Q1 21/22

Jul 23, 2021

Good morning, ladies and gentlemen, and thank you for joining the NCSF's Q1 FY 2022 Earnings Conference Call. I am Lisanne, your moderator for the day. We have with us today Mr. Nitin Rakesh, CEO of Mphasis and Mr. Manish Duggar, CFO. As a reminder, there is a webcast link in the call in white mail that the ENSYS management team would be referring to today. The same presentation is also available on the ENSYS website that is www.ensys.com. In the Investors section under Financial and Filing as well on both the BSE and LSE websites. I request you to please have the presentation handy. As a reminder, all participant lines will be in the listen only mode and there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded. I now hand the conference over to Mr. Shiv Mathieu from CDR. Thank you, and over to you, sir. Yes. Thank you, Lizanne. Good morning, everyone, Thank you for joining us on Mphasis Q1 FY 2022 results conference call. We have with us today Mr. Nitin Rakesh, CEO Mr. Manish Duggar, CFO and Mr. Viju George, Head, Investor Relations. Before we begin, I would like to state that some of the statements in today's discussion may be forward looking in nature and may involve certain risks and uncertainties. A detailed statement in this regard is available on the Q1 FY 'twenty two results release that has been sent out to all of you earlier. I'll now invite Riten to begin the proceedings of this call. Over to you, Riten. Thank you, Shiv. Good morning, everyone, and thank you for joining the call this morning. I hope all are staying healthy and well. As we step into this new financial year, I look back at the past year and all the events that unfolded throughout the year. It is remarkable how much they've accomplished, not only in terms of financial performance, but also in our commitment to help clients, communities and our employees. I wish to first thank all Mphasis employees globally for their dedication and relentless efforts in the face of difficult personal challenges during an unprecedented situation. In the midst of this crisis, there were also powerful opportunities. I am glad that we made the investments at the time we did and proud of how we were able to achieve client demands. Our bring feedback into IT strategy enables us to profitably play in higher value and significant digital ad constructs. As we look back at some of the core megatrends that were in play before the crisis, it was clear that the end customer led disruption was becoming the norm, with expectations shifting dramatically towards a digital native experience powered and shaped by use of creative technologies that were being deployed in front of the customers. This also led to a pressure on most traditional enterprises to become more agile and responsive, especially in response times, while staying resilient in place of shifting volume and demand patterns. The demand from businesses to their CIO and IT providers was to provide this combination of great customer experience, high agility, while lowering the operating costs, including the costs of associated legacy technology. The recent crisis is a major accelerant in this regard and has accentuated the need for enterprises to fast track their transformation programs, leading to a snapback in demand along few major themes such as public and hybrid cloud adoption, data driven transformation to drive better personalized experiences as well as to unlock the power of data driven revenue streams. There is also a renewed focus on core modernization combined with the themes of cloud and data as well as investing in building new platforms that can drive a new business architecture aligned towards agility and customer centricity. The investments in consumer facing tech have also seen an acceleration with the digital growth mindset. All these trends are well captured by our tribes as we have discussed in the past few quarters and as I will further elaborate shortly. Playing profitably in these themes is instrumental to our market share gains and growth. Our 4 pillar strategy for FY 2020 beyond, as outlined in the last call, is underpinned on building a scalable, sustainable growth firm. To recap, our theme of continuity and acceleration to play profitably in the 4 tech megatrends identified in the prior slide rests on fortifying 4 pillars. 1st, it's continuously augmenting our capability, both from a go to market as a visibility perspective. This consists of tribes and squads expansion, our 2 differentiator, which we mentioned before. Specialist resource build up in our cloud unit, which is structured as a field foundational to all our tribes. Domain expertise that cuts across all the units that we operate in across all geographies. 2nd, geographic expansion of sales and delivery. We recently announced our expansion into Canada to build on our existing operations there. We're setting up a new emphasis Canadian headquarters in Calgary, Alberta in partnership with Government of Alberta and University of Calgary. This is a great showcase of public private partnership for tech transformation in the region. Through this multi faceted partnership, we plan to co invest with the university to establish a Quantum City Center of Excellence that will be dedicated to promoting the commercial application of quantum technologies. Recognized as one of the fastest growing service companies in quantum computing, Mphasis will act as anchor company committed to growing applications of quantum science to users in global market, while enabling fundamental research in quantum science and engineering throughout the university. We are also expanding our expansion to the continent on the continent of Europe with plans for the Nordics and ARC, especially Germany, along with our anchor clients in each of those regions. 3rd, deepening and broadening of the leadership pool. We promoted tenured leaders while also bringing in new management talent. And finally, expanding our portfolio of IP driven AI ML innovations. We continue to be a market leader in offering our AI ML and quantum computing solutions to some of the leading technology marketplaces. NextLab continues to be at the forefront of building these innovations. A key component of our continuity and acceleration strategy is the new plant acquisition or the NCA program. We've reinvigorated this program over the recent quarters with dedicated leadership. We've powered our 5 well considered select verticals to focus on for NCS, namely BFS and insurance, in both of which our positioning and track record is already strong. These two verticals are large enough to continue to provide growth runway in the long term. Logistics, high-tech and healthcare form the other 3 verticals on the NCA charter. Each of these 5 verticals has its respective client acquisition strategies led by dedicated sales, delivery and domain NCA leadership. We have an elaborate operating model in place to transition NCA clients to strategic client status with a client engagement structure and investments defined through the phases of the transition. We are pleased with the outcomes of our NCS strategy. Our strong growth in Hi Tech is encouraging. We see this becoming the next $100,000,000 vertical. On a quarterly annualized basis, we are already there. We also see our tech based propositions and solutions frameworks having valuable use cases in multiple verticals, augmenting our NCS strategy. Another heartening outcome is that today we count all top 10 U. S. Banks ranked by asset size among our clients, when 3 years ago we had 5 in this category. Except for Q1 of FY 2021, the pandemic quarter, we have had consistent sequential growth every quarter led by the direct business growth. Our direct business growth is accelerating on a larger revenue base. In Q1 FY22, our overall gross revenue at US362.9 million dollars registered a growth of 6% quarter over quarter and 18.8 percent year over year in U. S. Dollar terms and 5.9% quarter over quarter and 16.3% year over year in constant currency. Direct business continues to power our growth, growing at 10% quarter over quarter and 34.7% year over year in U. S. Dollar terms and 9.8% quarter over quarter and 32.5% year over year in constant currency. The trajectory of our direct annual growth is consistently rising with the growth dropping 32% in this quarter from 7% 4 quarters back in Q1 FY 2021. Our year over year growth in direct is the highest on record. The contribution of direct at 89% continues to rise. As we continue to prioritize our growth and investments in Direct, the strong showing has also helped us to manage the decline in DXC, the contribution of which is now at 9% of revenue. DXC revenue declined 18.1% quarter over quarter 48.7 percent year over year in constant currency. This was in line with our commentary of DxE dropping to mid to high single digit as a percent of revenue by end of FY 2022. We continue to add clients in the significant revenue buckets. In this quarter, we added 2 clients in the U. S. $100,000,000 plus category and U. S. $50,000,000 plus category each to take the count of 100,000,000 and 50,000,000 clients to 4 and 7, respectively. Geography wise, all our markets fared well. Our core market, the U. S, grew 27.8%. Direct in Europe has grown 35.5% year over year in U. S. Dollar terms. Our pipeline in Europe is strong, especially with new clients, and we expect this region to continue to be a growth driver for FY 2022 and beyond. Specifically, I would like to call out our sustained industry leading growth performance in direct. Market share gains with our top 10 clients and beyond have helped drive growth here. Contribution from our key clients has been consistently rising, reflecting increasing desktop key relationships and share gains. While our top 10 clients have collectively grown double digits year over year on a consistent basis, what is equally heartening is the growth picking up beyond the top 10 clients, a theme that we will return to in a bit. We believe that our broad based success with clients positions us well for industry leading growth in the right for FY 2022, on top of our industry leading direct growth in FY 2021, in line with our FY22 guidance articulated last quarter. Our growth this quarter indirect was broad based across most verticals. Our largest vertical, banking and capital markets, has grown 23.7% year over year in constant currency for the quarter, representing the 4th straight quarter of 20 plus percent growth. Our direct BCM grew 11% quarter over quarter and 29.3% year over year in U. S. Dollar terms. On a year over year basis, we believe this is best in class growth in that industry segment and was broad based across sub segments of BCM. We continue to enjoy share gains with our key clients in BCM. This quarter also saw robust sequential growth in ICCE and logistics and transportation verticals within direct, with ITCE growing at 16.4% sequentially and 168% year over year off a low base and logistics transportation growing at 14.4% sequentially 27.7% year over year in constant currency. Our client stats reflect the strengthening position with several top clients post vendor consolidation. We continue to believe that our wallet share gains emanate from our competency driven positioning. As our top clients prioritize and execute their spending plans, our preferred partner status places us well to capture additional market share. Notably, we are also seeing stronger growth from the lower half of our top 10 clients as well as growth beyond our top 10 clients. Our top 5 and top 10 clients have grown consistently, registering 17% and 24% growth, respectively, in 1Q on a trailing 12 month basis. The average contribution of our top 5 clients exceeds $110,000,000 on a trailing 12 month basis as well. Our top 4 clients are now $100,000,000 plus on a trailing 12 month basis, and all our top 5 clients are $25,000,000 plus which we believe is unique for a company of our size. Top clients number 6 to 10 have grown at 56% on a trailing 12 month basis. This is much higher than average growth of 6 to 10 indicates strong growth diversification among our key clients. Our clients in the 11 to 20 bucket have grown at 19% on a trailing 12 month basis as well, with 24% growth for the overall direct business on a TTM basis. Notably, all of our $7,000,000 plus clients grew sequentially. In a nutshell, our strong client performance across the board supports our industry leading growth in direct. We recorded a TCV of $505,000,000 in the 1st quarter, an all time hyperemphasis. This quarter's TCV includes a $250,000,000 deal that we signed in this quarter and announced in our last earnings call. This marks the 6th straight quarter of $1,000,000 plus net new TCV that is not insured in renewal deals. Our TCV on a trailing 12 month basis is up 62% year over year. We believe that our firmly rising TCV trend is a testament to our improving track record in the scale and consistency of large deals. Specifically, I would like to make 2 points about our TCV composition that continues to shape our deals on an ongoing basis. There's an increasing component of large and longer tenure deals. These deals are transformation led, integrated and leverage our multiple deal archetypes and tribes in combination. Secondly, there is a heavy news and services portion in our net new PCV, thanks to the tribes with a contribution of 85% of 1st quarter deals in news and areas. As we report our TCV on a net new basis excluding renewals, we find the correlation between our TCV and revenue growth to be fairly high, exceeding 0.9 in this quarter. Coming to our client metrics. Our track record of migrating clients from 1 revenue bucket to the next continues to be healthy. Specifically, our conversion ratio of clients in 1 revenue tier to the next is solid and improving. Specifically, half of our $10,000,000 plus clients are $20 plus 1,000,000 clients over 3 quarters and over 3 quarters of our clients in the $20 plus 1,000,000 category are $50,000,000 plus and 60% of our $50,000,000 plus clients are $100,000,000 plus clients. These stats have continued to improve. We win 2 large deals on average every quarter, marked by increasing deal sizes. As the slide indicates, the average yield size on an ATM basis is $96,000,000 three times of what it was 2 years ago. As I mentioned, our large yields are increasingly multi tower, transmission based and longer tenure. The growing size reflects this capability evolution. Our margin philosophy affords us the flexibility to manage our profitability in an environment of rising cost of talent in a heated market. In this quarter, we were able to absorb higher cost of revenue and unexpected COVID related expenses by modulating our discretionary spend on the SG and A side and thus operated in the stated margin range. We've hired 1981 employees in the Q1 FY 2022, which represents a 7% addition to our workforce. Our utilization rate reflects our capacity buildup, including trainees, and we expect to deploy our bench in the Q2 while continuing to aggressively hire to service new demand. Our EBIT margin for the quarter at 15.9% are in line with our stated operating margin band of 15.5% to 17%. Our EPS for the quarter at 18.16%, grew 23.1% year over year. We had a one time COVID impact of about 30 basis points. Our EPS growth reflects exceeds our operating profit growth, which in turn exceeds our revenue growth, which we believe indicates operating leverage in our model. Our cash generation stood at $48,000,000 in Q1, represents the 5th consecutive quarter of $40,000,000 plus cash generation the highest absolute level in the past 19 quarters. Our operating cash flow as a percentage of EBITDA continues to rise and exceeds our profit. Our closing cash balance of $462,000,000 is highest since the Q1 of FY 2017. Several ingredients go into formulation of our success mantra that covers our robust performance in direct, namely our personalized customer engagement model with key clients, with sales client partner and delivery leaders for the account and dedicated account CTOs. Customer is the center of our GTM and resource allocation, which allows for a high degree of account specific innovation. 2nd, our ability to build an ever growing pipeline on the back of our effective Tizen scores model, which gives us future visibility. 85 percent of our T3 wins are TRY led. Supporting our TRY's model with the smart surround and lean port strategy that characterizes Amphis's innovation DNA, including client dedicated CTOs and consulting oriented technology advisory group, programmatic innovation with our partner program, focused research and IP innovation through our NextLabs group. Our capacity to switch large integrated deals using our proven transformation models such as sign to back and 0 cost transformation, which we have discussed in the past with you. The $250,000,000 engagement that we've announced is a good example of this. And finally, the scaling up of the digital competencies of our talent with our well established key learning service platform, PlanetNext. This has seen rapid adoption since its inception 3 years ago. It provides emphasis the skill muscle to enable execution on next gen positioning with an approach to a T shaped talent, blending domain and technology competencies for next gen skills. All of the above 3rd together constitute our business operating model designed for differentiation, repeatability and scalability. This model enables us to win more proactively with higher win rates. Over 80% of PCB deal wins are proactively shaped. We are pleased to note that given the strong demand for our services and strengthening position across our client base, we also see pricing leverage in our business. To that end, we have actioned a value based pricing program and are seeing early success in some parts of the portfolio. We expect this to be able to help mitigate some supply side challenges and provide currency for further investments with our clients. To sum up, I'll leave you with 3 points. One, we are off to a good start in FY 2022. Direct growth, 32.5 percent year over year in constant currency, will continue to be supported by robust TCV that we've added across verticals. Direct performance has also helped us mitigate declines in DXC, the contribution of which is now reduced to 9% of revenue in the Q1. 2, all our KPIs are moving in the right direction, namely our track record of winning large deals is consistently improving with 100,000,000, 200,000,000 and 250,000,000 deals in less than a year. The nature of our deals is increasingly transformation led and long tenure based. Our TCV at an all time high of $500,000,000 is up 62% on a trailing 12 month basis. Our growth is getting broad based with Europe, high-tech, logistics and transportation aiding growth in addition to the anchor verticals of BCM and anchor geography in the U. S. We continue to drive market share gains with our key clients. And finally, our client mining metrics across revenue buckets continues to strengthen. As is referenced, our average top 5 client contribution costs $110,000,000 and our top 6 to 10 clients are now growing well above our direct revenue growth with 67 percent LTM growth. We value to our account of $50,000,000 $100,000,000 clients with 4 clients in the $100,000,000 plus and $760,000,000 plus bucket. We believe this is unique for a company of our size. 3, investing for growth by using operating leverage and operating as any target operating margin band. We believe our margin stands and shows stability in an environment of supply headwinds. Thus, the revenue growth translates into sustainable EPS impact growth and consistently rising free cash flow generation, complemented by improving DSO. Our strong start to the year reinforces our confidence in reiterating our guidance for the industry leading growth in direct on top of industry leading performance in FY 2021. We retain our scheduled operating margin band of 15.5% to 17%. Our margin stance enables us to make the needed investments to sustain our industry leading direct growth, while also absorbing rising costs associated with supply side. We expect continued growth from our key clients as revenue consolidation gains continue to accrue in a healthy spend environment. It's the increasingly diversified nature of our client base and their metrics that are foundation of our growth. On that note, I request the operator to open the line for questions, please. Thank you. Ladies and gentlemen, we will now begin with the question and answer session. The first question is from the line of Mukul Garg from Motilal Oswal. Please go ahead. Thanks. First of all, Leland, congratulations, excellent quarter in terms of growth. The first question obviously is on this, the kind of growth you are delivering currently. I think this probably will be one of the strongest growth ever in your history. If you can just give us some sense of like how sustainable is this? Was there any one off which was there? And combined with the delays in number, what's the perception of the market right now versus maybe a quarter back? Are you seeing an explanation in the overall deal environment or it remains it was robust and it remains so? Great question, Mukul. I think there are 3 or 4 questions in your questions, but let me address them 1 by 1. Firstly, I think as I mentioned in my opening remarks, the spend environment is actually fairly tailwinded. I think the number of the trends that have accelerated, thanks to this despite the unfortunate human costs of the crisis, are basically forcing enterprises to accelerate a lot of their longer term spend plans into a crunch timeframe. I think the basic structural pivot in enterprise tech consumption really is very simply the massive migration from spending money in a CapEx driven on prem data center centric model to consuming almost all tech on as a service, because that gives them the agility and the customer centricity that is needed to compete in the market today. This is not an overnight shift. This is not a 1, 2 quarter phenomenon. This was something that started in the 2012, 2013, 2014 timeframe, slowly was picking up speed and got massively accelerated by the crisis. We still believe this is a 3 to 5 year journey for most enterprises at the very least because of the complexity required in actually making that pivot and changing that model. It is a technological change. There's a skill set issue. It is a culture issue. So I think this is in many of our conversations, clients are calling it a tech investing super cycle that will last at least a few years. Now of course, our growth has been fairly broad based. I mentioned that across client segments, across industries. It is not led by one client expansion. It is not led by one deal conversion. It is actually fairly broad based because the fact all of our $50,000,000 plus clients have grown sequentially and all of our verticals have seen solid growth on a year over year basis is really a culmination of all the work that we've done and the fact that we've actually had a pretty strong TCV wins for 5 quarters in a row now. So I think it's a to me, it is we are in the midst of a pretty strong tech investment cycle. And the challenge for us will be to keep up with those demands, to keep up with sets and to also continue to look around the corners because a lot of the tech is actually evolving very, very rapidly. Not only the consumption is evolved rapidly, the change is also evolving very rapidly. So ability to just look ahead and making those investments, what looked like a 3, 4 year runway is probably a 2 quarter runway to invest and hence we have to be very, very nimble in those investment decisions as well. So, hopefully that gives you some color. Sure. Thanks. And I know that DXC is becoming a smaller part of your business. So this is kind of a repeated question. Any update on the resolution with DXC given the stage where you are in the MRC? Again, I said that last time also, Mukher, I think we've given you some guidance on where we think we will stabilize. At this point, it's a little bit premature to talk about the I know the next steps probably as we have more upgrades, we will provide them as we go forward. Fair enough. I'll get back into the queue. Thanks for taking my question and best of luck for rest of the year. Thank you. Thank you. The next question is from the line of Manik Taneja from JM Financial. Please go ahead. Hi, thank you for the opportunity and congratulations for a very solid performance this quarter. Just want to get some sense on a couple of things. We've seen our onshore proportion of revenues increase in the current quarter. This is contrary to the trend that we've seen across peers. So is this led by some of the new deals will ramp up? And do we expect this to reverse? That's question number 1. The second question was with regards to your comments on pricing. You suggested that you were seeing some pricing leverage in the market. Just wanted to get more insights on the overall pricing environment. And do you think that has negate some of the supply side pressures? Thanks. Sure. I understood your second question. I'm a little bit unserious to what the question was on the first part. But let me address the pricing issue and then maybe you can summarize your first question for me again. I think what I mentioned on the pricing side was that as you go after value chain, as we engage really our ability to drive value based pricing and move away from pure simple cost plus models, as well as actually work closely with customers in ensuring that they're able to see the value we bring and the environment we're operating in and hence give us the ability to do right pricing. So I think that is a program that we are very collaboratively working on with our engagement teams as well as with our clients. And we definitely expect that release some of the supply constraints driven margin pressures. Of course, the intention for us is to make sure that we are able to balance growth needs, investment needs and operate in the bank that we've stated. So we definitely think that is a lever we can use to continue to invest in the business. I think on your first question, you asked us whether the growth acceleration was due to one large deal or something broader, am I right? So, Nitin, basically the question was with regards to the on-site increase in on-site component of revenues in the current quarter. Just wanted to understand, is this led by some of the largely rampers? No, no, I understood. I think headcount addition is a leading indicator for revenue. Definitely, some of the larger deals require us to ramp up on-site first and then we obviously find ways to continue to stabilize as we sometimes transition and sometimes stabilize the program. If you look at Q4, we had a pretty strong headcount addition on-site. And that's obviously converted to revenue this quarter because that's the way the cycle works. If you look at the current quarter, we've actually had stronger headcount addition offshore. So some of that will actually normalize as we go forward. So I think the long trend doesn't look like it's going to change dramatically. We will probably have a bias towards growth offshore. But at the same time, we'll obviously continue to proportionately add people in whichever geography we talk about based on where we need the talent or where we need to deliver the work. Also keep in mind, we've also added newer geographies outside India. So some of that also may be playing up in the revenue numbers and we can give you some more color on that as well as we go forward. Sure. Thank you and all the best, Peter. Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead. Yes. Hi, good morning, everyone, and congratulations on a great quarter. My question is around margins. So this quarter, we have seen gross margins fall off quite a bit and we have dialed back on S and M and G and A. Just wanted your sense on how much of this gross margins is recoverable going forward? And we don't report attrition, but it's very clear that from an industry perspective, it's going up quite a bit. So in that context, in terms of gross margin recoverability and your ability to continue to sort of invest in S and M. I just wanted your thoughts on that. So, Sunitin, I'll give you a quick response and maybe Manish can add some more color to it. Broadly speaking, the impact on gross margin is explainable by 2 or 3 factors. Firstly, if you look at just the COVID impact, we called out about 30 bps or so as a one time impact. Then we had utilization that dropped because we ramped up. There is obviously a lag time between hiring, deployment and billability or ability to convert the employees from a revenue standpoint. That obviously has an impact on the margin as well. There is some element of this onshore versus offshore based on just the phase of the ramp up. And also, of course, there is some element of the ability to attract talent. And I think you referenced attrition and cost of labor. So clearly, we are going through those as well. I think the key thing to note is that we talked about over the last 3 or 4 quarters, the fact that we will prioritize growth with a margin band that we want to operate in. There are certain discretionary spends that are non manpower related, even though still in our SG and A expense line. And I think we were able to manage those to make sure that we stay in the EBIT operating band ratio. Combined the factors that I talked about from the standpoint of some pricing leverage, some normalization in the on-site offshore mix given the onboarding trends of the Q1. And of course, our ability to continue to operate the supply chain, so we keep our margin steady is other things that we'll focus on as we go forward. I don't know Manish, you want to add anything to that. I think, Nathan, you covered all the points. I would just like to give one color to it, which is the short term and the long term. There are to your point, Nitin, that Nitin, Padmanabhan, I mean, there are a few costs which has come in as a one time, whether it is the COVID expense or the investment for growth reflected in more utilization. Those are recoverable in the short run. And when we look at some of the longer term investments, those investments will probably have matching from our pricing conversations. So I guess to your point, gross margins are certainly recoverable, some in short term, some in long term. And while that happens, the profitability can be maintained in that range that we have talked about very, very clearly. And the primary levers are the discretionary spend, which we can kind of control, and that's what we have demonstrated in this quarter as well. Sure. That's helpful. Just one more from my side. The unbilled revenue has gone up quite a bit this quarter. Just some color, if you could give share, what's driving that and when you expect normalization? Yes. Sure. As you know that month to month gets over, the invoicing happens after the month. And when you are in an accelerating mode, your subsequent month revenues are typically much higher than the previous month. And if you look at the last month revenue of previous quarter versus last month revenue of this quarter, that's a delta significantly larger than the incremental unbilled. Just to give you some quantification, the actual increase in unbilled is about $30,000,000 while the quarter end month end revenues are actually higher by about $17,000,000 From an aging perspective, 95% of this is within the payment contracted terms. So I would say that this unbilled is just a reflection of the scale of growth and as this as the period goes, we will build them and it will move to the build category. Overall, on a DSO basis, if you look at it, unbilled happens to be 35 days out of the 61 days of DSO, which is pretty much in line with what we have seen in the past as well. Well. We'll move on to the next question that is from the line of Sandeep Shah from Equita Securities. Please go ahead. Yes. Thanks for the opportunity and congrats on a very great contribution here from revenue and margin. Nitin, it's good to hear about the pricing comment as a way. So just wanted to understand, is it becoming a rising uptick from most of your strategic account? Or wanted to understand that because at one end in the industry, there is a traditional portfolio where pricing pressure continues. At the other end, there is a new generation portfolio where pricing increase can be possible. So how these buckets looks like for the emphasis? And what confidence drives us that even despite some legacy portfolio, we are confident to bring the pricing up going forward? So some color will help, Basil. Would hope. I think you actually answered your own question. Pricing leverage is a function of what part of the value chain you're operating in. I think I called out some 4 or 5 key trends at the beginning of my presentation. Those are areas where it is possible for us to look at value based pricing. It is also possible for us to construct some transformation themes like 0 cost, where we can actually bundle the run business in a managed outcome construct, apply extreme automation and then find the savings to deploy back into the change in the transformation programs. Those are turning to be fairly popular with at least a number of our engagements where we are able to help the client find the money to apply into transformation and hence increase the size and scope of what we do. I think on a pure run the business or legacy portfolio basis, you're right, there is pressure on those costs because that's a leaking bucket and will continue to actually be as a leaking portion of tech spend as the spend migrates to this new mode of consuming everything on demand. So I think blend on an overall basis, we do believe that we have the ability to continue to improve our pricing leverage. Of course, as I mentioned, we're working very closely with our engagement teams and our clients in making sure that we're able to right price all our engagements. Okay, okay. Thanks. And just on the pipeline, with great closure of larger deal size, can you throw some light whether such larger deal size or mega deals are still in the pipeline? Pipeline now has a more mix of small to medium size. Second on BPO, this time also the revenue growth has been robust. So is it driven through digital or is it outside digital risk which has driven the growth in BPO? Yes. And I think first question on we've said in the last 3 or 4 quarters that our pipeline continues to be robust, which means as we've converted almost $1,600,000,000 into deals 1, we've continued to actually add new deals to the pipeline. And as always, the large deals will be lumpy, but some will be $50,000,000 some could be $250,000,000 But the pipeline actually continues to be fairly robust and fairly healthy and fairly broad based across the sizes of these as well. Of course, we'll give you more color as we get through the next 2 or 3 quarters. On the BPS revenue growth, I think some of it is, as I mentioned over the last I think in FY 2021 Q3, we talked about the fact that many of our deals are actually bundled where we are able to find with operating levers to apply automation on the business process, apply the whole customer journey map, adviser workstation and digital intervention. So in a number of ways, it is led by digital transformation. I think the Doctor portion has been fairly stable given that most of the volumes that we saw increased happened in FY 2021. So I think that portion will continue to stay stable, but broadly the BPS growth is really driven more by transformation projects that are bundled along with many of our large deal constructs. Okay, okay. Thanks. And just last bookkeeping question. Mahesh, wanted to understand in terms of the ForEx hedge gain in the revenue line, will it be a tailwind to the margin in FY 2022 as of which versus FY 2021? So at this point in time, we ended the quarter at INR 74 point 3 rupees average and at least for the given our hedge policy of covering 100% for the next 4 quarters and progressively reduced percentage over the next 4 quarters. The forward premium that we have is higher than what we currently are experiencing. So we do believe that if the exchange remains at the level at which it is, we should see some tailwind on margins, at least for that 4 to 6 quarters period. Okay. Thanks and all the best. Thank you. The next question is from the line of Dipesh Mehta from MK Global. Please go ahead. Yes. Thanks for the opportunity. Congrats on very strong execution and very early deleter, something. Two questions. First about the revenue mix, is our revenue mix still toward more new gen business? And we as you commented about value based pricing program, do you think structurally our margin will expand over medium term considering these two factors where your new gen is growing and you have some ability to price it better? Second question is about can you provide some update about how the Blackstone completed the portfolio doing for us over, let's say, last few quarters? And the third thing is about the headcount addition, how we are managing our overall resource requirement, pressure versus electricity, if you can provide some color? Thanks. So, Dipesh, on the first one, I think I actually reiterated the philosophy when I talked about the pricing discussion. Firstly, our attempt is to maximize growth, maximize TCV wins and more importantly, TCV conversion to revenue growth. And that requires a certain investment, both in capability, competency buildup, utilization, having the right talent, all of the above. So I think we will prioritize growth. And the reason we want to hold the margin in the band is because there will be puts and takes that will require us every quarter to adjust up or down some of these investments. So I think pricing is at this point in time, at least we are seeing it as a hedge against some of the inflationary pressures. But at this point, our expectation is to continue to operate in the margin guidance that we gave. And of course, there is there will be, as I mentioned, based on SV quarterly movement, for example, in Q1, we had unexpected COVID issues. But I think we'll continue to operate in the guidance range that we gave, but prioritize for growth. Second question that you had was around Blackstone portfolio. I think we again, it's very much part of our direct business. It continues to be a fairly strong contributor to pipeline growth as well as TCV conversion. By definition, of course, those are companies that are not the size and scale of some of our larger accounts. But as a cluster, that is definitely very, very valuable to us and we'll continue to invest and prioritize on that growth. Not only Blackstone, but all the other stakeholders that we are now working with will fit in that bucket. We obviously made a lot of investment in creating a go to market approach and making sure that we have the right set up for us to service those customers. We'll continue to give you update as we have any. Hopefully, there will be some more specific updates. I think it's a little premature for us to talk about some of those at this stage. And finally, I think on the supply side, we are taking a supply chain approach. It's a blend of, of course, campus recruitment as well as lateral recruitment. And not to forget the 3rd leg of this tool continues to be a talent transformation program called TalentNext. The additional thing we've done is we've added new supply centers. If you remember the last quarter, we talked about addition of our delivery centers in Taiwan. Actually, we expanded that significantly. Mexico was a new center, Costa Rica was a new center, Estonia is a new center. And we just announced we actually expanded in the UK for a specific specific plant project outside of London in a city called Leeds. And we also announced a program to actually apply talent transformation and attract the talent pool from Calgary over the next couple of years. So I think all of these are supply chain initiatives as well as expansion in some markets like UK and Canada. All of this kind of goes into the solving the puzzle for finding the right talent for the right job in the right market at the right price. Understood. Thank you. Thank you. The next question is from the line of Amit Kanandra from HDFC AMC. Please go ahead. Hello? Hello? Yes, go ahead. Yes, I just have one question. So now DFC is a very small proportion of your overall top line and anyways the other business segments continue to do well. So how long before you can now confidently guide that you will have industry leading overall top line growth and not only the direct core growth? Manish, I think the answer to that is that as we have any update we'll give you. I think at this point in time, let's just stay with the fact that we expect industrial leading growth in direct, which is now 80% or 89% of our revenue. And we still expect top quartile growth in the overall company. Where we end up with FY 2022, again, we have 3 more quarters to go. But I think it's only fair given the current position that we will give you outlook based on our current visibility. So I think the best case visibility I can give you at this point in time. Having said that, I think keep in mind that we have seen accelerating growth in direct and that has actually really helped us mitigate. And in many cases, we were able to take dynamic calls on where we want to invest and what segments we want to grow. So it's great as we try to manage the balance of the portfolio, it's great to actually have the optionality of making sure that we are able to grow in strategic chosen areas. And that's the philosophy that we'll continue to follow. Sure. Thanks. Thank you. The next question is from the line of Mohit Jain from Anandrati. Please go ahead. Hi, Manish. Just one question on the margin trajectory for the rest of the year. Like are you guys like given the situation on the attrition side, are you guys planning some one time correction of wages in 1 of the quarters? Or do you think the margin trajectory for the year should be quite similar to what we have seen in the past year? Given we saw the increased demand and the supply situation and this being a year of execution, while we had an upward bias to our margin, we felt it prudent to keep it in the range of 15.5% at the bottom. And we want to make sure we continue with our philosophy of investing for growth and capture the opportunity for that at this point in time. We would like to make sure that we or rather, we believe we should be able to sustain the margins in a narrow time and try and maximize from a growth opportunity perspective. As we talked about the investments that we made last quarter and managed to still deliver consistent margins by managing the discretionary spend, I would say that sustaining the margins is something that we will certainly be able to do during the year. My specific question was like generally, first half versus second half, you had a different trend, of course, in FY 2021. But before that, we used to have a better margin in the second half because most of the things used to happen in the first half. So from a second quarter specifically perspective, you are seeing there is no specific direction that you'll see in 1 quarter or something. It will be how many it used to happen for emphasis spread across the year. Is that correct? The good thing from our model perspective is the compensation increase is baked in on a quarterly basis given the philosophy of that being linked to the GC score, which we talked about extensively in the last quarter's earnings. So we don't expect a lumpy 1 quarter big impact because of that. And at the same time, the tailwinds that we will have on the margins, how much of that will flow into the EBIT will depend on our desire to continue invest and plow back some of that to the SC expenses. And if we still get some tailwinds and if the whole supply situation becomes better, both in terms of COVID as well as in terms of availability of talent, then it may see an upward bias. But at this point in time, based on what we see, we think it will remain in our range. Understood. And second was on the M and A side. I think a few quarters back, we're talking about expanding some presence in Europe. So is there an update there or how you guys are sort of approaching this whole thing of increasing our presence in Europe? I can take that. Sorry, Manish. Yes, I can take that, Manish. Yes, I mean it's not just a Europe issue, to be honest. I think it's a multi factor matrix that we are working with. There's a competency element. I think we've talked about strengthening some of our tribes. Some of our tribes are market leading, some of them need more investment, some of that escalation can happen through M and A. For example, we did DevOps strengthening through Stelligent. We did data drive strengthening through our acquisition of Datalytics in November. And we've identified a few more areas as well as prospects that we are actively looking at right now. 2nd element is customer acquisition driven. There are segments of verticals or clients that we don't operate in. We have a very clear identification of which segments are attractive to us and we have that on the list as well as on the search process. And thirdly is geography. I think if you can find something that helps us accelerate growth in a new market, we'll definitely look at it. But there is really a combination of these 3. If you can find something that cuts across 2 of the 3 or 3 out of the 3 that we get prioritized. And that's the philosophy we are taking. Very actively looking, very actively diligenceing businesses and very actively continue to source new transactions. So we should expect something in FY 2022. Is that a fair It's not done till it's done. So it's hard for me to give you certainty on that, but the intent is definitely there. Anything on size, how big or small could it be? Or any comfort range that you have while looking at these targets? We talked about some indication in the last quarter. We said we are not looking to do transformational, it's not about doing a mega deal. It's really about looking at still the mindset is a little bit, I would say, strategic stroke tuck in, tuck in is a little bit smaller, strategic is a little bit bigger. But I would say anything that is sub-ten percent, 15% of revenue is probably the upper limit right now. Understood. Thank you, sir. That's all from my side and all the best. Thank you. The next question is from the line of Vikas Ruja from AtticStock Booking. Please go ahead. Yes, hi. Congrats on a very solid quarter. I have two questions. First, e bookings continue to surprise positively. Just wanted to understand what has changed exactly or what are we doing different that our bookings are much stronger than compared to our peers especially? And secondly on DXC, the revenue has been declining and now last quarter you said it will end up around mid single digits. My question is DXC has been surprising continuously on the negative side. And what gives us confidence now that it will actually end up at mid single digit and they will not exit it completely? Thank you. Yes. I think on the first question, I actually spent a considerable amount of time going through the what works for us and what's the success formula that is actually working and giving us these larger deals and bigger TCV deals. If you kind of go back to the earnings deck that we presented and look at the slide that talked about the 4 ingredients on Slide 12, That's really a combination of all the work we've done, all the deals architecturally constructed, early engagement with clients, consulting led, tech advisory led group, repeatability of our go to market muscle. If a deal architect works in one customer, it can be directly carried to the other. And most importantly, our mindset of being in the business of 1, which means every customer gets a fairly dedicated engagement personalized kind of mindset. That helps us contextualize, understand the client environment and then position for maximum impact. On your second question around DXC, of course, there are no guarantees. No customer has given any guarantee. We are to continue to work to kind of win that business. I mean, based on our understanding of the accounts, the relationship, their needs, our ability to help, whether in industries or in geographies. We do believe at this point in time that we will have continued relationship. As and when things evolve and if things then change, we will give you the update. But I think that's the best answer I can give you right now on our visibility. Of course, as I mentioned, if things change, we will update you. There are no guarantees in business. We have to earn every day. Thank you so much. Thank you. The next question is from the line of Nirmal Bari from Samixa Capital. Please go ahead. Yes. Thanks for taking my question and congrats on the very good set of numbers. My first question is on the logistics and transportation, the gross margin that we gave in segmental. So there we have been recording significantly stronger gross margin in logistics and transportation. So what is the reason for that? And is that sustainable? I think, again, every cloud environment is different, every industry has its own different dynamic. Competitive intensity, value pricing, we talked about, some of those things are at play here. So I think this is not something new, it's historically improved as well. And we do continue to believe that as well as we keep feeding growth into that segment, we'll have the ability and the leverage to continue to generate good margins there. Okay. And the second part is on the other slightly report. So is there any segment significantly big enough there that you would want to break out that segment out from it? We made certain changes to the segment reportings. I think we still have some more work to do as we expand some of these segments. We talked about 5 focus areas on the NCA side. We are right now clubbing many of those. In others, we will start reporting them separately as we believe we get to a point that we need to start reporting. I think at this point in time, these are good visibility areas for us to give you. The third question is that one of the participants earlier asked this question, but I'd like to frame it a bit differently. On the supply side, I think that what we are seeing from the LSA, there's so much of issue regarding attrition and wage inflation and everything. We have typically over the years been giving salary hikes over the entire duration of the year end. There is no one single quarter where this impact. But at this time, are we planning to do it a bit differently? I think there would be a salary hike related to the normal upscaling as well as we will give out some one off salary hikes in any particular quarter just to retain client sorry, employees? I think that's a good question. We debate that constantly. Anything as part of that periodic adjustment that we've talked about, we always have some discretion in how we want to play that, how we want to spend that, so to speak, retention pool. So I think we'll continue to make those decisions on a pretty dynamic basis and a judicial basis. I think I have a little bit of a different approach and view to this demand supply dynamic. I think we are as an industry, we are in the business of creating net new skills. We exist because clients expect us to bring skills to them. We expect us to bring a lot more than skills today. Expect us to bring skills to them. We expect us to bring a lot more than skills today. But at the very heart, we have to continue to find ways to create new supply chains. And I think I talked a little bit about how we've expanded that across locations, across geographies, across tiers, across experience levels and across cities. And I think we need to just continue to do that. And whatever it takes in the interim to keep customer service delivery at the heart of everything we do and make sure that we are able to retain, retrain and onboard new talent. I think all of those are part of the equation. Okay. And the final question is, if you can please repeat the 11 to 20 customers growth in the current quarter sequentially as well as year on year. I missed that number earlier. Sure. I think the 11% to 20% number is 19%. Year on year. Yes. Not trailing 12 months. Okay. Got it. Okay. Thank you. Thank you. The next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead. Hi. Thanks for the opportunity and congrats on good set of numbers. Nitin, one question in terms of we've done pretty well in the top 10 accounts and now we are seeing a broadening of that growth, let's say, 19% growth in your top 11% to 20%. So if you can just give some idea on the next set of clients, their profile in terms of size, scale as well as potential to drive continued improvement in terms of the flow going forward? Absolutely, Ashwin. I think the profile of customers is actually not that different, because if you're going to recall, most of our clients, I talked about the fact that we now have top 10 U. S. Banks by assets of customers. We had 5 of them 3 years ago. So those will obviously not be sitting in top 10 already. That's a good example of what Potensoe exists also the top 10. I think by definition, we are obviously a little bit more tilted towards the Fortune 100, 200, 500 client segment anyways. So that's where I think the opportunity is really, really immense. We have the playbook. We understand what it takes to create that being in the business of one mindset. We operate with a very high client centricity mindset. We invest in engagement and understanding of the client priorities, and we take the best of emphasis through our drives and engagement teams in there. So I'm actually very excited that we have a tremendous group of customers outside of top 10, potentially not just the top next 10, but the next 25 to 30 that actually can definitely be target potential area for us to bring into this into the client metric that we've talked about. The reason we now have 4 clients over $100,000,000 7 clients over $50,000,000 and the fact that we've improved every segment of metric is really the playbook that we will just continue to apply at scale. And that's really what I think we are very, very focused on from an execution standpoint. Fair. Thanks. And just one more. In terms of say, do you see an exercise of that MRC shortfall related penalty clause in DXP near term and could that be a one time benefit for us in terms of margins near term or we would still think about smoothing the decline here instead of going in for that? Yes. At this point, I would refrain from making any comments or confirmations because it's just we want to just make sure that we have all the optionality we need as we think about those things. So we'll give you an update as we go through the next in a couple of quarters. Okay. Thanks, Nitin, and all the best. Thank you. Thank you. The next question is from the line of Ashok from SUD Life. Please go ahead. Ashok, your line is in the talk mode. Please go ahead. As there's no response from the current participants, we'll move on to the next. That is from the line of Rashid Jain Jainwala from IISL. Please go ahead. Yes. Thanks for the opportunity. Just one question. Given that we are seeing a pretty sharp decline in DSP for the past 4, 5 quarters. I just wanted to understand a bit in terms of how do we manage the supply side there or the headcount, right? Because if you really look at that, DSP is largely a non DSSI portfolio. So just wanted to understand the fungibility, does that help? How do we manage supply there? And is that has does that have any bearing on margins in the near term? Absolutely, Rishi. Great question. I think there is there are 2 ways to think about it. There is some potential for us to redeploy. There is extremely high complexity matching those ramp downs with ramp ups. And in many cases, we actually have to run them through the Calendlyx program with that visibility in mind. So I think it's a complex equation that we have to manage. That definitely has a bearing on many of the metrics that you see in the MD and A. For example, you will see decline in ITO business. You will see decline in some elements of our verticals. So some places we do have fungibility. In some cases we use that as best as we can. I think in some part, our first effort is to make sure that we are able to run them through our riskrelling programs and absorb them. And that's one of the reasons why you will see on a net addition basis, we are still while the numbers are going up, we are still able to actually reuse and reduce some of those people. To your question around margin impact, yes, that has some impact on holding cost or utilization because it's impossible to match it on a day to day basis. But that's something that we've made part of our management metrics and we have to continue to focus on those on a daily basis. Great. And secondly, on the deal wins, right, given that the quantum has increased substantially, can you give some color on how the average tenure has moved over the past 1 year? And also, if the large landmark deal that we had won has already started giving revenues in 1Q? Thank you. So, Rishi, I think the average tenure I mean, we haven't put that number out publicly. We obviously are tracking it internally. If you look at the metric of the $96,000,000 average deal size, that obviously is also impacted by the fact that the large deal is actually a 10 year deal. That's probably the longest deal we've actually signed in the history of the company. But on an average basis, our duration definitely has moved, I would say, closer to the 2 to 3 year mark. There's always a blend. There are some deals that are much shorter term, less than a year, depending on the type of work we do. But there are many that go in the 3, 4, 5 year capital. So I think it's a very good, I would say, reset and capability reflection that we're able to actually do larger, more transformational deals that run longer as well. If I can just add to that Rishi, Manish here. While there is an increase in the number of large deals and the size of large deals and we are winning significant amount of TCV. The tenure is not increasing very significantly. It is also reflected in the fact that when you see the correlation coefficient, which we have been reporting, that has actually shown an improvement in terms of year on year, which means we are converting the TCV to revenue in a better manner than what we were doing before. Yes. I think the only other question that we asked, Rishi, is the largest conversion. I think we talked about the fact that we are going to be in transition in the current quarter, and we expect that to start converting to revenue Q3 onwards. Thank you so much. All the best. Thank you. The next question is from the line of Philip Goela from Morgan Stanley. Please go ahead. Yes, hi. Thanks for the opportunity. I just had one question. So on your top 10 client base where we've seen a significant growth this quarter, Nitin, you touched upon client mining and market share gains, particularly in the strategic accounts that we've seen there. So just wanted to understand that where we are in that journey of these vendor consolidation exercises and how much do you think is played out already in the numbers there? I think the fact that we're able to grow all of our top accounts over $50,000,000 they're actually top 7 accounts, so to speak. And the fact that we are still seeing 6 to 10 grow dramatically faster than 1 to 5 or even 1 to 10 is reflective of the fact that we are on the right side of the consolidation, especially in our strategic accounts. Secondly, I think, as I mentioned earlier, we definitely feel there is runway ahead from this investment cycle that we are seeing in tech. It's not a short term phenomenon. So there's definitely going to be as long as we have the right set of competencies and we make sure that we continue to invest in those, I think there is a runway ahead for us to continue to gain wallet share in those accounts. Of course, we are very focused on the rest of the federal level, the top 5 or the top 10, as I just mentioned, because I think that's where we are seeing these accounts actually become another 20,000,000 to 15,000,000 to 75,000,000 to 100,000,000 accounts in that sequence as we progress into the conversion. If you remember, I actually talked about conversion rates because that's something we measure very, very purely. Sure. Thank you. That's very helpful. Thank you. The next question is from the line of Ashok from SUD Life. Please go ahead. Yes. Hi, this is Ashok from SUD Live. Thanks for giving me the opportunity and congrats for the good number consistent numbers on the direct side. I have one question on the DXC front. Just want to dig slightly deeper on the revenue leakage here. So let's say in terms of what type of work has been getting transferred or is it a lower margin business for you and it has been transferred to any other, let's say, Indian vendors or it's DxV in stores and yet? Any color on that front will be helpful. Again, at least to our knowledge, we don't think this is a wallet share issue. I think it's for us, what we are doing really is continuing to focus on where we think there is opportunity for us. And I think the life cycle of those businesses is different. And we'll continue to, as I mentioned earlier, somewhere we think there is best use of our growth investment in dollars. The relationship continues to be good. We know there is opportunity, but we'll continue to focus on where we think that is best, as I said, use of our strategic focus. Okay, okay. That was it. That's it for my side. Thank you. Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Nitin Rakesh for his closing comments. Thank you, operator. I think, again, we've had a great start to FY 'twenty two. Thank you all for your questions, your patience, your interest and your coverage of the company. We look forward to staying consistent with our performance and continue to keep our clients and our employees at the heart of everything we do. Thank you very much. Stay safe, and we'll talk to you next quarter. Thank you. Ladies and gentlemen, on behalf of Mphasis Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.