Zensar Technologies Analyst Call Transcript on Q4 Earnings
Date - 25th April, 2008
Moderator: Good afternoon ladies and gentlemen. I am Leela, moderator for this conference. Welcome to the conference call of Zensar Technologies Limited. We have with us today Dr. Ganesh Natarajan, CEO, Mr. V. Balasubramanian, Head Global Transformation Services, EMEIA, Mr. S. Balasubramaniam, CFO, and Ms. Vaijayanthi Deshpande, Financial Controller of Zensar Technologies Limited. 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. Ganesh Natarajan.
Ganesh Natarajan: Very good afternoon to all of you and thank you for joining this call on Zensar’s Q4 and Year ended results. I am sure all of you have seen the numbers. We have had an excellent quarter and came very close to meeting what was our both ambitious and optimistic projection for the quarter. And I think its been very good for us, because all the business units barring the acquired company ThoughtDigital have been profitable. In fact for the whole year both ITS, which was a bit of an issue last year, has turned very profitable, BPO is profitable as well. With the new contract we have signed, I think BPO should continue to do extremely well. Overall as you have seen from the results, the year-on-year revenue for this quarter was 19%, net income was 25%, so it’s been a very good quarter.
I just want to focus the next few minutes on what has been our strategy and what has given us this comeback as well as of course what we see as a lot of confidence going forward, and then I will ask my colleague Bala, who is responsible for much of the non-US, non-UK strategy of Zensar to comment on what's been his vision for the last four years and how its resulted in business. Most important, and I have mentioned this before, we decided two years back to focus on three segments, one was to continue our business with Fortune 500, Fortune 5000 clients, and I am glad to say that all our big clients, particularly Cisco for instance have been extremely happy with us, in fact we had a visit from Wim Elfrink, who is the number two for Cisco and who is the Chief Globalization Officer. He inaugurated our Cisco building on the campus, which we hope some of you will come and see one of these days. And Wim was very happy to call us the most proactive partner in Cisco. Cisco, as you know works with all the global and most of the large Indian firms. And I think that’s been a continuing story. The other story that we started last year, which was really working on FTOs or First Time Offshoring clients has also been very good. I think because we have got some very blue chip names and also new clients, literally from all continents. So we have got good FTO clients from the US, from UK, from continental Europe, and of course Middle East, Singapore, and South Africa. The third one, of course, is our acquisition strategy. As all of you know, our most successful acquisition is the one which is now two years old. This company that we bought in the SAP space, which was primarily in Hyderabad, but today, is active again in Australia, US, UK, as well as Europe. So that’s been very, very good. The other company we bought in March of last year, which is a company called EZA, which is now a minority share holder in this new entity called ZATL, or Zensar Advanced Technologies Limited, we have set up, did extremely well. In fact it not only served our purpose of being a significantly expanded player in the Japanese market, but has also got us some excellent new deals with clients like NEC Hitachi, which have all the potential to be very, very large in the years to come. And again that made a profit of over a crore.
Our disappointment this year, which in fact depressed what could have been a 21% growth in overall profits, now has been, ThoughtDigital, and as I mentioned even in the last call, we acquired the company primarily for establishing our East Coast presence in Oracle, which of course was not there because it was primarily in the West Coast, and that got served, but we also had some problems because out of the five founders, two of them had kind of decided to switch out and weren’t really interested in growing the business. And we finally got rid of them, in fact we fired both of them in January of this year and replaced them with lower cost sales people, and we are already seeing the results. In the last three months, we have had over 4 million dollars of new business booked in that business. I am very confident that this year we expect to do around 20 million in that company, and that is very likely to happen and will be profitable. In fact we expect to turn the corner and write off of their mortgage clients.
I think the losses are more or less turned and probably definitely by second quarter there will be profits. So what gives us the confidence going forward? As I said all the businesses are profitable, including ThoughtDigital, all the acquired companies. The portfolio mix in terms of annuity clients, which today are over 85 in numbers and the project clients, which is just under 200 at this point of time, and that of course keeps changing, but that’s very strong. And of course the dependence of the US is substantially lower than what it used to be maybe a couple of years ago. So I think with this balance portfolio of businesses, customer mix as well as markets, I believe that they are in good shape to go ahead. So, before I stop and ask you for your questions and comments, I want to ask Bala and as I said Bala has been with the company for the last six years and has been primarily responsible in driving the emerging market story of Zensar. And he will speak briefly on what has been the strategy, what's been a success, and what he sees as the opportunity going forward. Bala?
V. Balasubramanian: Hi, good afternoon. Five years back we started doing research on the emerging markets through our own market intelligence model. Based on that we identified five countries and based on the research we also identified certain verticals, which we needed to focus on this market. So that’s how we started and we took a vision saying that we will focus on these countries and we will be leadership in chosen verticals. Based on that we identified South Africa, Japan, India, Middle East, and Singapore as our countries for focus and we also chose specific verticals in these markets to achieve leadership position in these markets. Based on that we have started working on delivery capability, which can meet the requirements of the customers, and today if you see the top five customers in chosen verticals in these markets are our customers. These have happened because in each of those markets we have done a significantly different strategy. If you look at Japan, we acquired a company called EZA to penetrate the leadership position. If you look at South Africa, we started working on our BEE level 5 certification, which gives a lot of advantage to our customers. Similarly we also started developing IP solutions for the India market for that vertical and also started working on alliances. Today, I would say that because of our last four years of research and building niche capabilities in these markets, in this year we have grown significantly in each of those markets. If you see the results, we have grown about 80% in South Africa and Japan, about 140% in India and Middle East, and about 50% in Singapore. And I am really confident that next few years will see a significant growth in this market. Thank you very much.
Ganesh Natarajan: Bala, you want to add something, from the financial point of view?
S. Balasubramaniam: Well, from financial point of view, it gives me delight to say that we more or less kept with our earnings forecast that we had mentioned. We are quite confident of the way going forward in terms of the robustness of our model and the state of the business as it stands today. And going forward, these coming years seems to look as exciting as the previous year that we just kind of completed.
Ganesh Natarajan: Basically that’s what I wanted to tell you, as I said the business is in good shape, we have had our, like everybody else we had our setback in the first quarter with the declining US dollar. But I think we have bounced back very well in all areas and we look forward to an exciting year. So, quite happy to answer any questions, as our financial controller and Bala are both here, plus anything on strategy, your ideas we can take from you. Thank you.
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 withdraw your request you may do so by pressing # key.
Our first question comes from Mr. Ruchit Mehta of HSBC.
Ruchit Mehta: Yeah hi, good afternoon. Congratulations on the quarter. I just wanted to get a sense on the margin environment, in this quarter we had a nice off take in margins. Going forward, how do you see margins panning out, should one factor in the current quarter’s margins as being sustainable going into fiscal ’09 as well?
Ganesh Natarajan: Not really, I think the way they are looking is, of course we will improve our margins, in fact our history as an organization has been that our profit growth has been higher than our revenue growth, because we came off a very bad start in 2001, except for this year of course, for all the reasons I mentioned, margin growth has not been as good. Next year we are looking at 20% to 21% growth in revenues, like everybody else, because we are expecting a dull customer situation. But we are still looking at 24% to 25% or maybe even higher growth in PAT. So essentially what that means is, somewhere in the region of 950 crores of revenue and 80 to 82 crores of PAT is what we are looking at as possible guidance for next year.
Ruchit Mehta: 80 to 84 crores?
Ganesh Natarajan: 80 to 82.
Ruchit Mehta: And this has assumed whatever turnaround that happens in ThoughtDigital?
Ganesh Natarajan: Yes, absolutely. We are looking at a profitable company in ThoughtDigital, breaking even in the second quarter and going on to make more profits.
Ruchit Mehta: Okay, and just on your main customer Cisco, why was it people got scared when Cisco started talking about having a very tough environment? How are you seeing your relationship with Cisco developing and how do you see revenue growth panning out over there?
Ganesh Natarajan: Yeah, relationship with Cisco is absolutely outstanding. As I mentioned earlier in the call, we had Wim Elfrink who actually came and spent a day with us last Monday along with his entire team. And to give an example, we started off primarily as an Oracle player, today this building that we have built, houses 700 people for Cisco and they go all the way from, again its not contextual, its not something where we are doing some application support, which can be whisked away. So right from supporting their key technology, which is tele-presence, building applications, supporting them, helping them in their rollouts, I think it’s a very strategic relationship and I believe that the best is yet to come, because given the kind of CXO level relationships we now have with Cisco, I think the opportunity is tremendous.
Ruchit Mehta: And how do you see the account growing going into next year?
Ganesh Natarajan: We are only limited by the fact that we don’t want it to be over 25% of our revenues and that’s really what it is, so I would certainly expect that probably next year; it will grow to about close to 60, 61 million dollars. And the order book is there to justify that and do more.
Ruchit Mehta: Okay, and any other major concerns you have on the growth environment because there seems to be a lot of noise in the market and it is very difficult to decipher, what is actually happening on the ground level. So in your interaction with your customers, how are you seeing them behaving in terms of their business planning and orders?
Ganesh Natarajan: for most of our major customers, we have had between four to six percent price increases during the year. And that’s sustainable in the sense that I don’t see price drops happening in the market. So I think we will continue to farm our existing clients and my own expectation is, we are already engaging with them on the relationships, both in South Africa, Middle East, as well as UK and US. My own feeling is that from existing firm accounts, we will see more business, maybe not at an increased price, but certainly at a sustained price. Where it will affect is, the fence sitters, because lot of discussions that many of us are having, probably true for the entire industry, are getting postponed, people are not very sure on how wide, how deep the slowdown is going to be. Our own expectation is that, fence sitters, either positively or negatively will decide over the next three to four months. So I think the order booking environment will substantially pick up in September. And till then I think, as I have said in many interviews, we all have to make sure that our utilization is high, our costs are low, and we continue to make profits. But I think the real order inflows from new customers will probably recommence definitely sometime in August-September. In fact that’s why its just cautious optimism, our optimism comes from the fact that our businesses are doing well, it’s cautious because yes, there is a slowdown in the spending environment.
Ruchit Mehta: Okay. And just on the EAS side of the business, its been slightly volatile sequentially in terms of growth, as well Q2, Q3 de-growth sequentially and now it has shown some bit of growth, so going forward how do you see that growing, should one anticipate sustainable sequential growth or it will be still be little volatile?
Ganesh Natarajan: I think it is certainly sustainable sequentially, and the volatility thing will always be there quarter-to-quarter because even now in the Enterprise space, whether SAP or Oracle, or even Business Intelligence, almost 68% to 70% of that business is onsite and consulting driven, and sometimes projects driven. Given that situation, you will see, it’s very difficult to compare quarter-on-quarter. My own bet is that, if you look at over the next four half years, you will see a growth. Obviously Oracle will grow. Right now SAP is doing extremely well. In retrospect it was a very good strategy to have a dual enterprise strategy with Oracle and SAP. And Oracle has been a little flat over the last three to four quarters. But given the fact that we now have the strong bases, through ThoughtDigital in the East Coast, and as well as in UK, because we are now substantially increasing our UK operations, Oracle retail operation in Middle East is doing extremely well. So my estimate is that it will continue to grow, not so much quarter by quarter, but definitely half year by half year.
Ruchit Mehta: Okay. And just finally what sort of CAPEX plans do you for this year?
S. Balasubramaniam: This year we have a CAPEX plan of about 40 crores.
Ruchit Mehta: Okay. And what's the debt on the books of the company?
S. Balasubramaniam: Debts in the books of the company is 15 million USD, which is a US subsidiary, debt that we had in our Indian holding company has been paid off, we had about 3 million dollars.
Ruchit Mehta: Okay, so we only have 15 million dollars which sits in US on a consolidated basis.
S. Balasubramaniam: Yes, at Libor plus 1% interest rate.
Ruchit Mehta: And what's the cash position?
S. Balasubramaniam: As of end March, we had Rs. 53 crores.
Ruchit Mehta: Okay thanks.
Moderator: Our next question comes from Mr. Dipen Shah of Kotak Securities.
Dipen Shah: Hi Ganesh, congratulations on a good set of numbers. I had a couple of questions, first of all just wanted to know how your SOA relationship is progressing, whether we have got any tangible benefits out of it. That’s the first question please.
Ganesh Natarajan: Yeah, this is a good question. In fact SOA is now part of our overall strategy, in fact even our own internal systems are being re-architected using service oriented architecture. So I think if you look at SOA one year back, it was almost like a good business to get into. Today if you look at most of the work we are doing for some of our insurance companies, etc, in fact we are now rebuilding the entire insurance systems of one of our South African clients in SOA. So both the collaboration with the company called SOA and the overall integration of SOA into our consulting business, right from work flow tools to enterprise document management, records management, we are doing through service oriented architecture. So I think going forward, SOA and SAA which is software as a service will become integral parts of the solution delivery. So I am glad that we kind of spotted that opportunity early. Today we have close to 120 consultants in Zensar who are all trained on SOA and who are implementing it in all the new solutions we have.
Dipen Shah: Okay. And any benefits from the company SOA like we had Pfizer and Merrill as its clients, so any relationships which have started out of SOA?
Ganesh Natarajan: We are doing two projects, which is onsite with them, but they are also a small company, in fact our tie up with them was more for getting our people trained and getting technology understanding. So as a partner, we have two or three relationships like that. There's another company called Blue Slate in New York who do work in specific areas called Pegasystems Technology, but these are more of strategic tactical partners, because it helps us to get technology access, it enables us to implement it across customer projects.
Dipen Shah: And on the macro picture, just some more color on the fact that we are looking at more of first hand outsourcers as our clients, and we have got more than 200 project based clients. So how is the experience with these clients as far as the last one quarter is concerned? Any project cancellations or delays from that?
Ganesh Natarajan: No, not all. Even our FTOs tend to be fairly large clients, it’s not like they are small clients. So we have not seen a single project cancellation at this point of time. At least four of our FTOs next year will be over a million dollars, in some cases over a million pounds. So it’s been good. But as I said, we have some fairly stringent criteria of what kind of clients we take on as well. Even that, at this point of time I don’t see a single client of ours who might cancel a project. Only problem we had last year was with this company, American Home Mortgage, which is a ThoughtDigital client. Although we might still get the money back, we ended off providing and writing off every cent.
Dipen Shah: Okay, and just lastly once again a broader question, if you were to just look at the past four quarters and look at the revenue growth per se, if you have to see that the revenue growth has been pretty much in the range of 2% to 4% for the last three quarters. Now this quarter also we have added about 150 employees, but our utilization is at 85%. So in fact being at such utilizations, we have still not added significant number of people, one is obviously because of margin considerations, but does this mean that maybe the next quarter or the quarter after that could be a slowish quarter and we are looking more of a back ended growth?
Ganesh Natarajan: Not really I think we are looking at adding about 350 people from campuses over the next six months. Obviously I think we have all learnt from our experience of last year, and we are kind of staggering the intake, so they will probably come in 70 per month over the next five months, and that’s really what we have told the campuses. So that will add on. Plus we are ramping up for this BPO client of ours, so that will get added as well. So there will be some training. But does it mean that the growth will not be there, I don’t think so, because given the order book, I think the growth will continue to be there and when I said, we were talking about doing 20%, 21% revenue growth, I don’t see that as being back ended. Obviously the fourth quarter for us always is good because lot of the order booking takes place in September, October, November, which is executed, apart from the normal high fourth quarter, but I think the first three quarters you will see fairly steady growth.
Dipen Shah: Okay because if we start adding people from now on obviously they will take some time on training, and they will become probably billable in the second quarter, so that’s the main reason why I was asking whether maybe first quarter we could be looking at a similar trend in revenues of between 2% to 4% growth?
Ganesh Natarajan: I can't give you the exact numbers Dipen, but what will happen is, we are not looking at a bunching of recruitments in this quarter, that’s not going to happen. It will be phased out over a period of time. You can't expect to see too much of any dips as far as the revenue or profit growth.
Dipen Shah: Okay, and just lastly could you just throw some more light on the billing rate increases, which we have received or which we were supposed to receive from our top two to three clients and what has been the trend all across on an average basis? Thanks very much and all the best.
Ganesh Natarajan: Yeah thanks Dipen. Just your question on billing rates, if you take 60% of our revenues, if we take the top seven or eight clients, the average bill rate increase has been about 4% to 5%. Even that, which is really, we had asked for anywhere between 4 to 7, so it’s still about 5%. Fortunately the biggest clients in Cisco, the bill rate has actually been higher than that in terms of rating. Even apart from that except for one client in the top 10, most people have been receptive to rate increases and it has happened. And going forward there are lots of new clients, all the new clients are coming in at very good prices. In fact the average over the last three years versus the new orders signed over the last one year, the rate has been close to 10% to 12% higher than the previous rates. So this is the reason why they are fairly sanguine about the prospects for the next year.
Moderator: Next question comes from Mr. Sujit of Irevna Research
Sujit: Hi, good afternoon. Congratulations for a good set of numbers. One question, what is the realized dollar rate that you had, if you could just give us that number?
S. Balasubramaniam: The realized dollar rates for this quarter that is quarter ended 31st March was 40.20.
Sujit: Okay, and I see some divergent trend in terms of the number of people you have hired and the manpower cost that slightly have tended to be on the lower side in Q4. Could you just throw some light on whether the wages have been on the lower side, or have you had more number of freshers or more of BPO staff this time around?
Vaijayanthi Deshpande: Yeah, of course BPO has grown, that is one of the reasons, and the second reason is utilization has also increased. Third reason is, also at the year end we do a finalization of our numbers in terms of actual valuations, so gratuity, leave encashment, and so on. And that has resulted in a bit of a lower cost.
Sujit: Okay, could you throw some light on your order book size at the moment, on EAS, ITS side, what is the order book you are seeing at like for the next one year or so, whatever you have right now.
Ganesh Natarajan: See, if you look at the order book, BPO is almost entirely covered, so it’s almost 100% covered by orders. In fact it goes beyond, into almost 18 months coverage by order book. If you look at the APM business, which is now what are calling GTS, GTS is almost 65% covered by existing orders and the rest is of course annuity, which will get converted to orders. The EAS business always tends to be lower, so we are currently covered for about five months. I think it’s about 35%, 40% of next year’s target is covered by orders. And if you take the pipeline also, I think it covers about 90% of next year’s orders. So I think which is very predictable and very normal. BPO used to be much lower, but BPO because of the last two orders we have received, covers the entire year in terms of order book.
Sujit: Okay. And one final question on the demand environment, if you could give a broader outlook on where do you see softness and where do you see some resilience in the market, from the different kind of clients that you service?
Ganesh Natarajan: Softness is clearly there in the financial sector, but fortunately our exposure to the securities, investment banking side is low, and our focus even in FS is primarily on insurance, where there is no softness. We are seeing some softness in electronics manufacturing business, even Cisco for instance. Yes, there is a move in Cisco to reduce their own costs, so obviously the pie is not going to be as large as we would like it to be, but we still get our fair share and probably more. Similarly retail, we are not seeing any great slowness in retail yes, but in US retail yes. In fact we just had a visit from one of our Fortune 100 customers yesterday, and the lady was talking about, they are little worried about the trends in the market. Similarly even in the UK, we have three large retail clients, and although it hasn’t affected them directly, in fact one of our clients actually had a very good Christmas, so they are still doing well. But their outlook for the year is that, it will be probably nowhere near the kind of growth they had last year. So and if we take the top three retail clients, I think there will be a, so we are actually presenting that while retail today is about 11% of our revenues, we don’t expect that market share or the pie share within Zensar to grow substantially. But given the fact that our focus is really on the emerging markets, and that is continuing to grow, I think that we don’t see any problem at all. In fact on the contrary, retail for instance in India and the Middle East continues to be extremely strong, the insurance market in South Africa which we go after is very good. The technology market in Japan, which Bala talked about, is also very good. And right now we are looking at increasing our focus in the European market. We have opened an office in Amsterdam. So looking at beyond what we currently do in the Nordic, expand our Europe center in the city of Gdansk in Poland. And intensify our efforts in UK, Nordic, as well as the DACH regions, Germany, and Switzerland. So I think we will be in good shape, but softening yes is there in the financial services and definitely across the US. So I don’t see that changing in the next six months.
Sujit: Okay, thanks a lot, and one last question on manufacturing and telecom vertical, could you just split it across, how it is looking for telecom subsidy in terms of…
Ganesh Natarajan: We actually don’t do anything in telecom, so telecom is just one or two marginal clients. Its really electronics manufacturing. We made a mistake in the process of classifying Cisco as telecom, so that’s really the big chunk you’d probably see when you see that. But now we are looking at that as electronic manufacturing, so if you really look at it, almost 60% of our revenues are coming from the manufacturing segment. And roughly as I said, 11% to 13% from retail and the rest is financial services, and some stuff with the software products vertical, utility international grade business vertical, so not too much in the telecom space.
Sujit: Okay, thanks a lot and all the best.
Ganesh Natarajan: Sure, thank you.
Moderator: Next question comes from Mr. Raunak of Value Quest.
Raunak: Hello, congratulations on a good set of numbers.
Ganesh Natarajan: Thank you.
Raunak: Will there be a wage hike in FY09?
Ganesh Natarajan: In FY09 yes certainly there will be a wage hike.
Raunak: Sir, what percentage like, how much?
Ganesh Natarajan: We are looking at about 8.5% to 9%. Not fully decided yet, but it will certainly not be in double digits, and that is in India. And if you look at overseas, it will probably be something like 2.5%.
Raunak: Sir, and what effect it will have on our margins?
Ganesh Natarajan: That’s normal, because obviously we continue to improve productivity, the addition of new customers at higher rates, so we don’t expect any change in margins, in fact you can see we have come back to close to 10% margins and next year our guidance is based on close to 9% and that factors in the wage hikes and everything else, even it factors in some emergency wage hikes we may have to give towards January of next year, so all that is normal process.
Raunak: All that is factored in 9%?
Ganesh Natarajan: Very much.
Raunak: And sir, one more question, sir what percentage of your revenues comes from US?
Ganesh Natarajan: Currently just 50%, it’s exactly 50%, and we expect that that will stay at 50%. I don’t see that lessening because the order book is still good.
Raunak: It will stay at 50%...?
Ganesh Natarajan: It will stay at 50% because our goal was to bring it to 50%, so we systematically brought the UK and Asia-Pac revenues up, but in an ideal world I would look at 50% and 27% from Europe and 23% from Asia and Africa, and Middle East…
Raunak: So are you seeing any revenue increase from Asia, Europe, and all, or it will be same only, 23% and 27%.
Ganesh Natarajan: 23 is actually an ideal mix, but yes Japan might go up even further, so it could be 25, 25, you could look at 25% Europe and 25% Asia, Middle East.
Raunak: Okay, thank you sir.
Ganesh Natarajan: Sure.
Moderator: Our next question comes from Mr. Hardik Shah of Asit C. Mehta.
Hardik Shah: Good afternoon sir. First question is like what is the volume growth in this quarter, Q-on-Q basis?
Ganesh Natarajan: Roughly 3% volume growth.
Hardik Shah: Sir, if we see like, onsite component has increased drastically on Q-on-Q basis also and Y-on-Y basis also. So is it one of the main factors for the growth in revenue in this quarter?
Ganesh Natarajan: No, not really. I will tell you what's happening today, because the offshore revenues have been fairly robust, except for Cisco. In fact Cisco there is a lot of work that has started recently, which is all onsite. So and we used to average about 100 people of onsite, and about maybe 300, 400 people offshore. Today we are close to 160 people onsite, so they will probably come back offshore. Also a lot of the work we are doing today in Japan, because primarily it’s now in the embedded technology space, is being done onsite. Similarly if you look at what we are doing in the Middle East, there is a fair amount of work that is being done in Oracle implementation onsite. South Africa I think we have nearly 100 people right now. So I am not very happy with the onsite percentage, but because it’s primarily for offshore clients, we are not worried. So we really would expect that what is nearly a 70:30 mix will come back and by the end of next year I would expect to come back to 60:40, 60 onsite and 40 offshore.
Hardik Shah: Sir, basically if you look at the numbers of technical employees, onsite and offshore, without considering the BPO, it is like 8% on Y-on-Y basis, and our revenue growth is nearing 22% after considering the rupee appreciation also. So like, growth is because of the billing, or because of some other factors?
Ganesh Natarajan: I mean, there is obviously volume growth and yes, there will be revenue growth because of onsite. See I am not too worried about onsite. Because so long as the profits keep going up, which means you are realizing good potential. Like even if you look at our Oracle business, the East Coast business throughout the last year was entirely onsite, but it has good margins, and some of that is now translating to offshore business. So onsite per se is not a problem, if onsite were to be done at low margins, which is kind of with the connotation you normally associate with onsite that would be a problem. But I think so long as the mix is reasonable and the profits keep growing, which is really what our objective is. So we don’t really object to somebody saying, can this project be done onsite, so long as the profitability measures as the same as if they were being done offshore.
Hardik Shah: Sir, I am really trying to really understand like, we had only 8% okay, Y-on-Y basis, still the growth is 22% considering the rupee appreciation. So like question is not related to onsite, its basically like volume growth will be 8% to 10%, of the total 22%, billing component will be 4% to 5%, so rest of the components will be what, because of the move up in the value chain, or some other factors?
S. Balasubramaniam: It’s a very detailed question. What I suggest is, you get in touch with me, I am Bala, CFO here, at my email id, which is suby@zensar.com, analyst call we won't be able to give very specific detailed kind of questions.
Hardik Shah: Okay sir, thank you very much sir.
Moderator: Our next question comes from Mr. Sanketh of Span Capital
Sudhakar: Yeah, hi Ganesh, this is Sudhakar here. Congratulations for a great set of numbers. Ganesh, I just had one question, what is the biggest risk do you see to your guidance for FY09?
Ganesh Natarajan: The biggest risk is that you have a lousy US election, everything goes for a toss, I mean, you never know, but the way I see it now, that we will see this softness in the next six months. I think all the Asian markets are doing well, but if there is really a very bad recession and it starts affecting retail spending in a big way, which I don’t see it happening at this point of time, I think it is still soft. So, the biggest risk, I think for the entire industry as well as for Zensar is that, if there is a huge recession there, this time next year if people are still scurrying for cover in terms of the recession trend, then yes, I mean, then there could be a risk in the guidance, but otherwise, if what we expect as an industry happens, which is six months of softness and then you pick up from the fall, then I think there is no risk on the guidance.
Sudhakar: And what is the exchange rate you are considering while giving this guidance?
Ganesh Natarajan: 39 at this point of time because the consensus expectation is that it will more or less hover around the same range.
Sudhakar: Okay, thank you.
Moderator: Next question comes from Mr. Neerav Dalal of Capital Markets.
Neerav Dalal: Good afternoon, sir. I wanted to know what is the volume and the pricing growth that you put in for the next year’s guidance, a rough idea.
Vaijayanthi Deshpande: This year the entire growth we have factored in the volume growth, there is no price increase.
Ganesh Natarajan: Yeah, we have not factored any price increase, so all revenue growth is volume growth.
Neerav Dalal: Okay and there has been a slump in the active clients this quarter, there had been a steady increase in the last three quarters, but there has been a slump this quarter, any reasons?
Ganesh Natarajan: These are project clients, because both in SAP and Oracle, so I think even during the year about 45 project clients came to an end, about 85 clients would have added on, so I think during the quarter, yeah, you would see them…
Neerav Dalal: Okay, thank you.
Moderator: Our next question comes from Ms. Vibha of IL&FS.
Vibha: Yeah, congrats on good set of numbers. I would just like to know about, could you give us the levers for the margin expansion during the quarter, 331 basis points quarter-on-quarter, can you quantify that?
Vaijayanthi Deshpande: Essentially due to higher utilizations and also due to lower onsite during the quarter.
Vibha: Okay and could you break up the other income component during the quarter?
Vaijayanthi Deshpande: It’s mainly treasury here and some old credit balance which was written back.
Vibha: Okay, how many clients were added in the quarter and the year for TD?
Ganesh Natarajan: For TD, I can give you exact numbers, but I would think about 7 new clients for ThoughtDigital would have been added over the year. They are some very large clients, like Wyndham Hotels, that have been added by ThoughtDigital.
Vibha: Okay, and again I would like to get an outlook on the EAS business and the ITS?
Ganesh Natarajan: ITS is reclassified, but ITS, just to put you in the picture was a combination of migration, embedded system, etc, so that’s now moved more geographical, so if you look at our current structure, GTS is Global Transformation Services. There are only two big businesses, enterprise applications and GTS; I would expect that the growth in both the businesses would be similar. So, we don’t see any fundamental difference between the two. We will look at 20% growth in both the businesses and obviously one or two of them will do better.
Vibha: Okay, what is the hedging position as on March ‘09?
S. Balasubramaniam: Hedging position continues to be the same policy for approximately 70% of our exposure.
Vibha: Okay, thanks. That’s it from my side.
Moderator: We have a followup question from Mr. Dipen Shah of Kotak Securities.
Dipen Shah: Yeah, I just had a couple of issues, first of all were there any extraordinary items in the fourth quarter in terms of either expenses or income?
Vaijayanthi Deshpande: Yeah, extraordinary items were in terms of getting an actuarial evaluation done for our employees or benefits, gratuity and leave encashment and so on that revolves basically only one thing.
Dipen Shah: So, how did it impact the margins in the quarter, was there a write back or write off?
Vaijayanthi Deshpande: There was a write back, that’s why the margin also improved.
Dipen Shah: And can we quantify that?
Vaijayanthi Deshpande: Yeah, it was about one and a half crores.
Dipen Shah: Okay and the other part is, in this year also do we expect salary increases to come in from second quarter onwards or has there been a…
Ganesh Natarajan: Our policy is that we do appraisals this quarter and salary increases effective July 1st.
Dipen Shah: Okay, so same thing. And the last thing is, Ganesh, just some brief update on the SBP and how many employees do we now have in Poland and how has been the progress on that?
Ganesh Natarajan: We have hired the first batch of 26 people, so its 30 people right now. We will probably increase that to close to 100 in this current year. We are doing two projects right now and the basic idea is in fact we have along with the government of Poland we are doing a joint session for Europe CIO’s in September and that is basically a marketing event, so the basic idea is to make sure the people understand the nuances of our multi shore model. It will be slow, but we are looking at it as a long term bet for EU.
Dipen Shah: Okay, thank you very much.
Moderator: Our next question comes from Mr. Jayendran Rajappa of Prabhudas Leeladhar.
Jayendran Rajappa: Hi, thank you for taking my question. A good quarter. Just two queries, one is in terms of fixed price contracts on a YOY basis, it seems to be showing a declining trend, any comments on that and secondly the attrition rate, please?
Ganesh Natarajan: See, actually most of the offshore projects, and there is an upward trend in fixed price, but as I answered the question earlier, because there is a lot of onsite, onsite work tends to be T&M.
Jayendran Rajappa: Which means going forward, should we expect something on similar lines?
Ganesh Natarajan: No, I would definitely hope not, because as I mentioned earlier , our hope is to climb closer to the 40% offshore by the end of the year, in which case the fixed price component would also go up and on your second question, attrition has been, I mean, its probably true for the whole industry, attrition has come down very substantially, I think, obviously also because there is some amount of uncertainty, so we are finding that, our overall attrition is lower than 20% and if you look at the critical talent, which is what we you imagine, 10% is always looked at as critical talent, there the attrition during the year has been as low as 4.5%. So, it’s probably the lowest attrition levels we have had in the last three years.
Jayendran Rajappa: Anything in particular you would attribute that to, I mean that seems to be pretty good.
Ganesh Natarajan: No, it is a general scare. So long as Economic Times is our friend and keeps carrying scared stories about how many people are getting sacked, I think, that’s perfect for us.
Jayendran Rajappa: Okay and I don’t know whether I missed this one out, but what is the wage hike that you are factoring in for the next year?
Ganesh Natarajan: We are factoring in 8.5 to 9% in India and 2.5% overseas.
Jayendran Rajappa: Okay and just if I may add in, this seems to be slightly on the lower end of the industrial range.
Ganesh Natarajan: Not really, today if you look at the papers, people are talking about 6 to 9%. We did a quick poll in NASSCOM again in the executive conference and the general view was single digits, I mean, there will be some companies who will give 12, 13 and even in our case, I mean, you will find exceptional employees will get 15%. Average we are saying 8.5%.
Jayendran Rajappa: Very true. Thank you so much, all the best.
Moderator: Our next question comes from Mr. Amitabh Santalia of S. K. Santalia Securities.
Amitabh Santalia: Hi, just had a few questions relating to the financials. One is, what would be your ‘08 debt levels, this might have been answered before, if you can please repeat that?
S. Balasubramaniam: We have a debt of about 15 million US dollars.
Amitabh Santalia: Okay, this is all rupee debt or is it…
S. Balasubramaniam: No, this is the debt in our US subsidiary taken in the US.
Amitabh Santalia: So, your consolidated debt would be about 50 million US?
S. Balasubramaniam: Right.
Amitabh Santalia: On your consolidated balance sheet for ‘08, is that correct?
S. Balasubramaniam: That’s right.
Amitabh Santalia: Okay and you have shown an interest expense of about, in the consolidated accounts for this year of about 6 crores, can one assume that that’s the cost of this debt?
Vaijayanthi Deshpande: No, actually that’s included another loan…
S. Balasubramaniam: We have repaid about 3 million dollars during the course of the year. So the amount that you see, that we repaid in the month of, partly in October, partly in November, so the cost that you see is for 3 million dollars at say for about seven months and the rest of the debt for the 12 month period.
Amitabh Santalia: Okay, so if you can just make it simple in terms of, if I were to estimate next year’s interest expense, what would that be roughly?
S. Balasubramaniam: Well, I think I will need the help of the US treasury secretary also, because its a US debt, there is no link to the LIBOR and fortunately for me, it kind of keeps dropping, of course currently it is about 3.2 + 1, its about 4%. So, for a moment you could take it as 4% on 50 million dollars, so it’s about 600,000.
Amitabh Santalia: Okay, so basically 4% on 50 million is the rough estimated interest cost for next year.
S. Balasubramaniam: Right.
Amitabh Santalia: Okay and in terms of your standalone books, what would be your debt presently?
S. Balasubramaniam: No, we don’t have any debt.
Amitabh Santalia: Okay and you mentioned something about having 50 crores of cash on books as on ‘08?
S. Balasubramaniam: That’s right.
Amitabh Santalia: Yeah, so I am just deducting that cash from your overseas debt to arrive at the net debt on your consolidated books at about approximately 12…
S. Balasubramaniam: Yeah, -10 crores, but it could become positive, because what you see 50 crores is end March position, every month we are adding.
Amitabh Santalia: Right, and what do you hope to end ‘09 with, I mean, how much of this debt do you hope to pay back?
S. Balasubramaniam: No, we have a moratorium for, this debt we took for the acquisition of our company, ThoughtDigital, so we have a moratorium for two years, of which one year has got expired, we have one more year to go and we will pay it in equal installments of 5 million, 5 million, 5 million in the subsequent three years.
Amitabh Santalia: Okay, so that’s basically the schedule by which the debt is going to come down.
S. Balasubramaniam: Yeah.
Amitabh Santalia: And do you have any plans for, are you scouting for any acquisitions in the next year or so, do you have…
Ganesh Natarajan: We will be looking at one tactical acquisition and that’s primarily in either Germany or Switzerland, so that will be like the Japanese acquisition we did, Japan was a real small acquisition, 30 people, but that proved to be very good, so we are not in the, our budget for instance does not factor in any acquisition, but in case we get a good company, which gives us a stronger toe hold into the Switzerland and Germany markets, we will probably do that, but right now it is not budgeted, not budgeted means, not planned for in the revenue of our projections.
Amitabh Santalia: So, it is safe to assume there is no fund raising plans in the near future?
Ganesh Natarajan: No, not at all.
Amitabh Santalia: And are there any warrants or any type of FCCBs out standing, which will dilute your equity in the future?
S. Balasubramaniam: None, whatsoever.
Amitabh Santalia: Okay and you mentioned something in your notes about MAT credit and even though I am not a tax expert, I do recall, there was some provision in the budget, which disallowed MAT credit retroactively for the last, since 2001. Is this along the lines of the budget provisions, the changes that were made in the budget, note 5 on your consolidated accounts?
Vaijayanthi Deshpande: This is the first time we are paying MAT, last year there was no MAT charged to Zensar and this we will definitely get a credit once the STPI benefits go and we start paying tax in India, we will see the benefit of that.
Amitabh Santalia: So, there is no impact of the budgetary roll back of MAT credit retrospectively, apparently there was some roll back of MAT credit, which has impacted some companies retroactively?
Vaijayanthi Deshpande: Yeah, but since we were not paying MAT at that time, there is no problem for us.
Amitabh Santalia: Okay and our current tax rate for this year have gone down slightly.
S. Balasubramaniam: That’s right.
Amitabh Santalia: It’s at about 21% now, what do we see as the impact next year on the tax rate when the STPI benefits are withdrawn?
S. Balasubramaniam: See, our tax rate will depend on the kind of profits in the various geographical territories where we have our subsidiaries. Ours is a model where we have subsidiaries in the various geographies that we operate and branches in some of the geographies that we operate, therefore it will depend on the mix and the revenue and to a certain extent the US subsidiary, which we had acquired, US acquisition rather, had made a loss this year, so that kind of gave us a bit of a tax shelter. So, going forward we hope to maintain the same tax rate despite that, through better tax allocations.
Ganesh Natarajan: That’s this year and if your question was alluding to the 10A, 10B benefits, that’s valid till March 2009 and beyond that what we are doing is, there will be obviously an impact for the first year, in case the STPI benefits get withdrawn, but what we are already doing is, we have taken seats in an SEZ adjoining our campus, we are also looking at a similar SEZ rental space in Hyderabad, so I think if at all the benefit gets withdrawn, then we will again stabilize may be over a two year period after that, but this year, which is the current fiscal, we don’t see any significant difference in tax rate.
Amitabh Santalia: Right, so your tax projections for the current year take into account approximately the same tax rate as last year?
Ganesh Natarajan: That’s correct.
Amitabh Santalia: And it is safe to assume there will be some increased tax, I mean, tax rate increases in FY10?
Ganesh Natarajan: Yes, absolutely, I mean, if the STPI benefits are withdrawn, yes.
Amitabh Santalia: And is there any reason to believe that it may be withdrawn, is that something that the industry…
Ganesh Natarajan: As per the current thing, it is going to be withdrawn, I mean, March 2009 is the sunset date for 10A, 10B benefits under the STPI scheme. From a NASSCOM point of view, we have been talking to everybody in terms of the overall benefits to the industry of continuing it, so that it is concurrent with the SEZ benefits and we are hopeful about that, but it will take six months for us to figure that out. In the mean time we are adopting a defensive strategy of making sure we have seats available in adjoining SEZs, so that we don’t get taken by surprise.
Amitabh Santalia: Okay, so the assumption of the rupee dollar rate in our PAT guidance for the year is about 39, is that correct?
Ganesh Natarajan: That’s correct.
Amitabh Santalia: So, assuming that the rupee actually weakens, could you do better than your guidance or it would be taken care of as in that, you would have the corresponding hedges, so you won't really benefit from a rupee appreciation?
S. Balasubramaniam: The answer to that will depend on how fast this happens, I mean, if this happens over a period of time, obviously our hedging cover will take care of it, but if it happens very rapidly, which is very unlikely, therefore in a way it is a very hypothetical question, but that’s how it will pan out.
Ganesh Natarajan: If I can just interrupt for a minute, ladies and gentlemen, I have to leave, but the team is still here, so feel free to ask more questions, But, I just wanted to say thank you very much and thank you for your ongoing support to Zensar and as I said we look forward to, but please continue.
Amitabh Santalia: Wish you all the best. Just if I can, I am looking at the infrastructure that you reported in your press release, you have currently about half a million sq. foot at Pune between your existing facilities and the one that’s coming up, when is your new development center, which is work-in-progress going to be ready by?
S. Balasubramaniam: It’s already started, one block we have kind of inaugurated; this is what Ganesh mentioned in his opening speech, for Cisco. This will approximately house about 700 people and the other block, which will approximately house about 900 people, should be up and ready by September of this year.
Amitabh Santalia: Okay, so is there any further CAPEX envisaged beyond this?
S. Balasubramaniam: No, not inside this campus.
Amitabh Santalia: Okay, and currently your Pune campus, which has about half a million sq. foot of space, is that entirely owned by the company or is it leased partially?
S. Balasubramaniam: Completely owned by the company.
Amitabh Santalia: And what about your Hyderabad facility, is that…
S. Balasubramaniam: That’s a leased facility.
Amitabh Santalia: Okay and in future, for our future expansion you mentioned something along the lines of leasing space in SEZs, etc that would be on a lease model?
S. Balasubramaniam: That’s right; we will not build any more campuses.
Amitabh Santalia: Okay, so as far as your further investments in real estate or building your own campuses is concerned, there are no plans on that front?
S. Balasubramaniam: Yeah, that’s the thinking of my board as on date.
Amitabh Santalia: Okay and neither have you acquired any land for that purpose or would you be fully utilizing your available space in Pune after these two facilities are commissioned?
S. Balasubramaniam: Yes, we would have fully utilized our facility.
Amitabh Santalia: Okay, alright. Wish you all the best, thank you.
S. Balasubramaniam: Thank you, Mr. Santalia.
Moderator: Participants having questions please press * and 1 on your telephone key pad. Next question comes from Mr. Rahul, an individual investor.
Rahul: Well, Mr. Bala, I wanted to know about this, you have projected about Rs. 33 kind of earnings for FY09, your stock is quoting at about 153, its quoting at less than five times, why doesn’t the company go in for a buy back or may be split or something, aren't you concerned about your, I mean, responsibility towards the share holders for creating more wealth?
S. Balasubramaniam: I am very conscious about what you said last, which is why if you really look at it, our share prices have moved up from 90 to 150, it all depends on, whether you look at half glass full or half glass empty. The fact of the matter is that, we believe that there is much more value than what the stock markets have given acknowledgement thereof and we are here for the long term, we have very committed long term strategies, if you have been associated with Zensar in the past and then if you see our strategies and our execution and the way we have been going about it in a systematic manner with focus, I mean, it all answers some of the questions that you have been, kind of popped up, but however the real answer to that question will perhaps come in the future couple of months as we kind of roll out our strategies for this year and execute it and get back to you in the same call may be next quarter.
Rahul: Yeah, but the point is that you said the stock went up from 90 to I think current levels of 150, but I mean the stock had fallen from 380 to 90, so that is what you missed out actually?
S. Balasubramaniam: No, Rahul its not fair for all the other listeners, because this is a call for our results, but I will quickly make a very brief situation, its not only ours, the general IT sentiment had got down for various reasons, but feel free to get in touch with me on my email.
Rahul: No, but my only point is don’t you think the stock is under priced, highly undervalued, I mean, even mid cap IT companies are quoting at 9 and 10 times the earnings. Even a company like Sasken trades at 10 times, a smaller company than you.
S. Balasubramaniam: Yeah, it all depends on how you perceive, may be after today’s call, our multiples will go up, it all depends on, I mean, as I told you, it depends on how you look at it. Each company is specific just as how people kind of evaluate each company. It is difficult for me to as a CFO of the company to comment on it, but you have a valid point, I can see.
Rahul: Yeah okay, thank you.
Moderator: We have a followup question from Mr. Amitabh Santalia of S. K. Santalia Securities.
Amitabh Santalia: Yeah, just a bit of, I guess, take on the previous question, sir, see, I think we are being valued as a commodity stock right now and the valuations that are being given to Zensar or some of the other IT companies is that of commodity stock, like cement companies, for example, where earnings are expected to peak and then decline sharply, may be couple of years down the line and some concerns where we sort of justified or may be the concerns could be exaggerated, but to some extent the concerns may be valid that with the STPI benefits being withdrawn and IT is not exactly a sunrise industry any more, I was just wanting to get some thoughts from the management as to what is the, you have given very strong PAT guidance, for example, for FY09, which is very encouraging to me as an investor. However, markets don’t value stocks based on one quarter or one year, so perhaps if you can share some thoughts and I know its too early to give any kind of guidance beyond this year, but as to what your thoughts would be for the next five years for the company and how do we see our business model evolving, is there any sort of risk to our, basically what would be our growth strategy going forward, where we think how we can maintain a certain minimum growth rate for the next five years?
S. Balasubramaniam: Well, Mr. Santalia, it’s a very long question, but I will try to give a very short reply, but I think it will be wonderful if you can also spend time with us, visit us in Pune.
Amitabh Santalia: Sure.
S. Balasubramaniam: See, if you really look at our model, we have kind of looked at the model of both innovation and exploration and exploitation, by which what I mean is that we exploit the businesses in which we have a fairly good substantial stake going forward in terms of our APM businesses and throughout the new areas of businesses like product engineering, embedded systems. If you do really look at our verticals, we are pretty strong in retail; we are very good in electronic manufacturing and in terms of the focus area of our strategy is that we have been in a package software implementation, which is what has been kind of helping us grow further. As we look at the scenario going forward, we feel more and more of application development will cease and the package software implementation will only kind of gain momentum. To that extent we are present both in Oracle and in SAP and with a very clear focus we acquired an Oracle company based out of the East Coast and it has started to give us good traction. So, if you really look at the focus, approach and strategy, we have been kind of very focused and we have been committed to that and we are quite confident in executing that going forward in the next scenario. Its very difficult for me to kind of say what this company will be five years from now, but we are quite confident of executing our strategies in the EAS space, if you see how our EAS business has grown over the last five years and where we have kind of, will get strength, some of the verticals that, which kind of is emerging, so we have been fairly, I should say stable in setting a certain direction and following it and only making course correction if it is absolutely required.
Amitabh Santalia: Okay and what is the, you mentioned something about visiting your facility, how does one go about that?
S. Balasubramaniam: I would suggest you take my e-mail, its suby@zensar.com and we will get into the details.
Amitabh Santalia: Okay, thank you so much.
S. Balasubramaniam: Thank you, Mr. Santalia.
Moderator: Dear participants, please press * and 1 for your questions. Participants having questions, please press * and 1 on your telephone keypad. We have a followup question from Mr. Raunak of Value Quest.
Raunak: Hello. Sir, I just wanted to know the debt on your books, sorry to ask again, but I didn’t get the figures as such.
S. Balasubramaniam: We have a debt of 15 million US dollars, which is 60 crores.
Raunak: Okay, thank you.
Moderator: Dear participants, please press * and 1 for your questions. There are no further questions. Now I hand over the floor to Dr. Ganesh Natarajan for closing comments.
S. Balasubramaniam: Well, ladies and gentlemen Ganesh has stepped out for another appointment; this is Bala, CFO here. We thank you for spending time with us and asking us very deeply probed questions and we were also delighted to share our insights. It has been a wonderful quarter for us and going forward we are quite confident of executing some of the strategies that we set for ourselves and it’s been wonderful having you. Thank you so much.
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