Quess Corp Ltd

NSE:QUESS

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Quess Corp Q2 FY '23 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Aditi Patil from ICICI Securities. Thank you, and over to you, ma'am.

[Aditi Patil, analyst]

Thank you, Lizaan good day, everyone, and thank you for joining this call. From the company's leadership team, we have with us Mr. Guruprasad Srinivasan , Executive Director and Group CEO, Mr. Ravi Vishwanath, Group CFO; Mr. Kamal Pal Hoda, Group CFO Designate; Mr. Lohit Bhatia , President, Workforce Management; Mr. Pinaki Kar, President, Global Technology Solutions; and Mr. Sekhar Garisa, President Emerging Businesses. Management would open the call with opening remarks followed by a Q&A session. I would now like to hand it over to Girish Kumar Sharma, DGM, Investor Relations, to take the call forward. Thank you, and over to you, Girish.

[Girish Sharma, executive]

Thanks, Aditi. Good morning, everyone, and thank you for joining our earnings call today. Please note that the results and presentations are already uploaded on our website. Anything we say, which refers to our outlook for the future is a forward-looking statement and must be read in consumption with the risks that the company faces. These uncertainties and risks are included, but not limited to, what we have already mentioned in the prospectus filed with SEBI. With that said, I will hand over the call to our Executive Director and Group CEO, Mr. Guruprasad Srinivasan. Over to you, sir.

[Srinivasan Guruprasad, executive]

Thank you, Girish. Thank you so much, and a very good afternoon to all, and thanks for joining us today. Let me start briefly saying that it has been a terrific quarter from the growth perspective. As we crossed 500,000 wide headcount on back of about 33,000 associates addition during the quarter. I'm happy to be -- our leadership teams are demonstrating their capability to stay ahead with the growth in this environment. The business environment for quarter was mixed, while BFSI and retail sector grow the headcount, there was a slowdown in IT, which impacted our IT Staffing and Selection business. Our mature businesses have all contributed to demonstrate the growth driving our consolidated revenues up by 32% year-on-year and 7% quarter-on-quarter.

The consolidated EBITDA for the quarter was INR 135 crores, a 12% quarter-on-quarter drop following factors have contributed the same. First is impact of around INR 13 crores in IT Staffing and Selection business due to slowdown in IT hiring second, provision of INR 3 crore in training and skill development business to account the student dropout on ongoing projects, increase in corporate cost expenses to extent INR 5 crore due to -- largely from higher salary costs, increased travel and spend on technology.

Lastly, we have made a new investment around INR 4 crores towards building a staffing presence in the United States. This investment is in line with our long-term aspirational goal of achieving 6% EBITDA while maintaining 20% year-on-year growth. With estimated market size of -- I mean, estimated market size around 160 billion, U.S. is the largest staffing market in the world. While this investment has some margin impact in short term, we believe that this investment will open up new avenues and improve our margin profile of business in the long term. We firmly believe it's the best time to invest when there is a downturn.

Ravi and I will be sharing more details on these cost matters during our -- during the course of the call. The headcount addition has been best so far. We have added 33,000 associates by headcount in quarter 2, and we now deploy over 0.5 million people across verticals and geographies. Please note, this number does not include an additional 21,600 associates who were payroll in September, but were not on roles by end of the month.

Cash generation continues to be strong with OCF-to-EBITDA conversion at 72%, consistent with our guidance. The sales engine continues to perform well as evident with our headcount addition. We acquired 254 new customers in Q2, the sales engine continues to contribute significantly with 63 wins in our cross-sell in H1.

Now coming specific to the platform updates, starting with workforce management. The platform posted a revenue growth of 7% quarter-on-quarter and 33% year-on-year. Headcount reached 376,000, an increase of 7% quarter-on-quarter and 27% (sic) [ 28% ] year-on-year. General staffing headcount has crossed 333k (sic) [ 330,000 ] with retail, manufacturing, BFSI, being the key drivers, driven by addition of -- net addition of 25,000 by headcount in the quarter. General Staffing grew by 8% quarter-on-quarter and 36% year-on-year.

The margin profile, which we refer to PAPM, the PAPM gross margin profile stayed stable at 700. Value-added services in General Staffing continues to contribute 19% of general staffing gross margin. Workforce management added over 100 new customers. in the quarter, continuing 100-plus client addition streaks for over 6 quarters in a row. EBITDA from operations grew by 82% year-on-year and declined by 16% quarter-on-quarter.

As outlined earlier, the major reason for EBITDA drops are as follows. Regarding the EBITDA of INR 13 crores due to slowdown in IT hiring. Our IT staffing business saw a headcount decline of about 300 during the quarter. The slowdown in IT hiring has increased the cost pressure from our clients. While the cost of acquiring a candidate has not gone down. In addition, this is the first time we have witnessed a delay in associate onboarding with the client. I mean, this has created a kind of bench of around 100-plus associates. As a result, we have incurred an additional cost of INR 2.25 crores.

Our Collection business saw a decline of 30% as this business has -- I mean this business has a fixed cost. It is registered disproportionate to the EBITDA decline. While we expect a part of volume decline to last till Q4, we expect a certain percentage around 20% to 30% of volume recovery to happen in Q3 on a run rate basis.

Regarding INR 3 crore provision in training and skill development business, while during normal course of business, we used to backfill the student who used to drop out. we now decided to stop these in accordance to our decision to wind down this business. We expect this cost to be minimal going forward. We have invested INR 4 crores in Q2 towards building our presence in United States. International business contributed almost about INR 25 crore EBITDA this quarter. This has given us confidence to enter into the largest staffing market in the world. This helps us to achieve and sustain the high-margin organic growth. We expect to achieve a breakeven in this business by Q1 FY '24.

Given by record headcount additions, we are now focused on improving our margins in this segment. Moving on to our Global Technology Solutions platform. The segment continues to show impressive growth, revenue growing by 23% and 4% quarter-on-quarter, while EBITDA grew by 9% year-on-year and 2% quarter-on-quarter. Customer Lifecycle segment continues to grow at 20%-plus growth rate driven by 36% growth rate in international CLM business both Conneqt and AllSec had impressive revenue growth and achieved highest-ever revenue during the quarter.

We have made several business model innovations in CLM resulting in double -- in doubling our order book to about INR 230 crores in H1 compared to INR 110 crores in H1 FY '22. In the non-voice BPO, our collection business had a very good Q2, resulting in 23% year-on-year growth. This is a good example of solution-centric approach resulting in platformization of our collection business using digital tools.

In platform-based services, our North American business under MFX grew by 8% quarter-on-quarter. HRO platform business, AllSec added 100,000 new payslips during the quarter and leading to 15% growth year-on-year.

Moving on to Integrated Asset Management business. This business registered a robust top line of over 33% year-on-year and 9% quarter-on-quarter. Integrated Facility Management saw a revenue growth of 33% year-on-year and 10% quarter-on-quarter. During the quarter, we saw a muted sector like IT/ITES and education coming back to an extent while our focused sector are seem to be continuous in demand. The business added 36 new logos during the quarter. IT segment witnessed a marginal recovery on return back to work and grew by 15% quarter-on-quarter. Number of meals served have also picked up, registering a 5% growth quarter-on-quarter. This has resulted quarter-on-quarter increase in Q2.

Our facility management business have launched an application named Qbridge, which facilitates real-time project management leading to integrated facility management monitoring, significantly improving the efficiency of operations and monitoring the service level delivered to customers.

This has resulted in improvement in core-to-associate to 95% from 91% in Q1. We expect Qbridge to fully -- I mean, we expect Qbridge to fully manage all aspects of our service level deliveries in -- by Q1 FY '24, which will lead to higher efficiency and better customer engagement. Security business grew by 28% year-on-year on back of strong headcount up by 25%. Customer sales momentum remained strong with 21 new customers in the quarter. Our telecom business [indiscernible] grew by 38% year-on-year on back of increased demand from telecom segment and upcoming 5G rollout.

Let's move on to our product business, where we continue to make significant progress. Monster continued to log interesting number with sales revenue growing up by 37% and 40% year-on-year, respectively. New user acquisition was at highest ever with 1.8 million registrations in Q2. The candidate traffic and engagement as per with 6-month active candidate base grew to 17.3 million, and traffic on the platform growing by 25% quarter-on-quarter and crossing 44 million. Strong customer acquisition continued with more than 2,700 new contracts signed. The customer feedback continues to be positive as the business achieved CSAT and NPS scores of 90% and 20%, respectively. Zuno Fellowship, which was launched in July saw more than 130 K candidates registering for fellowship test.

Coming to blue collar job platform, we have started exploring the options towards monetizing our products Q2 saw an external customer count reaching to 7,900 increase year-on-year. The new jobs opening hosted on platform increased by 122% year-on-year to 2 million, the NPLs continues to be among the best in the industry. The cash burn in this segment is as per our expected in line with prior I think as we have communicated in the past, we are in line. Our corporate cost has gone up by 8% quarter-on-quarter, driven by higher salary costs, increased spend on travel and tools and tech. While we continue to invest in automation and other technology to drive our processes, we are simultaneously looking very closely at our cost structure to identify opportunity for reduction.

Coming on to the corporate updates. We have completed divestment of Simpliance. The transaction valued Simpliance at enterprise value of INR 120 crores against our original investment of INR 4.5 crores for a 53% stake in the company. This transaction validates our ability to nurture and turn around the base -- the tick base business. In line with our capital allocation policy, we have announced an interim dividend of INR 8 per share for FY '23. This reflects our confidence in cash generation ability of our businesses.

So far, that was the overview. Going forward, our focus continues to be: a, adding additional headcount; b, driving sales and cost optimization to improve margins. We thank you, the analyst community as it is your support and our institution as a primary focus, we will continue to grow, focus on margin. Certain reinforcement just before I conclude. Strength of our business model in GTS, holding up where there is a weakness in other sectors. Simpliance divestment as part of our outcome of capital allocation policy and our long-term orientation, we hope to see more such portfolio rebalancing projects in the future. Greater growth than competition in general staffing. Dividend payout is a reflection of our confidence in cash generation. Investment in technology and organic growth will continue. Stability and focus on ROE and market share are our key priorities.

So with that, now I hand over to Ravi to talk about financial matters.

[Narayanaswamy Vishwanath, executive]

Thank you, Guru, and good afternoon, everybody. Despite putting the pandemic behind us and powering on, global uncertainties continue to provide some challenges in the business environment, which is evident largely through a slowdown in IT hiring that have impacted our IT Staffing and Selection businesses. However, this quarter also highlighted the intrinsic strength of our business model as our GTS vertical held up, even when there is a general weakness in the operating environment, especially in the Specialty Staffing businesses. Let me now walk you through the financial performance of the company.

Our overall revenue in Q2 improved by 7% compared to the previous quarter and grew by 32% on a year-on-year basis. All the segments posted healthy top line growth with WF -- Workforce Management, GTS, Global Tech Solutions, Operating Asset Management and Product-Led business platforms growing by 33%, 23%, 33% and 62%, respectively, on a year-on-year basis. Our EBITDA from operations in Q2 FY '23 in absolute terms improved by 20% on a year-on-year basis to INR 135 crores. EBITDA margins have declined by 32% year-on-year and 70% quarter-on-quarter to 3.16%, largely due to the following reasons.

Workforce management has been impacted by INR 13 crores due to a slowdown in the IT Staffing and Selection business and so close towards a newly set up North American Professional Staffing business. Operating Asset Management saw an additional inventory cost of INR 3 crores in the food business. Our SG&A costs were also up by about INR 5 crores, largely on account of salaries, travel and tech implementation costs.

I would like to now move on to segment-wise updates. Let's start with Workforce Management. Workforce Management as a segment, the revenue grew by about 7% on a quarter-on-quarter basis and 33% on a year-on-year basis, driven by General staffing in the Singapore. General Staffing business grew by 8% quarter-on-quarter and 36% on a year-on-year basis, while Comtel in Singapore grew 11% quarter-on-quarter and 48% on a year-on-year basis. We have already spoken about the reasons for EBITDA decline in workforce management. However, I would like to add that we are already starting to see the part of business coming back and expect margin improvement in the coming quarters.

Global Technology Solutions. This segment has shown a 4% revenue growth on a quarter-on-quarter driven by MFX and Conneqt, which grew by 18% and 3% on quarter-on-quarter, respectively. The year-on-year growth of 23% driven also driven chiefly by Conneqt -- by the Conneqt business. EBITDA for the segment grew by 2% on a quarter-on-quarter and 8% on a year-on-year basis, driven mainly by the InsurTech platform and the AllSec business. There have been a slight margin that in this vertical due to expensive incur in posting the tech capability of our businesses.

Operating Asset Management. Revenues have increased by 33% year-on-year and 9% quarter-on-quarter, driven by our facility management, security and telecom service business. EBITDA was decline of 7% quarter-on-quarter due to an additional inventory cost in food business and some additional costs in the industrial asset management segment. Our continuing efforts in collections has resulted in a much better working capital management and that being instrumental in gaining back our OCF-to-EBITDA to about over 70% in Q2. As a result, we reached a net cash position of INR 57 crores in Q2 with a net debt position of INR 59 crores in Q1.

I would like to now touch upon depreciation and interest costs. Depreciation increase 7 crores quarter-on-quarter, predominantly on account of NDAs adjustments in lease payments and equipment for the GTS business for Conneqt. The operating depreciation continued to be around INR 31 crores, an increase only by about INR 1 crore in Q2. We continue to maintain our annual CapEx run rate of INR 80 crores to INR 90 crores, as communicated earlier. Similarly, interest cost increase of INR 6 crores can be divided into 2 parts. INR 3 crores of increase has been on account of rising interest rates as a result, our interest outflow increased from INR 12 crores in Q1 to INR 15 crores in Q2. The remaining balance increase has been on account of NDAs adjustments towards lease services as explained earlier, especially for Conneqt.

Balance sheet and corporate actions. We continue to acutely focus on collections, and this has resulted in our overall DSO reducing by 1 day quarter-on-quarter to 58 days. In line with our policy of capital allocation, we have announced an interim dividend of INR 8 per share for FY '23. This truly reflects our confidence in the prospects of cash generation -- of the cash generation abilities of all our businesses. We continue to focus on corporate simplification, and we will hear from us more about this as and when we are ready with news from this front.

Lastly, on taxation, there has been no significant update regarding the ongoing income tax matter. The special audit, which was ordered by the tax authorities for the financial year '18-'19 has also been completed, and the draft assessment order is expected shortly. We believe the draft assessment order would be a line similar to what we had received for the previous year.

Once again, we would like to thank you all for your continued support. And I would like to now open the floor for questions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Nitin Padmanabhan from Investec.

[Nitin Padmanabhan, analyst]

Congrats on the strong revenue performance. I had a question on the operating expenses. So there is this line item cost of materials, stores and spare parts. So that's -- that's been growing at a 22% CAGR since Q1 FY '22 and it's now at INR 129 crores. Even this quarter, it's like 0.5% sort of impact on margins. So just want to understand how we should look at this number, what's the context behind these numbers. And what's driving such a massive growth on this cost line?

[Srinivasan Guruprasad, executive]

Sure. Guru here. And largely, this particular line item refers to a business that we are into a break/fix business. There -- around between April to October is a peak time for this business, and the inventory management of that is what is driving the cost of material in this largely -- that's a majority contribution. I mean, cyclically, this business has a peak between April to October, then Q3, it slightly tapers back and then regains again thereafter. So that's how this business operates. So that's the cost which you are seeing there.

[Nitin Padmanabhan, analyst]

But the only reason I pointed it out is possibly the highest number we have ever seen. And although I understand the cyclicality, the intensity is only increasing. So the intensity of the expense. So I was just wondering, is there a commensurate revenue addition with the margin on to or how should we think about this but at all? And does this really have a bearing on margin in reality.

[Narayanaswamy Vishwanath, executive]

Absolutely, Nitin. You're absolutely right. This cost is directly linked to our revenues and margins in QDigi business. And so there's absolutely -- so not a cost that's actually we let say, incurring separately.

[Nitin Padmanabhan, analyst]

That's fair enough. And just if I may, just another broad question on the demand environment. So if you could just give some color on the General staffing business? How do you see that for the second half? And generally, within that, even the IT Staffing business, do you expect declines on that side of the business, those are the 2 questions.

[Srinivasan Guruprasad, executive]

Lohit, you want to take this?

[Lohit Bhatia, executive]

Yes. Thank you, Guru. This is Lohit here. Thank you for your question. And if you notice in the first half of the year, our general staffing team in India has added close to 53,000 net adds. In the last 12 months has been our best ever. And in fact, in 6 months also, we've added in the last 12 months about 81,000 net adds. The reason I give these numbers out why you've already said it's a good performance is because in an ordinary year, we used to do our best year, not after year. But ordinarily best year, we used to do about 50,000 plus in 12 months, which our deal has been able to achieve in 6 months. Couple of points if you remember from the last few quarters call. One, we said we doubled down on our sales initiative in this entire business. We doubled our sales. And yes, we incurred some costs bringing in the sales resources.

Second, we focused on M&I and M&A. Manufacturing and industries, if you notice, used to be ranking sixth and seventh segment for our business. It has inched up to the fourth place the fourth segment in our business after BFSI, retail, telecom and now manufacturing. Telecom and manufacturing now at Quess General Staffing are neck and neck with each other, both at about 50,000 associates each. So that's the second point which we focused on.

The third as far as the demand environment that you're talking about, our sourcing team has started run rating at an average between 7,000 to 10,000 people sourced every month. and that's the capacity again that we've added, both in terms of digital capacity from QJobs and the other platforms that we brought in the last 12 months, but also from the recruiters. I must also add, If you've obviously heard that we've crossed the 500,000 mark. But if you split our data in that 500,000, you would see that Tier 3 today contributes nearly 1/3 of the deployment in the country.

So with Quess, the kind of size of operations and branches that we have, the kind of technology we have, the sourcing that we have, we definitely feel that this would be something that we would be able to replicate. To your very specific point on what would happen after the demand season is over. Yes, there is some destocking or reduction of the people hired internally only for the season. In this number, our estimate is about 6,000 only are those numbers. So this number does not contribute more than 25% of such resources, which were higher for a short-term duration.

[Srinivasan Guruprasad, executive]

Just to add here, Nitin. The data is quite inspiring to see the way it is the distribution in cities are panning out. So we were just doing our own research on this. And it's good to see that kind of distribution with Tier 1, Tier 2, Tier 3 for us is almost equal, which means about 25% Tier 1 and more demand coming from Tier 2 and Tier 3 kind of cities. So -- that's just a data point.

[Operator]

The next question is from the line of [ Jatin Arora ] from ICICI Prudential.

[Unknown Analyst]

I have a couple of questions. Given that we have clearly laid out that we are targeting a particular ROE and also a 6% EBITDA by 2025. I see, last quarter, there were certain issues because of which the EBITDA was for -- this quarter, again, I see the EBITDA margin is at 3.2%. So I just want to understand from the team, how do we see ourselves from the current 3.2% to reaching that target of 6% by 2025? Is that simply aspirational? Or do we believe that there is a glide path to it.

[Srinivasan Guruprasad, executive]

Okay. So Jatin, thanks for bringing this. So first and foremost, it's a separately a role and aspirational number that we are...

[Unknown Analyst]

So Guru, in that case, may I ask that case may ask, what is the more realistic number that as investors, we should keep in mind?

[Srinivasan Guruprasad, executive]

I'll bridge that. So let me give you certain -- what thinking goes behind putting a number like this. So first and foremost, I mean that we entered the -- when we entered this financial year, it was little unforeseen at the terms that happened. Probably a couple of investments that we had planned or -- for the month -- when we did the plan -- when we did that initial planning, Monster fund pricing was not in our road map at that point in time because the product was still under construction, and we still had not reached a situation to write the capital there.

So -- and BCPL is another product which is doing clearly well, and there is a good traction from the investment community in that product -- in the product-led business. So with this, not completely anticipated into the plan, we would have definitely reach to where we have committed. But however, if you look at considering the kind of burn that we are looking into the investment that we have raised, by FY '24, we firmly believe that we are on the course to reduce the burn and start -- the moment we start reducing the burn by FY '24 as per the plan that we have. We are still confident that we can slowly graduate towards that direction.

Having said that, there are a couple of other businesses, which are turning out. For example, our entire asset management business, which used to deliver an EBITDA of 8%. Now where we are is about 3% to 4.5%. Now there is -- I mean, there is a solid growth trajectory in this business. And this business was genuinely down for last 2 years. And as and when the market is opening now, we are already seeing 15% growth in IT/ITES slowly coming back, plus our focus on growth in this business. Going aggressively on sales, we are confident to bring this -- get this back to the trajectory, which will be accretive to our margin.

Number three, our international businesses, which are delivering well today, out of total EBITDA, what we generate on an annualized basis, roughly INR 100 crores comes from our international business which is -- which constitutes about 7,000 headcount. With the new investments in America -- U.S. that we are currently doing and setting up the platform for future revenues. And these businesses come very high margin over a period of time, right?

So the product mix is something that will drive that will drive the margin increase for us over a period of time. However, we cannot stop our general staffing growth. We are, number one, we'll continue to grow. And we don't they don't grow at the kind of margin that we anticipate. So they have an ability to deliver anywhere between 700 to 750. So with more operational efficiency coming into and more growth-oriented all our other 2 platforms, plus product-led business turning into FY '24. I'm sure we are still confident that we will march towards that direction.

[Unknown Analyst]

Thanks Guru, what -- see, the thing is that as an investor, when you guide for a particular margin or for a particular kind of business performance, it has assumed that management has taken into account some of the roadblocks that it will potentially face on the way and hence, has been a little bit of conservative in terms of their guidance. What -- unfortunately, I don't get that sense right now when I heard from you.

[Srinivasan Guruprasad, executive]

Sure. I mean our plan in mind to what we are doing. I mean we are definitely mindful about the direction that we are going into. But however, we'll -- we are constantly recalibrating and going back to the drawing board. So we'll compare let you know at a point.

[Unknown Analyst]

Yes. So in that case, I'll appreciate it if we can get a more realistic sense of where we can be perhaps. I really appreciate that.

[Srinivasan Guruprasad, executive]

Sure. Sure. Sure. Jatin.

[Operator]

The next question is from the line of Vidit from IIFL Securities.

[Vidit Shah, analyst]

My first question was this INR 13 crore impact on IT Staffing and Selection, if you could delve a bit into it and give some further insight. I mean, assuming we do somewhere around 1.7%, 1.6% in General Staffing. It appears the IT Staffing margins have really halved versus the previous quarter. I mean -- and that would imply that our fixed costs in this business is extremely, extremely high, which is typically not the case. So if you could like somewhat explain this INR 13 crore impact would be very helpful.

[Lohit Bhatia, executive]

Is, this is Lohit. I'll take that. So first and foremost, before I go into your specific question and walk you through the margin profile and what happened Q-on-Q I must just call it out that our IT staffing and permanent recruitment team has done a fabulous job in the last 3 years. If you look at us in a 3- to 4-year period pre-COVID, during COVID today, we are at triple of our EBITDA from this business on an H1 basis this year in comparison to H1 of '21, and we are double of our EBITDA from H1 of '19 and H1 of '20. So that's number one, I wanted to clearly call it out. IT has been a strategy that we feel we will play, we are one of the largest players there, both in permanent as well as temporary staffing. We will continue to play in that space. That's point number one.

Point number two. Now what has happened between Q1 and Q2. So a couple of things have happened. One, you must also be seeing all the IT news coming across the world and from the IT services companies in India as well. as the wage inflation in the last 12 to 18 months really went up, the supply side and the demand side, both started having a wage inflation, which means customers POs also went up simultaneously associates compensation and salaries also went up. In the last 4 to 6 months, a lot of companies have become extremely cautious on the margins, which means that the customer pressure on revenues and PO lines became faster, then you can convert the cost.

So cost takes a lag of about 1 to 2 quarters before you can start rebalancing the cost itself. That's the first thing which has happened in this business and which is where Guru in his speech itself had mentioned and so did Ravi, that INR 7 crore of impact has come from that side of the business. The second important thing here is we are fairly large with a INR 100-plus crore revenue line from our permanent IT practice. This practice from a Q-on-Q basis has come down by almost 40%. Our fitments in Q1 were close to 3,300 onboards to customers, which shrunk to 2,200 and below. Now 2 reasons have happened. One, obviously, like I said, customers have become a little margin conscious. And hence, onboardings have either been deferred or the number of open man days on which we were working in our RPOs have kind of come down. what would happen going forward.

Now we are seeing Q3 would be the ebb from where we would start to rise again. And in Q3, there are 2 actions which we are taking. One, obviously, on the cost side, wherever we had lead skills, but the lead skills have not been deployed to customers will be relooked at. They will be rebatched or moved in other projects. The second thing what we would look at is renegotiation of contracts where we can. And the third, obviously, what we would be looking at is getting more demand back on the basis.

Where do I see it on 10 November in the last 40 days, we see some of that demand has started to rise again. We've also moved some segment outside of the IT and ITES to give a little bit of a flavor. So that's where it is as far as the IT/ITES is concerned, which is why only from a pure -- quarter-on-quarter perspective, when you look at it, you would see the pain. But if you compare this half of the year with any of the half of the year in the past, it has been still a very, very phenomenal result, and we'll continue to be a big player in this industry.

[Vidit Shah, analyst]

Got it. So I mean like with the 2-quarter lag for cost optimization, we'd expect it to be back to 1Q levels by 4Q and after.

[Lohit Bhatia, executive]

Yes, very good assessment. Absolutely.

[Vidit Shah, analyst]

Okay. Got it. And my second question was on the -- the investments made in U.S. Staffing. I mean if you could shed some light on the sort of market share that we have out there and whether this INR 4 crores of investment that you -- that is being made? Is it enough for really kickstarting high-growth momentum out there? Or is are we going to require continuous investments to really capture that market?

[Lohit Bhatia, executive]

I think it's a brilliant question, and thank you for asking that. So first and foremost, I think Guru answered it both in his opening speech and then also when the question came that how do we go to the glide path of 6% EBITDA sometime into the future. Let me give you a little bit of a color of the U.S. market and what prompted us to get there. The United States market has $160 billion of staffing growing at about 8% per annum. U.S. is adding on Indian staffing every year. So while India is definitely growing at 25%, 30%. Indian stocking federations last number shows 21% plus, and we assume that the market will continue to grow at that space, and we are obviously growing faster than the market in India. The U.S. is, I think, 1 Indian staffing every year as a market it. That's number one.

Number two, India has about 5 million to 5.5 million IT staff deployed in our country. At the same time, USA is the only other country in the world, which has as many and more people deployed in IT as well. So it's a very large market out there. Currently, what we do in the United States and Canada for the last couple of years is through MFX and our InsurTech business, which comes under our GTS platform. Staffing hasn't really done anything in the last couple of years, and we wanted to be strong in both India and APAC to be at the right time to make that conscious call to go to U.S.

Third, to your question that how does this start to pan out, this INR 4 crores is an investment towards registering the legal entity in Delaware it's for all the taxation requirements and the paperwork that we've done to hire the 3 leadership team that we've already hired. Going forward, we feel that on a quarter-on-quarter basis, this INR 4 crore number would start to taper downwards. Somewhere by the exit of this financial year and the early entry into the next financial year, we would be at a situation of breakeven as far as the U.S. staffing business on the WFM itself is concerned.

Last point I want to leave you with, not only is it the largest market in the world, it operates at a 6% to 8% and above EBITDA margin as well. And with where the U.S. dollar to Indian rupee is I'm sure you will understand that at some point of time, this will play out in the medium to long term for Quess overall.

[Vidit Shah, analyst]

Okay. And just 1 follow-up to that would be -- I mean, what is the differentiating factor that is Quess is going to offer versus the existing players in that particular market that make customers move. Are you just targeting new customers?

[Lohit Bhatia, executive]

We would 1 -- the short answer to that is we'd be targeting both. There are new customers coming up as well as their existing customers. Second, U.S. has on last count, a shortage of about 1 million IT workers and customers are looking for new companies who have innovative technology solutions and deployment and sourcing capabilities on the basis of which orders can be given.

Let us not forget, we control 1,700 recruiters in the Indian geography itself. We are the largest recruitment factory, and we have a huge OTC that can be created in India in practically more time. We also have 500 of those 1,700 recruiters in IT. So we understand that space very well.

We also have a fairly decent business in Philippines. So if you kick in the back end from Philippines and India, as an ODC for sourcing and deployment with the customers front ended from the United States of America, you can definitely imagine that we could get some of the $160 billion space. Today, WFM is over the $1 billion, $1.5 billion mark. We obviously need to add the next $1.5 billion at much higher margins from another geography as well. So we are pretty confident that what Quess has been able to create in 15 years, both with its delivery as well as technology capability. Customers in U.S.A. are also having very, very decent conversations with us.

Anecdotally, let me tell you, from whatever conversations I have personally done with customers and met with them. They have been shocked by seeing the POP onboarding tool that Quess has created the workforce productivity tool called WorQ and the QJobs. And many of the companies and with due respect to all my international competitors as well, who've been in business for 70 years or more, many of them have not created technologies like this, which in a market like India, obviously, Quess has created.

[Operator]

The next question is from the line of Nikhil Gada from Abakkus AMC.

[Nikhil Gada, analyst]

So sir, when you explained about the IT staffing part and while you say that it might take a couple of quarters to get our cost optimization on and maybe even see improvement in the business. So then what kind of EBITDA margin do we expect in the WFM for the second half of FY '23?

[Srinivasan Guruprasad, executive]

So WFM in all likelihood, in our understanding and our internal homework is at its lowest that it could be, be baking in Q2, whatever cost we had to incur, whether it is for IT staffing, whether it's the temporary slowdown that we saw in RPO or permanent as I just spoke about. -- whether it is our investments in U.S. and in technology. So all these are already breaking to the numbers. You can take these as bottoms as far as WFM is concerned. -- and we can -- with our growth, both in India and outside of India, and Ravi alluded in his presentation where you spoke about the fact that how phenomenally the asset that we acquired a few years ago in Singapore is doing today, and it's grown over 40% in EBITDA year-on-year basis.

So going forward, we definitely want to first inch back to 3.4%, 3.5% EBITDA margins. Thereafter, to gradually get to the aspirational 4% mark from this asset for the rest of the Quess to also inch equally upwards.

[Nikhil Gada, analyst]

And to reach the 3.4% back to the 3.4% margin, how many quarters do you think would it take.

[Lohit Bhatia, executive]

Nikhil, in the WFM business, as you understand, the largest -- the 80-pound gorilla in the room is the staffing business. It's a 2% EBITDA margin business. if some of the other elements like on the last call, I remember, I had mentioned that the General Staffing business while growing 25%, 30% year-on-year was contributing only 45% to the overall mix. So if General Staffing continues to grow, but others disproportionately grow faster than General Staffing and U.S. also starts to join the party this will move up much faster than all of us can expect. So there are a couple of moving parts. You can understand my challenge here by giving a specific date or a specific month. but I'm not saying this is going to take you also the promise.

[Srinivasan Guruprasad, executive]

But the question is, Nikhil. Are we working in that direction to create the right product mix, the question -- the answer is yes. So -- we are doing everything to see how we can gradually move whether it is a one-way investment and the new product line, international and other geographies delivering a higher EBITDA margins. IT Staffing, of course, reviving back and even cost reduction, et cetera. So we are definitely working on every other parameter to get to that direction.

[Nikhil Gada, analyst]

Understood, sir. And sir, secondly, regarding the OAM business. You mentioned there was a INR 3 crore write-off because of inventory. Is that the only reason the margins have fallen further from 5% in 1Q to around 4.5% in 2Q.

[Srinivasan Guruprasad, executive]

No. It is -- see, the -- I mean it's not a -- I mean it's a onetime Q2 impact that we have taken in one of our businesses. So I mean it will not recur back in Q3. So we should -- that business definitely has a potential to revise back towards EBITDA margins in coming quarters.

[Nikhil Gada, analyst]

Any sort of guidance you would say? Because I think last time you mentioned that 5% is absolute low that we might take in the OAM business.

[Srinivasan Guruprasad, executive]

So yes, I mean, of course, it will be close to 5%, anywhere between 4.8% to 5%. It definitely has a potential in the next 2 quarters to get back to those levels.

[Nikhil Gada, analyst]

Okay. Got it. And sir, just I did not understand the India's adjustment for the depreciation and the interest part for Conneqt business. If you can be more specific as in all the changes have been?

[Narayanaswamy Vishwanath, executive]

Sure. So basically, your lease assets, you have your -- you calculate certain interest components and you can amortize the rental over the future lease period, right? That's what I meant by saying that there are 2 components in the interest and to the depreciation and amortization. One, the facility that we have taken on rent gets amortized along the interest part of it actually. So -- and that's what I meant by saying that there are 2 components. One is as the interest on lease and second is the depreciation itself.

[Nikhil Gada, analyst]

So then this sort of the run rate that we are seeing now in depreciation and interest, that is something which we expect to continue, right?

[Narayanaswamy Vishwanath, executive]

Yes. 1 on depreciation will continue and our borrowings keep coming down, the financial interest costs, which are coming down too.

[Operator]

[Operator Instructions] The next question is from the line of Sanjay an individual investor.

[Unknown Attendee]

Yes, there was a good increase in business in Monster and -- just want to check about what are your plans to capitalize this Monster investment? Are you planning to tie this or you're planning to separate it out or bring it to the public. Any plans you have in Monster.

[Srinivasan Guruprasad, executive]

Yes, we've been having a couple of great years at Monster going very rapidly. And more importantly, the product metric, which is around engagement with recruiters and candidates has been growing very, very fast. There is still a huge growth waiting ahead for Monster. We are adequately capitalized, as you know, we raised capital just in the January earlier this year. We expect the current growth to continue at least for the next 3, 4 years, there's so much headroom to grow and we're expert about the product lineup. And when we do that, all options are possible.

There is [indiscernible] more investor interest still in a private investor interest. But at the same time, the way the business model works as business model. Once it starts turning profitable, the margins are significantly higher. And we have another example of some great publicly listed companies in this model. So all options are on the table. Right now we're focusing on doing the right things for the business. We're growing fast and we doing the right things from the product.

[Operator]

[Operator Instructions] The next question is from the line of Mukul Garg from Motilal Oswal Financial Services.

[Mukul Garg, analyst]

My question, I just had 2 follow up questions to Lohit the U.S market expansion I'm assume that this will be stopped purely from local resources. And I wanted to understand it a bit better, when if you look at the U.S. market till now it has been an extremely supply constrained market. And that was the reason why there are so many open which are there in the local economy. So how are you going to kind of bridge gap in terms of supply, which is there, which I mean your local peers has struggled like a lot to do it. Do you think there is some booking knows how technological advantage, which you can bring to the table.

And B, as the macroeconomic environment slows down the -- and as this kind of move some deficient to an environment where we will staff to just kind of gets impacted because of lack of demand. How should we think about the right part of profitability over the next few quarters? Is that something which you have factored into estimates?

[Lohit Bhatia, executive]

Sure, Mukul. Lohit here. And thanks for the question. So first and foremost, you're right. In the U.S. market, there are 2 ways that you can play the market. There are local candidates and there is the immigration policy business as well that you can do. At some stage, given Quess' size, scale, stature and ability to move talent across geographies as well as we've been very successfully been able to do that in the last 5 to 6 years between India, Middle East, India, APAC and other geographies, we should be able to play in that game as well. However, our current numbers are not based or our current calculations and entry into the U.S. market is not based on a visa strategy or on immigration strategy. What it is based on is, there is 100,000 people who have probably been let go. And there is 1 million people in the IT space where there is an open mandate.

In the U.S. also, you could see just like in India, there are 2 categories of people who are getting higher than there are the niche skills where we can definitely play a lot, and there are the [ perennial ] skills. Perennial skills are the ones where companies would offload people when the times are slightly tough, and we've been having some news of that as well. It allows our recruiters to onboard those people quicker because they're already onshore in America, and they can be moved from assignment A to assignment B, whether they are on an H-1B visa or whether they are on any other status there.

However, in the lease segment also is something that we've already started playing. And this is something which both for APAC as well as India, our teams have been very successfully doing. So when I was mentioning the 1,700 recruiters on an average in India out of which 500 are tenured recruiters and in the IT space at Western India, there another 200 recruiters, which are in APAC and the Middle East who also understand the space very well.

So a lot of coordination across hundreds of our IT customers from APAC, Middle East and India and a lot of coordination across the hundreds of recruiters that we have. You just couple that with technology advancement that we do. So I'll just leave 1 thought with you how technology makes this whole differentiation. Today, if you call up most of the staffing companies in the U.S., they'll tell you that they still use UPS to onboard the candidate. It takes anywhere between 30, 35 days for the papers to go and the tables to be returned back and a candidate to be successfully finally onboarded. You know it. Quess has 6,350 town and cities and villages where people are deployed. And our POP works between 7.5 to 8 minutes to have onboard a candidate.

So just think about it, if tomorrow Quess Corp will stand in the same market and tell people that what could earlier be done in 30 to 35 days or we could current the time down to 8 minutes. Instead of it taking $50 or $100 to onboard a person using UPS but people do it in a matter of $1 to $5 using our technology. I don't need to explain further as to what are the opportunities available in the market.

[Srinivasan Guruprasad, executive]

Just to add, Mukul, these technologies, we are not still testing in the U.S. We have already tested in our APAC geographies, and we are prepared to take this out. So that's just an addition.

[Mukul Garg, analyst]

No, I understand that Guru and Lohit -- pardon me for following up on this I understand on APAC and India, this has worked quite well. But when I look at the U.S. market and particularly the technology space, it has been a fairly penetrated, I would say, over space. and you have technology companies who are all over the place there. Now when I'm looking at the market right now, it is, as looking at correctly highlighted, it's a market where there's a lot of supply, which is coming in [indiscernible] employees. When I look at your explanation to turn profitable by Q1 FY'24, is there something which can be -- which can get delayed because there is, I would say, a little demand for scale up over the next few quarters, and we can kind of play out that we be a little longer time horizon.

[Srinivasan Guruprasad, executive]

You're right. The market has been -- the U.S. market starting is not new. There are operators who've been operating for 70 years and more. Yet in the last 5 years, a lot of smaller firms have created a niche for themselves and build up practices and go between USD 50 million to about USD 300 million. And I'm not talking about any of the listed companies.

The second point is that the active conversations in the last 3 to 4 months that we've had with customers spread across permanent staffing RPO as well as contract staffing. And many of these customers are currently already using homegrown U.S. firms, yet they are in talks with us to have Quess in panels and onboarded as a partner. So Mukul, I definitely take your feedback. And we will keep all these points that you've raised in our mind, in our deliberations with our teams, and we will ensure that -- this is not just another strategy to add a flag in another geography, but it significantly adds to the bottom line at Quess.

[Operator]

Ladies and gentlemen, this was the last question today. I now hand the conference over to the management for closing comments. Over to you Sir.

[Srinivasan Guruprasad, executive]

Thank you. Thanks for everyone. I think it was quite engaging conversation. So I take this opportunity to thank analysts and investors and the community. It's a support to us and the kind of support there that you get from you and insights for our institution. We'll continue to focus -- our primary focus is going to be on growth and margin. So we'll not take our eyes off. We'll continue to drive and stay ahead in the market. Thank you so much.

[Operator]

Thank you. Ladies and gentlemen, on behalf of ICICI Securities Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.