Ladies and gentlemen, good day, and welcome to the Mastek Limited Q2 FY 2025 earnings conference call. As a reminder, all participants in line will be in listen-only mode, and 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. I now hand the conference over to Ms. Asha Gupta from E&Y. Thank you, and over to you, ma'am.
Thank you, Rachel. Good day to all of you. Welcome to the Q2 FY 2025 earnings call of Mastek Limited. The results and presentation have already been mailed to you, and you can also view it on our website, www.mastek.com. To take us through the results today and to answer your questions, we have the top management of Mastek, represented by Umang Nahata, CEO, and Arun Agarwal, CFO. Umang will start the call with a business update, which will be followed by Arun providing the financial update for the quarter. Post that, we will open the floor for Q&A session. As usual, I would like to remind you that anything that is said on this call that reflects any outlook for the future or which can be construed as forward-looking statement, must be viewed in conjunction with the risks and uncertainties that we face.
These risks and uncertainties are included, but not limited to, what we have mentioned in the prospectus filed with the SEBI and subsequent annual report that you can find on our website. Having said that, I will now hand over the call to Umang Nahata. Over to you, Umang.
Thank you, Asha. Good afternoon and good evening to everyone. Welcome to the quarterly results call for Mastek Limited for the quarter two performance. I'll cover a few broad topics today. I'll take you through the overall performance of Mastek for this quarter. We'll then also talk about how did we... How are we faring on some of our key strategic priorities, and then we'll give some directional input on where we see the market trending and moving forward. After that, Arun will take you through more details of our financial performance, and then, of course, we'll go through a Q&A round of answering your questions as far as possible. On an overall basis, I think this was a very good quarter for us.
We've had 6.7% QoQ growth, and also a healthy improvement in our EBITDA performance, compared to the previous quarter. We continue to be cautiously optimistic as we step into the rest of the year and step into H2. Taking that down into some of our strategic markets on how the performance has been, I'll start with U.K. and Europe, which is our most important and largest market. U.K. continues to be resilient and growing for us in this quarter. As the new Labour government starts taking hold of the business and making some more clarity in terms of their direction and execution, we're starting to see some important, you know, flow down to our business.
For example, the healthcare investment of the government, which is now much more stronger and directional, is very positively impacting our business. We are helping the government on a few very important deals that we saw in this quarter, both in terms of helping them with prevention of healthcare, as well as helping in collection of data and analyzing that for providing better healthcare solutions. Our secured government services business continues to be stable and, you know, resilient, and we see steady growth in that portion of the business, too. We are cautiously optimistic about the market as the government enters into this next phase of planning and budgeting, and we feel confident that it should be a cautiously positive market going forward. Talking about North America. North America, we are really delighted with the performance in North America.
We saw 18% quarter-over-quarter growth in North America. This has been backed by healthy performance across all of our sectors, which is Oracle, Salesforce, data, including healthcare and all the other commercial verticals that we focus on. We continue to see good traction in healthcare in North America. Again, in this quarter, we added a few new really important logos. We added another significant not-for-profit healthcare provider, which is known as one of the most innovative healthcare providers in the region, and we're doing a turnkey program for them.
Our account mining strategy in North America continues to be a key focus for us, and we're seeing good cross-service line growth in a few of our accounts, wherein we are, you know, moving them lanes from one service line to the other. And our capability expansion that we've been doing over the last year and a half is now starting to really help with the account mining business that we have in North America. As far as our APAC and Middle East business is concerned, as you know, suggested earlier, we are really, you know, shaping up our focus and priority. Australia continues to be one of our key big bets in that market, and we're seeing good traction there.
Again, we saw some really important new logos close in this quarter, especially around local government and healthcare, and the ports business in Australia. In the long run, we think, and we look forward to Australia to grow and become a significant portion of our business. On an overall basis, all service lines continue to deliver, and starting to, you know, execute well. AI is, and GenAI is a very important part of our strategy, as we had, you know, been explaining earlier. We're currently looking at our AI strategy in three broad buckets. The first bucket is around, delivering efficiencies and, quality improvement on all the services that we offer, which is starting from Digital to Oracle to Salesforce and Data.
We are making some serious investments and in terms of resources and capabilities to really upgrade our skills there, including training and tooling and partnerships, and we really would love to take that kind of efficiency back to our market very soon. The second pillar is around development of GenAI-led applications. On our icxPro platform, it continues to evolve, and we have use cases that we have updated on that platform. We are running quite a few POCs with our customers, and we hope as we get into the next two quarters, we'll start seeing some revenue flow from these new applications and use cases that we have built.
The third important pillar that we have now started, and we are really excited about it, is based or backed on the NVIDIA partnership that we had announced last quarter. We're now working on developing an enterprise AI solution, which will create a platform AI, which is specific to clients and could be used for developing multiple use cases and applications, which will allow them to automate their business. Again, it's in the development stage. Currently, we're working closely with our innovation team, as well as working closely with NVIDIA, to put that solution together. Again, we have had initial discussions with some customers, and we are hoping to take it to market forward.
AI continues to be front and focus of all of our next-generation developments, and we look at making significant investments and directionally shifting our business to AI-led solutioning and AI-led delivery. On an overall basis, the market continues to be cautiously optimistic. We have some important global events happening, the elections in North America, the U.K. going through their, you know, strategic directions and priority finalization. Of course, there's some unrest in the Middle East market. We are very closely monitoring and observing the geopolitical changes. We currently don't see any direct impact to our business in any of these geographies. However, like I said, we are cautiously optimistic and very closely observing the developments that are happening in various parts of the world.
With that, I would like to hand over the call to Arun to share more details on the financial performance of the company. Arun?
Thanks, Umang. Wishing you all a very good day. Good morning, good afternoon, good evening, depending upon which part of the geography you are in. While detailed presentation has been already shared, I will cover key financial highlights for the quarter. We reported revenue of INR 867 crores for the quarter, which is up by 6.7% quarter-on-quarter and 13.3% year-on-year. This reflects into quarter-on-quarter constant currency growth of 4.7%.
As Umang mentioned, we are delighted with our performance across Americas, U.K., and European market, as they continue to be not only resilient, but they are also driving the growth, whether you look into from quarter-on-quarter or from year-on-year perspective. We continue to win and onboard new customers, again, across the geography. During the quarter, we have onboarded fourteen new customers, and consequently, our twelve-month order backlog grew by 17.9% year-on-year. On a quarter-on-quarter terms, it's a marginal increase of 1.2% in INR terms, broadly flat, when you see on a constant currency basis. Our operating EBITDA for the quarter was at 16.5%, showing an improvement of 125 basis points quarter- and- quarter.
Kindly note, this is after taking the partial impact of wage hike, which we have done for certain grades, in the mid of this quarter. The full scale wage hike, as we said earlier, will be done effective quarter three. But there was an impact which has been absorbed into the reported numbers. Obviously, there is some support which we have got from the currency, as the GBP was stronger versus dollar in the current quarter. Our profit after tax for the quarter was at INR 128.7 crores versus INR 71.5 crores in the previous quarter. There are two reasons why the PAT has gone up. One, obviously, the operating EBITDA function has been reflected into our profitability.
However, at the same time, we have certain exceptional gain in the current quarter, which is partially offset by the old goodwill impairment, which has happened. But both put together are still giving some additional income in the current quarter, both getting reflected into our profit after tax of INR 128.7 crores. Our gross cash for the quarter was at INR 390.5 crores. Kindly note, during the quarter, we have distributed dividend for last financial year to all our shareholders, and also we have discharged all the loan installments as they were due during the quarter. During the quarter, our DSO got expanded to 95 days versus 92 days. This was predominantly due to certain expected collections getting right-shifted.
We don't see any challenge, and in quarter three to quarter four, we'll be able to further improve the DSO profile of the company. Borrowing for the quarter stood at six point- not for the quarter, borrowing as of 30th September stood at INR 643.6 crores. There's an increase of approximately $24 million-$25 million during the quarter, as we had to borrow money for the payout of earn-out relating to MST acquisition. It was the only one earn-out which has been discharged, and now Mastek owns the Salesforce MST business completely, and there's no further payout which is expected in the future quarters. Our closing headcount was 5,005. There's a marginal decline from 5,546 in the previous quarter.
Our utilization was at 85.6% adjusted for leave, which is a marginal decline of 90 basis points quarter-on-quarter. Our focus continues to be driving growth, and that's of paramount importance. U.S. recovery has been taken very positively and we believe we'll continue to build on it. U.K. and Europe, as I mentioned, continue to be steady and driving the consistent and constant growth both quarter-on-quarter and year-on-year. Keeping all profile of the company together and focusing upon the strategy execution, we are very, very positive as we grow in the coming quarters and the coming year to build on top of it. Thanks for your time and support and your continued trust in the Mastek. Going back to the moderator and opening the floor for Q&A.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Jalaj Svan Investments. please go ahead.
Hi, good morning. Hi, Arun, thank you very much for taking my question and congrats on a very good set of numbers.
I interrupted you, sir. I would request you to please use your handset.
Yeah, am I audible clearly?
Yes, sir, please go ahead.
Yeah. Umang, Arun, good evening, and thank you very much for taking my question, and congrats on a very good set of numbers. The first question is related to the U.S. market, and we can definitely see some recovery there, 18% sequential growth. But if I see YoY growth is still at 11%. So just wanted to get some sense that the growth that we are seeing in the U.S. market, how much of that number is sustainable? How much of that is coming from macro trends? How much it is because of the efforts that we have taken for last several quarters? So we just wanted to get some sense there.
Yeah. Hi, Jalaj, this is Umang here. Thank you for your compliment. So the U.S. growth, like you rightly said, we've had a good QoQ growth, and at a YoY level, we are still at a steady level and, from there we are. The key indicators for the growth, I would say, is largely based on the hard work that we have put in over the last six to eight quarters. Like we had mentioned in our previous calls, that we had some right shifting of a few deals and a few deals that got delayed in terms of start. As we get back into, we got back into action on all of those transactions, as well as there is new momentum that we see in the market.
Both of those have helped us, you know, come back with a healthy growth. This was a growth rate that we generally, you know, expected for the U.S. to grow. The macro is a positive sign. We haven't seen any direct impact of the, you know, Fed rate cuts on our business yet. But in general, the sentiment in the market looks to be positive as compared to where it was earlier.
Okay. So, so the question, and basically why I was, I was asking this macro-related question is, our dependence on Oracle for Salesforce kind of business where, you know, the project-related business or the discretionary dependence is very, very high, so obviously we'll be getting the early mover advantage there when macro trends come in. So, do you see that happening, or it is basically more to do with the efforts that we have put in, on the top of the macro trends in the business?
See, while Oracle and Salesforce continue to be our, continue to be important service line for our North America business, our business is actually a lot dependent on our large installed base also. So account mining is a key part of our strategy, trying to upsell and grow into, the accounts that we already have. And, we have a really good set of, you know, accounts, with spending budgets. We are a very fractional portion of their spending budget, so our focus is on growing the, accounts from that particular portion. Having said that, we are, continuously focused on generating net new business, working with Oracle and with Salesforce. And, I mean, we are optimistic that as the market improves, we'll start seeing more, positive deal flow from Oracle and from Salesforce.
Great. The second question is related to U.K. business. I divide U.K. in two parts. Obviously, our bread and butter government business there, which we have seen some kind of slowdown in this quarter. So first question related to that, whether it is more seasonal in nature and we are expecting recovery going forward? And second question is U.K. private market, if you see that for last six, seven quarters, that's a market which was kind of struggling for us... But last quarter also, we have seen the initial signs of recovery. This quarter, it was a blockbuster quarter in the U.K. private market or Europe private market. So if you can give us some direction on both U.K. government and Europe private market, what is happening on U.K. side?
Yeah, sure, Jalaj. So I think your observations are right. Our U.K. secured government services business continues to be steady and resilient. We saw a decent 5% quarter-over-quarter growth in that particular sector. Having said that, like I said earlier, this is, you know, where we are closely... We have a steady base business, but we are also trying to closely monitor the government initiatives and what kind of directional flow will it have. And we are cautiously optimistic that it will drive, you know, more in our U.K. secured government businesses as the policies take more firm shape and the government spend directions become more clear. As far as the private sector is concerned, again, your observations are very right.
It's been a sector that has really put in a lot of effort over the last few years, and as you see, these efforts are now starting to materialize. As we expand our capabilities from digital to Oracle Salesforce data, we're seeing much more pickup across service lines. We've got new businesses in our data capabilities, and we continue to see good momentum in Oracle and other capabilities that we have. So the accounts that we had and the new accounts that we've added, as we offer them more broader services, is really helping generate better traction within the private sector.
Sure, sure. One last question, Umang, we have, you know, if I see our client number of clients and new client additions, although it's part of our strategy, there is a significant reduction quarter- after- quarter we are seeing. So last year, same time, we had around 450 clients, which has come down to around 380 today. Also, do you think that it has kind of settled at the current level, we are happy with the number of clients that we have today, or we see further kind of reduction there?
Again, good observation, Jalaj. Like I, like I've been mentioning earlier, it has been a part of our strategy to start reducing the number of accounts, the tail accounts especially, and really focusing on the accounts that we have, that we really want to go deep and expand our portfolio in. As we grew our capabilities, we really wanted to go deep in in some of the top accounts, and so account mining has been a key part of our strategy. So the reduction in the number of new client additions as well as the overall accounts that we service is a very thoughtful and strategic move that we have made. We still see some more reduction in accounts, especially in the AMEA region, where we continue to have still a pretty long tail.
So we would be making some more reductions in the AMEA region in terms of the number of accounts or small accounts or non-target accounts that we have. Our broad intention and direction is to have a healthy set of accounts and deliver phenomenal end-to-end services to them, and we continue to move in that direction.
Sure, sure. One last observation may be, if I see from the, your commentary, it seems to be that you are pretty comfortable from the growth levels from the developed market, and you don't need to get back into the Middle East market, where our, debtor days got stretched because of, new businesses there. So is my understanding correct that, our developed market growth would be sufficient enough for us so that our debtor days and unbilled revenue will remain under control for next few quarters at least?
Sorry, Jalaj, the last part of the question was not clear. Can you repeat?
Okay, so what I'm saying is, from your commentary, it seems to be that you are pretty comfortable from the growth that you are getting from U.S., U.K. market, and you don't need to get back into the Middle East market in a hurry, which normally takes our, debtor plus unbilled days, into very high levels, so is my understanding correct that our, growth expectation from U.K. and U.S. market are sufficient enough that we don't need to get back into the Middle East market, so that our debtor days and unbilled revenue will remain under control for at least the next two, three quarters?
Dhananjay, I think the way we are looking at this is, so Middle East and APAC is an important market. We have a strong, dominant position. However, the kind of business that we do in the market is where we are really trying to zero down on. We definitely want to bring down our, DSOs, and improve our cash flow and collection in the market. So which is where we are looking at the right set of customers and the right set of verticals. So there is going to be further focus in terms of the kind of business that we want to do. Having said that, we continue to want to grow in Middle East and APAC, but our growth has to be more systematic and in structured verticals and accounts, that we want to do.
So it's going to be more targeted growth that we are going to look at, rather than just by adding more customers that we used to do long back.
Sure, sure. Thank you very much for answering my question, and wish you all the best.
Thank you.
Thank you. The next question is from the line of Hasmukh from Tata Mutual Fund. Please go ahead.
Yeah, hi. Thanks for the opportunity, and congratulations on a great set of numbers. I have few questions. Firstly, on, let's say, order backlog. So, if you could elaborate on the order backlog in terms of, let's say, tenure of these deals or what are the areas where we have won major deals, where. And with U.K. reviving, do you think this, let's say, 11% CC sort of growth can move to mid to high teens?
So, as well, thanks for the question. The order backlog report is twelve-month order backlogs. So all of these are going to be executed in the next twelve months, right? So, that, that's what the number is reported. Obviously, our total order backlog is much larger than the numbers which you see as a reported one. So while the U.K. growth is considered, as Umang mentioned in the previous as well, that's very steady and, you know, market for us. We are seeing the traction. We believe we continue to grow. It's, you know, it's about the new government settling down, then the new projects will start coming in, which we are waiting for, while we have seen NHS traction already building up.
So a lot of good deal momentum we have seen already coming up in the health. Because that was one of the stated agenda of the government, and that's what is happening. So we are just waiting for the policy finalization, their budget releases, and we are confident that, you know, more and more leads will be there for us to grab.
Sure. Sure. So secondly, on the employee count, so just wondering, despite, let's say, strong growth, strong order book, with utilization nearly, let's say, at 85%-86%, why the employee count declined? And if you could, let's say, give some sense around how the employee addition or strategy around that would be in near future for you.
Yeah. So employee count is very, very important for us. So still, if you notice, we have 84%-85% kind of a utilization, and we have maxed out. That's what we have stated in the past. Considering we have to, we are also focusing upon the quality of earning. So there is a balance, which has been, you know, managed internally very effectively in terms of the growth and also in terms of the headcount, which you have to keep in advance in terms of your bench. So I think, it's much more actively managed bench as we speak. Obviously, there'll be more headcount addition as we go down the quarters, as the growth is getting reflected, and we will not have sufficient bench to, you know, fulfill them.
But currently, we, you know, we don't see any risk to our revenue realization, because depending upon service line, depending upon geographies, we are keeping the right bench, as may be required.
Got it. Got it. So in that sense, what are the other levers in terms of margin for you, considering higher utilization, et cetera, which can help you to, let's say, get back to EBITDA, let's say, margins to 17%-18%, sort of?
Yeah, we have stated earlier, in past institute as well, our margin expansion utilization was a lever which was utilized already. But there are a lot of subcontractor mix change. There are other operating levers, like onshore, offshore. As you are moving into more commercial section, as our U.S. growth comes, the margin expansion will happen because a lot of investments have gone into GenAI and driving the growth out there. So when you grow, you will not make same proportionate investments. You would have seen our U.S. margin already improving quarter-on-quarter, and our stated objective has been to improve margin further there. There are multiple combination. Obviously, great mix, using more freshers versus, you know, when all this combination stays. Umang spoke about the AI. How can we drive more, you know, delivery-led improvement based on the AI?
You know, you can pass on something to customers. Something will help you to further improve the margins. There are multiple levers which we are working on, and we feel comfortable where we are in the current journey, that we will maintain the margin profile.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants, please limit your questions to two per participant. If you have a follow-up question, I would request you to rejoin the queue. The next question is from the line of Ravi Naredi, from Naredi Investments. Please go ahead.
Any new MD likely to join in the company?
Sorry, what was the question?
New managing director is likely to join the company?
Ravi, are you talking about the new CEO or the new managing director?
CEO. New CEO. New CEO.
So yeah, like we had mentioned earlier, our search for a new CEO is on, and we are following the process, and you know, yeah, it's currently ongoing as we speak.
Okay. And sir, what are main reasons to rise in net profit, almost 600 basis points, and is it sustainable in next two quarters?
So there are two things, Ravi. One is the expansion of operating EBITDA, which is sustainable. Rather, we expect it to further improve as we get into quarter four and onwards. But there is one exceptional item which is also there in the reported numbers, and there's a separate line which we have given so that it can be identified separately. That is not repeatable. That is one time. And that happens from, you know, whenever you make a note in other P&L, if your liability accrual was much more than what actually payout has happened, and the differential actually gets into the P&L, right? So those are definitely not repeatable. But you will see consistent, as our endeavor is to consistently deliver both top-end and bottom-end growth. We expect it to be moving in the right direction.
Okay. Thank you very much.
Thank you. The next question is from the line of Yash, from Stallion Asset. Please go ahead.
Hi. Thank you for the opportunity. I just wanted to know if you've got any guidance in your constant currency revenue growth for this year?
Hi, Yash. As you know, we don't provide any guidance, you know. Generally, like I'd mentioned earlier, we see the market as cautiously optimistic, while it is also the next quarter, the quarter of furlough. So we're continuously working towards, you know, delivering consistent growth. But, having said that, there are, the furlough quarter as well as, you know, some caution from broad macro parameters that we are cautious of.
Okay. Okay, thank you.
Thank you. The next question is from the line of Amit Chandra from HDFC Securities. Please go ahead.
Yeah, thanks for the opportunity. Sir, you mentioned about, you know, the recovery of the NHS program, the healthcare program in the U.K. geography. So, you know, what's happening? Are we at a start of the recovery, or still the recovery has been there in this quarter? And also, in the order book, you know, is there a component of the deals from the NHS, and also in terms of the integration that was happening, you know, in the various departments of NHS? And obviously, the new government focus has been on, you know, enhancing the healthcare as well, you know, in the U.K. So how do we see it, whether it's the, you know, like, revival of the deals that we have won earlier? Or is it a totally new deals that is being awarded, specifically to NHS?
Yeah. Hi, Yash. So no, great, great question. So the current NHS business that you're seeing, so some of them is from the revival of the old contract that we had, so new SOW signed in the contract that we had signed earlier. Having said that, the broad direction of the government of, you know, improving healthcare via preventions, improving healthcare by using digital ways and means for better scheduling of patients, improving just the digital healthcare initiatives overall is very, very pertinent and so we see that direction of travel to continue. It's like I said, it's just the start of the journey. We are, we're definitely very keen and optimistic about the healthcare vertical in general, and especially the U.K. healthcare, as the, you know, initiatives start taking shape.
Like I mentioned, we've already got some of these old, long-standing contracts now, you know, fructifying, and we've, we see a healthy pipe of new business that we look forward to execute in the coming quarters.
Okay. And also on the, you know, defense deal that we won, is there a ramp-up of that deal as well in this quarter, or is it more in the like build phase? And also, in terms of the order book, is there a component of the defense deal also in place in the order?
Sorry, Yash, can you repeat that question again? We had some trouble in the line on our side.
Okay. So I was just mentioning about the, you know, recent win that we had on the defense side, wherein the expectation was that it will add around $30 million-$40 million over a period of 3 years. So are we already, you know, building in that in terms of run rate in this quarter? Or, and also in terms of order book, is it, you know, like, there in the order book, in the like, 12-month execute order book that we have?
So these, the output of these orders that we have won definitely is reflecting in the twelve-month backlog that we are showcasing to you right now. These, most of the healthcare orders that we have received are, you know, annualized orders for now. So these are trying to close out the old contracts that were already open. The renewals as well as net new contracts, I think we are looking forward in the coming quarters. But currently, this is more close out of what was already open, and like I said, it's reflected in our backlogs, twelve-month backlogs.
Okay. And also the strong recovery that we had in the U.S. geography, what gives us the confidence that, you know, we will continue in terms of the growth journey there? Was the growth that we had in this quarter was a result of, you know, like new deals, net new deals ramping, or it was more of the revival of the older deals, which were into stagnation, and some of the deals that we... I know some issues with some clients, also reviving. So, how is the mix in terms of, so how you want to, you know, like dissect the U.S. growth? So which gives us the confidence that the growth will continue, it's not, like volatile as it used to be in the past?
Yeah. Again, North America business that we see is a combination of all the three that you mentioned. There definitely was execution on some of the deals that we had won but were delayed in terms of start, so a portion of that comes back from there. There also continued to be new wins, net new wins, which had quick ramp-ups, and that also helped delivering growth in this quarter, and we continue to see those ramp-ups help in the coming quarters. But the broad theme is we are seeing the capabilities that we have across Oracle, Data, Salesforce, and our digital. The North America business is starting to shape well in terms of the overall capabilities that we have, and the clients start recognizing us across capabilities.
And that is the primary theme of growth that we are looking forward to, which is what we have been building over the years, and now we are seeing that kind of direction of travel in North America. But for this particular quarter, it was all Q2, and we are, like I said, cautiously optimistic of continuing to grow over the several quarters.
Okay. Okay, thank you, and all the best. Thank you.
Thank you.
Thank you. The next question is from the line of Dipesh from Emkay Global Financial Services. Please go ahead.
Yeah, thanks for the opportunity. Two questions. First, about the North America growth trajectory. It seems North America has a peculiar seasonality in Q2, where Q2 is very strong. Can you help us understand what led to this kind of peculiar seasonality in Q2 in North America for us? Second question is about the cash flow generation. Cash flow generation is fairly weak this first half. So if you can help us understand what led to weak cash conversion in H1. Thank you.
Sure, Dipesh. I'll take the first question, and then Arun will help you on the second part of the answer. As far as the North America business is concerned, we don't see this as any kind of seasonality impact to our business. It is, like I mentioned earlier, we had deals, and there was some right shifting of deals which we had won or which we were likely to win, but couldn't start in time. So many of those, you know, blips that we had earlier have now come back to strength, and we're now in the execution mode on those transactions. As well as, the net new customers that we look forward to continue to win and fire across service lines.
I think it's a much more balanced portfolio across service lines that is allowing us to shape these quarters, so I don't see any seasonality pattern in our North America's performance for this quarter. On the cash flow part, your observation is right, Dipesh. H1 operating cash flow generation is lower than our expectation, and there's a seasonality as well to that, because most of your annual payouts get paid out in quarter one, like our variable pay, we do pay out in the month of May, so those are significant payouts happening at the company level, which definitely impact the overall operating cash flow, right?
So, but as you move into quarter two, quarter three, and quarter four, you start, you know, improving those percentage and come closer to the company average. So, we are very confident you will see consistent improvement in quarter three and quarter four, and the full year this is, this will be broadly in line with the expectation.
Understand. Thank you.
Thank you. The next question is from the line of Ravi Menon from Macquarie. Please go ahead.
Hi. Thank you for the opportunity, and congrats on a really good quarter. Wanted to understand here, there are things like, not too much of change in our costs at all. It just seems to be driven by operating leverage. So margin, it can be continued to improve this towards the 17%. Do you have some sort of timeframe in mind, about that, and what sort of impact are you expecting from the wage hikes next quarter?
Yeah, no, that's again a good question. So Ravi, as we have stated, you know, we want to operate closer to 17%, 70% plus, and that has been our endeavor. Sixteen point five percent is the reflection in that particular direction. Wage hike, as you rightly said, we have done partially this quarter, and the full quarter impact will be next quarter three, which will take the full quarter impact. So we believe quarter-on-quarter, 120 to 130, this impact will come. But there are multiple levers that on which we are working upon, and we believe we'll be able to absorb significant portion of that, and continue to reflect good margin performance in quarter three and quarter four.
Thanks, Arun. And the attrition at 20% and it's materially higher compared to our peer group. And do you have any goal of bringing this down, or are you comfortable with this and this is all of the attrition that you know, we've had historically as a firm, and we think we can manage with where the utilization is currently?
Yeah. Hey, Ravi, this is Umang here. So I think attrition is a concern for us. It is definitely much higher than what we would really like it to be. We've gone through some deep dive into some root cause understandings. We've also looked at you know some corrections in terms of our process, in terms of the wage hike that has recently gone out and the you know other balancing factors that we could put into play. Our you know target and ambition is to be industry-leading as far as our attrition and ESAT scores are also concerned. However, this will take us a few more quarters before we really drive the full impact of change that we want to make. Currently there are a few pointed areas that needs more attention, and we are carefully looking at it and making decisions as we go along.
Thanks so much, Umang. Just a suggestion that, you know, how you guys report the financials, it would be great if you could show the breakup between direct costs and SG&A, because that will allow us to clearly see, you know, the gross margin versus where we have operating leverage as we scale up our account mining.
That's, that's a fair feedback, Ravi. Allow us, allow us some time. We'll definitely reflect upon it, and we'll start publishing at the right time. But that's it.
Thanks so much. Thanks so much. Best luck.
Thank you.
Thank you.
The next question is from the line of Ayush Rastogi from B&K Securities . Please go ahead.
Yeah, hi. Thank you. So couple of questions. So first is for Umang. So definitely if we see your commentary that you know, that you are a bit cautiously optimistic about the growth in the next half, which is 2H. But if we see, you know, the order backlog pipeline that we have, it's currently standing at an all-time high. So are we, like, hinting that, you know, there would be a lot more furloughs than the last year? Or is it like, are we seeing any kind of delays in the ramp ups or, you know, some sign of slippages in the same? And second, I'll have a follow-up on the same for Arun.
Let me answer the first question. I think, so we don't necessarily see any abnormality in the furloughs that we're going to have this year. It's going to be the usual furlough that we have every year. So furlough, I don't think is any concern to us. As far as being cautiously optimistic is concerned, you know, looking at variety of you know, macro as well as you know, internal factors. Like I said, we are still going through the U.K. government finalizing their budgets and their plans, so that's a important you know, indicator and observation for us. The U.S. is going to go through elections in this quarter, so that's another important macro factor that we are wanting to look at and observe.
So it's more macro-driven caution that we currently see in our business. And sometimes these macro can push out, you know, the signings as well as start of the programs. You know, we've seen that in the past. So that's the reason for being cautious here. But in general, like I said, we feel optimistic, but with a degree of macro caution.
Great. Thank you. So, so the next question is for Arun. So if you can just walk us through how, or, you know, puts and takes for the margin expansion that we have shown in this quarter. And also, if you can, you know, guide us, like, how are we eyeing for the trajectory for the going forward? Because if you see, the ask rate becomes high for the 4 Q to reach almost, you know, the midpoint of the guidance that we have. So what are the puts and takes for the same?
As we had mentioned, I think we are moving in the right direction. In the last call as well, we had mentioned that quarter two will bounce back because there were certain one-timers, which hit us. That's one. And second, obviously, operating leverages, we are looking into the business profile and bringing them up as and when it's become possible, right? So I think that's continuously going to be executed, and you will see the consistent margin expansion from here. Obviously, quarter four is something which is very critical because quarter three will have some impact of the wage hike, the full quarter impact, which we are going to do. But there are a lot of operating levers we are working upon, and we feel very confident that, you know, we'll maintain to improve from here, and that, that's the endeavor we are working with internally.
If you can just walk me through what has led to the margin expansion in terms of quantification, like, because currency has been a very big, you know, beneficiary for us. So how much of the benefit has come, led to the margin expansion, and what was the margin impact from the wage hike that we have provided in this quarter?
Yeah. Broadly, again, at a broad level, roughly 50 basis points impact of the wage hike in the current quarter. And currency would have given the similar range, 50-50 bps , because, you know, we have significant onshore as well. And the kind of business model, the company model which we have set up is we don't sign these from India. Most of the companies which we have in the geographies are the prime fees, you know, and hence we run little differently. So the currency benefit is probably in the similar range. What we see is reflected into the numbers are the operating leverage, which finally played out and helped us deliver the numbers for the quarter.
And, just the last question again on margins. So definitely, you know, it has been a very good quarter in terms of expansion of North America margins. So how do we see the sustainability of this margin going forward? Like, what, what is the trajectory are we eyeing for, coupled with, if you can just, you know, guide us, what will be the margin levels and the headwinds that we are expecting it from expansion of the North America, region margins specifically?
That's again a very good observation, Ayush. We have said historically as well as North America is coming back to the growth, the kind of investments we have made into the geography will help us to get into expansion of margin profile in the geography. And the same is the reflection, as the growth is coming, you can see there's an expansion which is happening. Our endeavor is to get into double digits in the coming quarters. By the time we end this year, we want to be in mid teens, at least. That's the target we are running with. There could be some plus and minus, but that's the direction of travel you will witness as we perform quarter three and quarter four.
Great. Thank you so much.
Thank you. Ladies and gentlemen, you may press star and one to ask a question. A reminder to all the participants, you may press star and one to ask a question. The next follow-up question is from the line of Jalaj Svan Investments. please go ahead.
Yes, thanks for the opportunity. So I wanted to dig a bit little deeper into the margins again. So there has been the majority spike in the margins has come from the lower other expenses. So could you help us understand if these numbers as a percentage of revenue, should we understand that these are going to stay stable at these levels, either as a percentage of revenue or as other expenses as absolute term? Could you please guide us about it?
No, that's again, good observation, Jalaj . The other expenses has one component, which is subcontractors, which is again, depending upon, you know, whether you're hiring employee or you're hiring subcontractor, they, they may swing sometimes, right? So the exact percentage of revenue may not work. But broadly, yes, you can see there are a lot of other, you know, semi-variable expenses are also part of it, which is your facility and other costs which came into. It doesn't increase proportionately. So they, they're both combination. They can be swinged on both sides. But broadly, as you are, as you can assume, you know, there are no significant one-timers which are included into it. So it, it gives a good representation of, you know, cost as a percentage to revenue.
Got it. Secondly, on the margin guidance, maybe I'll combine two questions here. The guidance of 17%- 18% EBITDA margin, when do we believe, or let's say, what is an aspiration also, what timeline are we thinking in terms of achieving it? What will be the assumptions which will be required for it to achieve it early, as you would say?
Again, as we said, that the endeavor is 17%-18%, and you can see the direction. We have already delivered 16.5%. And as I mentioned in my previous comment, you will see consistent improvement. Obviously, quarter three, we need to watch for considering the wage hike and furlough. But as you get into four, you will see the direction is coming into the line of sight.
Got it, and last one quick question. As you mentioned that there will be an impact of almost 1%, due to the complete wage hike, which will be taken in next quarter. So, what sort of, what are your expectations and what possibly would we be able to mitigate the impact from this, headwind, which we would have from 1% in the wage hike?
Our endeavor is we want to maintain the margin profile, Jalaj. Obviously, we have, we are looking into a lot of operating levers to offset the impact of it, right? We don't want to reduce our EBITDA profile, but we have to watch for. A lot of work has to happen between now and December, including the revenue profiling, which we are working upon. But our endeavor is not to reduce the operating EBITDA profile, but rather maintain to improve it.
Got it. And then where are we on our terms of the large deal, for which we were looking on to, which has been on the agenda for quite a large time or longer period of time. Where are we on it right now, and what sort of pipeline or traction are we seeing there?
Yeah, Jalaj, I think the large deal continues to be a key part of our initiatives. As we speak, we're still, you know, we're building up our AI proposition or efficiency, you know, different AI proposition is adding to the services that we already have. We have a few very active discussions, but, and it will be hard to comment on timelines today. Like I said, the focus is there. The capabilities now, all capabilities being AI-enhanced, gives us much better leverage on, you know, securing larger deals. We have a few in discussion, but, you know, nothing immediate in the line of sight that we could comment on.
Understood. Okay. Thanks a lot and best of luck.
Thank you.
Thank you. The next follow-up question is from the line of Ravi Menon from Macquarie. Please go ahead.
Hi. Thank you for the opportunity again. If you could talk a little bit about your icxPro AI platform and the use cases that you have in manufacturing, where it's already been demonstrated, and, you know, there's also, I thought in the presentation, some reference about, you, you're seeing tremendous potential for it in BFSI and healthcare. So if you could talk a bit about the use cases that you have in mind, that'd be great, thanks.
Yeah, sure. So our AI positioning, like we had mentioned, Ravi, has two different, you know, views. One is a use case-driven approach, where, icxPro, we have already built some use cases there. And then there is the, concept of building an enterprise AI kind of platform. So on the first one, which is where we are building use cases, we've had, some use case development for around, you know, parts automation, which is very applicable to, most manufacturing firms in terms of, whenever they have to go through a replacement of parts or finding the right part, as they've gone through their years of archival data. It helps and/or it is already seen, it's improving, you know, the process from weeks to few hours.
So that's the kind of improvement we've been able to demonstrate to our clients already. Similar kind of other initiatives and use cases we are running on two important use cases, which is around recruitment and talent management. Again, very phenomenal AI assisted you know use case that allows significant process drop as process time improvement, as well as quality of hiring going up. Again, we're discussing this with lot of existing strategic customers who are you know pretty excited about the idea as we take them forward.
There are various other use cases in the financials area, in the supply chain space, in the, you know, CX, space that we have initiated and delivered, you know, from supply chain demand optimization, demand forecasting, supply chain optimization to, like I said, financial forecasting, and quite a few. So the use case-driven model is quite active. Like I mentioned earlier, our enterprise AI is the other area that we think will become even more, you know, strategic as we go forward. It's been working close, collaborations with, NVIDIA, and that will allow customers to develop far many more use cases on a custom basis as they, you know, really, move towards their AI journey.
Thanks for comprehensive answer, and are you using some of those internally to transform your own processes as well?
Oh, 100%. So Mastek internal is our first, you know, significant large customer, so we are trying the Enterprise AI on Mastek internal. We believe, in fact, Arun did mention this to change our business, internal business significantly, right? From the execution that we do on services and development and implementation to all of our surrounding processes, HR, finance, operations, all of it. So yeah, we are developing the Enterprise AI on top of Mastek data. That's our, you know, that's where our POC is currently running.
Thanks so much. One last question, if I may. I know that you guys have historically had, you know, no SAP, just focus on Oracle approach. Yeah, but in the context of the demand for SAP, are you seeing any change to that mindset, or are you seeing any kind of, you know, higher incentive among customers to do an Oracle upgrade instead of replace SAP?
We're seeing both kinds of businesses. Our focus on Oracle continues to be high, and our commitment to that Oracle business continues to be high. And within that Oracle space, we are seeing people upgrading from their Oracle on-premise to Oracle Cloud. In fact, we also see people shifting platforms, so shifting from SAP EC C to Oracle Cloud or shifting from JD Edwards or some of the other, Tier 2 ERPs to Oracle Cloud. So we see both kinds of scenarios. However, on a broad basis, we still feel Oracle is the right partner for us. Our level of relationship and the traction in business that we have is very healthy. And in the near term, we continue to focus only on Oracle as far as the ERP business is concerned.
Thank you so much, and best of luck.
Thank you. Ladies and gentlemen, we will take that as the last question. I would now like to hand the conference over to the management for closing comments.
Thank you, everyone, for all the questions that you have and the good feedback that you all provided. We continue to be, you know, pretty excited about the performance that we've had this quarter, especially our, you know, growth in North America, as well as our continued growth that we saw in U.K. and you know, momentum that we see, especially in healthcare and other verticals, globally. Like I said earlier, our, you know, operating levers are, you know, there's still a lot of room in terms of our operating levers to bounce back to the kind of operating margin expectations that we have as we get into Q3 and Q4.
In general, like I said, we are seeing the internal scenario in terms of our business, our backlog, our capability seems pretty positive and optimistic. While we are cautious about the macro environment and we're taking a close view of how, you know, how events will turn out, and hopefully we'll continue to deliver healthy top line and bottom line growth over the fiscal and in the long run.
Thank you. On behalf of Mastek Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.