 31 in the current financial year. In financial year '22, we added 4 customers to the 10 million-plus bucket from 9 in financial year 2021 to 13 in the current financial year, reflecting an effective client mining and cross-selling strategy. We added 1,153 professionals during the year and the total headcount stood at 12,204 as of March 31, 2022, and we continue to maintain over 85% utilization level throughout the year.
We are making investments in transformation programs to help bring the agility, drive faster growth, strengthen service line and invest in talent and skill development and improve pricing and productivity.
As a testimony to our growth trend or growing brand, we have received several accolades. Birlasoft was recognized as a Great Place To Work certified and Birlasoft was among the leading provider in the Bloomberg 15 category globally based on Annual Contract Value won over the last 12 months according to first quarter '22 Global ISG Index. It is the eighth consecutive time that we have been featured across named category by ISG.
As you are aware, the Board has announced a share buyback program. Chandru will take us through details of it in his remarks. But I just wanted to say that the buyback is part of the company's philosophy to deliver consistent returns to shareholders. The buyback in addition to the final dividend is being implemented to distribute part of the surplus capital of the company and is not expected to impact its organic and inorganic growth strategies and plans.
In conclusion, I would like to add that demand environment continues to remain robust, especially in digital, cloud and reinitiation of transformation programs. This demand is powered by customers looking at shorter and sharper returns and focusing on cost containment while improving their spend on value-driven initiatives.
The deal pipeline is robust and traction from both new and existing customers is good. I remain optimistic about our growth journey and look forward to yet another successful year. As I have been always saying that we want to be predictable and sustainable company, but I think I will add that we also want to be now a confident company and our steps taken in the direction of buyback and dividend in this current quarter is a clear demonstration that we are becoming more and more confident about our growth and profitability and that is where we want to continue our growth journey going forward.
Handing over the call to Chandru for some more insights into the financials. Thank you, Chandru.
Thank you, DK. I hope I'm audible to everybody. I wish you all a good day, good evening, and I hope you're all doing well. Let me take you through some financial highlights, first for the fourth quarter FY '22 and then for the full year of FY '22.
Our Q4 revenue was at INR 146.4 million, representing a growth of 2.1% sequentially and 18.8% year-on-year. In rupee terms, the revenue was at INR 1,101 crore, a sequential growth of 2.8% year-on-year growth of 22%. Q4 had some cross-currency headwind of 10 basis points. Therefore, the constant currency revenue growth was at 2.2%. And Q4, year-on-year constant currency growth was at 19.6%.
EBITDA for Q4 was at $23.2 million versus $21.8 million in the third quarter, and that means a growth of 6.5% as DK said and a year-on-year growth of 11.5%. EBITDA margin stood at 15.8% and that's an improvement of 60 basis points quarter-on-quarter. Margin improvement was aided by revenue growth, reduction in our subcontractor costs and in improved pricing.
We did have some impact on account of the increased travel cost and also a continuing impact on account of wage cost inflation coming from new hiring and retention program. Our quarter 4 PAT was at $17.7 million versus $15.2 million in the previous quarter and that's a growth of 15.9% quarter-on-quarter and a growth of 30.7% year-on-year.
In rupee terms, this was 34.3% improvement on a year-on-year basis. The effective tax rate was at 23.4% in the fourth quarter versus 25.8% in the third quarter. There was a onetime tax refund in one of our subsidiaries, and that led to a lower tax in Q4. I believe that the normalized tax rate would be closer to 26%.
Coming to the full year numbers. Revenue was at $555.2 million, and that's a growth of 15.8% on a year-on-year basis. In FY '22, we saw a cross-currency tailwind of about 20 basis points hence revenue growth in constant currency terms was at 15.6%. EBITDA for FY '22 was $86 million versus $71.5 million in the previous year and that's a growth of 20.4%.
Margin saw an improvement of 60 basis points on a year-on-year basis. Factors that led to an improved EBITDA margin was improvement in our utilization levels, better pricing, improved off-shoring and there was also new business coming to us at better margins. We did have impact on account of higher contractor expenses given the travel and bigger situation, wage hike investment in capability building and marginal pickup in travel expenses.
Other income was higher at $8.9 million for FY '22 versus $2.6 million in FY '21. Interest income on fixed deposits and liquid mutual funds was around $4.5 million and ForEx gain was about $3.5 million versus ForEx loss of $1.5 million in FY '21, that's leading to a positive swing of $5 million on accounted ForEx on a year-on-year basis.
FY '22 PAT was $62.3 million, up 43.6% year-on-year. You would be aware, in Q3, in the past financial year in FY '21, that is, we switched to the new tax regime that led to a lower tax rate of 24.8% in FY '22 versus 29.5% in FY '21. PAT margin was at 11.2% versus 9% in the prior -- previous financial year, marking improvement of 220 basis points year-on-year.
Earnings per share for FY '22 stood at INR 16.3 versus INR 11.53 and that's a growth of 44.2%. Our DSO at the end of the year was 58 days, this saw an increase of 2 days on a year-on-year basis and 3 days sequentially. We did have some billing skewed towards the end of the quarter in the fourth quarter and that was on account of the contract annual process with some of our customers and the related documentation. And that delayed our collections. We expect DSO to remain below the 60-day levels going forward.
The CapEx for FY '22 was $8.5 million versus $3.5 million in FY '21. CapEx was primarily related to purchase of IT assets to fuel the growth that we were seeing in our business. The year-end net cash and cash equivalents stood at $161.6 million, that's INR 1,225 crore against $153.1 million as of March 2021, and this was up $14 million year-on-year.
So the past couple of years, we've been receiving feedback from investors and requesting us to reflect overall capital allocation with cash and cash equivalents remaining healthy and as a step to improving our capital allocation. As DK has said Board of Directors have proposed a buyback program and also a final dividend. The buyback of equity shares is for an aggregate amount not exceeding INR 390 crores at a buyback price of INR 500 per share. This amount excludes taxes and other incidental costs of the buybuck.
The buyback will be undertaken through a tender offer in accordance with SEBI buyback regulations, and it's subject to shareholder approval. The dividend is subject to director's -- the shareholders' approval as well. The dividend that was proposed is INR 3 per share. There's a final dividend per share of INR 2 for the financial year FY '22.
Including the interim dividend of INR 1.50 that was announced after our Q2 resulted, so total dividend of INR 4.50 per share. The dividend payout ratio comes out to 27.1% compared to the FY '22 PAT. And in the corresponding payout ratio for FY '21, as you recall, was 30.2%. Including a buyback of shares worth INR 390 crores, excluding taxes, the payout will be approximately 111% of the FY '22 PAT.
To conclude, I believe that year's performance has been remarkable for us. We've seen good growth, improved margins. We've seen stable DSO and further strengthening of our balance sheet. We were able to drive multiple automation initiatives across the company, including our finance function. We will continue to keep a balance between revenue growth, margins and cash flow and will keep tight control on key performance metrics.
With this, let me throw the floor open to questions.
[Operator Instructions] The first question is from the line of Mihir, from Carnelian Asset Management.
Congratulations on a good set of numbers and also for the buyback large number over there. I wanted to get an outlook on the demand environment, per se. I mean, DK, how are you seeing the demand environment as of now? And extending this to the situation that if U.S. enters into a recession, at least what the bond yields are saying, how do we see ourselves? I means do we still maintain that $1 billion kind of a target that we have for FY '25?
I think you are right that there is a discussion about a recession that is there. Some of the articles have started appearing in the media, but as far as we are concerned, I have not yet experienced that the demand is going down because, for example today I'm in the U.S., and I have been meeting our clients in the last 2, 3 weeks also, I continue to see that they are continuing with their program and with their projects, and there is no discussion that has happened from their side in terms of reducing their budgets.
So from that perspective, I don't think there is a clear visible size in the eyes of our customers that the demand is going to go down. But I also do read the reports that are coming on the recession side and all that. We may have to wait and watch. But so far, so good. I think the demand is there. And we continue to look at that our pipeline is growing healthy. The share pipeline as well as the win deals. Now win of the deal is continuing to happen, so I remain completely optimistic. We are also very confident of achieving our $1 billion goal, and we are really putting all the efforts and strategy and plan that is required in order to achieve that.
Sure, DK. Sure. And how should we understand the organic inorganic component in this $1 billion?
It remains same as it was in the previous quarter, where I said that we would reach to about $800 million to $850 million organically. And there should be about $150 million to $200 million coming from inorganic growth.
Sure, sure. And just 1 more question on the attrition side. I mean we are seeing that for us the attrition is still at high at 34% versus we are seeing slight flattening happening for some other peers in the industry. So I mean, how should we see the wage hikes going forward in this particular year, FY '23 and consequently, the margins per se, I mean?
Yes. So even for us, the quarter 4 was better than quarter 3 on the attrition side, but if you look at the last 12 months, it remains in that range, which is definitely a concern for the industry as well as for Birlasoft.
So we need to continue to look at how do we apply different strategies in order to contain the attrition, at the same time, you continue to attract the talent from outside because we are continuing to see the growth also. So there are multiple initiatives that we have taken. For example, we have advanced the promotions of our top performers, okay? So that is 1 step that we have taken.
At the same time, the increments are going to be better than before, that's the second step that we have taken. Third is the long-term incentive that we are planning for our key talent and that is going to be the third way of really looking at and we're trying to broaden that where we start rewarding people in a way that they continue to build the wealth if they continue to stay with Birlasoft. So there are multiple such initiatives that we are taking in order to contain the attrition, and we are hopeful that it should get addressed with that.
At the same time, I'm sure that as the time flies by, probably the work from office will also continue, though slowly, but that also may address the attrition issue because when people are working from home, a lot of time, it is very difficult to continue to connect with them and build the relationships and when they start working from office, I think that is another thing that will be able to address the attrition.
Sure, sure. And how do you see margins? I mean consequently, wage hikes, what will be the quantum of wage hikes and the margins?
On the margin side, your question?
On the wage hikes, I mean, what will be the quantum of wage hikes in FY '23 and when would -- when one should budget for it?
No, it is going to be the single digit, okay? It is going to be the single digit, but we are working on a different model, okay, where we are going to look at both the performance and the variability, which is going to be higher than before, so that it has a component of a retainership and that is how then we will give it. So there is going to be multiple ways by which we will try to compensate them so that is very attractive for our employees.
[Operator Instructions] The next question is from the line of Sandeep Shah from Equirus Securities.
Yes. Can you hear me?
Yes.
Yes. DK, just 1 question. Last quarter, you have said we are winning many small-sized deals with a smaller tenure, which may lead to a faster conversion of deal wins into growth as a whole. But if we look at the Q4 growth looks softer than most of the peers versus your own earlier quarters as well. So anything to call out in terms of 4Q in terms of a growth headwind? And is it lower than your own expectation at the start of the quarter?
So I would say that -- because there are a few things that we have to look at. One has to look at that what part of the portfolio is getting normalized with respect to the revenues. So there will always be 1 of those quarters where the revenue normalization will happen because the transformation programs will finish -- and it will look like that the normalization happen on the revenue on that front. So there will be always that kind of quarter once in a while.
And I think quarter 4 was off that type. At the same time, we also started looking at that how do we not really dilute our focus on the margin side? And how do we go after the deals that are going to be more profit-focused, margin-focus deals also, okay? Because we wanted to combine the 2 so that we are able to go after the right deal. The good part is that the number of wins that we had or the deals that we won during the quarter 4 was much, much better than what we have been doing it before. So that definitely was very promising. But definitely, this was one of the quarter where we normalize our revenue.
Okay. Okay. But do you believe is there a supply side issue, which has led to a demand fulfillment in Q4?
See, there will always be a little bit of impact of the supply side issue on the growth side also. But I would not say that it is a major concern, but because we were able to add resources and we are able to continue to attract the talent that is required. So it is a concern, definitely, like it is there in the industry, but is it significantly different? No, it is not. And it is well within control that we are able to attract the talent for the opportunity that we want to go after.
Okay. Perfect. And just a question, if I look at the total TCV which you report and from that, if I minus the new business TCV, that TCV in this year has been $253 million versus last year it was $460 million. So it's a sizable decline, and it continues to remain volatile year after year. So how to read a renewal TCV year after year?
So renewal is -- if you look at, you have to look at renewal of the deals depending upon what had been the contract period. So last year, because it was the COVID situation, we had gone and negotiated a lot with our existing customers so that we can renew the deals out of the terms and there's a reason, at that point of time, our focus for us in order to protect our revenue with our existing customers.
And we negotiated with them so that we can sign 3- and 5-years deals, okay? So that's the reason that you saw more of the renewal deals in the previous year. This year, it was not required as much because those deals are 3 to 5 years and the time is not there for them to renegotiate and renew that deal.
So I don't think the renewal of the deal should be seen as a dip, it should be seen that it was not the year where the renewals were required because those deals are already running with us. And the deals that we renewed last year were actually with be top customers, and that's the reason the value was higher in the previous year.
Okay. Okay. And just last question. In earlier quarters, we were aspiring to grow even in high-teens in FY '23, which we have already shown in FY '22, but we were also aspiring to grow at a similar rate or higher this year's growth rate in FY '23 with better EBITDA margin Y-o-Y. So whether that aspiration continues to remain good or do you believe the macro headwinds makes us slightly cautious and watchful?
So far, we are not able to experience the headwinds. Apart from the supply side of retailers, that continues. But otherwise, as the question came up earlier on the demand environment and the recession that headwind we have not experienced so far. So our goals remain the same as we planned during the budget cycle. So we want to continue to do better than the previous year.
Okay. Even both on revenue and margins?
That's right.
[Operator Instructions] The next question is from the line of Sameer Dosani from ICICI Prudential Mutual Fund.
Just 1 clarification on 1 answer that has made. Is that we have announced a buyback and our dividend, right, which will use up around INR 500 crores, INR 520 crores of cash from the INR 1,250 crores cash we have, right?
And to fund our aspirations of $150 million to $100 million organic revenue part, we'll need -- at least at 1 time since we need around INR 1,000 crores, INR 1,500 crores of cash. And as things get better, I think that -- we'll be less out on the opportunity when we are using this amount of cash for buyback and dividend? And how do you see that happening for Birlasoft? That's my first question.
Yes. So if you look at as of March 31, we had accumulated cash and short-term investments in excess of INR 1,200 crore, which is higher than the comparable IT services companies as a percentage of market capitalization. The return of start of that surplus cash will not affect the company's ability to grow organically or inorganically. Birlasoft can continue to consider acquisition up to $300 million over about I would say that about INR 1,200 crore to INR 1,300 crore rupees, okay, that level of acquisition we can go for with leverage if required in future. So I don't think that it is going to impact our inorganic aspirations that we have.
Okay. Okay. And also second question is on the deal win side. $125 million of deal wins as compared to earlier quarters, I mean, when I compare it on the full year basis, it's flat and when I compare it on a quarter-on-quarter basis, it's also flat. Is this not a sign of any slowdown of demand environment? And how are you seeing Q1 and Q2 in this relation from a deal win perspective?
So if I look at the way our sales pipeline is today, I don't see that there is a slowdown in the demand, okay? We continue to look at the request from the clients where the participation into the deals that is there. So that remains. And if I look at from that perspective, I believe that the demand has not slowed down.
While I also continue to hear the concerns across in terms of what is happening in every country and due to geopolitical situations. But IT industry is a very interesting industry because a lot of time when our clients are under pressure, they actually do focus on the cost reduction.
And more and more, when they focus on the cost reduction, they need help from the IP outsourcing service providers to come and help them in reducing the cost. So sometimes, that can come across as an opportunity also. So we are being optimistic keeping all the things that are going on in mind. And I don't think that right now there is any need to change any plans that we have for the financial year.
That gives a lot of confidence. Lastly, have we done any pressure addition? And what is the quantum of pressure addition that we have seen in last 12 months, last quarter, anything if you want to speak about? And how does that help all the margin investors?
Yes. So if you look at 1 year back, we started a program called Skill to Scale. And the objective was that how do we look at pressure, how do we look at the raw skills that we bring into the organization and put a method of developing their talent and still going forward in order to scale faster because you cannot have the dependence on the external talent coming in all the time.
So it was in the initial stages in the first 3 to 6 months, and we started seeing the result in the quarter 3 and quarter 4. And today, we have reached to a level where now we can really very confidently say that we have the model in place where on 1 side, we continue to bring the freshers, keeping in mind the forecast that we have for the future, and we continue to develop that skill and develop that talent through our training programs, certification programs and many other actions that we do.
So I think that is really working very well, and that definitely continues to bring the freshers as well as the junior people who are there working in the other companies, and we attract that talent also because we are going to put the growth opportunity in front of them and giving them an opportunity to work in the engagements that they believe that it is going to be a stepping stone in their carrier in the future.
Understood. But any quantum, what is the number of additions that you have done in FY '22?
Yes. We plan approximately 1,800 to 2,000 people on the fresher side, and we are achieving that.
And any plans for FY '23?
For the financial year '23, it is going to be probably a little higher. My feeling is that about 2,000 to 2,020 -- I mean, 2,200 is what we'll plan for, for the financial year '23 also.
The next question is from the line of Hiten Jain from Invesco.
Sir, you said that the demand -- the deal pipeline is quite strong given that the demand environment is also quite healthy. But some where are you disappointed in terms of translation of those deals in the pipeline to actual TC -- actual wins? Because as the earlier participant was also checking FY '22 new deal wins is just 3% -- is up just 3% over FY '21. So somewhere you think that the translation into wins from pipeline is weak, at least it looks from the numbers?
No, I don't think so. And I don't think that I am disappointed with that because we have to look at one thing that historically and traditionally, everyone has been focused on the TCV wins, okay? And so far, we also continue to report the same way.
But the model is changing from TCV in the traditional terms because earlier the deals used to be long term and the deals used to be larger. But as we progress, the deals are becoming shorter -- smaller and shorter tenure. There, the TCV value will not look high because there is absolutely no other way by which we can explain that the TCV deals are going down, whereas the quarter-on-quarter revenue for the organization continue to grow.
It is because the ACV is higher than before. That means what we had to deliver today and in the shorter period in this current financial year itself is higher because the deal sizes are smaller. But the clients are also looking at that when more and more deals are going to come as a digital deal.
And the global environment is not as predictable as we would like it to be, they also want to be sure that they go and commit to the deals that they have the visibility into. And when it is also a digital deal, they do not know what the end state is going to be. And hence, they want to take the stepped approach. And you will see that a larger deal is going to get divided into 4 or 5 pieces and awarded one after another rather than they go for a multiyear deal and award it in one go.
I think that is what we have to look at. Very soon, we will see that there will be a different way for us to report that how the deals has to be looked at from the ACV perspective and not just a TCV perspective.
Sure, sir. Actually, the reason that I asked was even if you look at our sequential growth of 2%, it's lower than what you have been reporting till the same time last year and even fourth quarter of FY '20. And even now given that all the companies have reported the midsized IT companies have all of them have reported better growth than 2% sequential. So somewhere, it looks like there is some slowdown in the numbers that you have reported this quarter in growth.
That is because of the normalization, as I reported earlier. As I mentioned before that there are certain programs that we continue to do on the Enterprise Solutions, okay? And when that program finishes, so that part of the revenue goes down and you had to really win the other deals.
So we continue to win the other deals, but the normalization does happen when the transformation program finishes. But when we look at the annuity revenue, when we look at the RTB revenue, that continues to remain very stable and continue to improve also. So I'm not [totally] concerned by the slowness that you might be looking at. But yes, I also wish that the growth was higher than 2.1%, but it is all because of the normalization and not because the momentum may slow down or our deal wins or pipeline has slowed down.
Sure, sir. So sir, is this normalization behind? Or do we expect this normalization to carry on into FY '23 also? And at the same time, even your headcount growth, that also is -- you're operating at 85% utilization, headcount grew 10% year-on-year for a 15% revenue growth. So somewhere you think you need to pick up -- I mean, is it that you have hired less because you expect some more normalization going forward?
No, no, no. It is the productivity enhancement because if you look at -- when you are going to pay people higher, you are going to expect more. If we had to make the margins, we have to introduce automation, we have to introduce the methods to improve the productivity. And that is the reason -- in fact, it is a very, very healthy indicator that we have been introducing both the productivity improvement as well as the automation so that we can deliver more with less number of people.
And sir, is this normalization now behind or do you expect it to carry on into FY '23 also?
As I said earlier, there will always be one of those quarters that will come every 4, 5 quarters and all that, and we should continue to foresee that if we can avoid those but there will always be something like that will come, but it is behind us, what was there in the month of -- in the quarter of Jan, Feb, March.
Next question is from the line of Shradha from Asian Market Securities.
Can you hear me?
Yes.
Just wanted to check on when is our salary hike cycle? And you did indicate that attrition number for this quarter has come down. Is it possible to quantify the annualized attrition number for this quarter versus last quarter?
So I believe that quarter-on-quarter, the attrition numbers will be down, okay? We still are into the middle of the quarter, and we are seeing the indicators that the attrition is going down. But will it be significantly different? I doubt because we still have 1 more month to go.
And as I said earlier that it is too soon to start celebrating because our quarter 4 was better than quarter 3. But we want to continue to initiate and upscale our activity of connecting with people so that we want to continue. And from that perspective, I think it is helping us. And now that we cycle for the salary increment is coming up, I think that offer is going to add and give us a benefit on the attrition side.
So when is the salary hike cycle, Q1?
Yes, in the month of July.
In the month of July. And can you quantify the annualized attrition number for Q3 and Q4?
The attrition number you said?
LTM number is what you've already given in the press release, I was talking about annualized attrition number for Q3 and Q4?
Let me check if we have that. If you look at the attrition in Q3, it was 34.7% and in the Q4, it was 34.3%.
The quarterly annualized number you're saying?
That's right.
Right. And sir, on the ERP segment, I mean, for the last 2 years, we've seen the segment being flattish, I mean just a 2%-3% growth this year versus a decline last year. How should we look at growth trends in the ERP segment? Any lead indicators to suggest that this segment will contribute to growth in FY '23?
Yes. For the year, we had to look at it that this -- the current -- the previous financial year, while the growth will look like 2% be lower single-digit growth, but if you divide that into H1 and H2, the H2 was high single-digit growth. So it is picking up, and that is a positive sign because the -- really, the devils in the details that if we go and look at quarter-on-quarter in H1 and H2, it has the story that the trend is getting better. And more and more clients are also now looking at the transformation deals.
Yes. So what is changing in the demand environment for us to suggest that 23% growth rates in the ERP segment should be better than what it has been in the last 2 years? Because we are already talking about some macro concerns emerging again what was seen in the COVID environment. So from that perspective, do you think clients will continue to go for discretionary transformation projects or again, will that thing take a back seat?
No, I don't think that we are changing any of our plans. We are continuing to maintain our internal guidance that we planned as part of the budget, both on the revenue side and on the margin side. So, so far, no change. And I hope that there is nothing new that emerges, which will change in the future. But as far as I'm talking to our clients, I'm not experiencing that change.
And sir, your guidance on margins is that '23 margins should be better than '22 margins. Is this reading right?
That's right. That's right.
[Operator Instructions] The next question is from the line of Devang Bhatt from IDBI Capital.
Am I audible?
Yes.
Yes. So there are 2 questions. One is that will the promoter participate in the buyback. And your BFSI growth is softer than manifested in an E&U. So is there any normalization in that segment, too?
The first question, I'll ask you to repeat the second question later. But the answer to the first question is that whatever information is available so far that we have declared is where we do not know which all shareholders will participate or not. I think at some point of time, we will know that, and then we will really put that declaration also. And every shareholder has the right to participate or not participate. And I think in the due course of time, they are going to take their decisions and make it public.
Okay. And your -- if you see Y-o-Y growth of FY '22 over FY '23, your BFSI growth is softer than your manufacturing and your E&U vertical. So is there any normalization of revenues in that segment, too? That was my question?
I wouldn't share that there was not as much normalization of revenue in the BFSI space, but we did have in the Life Sciences space, okay? But yes, it is right that our manufacturing story has been selling much better than the other verticals. So from a percentage point of view, you will see that our share of manufacturing revenue has grown better than the others.
So from that perspective, was there a growth in the BFSI? Yes, absolutely, there was a growth in the BFSI. So I don't think that the revenue is declining. It is all growing there also. But the growth is lesser than what we have seen in the manufacturing space over energy and utility space during this time.
Okay. And considering your comments that your dealings are healthy, you have signed multiyear deals and you're seeing a strong healthy demand as of now. So are you expecting that your growth will exceed the FY '22 growth in FY '23?
That's the way we are working towards, but we don't give any guidance. As you know, we have the policy within the organization that we don't give any guidance. But as I said earlier that I'm quite optimistic, and we are quite confident that we will continue to deliver better than the expectations of results in this financial year as well.
The next question is from the line of Sameer Dosani from ICICI Prudential Mutual Fund.
Just one thing. And so what we are seeing is that utilization levels are at very high levels right now? And do you think that, that will normalize? That is one thing.
And second, also on the margin front, right, with wage hikes coming in and utilization level settling -- normalizing, what are the levers that you're seeing that will help you do better margins in FY '23 than FY '22?
Yes. So let me take the first question on utilization. Utilization is absolutely normalized for us, and it is flattened because if you look at in the last 3, 4 quarters, we are in the range of about 85% or 86% utilization. And this is the healthy levels that we want to continue to maintain, okay? That is the first piece, so it is all in a good balance right now.
Now when it comes to the margin, there are multiple ways by which we have to look at. You're right that there are going to be headwinds such as the wage hike and other factors that are going to come into the play or the cost or for -- that is going to come into the play. But there are various other levers such as we continue to optimize our pyramid.
We continue to bring in more and more automation, okay? We continue to introduce more and more freshers through the Skill to Scale program, okay? Then we continue to go after our clients so that we can renew our pricing, and we are negotiating for last 6 months with our key clients that we negotiated the price upward, and we are getting it in a stepped approach so that also is helping into.
Then there are other factors where sometimes you take the margin hit because you want to go and fulfill for a particular engagement. And the only way possible at that point of time was that we hire the subcontractors. And the subcontractors, as you know, that comes more expenses. And we have been able to rationalize the loss in the last 3 to 6 months, and we want to continue to maintain that as we bring more and more subcontractors, we either convert them into the employees or continue to replace them with our employees that we develop through Skill to Scale program.
So I think these are some of the levers that are helping us keep our margins in a range where we are growing quarter-on-quarter, though it is small improvement, but I think on the margin side, even a small improvement we say is looking at hard work.
Right. On the subcon side, you have already rationalized or there is more rationalization to happen over the year?
It is an ongoing thing because as you continue to rationalize, there are new wins that you continue to make and there are more will continue to come. So my feeling is that if we are at the level where we are today, I think we will be able to really use the other levers in order to optimize our margins going forward.
But as the supply side of issues are easier to manage at that point of time, we will do a further rationalization. But looking at the current conditions, I think we are at a good place right now.
The next question is from the line of V.P. Rajesh from Banyan Capital.
Most of my questions have been answered. But just one on the M&A side, if you can qualitatively give us a feel for what you're looking at and are the valuations coming down? And what kind of areas are you looking to acquire in?
So the strategy, I think once or twice I had talked about. And the idea was that how do we use this funnel approach to continue to look at and 0 down on what kind of company and what kind of skills that we will go after. As I earlier said that I will always continue to look at 3 parameters.
One, what kind of industry that customer is in? And is there any significant amount of revenue that come from 1 industry, okay, of our interest. Second is that is there any niche that we have? And third is that do they have a few clients where they have a significant revenue? And it is not that we end up buying tail. So out of these 3, if I get 2, then that's a good company for me. And we are going and scanning the market for that.
But I'm looking -- by looking at the revenue and the growth that we are seeing and the momentum that we are seeing, I think everything around digital and cloud is going to be a preference that we will have going forward. So we yet have to identify a company, but definitely, there are candidates that are there, okay, that we are scanning. And as soon as we get something that is going to be more interesting probably then we'll start the discussion.
Okay. And are you looking for 1 deal size to get you to your target inorganic growth or will there be multiple deals over the next 3 years?
Preferably, preferably 1 deal. But we had to then look at when there is not 1 then probably 2, but we are not interested in the tuck-in -- or multiple tuck-in deals because it doesn't matter if a company is of $200 million or $20 million, the effort required for integration are same.
And sometimes, actually, it is easier to integrate a $200 million company than a $20 million company. So we are interested in a single large deal rather than multiple tuck-in acquisitions.
The next question is from the line of Debashish Mazumdar from B&K Securities.
I have only one question, most of my questions have been answered. So if I see the last 2 quarters' performance, there's a very clear indication that ERP has kind of picked up for us and kind of reporting a growth of 8% to 9% Y-o-Y. Whereas the other part of the business is continuing to report anywhere between 28% to 32% growth.
So I just wanted to understand, as you remain pretty confident on deal pipelines and growth trajectories, and ERP kind of picking up, what resists us to tell you that in FY '23 growth numbers would be far higher than 15%, 16%, it would be [indiscernible] 18% to 20%? That's only query I have.
So I would absolutely like to have that kind of status when we're talking at the same time next year that the growth was much higher than the previous year and that's the goal. But as you know that we have to continue to look at how market responds because there is definitely a clear preference that our clients have towards the deal, which are transformational deals in the digital and cloud area or customer experience area, okay?
So that is where there are better margins. That is where there are more number of deals that are happening. And we are also continuing to experience the same thing and our deal wins data and the growth data shows that indicator. So from that perspective, the ERP picking up is a good story because we always have maintained that we wanted to be an enterprise digital company which we are today. And that continues to give us the confidence that the ERP is not going to go away.
But ERP is going to be very helpful in going and winning more and more digital deals because ERP is what has been processing it. ERP is what contains the data of many years. And if somebody wants to really have better AI, ML or data and analytics, it has to be sitting on top of the ERPs. So actually, the ERP growth to high single-digit growth is a very good news for us. And you're absolutely right that if it remains that way, we will show better results going forward.
Excellent. One last question, sir, on capital allocation, is directed to Chandru, basically. So this year, we have definitely seen a very high payout ratio. So is there any fixed payout ratio that we have in our mind for the future years?
The short answer is no. We do not have a policy on payout yet. But as we have done in the past, we will continue to look at, one, the capital allocation, what is the best thing to do for the company and for our stakeholders, and we'll continue to work through that, Debashish.
The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.
Sir, my first question is from a vertical perspective, I mean, we -- I think you spoke about this in the last quarter as well. Life Sciences is 1 vertical that has underperformed the company growth in this year. Now you had alluded that the projects have gotten completed and hence, there is a delay before the next set of projects start.
Other than that, is there any off-shoring also that is happening there and that is leading to a slower growth from a -- that is visible for us, per say? And how to think of this vertical firing? And that is the first point -- question on the -- from a vertical perspective.
Secondly, Energy & Utilities as a vertical, is there -- are there any headwinds that you are seeing from any customers there on the Energy & Utilities vertical? I mean over a period of 3 years this vertical has been largely a little bit sluggish. This year, we have done a very good job. But if you dial it back -- a little bit back this vertically has not grown much, per se, for us. Now given the changed environment, are there any headwinds that we are facing in the energy risk space right now?
Yes. So good question. You would have seen that we have shown better growth in the Energy & Utilities than the Life Sciences because of the revenue normalization and all that. But if I look at my optimism, my optimism comes more from the Life Sciences because it is far more stable vertical or industry than the Energy & Utilities because Energy & Utilities is 1 sector which is always in news for 1 reason or another.
And right now, because of the energy-related crisis that is happening because of geopolitical situation, there could be something that may emerge which we may have not foreseen. So from that perspective, I continue to remain more optimistic in the Life Sciences space than Energy & Utilities. But we do have good pipeline in both the verticals, and we are definitely hoping that we'll continue to grow in both.
Understood, sir. Sir, my next question is, just from a balance sheet perspective, we see that our receivable days and unbilled receivables together has gone up compared to last year, per se. Are there any change in terms of how we sign contracts with our customers? Any perspective that you can share on that front, per se? because the operating cash flow to the EBITDA has been quite low year because of the working capital that has hit us. So just trying to understand, is there any change in terms of how or contracts are structured, per se, from a receivable cycle -- billing cycle perspective?
Yes. Chandru here, and I'll take that question. So there are 2 things that need to be kept in mind. One was that in the fourth quarter, which is the quarter where a few of our clients do our -- the renewal of the contracts and the related documentation happen in the fourth quarter.
And when that gets initiated, it does take until DSO, but the later part of the quarter for some of those documentation to get completed, and therefore, the billing gets done later than -- earlier in the quarter, right? So that was 1 reason why the receivables in the fourth quarter was slightly up versus the prior quarter. And some of it also was shown in the unbilled receivables, right, because of the billing happening later than earlier.
The good part is that we have seen better DSO performance in the month of April, April was DSO 54, and that reflects the fact that we did make our collections in the current quarter. Having said that, I also have to say that clients continue to put pressure on us to increase payment terms. This is both in the case of existing clients and new clients. And that is a constant battle, if you will, right?
So we will continue to work through that. So in a sense, I would say that the DSO performance is still amongst the best that you would see amongst our peer group. We will continue to work within the 60-day range as far as possible, and we will continue to make sure that we do our best with our clients on delivery and, therefore, collections.
Sir, one last question. The SG&A this quarter has been slightly lower. Is it got to do with the subcontracting costs that DK sir alluded earlier, per se? How much would be the subcontracting costs in Q4, if you can share that percentage of sales -- percentage for our reference? And where would we -- ideally, where would we like that number to be?
Yes. So the question on the subcontract cost as a percentage of revenue in the fourth quarter, the number was 15.8% of revenue. In the third quarter, corresponding number was 17.5%. And that is why -- in my remarks, I have said that we did have improved subcontractor spending or lower subcontractor spending in the fourth quarter.
So we're seeing that abate a bit and that is what reflects in our lower SG&A in the fourth quarter versus the third quarter? You know that we've been at levels about 11% or even under 11% in FY '21. FY '21 number was 11.9%, right? So obviously, the FY '22 numbers are not what we can sustain. And with traveling -- travel opening up and with the talent supply situation, hopefully improving, we should see these numbers move back to more same levels going forward.
I now hand the conference over to Mr. Dharmender Kapoor for closing comments.
Once again, thank you, everyone, for joining the call at this time. As I earlier said that we always wanted to be a predictable and sustainable company. And going forward, we are just adding confidence into it. So we want to be predictable, sustainable and confident company.
And I think our growth for the financial year is a good indicator of that. And I'm sure that we'll continue to deliver better than the expectations in the upcoming year also. So thank you very much for all of your support. Looking forward to talk to you again in the next quarter.
Thank you very much. On behalf of Birlasoft Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.