Birlasoft Limited (BSOFT) Earnings Call Transcript

Yes. So Priyank, let me try and give even more clarity. The deal that got moved from Q4 to Q1, we signed. That's a part of our $107 million. There are two deals that moved from Q2 to Q3, which when I say moved, I don't mean the decision has moved. The decision had already happened. The signing of the paper did not happen. As a result, we couldn't count it in Q2. We are going to count it in Q3. Now the other point that I, and those deals, like I was, I think, telling Dipesh, that those two deals put together would have been about in that range, which would have helped us to get to that $165 million in Q2, but it didn't because those deals moved. And again, just for clarity, Priyank, those deals are committed. It's only the signing of the paper did not happen, right? So it's not that the deal moved. The deal is already done. Now as far as the $850 million for the year is concerned, that's our endeavor. That's not our commitment. If you remember, even in the last quarter, we had said that our endeavor will be to maximize order book, and that is what we are at. Now whether we end up at $800 million, $850 million, I can't say today. But our endeavor would be to deliver higher order book than what we delivered in FY '25.

Got it. So the two deals worth of, say, $60 million, $65 million has shifted to Q3. What would be, say, a Q3 normalized run rate instead of, I mean, I may take a note of the $65 million shifting to Q3. The Q3 order book should be beyond the $65 million, right, which has been shifted. So what would be that mix that we would be targeting?

So I can't give you an exact number, Priyank. It's very hard to give a number because order book, unlike revenue, revenue is certain. Order book, if a customer comes in, commits a deal to me and the sign of the paper gets moved from, let's say, one quarter to the next quarter or one month to the next month, it's very hard to commit an order book, which is why my request Priyank, is to look at order book from a year-to-date perspective. So your point is right. I mean, though my $60 million got shifted to Q3, year-to-date, actual number is only $247 million. Now the entire management team focus is to not only sign that $60 million, plus also to deliver much more order book and drive more pipeline. Now how much exact signings will happen in Q3? Hard for me to comment.

No problem. Let me refocus the conversation to the large organizational changes that we were trying to do. I think what we see the update is the new Americas CEO also getting onboarded. Are there more changes pending at your end to build a sustainable organization that you already where in sight of it. Also then also if the new Americas CEO Mr. Komal, would he be there on the call? So we would like to hear his immediate target goals and the strategy around the business.

Yes. So Priyank, look, Komal has just joined about a month ago. You must give him a little bit of time to settle down and then definitely, he will be talking to all of you. But just give him some amount of time to settle down, get a hang of the organization first before you get to meet with him. That is point number one. Point number two, we now have a stable organization. But Priyank, I've always said this that the organization structure is stable and people are stable. However, we will drive performance metrics. So we may change people due to nonperformance that we will continue to do. If people don't perform, we will get new leaders in that position. But the structure, the overall structure is stable. The majority of our leadership is stable. But some of the leaders who don't perform, we will move and get new leaders in.

One last question on the business mix and the capabilities that we foresee, 1/3 which is nearly ERP driven with the Manufacturing sector, you find a requirement of more capabilities for you to bid in the wider basket of deals that are coming through? Or within the available capabilities, do you think that even on a two-year, three-year basis, we are ready for more than $1 billion of kind of an order book accretion.

Yes. So Priyank, that's our endeavor. From a capability perspective, we've invested a lot on our capability. Even on the ERP side, we are continuously investing, including leadership, right? And capability is what capability is the ability to use the work that we are currently doing and take it to other clients because we've got great capability when it comes to JDE, when it comes to Oracle, when it comes to SAP. SAP probably not as much. Maybe we need to invest more on the SAP side. But on JDE, I mean, just to give you some statistics, over the last decade, we've done 240 JDE implementations, right? So we know that field extremely well. The question is only to kind of take it to larger and larger customer base. And like I said, I think to Vibhor, that once the cycle changes, right now, the cycle is with large spenders. And when the cycle changes and comes to the mid-market, we'll be ready to capture it. We are also investing in our data and digital business significantly. We've created, over the last three years, we've invested a lot more money to create our own Agentic AI platform, which is Cogito. On the basis of that platform, we've won a couple of deals. In fact, some of the deals I talked about that got committed to us, but the signing is going to happen later is basis on our Agentic AI platform. So I'm feeling very confident that we have the capability. Of course, we need to invest in more capability, which is an ongoing activity. But I don't think capability will, is the reason for us not growing. I think the reason for us not growing is not having enough pipeline and not being able to convert fast enough. That is what the management team is focused on.

No doubt, sir, best wishes. Our wishes are always with the management team, one. Two feedback, one which was shared last quarter also on the capital allocation in case. In case we are not hunting for any, or I would reframe this. In case we are not; inorganic acquisition is not our top priority, maybe returning back the capital and improving the return ratios via buyback would be a great thing to think about the minority wealth creation. And that's first feedback, and I'm sharing it again. And the second one, a lot of questions around the tax provisioning, right? The provisioning have gone up 60% higher Y-o-Y versus the cash flow doesn't reflect that. And it's given a material financial impact. It's a request that as a good corporate governance practice, we must have a separate filing done explaining the background of this increased with whatever the case example and the better clarity that can be documented itself would be helpful. So that’s all. Thank you for the opportunity.

We'll take our next question from the line of Sandeep Shah from Equirus Securities.

Angan, just one strategic question. If I look at last six to seven quarters, there has been a decline in the revenues or flattish, except for one quarter, we have done well. So in this transition where leakage could have been an issue, is it you believe the current portfolio has now become more defensive, more sticky, more annuity? If you can share the number in terms of still the discretionary or a project-based portfolio versus defensive, annuity, sticky kind of a portfolio. 

So Sandeep, I will give you my view, but here is where I would ask Chandru to also give his view as well. So first of all, Sandeep, you're right. Over the last three quarters, we've degrown. And if you look at the last six quarters, barring maybe two quarters, four quarters over the last eight quarters, we have degrown. Let me say it that way. But four quarters, we grew and four quarters, we have not grown. I believe, and at least that's what even Chandru and I and the rest of the management team, we believe that we are now at the bottom of the pyramid. This quarter, at least we have at stable revenues.  Going forward, I think we can continue to grow. We'll be back on our growth path. Like I said, Q3, we will grow. Q4, we will grow. Q1, a little too early to say, depending upon how much orders I close. On the second question, our endeavor is to move our revenue from a quality of revenue perspective, right? And we are doing a lot of work. In fact, some of the new deals that we are winning are all outcome-based deals, which is a very positive because that also makes those engagements very, very sticky from our perspective.  I personally believe that our business is much more stickier now. And going forward, the kind of deals we want to pursue, it will become even more stickier. We do not want to do staff on deals anymore. We want to deliver outcome-based deals, right? So that is what we want to do. But I'll ask Chandru to give you specifics in terms of numbers, if you will, to the tune that as much as we can share. Chandru, over to you. 

Yes. As you said, Angan, the endeavor clearly for us is to get to continuously improve our quality of revenue with more and more annuity deals on the one hand and outcome-based deals on the other where we're really doing cutting-edge work for our clients, right? So my current understanding of the percentages here, we would have about 65% to 70% roughly on annuity plus, annuity deals plus some of the long-term deals and then the project-based would be in 30%, 35% range. So that's the number that we have. Annuity includes our long-term deals which we sign three year, five year, the one-year plus deals, all of these constitute the annuity in my book. And then, of course, the project-based. So it's at a high level, 65-35. 

Okay. And just a related question, if I look at ERP around almost 14, 16 quarters back, it used to be 37%. It is closer to 30%. Can you share a similar metrics here what within ERP is still implementation project-based business versus the maintenance or upgrade kind of a business? 

Yes. So let me take that question, Sandeep. So currently, if you look at all our ERP business, it is not a staff of business. By nature, ERP is all project-based. We deliver a project. And after we deliver a project, we do the maintenance, right? So today, if you look at it, and it all depends upon which business are you looking at. If you look at JDE, JDE is all implementation, right? It is all implementation and post implementation support. So technically, it is, or it may be not long term, but it is still sticky because once you implement, you understand the systems of the client, and it is not staff formed. It is more managed services, if you will, may not be outcome, but managed services, if you will.  But if you look at SAP for us, SAP is it's more about doing implementation, which are very smaller deals and then doing support, which is probably a larger portion of our SAP business. So it really depends upon what you're talking about. But overall, as an ERP business, right, it is a high-margin business. I mean if you dissect or if you see it is a high-margin business, it is project-based business. And there is a lot of opportunity in my mind to work with the clients between the $2 billion to $10 billion range, which are more the mid-tier clients, where we can come in when the cycle turns, right, and do a lot of work both with SAP as well as Oracle, both on the JV side as well as on the Oracle Fusion side. 

Okay. Okay. And just in terms of after Komal joining, what would be the key leadership team's agenda? Is it to create more aggression within sales team? Or is it more to fill the gaps in the offering to increase our addressable market? 

So Sandeep, we are very clear about that. Our, not only Komal, whether it is Komal, whether it's Chandru, me, Manju, our Chief Operating Officer, whoever, everybody's job is now to be very aggressive in the market and get growth. We have to get growth back. Our biggest problem is our growth. Rest of the organization, thanks to everything that Chandru has done, we are stable. Our cost base is coming into control, which you have seen through margin improvement, right? Our cash flows are great. Everything is good. The only thing that we need is aggressive sales growth. So Komal, of course, comes in with a lot of aggression in his earlier company. He spent 28 years with a Tier 1 company, and he's demonstrated great success. So not only Komal, but all of us will be sharply focused on aggressive sales and growth. 

Okay. Okay. And, Chandru sir, if I look at the rupee-dollar continues at current levels, which is INR 88.2 which has been the realized rupee for Q2, is it fair to assume closer to around 14.5% to 15% EBITDA margin is a maintainable assuming rupee remains where it is? 

So like I said, Sandeep, 13.5% to 14% is where I see our EBITDA levels at this time, right? I think 14% and improving from there would be a good aspiration to go with, but the base would be 14%. So short answer to your question, a sustainable number is 14% at this time. 

Okay. And sir, last question, Angan, in terms of, if I look at the top 20 clients, top 6 to 10 has been seeing a consistent decline. Is there an effort to change the mix of the top 20 clients as well? And if yes, how you are planning to do so? 

Yes. So Sandeep, our top 20 clients in a cluster have actually grown, right? Our top 20 clients, if you look at that cluster. Now within the cluster, you're right, 7 or 8 accounts have not grown, which are predominantly Manufacturing accounts. But outside of Manufacturing accounts, whether they're LSS, financial services, ENU accounts have all grown, right, in the top 20 bucket. So clearly, there is a push to revise the Manufacturing set of accounts, right? Now with Komal coming in, in the U.S. with all of us as well as our rest of the world business, which, by the way, we have won some deals, and you will see that reflect in growth in Q3, our entire endeavor would be to first reselect the Manufacturing business.  And if we do that, automatically, our cohort of not only top 20, but even the next 16 will see good growth. But we have to really get into the details and it has to be an account-based strategy. So look, we have got good clients, Sandeep. We've got great clients. Our clients are doing reasonably well financially. And we've got very good names whom we have served for over 10, 15 years. So no reason we can't get growth back. We have to get that focus and which is what as a management team, we all commit to do. 

Next question is from the line of Abhishek Shindadkar from Incred Capital.

Sir, just two questions. First, I presume that you may have reprioritized the workforce towards freshers, given that we have let go some of the business, our utilization has dropped, the employee count is up. But despite all of this, why would our employee expense absolute number has gone up? That's first question. Second, what could be the benefit to the margins because of letting go the low-margin business? And the third, Chandru sir, highlighted that our project nature of the business could be in that 35%, 40% range. If I recollect, this number is similar to maybe FY '22. So what has changed in the business dramatically that we are back to almost three years of what we were doing? So any answers to that would be helpful.

Yes. Chandru, would you want to take the first part of the question?

Yes. I'll take the first two questions, right? One was reprioritizing workforce towards freshers and the employee count and why has the employee expenses increased, right? So the answer to that really is that we've had, one is there's a mix that you're looking at in terms of the kind of employees that you take in based on the kind of work that we do. So some of this reflects the, I would say, the improvement or the enhancement in the kind of work that we do. That's one. But that's a small component, right? There are other items. Again, there were some benefit that we received in the first quarter based on our performance in FY '25, the payout on variable incentives and so on and so forth. So there were some correction reversal onetime benefits in the first quarter that we did not get in the second. So that was the second point. Third, there was a very marginal increase in headcount. So it's a point in time statement. And that really doesn't significantly move the needle on the employee cost. The second one you had asked about the benefit that we received on account of tail account rationalization, and that's the point that I made in my opening commentary. So I would say as part of our effort to improve margin we did some of the pruning and about 100 basis points came from not just the pruning, but also the fact that we took the time and the effort, therefore, to focus on, one, some of our higher-margin accounts, two some of our larger accounts where we were able to squeeze better margin through operational interventions, right? So that's really how we do it. So it's not just the tail account itself that is giving us the improvement. It's also the bandwidth released that helps us do things differently and better on our other large accounts.

Yes. And Abhishek, from your question about our mix of business, which has not changed over the years, right? The difference though, the only difference I can tell is the fact that our Manufacturing business has taken a massive hit and the ERP business has taken a massive hit. Though while the mix of the business has not changed because one vertical has taken a hit, whereas all the other verticals have supported the business while this has taken a hit, that has caused the issue that we have had on margins earlier. But now like Chandru has explained that we have taken some very drastic calls. We've taken some bold decisions. So now like I said earlier also, we are very comfortable with our cost plan. Of course, we've got to do a lot more on cost as well. But I think our bigger priority as a firm is to drive pipeline and growth. If we can get the pipeline going, order book going and eventually revenue growth going, then the margins can easily be sustainable.

Just two follow-ups to the answers that you said. So Chandru sir, just to clarify, the one-off was 150 bps. FX was 100 bps and then the let go of low-margin business, the number that you mentioned should have been captured in this FX plus those one-offs or in the 150 bps or in the 100 bps, just to clarify that. And the other follow-up is, sir, again, sorry to harp on this, but the presumption is that SAP business would have been project nature. That is not contributing. The mix is away from SAP, Oracle ERP business. And despite that, the mix of business is more projects. So I'm just trying to understand has anything from a strategy perspective changed? And probably what could be the interventions that Mr. Jain and you could take to kind of move this to a more annuity nature of business?

Abhishek, let me take the first part. You're talking about the improvement on account of the tail account rationalization, I said 100 bps. So there are three components, right? So there is 100 basis points that was on account of the 100 basis points that was on account of the exchange delta about 150 bps on account of one-off, right? And net of that, the 16% would have come down to 13.5%, right? And there is still an upside between the 12.4% in Q1 and the 13.5% in Q2. I was trying to explain that delta of 110 bps, right? I'm saying out of that, the operational efficiencies that we drive on two accounts. One is working on the large deals, where we get so much more focus because we are trying to, we've been working on the tail account rationalization for some time as you know. And this will be a continuous exercise. It's a spring cleaning that we continue to do. As we do that, there will be some bandwidth released on account of that, which will help us focus on the larger and more strategic accounts and what we call the growth accounts. Two, the tail accounts itself, which are not significantly profit accretive, we get rid of them. There are tail accounts which will grow. So those are part of our growth accounts that will continue. There are these tail accounts that are neither growing nor are giving us the, I would say, the benchmark profitability that we're looking at, and those are the ones that we clean up. Both put together is the 100 basis points I'm talking about as part of the overall improvement and which is why I'm saying that's a sustainable component and the full impact of some of the efforts that we've made will start showing Q3 onwards, which is why I'm confident of 14% at a steady-state level is an achievable and expected EBITDA to be.

Okay. And Abhishek, let me answer your intervention question, right? So one is we keep saying ERP has not done well, which is a given. So there are multiple interventions we are doing on the ERP business. Some of it, we don't have enough time to discuss. There are a lot of interventions that we are doing. But the bigger issue is that we also have a very large digital data business now, which is almost $300 million, and that is growing. We are investing in that business also, and that will grow. And plus now we have a sustainable infrastructure business, which is outside of the pass-throughs. As some of you have noted, we have got out of the pass-throughs. And even then the infrastructure business will continue to grow. But the larger point being that our top 24 accounts, the next 16 accounts and then the next set of 50-odd accounts that we have, which are good solid names, we need to get into those accounts, and we should mine those accounts and get growth back. And that will be Komal and not only Komal, but Komal and the entire management team's responsibility. 

We'll take our next question from the line of Ayush from Dymon Asia.

So a couple of questions on 3Q growth. So you have already alluded that 3Q and 4Q would be a [better] quarter for us. But at the same time, you said that BFSI would be kind of flattish and Manufacturing would take a couple of quarters. So what is leading in the other two verticals for us to show the confidence in terms of growth from the Energy and Life Sciences? That's the first thing. And the second thing that I have observed is the T&M part of our business has increased sharply from almost like 40% to almost 51% in just a quarter of time. But at the same time, we are maintaining that we would be kind of focusing towards more of outcome-based deals. So is it kind of a one-off that one should be treating? Or is it like the steady-state thing that T&M would gradually decline from 50% or maybe it would stay at these current levels and we can see this thing as a normal thing going forward? So these are the two questions. 

Yes. So Ayush, I said BFSI will be a flattish quarter in Q3 alone because obviously, there are furloughs in BFSI. Our other accounts don't see furloughs, which is why in one quarter, we would see that little bit of bump in the road. But Q4, again, BFSI will grow. So that is clarification number one. The reason, like I said, we are getting the confidence is because of two. One is our other verticals, right, whether it is Life Sciences vertical, whether it is Energy Utilities vertical, we have a small Technology vertical business, all of that is growing. We are also seeing good growth in Europe, thanks to some of the deals that we closed in Q4, where transition is over and it's going to come back. Manufacturing will continue to be a drag. It will continue to be a drag for Q3 and Q4, but all the others will overcompensate, which is why we feel that we can get positive growth. Second question of yours, Ayush, is in terms of T&M. T&M, you should look at it more as a commercial model than anything else, right? I feel our endeavor will be to reduce, well, I will not call it T&M, commercial model, let us leave it behind. But our staff of business, we want to reduce. Now even in a managed capacity, we may bill a client on a T&M basis, but they may not be T&M businesses. They may be managed capacity or what have you, right?  Our endeavor, like Chandru said earlier in his commentary, and I also alluded to that in my commentary, our endeavor will be to go, going forward, all the deals that we do will be either managed services or outcome-based or managed capacity. We are staying -- consciously, we will stay away. And I repeat, we will stay away from staff of business, where we are just putting bodies. We will stay away from that business. 

To what you said, Ayush, I may, just to add to what Angan said, the time material as a commercial construct based on the construct that we have with the customers and a lot of the new age deals that we do, continuing to do the outcome-based deals, the AI-led deals and so on, the commercial constructs are certainly different from what we had in the past. And to your question on whether this is one-off, the answer is no. And this is sustainable. It could hover around this percentage that we talked about, roughly 50-50. And that's where it is at this time and will continue for some time to come. 

Great. Just a follow-up on the previous answer that when we say that Manufacturing would be a drag, so it would be great if you can just explain us in terms of qualitative terms maybe, not in the numeric terms that this the kind of a degrowth that we have seen in 1H or maybe like 1Q or 2Q, the similar trend can one expect? Or is it now that trend should start favoring us towards the end of 4Q? 

Yes. So Ayush, like I said that we are making some structural changes in Manufacturing business. Some of it, I can't talk about it because those are internal to the company. And some of it probably needs a more deeper explanation. So, which is why I said let Komal settle down. When Komal gets a complete handle on the business, he can allude this strategy. But to answer your specific question, I see softness in Manufacturing in 3Q as well as in 4Q. Next year onwards, even Manufacturing will get back to growth. But the other verticals will overcompensate for the Manufacturing business as we see it in 3Q and 4Q. 

The next question is from the line of Dipesh Mehta from Emkay Global.

My question has been answered.

We'll take our next question from the line of Sandeep Shah from Equirus Securities. 

Sir, just one question in terms of, you also said that TCV wins would be better in 3Q and 4Q, both on a Q-on-Q or that is only a comment for the revenue growth? 

No. So revenue, we feel, and revenue, again, we will, we can't obviously give guidance. Like I said, if the furloughs remain at the current levels as we know, which is equivalent to the last year, Q3, we definitely see a Q-o-Q revenue growth. Q4 a little too early to comment, but we feel structurally, our direction is that even Q4, we will deliver quarter-on-quarter growth, which means our revenue for H2 will be better than H1. That's comment number one. On TCV, I said please measure us on a year basis, right? Our endeavor is to deliver higher TCV than what we delivered in FY '25. That's a given. FY '25, whatever we deliver, our endeavor will be to deliver a higher TCV.  But the comment that I had also made is our endeavor is to try and take the TCV past that INR 800 million closer to INR 850 million. But I don't know whether we'll achieve that or not because that is our internal aspiration. I may not achieve that. I may end up at INR 800 million or INR 790 million or whatever, I don't know that yet. But our endeavor will be to get there. So today, we are taking baby steps at a time. We are building our pipeline. We are trying to increase our conversion ratio. We are trying to move work from rather than staff off kind of work to more managed services, managed outcome-based model work. So most of the deals that we are now contesting are towards that region. So that's the overall comment, Dipesh. Sorry, Sandeep.

Yes. And sir, last thing on time and material, a follow-up question. When it goes up from 39% to 51%, will it be a hurdle for higher impact through furlough because those businesses are being stopped versus fixed price project businesses continue even if client ask for a furlough? 

Yes. So Sandeep, like Chandru also mentioned, that is a commercial model. We don't believe that that commercial model will impact our growth because of furlough. And by the way, we are in the month of November. We already have a fair idea in terms of what will be the furlough that we will go with. Currently, I tell you it is in the same levels as last year. But again, we don't know. Anything can happen. If it changes, we will come back to you. But currently, we don't believe furloughs will be any different than what it is last year, whether it's T&M or whatever. 

As there are no further questions from the participants, I now hand the conference over to Mr. Angan Guha, CEO and Managing Director, Birlasoft Limited, for closing comments. Over to you, sir. 

Yes. Thank you very much. So first of all, I would like to thank all of you once again for joining us on this call today and for your insightful questions. I appreciate your interest in Birlasoft. Our fundamentals, like I said earlier, and Chandru alluded to as well, remain very solid. It's very strong. We now have a very reinforced team. We've added a lot of leadership to our team. who can take us to the next phase of our growth journey. Despite the challenges that our industry is facing, we expect the second half of FY '26 to be operationally better than the first half. I look forward to speaking with you again next quarter. And in the meanwhile, please feel free to reach out to Abhinandan for any clarification or feedback. Thank you once again, and have a good evening, good morning, wherever you are. 

Thank you. On behalf of Birlasoft, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.