Zensar Technologies Ltd

NSE:ZENSARTECH

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Zensar Technologies Limited Q2 FY '23 Earnings Conference Call hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Mukul Garg from Motilal Oswal Financial Services Limited. Thank you, and over to you, Mr. Garg.

[Mukul Garg, analyst]

Thank you, Nirav. Good morning, everyone. On behalf of Motilal Oswal Financial Services, I welcome you all to Zensar's Q2 FY '23 earnings call. We have with us today Mr. Ajay Bhutoria, CEO and Managing Director of Zensar Technologies; Mr. Sachin Zute, CFO; and other senior management team members.

Before I hand over the floor to Ajay, I would like to highlight that the safe harbor statement on the second slide of the analyst presentation is assumed to be read and understood.

With this, Ajay, over to you.

[Ajay Bhutoria, executive]

Thank you, Mukul. Good morning, good afternoon, and good evening, everyone. Thank you for taking the time today to discuss Zensar's financial results for the second quarter of FY '23. With me on the call are a few others from the Zensar leadership team: Sachin Zute, our Chief Financial Officer; Prameela Kalive, Chief Operating Officer; Vivek Ranjan, our Chief Human Relations Officer; Harjott Atrii, Global Head of Hi-Tech and Manufacturing; Samir Gosavi, Global Head of Consumer Services; Nachiketa Mitra, Global Head of Financial Services; Manikandesh Venkatachalam, Global Head for Markets for Services Lines; and Ankush Akar, Global Finance Controller.

The second quarter of FY '23 stood steady for us with revenue of $155 million, representing quarterly year-on-year growth of 14.4% and a sequential quarter-on-quarter growth of 1.6% in constant currency. In reported currency terms, we registered quarterly year-on-year growth of 9.3% and a sequential Q-on-Q decline of 0.5%.

Before we go through individual business level performances, let me spend some time on the trends we see in the global market and IT industry today. There has been a deceleration in the demand environment, driven by softness in global macro factors, which is also reflected in broader market indices. As such, we have seen margin pressures across companies, including the Fortune 2000. In this environment, we have seen a segment of our clients, particularly in the HTM and CS verticals, deferring or optimizing their discretionary spend and scaling back their budgets.

That said, let me walk you through the performance of our geographies and verticals for the quarter. All growth numbers are in constant currency. The U.S. region registered quarterly year-on-year growth of 11.1% and a muted sequential quarter-on-quarter growth of 0.4%. We continued to show growth in this region, aided by momentum in the BFSI vertical, which helped offset headwinds in HTM and Consumer Services verticals. We registered modest growth in Europe with quarterly year-on-year growth of 25.9% and a sequential quarter-on-quarter growth of 1.7%. We have witnessed good deal wins, especially with existing clients in this region despite global uncertainties. The South Africa region, too, continued its growth momentum with quarterly year-on-year growth of 16.4% and a sequential quarter-on-quarter growth of 9.1%. We continue to have positive traction in this region for our offerings in cloud, data and advanced engineering services, resulting in ramp-up with some of our key banking and retail clients.

Moving to our verticals, BFSI continued its growth trajectory with a quarterly year-on-year growth of 33.8% and a sequential quarter-on-quarter growth of 6.1%. We are witnessing good traction in this vertical from both long-standing and new clients. Over the last few quarters, we have added marquee new logos, including from the Fortune 500 group, which enables significant headroom for growth. We are scaling these accounts through our verticalized offerings, as well as through advanced engineering and data services. In Q2 FY '23, growth has been flat for HTM and Emerging vertical, with a quarterly year-on-year growth of 6.5% and a sequential quarter-on-quarter growth of 0.1%. Our Consumer Services vertical registered quarterly year-on-year growth of 5% and a sequential quarter-on-quarter decline of 2.5%. As I noted earlier, we anticipated a slowdown in growth along these 2 verticals. To negate the impact, we continue to drive our efforts with targeted industry-aligned solutions, while also strengthening our go-to-market initiatives and focus on existing and newly opened accounts.

Our gross margin stood at 25.3% in Q2 FY '23, representing a sequential quarter-on-quarter decline of 120 basis points. Our EBITDA stood at 8.5%, a sequential quarter-on-quarter decline of 270 basis points. We ended the quarter with a net cash position of $162.1 million. The order book for Q2 FY '23 stood at $141.8 million, supported by multiple wins across verticals and a healthy mix of new wins and renewals.

For the second quarter, our last 12-month attrition stood at 26.3%. Our in-quarter attrition trend has seen significant improvement by more than 450 basis points. This quarter, we gave one of the largest salary increases in our recent history, which has been well received by our associates across all levels, our global head count at the end of Q2 FY '23 stood at 11,250 associates. The momentum in our fresher program remains strong. We onboarded more than 1,200 freshers in the second half of FY '22 and another 400 in the first half of FY '23, which has reduced our dependency on lateral hiring. Our clients have responded positively to this program, which is a credit to our new expansive learning and development program and our robust gating process. In all, we have seen both an uptick in pressure deployment and improvement in our pyramid.

Our service lines continue to scale up and deliver targeted solutions for our clients. Overall, we have seen a rise in multiservice line deals this quarter. Our focus service lines, advanced engineering services and data engineering, registered 7.4% and 16.8% sequential quarter-on-quarter growth, respectively. We are witnessing notable movement in our digital engineering services with multiple wins in cloud migration, cloud modernization and enterprise transformation. Likewise, our data engineering services are experiencing a similar assent with strong revenue growth and multiple industry recognitions in recent quarters.

As always, I am excited to speak about the work we do for our clients. We continue to deliver value through integrated solutions encompassing multiple capabilities and service lines, let me take a few minutes to share some examples of our high-impact work. We partnered with a major American insurance provider for modernization of their data warehouse using cloud-native data services.

This re-architected platform help the client reduce the reporting efforts for policies, billing and claims, thus optimizing their support and maintenance cost. We were selected as a partner by a specialist investment management firm to provide application development services. We followed a design-led approach for digital engineering, which helped in industrialization of development practices across the company. We worked with a U.S.-based omnichannel retailer to modernize their enterprise platform and partnered for the company's POS transformation program, which has helped the company achieve stability, scalability and higher resiliency in its applications. In the cloud and data engineering space, we worked on the AWS Migration of services, workloads for a leading oil and gas company.

A leading South African bank partnered with us for their product suite modernization, the scope of work included consolidating 15 lending applications on a new common platform, which helped the client to rationalize this application portfolio, leading to a reduction of cost and effort. We were selected as a strategic partner by a global air logistics leader for its application management and platform modernization initiative. Our cloud-first total experience approach is helping the client run the business and modernize these systems with minimal disruption.

We continue to make strides in our sustainability journey in line with our published ESG vision and mission. We have successfully launched Phase 2 of our official sustainability microsite, and it is now readily available to our stakeholders. In support of World Health Day 2022, we aligned with the World Health Federation's month-long campaign communicating both internally and externally for the benefit of our associates globally. We also participated in various forums, including the 15th Edition of Environment and Energy Conclave and the Asia Pacific CEO Roundtable hosted by the UN GCNI and SAP, where we presented the ESG best practices at that time.

In closing, our order book has steadily increased despite global uncertainties. We continue to invest in our freshers program for better control of our supply chain. On the margin front, we are working with utmost discipline and diligence. We are focused on the 6 identified margin levers to drive meaningful improvement in the medium-term while also ensuring a healthy allocation for growth. While we continue to navigate macro-induced headwinds, we are certain that secular long-term growth in the IT industry will not diminish, as digital transformation and tech spending have become core to the client journeys towards long-term growth. In the past year, the changes we have made to sharpen our services, improve our go-to-market and invest in our talent, have yielded significant results. We are confident that Zensar is emerging stronger as the preferred go-to partner for our clients worldwide.

With that, I will now invite Sachin Zute, our Chief Financial Officer, to provide an update on critical financial data. After which, we will open the floor for questions.

[Sachin Zute, executive]

Thank you, Ajay. Good day, everyone. Welcome to this call. In addition to Ajay talking about business, I'll take you through some key financial metrics. In U.S. dollar terms, the company reported a revenue of $155 million for the second quarter of FY '23, reflecting a decline of 0.5% sequentially and growth of 9.3% year-on-year. In constant currency terms, however, revenue growth for the quarter is 1.6% sequentially and 14.4% year-on-year. The U.S. dollar realization during the quarter has been INR 79.6 per dollar against INR 77.1 in the previous quarter.

Our gross margin for the quarter stood at 25.3%, 120 basis points lower than previous quarter. And EBITDA stood at 8.5%, 270 basis points lower than previous quarter. Decline in EBITDA was primarily due to wage hike impact of 320 basis points and negative impact due to overall currency movement of 20 basis points. The benefit of 3.1% USD/INR depreciation was negated by other cross-currency movement, where GBP and ZAR depreciated by 6.3% and 8.5%, respectively. In line with what we shared in annual investor conference last month, we continue to drive disciplined program for margin improvement through measures such as increasing pressure deployment, improving commercial, optimizing operational metrics and rationalizing costs. This has helped us to partially mitigate the impact of wage hikes in the current quarter. Give the steps taken, we believe that we have bottomed out on margins and expect to see improvements from current levels. At the same time, we continue to focus on achieving our long-term objective of predictable growth by making growth-driven investments into the business.

For the quarter ended September 30, 2022, DSO, including unbilled, stood at 80 days as against 83 days in previous quarters. For the quarter, cash and cash equivalents, including investments in mutual funds stood at $162.1 million, post dividend payout of $9.7 million and annual variable payout for FY '22. The effective tax rate for the company has remained flat at 26.3% against the previous quarter.

With that, I come to end of my presentation, and I open the house for the questions. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Mihir Manohar from Carnelian Asset Management.

[Mihir Manohar;Carnelian Asset Management;Equity Research Analyst, analyst]

My question was on the margins. I mean, we have seen margins going down 300 basis points Q-on-Q. I mean, we understand that you had indicated about the large wage hike that you had given. But I mean, just wanted to understand what is the thought process now because when we see the situation currently, I mean, the demand environment is looking weak as per your commentaries. And despite that, we are giving one of the large wage hikes. So I mean, how are you seeing the situation now? And your guidance of mid-teens kind of margins, which was there in the -- by second quarter of -- I mean, second quarter of FY '24. I mean, it becomes really difficult to understand as to how you will be able to achieve that given now at least demand is slowing down and we are having a utilization which is 80%. So just wanted to understand what is your thought on that.

[Ajay Bhutoria, executive]

Sure. So I'm not sure I -- this is Mihir, right?

[Mihir Manohar;Carnelian Asset Management;Equity Research Analyst, analyst]

Yes.

[Ajay Bhutoria, executive]

Yes, Mihir. So Mihir, thank you for the question. So let me start by saying that we have bottomed out on margins, right? You see what happened -- what led to this situation was largely driven by unprecedented attrition that we suffered and a huge dependence that we as a company had for lateral hiring to drive growth that we saw over the last 6 quarters. We have put very significant measures in place, starting with a very expansive freshers program. In addition, we are running a very disciplined shift to improve margins across 6 levers that Sachin mentioned, right, improved service mix, improved commercial, improved utilization, optimize pyramid, optimize support costs and optimize cost of talent acquisition. The way we are running this shift, the way we are enforcing the discipline, right, and even after factoring what we see softness in some segments of our business, we are sanguine that we will achieve our stated objectives of margin targets. And like I said, we are firmly believe that we have bottomed out this quarter, and that, these -- we see margins steadily improve from this point onwards.

Sachin, would you like to add?

[Sachin Zute, executive]

Ajay, what you said, there are 6 programs which we are internally running. And we have started seeing initial success of each of these programs. And in spite of the softer environment which you referred to, we believe that the discipline and the rigor which we have put in the organization will help us to improve our margins from Q2 levels.

[Mihir Manohar;Carnelian Asset Management;Equity Research Analyst, analyst]

Just one question on the demand side. I mean, if you could throw some more highlight as per the verticals? Consumer Services is facing pressure. So do we see similar kind of pressure continuing this year and next year as well?

[Ajay Bhutoria, executive]

Yes. So we see segment -- because of what's happening with the macro economy, we see segments of softness. And this softness is helping -- is hitting us on 2 fronts. One is, within our HTM and Consumer Services vertical. And also, a large part of this is resulting in reduction of discretionary spend from certain segments of our clients. So our service line, which cater to a lot of this discretionary spend with is experience and [ advance ] services has also suffered headwinds because of that. We foresee in the short-term these headwinds to continue. We also believe that the long-term secular demand trajectory will go up. So in the short-term, the headwinds will persist, but in the medium- and long-term, the secular demand scenario will continue to look upwards and will then assist the growth of Consumer Services and also segments of our Hi-Tech Manufacturing vertical.

[Operator]

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

[Mukul Garg, analyst]

Ajay, just wanted to follow up on the query about HTM and Consumer. What's the outlook for both of them in the near-term? You usually have a fairly pronounced furlough impact in Q3. Is that something which we should anticipate this year as well, given the kind of preemptive weakness we have seen during this quarter? And by when do you expect the revenues from these 2 verticals to start stabilizing from a growth perspective? And is this something which is likely to overshadow overall company growth over next 1 to 2 quarters?

[Ajay Bhutoria, executive]

Right. So let me start by addressing the second part of your question first, right? So last quarter also, we had indicated that there will be short-term blips due to economic conditions, even though in medium- to long-term secular demand scenarios are positive. So we still maintain that [ rate ]. And then we see signs of softness due to macroeconomic conditions in certain industries and around certain types of spending, largely discretionary spending. We are keeping close watch over that and we have been very close to our clients. Now having said that, the areas where we made investments, such as engineering, data platforms is bearing fruit, striving strong, and we continue to [indiscernible] and see results. Right?

Now overall, right, if you look at what's happening in Hi-Tech Manufacturing, we will see furloughs in this holiday quarter, and the furloughs will be in line with what we have seen in the previous years, right? So that's Hi-Tech Manufacturing and Consumer Services largely. But overall -- from a overall portfolio, we will see furloughs, and we will see impact of that in the holiday quarter.

Having said that, as we go forward and as the economy stabilizes, as the spend from our clients stabilizes and as discretionary spend comes back, either third -- the last quarter of this fiscal or in the following quarter or 2 of the following fiscal, right, we will see these 2 verticals come back on track. We believe that our Banking, Financial Services vertical and Banking, Financial Services and Insurance vertical will continue to thrive in the current environment because the current environment is conducive and all the investments that we made in the vertical are bearing very strong fruit, right?

The last thing I would say is that, we are not entirely dependent on what's happening with the economy and its impact on Hi-Tech Manufacturing and Consumer Services verticals. We are continuing to drive trust in specialty areas, which impact the core of our clients by providing services and by increasing pipeline. And as we speak, we see green shoots of that trust, which will pay us back over the course of next couple of quarters.

[Mukul Garg, analyst]

Sure. And also, just continuing on this improvement in the BFS space, can you just share your thoughts on the use of cash which you have right now? BFS has now grown to be your second largest vertical after you acquired M3bi. Are there areas where you're looking to deploy cash to further lower your exposure to the declining Hi-Tech space and kind of maybe grow a particular sub-vertical within BFS or enter a new area of -- kind of focus for clients?

[Ajay Bhutoria, executive]

Right. So Mukul, we will continue to double down on BFSI. We made strong investments. The investments are bearing very good fruits. The core organic business of BFSI, as well as the benefits that we got from the M3bi acquisition. And both of these engines are firing very well. And as we see right now, we see that trend not diminish, it will continue. So as we look forward and as you rightly said, right, that we are sitting on a sizable pile of cash, $162.1 million after paying off the variable comp and dividend, right? So after that, we're still sitting in on sizable. We are constantly also evaluating opportunities to expand inorganically. And our approach towards that continues to be that we will do tuck-in type acquisitions. And we are evaluating that space, including right now very seriously. And in areas that bring us capability, scale, market access and also support us from the areas of business that are seeing momentum. The areas where we see market spend increasing over a period of time, and the areas where market trends continue to be positive. So that we are constantly evaluating, Mukul.

[Operator]

[Operator Instructions] Next question is from line of Sameer Dosani from ICICI Prudential Asset Management.

[Sameer Dosani;ICICI Prudential;Investment Analyst, analyst]

So Ajay, you had mentioned and we have invested a lot in the freshers program, and we have hired around 1,000 freshers. Can you share some details around -- this was in Q4, right? So can you share some details around what is the number of freshers that you hired in last 3 quarters? And how much of them have been deployed till date? And if you can just speak about how much and what is the deployment strategy going to be? And how this will help our margins? If you can just quantify that also?

[Ajay Bhutoria, executive]

Sure. So Sameer, we had completely revamped our fresher program 4 quarters back. Okay? Now in the second half of FY '22, we hired over 1,000 freshers. In the first half of FY '23, we have hired more than 450 freshers, right? It is one of the strongest programs that we have put in place and we put, like I mentioned in my transcript, right, that the kind of program, the learning and development, as well as the gating program that we had put in place has been a strong success. And what we now see, especially in this quarter, is the fresher deployment significantly rising, the acceptability of fresher visit by our clients significantly go up and overall billability, substantially increasing. So it has been a very successful program for us, and we will continue to drive this program to support our growth, as well as to reduce dependency on the lateral market.

[Sameer Dosani;ICICI Prudential;Investment Analyst, analyst]

How many freshers will be deployed from this [ 1,450 ] freshers that you would have hired in last -- from H2 onwards?

[Ajay Bhutoria, executive]

Yes. So Sameer, we don't disclose the exact numbers, but I will tell you that from the H2, a sizable population of the freshers has been deployed, and we are tracking to our targets. And it's one of the reasons why we were assisted from a pyramid optimization perspective, and we got benefits on our overall gross margin. So despite 320 basis points of -- worth of wage hikes, the actual impact on gross margin and EBITDA was reduced on a big part because of the fresher hiring program. And we will continue to track that -- the results are very encouraging is what I can share with you.

[Sameer Dosani;ICICI Prudential;Investment Analyst, analyst]

Okay. And as you mentioned about the margins that they have been -- these margins have bottomed out. What do you -- do you think retail in these 3 segments that we have seen pressure on, they have also bottomed out, you won't see much decline from here, maybe there can be some softness, but decline essentially has been [ listed ]. What do you think about that?

[Ajay Bhutoria, executive]

So -- and if I may just clarify, are you talking about revenue?

[Sameer Dosani;ICICI Prudential;Investment Analyst, analyst]

Revenue. From a revenue point of view, revenue point of view.

[Ajay Bhutoria, executive]

Right. See, the macro softness that we have seen and the impact of that in certain segments of the industry that we serve, that will continue in the short-term, right? And then we've got the holiday quarter with furloughs coming up. So we will see some softness in that, but there are 2 factors. One is that, we are very sure -- we are very certain that the long-term secular demand is going to continue to rise and the turnaround will happen either 2 quarters out or 3 quarters out as soon as the new baseline is established. And that is going to favorably impact us for both these verticals, HTM and Consumer Services. Having said that, we are not, obviously, waiting for the economic turnaround to happen. We put some major, major sales motions in place and the pipeline in these 2 verticals is beginning to look quite healthy, right? So the short-term softness, we will look to offset with direct growth in our business momentum, as well as [ several odd ] economy and the improvement in discretionary spend by our clients.

[Sameer Dosani;ICICI Prudential;Investment Analyst, analyst]

So just to clarify, softness would mean lower growth or no growth? Or do you think there could be some decline also that is what I was looking for?

[Ajay Bhutoria, executive]

Yes. Sameer, so we don't guide. So this is why I gave you a qualitative commentary in terms of what's happening in the economy, impact of it on our business without getting into providing specific guidance.

[Operator]

Next question is from the line of Nitin Padmanabhan from Investec.

[Nitin Padmanabhan, analyst]

Actually, 2 questions. So one is on the -- if you could give some color on insurance? So I think one of your largest peers basically mentioned that there are headwinds on the P&C side of insurance and a lot of weakness. I just wanted your thoughts on how is our exposure to P&C be within the insurance vertical. And how are you seeing the broad demand trends there, both on a near-term and medium-term basis?

The second is, it looks like the top client bucket has done quite okay. It's actually grown. Just wanted to understand, not the top client, specifically the top 5 is what I mean. So which vertical really sort of has pushed that? Is it a banking or something on the emerging side?

And finally, if you could give us some color on the Emerging vertical side as to what all are there within that and which sort of sectors within that is really driving the growth?

[Ajay Bhutoria, executive]

Right. So Nitin, let me just highlight and then I'll request, Nachi Mitra, who is Global Head of Banking, Financial Services and Insurance for us to give you additional color. So Insurance business for us continues to be strong, right? We grew 3.9% quarter-on-quarter sequential and 15.6% year-on-year. So that continues to be strong. And today, we have divided our book into 3 parts, all the 3 parts are firing. And I would actually request Nachi to give you a view of what is going on. And then I'll answer your questions on top client bucket, as well as Emerging vertical. Nachi?

[Nachiketa Mitra, executive]

Thank you, Ajay. And thanks, Nitin, for asking the question. From a broad trends perspective, we are seeing pretty good traction. We're specialized in P&C, right? And we specialize in one of the primary software being used in the P&C industry, and we don't see any slowdown. In fact, more and more clients in that segment are moving to cloud, so we see a lot of opportunities in that. We see a lot of clients wanting to move to digital, we see traction in that. So overall, what we also are noticing from an Insurance standpoint is that, whenever the clients want to optimize their budget, but also there is an opportunity for us to be very creative. And that's why we are also called to the table [indiscernible] they do transformation programs. So we are on both sides. The run the business and change the business, they see us as very valuable partners. And it has taken some time to get there, but I think we have established a name for ourselves. And we have a very strong capability right now to have that kind of traction with our clients.

There was a second part of question, Nitin, I missed. If you can just repeat? And also let me know if my answer kind of addressed your question?

[Nitin Padmanabhan, analyst]

Yes. So just incrementally, Nachiketa, is -- see, historically, the Insurance business has been a little volatile. I think as those Guidewire projects get over, the revenue comes off and then it's off sort of weak for some time and then there is a spike. Just wanted your thoughts on the pipeline and how comfortable you are in terms of being able to sustain growth rates here? Or do you expect it to continue to be sort of lumpy, right? Because you need a steady flow of business to maintain consistent growth here. So what is it that you are doing in this business to sort of reduce the lumpiness and have a little more consistent kind of flow of growth?

[Nachiketa Mitra, executive]

Yes. Thank you, Nitin. I think you have -- you're spot on in terms of the concern that you raised. Earlier, we would be very project-focused and Guidewire implementations and [indiscernible] implementation book is over, we would have -- we would be actually looking at a cliff. What we are trying to do very actively now, Nitin is, we've just flown the implementation, how do you support the client after the implementation, right? So which gets into more annuity-based revenue model. That's number 1.

Secondly, we are also trying to change the mix of our clients. Having clients who are very, very small to clients who are Fortune 1000 and Fortune 500, where they have a wider area of needs, right? And then the third part of the equation is, Nitin, based on this relationship that we have, every client has an infrastructure requirement. Every client has a data requirement. It's just not Guidewire. So one of the key messages is, we would be Guidewire implementation and then support it as well. Secondly, we are more than Guidewire. For the rest of the 98% of the organization we do data, we do experience, we do infrastructure. And recently, we have had some significant wins in new areas. So we are opening up new frontiers in the insurance domain. And then we're also trying to diversify as much as possible into other segments of insurance. So we are having very active conversations in life and [ annuity ] as well. So overall, I think we have been able to bucket the Insurance business from the vagaries of the peaks and the valleys, and I think we are very well geared up to have a very strong business going forward.

Does that answer your question, Nitin?

[Nitin Padmanabhan, analyst]

Yes, it does.

[Ajay Bhutoria, executive]

And Nitin, so your second question on top client buckets, right? It has grown. A tale of 2 cities, part of the top clients bucket has softened, another part of the top 5 clients bucket has performed extremely well. Net-net, we have done extremely well in the top 5 client bucket.

In terms of Emerging verticals, again, done very well. It's a vertical that runs smart cities, health tech, et cetera, right? And it has done very well. And for that, if I can request, Harjott to provide some additional color.

[Harjott Atrii, executive]

So Nitin, in terms of the Emerging vertical, as Ajay mentioned, we are seeing the growth. We have entered these verticals and opened new logos in the last few years with large deals. So they continue to sustain, and we're growing those relationships as well. And these were signed with large customers, which have a significant headwind for expansion as well. So we are encouraged with what we see in the pipeline for Emerging, as well as the recent deal wins we have in the Emerging vertical.

[Nitin Padmanabhan, analyst]

So just one thing on the second question was it, what I was asking was, which -- within those top 5, which vertical actually contributed to the growth? Is it Banking -- is it a Banking customer or what really is sort of drove? What are the positives and negatives from a vertical perspective in the top 5?

[Ajay Bhutoria, executive]

So Nitin, surprisingly, it was across, so not just Banking, but they're supported by other verticals as well. What I can share with you is, the part of the top 5 that grew was across and outside of Banking as well. So yes, there was a Banking involvement in that [ grit ], but there was non-banking as well.

[Operator]

Next question is from the line of Amit Chandra from HDFC Securities.

[Amit Chandra, analyst]

Sir, my question is on the margin trajectory. So you mentioned that the margins have bottomed out. And earlier, we mentioned that we aspire to reach mid-teens by second quarter of next year. So are we on track to achieve that? And also in terms of the wage hikes that we have provided this year, is it higher than what you have given last year? Or is it in line with what you planned earlier?

[Ajay Bhutoria, executive]

Sure, Amit. I would actually defer that question to Sachin. Sachin, can you take that question?

[Sachin Zute, executive]

Sure, Ajay. So Amit, obviously, in a particular quarter, we had a 320 basis point impact of wages against 250 basis points impact which we had last year same quarter. Now as we discussed during the annual investor conference as well, there are 6 tracks which we have put in place, and each of us are working very judiciously in executing the plans which we have put under each of these plans -- under each of these tracks. Now given that the success which we have seen in Q2, that gives us fair confidence that we might have actually bottomed out as far as margins are concerned in Q2. And as we discussed, our aspiration to be mid-teens by next year Q2 continues to be there. And every work is going in that direction. So I think we will -- we are currently tracking to hit mid-teens by Q2 of next year.

[Amit Chandra, analyst]

To your other question, Amit, the wage hike that we have given this year is unprecedented. And it is higher than what we have given at least for the last 10 years, if not longer. And that was primarily because, if you recall, last -- until last quarter, our LTM, last 12-month attrition was 28-point-some-percent, right, 28.1%. And we just decided to take the bull by the horns. We gave a very substantial high. Its impact on margin was 320 basis points. And we see a very positive impact of that on the attrition rate for this quarter, for Q2. So a very quick answer to that part of your question.

Okay. And sir, on the incremental growth over the last 2, 3 quarters, we have been saying that Emerging vertical and also from the services perspective, cloud and infra, that has been actually growing pretty well for us. So it is fair to assume that these contracts are largely on-site contracts or the margins in these contracts are fairly lower than what the company level average is. So that's why the impact on the margins is seen apart from the wage hikes that we have given. So these contracts are fairly like low margin contracts. And also in terms of the TCV wins that we are seeing, if you can provide some clarity on what was the renewals versus net new? And also in terms of the new deals, which we are winning, how is the offshore component in it? And are we seeing some pricing benefits in these deals?

[Ajay Bhutoria, executive]

Sure. So Amit, so first of all, is that if you see the services, that are firing really well, which is advanced engineering services that grew for us quarter-on-quarter over 6% and data engineering services that quarter-on-quarter grew for us 16.8%, actually data engineering 7.4%, sorry. So these are strong service lines, and they attract very good commercials. Okay? So this -- we feel pretty good about and confident about that this growth is, if anything, it's very clearly margin accretive.

Now in terms of the deals we have won, with the exception of maybe 1 deal, most of these are global deals, which means they have an on-site component and an offshore component, right? And then both given that we are tracking our target margin profiles, right? So these are not margin dilutive. So I just wanted to give very clear guidance to you in terms of -- very clear data points to you in terms of what's happening with our deal wins and its impact on margins.

And the last question that you had, look, this time, the order book has been $141.8 million, which is a little over 13.5% growth over the previous quarter. So the order book has been healthy. And the order book between new and renewals is 40/60.

[Operator]

Next question is from the line of Amit Shah (sic) [ Sandeep Shah ] from Equirus Securities.

[Sandeep Shah, analyst]

So my name is Sandeep Shah, not Amit Shah. Just for clarity. The first question is, I think when do we expect well balance growth across verticals because BFSI has been doing a heavy lifting for so many quarters. So on a high-growth base, the growth may burn out going forward? Or you believe no BFSI may continue to do well and that has helped us in terms of seeing the organizational level growth to continue because we still expect the affected vertical of Hi-Tech Manufacturing, Consumers, remains [ at least ] in the near term?

[Ajay Bhutoria, executive]

So Sandeep, look, for -- I would say all parts of our business, be it the 3 verticals or the 5 service lines, what we have endeavored to do is to put grassroot strength, both in terms of our capability, as well as in terms of our go-to-market and the kind of projects that we are addressing. What I can say confidently is that, BFSI, the engine that we have created and what you also heard from Nachi in terms of specifically what's happening with Insurance, this is a very resilient engine, right? And I think this will continue to do very well. I don't see any issues in the near-term or far term with BFSI.

What will happen is, what we are hoping is that, as the industry has been stabilized, right, that we go back to driving our strength in the other 2 verticals. If you saw what we did last year with both Hi-Tech Manufacturing and Consumer Services, we had pretty spectacular years, right? And then we got hit by this economic headwinds, which particularly affected the segment that we address, the customer segment and the industry segment that these subsegments that we address in these 2 verticals. And we are putting in place sales motions, as well as capability motions that will make us more resilient. So I also feel confident that these are short-term issues and that in the medium- to long-term, we are on the right track.

[Sandeep Shah, analyst]

Okay. And just in terms of entering into Q3, generally, we have furloughs, especially from some of our top clients in the Hi-Tech. And what we are hearing from some of the peers this time there could be abnormal furloughs in some of the clients in Hi-Tech and Manufacturing. Are we also witnessing the same? And this time, the furlough impact in Q3 could be higher than last year's Q2?

[Ajay Bhutoria, executive]

So Sandeep, what I can share with you right now is that -- and of course, things change as we go forward. But what I can share with you right now as we speak is, the furloughs to be in line with what we have seen in the past.

[Sandeep Shah, analyst]

Okay. And on the margin, as I understand, it has bottomed out, but will it have a V-shaped recovery or will have a U-shaped recovery because V-shape could be the aspirate to go to aspiration of a mid-teen? Otherwise, a U-shape may not help us to go to that kind of an aspiration.

[Ajay Bhutoria, executive]

Right. I would defer that question to Sachin, Sandeep.

[Sachin Zute, executive]

Yes. So Sandeep, as I said, that there are tracks which we are running right from improving the commercial, improving the subcon mix, improving on our recruitment cost, the pressure deployment, which will help me to improve my pyramid. These tracks are currently running and that gives us confidence that in the medium-term, we will be able to recover our margins. And we are feeling fairly confident that we will be -- we still have the aspiration of reaching mid-teen margins by next year Q2.

[Sandeep Shah, analyst]

Just a follow-up question. Even in the near-term, despite the seasonal weakness in the furlough, one can say there would be an upward bias to the margin because of the 6 tracks which we are working immensely and focusedly.

[Sachin Zute, executive]

Yes, Sandeep, that exactly how we are currently tracking.

[Sandeep Shah, analyst]

Okay. All the best.

[Operator]

[Operator Instructions] The next question is from the line of Chirag from Ashika Institutional Equities.

[Chirag Jain, analyst]

Hello. Sir, I have a few questions. Like in defense technology...

[Operator]

Chirag, a little bit of disturbance coming from the line. May I request to speak through the handset?

[Chirag Jain, analyst]

Now it's audible?

[Operator]

Yes.

[Chirag Jain, analyst]

Yes. So sir, I have a few questions. Like you mentioned in your earlier remarks that some of Fortune clients deferring their spending. So as for your conversation with them, when you feel that they will come back to normal in terms of spend? And also in defense technology, other than [ drone ] in which areas we are working?

[Ajay Bhutoria, executive]

Yes. Okay, Chirag. So we see softness largely being driven by global macro conditions, which in turn has largely been driven by what's happening with the inflationary environment and the general compression of margins across the globe in the body component, right? And this will play out over the course of next couple of quarters. Now as the margins get stretched, right, the natural reaction from the industry is to reduce discretionary spend. And we got impacted because of that, especially in the segments that we serve in Hi-Tech Manufacturing and Consumer Services. This will play out until the inflation situation and the margin situation with the global body corporate stabilizes, right, and that will play out over the course of next 2 to 3 quarters. So that is what we are tracking. And obviously, we have put mechanisms that we are not entirely reliant on this turnaround of margin. And then we put sales motions in place to increase our pipeline elsewhere, right? So that is what I can share, number 1.

Number 2 is, on the Emerging side, we have big plays in smart cities, in health tech, et cetera, right? And those will continue to be focus areas for us.

[Chirag Jain, analyst]

And your strategy with respect to domestic business for the next 5 years?

[Ajay Bhutoria, executive]

Yes. So Chirag, good point. We are watching the market very closely. And we will take a decision on that as we see fit into our general overall strategy from a service perspective, as well as from a geography perspective. But we are watching that carefully.

[Operator]

[Operator Instructions] As there are no further questions, I will now hand the conference over to Mr. Ajay Bhutoria for closing comments.

[Ajay Bhutoria, executive]

Thank you, ladies and gentlemen, for joining our call today. Really appreciate you taking the time and look forward to connecting with you in the next quarterly call, if not earlier. Thank you very much. Good morning, good afternoon, and good evening to all of you.

[Operator]

Thank you very much. On behalf of Motilal Oswal Financial Services Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.