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Date - 17th October, 2006
Moderator: Good afternoon ladies and gentlemen, I am Johnson, moderator for this conference. Welcome to the conference call of Zensar Technologies Limited. We have with us today Dr. Ganesh Natarajan, Deputy Chairman and Managing Director, Mr. Parmod Bhalla, Chief Operating Officer, Mr. S. Balasubramaniam, VP and Chief Financial Officer and Mrs. Vaijayanti Deshpande, AVP and Financial Controller. At this moment, all participants are in listen-only mode. Later we will conduct a question and answer session. At that time, if you have a question, please press * and 1 on your telephone keypad. Please note this conference is recorded. I would now like to hand over the conference to Dr. Natarajan.
Ganesh Natarajan: Good afternoon to all of you, and thank you for joining this call. I will just do this in two parts; give you a quick summary of, where we are, from operations and strategy point of view, and also walk you through the numbers for this quarter, and what’s our outlook for the year, and then I think we will be happy to answer any questions you have.
In terms of strategy, I think we are bang on track in terms of what we set out to do this year, because as most of you are aware, we said that, we are looking at a strategy, which will move us into various spaces. In fact IT-BPO integration was one of our priorities for this year, in which now we have 4 clients already, where we are process consultants, and actually working with them on building application, supporting application and running their process, which is our healthy sign.
I think we are also being successful in our move towards being true integrators, because there are quite of few our existing clients as well as newer clients, where we are now moving from being application developers to providing full testing services. We just won a very large testing contract for one our existing incumbent clients. We see that as a sign where, not only for the ERP implementation, but all the peripheral applications around that where we are chosen as partners, process the application, as well as provide the business integration, and the business intelligence services, and testing services. And this is the strategy that is working for us, not just in the US, which is one of our main markets, but also within UK in Holland. We just signed a deal with one of the large German Automobile company to be their testing partner, also of course in Asia-Pac where we are now expanding our reach with Landmark Stores, in Dubai where we are now their oracle retail implementation partner, and also in other parts of the world. So I think from a strategic point of view what we set out to do even in January 2005 is working extremely well. You already see the impact of that in our results. If you compare with our early beginning in the last year on the new strategy to where we are today there is a very significant growth, and more important in terms of new business because we have added 14 client customers this quarter, again very similar to the last 2, or 3 quarters. A lot of these customers are for new businesses like testing, BI etc. And in terms overall numbers revenue has grown 50% on a year-on-year basis, also 8% on the sequential quarter basis.
We have also managed to keep our OPEX to fairly manageable proportions, which is the reason why you see the improvement in profitability. PBT has grown160% over the last year, PAT 175% over the last year. You are seeing a sequential drop in PAT 18% on quarter-to-quarter basis that’s primarily because of two reasons. One is, we have taken about a Rs. 3.2 crores provision for some delayed debtors, and in fact the bulk of that is one client. As I mentioned many of you before, we do a very prestigious project for a Department of the Government of Thailand. A lot of it was actually delivered in March and April and unfortunately some of that is still pending testing. I don’t need to explain the problems of the Government of Thailand. They had various issues over the last five months, but the good news is today it’s completely done. In fact the testing is complete and we have been guaranteed the payments in November and December. But as part of our organization policy anything that exceeds 180 days we immediately provide for. So I think out of that 3 crores we have provided for this quarter at least 2 crores will definitely get collected, so that adds back to the profits. Another thing we have done of course is a provision for currency option and I will let Bala explain that to you. There is a 2.76 crores provision that we have taken as abundant caution, for some option that we have entered into. Bala I want you to explain that.
S. Balasubramaniam: As part of our overall risk strategy of hedging our foreign currency exposure, we have entered into certain option contracts, and while the Accounting Standard as such in India, AS 11, is silent on how these have to be accounted for. We have taken a view that we will follow IAS 39, and do mark-to-market provision to the P&L even though the accounting standards per se do not require us to do so. We provided for the notional loss as matter of abundant caution as part of overall Corporate Governance Requirements. Some companies do, some companies don’t, and we are in that category, which does.
Ganesh Natarajan: So, there were two reasons as I mentioned as about so nearly 5.5 crores, which is over in above our operating profits, and hence in terms of actual operation profitability is as good as it was last quarter. And if you look at the half year, as I mentioned, we had a 50-crore PAT as our guidance for this year, and we are already 26 crores even with all these provisions at the end of the half year, but fairly comfortable that we will meet and exceed the 50-crore PAT guidance.
At this stage revenue of 550 crores look very easily achievable. So we should definitely exceed that. So I think we are in good shape in terms of profitability itself. As I mentioned to some of you, our internal goal is to increase PAT, I mean get into double digits which will exceed 10%, and this quarter is obviously 8% because of the provisions, but it looks that we are on the right track. So I think moving forward our investments are going to be in both geographies as well as some new areas that we have strengthening. We have just added our consulting business. We have hired a very senior person to head up the consulting practice. And he is integrating our various activities and collaboration management consulting, as well as usability, and there is a team coming through which are now doing, in fact, we already have a very prestigious client, that we have signed in Australia, which is actually helping them to do decide their enterprise architecture strategy. And I think you will see a lot more of these deals coming through as we go long both in domain consulting as well in architecture consulting so I think that’s beginning to happen.
Finally, as part of our geographic strategy we are now well in the way to implementing what we call as three-shore strategy. In fact I am just coming from UK where we inaugurated our Slough centre, which is not just our Europe Headquarters, but also where we will have 30 to 40 developers who are doing near-shore work. For instance, we have started a project with one of the Government Departments, which is going to be executed out of there. We have also finalized a plan to set out near-shore centre in Gdansk which is bordering both our markets in Finland and Germany, and we have a team out there hiring the first 30 people. We have a contract with the Government of Poland to actually pay for the training. So they will be trained over 3 months in India, and then sent back. So I expect the Gdansk centre to be up and running by January. Hyderabad is already up and running. We have a 500-seat centre coming up there. 200 odd seats already occupied and we expect to fill that. So I think we are expanding in Pune, setting up in Hyderabad expanding there, in China we have got new country Manager, who is a Chinese origin American citizen and she is leading the charge there. And with that and the near-shore coming up in Poland plus the operations that I have talked about offsite centre, I think we are in good shape. Because as an integrator we want to be seen not just as an Indian company with offices overseas, but actually people who can do work in that area, and our experience with Essilor in Dallas, which is an extremely well-managed business intelligence project in the US, and is now moving offshore is that we need to be able to execute work in any market where the customer chooses. So I think that’s really where we are and today we are in a position where we can offer a full range of services. The numbers I think are going in the right direction. So we are fairly confident about what the future holds. I think that’s basically what we have to say, but questions we are all here to answer, so I will stop here.
Question and Answer Session
Moderator: Thank you sir. Ladies and gentlemen we will now begin the question and answer session. If you have a question, please press * and 1 on your telephone keypad and wait for your turn to ask the question. If your question has been answered before your turn and you wish to with draw your request you may do so by pressing # key. Our first question comes from Mr. Hitesh Javeri of Edelweiss.
Hitesh Zaveri: Hi, Ganesh congratulations to the team on the numbers. I noticed that despite the provisions there is a significant rise in year-on-year basis. What concerns me however is the BPO part of the business. When will it contribute meaningfully to your bottom line numbers?
Ganesh Natarajan: Actually it is a good question and in fact just to share one statistic with you, in the last month, which is the month of September, BPO had revenue of over 2 crores, I think 2.08 crores and made up operating profit of 25 lakhs. So if you really look at that on an operating basis it’s already over 10% in terms of profitability. We have taken a provision, one of the provisions I talked about is a 40-lakh provision for a Canadian client, who had a cash flow problem and hence the outstanding went up. It is already being paid as we speak. So if you really look at it BPO has maintained its second quarter profitability and in spite of the 40-lakh provision and if you add that back, which is getting collected this quarter, I think we are in good shape. However, Hitesh thanks for asking that question because we are now at a stage where we have got BPO a reasonable profitability. But now we are looking at what to invest in the business, and in fact in BPO we have decided that we definitely want to continue this strategy of integrated process consultants. So that kind of work we are doing for Home depot, the kind of work we are doing for Landmark stores, Marks & Spencer are all real retail transaction processing work, and that’s something we want to continue. So transaction processing whether it’s in retail or in HR outsourcing, we already have all our licenses fully used for over 12 clients today doing HR back office and of course financial accounting back office where we have other customer coming in and that’s our focus area. We will continue to do some voice work because we cannot not-have-a-voice facility, but the idea is to focus in transaction process. I think you will see that it will not only meet but exceed all our profitability criteria by the end of this financial year.
Hitesh Zaveri: And sir positive trend I noted was about the active clients increasing now at 174 compared to about 94 a year ago. However, at the same time the top 10 contribution has also gone up. The top 10 has now gone for 70%. Sir, does it mean that the new clients that have come in, in the last 12 months or so apart from the other existing clients, that the growth there is very low?
Ganesh Natarajan: This is a good question. Two of our clients, which is Marks & Spencer and Cisco have actually continued to exceed the overall growth of the company, which is good news. I am just coming from meetings with both these clients. They are extremely happy with what they do with us in spite of the fact that we are in that client along with some of the biggest names nationally and internationally. So I think that’s a good sign. You will probably see by the end of the year because some of new clients are really scaling up this point, so you will probably find that the top 10 will again come back down, and I think that’s the trend. So I think there is no cause for concern here because these are all big blue-chip clients, but at the same time, yes I think many of these customers that we have signed over the last 18 month are for instance Euromax, which is the fully automated port in Holland, will contribute over a million to this year’s revenues. So there are at least 6 clients I can think of that we have signed last year that are approaching a million dollar revenue this year. They are all good clients with scaling potential across our horizontal practices and I think it’s a good sign.
Hitesh Javeri: I believe this issue will be important; I am going to repeat the same question. Put it differently, if you look at client No 11 to your client No. 50, how do you see them growing over next 12 to 18 months?
Ganesh Natarajan: I would say client 7 to client 19 or 20 we will see good growth and beyond that it is difficult to predict because some of these are new clients that we have added. I think only about 2 clients are scaling down, as I mentioned earlier Nomura has scaled down because their entire strategy is shifted to China. That obviously was a worry for us in the beginning of the year seeing that we had anticipated a lot of revenues from Nomura this year and that was not going to happen but more than compensated for that with the clients who are in the top 20 but not in the top 5 as we speak. I think apart from that and of course PONL, which is one of our top 10 clients two years back, has also scaled down completely because they got taken over by Maersk. But I think we have more than offset the loss of these clients by adding new revenues from various areas.
Hitesh Zaveri: I have more questions I will wait my turn for the next round.
Ganesh Natarajan: Sure thanks Hitesh.
Moderator: Our next question comes from Mr. Srivatsa of UTI Mutual Fund.
Srivatsa: Hi Ganesh, congratulations for a good set of numbers. I just want to know about the salary hikes. Have you given the salary hikes this quarter? Where do we stand as far as the hikes go?
Ganesh Natarajan: Salary hikes have been effective in this quarter. We do our appraisals in the first quarter. It is with effect from July 1st so that’s already been effected. It is an average salary hike of just under 15% and we have already seen that impacted into this quarter.
Srivatsa: Do you see any necessity for any out of turn hikes or have you done away with it far as the year as concerned?
Ganesh Natarajan: Normally, we have another appraisal point in January, which is half time increment point. More on exceptional basis and we normally keep 2-crore budget appraisal and that will continue to happen this year as well. You are right, it is a hot market and we have got a good record as far as the management level is concerned.
Srivatsa: Okay the second thing is I noticed is that your tax provision has consistently been on the higher side, much higher than the industry; it’s in the region of 20%. Is there any specific reason? Are you having some domestic revenues, or have you lost some exemption, or do you see it coming back to industrial levels?
Vaijayanti Deshpande: Actually in India we are completely in STP, so there is no tax. But our subsidiaries are making good profit; both UK as well as US are doing very well being the higher tax earners.
Srivatsa: But is there no scope of any to transfer pricing to minimize the tax outflow within the legal norms?
Vaijayanti Deshpande: We are doing all we can actually and in fact last year we had a visit from IRS and on transfer pricing, they gave us a clean chit.
Srivatsa: Okay and secondly in terms of billing rates we have had a lot of new clients entering and possibly a lot of clients who are there in the top 10 may not have been our clients 2, or 3 years back. So do you see any significant improvement in the billing rates or do you foresee any big improvement as and when the new clients scale up significantly in the next 3 to 4 quarters?
Ganesh Natarajan: Yeah, we do actually. In fact the good news is that even within our existing clients whose business we are getting like I mentioned one of our big clients, is at a better rates because it is a more evolved kind of practice. Brand addition is again in new practices like consulting is one of the reasons why you see the improvement in overall margins because of better billing rates as well. I think that will continue to happen. One or two clients where we do what we call cost-plus kind of model, which includes Fujitsu and one other American client, where you will probably find that billing the rates itself is something you cannot measure. In addition to billing rates on a cost basis, they also provide infrastructure and compensate in other ways. It sometimes becomes fallacious to calculate just billing rate. But I think overall if you look at the profitability of the business that we are executing….
Srivatsa: I mean if I look at your performance in the last 5 to 6 quarters you have done great deal of work as far as improving the margins are concerned. I would say we are inline with the mid-tier companies. Do you see any big improvements from these levels both at the gross margins and at the operating margins or would you be comfortable with these levels of margin?
Ganesh Natarajan: We are certainly not comfortable. In fact as I mentioned in the last quarter, our goal this year was to meet double digits and we are still hopeful of doing that. But over the next two years we plan to take that up to 12%, 12.5%. The idea is to continually to look for clients who can give us better realization as well as expanding the width and depth of what do in existing companies.
Srivatsa: Okay and how is this Fujitsu venture progressing in the current quarter?
Ganesh Natarajan: That’s more of an alliance in the sense that there are 4 clients, to mention a few names the UK Post office, Automobile Association of UK etc., and there are a couple of utilities also that we started work with, and all these are either existing Fujitsu clients or new Fujitsu accounts and have been demanding offshore, so that’s really what is happening.
Srivatsa: Okay is there any scope of moving this to some other geographies where Fujitsu is present or it’s only for the UK geography?
Ganesh Natarajan: Currently about 128 people who are billing in Fujitsu. I think as I mentioned in the earlier call, it will help us to move to 250 people in this account and the number of people who are doing work on Fujitsu I think it will exceed that by the end of this year. On the question of geographies, we are expanding our work with Fujitsu in Japan and Thailand. We have new business from Fujitsu in Finland. But again the goal is to keep Fujitsu-related business to less than 5% of our overall business.
Srivatsa: Okay and how is the Cisco relationship? You had mentioned about Cisco that it has exceeded the expectations, and if I see the top client also it has maintained its growth rate. So do you feel that this momentum will continue in the coming quarter or do you see some slow down?
Ganesh Natarajan: No, I think it will continue. There are a couple of projects I had mentioned in the last analyst call that we might see some slowdown in the third quarter, A couple of discrete projects that we were doing, which is one of the rule outs, have come to an end this quarter. We have signed a couple of large deals again within Cisco, which will compensate for that. So I would expect that here we are looking at 2 million plus from Cisco itself.
Srivatsa: And in terms of acquisition are you scanning any acquisition currently? Can you also explain what is the integration done with the acquisition, which you did last year?
Ganesh Natarajan: There were two acquisitions we did. One was of course mutual property acquisition from this company called Seacom, which is really a point of scale and has the symbol called Smartshop and that was fully integrated into our operation for retail vertical and are contributing a lot to currently our domestic business and eventually do overseas. The other company, which was the SAP shop that we have acquired, is doing extremely well. In fact yesterday we had a board meeting, where we presented it as outstanding acquisition to the management. I think the whole team has got integrated extremely well. We are working with them and getting them new business in Finland, it’s actually working with them in other parts of the world, including the US. So I think they have grown. In fact they were within 40 consultants when we acquired them. Today we have crossed 200 and doing extremely well, and I see SAP as a very complementary strategy to what we are doing in the market with Oracle. To answer your first question – where are we now in our new acquisition plan, we will have two plans for acquisition. One is tactical acquisition, which could be really geographic, because as we make our plans for Europe next year, we certainly want make a much bigger impact in the German-speaking and in the Benelux market place. So we are looking for possible small acquisitions of the OBT variety either in Holland or Germany or in both. On the other side we are looking for more strategic, one of the goals that we have kind of set along with our board, is to identify certain areas like – retail, where we are doing extremely well, like the Oracle space and business intelligence where we are doing very well. So we have given a mandate for a company in New York to help us to find companies in the size of 20 to 25 million, initial acquisition possibilities for Zensar. There is no particular calendar on that. It is over the next 6 to 9 months. So I think we may or may not do another acquisition this year, but both these are in lines with either our tactical gap-filling strategy or our organic-growth strategy for dominance in certain verticals or horizontals.
Srivatsa: Okay finally just a housekeeping question, how much as cash on hand as on September 30th?
Ganesh Natarajan: 62 crores are roughly what we have.
Srivatsa: Okay thank you.
Moderator: Thank you sir. Our next question comes from Mr. Ruchit Mehta of HSBC Asset Management.
Ruchit: Good morning sir, the first question is about the provision that you made of 3.2 crores, is it over and above the 2 crores provisioning done for the mark-to-market losses?
Ganesh Natarajan: Yes.
Ruchit: What is your outflow of CAPEX for the full year?
S. Balasubramaniam: Roughly about 40 crores.
Ruchit: Okay the previous question was that with 3.2 crores of provisioning in this quarter, was this over and above the 2 crores of FX mark-to-market losses?
Ganesh Natarajan: Yes, so that’s 2.76 crores for mark-to-market, but 3.2 crores is - we have a policy that any amount which is outstanding for more than 180 days, is provided for and then reversed back when it is collected. That’s what I was explaining - out of the 3.2 crores, roughly 2 crores is on two accounts. One is the Thailand account and other is the Canadian BPO company both of which have already paid. The delays were due to - in Thailand it was because of the Thailand Government issues, in the BPO Company it was because of some temporary cash flow issues they had. But we have a new payment plan with them which is already coming through. So both these will be fully collected in this quarter. The reason we provided for this - that’s our Board policy that any amount that is outstanding, we provide for it; so that’s 2 crores out of the 3.2, the others are small outstandings here and there which hopefully will get collected.
Ruchit: Okay basically just 6 odd crores of provisioning?
Ganesh Natarajan: Yes you are right just about 6 crores have come because of these two.
Ruchit: Sir, in the IT segment we saw a very good sequential growth in the business of about 15%, but the profitability was still a bit weak in that account. Was most of the write-offs in the ITS segment?
Ganesh Natarajan: Yes you are absolutely right. In fact this provision of 1.4 crores has been because of that, plus we took couple of write offs for Nomura because some work that they transferred to Japan, and we negotiated a deal with them, I think that’s the reason. ITS will still not have a very good year in the sense that we are now getting new traction from the US both in the product business and migration business, which is part of ITS. But this year we have 60 people whom we are investing in for building a method - we call it the Global Delivery Platform and one of our goals for the next one year is to work with both universities in UK, US and as well as with the small partners where we will really help them, because this is part of our investment in building what we call programmer-less software development environment. I think this year we will still be doing that; obviously we will keep it within manageable limits. But I think the real growth of ITS you will see is probably beyond February of 2008 when a lot of these clients that we are talking to start giving large business. So ITS is still going to be the weak area of Zensar during this year, but we factored that in both our guidance and bidding through this year.
Ruchit: Okay sir, real growth will only be coming from fiscal ’09 onwards, is that correct?
Ganesh Natarajan: Yeah, primarily the real growth in ITS will come from fiscal ’08 onwards.
Ruchit: Okay sir the salary hikes were effective July 1st?
Ganesh Natarajan: Yes, July 1st.
Ruchit: Okay thank you.
Moderator: Thank you sir. Our next question comes from Mr. Akshay Shah of Quest Investments.
Akshay: Good afternoon sir, just want to know that we have targeted revenue of 1000 crores by FY09. So how do you see your business contribution from each business at that time and how is the geographic spread you are looking at?
Ganesh Natarajan: We actually have a strategic conference coming up in November so I think either immediately after that or when we speak in January I can give you better inputs as to how it will happen.
Akshay: How much will come from an inorganic acquisition?
Ganesh Natarajan: What we do expect is that some portion of this may be about 20% of that will come through acquisition. As I mentioned earlier, we are looking at acquisition and definitely you can look at an acquisition of 20 to $25 million over the next six months to a year.
Akshay: Okay sir, how is the pricing pressure sir, can you elaborate on that, and are you expressing pricing pressure?
Ganesh Natarajan: There is no pricing pressure as such. I think we are being able to focus and we are able to explain our story in terms of higher value-added service. We are not seeing too much of price improvement when we get new project for higher services like we just signed up for testing and business intelligence for Cisco, which as I said was at a higher price than our normal application development business. There is no pricing pressure and they are coming at somewhat higher prices, and I think we will be able to sustain and improve over the next year.
Akshay: Okay and sir one more question, now this being a part of the RPG group which is a conglomerate, what is the group vision for this company, and their involvement in management can you just elaborate on that?
Ganesh Natarajan: The way we have structured is - the Chairman of our company is Mr. Harsh Goenka, we have 2 other Directors on the Board from RPG, Group Head of HR, as well as Group Head of Technology Business. We also have 2 shareholders from Fujitsu, one from Electra, External Directors, plus me on the Board. The way RPG manages its Company; I mean it’s a joint venture, so they are very supportive in terms of all the campus recruitments are done along with RPG, who do a lot of ISB, IIM recruitments jointly. But apart from that this company is entirely run and managed by the Management and my colleagues who are a part of the strategy account, that’s really how it works. And the vision for the group is, I think Mr. Goenka is very bullish on Zensar and I think he feeds the story to both the flexible mid cap players as well our innovation story. And over the last 5 years I have had fairly freehand in terms of flexing for growth in what you are seeing today what we did with BPO, made loses for 18 months – a very supportive Board, I think they really want to support the management team.
Akshay: Okay sir and sir out of this current year 550 crores kind of turnover, how much is predictable I mean everything is predictable or something is still uncertain?
Ganesh Natarajan: If you ask me to predict I will say about 545 crores is predictable. This is not orders in hand but based on absolutely visible revenues. We certainly expect this.
Akshay: Based on customer interaction?
Ganesh Natarajan: Absolutely.
Akshay: Okay and sir just now you said that you are building a team of 60 people in ITS initially for the Global Delivery Platform, so where do you see once FY08 takes up? Will this team be expanding exponentially or will it be more like a product company and not a big investment in the people?
Ganesh Natarajan: Exactly, your last sentence is absolutely right. We don’t plan to have a large investment in people, so the basic idea is; it is not a product company more a vertical of Framework Company – this whole solution blueprint framework. It’s a global delivery platform that we are trying to aggregate the entire development so that the analysis could be done in Poland, in Hyderabad and in China or even at the client site so and client themselves will have the front-end tools to model the application. Design will be done by us, programming will be semi-automated. The testing again can be done anywhere. So you are literally taking modular approach to sell, making so that you can build the work across, which is the ideal model of software development and one of the goal which I have publicly stated is that we don’t build any more campuses, and we will continue to grow the Pune Campus. We will really have more of architecting centers in the rest of India, as well as in places like Poland and China.
Akshay: Okay sir just last question within ITS you said that post FY07 everything will be fine, do you expect a similar kind of loss in the second half also, something more than that or less than that?
Ganesh Natarajan: Certainly it will be less than that to answer your question, and next year like you said BPO this will be profitable, ITS is definitely going to be profitable next year and you will see the trend in the last quarter. Next year we don’t expect any loses whatsoever in ITS.
Akshay: But it will come out with excellent colors only FY09 – ITS?
Ganesh Natarajan: FY08.
Akshay: You said in February, FY08 it will be really pick up?
Ganesh Natarajan: No, in February 2007. I don’t know if I said FY08, I am sorry about that. I am saying that by end of this last quarter you will find that any of the investment etc. that’s all being….
Akshay: So it will be visible in FY08?
Ganesh Natarajan: Very much so.
Akshay: Okay thank you sir.
Moderator: Our next question comes from Mr. Dipan Mehta of Dipan Mehta Shares.
Dipan: Yes sir congratulation on great result, I just want to understand that the provision doubtful debt you said was 3.4 crores or 2.4 crores?
Ganesh Natarajan: 3.2 crores.
Dipan: And there is absolutely no tax deduction for that particular transaction is that correct understanding?
Ganesh Natarajan: Yeah you are right; there is no tax deduction for that.
Dipan: Okay so therefore 3.2 you could easily add to 12.09 which has been done for the quarter, and therefore arrive at a line to line comparison what was done in the previous first quarter is that right?
Ganesh Natarajan: In fact I would add 3.2 and also 2.76, so it is really 5.2 because out of the 2 crores that we provided this quarter for this mark-to-market already as you can see that the rupee is strengthening against the dollar. So my expectation is by end up this quarter or definitely by end of this financial year, but it’s anybody’s guess and nobody can predict the currency, but the way the trends are I don’t think we will carried this loss beyond this quarter.
Dipan: And sir I also observed that your other income has gone up about 90 odd lakhs to about 2.45 crores, any explanations on that? Is that that forex gain over there still or it is just financial income?
Vaijayanti Deshpande: There is a forex gain and there is also income that we earn on our investments.
Dipan: How much is the forex gain over there?
Vaijayanti Deshpande: Forex gain on a half-yearly basis is about 1.9 crores.
Dipan: That would be, when you say 2.76 crores for you option loss, wouldn’t that kind of net off each other and for our understanding 60-70 lakhs kind of?
Vaijayanti Deshpande: While presenting it, we have shown that 1.9 in the other income and taken the 2.7 in expenses.
Dipan: But you were just discussing that the right way would be to add the 5 odd crores, then we should necessarily deduct even the 1.9 crores of other income or whatever comes from forex gain am I right?
Vaijayanti Deshpande: Yeah, except that 1.9 is on an half yearly basis and the 2.2 crores that we have taken are for the quarter.
Dipan: I get confused because on one hand you say 5.5, then you say 2 and then 3.4 it’s a bit confusing. Ideally we should have come out in the investor communication as to where we stand in terms of recurring profit.
Ganesh Natarajan: I think the confusion is there because you are netting off forex gain with potential anticipated loss. While the gain has already happened this loss was essentially an accounting treatment based on the rate that was prevailing on 30th September. If you really ask what the potential loss as of today is, of course it has to be again done on a mark-to-mark based on Black Scholes model, but my quick guess is this loss will perhaps come that about another crore and as the rupee keeps strengthening it will perhaps become a gain. The confusion is that you are trying to net off what has been realized with what is essentially a notional book loss, which is inline with IAS 39.
Dipan: And is this the practice that the company is going to follow in terms of using options to add this forex and get into all these accounting issues?
Ganesh Natarajan: You see it’ a hedge strategy. The fact is that we are incurring cost in rupees and earning in dollars. So we have to protect our forex inflows. One way of doing is through a combination of options and forwards. What has happened is because of this new accounting standard, it’s not yet been made mandatory, but you will see in most IT companies, they would have provided for this loss. All the major ones do, some of them give it as part of foot notes. And because of the volatility of the rupee as we go further and further into globalization I think this is one of the hedge strategies, that is available for risk cover
Dipan: Okay I just want you to throw some more light on the IT, the losses in the ITS division. I think you have done some clarification but if you could just elaborate little more as to what is your strategy for that business is going forward?
Ganesh Natarajan: Yeah okay that’s the good question. What we set out to do this year was, because we had developed this whole framework called solution blueprint which is actually there is in our web site, if you need more information we’d he happy if you could even spend some time in Pune to understand this. But as I mentioned earlier, what we are now implementing, and we have now 30 people who are just working on the technology and another 20 people who are doing experimental projects to kind of refine the model. It’s what we are doing for the government of Thailand, the one I mentioned is a full migration project which is really moving from old mainframe to open source, where we use a lot of these code-generation technology, because that is reverse engineering from old systems to what they called UML which is really the used cases, and the forward engineering, and a lot of this is done through technology. So what we are trying to do is, one to semi-automate the development process or the migration process, it also works for embedded systems, it also works for our product engineering group. But more important, we are trying to change the way the life cycle of the software development projects. That’s why I said at some stage we would be in a position where we can even go to a client. It’s not going to be a client of the type of Cisco and Mark & Spencer, who have their own development platform, but the traditional bugbear of the Indian industry, which is that you know most of us really chase the fortune thousand and the FTSE 500 client will go away because you will be able to go to a much smaller client, let’s say a $200-million company in the US, who traditionally you don’t go to because the cost of selling outweighs the profits of doing business. But you could actually install the front end of the Global Delivery Platform there, encourage them and give them the tools to do their own models, and build and code. So you are not really wasting time. They can actually even access us on the web. So we are actually building this completely new method of interacting with clients, capturing their requirements, generating their code and implementing systems. It is a little path breaking, it is taking time to explain this to clients, but I think they have our first few paid clients already in place in South Africa, what we are currently doing in one of the large insurance firms in the US etc. So this is why I said this is something that we wanted to invest in, we have complete Board sanctions to make this investments and like we did in BPO we will probably see the impact of all this in ‘07 or ‘08 as far as ITS is concerned.
Dipan: Are you trying to perhaps hint to us that may be in ‘07 or ‘08. you could see this business breaking even?
Ganesh Natarajan: Definitely, much better then break even. It is difficult for me at this point we haven’t done the numbers yet to predict whether it will be….Definitely break even or better is what we are expecting.
Dipan: So all these costs would be kind of in the nature of investments made to build the business is that the correct understanding?
Ganesh Natarajan: When IT gets created, we capitalize over a period of time. There are lots of experimentation that this group does. That’s why we call it the Innovative Technologies Solution technologies group. Obviously, the salaries of people are all written off in the same year so that’s how it works.
Dipan: Sir just 2 small quick questions, the debt as of 30th September would be how much and the CAPEX plan for the FY07?
Ganesh Natarajan: Sorry what was your first question?
Dipan: That debt as on 30th September 2006 sir?
S. Balasubramaniam: Debt remains static. We have not taken any further burrowing. We have a 15-crore debt which we have taken I think over year and a half back.
Dipan: And capital expenditure plan for the current fiscal?
Ganesh Natarajan: 40 crores that includes the next stage of the construction of the campus that we are embarking on plus some operational capex.
Dipan: Also sir, you know just a few minute ago, you were kind of reflecting on your strategy as far as these development centers are going and you thought more of architect centers I couldn’t clearly understand this, if you could kind of repeat what your is vision is as far as the employee and the growth, and employee and then development centers, although I think you are doing something different.
Ganesh Natarajan: If you look at our overall vision, if you look at let’s say 30% growth every year or above that, the goal is not to add more than 20% employees. So the idea is that you should not literally be matching every dollar of revenue by adding more employees. So 2 or 3 things why that will happen, one is of course moving up the value chain in terms of providing, as I said more domain consulting, more areas like business intelligence testing etc. The second is to use much more technology. So when I talked about let’s say Poland or even China being an architecting centre, the idea is that we will have people with understanding of the market, understanding of the clients, understanding of the vertical, and we’ll give them the tools to model applications. So programming may still be done in the lowest cost territory possible, let’s say India and as much as possible of even that programming should be automated by technology, so that’s our vision. So the basic purpose of implementing a three-shore model for instance, I mean what are we doing in Slough. We are actually having good consultants who can go across literally on a half-an-hour basis and then go meet a client and then do the architecting, or the design creation maybe in Poland, but do the programming out of the central repository in India. That’s the basic model we are implementing, as I said it’s a very different model, because it helps clients to, and there is a new jargon that has come up called co-sourcing, and the basic idea is that both the client and the developer participate. So it is not transactional out sourcing, but it is actually participative development. So that’s the vision we are implementing. But on a broader basis, if you have seen some of our analyst presentation in the past, we are saying that we don’t want to put all our eggs into that basket, because obviously innovation is always fraught with some risk and so we are implementing this ambidextrous model where we have what is called an exploitation model. So our core businesses which are currently doing extremely well, which is the application portfolio management business and the enterprise solution business are what we call exploitation driving towards higher and higher profits. But we continue to invest whatever we can with appropriate levels of control in other side of the business, which is the exploration business. So ITS - Innovative Technology Solution is really the core to our exploration business whereas the two other core businesses, and India also was somewhat exploratory when we started doing HR transaction, and retail transaction, but that’s more into exploitation. So I think the way I see it is we will always follow some kind of three-horizon model where we have some core highly profitable businesses, some businesses moving towards profitability, and some businesses which will move towards profitability. And if you want me to paraphrase that into what we have doing today BPO is in the middle segment, where it’s moved towards profitability this quarter and ITS will move to profitability next quarter. And the other core businesses are now in as high in profitability as it gets. I mean our APM business is as profitable If not better than comparable to the mid-tier segment. But we believe and it is a Board supported strategy that we continue to invest innovation because ultimately that’s the future. As all of us have heard many times, if salaries keep going up 15% and rates go up 2%, at the end of the day by 2015 this industry may not exist. So we really are looking at a scenario where we ensure that we improve productivity, and don’t multiply manpower at the same level at which we multiply revenues.
Dipan: How very interesting thank you very much sir. Can I make a suggestion on the investor presentation? There is some amount of inconsistency in the way you have reported for the June quarter and then when you come to the September quarter especially the year-on-year, the quarter-on-quarter comparison are not there, and even some of the issues raised the basic data, doesn’t flow over to the second quarter as well like what happened to the Fujitsu and project and ITS and other things which were explained I think in the June quarter earnings. If you could just try and make it consistent it would be easier.
Ganesh Natarajan: Thank you I think that’s a very useful input and in fact if you have any other ideas also please feel free to send me a mail so I will talk to our investor team and make sure it is done.
Dipan: Thank you and all the best.
Moderator: Our next question comes from Ms. Deepa of Global Absolute Research.
Deepa: Thank you my question has already has been answered.
Moderator: Thank you. Our next question comes from Rajeev Ramchandini of Religare Securities.
Rajeev: Hello sir congratulations on a good set of numbers. Most of my questions have been answered. I was just looking to the effort in utilization part. The utilization has gone down almost 5% year-on-year and the onsite, offshore mix has been changing. And my second question in this is, when you look at the revenue by industry, there has been a complete changeover on the yearly basis. Could you tell more light on that one?
Ganesh Natarajan: Let me answer your first question, I missed your second question, but I will come back to that. As far as onsite, offshore mix is concerned, yes because of some of these new practices like testing and BI, there is a fair amount of work that we do onsite. For instance we have hired very competent team in the US, Mr. Dave Fenton who is one of the gurus of business intelligence in the US plus another person who has actually joined us from Satyam about a year back, Mr. Raja. So these gentlemen plus a team of 20 consultants are now working on this project for Essilor. So you are seeing this temporary onsite going up. It is not a concern because in new areas onsite is as profitable as offshore, so we don’t worry about that.
The second is on utilization, yes utilization has dipped a little particularly in the ITS business. As I mentioned to someone of you last time because of the sudden stoppage of the NRI project because of the change of strategy towards China, we actually were saddled with a bench of nearly 220 people at the beginning of the financial year, which because of the very hot labour market, we decided that we won’t ask them to leave. So we have been slowly deploying them, so even today if you look at the ITS services business the utilization is only around 70%, whereas in our other business utilization is more like 78%, 79%. That is one of the reasons for the dip, but again as I said it’s a correcting mechanism that is already in place which you will see in the second half. What was your second question?
Rajeev: My second question was regarding the revenue by industry. Where we have seen a pretty good shift of revenues from within the industry like the insurance, banking, and financial services coming down from 18% to 10%, and the retail going on the other hand on a higher 6% to 11%. Is this some kind of concerted effort that has been put in reclassification or?
Ganesh Natarajan: Absolutely it is a concerted effort because our big focus has been on retail. In fact our entire success of our IT-BPO integration strategy happened as I said because of these three big clients Home depot, Marks & Spencer, and now Landmark stores. So retail focus in fact we now have nearly 26 or 27 domain consultant very strong and understanding merchandise management, natural franchising, and point of sale as far as retail is concerned. In fact it may be even more at this point of time. Financial services have been a focus area for this year. So I would expect that financial services would again go up further next year and as you probably are aware we have been signed up as one of the global partners of Credit Suisse and moving from what we were doing primarily for their investment banking group in Singapore, now we have started doing business with them in Switzerland, should start in UK and US. So I think you will see financial services going up. The third area is manufacturing itself. Manufacturing is again is our conscious strategy for us to focus on our strength in electronics manufacturing and in fact we are hiring a very senior person to head the manufacturing vertical who should be coming on board in February. So these will be the 3 focus strategies. As far as the others are concerned if you look at the utilities for instance, that’s going up primarily because of the National Grid, the client that we use, but there we have a partnership. In fact we entered into partnership with a very strong domain consulting firm in Bangalore called Hemson, which is bunch of guys with significant experience. But that’s not part of our own investment strategy. So I think focus strategies will be around retail, we will continue, will improve in financial services and will start in manufacturing.
Moderator: Thank you sir. Our next question comes from Mr. Hardik Shah of Asit C Mehta Investment.
Hardik: I have a couple of questions. My first question is what is the attrition rate for this quarter?
Ganesh Natarajan: Attrition we actually measure on two, three levels. One is of course on what we call the managerial level; it continues to be very low I think our attrition rates are as low as 5 or 6%. At manager level, I am taking right from Project Manger upwards. In the core management team we don’t lose anybody at all so that’s never an issue. If you look at the lower level I think its gone up a little this quarter in terms of programmers because it always happens, the churn always happen, whereas people wait for their increment letters, and when they get it, they compare it with somebody else. At the programmer levels, I think it has gone up a little this quarter. The churn always happens because people wait for their pay raise with somebody else. At the programmer level it is going to about just under 20% so it’s about 18.5% or 19%. KPO has been stable; BPO of course is always higher, so in BPO we probably have 24% and 25% attrition. So I think it’s still under control, we’d like to reduce it further and I think we will see signs of reduction over the next two quarters because once this increment mela is complete in every organization you will see the worst attrition happen.
Hardik: So we can estimate that in the whole company level it is really 18% to 19%.
Ganesh Natarajan: In the whole company level it is closer to 16% to 17%.
Hardik: And what about the previous quarter sir?
Ganesh Natarajan: In the previous quarter it was lower. It was actually closer to 15%. On an overall basis, Managerial level was probably around the same. There are two reasons; one is of course we are based in Pune and there is a huge influx of companies, all the multinationals, as well as large Indian companies. Apart from that the BPO has been stable
Hardik: Sir, my other question is, the operating margin comes around 16% to 17%. Do you see any changes in that or no further changes?
Ganesh Natarajan: Right now it will be stable. I don’t see any short-term changes at least.
Hardik: Okay sir and if you considered billing rates, how much is the improvement in the billing rates on a broad basis?
Ganesh Natarajan: Billing rate again is stable as I explained it to an earlier question. So far our scaling contracts are not based on billing rates, but are based cost plus on other services as well. Billing rate I think by and large you will find it pretty stable, it’s not gone down, it’s gone up in a few cases, but the cost plus has kind of brought it down. So, I think you can assume that it will be rock solid throughout this financial year.
Hardik: Okay sir. Sir you already have achieved half year’s target for revenue, it is 285 crores so do you want reverse the guidance of 550 crores.
Ganesh Natarajan: Yes. We always assume that something will go wrong, but I am sure we will achieve it.
Hardik: So it can be 550 crores plus?
Ganesh Natarajan: Hope so, definitely.
Hardik: Congratulations sir, thank you very much.
Ganesh Natarajan: 50 crores plus on profit.
Moderator: Our next question comes from Ruchir Desai of Pioneer Intermediary.
Ruchir: Hi good afternoon my question is with respect to your retail product. I was wondering if you can give some more information on that with respect to how many clients you had for the product in the past couple of quarters, what was the competition and how much revenues they contributed in this quarter?
Ganesh Natarajan: We don’t have a product as such. Let me just explain how it works. We have a merchandise management template; have a point of sale the Smart Shop kind of thing that we have taken over from this company Seacom. If you look at the domestic market we are working with almost all the significant retailers, so I think there are probably 8 clients in the domestic market, in fact I think two more lined up in the first half. More important is that we are now migrating that product into our SBP related platform which means much easier to maintain etc. and that was the basic purpose, to have a full framework which can go into implementation. We have not been able to, or we have not attempted to market it as a framework outside India. One of the goals was that once we stabilize and improve the versions of this framework by end of this year, enter it in the proximate markets like Australia, Japan, and Middle East.
Ruchir: So how much do they contribute to revenue, if you can classify it that way?
Ganesh Natarajan: Product itself does not contribute much to revenue. I would say that if you look at purely as a value of the template to the overall revenues of Zensar, probably less than 0.5%.
Ruchir: All right fine thank you.
Moderator: Thank your sir. Our next question comes from Mr. Dipesh Mehta of Khandwala Securities.
Dipesh: Congratulations on a good set of numbers. My question is regarding your guidance. You maintain your guidance around 550 crores and 50 crores in bottom line, but if we compare your half yearly numbers it is around 286 crores and 27 crores roughly, any specific reason?
Ganesh Natarajan: The idea always is to do better than the guidance but I am saying at this stage, we had expected that some of the large clients would slow down in the second half of the year, because it’s not matching here. But we are still maintaining the guidance, yes, given the trend, order booking and the outline we have of new business it does look at this point as though we will exceed both our revenue and our profit guidance.
Dipesh: Okay about tax rate, this quarter the tax rate is a bit down, any specific reason?
Vaijayanti Deshpande: It was 24% and 25%, that’s the only difference.
Dipesh: Okay thanks very much.
Moderator: Thank you sir. There are no further questions. Now I hand over the floor to Dr. Natarajan for closing comments.
Ganesh Natarajan: Thank you very much. I think it was very useful interaction for us. I think the take away for us is we will try and give you as much more information as we can, and maintain (as somebody said) the consistency of the information in the next financial. I would also like to request some of you who showed lot of interest in our ITS strategy. It would be really great if you wanted to come to Pune and spend half day with out team, because I think the kind of capability that this platform has is really mind blowing, so it will be good for you to see it first hand. Apart from that I think as I said we are pretty happy with what we have done this year. I think it’s a continuation of our overall strategy and I think if we continued to do this and continued to work with very good clients as well as get new clients, I think we are in good shape. So thank you very much for being there and do send me a mail or contact our investor relations team in case you need any clarifications whatsoever on strategy or on financials. Thank you very much.
Moderator: Ladies and Gentlemen, this concludes your conference for today. Thank you for your participation and for using Door Sabha’s Conference Call Service. You may disconnect your lines now. Thank you and have a pleasant day.
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