Fidel Softech Limited (FIDEL) Earnings Call Transcript

Good day, everyone, and a very warm welcome to Q2 and H1 FY '27 Earnings Call for Fidel Softech Limited. The purpose of today's call is to discuss the company's financial performance, key business developments and strategic priorities for the first half of FY '27. Before we begin, please note that this call is being recorded. During the discussion, management may make forward-looking statements based on current expectations and assumptions. These statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied. Please refer to the company's relevant disclosures for further details. Representing Fidel Softech today, we have Mr. Sunil Kulkarni, Chairman and CEO. We will begin with the management team's opening remarks, followed by a question-and-answer session. With that, I invite Mr. Sunil sir to take the floor. Thank you, and over to you, sir.

Thanks a lot, Boomika. Really appreciate, [Foreign Language]. Dear investors, shareholders and friends, thanks a lot for joining us today. Good afternoon. Thanks for showing continued interest and confidence in Fidel. Today, I would like to discuss three things mainly and of course, touch upon many other things. But first, our performance during Q2 and the first half of FY '26, '27. Second, how we are progressing with the integration of existing acquisitions, improving operating efficiencies and responding to the changes happening in the tech industry, particularly around AI. And third, our proposed acquisition of Softener Private Limited, which I believe represents an important step in Fidel's first phase of growth. I would like to cover these points in about 10, 15 minutes, and then we'll open the floor for your questions. Before discussing this quarter, I'd like to take you through our journey and put into perspective. Just 4 years back, Fidel was a company with approximately INR 25 crores in annual revenues. We have a strong presence in Japan with differentiated Japanese capabilities built over 20 years, good customer relationships and established capabilities in language and tech services. Over the years, we have expanded our capabilities, added new customers, entered new markets and completed a few strategic acquisitions. Last financial year, we crossed INR 100 crores in annual revenue for the first time in our history. This was an important milestone for us. However, as I've already mentioned in investor communications, our ambition is not to stop at INR 100 crores. We have articulated our aspiration of growing Fidel fivefold towards INR 500 crores in annual revenues in 5 years. To achieve that, we need to do more than simply add customers or increase headcount every year. We need to build a larger operating platform, enter new markets, strengthen our capabilities while developing new ones and create a business model that can scale more efficiently. Our recent acquisition and now the proposed Softenger acquisition are part of that strategy. Coming to our quarterly performance. During Q2, our consolidated revenues were INR 37.97 crores of revenue, EBITDA at INR 5.61 crores, PBT at INR 4.62 crores, PAT at INR 3.60 crores, EPS INR 2.44. For the first half of the financial year, our consolidated revenue stood at INR 75.91 crores, EBITDA at INR 10.64 crores, PBT at INR 8.89 crores and PAT at INR 6.78 crores. EPS, INR 4.68 crores. We continue to remain profitable during the quarter. I would like to explain some of the factors affecting our cash savings and margin performance. First, we implemented our annual salary appraisals during this quarter. We had moved our appraisal cycle to July a couple of years ago so that we could review the first quarter results before making compensation decisions. Second, following Fidel's achievement of INR 100 crores in annual revenue, we provided a onetime appreciation incentive to key employees. And third, of course, we distributed approximately INR 3 crores in dividends to shareholders. Now the dividend is the cash outflow and does not impact our reported operating profit. The salary revisions and employee incentives, however, did have an impact on operating costs. I just wanted to clarify this distinction. More importantly, our focus is not only on quarterly revenue growth, but also on improving the quality of our earnings and cash generation over time. We continue to look closely at team members utilization, project margins, delivery costs and the opportunities to shift more work to offshore locations. One question that investors naturally have is while Fidel has grown significantly through acquisitions, what is happening with organic growth and where we see opportunities? So this is an important question. We understand we are seeing different growth patterns across our business. Earlier, it was easy. One has to attach oneself to a few big system integrator firms and business would trickle to SMEs. But it's difficult now just to depend on that or on network only as the world changes. One needs serious capabilities, scale, competencies and skills. In our stand-alone operations business, while growth looks subdued, at the same time, our Japan on-site business continues to see opportunities where customers require or prefer on-site delivery, local support and bilingual capabilities. We are also seeing new opportunities in the U.S. through Techwine. During Q2, we initiated an offshore engagement for a customer relationship originating from Techwine USA. This is significant because Techwine historically operated largely through high-end on-site consulting model. By introducing Fidel's offshore delivery capabilities, we can now offer these customers a wider range of services and improved delivery economics. The first engagement took longer than expected, but we believe that once customers see the difference, it can open doors for additional projects. Likewise, in Japan, one can see a bit higher revenues for IM as we are beginning to see cross-selling opportunities between Fidel and IM Corporation. We also added approximately six Japanese customers in India during this quarter, primarily companies establishing manufacturing facilities or GCCs. These engagements are initially small, but they are relevant to our long-term strategy. We want to enter customer relationships through one service and gradually expand into additional areas. For example, a Japanese manufacturing company entering India may require consulting or language support. Over time, it might also require IT infrastructure, application support, cybersecurity, data analytics and managed services. This is where Fidel's combination of technology, language localization and local market understanding becomes valuable. We do not expect every new customer to become a large account immediately, but building these relationships is an important part of our organic growth strategy. Let me also address some points on profitability and margins. As we expand through acquisitions, investors will naturally compare the margins of different businesses. Some of our language technology and specialized consulting business operate at high margins. On the other hand, traditional business or sometimes on-site business is operating at lower margins. So as our business mix changes, the consolidated margin profile has changed over a period. We recognize this. Our objective currently is not to maximize margin in every individual business at the expense of growth. Instead, we want to build a larger, sustainable and profitable group. At the same time, we see several opportunities to improve operating margins. First is offshore delivery. Wherever possible, we are trying to move suitable activities from on-site delivery to offshore or hybrid delivery model. Second is resource utilization. With a larger group, we can share our skills, reduce bench costs and improve deployment across customers and business units. Third is operational integration. For example, during Q2, IM Corporation moved into Fidel's Japan office. This is expected to save approximately USD 100,000 annually. Fourth is leveraging AI in automating our operations. We also replaced the third-party localization ERP system, which was costing us annually approx INR 30 lakhs with an internally developed solution using AI-assisted development. These may not appear to be very large numbers individually. But as we scale, we expect to identify many such opportunities and better execution. Our focus is to improve margins progressively through better execution rather than relying on price increase or aggressive cost reductions. Let me also talk a bit about AI because this is probably one of the most important developments affecting our industry. AI is, of course, changing the technology service business. It is changing software development, language localization, customer support, infrastructure operations and other activities. Some traditional services may face pricing pressure. We cannot ignore the reality. But for Fidel, we are seeing AI from two different perspectives. First is how AI can improve our own productivity. We are already using AI-assisted development for building applications, automate workflows, reduce dependency on certain third-party software products. In our [ localization ] and language service operations, we have automated significant parts of the workflow. We are also training our engineers to use AI-assisted development tools. The second perspective is how we can help customers adopt AI. During Q2, we conducted several demos and POCs for customers. Commercial conversions are a bit slower than anticipated, but we believe that opportunity remains meaningful. Our approach is to focus on practical enterprise use case where AI can improve productivity, reduce operating costs or improve service quality. This becomes particularly interesting when we look at managed IT operations, where AIOps and automation-led managed services could be the future. We do not expect AI to replace every engineer from support activity, but we believe that it can allow same delivery organization to handle greater volumes, improved response times and operate more efficiently. And this brings me to the Softenger acquisition. Today, our Board has approved the proposed acquisition of Soft Tanker Private Limited together with its subsidiaries and related company, subjected to applicable requirements and completion conditions. Softenger is an established managed IT infrastructure and technology services company with approximately 27 years of operating history. Starting from Pune, it has presence across India, Singapore, Malaysia and Dubai. So far, we had been -- as Fidel, we are always in -- like in Japan, which is far East and in India, which is far south. We were always looking for some kind of presence in ASEAN. With this, we get this opportunity. The business brings approximately INR 200 crores in annual revenue, more than 60-plus enterprise customer relationships and around 1,200-plus skilled professionals. Its customer includes Japanese enterprises, banks, financial institutions, capital market organizations, telecommunication companies, system integrators and insurance firms. For us, this is not simply an acquisition to add revenue. We see three important strategic benefits. First, scale and customer access. Building relationships with large enterprise customers take considerable time. Softenger brings established customer relationships and delivery experience in enterprise IT operations. We believe there will be opportunities to introduce Fidel's existing capabilities in AI, data analytics, language technology to these customers. Similarly, we can introduce Fidel's Softech infrastructure, cybersecurity and managed operations to selected Fidel Japanese customers. Second, geographical diversification. Historical, Japan has been our strongest market. Through Softech, we strengthened our presence in Singapore, Malaysia and Middle East, while continuing to build our business in India, Japan and United States. Now we are seen as an Asia Pac firm extending to Middle East. This gives us a broader international platform. Third, capabilities. Software Softer strengthens our position in managed infrastructure, cybersecurity, data center operations and enterprise IT support. Managed IT business was one of our business units where we were doing INR 10 crores to INR 15 crores of revenues. So we are strengthening our business units plus at the same time, creating more capabilities. These are areas where customers require long-term support and operational continuity. We believe that combining these capabilities, AI, automation and offshore delivery creates more meaningful opportunities. Let me also address an important aspect of this acquisition. Softenger operates in a business where margins are a bit lower than some of specialized technology services. We are all aware of this, and our evaluation has taken that into account. Our investment thesis is not based on assuming that Softenger margins will immediately become comparable with Fidel's margin business. Instead, we see an opportunity to improve profitability gradually through operational efficiencies, automation, cross-selling and better utilization. At INR 350 crores to INR 400 crores consolidated revenues now, even a relatively modest improvement in operating margins can have a meaningful impact when applied to a business of this scale. For example, on a INR 300 crores to INR 400 crore revenue base, a 1% improvement in operating margin would represent approximately INR 3 crores to INR 4 crores in additional annual profit. This is an illustration, of course, not a forecast. We also recognize that integration will take time. Our approach is not to disrupt existing customer relationships or delivery operations. The proposed transaction includes continuity of key management personnel, along with performance-linked incentives to future business performance. We believe retained experienced management or retaining that while introducing group level capability and governance is the right approach. We will prioritize customer continuity, employee retention, financial discipline and operational improvements. Another important acquisition is where -- whether the acquisition creates value for our shareholders. We have evaluated the transaction not only from a revenue perspective, but also from the standpoint of profitability, existing assets, management continuity and future cash generation. The proposed structure includes incentives which are aligned to management rewards with future business results. We believe this is more important because our objective is not simply to complete an acquisition, but to ensure that the acquired business continues to perform and improves over time. We will remain disciplined in our approach to capital allocation and funding. We also understand that increasing the scale of the group brings additional responsibilities around governance, financial reporting, working capital and operational controls. These will remain important priorities for management. The detailed transaction terms and required disclosures will be available through our stock exchange filing. Let me also connect this acquisition with our longer-term ambition or aspiration. When we first discussed the aspiration of growing Fidel from INR 100 crores to INR 500 crores, we were looking at a 5-year journey. The idea was to combine organic growth with selective strategic acquisitions. With Softer, the picture changes considerably. Based on our current business rates, the run rate, the combined group would have an indicated annualized revenue exceeding INR 350 crores. This means that subject to, of course, completion of the acquisition, we would be significantly closer to our scale. However, I want to emphasize something. Reaching INR 500 crores in revenue is not just the final objective. Building a profitable, sustainable and well-governed INR 500 crore company is one of the objectives. Every time you must have noticed in past 18 quarters, once we reach, say, quarterly INR 10 crores, INR 15 crores, our first objective has been to sustain it, ensure that we can hold to it, we can deliver it and then move it to the next level. Hence, we do not want to grow only for the sake of growing. We want to create a business with stronger customer relationships, diversified revenue streams, better delivery capabilities spread over different geographies and improving operating efficiencies. The proposed acquisition potentially accelerates our revenue journey, but converting that scale into sustainable earnings and shareholder value will require disciplined execution. As we look at the coming quarters, our priorities are clear. We will continue strengthening our existing business, improve offshore delivery, develop AI capabilities and integrate the companies that we have acquired. Subject to completion, Softenger will become an important part of this journey. We welcome their team on board. We see opportunities across managed IT operations, cybersecurity, data centers, AI-assisted development, enterprise applications, language technology and data analytics. At the same time, we remain conscious of the risks, including customer spending patterns, AI-led changes in service delivery, wage inflation, foreign exchange fluctuations and the challenges of integrating a larger international organization. We will approach these opportunities with our team, continuous learning together with financial and operating discipline. I believe Fidel is reaching an interesting stage in its evolution. We have established a strong foundation in Japan for more than 2 decades. We have developed delivery capabilities in India. We have entered U.S. market and strengthened our international presence. And now with Softenger, we have an opportunity to bring these capabilities together into a much larger global service platform. Our first journey was about proving that Fidel could grow from INR 25 crores to INR 100 crores. Our next journey is about demonstrating we can build a INR 500 crore technology group with strong capabilities, better operational leverage and sustainable profitability. I thank all our shareholders, our employee team members, our alumni, our partners for their continued trust and support. With that, I would like to take any of your questions. Thanks a lot.

[Operator Instructions] With that, we can take the first question.

By the way, I want to add, I have [ Mandar Jain ], Finance Manager; and Anil Pat, who is our advisers with me today to answer some of the questions if I'm unable to answer, but operational business anyway, I look forward to it. Thanks a lot. We can start with the first question.

Then, we have a hand raised from [ Amira ].

Sir, my questions are related to your acquisition of Softenger. So I just wanted to understand that the business is relatively large in comparison to what's existing operations are. So can you just throw some light that what attracted you towards this acquisition and how it will complement your existing Japan-focused business?

Great. Thanks a lot. So basically, Softenger current business, especially in Singapore and Malaysia, they already have -- so they have almost 60, 70-plus enterprise customers, like you take, say, MUFJ, Mitsubishi Bank, NTT and so on. So many of them today, even if we would like to enter, it is very difficult to enter all these organizations. So they have a lot of -- out of these customers, there are certain Japanese organizations they already have as customers. in Singapore and Malaysia, rather ASEAN, there's a lot of Japanese companies presence. We many times get requests from Japanese companies, do you have a local presence out in ASEAN, but we never had. And setting up something from ground again takes time. So when we saw that as an opportunity to work with or integrate ourselves with this kind of company, which already has a setup out there, it was kind of like a no-brainer for us. We have engineers who can speak Japanese. They have engineers who can speak Malay, Chinese, because always there's a requirement of bilingual in ASEAN. And so we saw a lot of integration out there. Mainly, I think secondly, last -- even in the last 10 days, you might have seen there's a lot of security-related cybersecurity related issues in PHP, Java, Oracle, there a lot of things happen. We already have a business unit. So this year, when we completed INR 100 crores -- so I'll speak more, maybe just excuse me. So earlier, we had only 2. I -- we were just saying IT services and language services. But from this year, what we did is in IT, we have created all these business units and so on. So one unit was and given them targets, right? So one was this managed IT service where we are already doing some cybersecurity, VAPT testing. This year, we backed the JPY 100 million contract in Japan, which was again about managed like outsourced operations, IT operations. So while we were doing and we have given this target to grow these business units, we are looking at an opportunity where they already have a presence, high-end skills into cybersecurity, data center operations, and so on. So without having to set up our own setup, we already are looking at skilled professionals, 100-plus SMEs, 500-plus certified engineers, even to hire these people takes time. So we believe that was like a good case for this, yes.

Understood, sir. So the proposed acquisition was valued at approximately INR 38.5 crores versus an EBITDA of around INR 11 crores. So the basic rationale behind it was that it is delivering us more projects and getting us enter into new companies, which we were not able to like from the start. So this will give us that space, correct?

Correct.

So that was one.

So acquisition...

[indiscernible], right?

Am I audible?

Sir you are audible but the volume is low.

This proposed acquisition actually is helping us in two specific areas. One is the market access like Malaysia, Singapore and Dubai, where we do not have direct presence, now we will be having presence through this acquired entity. The second is we have been able to get a customer base of 60-plus customers, and we will be able to leverage the Fidel Soft offerings across these markets as well as customers. So I think that is going to be the benefit and synergy which we are looking at to leverage through this acquisition.

And adding to that, regarding the value, the INR 38 crores or whatever, our idea, so whenever we are looking at any opportunity, what we typically see is in next 3 to 4 years, would we be able to recoup whatever we have invested in terms of -- there are the, of course, synergies and cash. But at the same time, we also have limitations. If suddenly something is too difficult for us to achieve, get back, then we have skipped many such opportunities as well. So -- but when we looked at this, it was a reasonable fair deal that we felt mutually acceptable again for them as well as for us and hence, we went forward.

Sir, I have one last question, and it is related to the EBITDA margins. So the EBITDA margins are relatively lower than what we are getting today. So it will basically dilute our margins. So what are your expected sustainable margins going forward that we can see and we can look for?

Correct. No. So this margins is always an issue, and we understand. So there are many, many areas again in that. So for example, they have certain customers where they have been supporting like 15, 20 years, where it is very difficult for even them to increase or ask for better rates because of certain long term and so on. But at the same time, the salaries have increased and so on. So at the same time, there are some new areas that they are also doing around cybersecurity or around data center where they are seeing some better rates. Secondly, Malaysia and what they are working on, the rates are extremely competitive. But when -- at the same customers, when we -- if we can take our data analytics practice, for example, or where we are taking some our buying Japanese capabilities or bring their capabilities into a Japan-like market, we believe that we can see some revision of rates or different kind of contracts or engagement that we can bring in and so on. So we believe that there are sufficient areas where we can target without disrupting the current business and so on. So earlier first 2 years, we were very conscious about trying to grow as well as trying to have better margins. So in our first 2 years, we were doing, let's say, 18% margin, 17%, 19% and so on. But our own salespeople were getting confused. So we left one or two projects at that time, which were like significant higher, like INR 3 crore project, but it was not having that margin and it didn't fit our margin this thing. So around 2 years back, we made a conscious decision that till INR 100 crores or till INR 300 crores to a sizable, let's focus more on growth because even when I was saying like INR 100 crores to INR 500 crores in 5 years, 5 years even this today's sense as an IT or tech guy feels very long enough. So that's where we want to see, are we profitable? Are we cash positive? Are we making money? Are we trying to having our EBITDA in double digit? Can we bring our PAT in double digit? So we want to ensure that. Can we get more? Of course, we want. But our immediate focus still INR 300 crores, INR 500 crores is how we can at least grow faster. And then if we have like-minded companies, if we have like-minded skill set people and areas that we want to go in, why not?

Next we have Saket [indiscernible]...

The question -- the last booking as a partly the occupation last year on acquisition. We have a binding kind of a company costs something that sales for people, and we are one also?

Perfect. Good question. I mean probably local. Rather one of our idea to acquire these companies is also to get newer management skilled people or get a more better bandwidth. For example, experienced people, Japanese, we could get in Japan. Fidel, I would have gone out to hire such people, Japan though I'm in Japan for 30 years, I'm still looked upon as a foreign and so on. And imagine the flight of any new company that comes in Japan. Today, if you look at them, they also have a kind of decent good layer of strong people who are with them for 10-plus years as middle management who bring a lot of such capabilities. So one of our -- these kind of through acquisitions also, we are trying to get good skilled and middle kind of skill sets. This is one. The second, [Foreign Language] so many people would say, when you go to 500 or 300, I would want to consider you or I can join you or I want to take it to 1,000 and so on. So what we are realizing getting people also, it's easier than done. So there are two aspects as we are growing faster. So today, even in last 1 hour, I got some LinkedIn connect or something, which with people whom I never thought would try to connect to me. So as you rightly said, at one end, while we are trying to grow, we are also trying to ensure is because [Foreign Language] have always been cautious in accepting them, making them feel like home. So because many companies -- [indiscernible] companies when they come in, they try to restructure immediately, bring profitability as a priority and so on. So which creates very bad feeling friction and so on. I am comfortable they take it to their customers like in the last 3 months, it's an amazing growth out there. So we are creating that bandwidth and that bandwidth will also come when people have that perception that Fidel is not a small [indiscernible] company. [Foreign Language]. That's a good way to see people. So I think rather we should be able to attract capabilities now while inheriting some in-house capabilities through these acquisitions, yes.

[Foreign Language] acquiring this company, this new company which we acquired now the risk is what I sometimes is that when we acquire new companies, the company may have some. Because this company has a very low margin, like if we look for IT companies, even bad companies in India have 10%, 12% net margin, but here the margin is hardly 3%, 4%. So the work that the company is doing doesn't look very like something niche or that kind of work. And now when we're acquiring such companies, are there risk of any kind of opposition coming out of the company like the profit is not very, very good. Ultimately, just we're seeing INR 8 crore profit, but maybe there are some issues with that. So how we safeguard that point that the company is a well-managed company. Do we have any connect with the company also?

So again, thanks a lot. Again, [indiscernible], we did all this third-party due diligence and -- but -- so when we met there a few team members, understood their business, actually looked at the case studies that they are working with different customers. We believe that in terms of India business, again, India pricing, and we all know Malaysia is still an ASEAN market where they're competing with Myanmar, Bangladesh, Cambodia and this kind of. So I understand that's [indiscernible]. At the same time, when we look at extremely technocrat people, well managed, 0 debt, no handy panty in finances, running for almost 25-plus years, very good references from customers. So when we look at that, it's just a question of they were running the company in a certain way, which they are continue at INR 200 crores, they are doing, let's say, INR 10 crores, INR 11 crores of EBITDA, 0 debt. So their PBT is almost same. PAT around INR 8 crores, INR 9 crores, we are getting that at INR 36 crores, INR 38 crores. We thought that looking at their current business at 3 to 5 years of contract duration, long-term contracts, we believe that there is no willful -- or any kind of tech can always bring disruption. Certain areas, we can -- as I said, we are trying to grow into high-end areas, cybersecurity kind of areas. We are trying to go into Japan. We are trying to take them into our customers. We are going to their customers with, say, different other options that they never had, like the [indiscernible], for example, data analytics or we also are in capital markets. Recently, we had -- we got a project from a capital markets firm for asset building asset management software, developing AI, using AI and so on. So these kind of capabilities we can take to their [ BFSI ] customers and so on. So we believe that there is always to our extent, we have checked out -- we believe that we are very comfortable that from a tech perspective, from a customer perspective, we will be able to better the scenario.

Do you think that they have so they may have not been able to ask for price increases that much. So now you see that when we take over the company, do we have a position that we can go for some price increases in the contract value and all?

So certain customers...

As I said, meaning, for example, they have a customer from 2004 or '05 but they want support. But for newer systems, they are trying to, for example, giving some better rates, for example. So but the Singapore and Malaysia customers where we want to focus more because of our Japan connection, I think there we can play a significant role. We are also seeing that Singapore, because of high -- it's getting expensive, some of these companies are trying to move their IT infrastructure to Malaysia. So while migrating that, a lot of new projects will be created where irrespective of earlier rates, these would be seen as project work again. So I think there, again, we see some opportunities out there. So coming there -- so in Dubai, where they have some business, which is slowly growing and they already have certain POs for next 1, 1.5 years. Again, these are better margins. So today, it looks like [Foreign Language]. But as I said, when we look at the opportunity size and their customers and seriously meaning -- if I go to, let's say -- so recently, in August, we got invest -- sorry, we got a vendor code for a big -- one of the leading chip companies in the world. You might know, I cannot name it, but getting there almost took 1 year. And we were just close to get the project manager, he wanted to have business in center in Philippines, not in India. And just, but getting vendor code that takes a lot of time. So getting a direct route into 60, 70-plus enterprise customers, [ BFSI ] is huge, huge.

Yes. Just to add to what Sunil San has been trying to communicate. Saket, I think we have got a base of now this new set of customers. We certainly have existing relationships through Softeners. Now getting access to such customers across three different geographies and then now connecting with them with value-added services coming from Fidel Soft, I think we will be able to get better deals as we progress on integration. So my expectation from this deal would be to strengthen our these relationships, continue to hold on to the existing stream of revenues and then focus on value-added services to drive the margin improvement. So it will be 2 or 3 tier structure with the set of customers, and it will take a little time, but I think that is going to be the strategy.