Good morning, ladies and gentlemen, thanks for joining the Mphasis Q3 FY23 2023 earnings conference call. I am Aman, your moderator for the day. We have with us Mr. Nitin Rakesh, CEO of Mphasis, and Mr. Manish Dugar, CFO. As a reminder, there's a webcast link in the call invite mail that the Mphasis management team will be referring to today. The same presentation is also available on the Mphasis website, www.mphasis.com in the Investor section, under Financial and Filing, as well as on both the BSE and NSE websites. Request you to please have the presentation handy. As a reminder, all participant lines will be in listen only mode, there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone.
Please note that this conference is being recorded. Before we begin, I would like to state that some of the statements made in today's discussion may be forward-looking in nLTMre and may involve certain risks and uncertainties. Our earlier statement in this regard is available in the Q3 results release that has been sent out to all of you earlier. I now hand over the floor to Mr. Nitin to begin the proceedings of this call. Thank you. Over to you, Nitin.
Thank you, Aman, and thanks everyone for joining us today. I know it's a busy day with multiple earnings calls. We appreciate your interest in Mphasis. I trust that everybody has had a chance to review our earnings release documents, including the presentation. Though the macro environment has progressively gotten more challenging over the past few months, we continue to see interest in strategic areas of technology transformation. Enterprises continue to prioritize investment in areas such as cloud adoption, data engineering, and strategic data assets, as well as areas like cybersecurity and customer experience and support transformation. As the latter also leads to a significant cost takeout opportunity given the high cost base of customer support operations. We see specific themes resonating across industries in 2023, including banking and insurance. Themes that facilitate accelerated transformation and digitalization.
Despite the resource environment easing up over the past couple of months, there is still scarcity of talent to address specific niches or segments in these areas. Our investment in tribes that you heard me talk about previously are well lined to play in these themes. On the other hand, providers most exposed to vendor offerings related to operating legacy tech architecture systems and data centers, mainframe and traditional support, et cetera, may find budgets in such areas being squeezed in 2023. Our consistent performance in apps and in anchor verticals such as BFSI reflects our ability to profitably place our teams. Our Q3 FY2023 revenue represents a 5.7% Y-o-Y growth in constant currency terms. Direct revenue declined 14% sequentially and grew 6.4% year-over-year in constant currency terms.
Our mortgage LOB, largely represented by Digital Risk, experienced significant volume ramp downs in this quarter. The magnitude of which was unanticipated and unprecedented. This business has experienced a perfect storm hammered by the dramatic drop in the trajectory of rates and home price inflation and steady home sales even as leading banks prepare for a mild recession in 2023. While mortgage rates have resumed their decline in the recent times, the market remains hypersensitive to rate movements with purchase demand experiencing large swings relative to minor changes in rates, leading to a phase of inactivity in residential real estate market in the U.S. The contribution of Digital Risk, our mortgage detail subsidiary, now stands at 8.8% of third quarter FY 2023 revenue.
Within Digital Risk, the contribution of the most vulnerable mortgage sub-segments, namely origination and refinancing, have declined to 20% of DR revenue or within 2% of our overall revenue. DR is a valuable piece of the business portfolio for the synergies and cross-selling opportunities it provides us on IT and applications with these same clients, as well as providing a key connect to the business owners at large banks in addition to their org. It allows us to pursue integrated deals, which we believe is a source of our competitive advantage in that domain. Given the extreme volatility that our mortgage business has faced, the headwinds, which we regard as cyclical, our overall direct performance may not give an accurate representation of the state of the other LOB, particularly in our focus areas. We are providing performance cards excluding DR wherever appropriate.
Excluding DR, our big direct businesses growth sequentially declined at 6%-- as well as a 15% Y-o-Y in constant currency terms. Managing this duality is akin to running on a two-speed track. One having speed breakers applied with greater force in short order, and the other one in which we try to sustain our robust growth in the face of economic headwinds. In keeping with the duality theme, we are providing some growth numbers here excluding Digital Risk. Our financial year to date FY2023 direct revenue growth is at 24.5% in constant currency terms and compared with the FY2022 constant currency of overall revenue at 17.3% for direct business. The direct business accounted for 94% of revenue in this quarter. EPIS contribution to our revenue is now less than 5% at 4.8%.
Given the low and declining contribution of this business to our overall revenue, direct business growth reflects more fully in the overall growth. Regarding geographic growth, direct business in America has recorded an overall growth of 6.2% in constant currency, weighed down by the mortgage LOB. Excluding Digital Risk, the U.S. grew at 17% Y-o-Y in constant currency.
From a servicing perspective, our applications outside have been a driver for growth with 19% growth in direct apps this quarter, following on from a 34% growth in the second quarter of 2023. Given the market share and market share growth, we believe that continued strong app growth is a testament to our continued investment in the right service areas within a unique product called the competency development model, as well as our ability to leverage the repeatability that comes with the highly efficient go-to-market and delivery model. Our anchor vertical, BFSI, continues to enjoy market share gains. While the overall numbers are impacted by the decline in the mortgage LOB, excluding the year, direct BFSI grew 2% sequentially and 17.6% year-over-year in constant currency terms.
While we continue to find gains from our positioning of specialization scale in banking, we are also seeing the contribution of other new engines of growth, especially our smaller verticals such as healthcare, clubbed in the other segment that grew faster, reaching 30% year-over-year growth in direct. The first growth of smaller verticals reflects our success of the NCA strategy our public has spoken to you in the past. The NCA basket has grown at 30% year-over-year in this quarter. While we've also been able to add some marquee new logos, large bank deals giving us further growth visibility as well as reinforcing our differentiation in new segments inside BFSI. As mentioned earlier, we continue to consolidate our standing within our key clients, resulting in market share gains. DR has impacted the growth of key client buckets as well.
Excluding DR, all our key customer segments grew strong double-digit year-over-year in constant currency. As you can see from the chart, top five and top 10 clients have grown consistently, reaching 21% and 20% respectively in third quarter in constant currency terms on an LTM basis. Excluding DR, LTM growth for top five and top 10 is significantly higher at 29% and 31% respectively. Our top three clients contributed to $150 million or more each in LTM revenue, with the top client LTM revenue contribution at over $200 million. Winning from this client already at an all-time high sets up further growth with strong market share gains as well as the expansion of TAM into new spend pockets in the last few quarters. The average LTM contribution of our top five clients exceeds $950 million.
Our top six clients are $825 million each, which we continue to believe is unique for a company in our category. Our top 67 clients, ex-Digital Risk, grew at 40% constant currency down on LTM basis. Our 11-20 clients bucket, ex-DR, grew at 30% LTM constant currency basis as well. As mentioned before, NCA continues to lead with 30% growth year-over-year and is now meaningful to the overall growth strategy. We recorded a TCV of $401 million of committed deals won in Q3 of FY2023, the second highest ever. We're happy to note that this is well above our recent quarterly average of approximately $300 million per quarter. 24% of the TCV is in new gen areas.
Last quarter, that is in second quarter of FY2023, we had noted that our pipeline was up 18% quarter-over-quarter. Converting some of that has resulted in strong TCV this quarter. Over half the TCV in this quarter accrues from BFSI, our anchor vertical, offering visibility of continued growth in this vertical. We have won five large deals in this quarter, matching the previous quarterly record with one deal over $100 million TCV. While we retain our market share with BFSI clients, our large deals are increasingly coming from other smaller verticals as well other than BFSI, such as insurance and healthcare, which do continue to generate high % of our TCV through proactive deal pursuit. The win rates are materially higher than in competitive RFP situations.
As we report our TCV on an AT basis excluding renewals, we find the correlation between our direct TCV and revenue growth to be reasonably high at 0.85. This correlation might have declined recently due to DR ramp-downs. The conversion of TCV to revenue and gross is largely continues to be in expected lines. Behind our strong TCV categories are evolved and continuously evolving product squad model driving the themes of cloud-led transformation. This model, which will edge up scale our ability to service the growing pipeline and to close more deals, continues to mLTMre. The portfolio squad within each tribe continuously ensures that we constantly evolve our solutions, adopting newer tools and technologies. Almost all our pipeline is tribe-driven and is up 6% sequentially and 27% year-over-year. We find record conversion from pipeline to new source TCV in the last four quarters.
Our pipeline is well distributed across verticals as well. BFSI continues to generate the highest share of pipeline at 56% despite large conversions in Q3. Pipeline in xBSS and BSS verticals has grown at 86% year-over-year, suggesting that our aggressive hunting beyond anchor BFSI segments and strategically hunting with large deals to drive into expansion is working well. In our client metrics, our category of migrating clients from one revenue bucket to the next continues to be healthy. In this quarter, we sequentially added to our count of clients in the US, $10 million and $20 million revenue categories. As mentioned, we won five large deals in this quarter, taking the total large deals in the last four quarters to 13 compared to eight in the previous period.
As a function of financial metrics, our margin flexibility affords us the flexibility to manage our profitability in this volatile environment. EBIT margins at 15.3% is within the stated band. In this quarter, we have substantially improved the pyramid with fresh billing at an all-time high in absolute and percentage terms. We have taken some proactive actions to manage the performance now and tend to improve developer procurement efficiencies. These actions have helped manage margins despite the significant Digital Risk revenue drop. Operating profit stayed largely flat sequentially and grew 13.8% year-over-year to INR 5,354 million in the third quarter of FY2023.
Our EPS for the quarter is at 21.9, declined 1.6% sequentially and grew 14.7% year-over-year. Tax conversion measured as operating cash, excluding one-offs was a percentage of profit after tax, stayed at 90+%. To sum up, I'll leave you with the following three points. One. Our direct growth year-over-year at ex-DR are still at a healthy 15% in constant currency terms in the first quarter. We've stayed significantly more resilient than the market generally. VR is now less than 9% of revenue. That being said, mortgage services remain an integral part of the business for vertical TCG benefits that I talked about for cross-selling and integrated large deals there. Two. Our KPM is moving in the right direction, mainly by consistently improving category winning large deals with five large deals this quarter, including a $100 million+ deal.
Over half the TCV origination is from the BF verticals. Improving client mining metrics across the revenue buckets continues to strengthen our diversifying growth. As I previously stated, our average top five client active contribution has crossed $115 million. 6-10 clients continue to grow well above our direct revenue growth to 30% LTM growth, while 11-20 clients have also grown in strong double digits. Our pipeline has grown 6% sequentially and 27% Y-o-Y. While BFSI continues to be the bedrock of the pipeline and TCV wins, our non-BFSI pipeline has grown at 86% Y-o-Y as the new earnings have rolled through. Our talent strategy implements optimization on both as well. Fixed economic in % and absolute numbers is at an all-time high.
Three, operating with a steady target operating margin band, we believe that the margin band ensures margin stability in a volatile environment, especially in a seasonally weak quarter with significant ramp down in one part of the business. Our EBIT margin of 15.3% lies within the stated band and our adjusted EBIT margin of 15.8% is stable sequentially and year-over-year. FY2023 will likely see increasing M&A consolidation, and we believe we are well-positioned to be net gainers from this theme, as demonstrated by our superior client mining and increasing each other TCV findings. To be sure, we are operating in an environment of increasing macro uncertainty, which potentially impacts certain decision making of clients, thus affecting the pace of transition of revenue to TCV and TCV delivery.
Potentially requiring clients to repurpose their spend and reprioritizing spend across segments for tech investment, all of which can alter the complexion of need and growth. We continue to believe that pipeline and TCV will be the leading indicator of outlook going forward. Coming to our FY fourth quarter 2023 outlook. We still are focusing on the micro and not certain macro. We believe that some of the pipeline that we have built up over the M&A consolidation theme will start to transfer into TCV during the current quarter. We also expect to grow developer topic counts sequentially, sustaining our market share gains. Thus despite being at all-time quarterly high revenue, we continue to scale. We will support our investments in broadening and strategic companies. Uncertain macro may weigh on the market sentiment in the near term.
The account pockets of the customer spending weakness in growth trends here that are subject to spend by the flames. We're confident on maintaining our EBIT margin in stated bands. Given our actions on operational efficiency and productivity, we also intend to continue to invest in growth across the certain business and technology segments. With that, we can open the call for Q&A. Operator?
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star two. Participants are requested to use handsets for asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.
Thank you. Nitin, to start with, on the mortgage part of the business, how should we see this in the near term? I know the visibility is fairly low right now, but, you know, obviously, and you have in earlier, you know, quarters also indicated that this is kind of bottoming out before the shock which we saw this quarter, with the kind of environment which is there in U.S. How should we see this business, you know, beyond maybe next one to two quarters? Is this something which is now coming close to stabilizing or, you know, again, visibility is low here.
Mukul I think, let me explain to you the structure of our mortgage business as well as the state of the union when it comes to the residential real estate market in the U.S. If you look at our current business, it's primarily made up of three buckets of services. First bucket is originations. That used to be the only business we were in a few years ago. Just to give you a sense, we've seen a volume drop between refinance and new purchases of about 80% in the last four quarters. That is because the market for new purchases is completely frozen in the U.S., given where the mortgage rates climbed to in the last quarter.
Not only are home prices still at elevated levels from coming out of the pandemic, but because interest rates spiked, buyers are basically finding these rates and these home prices not affordable. They're still okay when the interest rates go low because that kind of gives them some leverage, but I think that's one part of the story. To bring diversification into the business, as we've stated, you know, many quarters ago and we continue to talk about it, we actually added a home equity line of business over the last three quarters. And that line of business has a negative correlation because as home prices were up and new purchases, you know, were down, you still had a lot of homeowners cashing in on the equity as the economic environment changed. That correlation worked well for the last three, four quarters.
Given just the total freeze in the market right now, we are, you know, we are also seeing decline in volumes in home equity business, and that's what we saw playing out in the third quarter. The reason for that is, you know, at some part of the economic cycle, home prices start declining as well. High interest rates with lower home prices means the equity value starts disappearing also. The third line of the business that we have in the multi-servicing side is servicing, which is a little bit more project-based because that involves diligencing loans that are bought and sold either between the government institutions, Freddie and Fannie, or between secondary buyers, you know, from one bank to another or one capital market company to another.
I think the current environment in the market is, as I mentioned, it's fairly, you know, frozen. Activity was well, you know, volumes are very low. This cannot sustain because if the market stays frozen and the delinquencies go up, which is what the banks are expecting, then the loans will start getting traded and the servicing line will pick up. Which is kind of the reason why Digital Risk we had that line because we think that provides a certain hedge even if the interest rate cycle doesn't change. We expect that to come to a head at some point between this quarter and next quarter. Hopefully will give us a little bit more visibility, you know, to volume pick up in the servicing side of the house.
Eventually, of course, as the interest rate cycle peaks, the rest of the market will reverse and peak as well. I gave you a little bit more color. I think I wanted you guys to understand what is made up of the 8.8 personal revenue across these three segments. We've seen big brunt of the origination decline already happen. I think the unknown variable really is the timing of cycle turning, so it's very hard to assess it I guess. The known variable is that at least in the short to medium term, we will see some parts of the market start unlocking and activity will start, which will lead to opportunities and projects.
you know, we are very, very closely aligned with all our customers, and we're using this opportunity to also gain more volume share. In fact, in many cases, we're using this opportunity to also make up for, you know, services that traditionally were not considered for us on the tech side. That's the second motion that we continue to play with. To kind of just summarize, I think the very short term and, you know, outlook is uncertain. We think that as the market comes out of this freeze, we will see opportunities on servicing and eventually as well on the interest rate side.
Thanks. No, that's excellent. Nitin, another question which was there was, you know, your TCV number continued to increase. Are you seeing increasing instances of longer duration deals forming part of your overall TCV? How should we think about TCV or the deal duration perspective? You know, how much of this can convert into revenue over next four quarters?
I think, good question. In general, it is unusual to see very large banks do very large tenure deals. I think that that portion of the TCV is going to continue to be a little bit more, relatively shorter duration. There are deals that do stretch out into multi-year as well. I think we talked about a deal that we signed that was a 10-year deal, you know, early last year. I think in the current quarter the makeup is, I wouldn't say very unusual. We don't have very long-term deals, but we also don't have just short-term deals. It's a fairly good mix. I think the reason we give the correlation metrics is so you can actually see how that will convert to revenue.
While there is caution has crept in over the last, you know, quarter or two, I think, for strategic deals, we still continue to see conversion, you know, being steady. There, there's definitely, you know, it takes harder work for us to convert a deal and then convert that to, to revenue compared to this time last year. I think correlation is pretty strong, and that should give you a good visibility into the next four quarters.
Questions.
Thank you. The next question is from the line of Kawaljeet Saluja from Kotak Securities. Please go ahead.
Hi. Morning, everyone. Happy New Year, Nitin. A couple of questions. First, Nitin, is that, you know, when you look at your performance in the last 3 quarters, it has been fairly muted. You know, is it entirely due to mortgage exposure, or were there any areas in which Mphasis could have done better?
I think, Kawaljeet, we've broken out the whole mortgage, you know, segment in granularity this quarter because I thought that was the right thing to do for you to get an understanding of the level of extent of decline that's provided. I think there are a couple other pockets of weaknesses. None of them are not unknown to you, they're all well understood. We've called out the weakness in some segments in iTech last quarter. I think we had an unexpected furlough in Q2, that continued in Q3 in that segment. We've also seen, you know, one or two of our larger relationships go through short-term turbulence in their business. Looking for, you know, short-term cost takeout opportunities.
I think we've gained volume share in those engagements in the very short term itself. I think we're now, you know, we're now looking at getting back on the growth path, with, you know, including in Q3 and of course we'll be looking for Q4 to be strong as well. I think we, you know, answering your question of what we could have done differently, I mean, if we had a crystal ball, we could have figured out if there was something else we could have done to hedge against the interest rate cycle. I think the only thing we could have done was, you know, gone and looked for projects, on the servicing side, which typically are lumpier.
In a volume lag, I think, at a micro level, at an account level, we still had majority of our top five accounts that record revenues under it in the fourth quarter. You know, we still have robust growth in top 10. You know, new clients have grown quite robustly. You know, the new sectors we added, especially healthcare, has actually done really well, you know, over the last four quarters as well. I think the price we're paying for the portfolio is something that is visible to all, including us. The only way to summarize it is that we cannot control what we cannot control. What we can control is the micro bottom-up accounts strategy that has worked very well for us, and that's what we are focused on.
That's helpful, Nitin. The second question that I had is on a banking spend. In the last few days, a lot of the banks have reported and, you know, it's a mixed picture out there with Citi, Bofa, Wells Fargo talking about an increase, Goldman talking about a cut. You know, a lot of other, I mean, banks talking about continuing our strategic priorities. I just thought I'd basically pick your, you know, point of view on how to read this myriad of data points on banking spending, what your assessment is, and, you know, where does Mphasis fit in the overall scheme of things? You know, do you think that you'll end up being a significant gainer this year in the process?
Great question, Kamaljeet. I think the way to think about banking is to actually look at some segments of banking in an environment like this. As you mentioned, we talked about some clients that are increasing spend, and we talk about some clients that are reducing spend. I think the simplest way to think about it is that anybody who has a strong capital market linkage, anybody who has a strong linkage to BCM volumes, M&A, you know, IPOs definitely are. That business is kind of locked up as well, and they are looking for ways to balance their costs compared to the declines they're seeing in that business.
very diversified, large banks that have a retail franchise, I think they're looking to use this opportunity to invest in, getting to know their customers better and actually getting a higher share of their wallet. We've seen a lot of the deals in the last, you know, quarter or two align towards the themes of I wanna modernize my customer experience, I wanna modernize my core systems, because we are not being able to respond to clients in the time frames we need to respond to. That's leading to some significant, you know, opportunities in that segment. I think on a, on a BFS Digital Risk basis, we probably, still have best-in-class growth sequentially and Y-o-Y.
I think that should tell you that we still think there is large opportunity to gain wallet share and market share with the customers in this segment. I think that's reflecting in the TCV numbers because, you know, if you look at the pipeline, you know, we have, 50% of the pipeline is still business driven. If you look at current quarter TCV, you know, almost 50% came from that segment. I think at least in segments that are not only exposed to capital markets, we're finding a very good set of willing buyers that are very focused on the themes of cloud data, cyber customer and modernization.
That's extremely helpful, Nitin. Just a final question, to Manish. Manish, you have fixed every possible lever. You know, your utilization is up. You have, you know, utilized your sales and marketing leverage as well. That seems to be down as % of revenues. Margins refuse to budge from 15.3%. When does one see the much awaited improvement?
Well, we have stated earlier that the objective will be to invest for growth while maintaining margin in a stable, narrow range. You know, if you look at this quarter, you are right that we got the utilization improvement, although there is still opportunity to improve that. The fresher mix, availability has gone up. It's at its highest ever, and we also saw offshore mix improve. All of that does give us some wiggle room to make investments. A large part of that kind of was driven in managing the decline in the mortgage revenue. While we have an ability to manage the supply chain and the costs along with revenue decline, but this sudden decline was, you know, led to a little bit erosion in the margins.
As we go forward, I guess, our expectation is utilization should improve further because the fresher engine has started kicking in. That along with the revenue growth, we should certainly see an ability to report expanded margins.
Okay, I'm sorry, Manish, I'm gonna push a little bit more, push a little bit further. Let's say, what is required for you to take your margins up to 16%? You know, actually, let's not even talk about 17% because that seems to be also very out of possibility right now. You know, what is required for you to take the margin up to let's say even 16% number?
You know, the supply chain, if you remember, Kamal, when we guided that 12- 15.3- 17, we were expecting the supply chain situation to become much better. It has improved over the last few weeks. Attrition has reduced. We are seeing lesser pressure on compensation. We are still not at the place that we had been logically. This revenue decline was unexpected with a significant tightening of the volumes because of interest rate movement was unexpected. Couple that with the loss business as well getting affected. I guess, the macro, like Nitin mentioned, is not in our control, so we can't say when the interest rate reversal will happen.
Even without that, you know, we should start seeing the revenue coming back on track. The revenue comes back on track and we start seeing the supply chain becoming even more lean, there should be an expansion in margin. When we get to 16 is something that's difficult to say, but, you know, we should certainly be able to get to that, you know, in not too long from now.
Kawaljeet, if I can just add to what Manish said. I think, actually, firstly, I'm very, very pleased with the fact that we've optimized a lot of these levers, whether it was lateral bench reduction, fresher reduction, offshore increase. You know, all of those have been efforts that we've been, you know, undertaking for the last few quarters. I think the sudden disruption in the mortgage pipeline has obviously meant that we weren't able to keep costs in the same line, you know, as we would have wanted to. I think as that fixes, you will see, you know, margin expansion opportunities in the short to medium term as well.
Okay. Thanks, thanks, everyone. I wish you a great year ahead.
Thank you.
Thank you.
Next question is from the line of Abhishek Bhandari from Nomura. Please go ahead.
Yeah, thank you for the opportunity. Nitin, I just had a question on your, you know, employee count and the hiring outlook. This quarter we have seen, you know, some bit of reduction on your employee headcount, almost 1,200 people, you know, both on-site and offshore. Is it mostly to do with the continued attrition or there has been some, you know, involuntary, you know, attrition as well, you know, keeping in mind, you know, what kind of demand outlook we have at least for next few quarters? If you could also, you know, highlight what are your hiring plans going forward.
I think firstly, I think the headcount reduction, you know, obviously is in line with the optimization that we talked about. The biggest metric that I want you to focus on is the record fresher reduction both in absolute and percentage terms, given our track record since we've been tracking it. What that means is that we have the ability to then optimize our lateral bench both onshore and offshore, because that gives us the ability to actually do upward movement from within the company and do a lot more procurement from within the company. Hence, our aging of bench has reduced and our percentage of bench has reduced leading to high utilization as well.
Now that we've gone on this journey, we are not going to pause because remember our fresher is only a fresher for one year. A year later, you know, you still have to then, you know, continue to be on that treadmill, so you don't lose that pyramid shape. We have a significant number of freshers that are in queue for onboarding based on when we need them. We also have a pretty clear idea of their skill sets as well as the time required to actually absorb them into the, into the deliverable workforce. I think that gives us the confidence that we can operate at a slightly optimized or a more optimized competency. Hiring plans will continue to be optimized based on the demand forecast that we run for on a quarterly basis.
I think I wouldn't read the bench optimization as a view on demand forecast. I would definitely read that as, you know, the restructuring supply chain that we've been focused on over the last, you know, few quarters. What % of hiring we will do, it all depends on the segment growth. You know, what kind of, you know, what kind of productivity gains can we get and what kind of projects we are winning, between, you know, managed services, fixed price and managed payment. Some of these transformation projects actually start heavier offshore and then migrate, you know, heavier onshore and migrate offshore. Which also means that some of those actions will continue to be applied as in the offshore.
I think I can't give you a number because, you know, we typically don't disclose what our hiring plans are going on a going forward basis. I can tell you that the supply chain transformation work is work in progress, but we are pleased with the progress that we've made and that's what reflecting in the headcount metrics.
Thanks, Nitin. Nitin, my second and last question is on your top clients and, you know, top 2- 10. Do you see the polar situation in your top client ending soon? You know, what is the outlook over there? If you could also, you know, clarify, you know, the growth pattern of top 2- 10, because it looks like even, you know, top 10 accounts, growth rate seems to be moderating. It may be to do with the top client, if you could clarify, you know, the top 2- 10 as well.
I didn't get your question on the top client. I thought I actually addressed it.
The question was on top 2-10. It seems moderated.
I think that's the reason we broke out the top five and top 10 metrics ex-DR, you know, DR business, because that's what's muddying the overall growth of the top 10 because there are DR customers in there as well. I think if you look at the number ex-DR that I called out, that should give you a bit clearer picture of what that, what that metric is. I'll repeat that to you. If I look at the overall client metrics, I think just give me a minute. Okay. I think if I look at clients in the 6- 10 category, ex-DR they grew 40% CC ATM. 11 to 20 grew 30% against CC.
1 to 5, excluding DR, top five grew 29% and top 10 grew 31% ex-DR. I think that should give you a little bit of sense of what that, you know, the overall number looks like as we strip that out. Having said that, I think we talked about select pockets of business that have also reflected in between BNP and some of the other clients, more attuned to the e-commerce volumes. There, I think, we think we are behind, you know, that's behind us and that, those businesses are on track. I think we'll continue to watch, you know, the post-ferno impact on the, on the high-tech side as well. At least to me it looks like just behind us.
Thank you, Nitin, and have a good 2023.
Thank you.
Thank you.
Thank you. The next question is from the line of Nitin Jain from FairView Advisory. Please go ahead.
Yeah, thank you for the opportunity. Post the Q1 earnings call earlier in the year.
Nitin, I request you to use the handset, please, so your voice is more clear.
Yeah. Can you hear me now? Hello?
Please go ahead.
Yeah. Post the Q1 earnings call, the guidance was that, you know, revenue growth should pick up as the year progresses. But on the contrary, we have seen that the gap between TCV and revenue growth have widened with every quarter. This is, like despite the TCV ramping up from the average $250 million that we used to do last year to almost $400 million now. I mean, the numbers are kind of speaking for themselves. How, how bad do we think it can get in the short term, before things actually start to look up? My second question is on the margin.
In like the last three calls, the management has guided that, you know, there is an upward bias to the margin. As the acquisition cools down, there should be a significant pickup in the margin. However, we continue to be at right at the bottom of the guided band. Are these margins net of the Blink adjustment or it's not included in the 50.3% yet? Thank you, sir.
Nitin, let me take the second part first. Manish Dugar here. The margins are reported margins after adjustment of valuation because of M&A. We did say that there is an upward bias to the margin, and we have had events which have happened post those discussions leading to the expense and not happening. For example, the Fed increasing the interest rate twice by 0.75 is completely unprecedented. Which had had an impact on the mortgage business, as Nitin was explaining, leading to, you know, a significant decline in revenue. While we had not just, you know, one but multiple levers signing from a operating margin improvement perspective, a lot of those kind of got absorbed by the revenue decline.
So far as the growth is concerned, I think the answer again is the same. This mortgage was not projected at that point in time. I would say that, you know, if you look at ex mortgage, we are doing reasonably okay. Then, you know, outside of the mortgage business, the other businesses have had softness because of the macro effect, whether it is geopolitical situation or whether it is inflation or recessionary conversations in the U.S. It's difficult to do a reconciliation between what we said in Q1 versus where we are today. I think most of what has changed has been, you know, unexpected events and not necessarily, you know, something that we could have predicted at that point in time.
Just to put in context, this time last year the consensus was 425 basis points by Fed through 2022. Now, you know, you know, we broke through all that year out. I think, Again, the reason we broke out numbers ex DR is you get a better sense of what that breakup of growth is and breakdown of segments and sources of growth are. Hopefully that will give you, as you absorb the data we gave out in the earnings deck, that will give you a bit more color on how to think about it going forward.
Mr. Jain, does this answer your question?
I don't know if it's the last one. Why don't we move to the next question?
Yes, sir. Thank you. We'll move to the next question that is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Yeah. Thank you. Hi. Good morning. Couple of questions actually. The first is, do you think the pace of decline that we saw this time, do you think the worst is in terms of the pace is sort of over and things should incrementally moderate? That's the first one. Maybe on an overall basis, do you think the overall impact on the portfolio where we saw a decline on a sequential basis, do you think things should start gradually improving on a sequential basis from here on? The second bit is on if you look at the mortgage business, you spoke about how the originating piece has anyway dropped 80% in volume, and then the home equity is also seeing some decline.
I was just wondering, do you believe that the home equity is there risk within that business that could sort of see another bout of sort of headwind for the overall revenue? That was the second question. The third was in terms of new client additions. Do you think that the pace at which they're adding new clients is strong enough considering I think they're done very well in terms of mining and growing and having a large proportion of large customers compared to anyone else of this size. But in terms of new client additions, how is that sort of, are you happy with that? And do you think that new clients as a proportion of revenue in terms of contribution over the last three years, how is that sort of thing? Any context you could give there?
Finally, do you think that Mphasis should really look at some kind of an acquisition to really offset or sort of improve the portfolio on an overall basis? Those are the four questions. Thank you.
Let me take the DR question first. I think, at least the decline in originations at 80% seems to have taken a large beating. I think there's definitely some residual risk in the current book of business because we can't forecast for the, for the control, which is the environment. As I said, the answer, the answer to that is that the market cannot stay seized up for a very long time because this is a key part of the U.S. economy. That will give us opportunities, that will continue to, you know, to provide some cushion to that decline. Given the reason we broke out, the contribution of revenue is because we wanted you to get a sense of what that content can look like.
You know, what we don't want to happen is a day like Naval. That's why, you know, the 8.8% contribution of revenue in third quarter only from DR gives you a sense of, you know, what the residual risk is. You can assume, you know, the rates and the contents, you know, cannot sustain at this rate, you know, for a very long period of time. We do believe that, given the fact that a very large portion of the revenue in direct is outside of that, we are only focused on accelerating growth in that, given the positioning with large clients as well as the key meetings that we have seen.
The other question that you asked around, you know, NCA.
New account addition.
New account addition. You know, I think if you look at the metrics, NCA growth at 30% year-over-year and consistently been in that segment, it actually hasn't moderated in the last few quarters either. We do believe that we have focused on a strategic hunting mindset where we are trying to bring in some multi-logos. While we announce a certain number of new client additions that meet our threshold every quarter, you know, I think it was 4 this quarter and 6 the previous quarter. We have another 20+ customers that have been signed on just in FY2023 that, and many of those are large multi-logos in industries that we operate in that we still think haven't met the revenue threshold for announcement and new additions.
I'm giving the additional color because we track that separately. You know, in our industry, some people call them hunting licenses, where we've actually become a PD provider. We have an MSA in place, and we are now looking for opportunities in those accounts. I'm talking about multi-logos in healthcare, in, travel and logistics, in retail, in banking, in insurance. I think that should give you a sense that, you know, I think Engine definitely has, you know, we operate with a phasing approach. Think about it. Think of this as accounts signed up, accounts start generating revenue, accounts get on the investment period to do the mining, and then they continue to grow. That's the reason why we published accounts pyramid.
You can see that in the, even in the 14, in the million and above customers, you know, we've actually added clients almost every quarter. That's only on the reported basis as well. There is another, you know, tail of clients that have been brought on and that will continue to continue to contribute to growth. Just to give you some more color, I think that number I'm very pleased with, and it's a very, very healthy, you know, list of names that we managed to bring on board. Remind you, this was not an easy job to do for any company in our industry until a few years ago.
The opportunity that has come up in the last two or three years is, as said, every enterprise is looking at the group pivot and apply transformation. They're now looking for a new set of providers who actually have the ability to do that. That opens up a crack in the door, and that's what we've been leveraging on for the last couple of years, including, you know, as recently as actually even the current quarter post Q3 as well. I think that should give you a little bit more color.
Just to add, within, I think, you know, if you look at the pipeline growth, Y-o-Y, that's, while at an overall level, the pipeline has grown 27%. The non-BFSI segment, which largely represents, new accounts added by the NCA channel, that pipeline has actually grown 86%. Which reflects, which kind of suggests that not just like Nitin mentioned, we have more customers added which are yet to scale, but even those that are scaling are actually buying on all three years.
Right. I think two questions you took was one on the home equity side. Because the way I read it, I think home inventories in the U.S. are around 18.5 Months. The equity holdings of people are around $300,000, the highest ever.
Their residual mortgages, whatever they have on those houses are 30 or six mortgage rates. Do you see risk to that business on a going-forward basis? That's one. Just one clarification, if I got this right. Is the mortgage business, you know, sub $10 billion at this point in time? Is that a fair assumption based on the data that you gave? Thereby, that shouldn't be, maybe that's the rest of it, whatever goes away. Yeah, so those are two things. I think the last question was on the acquisition that I asked, in terms of, are you thinking of anything-
I'll address it.
Yeah.
I'll address those. I think what I said was that the contribution of DR to quarterly revenue is 8.8%. It's, you know, you can do the math on that one. Addressing the question around home equity line. I think by the way, that business has more than doubled in the last four quarters for us, on absolute dollar basis. That's one of the reasons why we were able to protect, you know, the contribution from DR over the last two or three quarters, despite origination starting to decline quite rapidly at the beginning of last year. Is there a residual risk in that business in the very short run?
The answer is yes, because even though there is home equity, getting home equity loan at such high rates also is a deterrent for many, you know, homeowners. We definitely think there is definitely residual risk in the very short run. We don't know what that will look like, because we're obviously monitoring on a daily basis, given that we run the business on a per transaction or a volume basis. As I said that those things that allows is where we think there is activity that will start picking up in the very short term as well.
I think, you know, the 8.8% of revenue, you know, you can assume, what the breakdown of that will be and, you know, I'll be happy to give some more color on that, if you need to.
Yeah.
Final question.
Nitin, you had mentioned mortgage is 22% of DR. Am I right?
You mean originations?
Yes. Originations is 22% of DR.
Data DR is mortgage.
Yeah, yeah. Origination is 22% of DR.
We never... We said No, no.
Okay. I got that wrong then. Okay.
What I said was it has declined 80% Y-o-Y.
Okay. You didn't give a number on it. Okay. Thank you.
I don't think we break out. Yeah. We didn't give a number on that.
Sure.
Last question is on M&A. I think the right way to think about it is the question is very pertinent. I mean, if you notice, we announced a new leadership position. We hired a new head of M&A that reports into me because the intent is for us to look at not only tuck-in but also some strategic deals. Given the intent and the desire to grow faster in our chosen areas, there are multiple dimensions to that besides technology-led dimensions. We are looking for new tech capabilities. They could be tuck-ins or they could be at scale. We are looking for vertical-led capabilities. We are also looking for geography-led capabilities.
When we will do a deal? I mean, it's very hard for me to say given that the variance of valuations in public versus private markets is only now starting to fall in line. I think this year, 2023, will be a conducive year for us to do some deal making. At least that's our intent. We're working hard at continuing to work on what we have in the pipeline as well as originating new deals in the pipeline aligned to the three areas we were talking about.
Fair enough. Thank you so much, Nitin. All the best.
Thank you.
Thank you. The next question is from the line of Mohit Jain from Anand Rathi. Please go ahead.
Sir, one question. Outside BCM vertical, and more related to service line breakup also, on the application service side, what is your outlook if you exclude this whole BCM piece? The second part which is related is if I adjust for BCM, in other verticals, how do you see growth panning out, say, over the next few quarters given your TCV pipeline, et cetera?
You know, Mohit Jain, we looked at the pipeline data by vertical if you look at it this time, that talks about, you know, both TCV wins as well as the pipeline growing at an overall level, plus growing for the non-BFSI segment at a faster clip. We have had some large deals wins which are outside of the non-BFSI segment as well. Specifically healthcare and insurance, we see, you know, the TCV conversions to be very healthy. As we go forward, the growth by the non-BFSI segment should continue to see growth. The non-BFSI segment also has reasonable wins and the pipeline to kind of give us comfort on the growth going forward.
This is because 3Q appears relatively flattish outside BCM also and also on the application side. That's why I was trying to see if there is some cyclical furlough or something else which you guys would have experienced in third quarter which we should not expect to repeat in the fourth quarter. Any specific.
Nitin talked about the fact that, you know, in one of the verticals, tech verticals, we did see furlough starting Q2 and we also had an incremental furlough in Q3 as well. Seasonally, Q3 is the weaker or a seasonally low quarter because of less number of working days and furlough. You know, if you are talking specifically about Q3, yes, those are factors that have impacted each of those businesses. Some of that will go away in Q4, whether it is the furlough or, you know, the less number of working days. Although the number of working days will not fully get recovered in Q4, it will really come back in Q1. Yes, if the observation is Q3 specific, yes, then it is driven by the seasonality and not necessarily any reflection on the business momentum.
Okay. Understood, sir. Thank you. That's all.
Thank you. The next question is from the line of Abhinav Ganeshan from SBI Pension Funds. Please go ahead.
Good morning, sir, and thank you for the opportunity. I just had two very broad questions. First one is, what is our book-to-bill right now?
I think we, you know, traditionally, book-to-bill includes the renewals in the overall TCV number. We only report net new TCV numbers, and then we report the correlation. I think.
Okay.
you can make a
Okay. Got that. If I invert that broadly, that is either book or bill.
Yeah. As a number user, we didn't do it. Yeah.
Sure. Couple of other broad questions is what would be your, you know, aspirational utilization level over the medium term? This correlation number, since you're speaking about that, You know, we've been at 90+ previously. Can we assume that that would be our aspiration in the medium term?
I think, we still think there is some room for upside in the utilization number because we are no longer at the very lows that we had two quarters ago, I think we are still at a point where we can see a 3%-4% increase in utilization in the near term. It also depends on demand outlook, you know, skill set match, and the ability to redeploy internally in a trade talent. I think there is upward bias in the utilization. On the correlation, I think, a big, you know, deal ramp down obviously, you know, takes the correlation down. As that ramp down goes behind us, the correlation will increase.
I think, we had a previous ramp of 0.93. That's, you know, that's definitely something that we will continue to look into above the 0.9 mark.
Thank you, sir. That's all from my side. All the best.
Thank you.
Great. Thank you. The next question is from the line of Ruchi Bhardwaj from Elara Capital. Please go ahead.
Hi. Thank you for the opportunity. I have two quick questions. First, do you see any deviation in deal ramp up compared to planned ones, particularly given the macro environment?
I think we addressed that briefly. In select cases, yes, you know, we are seeing, you know, that clients are taking longer to ramp up a deal given the scrutiny and the internal processes that they have to go through in some cases. I think the year-end, you know, budgeting cycle also, you know, sometimes interferes with that. Where we're still early in the new year, we are still seeing some clients take a very cautious approach. You know, there are instances, kind of one-off, but there are instances where clients have asked for a couple more months before they engage in a longer-term renewal. I think we are continuing to kind of work through those as well.
I think it's all a reflection of the fact that, you know, this zone of uncertainty where people are really forecasting what the recession will look like between soft landing, hard landing and deep recession. I think all of that is creating that regional uncertainty. I think our job is, as I mentioned, to, you know, worry less about the macro because we can't control it, but instead continue to work account by account in converting those deals and then converting those deals early.
Got it. Secondly, I mean, this has been discussed in the call, but can you summarize what you meant for Q4? Do you see Q4 as a growth quarter or not?
We talked about the, you know, the lead indicators for growth are, as you know, TCV and the pipeline, and $400 million is one of the largest, the second-highest TCV conversion that we have had. Pipeline has grown again over the previous quarter by 5%. Both of this does add to the confidence on the growth, kind of, countered partly by the uncertainty that continues to exist on the modules business. It's difficult to give a number for the quarter. However, you know, we should have an upward bias that Q4 should look better than Q3 for sure.
Thank you. Thank you, and all the best for the year.
Thank you. We will take the last two questions. The next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Nitin, you talked about the consolidation possibilities as you go forward. Whereby when do you see the revenue impact of those consolidation possibilities, and which segments are where you are seeing those consolidation opportunities? My second question was to Manish. Manish, we had around a $294 million loss because of hedges, which was taken to the revenue line this quarter.
When do we start to see participation in terms of rupee depreciation on margins? Because that seems to be also depressing your margins. Actually, Manish, here I'll take the second question first. As you know, our treasury policy has been to get assurance of a certainty of currency rather than operate on a profit and profit center basis. The stated policy was a coverage of 80% for the next four quarters. This will be 100% for the next four quarters. You know, then on a gradual scale, reducing for the next four quarters. Three quarters back, we started seeing the, you know, exchange rate significantly strengthening, dollar strengthening. We were already covered for four quarters.
The gap between the hedge and the spot became very high this quarter when we ended the quarter at 82.73. Leading to a INR 29 crore impact on the hedge, of the hedge on revenue as well as on the bottom line. We have for the last three quarters started reducing our coverage, you know, keeping in line with our policy and towards the bottom end. As we go forward, you know, this coverage is reducing and, you know, we can, we should be able to exploit the spot rate more and more. However, there is still one and a half quarters to go for us to become, you know, closer to 40%, 50% cover.
Hence, you know, unfortunately, if the exchange rate remains at these levels, we will see this opportunity loss in the P&L. That's the cost of, you know, certainty over the risk that you would like to take. Going forward, you know, depending on how the dollar performs, if we kind of get a view that it will remain stable, we will start taking the cover, but we will be taking the cover at a higher exchange rate. Hopefully we will either reduce this loss or, you know, get to a profitability on hedge again, you know, once we have kind of consumed the cover that we already have. Thanks. It's been a long day.
I think the good news is that, you know, we are already seeing consolidation deals in the pipeline. As you can expect, the very first set of accounts where you would see opportunity in consolidation will be your large accounts. Which definitely is, are, you know, right in the mix because we have a very strong positioning, strong account plans, strong track record and the like. Having said that, we are also seeing that given the dynamic I talked about, which is the fact that certain enterprises continue to look for new age providers that can, you know, accelerate their transformation agenda. Especially in banking and insurance, that is playing out really well because there is a lot of credibility and specialization that they're looking for to back that change agenda very quickly.
In terms of just in Q3 TCV, we actually have a large deal from a health scale customer, and that is a new customer and the first deal itself is a large deal for us. I think we are even seeing customers looking for these new partners as they want to move away from their legacy provider. You can call it consolidation or you can call it, you know, opening up of the tap for new providers. We are seeing opportunities open up there as well. Okay, fair enough. Just one follow-up, Nitin Rakesh. In terms of our concentration, we have around 59% of revenues coming in from top 10. Any risks that we'd want to call out in terms of that? Actually, I think at this point, nothing to call out.
You know, much as large accounts, you know, are a concentration risk, they're actually equally a source of strength. We bring our flexibility and the ability to gradually not only, you know, be a reference customer for a new client, but also capability and competency pools can be reused and leadership is actually well attuned to how to scale the account. I think to me, having a number of large relationships. I mean, if it was one client that was 30% of revenue, I would have been in a different, you know, mode from a risk standpoint. Given that, you know, top five, I think, on an average, you know, are over $150 million, I think gives us the strength.
One of them is over 200, and still, you know, is within 11%-12% range. I think gives us a big source of strength when it comes to, you know, the, that mix. The reason I broke out the fact that majority of our top five clients were actually at record ARR, which means the quarterly revenue is at a new record in Q3. Despite being a seasonally weak quarter should set us up nicely for us to continue to bind these accounts and find additional growth.
I do believe that, even at these levels, you know, whether it's $200 million ARR and $75 million ARR or $50 million, we are still at a volume share position where we can continue to find growth because spend pools are in $ billions in these accounts. Fair enough. Thanks, Nitin. The largest deal we announced this quarter is actually from a top 10 customer. Okay. Okay. Thank you, and all the best. Thank you. Thank you.
Thank you. As there are no further questions from the participants, I now hand the conference over to Mr. Nitin Rakesh for closing comments. Thank you. Over to you, Nitin Rakesh.
Thank you all. You know, we're still living through some interesting times. Despite the headwinds we are seeing in some parts of the business, we continue to have operating leverage needed to invest in the business for growth. Which means we have to continue to make strategic investments, both in powering and in hunting. I think we'll continue to focus intensely on executing our strategy and supporting our clients in this complex environment. We're planning conservatively and are prepared for all environments. I thank you for your continued interest in Mphasis and your sustained investment and time and effort. We look forward to speaking to you after the next quarter.
Thank you. Ladies and gentlemen, on behalf of Mphasis Limited, that concludes this conference. If you have any further questions, please reach out to the Mphasis Investor Relations at investor.relations@mphasis.com. Thank you for joining us, and you may now disconnect your lines.