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Coforge Ltd
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Thanks. A warm welcome to all of you to the Q1 FY '22 earnings conference call of Coforge. You would have received our results by now. Those are also available on our website, www.coforgetech.com. Present along with me on this call are our CEO, Mr. Sudhir Singh; and our CFO, Mr. Ajay Kalra. We will start this forum with opening remarks from our CEO. And post that, we'll be happy to open the floor for your questions. With that, I would now like to hand over the floor to Mr. Sudhir Singh, CEO, Coforge Limited. Over to you, Sudhir.
Thank you, Abhinandan, and a very good evening and a very good morning to you across the world, folks. Thank you very much for taking the time and for joining us for this conversation today. These are remarkable times that we are living through, and I hope that your family, your loved ones, your team members and you yourselves are safe and healthy. We meet today yet again in the continued shadow of a pandemic that is still raging in parts of the world. The quarter under discussion coincided with the second wave in India. Team Coforge responded to the situation by establishing 3 ICUs within its premises across cities, by structuring 24/7 ambulance on call services and by [ conducting ] 32 vaccination camps across India. As an ode to the times, let me kick off the discussion today by sharing a rather unusual metric, one centered around vaccination rates. At Coforge, I take great satisfaction in reporting to you that 72.3%, that's 72.3%, of our employees globally have now been vaccinated. And we are on target to complete the vaccination of all our employees who wish to be vaccinated by the end of the current quarter.With that, I would like to share some perspectives on our quarterly performance and the outlook going forward. Before I discuss our quarter 1 results, I would like to point out that this has been the first quarter where our reported performance also includes 2 months contribution from SLK Global, an acquisition that we closed in the last week of April this year. In order for you to better appreciate our operating performance, I shall call out organic performance, not including SLK Global metrics. And I shall also call out the firm's overall performance, including SLK Global metrics separately where relevant. With that, here goes. We are pleased to report that our organic growth as a firm accelerated further during the quarter. In Q1 fiscal year '22, our sequential organic Q-on-Q growth, was 7.6% in U.S. dollar terms, 7% in constant currency terms and 7.4% in Indian rupee terms. This organic sequential 7.6% growth in Q1 follows a growth of 7.1% in U.S. dollar terms previous quarter. As a consequence, of the sustained growth that the firm has seen, our year-on-year organic growth in quarter 1 fiscal year '22 is 32.3% in U.S. dollar terms. In quarter 1, our organic revenue stood at USD 185.1 million in reported terms and the reported revenue in Indian rupee terms was INR 13,546 million. The firm's overall performance, including the contribution from the acquired SLK Global business saw reported consolidated revenue grow by 16% quarter-on-quarter and 42.8% year-on-year in dollar terms. In Indian rupee terms, the growth for the firm in quarter 1 was 15.9% quarter-on-quarter and 38.3% year-over-year. Overall, consolidated revenue for the firm for quarter 1 stood at USD 199.7 million and INR 14,616 million in reported terms. With that, I shall now detail the vertical-wise growth for the quarter under year. The numbers I'm going to talk about now are excluding the impact of the SLK Global addition. Not including SLK Global, as noted, in quarter 1, our insurance vertical grew 10.1% sequentially and contributes 32% to the revenue mix. The BFS vertical grew 3.2% sequentially and contributes 16% to the total revenues. Our travel vertical grew 15.8% sequentially and contributes 20% to the revenue mix. The other verticals grew 2.1% sequentially, contributing 31% to the total mix. Our top 5 clients, not including clients from the SLK Global portfolio, grew 3.9% quarter-on-quarter. And our top 10 clients grew 5.6% quarter-on-quarter. Our top 5 clients contributed 24.6% to our overall revenue, and our top 10 clients contributed 35.9% of the total revenue. Our on-site revenues represented 60% of the total revenues in quarter 1 fiscal year '22. This indicates and follows the continuing trend of a gradual rise in offshore revenues over the past 4 quarters, with on-site revenue at 60% now being lower than the 64% recorded around the year back. Moving on to margins and to operating profits. During quarter 1, we delivered an EBITDA of INR 2,359 million before accounting for ESOPS costs and the part of the SLK Global acquisition-related expenses that got booked during the quarter under review. EBITDA margin for the quarter stands at 16.1%. The margin performance for quarter 1 fiscal year '22 reflects the full impact of global annual wage hikes rolled out across the organization with effect from April 1. They also reflect the impact of transition expenses in 4 of the 5 material deals signed over the last 6 months and also the movement of some AdvantageGo license sales into the next quarter. We do expect margins to expand substantially over the next 3 quarters with quarter 2, which is the quarter that we're currently in, expected to be around 200 bps higher than quarter 1 margins. Our consolidated reported after-tax profit for the quarter stood at INR 1,236 million, a decrease of 7% quarter-on-quarter and an increase of 54.7% year-on-year. The depreciation and amortization during the quarter also reflects amortization of intangibles created as part of purchase price allocation done for the acquisition of SLK Global that was concluded during the quarter. The impact of the same is $0.7 million in the current quarter, fundamentally reflecting around an impact of 2 months. Moving on to order intake and commentary around order intake. This quarter, the quarter under discussion, quarter 1 fiscal year '22, stood out as a record quarter for the firm in terms of composite order intake, order executable book and also importantly, the size and the significance of the large deals that we signed. Our organic order intake, not including SLK Global contribution, for the quarter was USD 318 million. You will recall that in the last 4 quarters, our order intake has been between $180 million to $220 million. The past quarter itself for order intake, again, you will recall was $201 million. So this was an appreciated result. Equally importantly, booked orders for the next 12 months, which is what we call out as order executable, not including the SLK Global business, now stands at USD 560 million. This metric is up 20.4% year-on-year. If we were to include SLK Global, the order executable for the firm today, at the end of last quarter, stands at USD 645 million. During the quarter under review, 11 new logos were signed. The spike in order intake has come on the back of 3 large and 3 very special deals signed during the quarter. 2 of these were signed across the BFS and the insurance verticals. The third was a large deal met purely by the horizontal cloud and infra services business. In the insurance domain, the firm signed a $20 million-plus contract over 3 years, which is the largest ever license contract for the AdvantageGo business. Revenues for this of course will be recognized over the 3 years around the licenses. In the BFS domain, the firm signed a $105 million contract to be delivered over 4 years, preceded by a staggered 8 months long transition. The BFS team will bring into place all our core transformation capabilities across enterprise architecture, industry consulting, data architecture, cloud engineering, digital integration and intelligent automation. Out of this organic USD 318 million order intake, excluding the SLK business, the U.S. contributed USD 46 million, EMEA was at USD 227 million and $46 million was secured from the rest of the world. Finally, to round out this section, in addition to the 3 large deals that I referenced, we wish to also share that with one of the largest banking and financial services institutions in the world, we have signed a global MSA to provide technology services from and to the centers across U.S., Europe and India. I shall now pivot to quick commentary around delivery operations and capability build activities. Today, more than 51% of our global tech revenues comes from our digital service lines. Another 20% comes from our cloud and infrastructure service lines. The firm service stack today, as a whole, is a composite of $100 million product engineering service line, $100 million cloud and infra service line, $100 million intelligent automation service line, with the addition of SLK, a $100 million business process management service line and a $50 million digital integration service line. The Cloud Services business continues to drive both accelerated growth and sharp differentiation. It also powers fully or partly almost every large deal pursued that we are undertaking. Our engineering convergence based agenda for the cloud that we've crafted; our own cloud innovation satisfactory framework; our infrastructure as a core transformation program approach for the cloud and our advanced AI ops platform, which is fundamentally an integral programmable platform, continued to deliver distinct and tangible value and differentiation in this space. Our product engineering service line with its agile next framework continues to power true product creation and upgrades. The AdvantageGo speciality insurance suite is a prime example of this. This quarter, one of the world's largest publicly traded property and casualty insurance companies signed AdvantageGo for the implementation of our underwriting product. Another U.S.-based Fortune 500 insurance company has successfully [ completed ] our risk insurance risk management software. Within the broader digital practice outside cloud, also outside product engineering for a global provider of risk management products and services, Coforge implemented a domain-driven design framework to modernize the API architecture of 2 of their crucial lines of business. And that in turn has helped them with the faster onboarding of the partners. Our digital consulting services team also leads our enterprise transformation offering for the largest independent global workforce deployment platform, which is incidentally a multinational conglomerate of over 7 companies. With them, we are engaged at the senior executive steering committee level itself to drive that transformation. And finally, to round out this section, on the recognition front, for the third successive year, we have been awarded the platinum partner status by Pega; our digital integration business was awarded our seventh new soft partner award to date; and we were also placed as a leader in the Everest Group PEAK Matrix insurance business model innovation enablement services. Pivoting once again towards the people metrics. The quarter under review broke the record established in the previous quarter of the highest net headcount addition in a quarter in the history of our firm. On an organic basis, again, not including SLK Global metrics, our head count recorded a net increase of 1,138 people during quarter 1 fiscal year '22, implying a 9.2% sequential increase. This comes on the back of an 8.5% sequential increase in head count during the last quarter. Effectively, total head count for the firm, excluding SLK Global has increased by around 18% over the last 2 quarters. On a reported basis, after adding in the 6,962 employees of SLK Global who now form part of the Coforge family, our total head count stands at 20,491. The strong head count growth, aligned with the significant number of employees engaged in transition activities to service the large deals and material deals that we have signed, has led to lower utilization during the quarter at 77%. You will recall last quarter, we were at 81%. We expect utilization to normalize as newly secured deals start to ramp up. Finally, I'm happy to note that attrition continues to be at a healthy level despite very tough market conditions around talent retention, and that it stays at 12.6%. Very quick commentary around balance sheet and then I'll finally pivot to summing up and outlook. On the balance sheet front, cash bank balances at the end of the quarter stood at INR 3,017 million after material payouts towards the interim dividend recommended in May and the SLK Global acquisition. CapEx spend during the quarter was INR 520 million. The debtors at the end of the quarter stand at 71 days of sales outstanding. OCF For quarter 1 fiscal year '22 stands at USD 5 million. We are pleased to share that, in line with our intent to return excess cash generated to shareholders, the Board has recommended an interim dividend of INR 13 per share. Summing up, and I'll follow the summing up with an outlook as well. Before I share the updated outlook for fiscal year '22, I would like to quickly summarize and reflect on the headwinds and also the tailwinds that drive our revenue and margin assessment for the year. On the revenue front, the tailwinds include: One, a 12-month organic committed order book, which is 20.4% higher than where it was a year back; two, revenue momentum that has accelerated. The $20 million plus insurtech wins and the $105 million BFS win represents a material milestone for the firm. Three, our client concentration and the associated risk with that client concentration continues to be low and contained. Four, upfront resource hiring over the last 2 quarters has increased global head count by 18% plus. This SME pool is available to staff who demand that we clearly see ahead of us. Five, and I think this is important, the increased recognition of our product engineering expertise. And our ability to stand up, manage and grow industry platforms independently continues to have a very positive rub off on the services revenue stream of the firm. Six, again, important, our forays into newer verticals over the last 18 months have now started paying dividends. We have stood up 3 material verticals in addition to our 3 core verticals over the past 2 years. High tech and manufacturing now accounts for 8.9%. That's almost 9% of our global revenues. Retail and health care accounts for 8.1% of our global revenues. And government outside India, accounts for 7.4%. Seventh checkpoint, the continuing rebound of our travel business, and you've seen the metrics, gives us confidence. We believe this business shall see another [ flip ] when the air travel in Europe rebounds. And finally, the portfolio of 14,000 clients where we are enrolled as a preferred partner, has doubled over the last 18 months. Growing these relationships alone reflects a material revenue expansion opportunity for the firm. Now while all of these are favorable, on the headwind side, supply challenges are a clear headwind around revenue growth. We recognize and are attempting to resolve supply challenges, particularly supply challenges around new skills. In May, we had shared that we are planning for an organic constant currency growth of at least 17% in fiscal year '22. You will have noted that our organic quarter 1 revenue times revenue multiplied by 4 just extrapolating will, by itself, represent an organic constant currency annual growth of 18-plus percent. Given this momentum and the backdrop that I just shared, we are now planning to deliver at least 19% CC organic growth for the year. Moving on to the margins outlook for the year. The tailwinds around margin include: one, the continued growth of and the discount reversal in our travel vertical; two, a gradual increase in offshoring percentage as larger size deals have been closed; three, the operating leverage that is coming from the accelerated growth that we all see. The headwinds on the margin side include: one, wage increase effective day 1 of the current fiscal, you will recall last year, there was no wage increase; two, retention cost and hiring cost increase; three, a decrease in utilization, and this is important, we believe, as larger net new deals warrant upfront transitions and transition cost. You will recall that in May, we had shared that we are targeting an EBITDA pre-RSU cost of 19% for the year. We continue to plan to target a 19% EBITDA as confirmed last quarter. In quarter 2 itself, we expect EBITDA to jump around 200 bps over quarter 1. This immediate jump in quarter 2 over quarter 1 will be facilitated by, one, a forecasted increase in utilization. Our global headcount has grown 18% in the last 6 months in an effort to staff on new large deals. 4 of the material deals signed in the last 6 months have an upfront transition period. In quarter 2, 2 of the 4 material deals will complete. The second thing that will give a short-term [ flip ] is that the annual visa cost that we book in quarter 1 for the full year will not recur in quarter 2. Three, AdvantageGo license sales that were held up towards the end of quarter 1 have now been realized in July and will provide a [ flip ] to quarter 2 margins. So that's the aggregate summary on the margin front. Summing up, Coforge is the name that we adopted around a year back, stands for working together to create lasting value. We believe that at the core of our operating concern is an intense focus on execution and surprise-free operations. We believe that over the last 4 years, we have put in place the leadership, the strategy, the culture and the tech capability stack to grow and differentiate. Moving ahead, we remain committed to building on the foundation that we created so painstakingly over the last [ 4 ] years. With that, ladies and gentlemen, I come to the end of my opening remarks. And I look forward to hearing your comments and to addressing your questions. Thank you.
[Operator Instructions] The first question is from the line of Vibhor Singhal from Phillip Capital.
Congrats on a good set of numbers yet again. So really just a couple of questions from my side. In terms of growth momentum that we see I believe a strong growth in this quarter. We are very able poised to actually post the kind of guidance that we have given of 19% plus growth. In fact, if I do the math, I think the required for the next 3 quarters to meet that 19% growth is the [indiscernible] [ 2% to 3% ] in fact even [ based ] on that. So just wanted to pick your brains on basically, is it that we're just kind of guiding it conservatively at this point of time? Or are we seeing any headwinds? Or are we being cautious about let's say a potential for the -- or the fallout of any such events like in the second half of the year? Second thing, my second question was more actually on the margins front. You've even articulated the takeup of how the margins in this quarter were impacted. So just wanted to check if you could just quantify the margin bridge for us in this quarter. So what was the basis point impact of the transition cost, visa cost and the [ paltry ] hike for us to be able to maybe build up [indiscernible] for the future forecast.
Sure. Thank you for the question, Vibhor. Let me just take both of them in order. You're right about the mathematical calculation around the growth required to hit the 19% threshold. It has a very low number. The intent, Vibhor, has always been to be conservative around revenue guidance, and that's how we've always offered guidance and which is why we've always met guidance and in most cases, exceeded guidance. That is the intent currently as well. We do not see any headwinds, material headwinds, to revenue growth. And the intent will be to hopefully exceed the 19% threshold, which is why the guidance has been called out very clearly as at least 19% CC organic. Moving on to your other question about margins. Vibhor, the wage impact during the quarter had an impact of between 200 to 200 bps. Utilization, you noticed has fallen 400 bps. Every 100 bps decrease in utilization has a material downdraft on margins again. AdvantageGo, and we always share those numbers during question-and-answer sessions like these. The negative impact on the firm because of license revenue recognition getting shifted to quarter 2 is about 100 bps. So very high level, wage had a 200 to 200 bps negative impact. AdvantageGo business license revenue recognition, roughly about 100 bps negative downdraft and utilization has gone down by about 400 bps. That again would have had -- that has had a significant impact. Finally, of course, there's a fourth parameter that I talked about, which was the visa cost that's all being booked upfront in quarter 1. That too has an impact, but not as strong as the wage of the utilization part. Did I answer your question?
Yes, I think is quite an answer. Just 1 last question on the recovery in the travel segment. We saw a very strong growth in the travel segment in this quarter. And if I look at the revenue from the travel segment for us in this quarter, I mean, we are actually -- I mean, it fell sharply in 1Q FY '21. And then, of course, it had a shift [indiscernible]. If I look at our revenue right now, it's around $38 million, which is just 10% less than what we were pre-COVID. So I just wanted to pick your brains on the composition of this revenue. Is it that we have actually recovered almost in the approach with I mean most of the revenue that we lost and we are back to 90% of the pre-COVID levels in the same accounts? Or is it that those accounts in which we had lost revenue, that [ because we expect ] to come. But in the meantime, we have added more accounts, and that is where the recovery can be actually [indiscernible].
So when we look at the travel sector from a geo perspective, both across Asia Pacific and the Middle East, the travel recovery is near complete in terms of spin. In Europe, which is a very significant geography for us on the travel vertical front, the recovery is still in its early phases, largely because U.K. where we have a material presence, airline travel -- airline recovery has not been on expected patterns. And hopefully, that will start roughly about 2 quarters from now. U.S. again, has now started limping back to the levels that it was at pre pandemic. So that's how I would represent the outlook for travel. Pre pandemic, as you are aware, Vibhor, travel was about 29% of our global revenues. At the current point in time, it is 20%. And the, I guess, the one thing that's helped us recover has been the fact that now we have 3 other verticals which are between about 8% to 9% contributors for us in addition to the first 3 that we talked about. So that's how we see travel at the current point in time. Over the last 4 quarters, as you rightly said, the travel vertical after the drop in Q1 of last year has broadly been growing almost 7% sequentially for the last 4 quarters.
[Operator Instructions] The next question is from the line of Abhishek Shindadkar from InCred Capital.
Congrats on great execution. Two questions. Firstly, sir, just wanted to understand how durable is this demand? Any comments would be interesting. And the second question is in the employee metric given in the presentation, the others, which likely is a staff has seen a substantial jump. Now is this primarily related to SLK because it appears high for a captive business? And does it also create a lever for margins and growth?
Thank you for the question, Abhishek. Let me take them in order again. At this point in time, when it comes to demand, there's been a lot of commentary that's been floating around, which talks about the fact that there is a material buoyancy in the demand environment, and that is lack of it. When we look at the current scenario and we try to project 3 to 5 years out and look at a scenario when demand will, I suspect, normalize, we believe that the capability matrix that we've created over the last 4 years, the tech capability metrics around product engineering, is likely to see sustained long-term demand. Cloud is likely to follow the same pattern. Digital integration is going to follow the same pattern we believe, as will intelligent automation. So while the market-based demand quite clearly is buoyant and at near peak levels or record levels, longer term, for our tech services stack, we think there's a long-term secular high-growth ramp on the demand side that we are seeing from the fences right now. The same thing would apply. If I were to flip this and talk about the vertical story, BFS innovation dollars continue to come in. Compliance dollars have been stable and at a high level. Insurance still seems to be in the early stages of pivoting towards longer-term investments in the tech stack. And travel, of course, should, from the abyss that it's been in, should, for a few years, be looking at significant demand because of cloudification picking up, because of touchless travel picking up, because of automated self-service picking up, because of security related aspects picking up. So that's how we see the demand. We see it at least from our vantage as a firm as something that is durable, to use your words. As far as employees are concerned, your observation is right. There's been a step jump. That step jump has come largely because of almost entirely is how I would characterize it, because of the SLK addition from the metrics that you saw last quarter. We believe SLK -- and we called it out last quarter as well, we believe SLK in the short to medium term should be growing even higher than Coforge minus SLK, that portfolio. The intent is to keep these numbers static. We are not in the business of extracting people and taking them out. But we will, as we have done with Coforge, try to keep G&A static and drive accelerated growth so that as a percentage, that cost keeps decreasing. But just summing up, your observation is correct. The increase in others has come from SLK. We plan to cap it at more or less the same levels where SLK is. And we plan to drive accelerated growth even higher than the Coforge mothership, and try to offset G&A percentage cost as a consequence. Those were the answers, Abhishek, to your questions.
The next question is from the line of Sandeep Shah from Equirus Securities.
And congratulations for a very good execution, especially on the sales front, which has been consistent. So just the first question to you in terms of the EBITDA margin guidance of 19%. So you have commented that there would be increased Q on Q in the next 3 quarters. But it looks like that there would be a heavy lifting still required in Q3 and Q4, and the Q4 exit rate on the EBITDA front would be close to 21% as a whole. So any risk to this -- and if this is actually [ able -- ] is it also fair to say that you may enter FY '23 with 21% kind of an EBITDA margin as well which will also set a stage about good margin defense, headwind defense in FY '23 as well?
Sandeep, a little difficult for us at this stage to comment on FY '23, but FY '22 that we are in right now, our short-term focus is to make sure that we first get to around the 200 bps jump that we've commented upon over the last quarter and then try to extend it if it's possible to extend it. So that the ramp expected in H2 around percentage margins is not very similar. It takes some time for the initial wage increase impact, which tends to be significant, 200 to 200 bps, to get offset and that happens progressively over the remaining 3 quarters. And we've seen that play out over the last many, many years. We expect discount reversals from the travel vertical to continue and almost all of them to go away almost completely by quarter 4. On retention and hiring costs, the fact that we've done so much of it upfront to service demand that we've been talking about from almost the last 3 quarters should allow us to have some slack around being a little selective, around how many folks we onboard and at what salary points we onboard. So as a composite, and I gave very detailed commentary around the headwinds and the tailwinds on margin. I talked in response to an earlier question around what the margin walk, what the impact of utilization, what the impact of advantage growth, license revenue is not being recognized, what the impact to the market wage depreciation has been. As a consequence, when we look at the overall piece, we do think, in the short term, as the Q2 plans play out around margin and for the full year, 19% EBITDA pre-RSU cost, which is what we talked about, is definitely achievable.
Okay. Okay. Just a follow-up. In terms of after closure of certain great deals on an organic basis, how is the deal pipeline looking out? And still you are having deals about $50 million in your pipeline. And last question in terms of if you look at the full year normally your 3Q and 4Q are seasonally great. So do you expect the same trend may continue even in FY '22?
Yes, Sandeep. So the deal pipeline continues to be robust and our intent, not just for this year, but in the years to come, it continues to be, as it has in the past to drive growth that is robust to drive growth that is sustainable and is not just a flash in the pan and to drive growth at -- profitable and over time increase in margins. Deal pipeline is robust. And of course, we closed $100 million-plus deal, and it's taken us about 4 years to come here. So we don't expect that to [indiscernible] up almost immediately. But as an aggregate, when we look at the deal pipeline, size of deals, number of deals, the spread of deals by tech horizontals and geos, we feel good about the year. Quarter 2 and quarter 3, and I noted this earlier as well, we do not see any headwinds, which should result in any kind of a negative surprise against the plans that we have drawn for ourselves for growth for the current year.
The next question is from the line of Vimal Gohil from Union Asset Management.
Firstly, congratulations on a great set of numbers. Sudhir mostly, you've answered most of my questions. I just had 1 clarification on localization. If you could just highlight given the kind of revenue growth that you've seen even organically, the reasons behind the fall in utilization. And you sort of highlighted that utilization could go down further as you highlight that headwind. That seems to be a big counter-intuitive because as and when your employees are off the bench and on projects utilization effectively should improve. So if you could just probably help me clarify this mathematics. That's all.
Thanks for the 2 questions, Vimal, let me take them in reverse order. I just want to clarify, we believe utilization will go up. I have not indicated utilization will go down. What I did say was that utilization has gone down from 81% in quarter 4 to 77% in quarter 1. But we believe utilization will go up, and that is going to be a very critical and a very important margin lever for us going forward. So that's one. Coming to your first question around why has utilization fallen, 4 of the material deals that we've signed within the last 6 months are still under a transition phase, and that has warranted upfront transition investments in cost and employees and people and SMEs. That's why utilization number has fallen.
Fair enough. Just 1 follow-up on the margins only, sorry. So basically, your margin guidance of 19% post RSU, this is after the integration of SLK, which you had highlighted at the time of acquisition that this was an asset which had higher margins as compared to Coforge. So this -- your margin guidance includes your SLK assumptions as well, I would believe?
Yes. So when it comes to revenue guidance, we had always qualified it saying it will be at least 19% now at the end of this quarter growth. And as far as EBITDA guidance is concerned, we are targeting 19% as a composite organization because SLK is a relatively small part of the overall firm. And even if it comes up at higher than the firm's average, it is not going to move the needle too much. So 19% is the EBITDA target for the composite firm for the current fiscal year and 19-plus percent is the revenue target for the composite firm for the current fiscal year.
The next question is from the line of Manik Taneja from JM Financial.
And congratulations on a great quarter and starting FY '22 on a very solid note. I had a couple of questions. Number one is on the deal wins in the U.S., is there some one-off impact there, given the fact that typically, we had about close to $100 million of deal wins in the U.S. on a quarterly basis this quarter, like number of years to be low. That's question number one. The second question was with regards to how do you see the on-site, offshore mix of your revenues progress more from a 2- to 3-year time frame, given the fact that we've had some offshore shift in the last 4 quarters and despite some of the large deals we are in well transitioning currently?
Thank you for both the questions, Manik. Deal wins, the out of the $318 million, the fact that the U.S. is $46 million in this quarter is just a -- it's just a passing blip. Demand pipeline in the U.S. is very strong. Our investments around sales and marketing additions have also been very, very focused on the U.S. in the recent years. So the U.S. should be back to within normal or higher than normal order intake starting quarter 2 itself.As far as on-site, offshore is concerned, on-site revenue has now fallen from about roughly -- what used to be roughly around 64%, 65% to 60% this quarter. If the -- if the deal velocity and if the median size of the deal is going up, if that trend continues, we think on-site revenues might fall below where they are, or at least at a minimum, stay where they are.
The next question is from the line of Mukul Garg from Motilal Oswal.
Sudhir, before I take my question, just wanted to share a feedback. Your revenue growth performance has been really exceptional. And while we understand and you have clearly laid out all the pulls and pushes on what is driving growth, it would be a lot more useful if the guidance can be a bit realistic. You guys are doing an amazing performance. And I don't think like there is any harm in kind of putting the growth you are seeing going forward over the next 3 quarters better than a flat type of a performance. So just wanted to kind of share that feedback. On the question, I just wanted to probe a bit on the margin guidance which you are giving. Is it possible to quantify the support from the strip of licenses to Q2 and reversal of discounts on the overall margin improvement -- margin guidance commented for FY '22. And excluding these, is improved pricing one of the reasons why your margins will go up over the next 3 quarters? Or is this more a case of containment on the SG&A side?
Sure. Thank you. Thank you for the feedback, Mukul, and thank you for the question. Let me very quickly respond to the feedback. I think we -- as a firm, we will take that as a back-handed complement, the fact that you think 19-plus percent revenue organic PC guidance is conservative. I do agree with the maths part of what you're saying. There is scope for us to perform better. And I want to assure you and to everyone else on the call but it is our intent to try to maximize growth. But thank you for that feedback. Coming back to your question around margin guidance and the more granular breakup of that margin guidance. See, license deferral from Q1 to Q2 had a negative 100 bps impact on our quarter 1 margin, Mukul. So that's something, as we think from the -- for the walk from Q1 to Q2, that's something that we are factoring in. Discounts, especially in the travel vertical continue to reverse. But as I noted earlier, we expect for the firm a blip, a material blip in margins owing to complete discounts going away, given how the pandemic has progressed of late to happen around Q4 of the current fiscal. Third, your point around pricing improvements, being a lever is correct. We have seen that -- and this is still early days of view from the tranches that, interestingly, and it's been a little bit of a surprise to us. Interestingly, the ability to ask for and get higher price realization, especially for niche skills, this time around has been led by the APAC geography. So the willingness for clients in APAC to align with increased pricing asks is higher. I'm not saying it doesn't exist in Europe and North America, but it is higher in impact, and we continue to have conversations with clients across North America and Europe and also secured pricing increases. In our experience, those pricing increases are not across the broad MSA linked for all skills kind of price increases. They are more structured around individual engagements or individual niche skill SMEs for home prices are getting renegotiated. So that is how I would characterize the answer to the pricing improvement comment that you had, Mukul.
The second question was on SG&A. There was a meaningful improvement or increase in the SG&A cost this quarter. Was that primarily because of SLK getting integrated into the organization? And second part is, if I look at the SG&A investments SG&A payouts you guys have been doing, I think slightly longer term, over last 4 years, it has very meaningfully trailed up your revenue growth around like the 1.5% quarterly increase versus revenue growth kind of almost reaching 4% on a Q-o-Q basis between Q1 FY '18 and Q1 FY '22. So how should we see this? Because SG&A is always supposed to be more variable in line with the revenues like a fixed cost, but the behavior and the performance is more [ same in nature ]. How should we see this going forward?
Mukul, If you look at our SG&A, and if I just reference the time frame that you're talking about, right, our SG&A from around fiscal year '18, it used to be roughly about 19%. In the quarter under review, it's come to 13.6%. So while there is a trading impact that you talked about, the long-term secular impact as growth has accelerated for us is that our SG&A as a percentage has been coming down, 13.6% which is where it is, is a number that to us seems to be a number that we would like to hold. We don't want to cut it beyond this because it's not just this year. At some stage, maybe after quarter 2, we need to start sweating over next year in how to make sure that growth sustains and hopefully accelerates. So that's how we're looking at SG&A numbers right now. The 13.6% this quarter is lower by 40 bps from the 14% that we saw last quarter. The other interesting metric that you would have seen in the fact sheet that we shared with you is that the number of sales and marketing people have actually gone up. And they have gone up, one, not just because SLK got [ handed ] to us. They've also gone up because as we've been creating newer verticals and as horizontals like cloud have started securing larger deals for us, we have started adding some of our existing delivery SMEs to the presales pools of the horizontals of the newer verticals that we created and also to U.S. geo, which we think can be a very material growth ramp for us over the next 3 to 5 years. Did I answer your question, Mukul?
Clearly, that is a very fair assessment. We just wanted to add for this kind of context to this, are you seeing any force multiplier because of your insurtech platform on your SG&A cost because obviously, the margins on product side are generally higher? So is that also one of the reasons why, over a longer period, you have been able to hold the cost while improving your revenues?
No, the biggest lever, as we assess that, Mukul, is the fact that over a period of time, right, we -- I mean if I look at current growth rate, we are almost twice as large as what we were 4 years back. So the biggest lever for us has been growth. Our SG&A costs have been rising, and they should keep rising. But they've been lagging, as you rightly said, the growth that the firm has experienced. That's been the biggest lever. I would not say that AdvantageGo, which is roughly only 5% of our global revenues has been a very significant force multiplier on the SG&A side.
The next question is from the line of Dipesh Mehta from Emkay Global.
Two questions from my side. First is about -- can you help us understand whether Q1 played out in line with what you anticipated at the beginning of quarter or played out better or worse? And it better than what surprises positively, if you can provide some perspective. Second question is on -- depreciation-related. Can you provide purchase price allocation of SLK Global across tangible/intangible goodwill? How we did that assignment?
Thank you for the question, Dipesh. Let me first request our CFO, Mr. Ajay Kalra, to take the depreciation question. And if you'd like to address question 1 as well, please go ahead, Ajay.
Sure. Thank you, Sudhir. On the purchase -- I'll go in the reverse order. On the purchase price allocation, we have done the preliminary assessment of our purchase price for SLK Global. As you would recall, the total consideration for 60% was INR 920 crores. Total identified tangible assets net of liabilities were INR 192 crores, identified intangible assets were valued at INR 315 crores. The goodwill we recorded was INR 615 crores. Does that answer your second question, Dipesh?
That answers. Only question is now INR 315 intangible, we will amortize over what period?
The amortization period would be approximately 10 years. It primarily consists of customer relationship and contracts, it is around 10 years.
On -- there was a question preceding the second question as well. Let me take a quick stab at that. The question was, Dipesh, whether quarter 1 played out in line with what we expected. It was in line. It was broadly in line with what our expectations were. Getting into quarter 1, we knew that we were chasing a $100 million deal. And we haven't closed a $100 million deal, at least in the last 4 years as an organization. So the fact that we were able to close it was not a surprise. But in many ways, it was a validation of the efforts that have gone on over the last 4 years in recreating the technology stack and the domain stack of the firm. Because -- and I've said this in the past, and Ajay also referenced this, because the revenue has seen such a spike, utilization has gone down because of the investments that had to be made to start staffing these deals. So they aren't surprises. But those are the 2 aspects: the very, very sharp and accelerating revenue growth, leading to a lower utilization. Wasn't a surprise, it was a conscious decision, but it was a little away from what we had built in around our utilization plans for quarter 1.
The next question is from Sandip Agarwal from Edelweiss.
I congratulate you on 3 fronts on excellent quarter upgrade of guidance and -- but more importantly, on the bold call of taking margin hit, but you have retained your employees and you've kept your attrition under control. But I also want to ask you a question that probably Mukul also asked, but I will ask it in a little different way, if I can get something more out of it. With the order book, which is up 38% year-over-year, travel opening up demand-supply massive mismatch, I don't see that mismatch would be met any time soon. And your attrition thing lower, so you obviously have a good amount of talent with you already. Why you are so giving such a weak guidance of 19%? And I understand that you may have built in something for wave 3 or even [ like some ] companies are massively underguiding. So I'm not blaming anything on that part. But what I'm trying to understand is, is there really some worry which gives you holding to give this 19% guidance or you just want to be -- give surprise for the investor every quarter because it will be almost impossible to achieve 19% unless we do some big blending as you are aware of some big client loss or something. That is what my worry is because I think with this kind of order book and travel opening up, everything going in our favor, 23%, 25% is something which is like we will not have to make much effort to do that because your people are also with you if you don't have a high attrition in the key people. So can you please help us a little bit on that.
Thank you for the question, Sandip, and thank you for your comments as well. I just want to reiterate, and I think I said this earlier, we do not have any ones linked to headwinds around the potential client loss or an existing revenue stream loss at all. I want to be absolutely categorical about that. We've never lost a material client, at least over the last 16, 17 quarters that we've all been getting together and talking about performance. And we really see nothing of that sort on the horizon at all. Our guidance, and I want to underline it and double underline it again, is at least -- we haven't said unlike EBITDA, we've given a fixed number. On revenue, one, we have taken it up by 2% from the last quarter. Two, we continue to qualify it as at least 19%. As both of us recognize, and I tie this back to Mukul's question as well, it is going to be a dynamic number. We have the next 2 or 3 quarters to continue to assess how the market progresses, how our deals progress. And if there are further upsides, we will continue to keep revising our guidance on the revenue side. 19%, I would encourage you, given the way we worded it also, to look at it as a threshold. That's what we are calling out, Sandip, but there is no material headwind that is playing into any other commentary around revenue guidance.
And -- yes, sorry.
Go ahead, Sandip.
So and second thing, which I wanted to know is, after how long you are seeing a position in the client market where pricing power is coming back, is it a decade or more?
That's an interesting question. There's always been pricing power whenever a firm or whenever we've been able to stand up a bunch of SMEs who delivered clear quantifiable impact to the client. So it's never been a situation where things were so bad that you can go back to a client after doing excellent work or after providing for an exceptional SME pool and not asked for a revision. COLA has been built in into a lot of our contracts, and there have always been ongoing conversations. That trend has intensified over the last 12 months. I haven't -- let me just -- let me make sure I get this right. The way I would put it is, in the last 7 to 8 years, this is possibly a point in time where the ability to go back and have that conversation -- and I have a very high conversion rate, it's the highest that I've seen over the last 1 decade. That is how I would call this out.
Best of luck for the future quarters, you have an excellent team in place, and you have retained all your teams so congratulations once again, and I'm very confident that at your at least 19% threshold will be beaten very, very significantly.
The next question is from the line of Vikas Ahuja from Antique Stockbroking.
My first question is on client concentration which continues to improve. We have seen top 10 client contribution coming down from roughly a little over 40% to close to 36% now in 3 years. But you think we need to use the same template for vertical-wise exposure as well. BFSI is more than 50% of total revenues now post acquisitions. Are we happy with that kind of exposure or you think we need to diversify over time? And second one is, as Vibhor mentioned earlier, we are 10% behind pre pandemic run rate on travel verticals. Do we still think, from here, travel will continue to lead the overall stack, assuming Europe follows U.S. maybe with a lag of 3 to 6 months? And also, last quarter, you talked about a couple of large deals we have won in that -- in the travel segment. Have the ramp-ups have already come this quarter or those would be coming next quarter?
Thanks for the question, Vikas. I'm going to take a quick stab at that and if Ajay wants to come in, I'll request him to also come in on the question. Client concentration, you're right. Top 10 are now 36%, and we feel very good about it. We always believe as an organization that the biggest risk for a firm our size is putting too much of our figurative eggs in a single client or a few client baskets. So the fact that client concentration is low gives us very significant confidence that growth will be sustainable in the medium to long term. We always talk about robust, sustainable and profitable growth and the sustainable growth largely drives off the fact that we do not have high client concentration. Your comment around the fact that we need to mirror what we've done on the client concentration side on the vertical side is something that we recognize and something that we have been pursuing. If you look at us as an organization, and I called it out, there are 3 verticals that have been created over the last 18 months which are now somewhere between 7% to 9% of our global revenues. And we made very, very concerted efforts at standing them up and a lot of investment so -- and that process will continue. BFSI, while I mean 1 can flip flop it together as 1 vertical, the way we look at it is BFS and Insurance have very different dynamics at work. Insurance is roughly 30%. BFS on the technology side is 16%, given the large deal that we've signed, $105 million on the banking side, we expect BFS to pick up pace very significantly and to be driving growth for the firm, which has not been the case in the last 2 or 3 years. So banking should be a clear growth lever. Insurance continues to have a very differentiated and a story that spans product platform and services that should continue on the growth curve it is. And travel, Vikas, our expectation is that the growth that we've seen over the last 4 quarters, post quarter 1 last year, is likely to sustain in the medium term, that pattern. There may be ups and downs in a few quarters here and there, largely because we believe the full recovery from our vantage has not played out because Europe travel has still not recovered. Recovery has largely been North America travel and APAC travel center. So that's the answer to question number 2. Question number 3 around travel, we talked about 2 material deals, which were one in travel in quarter 4. And I did talk today about the fact that 2 out of the 4 material deals are expected to complete transition in the current quarter. They happen to be the 2 travel deals that we signed in the previous quarter, where we were -- where we had placed SMEs, and they will now move to steady-state operations starting quarter 2. Did I answer your questions, Vikas?
The next question is from the line of Rishi Jhunjhunwala from IIFL.
Most of the answers to the questions, maybe customary one, can you give the data points on revenue and margins on your NITL, which is AdvantageGo [ ambitions ] that you typically give every quarter, in case I had missed out.
Sure. Ajay, would you like to give it? Or would you like me to go ahead on that?
Sudhir, I can give the numbers. The AdvantageGo revenue for the quarter was INR 750 million. EBITDA was 16%, and of which was the revenue for the quarter was [ $689 million ] and EBITDA was 15.5%. Another thing which I would like to add is that ratio of equity [indiscernible] performed by Coforge after [indiscernible] equity stake will be acquired in Q2 FY '22.
Understood. And just secondly, Sudhir, can you give some clarity in terms of comments that you have made around capital in the sense our main investor looking for response to ADR. You made some comments in the meeting in the morning. Just wanted to understand basically what's the kind of value you are looking at on that front, if that is something you can share.
Sure, Rishi, as we shared earlier and as we shared earlier this morning as well, the Board has passed enabling resolution on the 6th of July, and we had shared details of that resolution with everyone. Our assessment, the Board's assessment at the current point in time is that we do not have any primary requirements, which we are pursuing as part of the process. The Board's assessment also at the current point in time, under this enabling resolution, which is still awaiting approval by the shareholders, and that process will complete on the 30th of July at our AGM is that if the board were to decide to go for the issuance of depository receipts, we would prefer to do it the ADR route and not the GDR route. So that's where we stand currently, Rishi, around the enabling resolution passed on the 6th of July.
Understood. So that's basically conversion of the locally listed into ADR, no impact on our primary capital, right?
At this point in time, the Board believes that we do not have primary requirements that need to be serviced.
The next question is from the line of Sudheer Guntupalli from ICICI Securities.
So if you look at the receivables side, there is a INR 200 crore increase sequentially, and that is more or less equal to the sequential increase in overall firm revenue. Across industries and across companies, we understand that this growth is coming back from a low base. Some amount of working capital is getting absorbed back into the business. But in our case, the quantum of this increase seems to be pretty high. So if you can give some more color on whether we are witnessing any change in the working capital terms for new contracts? Or if there is any change in the revenue recognition policy? Or if this trend is being driven by any 1 particular vertical because incidentally, another competitor of yours with high exposure to travel has also witnessed a similar trend this quarter.
Thank you for the question, Sudhir. Ajay, can I request you to take that, please?
Sure. Sure. Thank you. The increase in the receivables, which you are seeing includes the SLK Global. And there is no change in the DSO of the firm and the overall composition of the terms -- the payment terms and the overall operating cash flows and capital structure, working capital. So it's just the addition of the SLK Global that is driving the increase -- an absolute increase in the receivables.
Okay. But I would suppose -- I mean if you're -- the revenue also got added, right? So -- In terms of -- if you're looking at the incremental revenue at overall firm level, so are we suggesting that SLK Global has a much different working capital profile than what we have in the core business?
No. No, we are not suggesting that. So there was 1 -- there was some payments that got delayed in India government because of the pandemic, second wave pandemic, to the tune of approximately $5,000. That will get recovered in Q2. However, in Q1, there was an impact. And in addition, I just want to also add that if you would look at Q4 of FY '21, the OCF was 144% of the EBITDA, which was significantly higher. And we had a significant good collections in Q4. And on top of that, the next quarter obviously has some headwinds because of the higher collections in the previous quarter. On an overall period basis, it evens out. But there is no changes in the payment terms over the last couple of quarters.
Okay, Ajay. And just if you can repeat the intangible assets, did you say INR 315 crores and goodwill is INR 615 crores?
That is correct. I'll repeat the numbers once again. The overall purchase consideration for 50% was INR 920 crores, as you are aware. Total tangible assets worth INR 192 crores. Intangible assets were valued at INR 315 crores, and the goodwill recorded was INR 615 crores.
So we are also considering the future payouts related to this, right, on top of INR 920 crores because obviously, these 3 will add up to more than INR 920 crores.
That is correct. The future acquisition cost has been recorded at INR 213 crores, and there is the noncontrolling interest which was recorded at INR 102 crores.
The next question is from the line of Ashwin Mehta from Ambit Capital.
Congrats on strong growth this quarter. Sudhir, just 1 clarification in terms of the deal flow. We were talking about last quarter that we are chasing 350 million-plus deals of which 1 was 100 million deal. So that 100 million seems to have been signed. But in terms of the other 2, does the deal flow this quarter include that? Or we are expecting decisioning on that to happen in the subsequent quarters?
One of the -- of those 2 has been converted. And they were referencing the 2 other large deals that I talked about, Ashwin. There's another one that is still in play and continues to be in play.
Okay. Okay. Fair enough. And just a follow-up in terms of -- we had earlier talked about that ESOP charges this year would be almost 50 bps lower than the last year. So this quarter, there was an increase in terms of ESOP charges. So do we see going forward a normalization of that? And do we stick with that 50 bps reduction in terms of ESOP charges??
Thanks for the question, Ashwin. Ajay, can you take that, please?
Yes, sure. Thank you, Sudhir. The increased cost of MIP basically is hugely grants given to the leadership that we had during the quarter, including the leaders of our recent acquisition of SLK Global at the higher market price. We do expect that the overall ESOP cost would be at approximately 85 bps instead of the 60 bps, which we had guided earlier for the financial year '22.
Okay. So it's 85 bps for the financial year that you're now looking at?
That's correct.
The next question is from the line of Sandeep Shah from Equirus Securities.
Just 1 question, Sudhir, on the demand side. If you look at more than 50% of your portfolio, which you indicated, product engineering, cloud, digital, intelligent automation, are in high demand, and you believe there could be a multiyear demand for this year as a whole. So I'm not asking for a guidance, but do you believe -- any reason not to believe that the organic growth momentum what we are seeing in FY '22 can even continue in FY '23? There are no major COVID-related risk or no other macro-related risk as a whole. So I'm not asking your guidance, but directionally, you believe this kind of a great momentum can be sustainable beyond FY '22? Or will year FY '22 is a year of pent-up demand and growth may naturally come down a bit in FY '23?
See, Sandeep, even last year during the pandemic, if you take out the travel vertical, right, through the pandemic, the rest of the business outside travel for the firm grew at 18.4% organic CC terms. Pre pandemic, the previous 2 years, we were growing at about 16% CC organic, and we were, of course, putting the building blocks around the tech stack buildup in those first 2 years. Year 3 during the pandemic, other than travel, we still delivered 18.4% CC organic growth. Travel for us is a very big vertical, but we did it. This quarter, clearly, we've called out 19-plus percent, and we see where we finally lined up. Our intent as a team, as an organization has always been to discover a path to sustainable 20% organic CC growth. But that's an ambition. That's not a guidance. We believe there are clear paths to that journey, to that destination that exists. We have seen organizations which are not necessarily India, based in the IT services space, create those and be on those for the past few years. So we are attempting and we are putting in everything that we have to try to get to a model where we can start delivering those growths on a sustained basis. Are we confident -- just to close, are we confident that we found a path already, I think the answer is no. But are we very, very intent on trying to get there at some stage? The answer is a clear yes.
Okay. Okay. And just second question, maybe you can answer overall for the industry as a whole because looking at the supply side, acquisition are real issues and the mitigating factors would be client's acceptance for the pricing as a whole. But for industry as a whole, if you look at 50% of the portfolio in digital, 60% is legacy. And you also said pricing increases are coming in pockets for specific engagement rather than across [ MSA ] as a whole. So net-net, we believe, Sudhir, the net increase on the realized pricing at consol levels may not be very high? Or you still believe the pricing increase on new skills could be actually surpassing the pricing pressure, which we [ note for ] a legacy portfolio as a whole?
I think the blip that we've seen on pricing is likely to be temporary. I do not, in the medium to long term, see pricing as something that's going to keep going up. At some point in time, that leverage will start decreasing, and we will come back to near normal levels where pricing is something that needs to be negotiated on an ongoing basis. To my mind, the bigger margin level that we will have available to us as an industry will be, one, making sure that we start eating our own dog food and inject automation in back-office operations with the same intensity with which we've been able to inject it into some of our client organizations. Second, with deal sizes are progressively going up, and I'm talking in relative terms, for mid-tier players like us, offshoring itself is going to be a very significant lever around margin increase given the historical offshoring percentage levels that mid-tier firms have had and where they can land up if we continue securing the large ticket deals that we have in the recent past. So that's how I will represent margins as we see them from our vantage.
Okay. And last, just a bookkeeping. CFO has said INR 102 crores on a purchase price allocation is towards what? Because your voice was feeble. The INR 213 is towards now, INR 102 is towards what?
The INR 102 is towards the noncontrolling interest because if you would recall, for SLK Global, we had acquired 80% -- we had acquired 50% upfront and contracted to acquire another 20% after 2 years. And the balance 20% is considered as noncontrolling interest, and that's the INR 102 crores.
That was the last question. I would now like to hand the conference over to Mr. Sudhir Singh, CEO, Coforge Limited for closing comments.
I'd like to reiterate the gratitude of the team, all 20,000 plus employees of Coforge, to all of you for having made time for this conversation. It's late evening in India, I think. We also thank you for your interest and for the comments and the insights that we continue to pick up from our interactions with all of you. I look forward to speaking with you along with Ajay 3 months from now. And we hope that you, your families, your friends, your teams stay safe over the next 3 months and beyond. Thank you very, very much for your time and for your interest once again. Bye-bye.