Ladies and gentlemen, good day and welcome to TeamLease Services Limited Q2 FY 2022 earnings conference call hosted by ICICI Securities. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sudheer Guntupalli from ICICI Securities. Thank you and over to you, sir.
Thank you, Inba. Good evening, ladies and gentlemen. Thanks for joining us today for the Q2 FY 2022 earnings call of TeamLease. I'd like to start off by thanking the management of TeamLease for giving us the opportunity to host this call. On the call we are pleased to have Mr. Ashok Reddy, MD and CEO, Ms. Rituparna Chakraborty, Executive Vice President, Staffing, Mr. Sunil Chemmankotil, Senior Vice President, Specialized Staffing, and Ms. Ramani Dathi, Chief Financial Officer. We'll start off with the prepared remarks from the management. Thereafter, we'll open the floor for questions. Thank you once again for joining us. Over to you, Ashok.
Thank you, Sudheer, and good evening and thank you all for joining. I think we've had a very strong organic growth in the current quarter. We've added over 25,000 headcount across the various businesses. I think staffing general staffing has added over 14,000 associates, while there have been headwinds around markup and the aspect of CAPM negotiations and stuff. I think the fact of what we have done in the past has enabled growth and hopefully will continue to enable growth in volumes. Specialized staffing has grown with nearly 1,000 headcount and has been gaining market share. We've also had a strong rebound in NETAP.
NETAP was impacted in Q1 on account of the second wave, and they've had a good strong rebound and have added nearly 10,000 trainees in the last quarter. I think on the back of that, coupled with the HR services businesses also delivering to growth, our operating EBITDA and PBT absolute numbers and margins have improved overall. We've also effectively focused on continuing the aspect of growth across these businesses while we maintain all the other parameters of operating cash flow and productivity and all of those. While Ramani will detail a little more from the provident fund perspective, we have had a settlement in DHFL and follow through on that. We have taken a provision in the books for the investments made there.
But you know, we will cover that later. I think overall, from an operating perspective, it's been a very strong quarter, and hopefully it is a reflection of the rebound in the market that we will continue to play to as we go forward. Ritu will give a commentary on staffing, and then we'll take it forward from Sunil then.
Thanks, Ashok. Good evening, everyone. Hope Diwali was fun-filled and joyous. We did remarkably well with a net associate growth of 9% over the Q1 base. Each of the six business cohorts in staffing came together to deliver a noteworthy performance. Of course, based on the economic recovery indicators, few cohorts did better than the others. The key standout for us has been a, differentiated hiring across the six cohorts has led to a high volume of temp additions hired by us across diverse profiles for the quarter, kind of bettering our best. Sustained aggression in new logo sign-ups in focused target segments. Finally, meaningful investments being made in talent and product, keeping the long-term vision and roadmap in mind.
I think the upside of the reorganization of the staffing business, which we did, at the beginning of the financial year, is evident in the performance of the six business cohorts. We witnessed the most aggressive net positive headcount growth in BFSI, consumer, e-commerce and the tel-tech cohorts. We had 59 new logo sign-ups during the quarter as against 47 in the previous quarter. Hiring contribution to gross additions continued to improve and was at about 31% in Q2, clearly signaling a departure from our past wherein most of our addition used to come through client-hired associates. Also, contribution of hires through non-recruiter-led channels stayed strong at about 60%. Our FTE productivity ratio for staffing alone improved by about 7% this quarter as against a dip we witnessed in Q1, largely on the back of our robust net added associate additions for the quarter.
We also managed to improve our per associate markup in absolute rupee terms marginally through the quarter. Barring one account, all one-off discounts to clients on account of COVID have stopped. The impact of this one account would remain in Q3, however, stop completely there on. While there has been a robust increase in associate headcounts, our margins are under pressure. Given the impact of some COVID-driven price reduction that we had to absorb, one-time payouts like bonus, which does not attract markup. Given all past furloughs for associates are done away with and then they are back on full wages. Given associate increments and incentives are back again, boosting our gross revenues. Given the investments we are making in sales, hiring capabilities and leadership.
Given we have to incur a higher recurring EDLI cost, which we have chosen not to pass on to our customers. We are expecting, of course, continued positive momentum on associate additions for the next quarter given the pipeline and strong hiring performance. However, for the above stated reasons, our margins are likely to remain flattish for the next two, three quarters. However, as the annuity kicks in and productivity improves, we will definitely see our margins improving. A little bit on the employment outlook. I think, based on our recent employment outlook report, which we do every quarter, there has been an improvement in Q3 by about 3% in terms of intent to hire.
Some of the key takeaways obviously shows that IT education services, healthcare, pharma, BFSI, e-commerce and FMCG are the top sectors with the highest intent to hire. Metro and Tier 1 cities are bouncing back much faster than the rest. Bangalore and Delhi is leading the pack. I think entry-level hiring intent outpaces every other category as business looks to optimizing cost. Sales and IT, some of the key hiring functions at this point. Side- by- side, attrition definitely has gone up, whether it's IT, educational services, KPOs. One good thing is laggard sectors, those worst affected by the pandemic, like hospitality, aviation, lifestyle retail, are making a comeback and showing marginal yet positive hiring intent.
On the regulatory environment, I think the subsection three of section one of the Haryana State Employment of Local Candidates Act, 2020 is an unpleasant move and contrary to the spirit of ease of doing business and meritocracy. While representations have been made by the various industry bodies to prevent this from coming into effect on 15 January 2022, we're not really sure of the outcome. Given elections are around the corner, it's safe to assume the motivation behind such a move. We'll have some disruption in hiring of candidates with monthly wages below INR 30,000, but we're at the moment trying to kind of assess the extent of it. Meanwhile, government continues to maintain an uneasy silence over the implementation of the four labor codes. The deliberation and the alignment with the states being cited as the primary cause for the delay.
While we have executed on our objectives of the reorganization of spring-loading scale, differentiated hiring and improving productivity. However, the future direction for us in staffing now lies in developing stronger contextual mastery across the six business cohorts, create differentiated servicing and differentiated product stack as per the future needs of each customers in each cohort. Thank you.
Thanks, Ritu. Good evening to everyone on the call. I hope you and your families continue to stay safe. We are delighted to share with you that we had yet another exceptional quarter with increased market share gain. The digitization super cycle post-pandemic has led to huge deal wins for our customers, and the same translated into a healthy pipeline for us. Despite a huge talent war leading to skill shortage, we focused on addressing the supply side challenges by offering hire, train, deploy solution in collaboration with our in-house TL EdTech company. Our state-of-the-art solution has helped our customers to meet their talent needs on time. Our strong hiring capabilities, coupled with hire, train, deploy solutions across skill levels, particularly in the new age skills like digital skills, have ensured our customers place more trust on us to fulfill the increased talent demand.
These efforts have translated to 11.5% growth of our consultants' headcount over the previous quarter. We closed with a headcount base of 8,713. Our sales engine continued to fire on all cylinders, resulting in 42 deal wins in Q2. In the last quarter, we did 27, but we did a 42 deal win this quarter. New deals, coupled with phenomenal growth in existing clients due to increased fulfillment of demands, helped us to grow the revenue by 36% year-on-year and 17% quarter-on-quarter. We have been focusing on fulfilling high-value mandates and hire, train, deploy solutions, which has helped us to improve our gross margin substantially. We increased by around 400 basis points year-on-year and 50 basis points quarter-on-quarter. Current quarter we have maintained a gross margin of 19.75%.
PBT grew 41% year-on-year and 20% quarter-on-quarter. We improved our PBT margins by 17 basis points despite investments towards creating additional capacity, capability, team leadership and long-term incentive provisions for our employees. We are confident of maintaining the PBT margins in the same range. I would like to thank my team for a customer-centric approach which made us partner of choice across the segments. To summarize, I would say that the demand environment continues to be very strong and we are confident of continuing the current performance trends in the coming quarters backed by a well-set execution engine. Thank you.
Good evening, all. This is Ramani. Hope you're all doing well and safe. Let me first talk about the exceptional item that we have accounted this quarter. As you know, TeamLease PF trust has made about INR 173 crore of investments in DHFL and IL&FS. Since they have maturities going up to financial year 2027, we plan to realize gains on other investments over the next six years to offset the loss. However, with the recent development on DHFL which got crystallized and we received 48% recovery as full and final settlement, we have taken a prudent call to make a provision of INR 75 crore in TeamLease books towards the investment loss in PF trust. This also factors for any potential interest shortfall in future at the trust level.
There is no immediate need for TeamLease to transfer the INR 75 crore to the trust because the trust is having sufficient reserves to maintain positive balance. On a need basis, we will be taking a call on how much of this INR 75 crore provision has to be translated into a cash transfer. The second element on overall cash flow front, we have maintained 100% conversion of EBITDA to the operating cash flow. Our funding exposure and DSO levels remain same as last quarter. On overall margin front, while staffing margins have remained flattish on a quarter-on-quarter basis, at a group level, our margins have improved at both EBITDA level as well as PBT level. This trend would continue even for the coming quarters, with majority contribution coming from specialized staffing and HR services.
As we mentioned earlier, in a previous quarter, HR services has broken even in this quarter, and it will start making meaningful contribution to the bottom line going forward. Thank you.
Sudheer, we are open to questions now.
Thank you very much, sir. Ladies and gentlemen, 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. Anyone who has a question may press star and one. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question is from the line of Sudheer Guntupalli from ICICI Securities. Please go ahead.
Yeah. Thank you. Ramani, probably we can start addressing the elephant in the room, which is the PF trust issue. So since this issue was first disclosed in September 2019, I think, we maintain the same stance, which is we have a net surplus, and we have an unrealized mark-to-market gain, both of which will more than cover for any potential shortfall because of the, let's say, haircut in these two instruments. We have, at one point in time, also gone to the extent of saying there is an unclaimed fund in the PF trust which can also be adjusted for liquidity needs.
At multiple instances, I think we have maintained the same stance that an item of provisioning or the scenario of provisioning will only get triggered if and only if there is a liquidity crunch in the fund. In that backdrop, I think even when the same issue came for, you know, auditors have qualified this at one point in time. Proxy advisory firms have suggested to vote against this. All those instances we have maintained the same stance that, you know, there will not be any liquidity crunch in the fund. Accordingly, there will not be a scenario of provisioning to be made. What has changed now, if I understand it right, let's say from the previous three months or last one month, two months to now, what has changed now?
I understand that DHFL, there is a resolution. In fact, it's a pleasant surprise for me because the expected recovery earlier was lower than what you are able to recover now. That should be a logically positive development. What made you change the stance and kind of go for this provisioning at this juncture?
Sure, Sudheer. Firstly, 2 elements to this. One is the DHFL crystallization that has happened in this quarter. Because as I mentioned earlier, we have maturity of DHFL going up to year 2027. Our plan was between the reserve that we already have on the balance sheet of PF trust, plus the future gains that we plan to realize on other investments over the next six years between these two, the plan is to offset the investment losses of DHFL and IL&FS. That's one element. That got crystallized now, and we have to upfront book for the investment loss in the books of PF trust, not in the books of TeamLease. The second element is, as I mentioned, this is more of a prudent decision taken by the management to make this provision of INR 75 crore.
This is mainly on account of any potential interest shortfall that might happen at the PF trust level in future. Because our liability to PF trust, PF account holders is 8.5%, while the average yield is currently standing at 7.5%, again, because of the shortfall happened with DHFL and IL&FS not making any yield for it. With this 1% interest shortfall, we, on a prudent basis, we want to create this provision. However, there is no need to make any actual cash transfer to the PF trust immediately. On a quarter-over-quarter basis, we see if there is any shortfall happening at the reserves of PF trust level, only to the extent we take a call if the cash transfer has to be actually made.
Just to add to that, Sudheer, I think the aspect of what we said earlier about there being reserves and there being unclaimed accounts and there being no liquidity issue at the trust continues to play out. I think the settlement of DHFL, which was maturing to 2027, is really what prompted the management to take a view that making a provision with the known aspect of the settlement and the aspect of how it has played out would be the prudent thing to do. Doesn't have an immediate cash flow impact. That would only happen on a basis of requirement if need be.
Sure, Ashok. No, I understand the fact that there may not be an immediate cash flow impact, but my only humble submission here is that for five, six quarters, if we have been maintaining the stance that there are XYZ events, if and only if those XYZ events happen, the provisioning will get triggered. Now, none of those XYZ events happened, and only another event, which is DHFL settlement happened-
That was the main one.
Which was actually a positive. Yeah, but that's actually, if I look at it, you are able to recover around INR 55 crore and there is a realized loss of around INR 58 crore. In June, as per June 2021 financial results of TeamLease, I can see roughly there is INR 120 crore unrealized surplus plus mark to market gain. Which is your realized loss of INR 59 crore is still lower than whatever your MTM unrealized gain plus net surplus of the pension plan. Just I'm little confused as to what triggered the provisioning event now.
This is because of the early settlement of DHFL, because as I mentioned earlier, we thought the maturities going up to 2027, we have another six years to realize gains and offset this. Also, as you mentioned in your question, so there have been queries from the proxy agents and few other investors on the audit qualification. It's more of a prudent call taken by the management to also get the qualification removed and take this one-time exceptional hit of INR 75 crore.
Yeah, sure. Sure, Ramani. Sorry for stretching this again. My earlier question holds on and it remains. Actually, when we were saying that we don't need provisioning for the last five, six quarters, and we were saying based on the fact that there is a good amount of unrealized MTM gain plus unrealized surplus in the pension plan. We were not really betting on the fact that in the next six years we will make some excess income and that excess income will be able to offset the loss realized on these two instruments, right? We were only betting on the unrealized gain, which we are seeing in the plan at that point in time.
I mean, whenever Ramani was there, this issue came up in questioning in the calls also, we were maintaining the same stance that we have a particular MTM unrealized gain, plus there is a net surplus in the pension plan, and we were only betting on that. We were nowhere betting on the future expected gains on that plan to be able to offset the losses. Just because of the conclusion of this DHFL NCLAT proceedings, I'm just little unclear as to why that should trigger. Logically, if the theoretical framework remains the same, why that should trigger a provisioning event at this juncture.
Sudheer, there is a difference between MTM gains and actual results. Because of settlement of DHFL, we have to upfront recognize the loss, investment loss on DHFL. We cannot completely realize the MTM gains that are there in the trust because majority of the MTM gains are on equity. After selling those equity, whatever proceeds that we get, 85% of them has to go into bonds and other securities, non-equity investments. That would further bring down the trust 7.5% yield to maybe 6%-6.2%. We have to balance between the year-on-year yield rates as well as maintaining the results positive.
Fine, Ramani. Again, if this is the case, obviously we were not expecting DHFL issue to go on till FY 2027, right? Settlement will happen sooner than later. Probably if not in September this year, probably it would have happened in December or next March. This should have happened earlier itself, right? The provisioning should have happened when auditors have flagged off this issue or when proxy advisory firms have flagged off this issue for the first time. That is point number one. Based on your response, I have a follow-up question on this.
I mean, historically, we have said that we wouldn't be taking the element of the provision, and we did have the reserves. But I think, you know, the qualification has been in our books and so has the call-out from the proxy agencies been there. I think it's also a call with the settlements coming into play that it would just be a more prudent element to get the provision taken and offset it with the element of the qualification being removed and take it on from there.
Sure, Ashok. One last question on this aspect before I move on to the next topic. Any further provisioning on the lines of the same that we may have to anticipate based on what exactly is the recovery rate on IL&FS instrument?
I don't think we would have additional provision required. I think we have factored for the element of IL&FS recovery also into the overall provisioning that has been taken. We don't see any future addition to this provision.
Sure. Just if I understand it right, this is a trust and TeamLease is a trustee, right? Logically speaking, there is no need to make the shortfall good unless and until there is a liquidity event. Again, do we have any liquidity event now or are we foreseeing any liquidity event in the next few quarters, which is why we have now taken a call to kind of make this provision?
No, not at all, Sudheer . There is no liquidity crunch at the TeamLease PF trust level. Even the INR 75 crore provision that we have created can be written back subsequently in case if the trust makes additional gains or in case if the IL&FS recovery is slightly higher than what we have estimated. This INR 75 crore can be written back. That's why we said this is only a book entry, only a provision entry made in TeamLease books without no actual cash transfer to the trust.
Sure, Ramani. Ashok and Ritu probably you may answer this question. Worldwide we are seeing this phenomena or this theme of great resignation playing out, and especially those developed economies like U.S. and U.K., which religiously give out employment data. We are actually seeing that the number of job openings to be higher than the number of unemployed people in many economies. Even in India we are anecdotally hearing that, but just that we don't have solid data to kind of understand what exactly is happening in the job market. Any insights on how do you see this kind of you know, either positively or negatively, however it is impacting your business, this theme which is playing out worldwide?
Yeah. Sudheer, I think one of the most important aspect is that this term Great Resignation is kind of floated around in countries where there were huge government bailouts at an individual level to people during the pandemic, right? What one is noticing is that because of that a lot of resources now are refusing to come back to the job market, and they prefer to lead the kind of life that they gotten used to during the pandemic. I think that is definitely something which is very different from what's happening worldwide, especially in some of these developed countries in India. I mean, this trend is widely seen right now in U.S. and in U.K., and a bit of Europe as well.
Thankfully in India we have not, we, o f course, there was no such government pandemic-driven pensions or subsidies that have been given to an individual level. That's one huge difference. The great resignation obviously is happening or rather the attrition is happening in the IT sector. But the reasons in that sector are obviously varied and may be different from what's happening in other parts of the country. In India, again, a lot of individuals, especially in the tech sectors, are preferring to you know either have the flexibility of choosing the kind of work that they want to do. They want the flexibility in choosing the location.
They would like to continue to work remotely, and if that becomes a deciding factor on somebody's employment, then they are choosing to opt out because they clearly know that there is a demand that exists in the marketplace. There is a lifestyle choice that is being made by people, candidates in that sector to kind of move to more freelancing rather than having a permanent kind of a job so that they can pursue activities, vocations, interests of their own in their free time. That's why you must have seen that there are some startups who are coming out with innovative ideas of four-day weeks, three-day weeks permanently for their employees. I think there is a difference with what's happening in some of the developed countries and India.
In India, the impact is widely being seen in the tech sector or the knowledge-driven sector. In the other sectors, no such trend. I mean, as a matter of fact, people are as hungry as ever now more than before in terms of wanting to get themselves a job and get back into the job market. I don't know whether that answers your question, but that's what's happening.
Sure, Rituparna. One last question before I actually leave the floor open for others. Is actually your commentary on margins seem to be a bit self-contradicting for the lack of a better word. On one hand, you're saying that the pressure on markups is kind of behind us or maybe only in one particular account it may spill over to the next quarter, but in most other accounts the pressure on markups kind of behind us. You're also saying that we may not see such a margin expansion for the next two to three quarters despite headcount you know going up dramatically this quarter and in the future also we are expecting strong headcount addition and despite markups remaining stable.
What exactly, if you can, you know, delve deeper a little bit, that would be helpful?
Yeah. Let me just address that, Sudheer. I think in absolute terms, there's a marginal improvement in the PAPM realization, despite the fact of discounts and renegotiation on pricing that has happened and so on. However, like Rituparna mentioned earlier, there has the top line billing from a wage perspective has gone up higher than the element of the growth on this front. Hence that kind of reduces the percentage realization from which the costs are further reduced to come at the profit margin for the staffing business. I think one is the aspect that the wage cost and the pass-through cost has increased. Our PAPM in absolute terms has actually gone up marginally.
The other element is what she called out at the top level at TeamLease's end, the element of the structural strategy that we adopted in terms of verticalization, the hiring focus, the elements that have enabled and driven our growth and will play out for the future are investments that we would continue to make. Over and above that, obviously, there have been some cost increases that have hit us on account of COVID, one of which is the huge hike in insurance costs. Those effectively will put the pressure on the margin being flattish while growth will continue. In absolute terms, the profits will go up.
Perfect. That's it from my side. I'll let others join the queue.
Thank you. Any participants who wish to ask a question may enter star and one in their touchtone telephone. Our next question is from the line of Manish Gupta from Solidarity Investment. Please go ahead.
I just wanted to understand how your PF trust structure works. Is there a return that you are guaranteeing to your employees under that scheme?
8.5% is the statutory requirement, as a return to the PF account holders under the trust. It is guaranteed 8.5%.
The government announces annually the rate of credit to be given to the provident fund contributors, and that is currently at 8.5%.
How do you intend to generate 8.5%? Because that would assume that you would need to take certain equity exposures, right?
The corpus of the trust can be invested in percentage terms across central state government bonds, across corporate bonds, and across equity linked investments. Effectively adhering to this, the element of the return plays out.
What is-
Yes.
Sorry, I interrupted you. Please go ahead.
These are dictated by the government in terms of what categories and what percentages can happen, and those are effectively looked at before making the investment.
Do you have internal guidelines at present on what is the equity exposure?
So, uh-
Yes. Currently, we have a capping of 10% on total equity exposure, while the statutory limits allow us up to 15%. Again, on a prudent basis, we have internally capped it to 10%. Also, under equity, we are only investing in indexed funds, not direct equities.
Currently, the exposure is around 6% in equity.
My question is that if, let's say, long-term and index fund returns 11%, let's say 12%, right? You are saying you are capping that exposure today at 10%, and you want to return 8.5%. That means that, you know, on the rest of your debt portfolio, you would have to, if I do the math, return, you know, something north of 7.25% on your debt portfolio, while a 10-year GSEC today is roughly 6.5%. I don't understand the math of how you will manage to return 8.5% by taking only 10% exposure to equities. Hence, is it that you would have to keep funding your provident fund trust from your core operating profits in order to bridge the deficit?
Currently, this 10% equity limit, we are also deliberating to take it up to the maximum levels in future. But as of now, we would like to stick to the 10% limit that we set internally. Also, there were a few indications that EPF guidelines also increase the exposure to equity limits from the current 15% to 20%-25%, because as you rightly said, otherwise, it's impossible for any PF trust, including the EPFO also, to manage this 8.5% yield.
I think currently there are some investments that have been made historically that are giving higher yield. Obviously, the current yield portfolio has reduced. At a balance level is what we would be looking at. The 8.5% Is not something that necessarily also has to hold forever into the future. In the past, even at the rates that were indicated, we had reserves built over the past few years. One is the element of the EPFO reviewing the 8.5% on the realizable yield. Part of the weighted portfolio of the earlier investments also contributing and balancing the realization is where we would approach it from.
Yeah. Sir, sorry to belabor this point, but if I just take the last 24 months, my point is that incremental contributions that you have made over the last, say, 12 or 24 months, if you assume that long term, the equity return on those investments will be 11%-12% because you're investing in an index fund, and if 90% will be in debt instruments, which will be say in the range of 6.5%-7%, I just don't think the mathematics works to get you to 8.5%. That means on the last 12- to 24-month investment, are you on a long-term basis actually carrying a deficit?
Currently there is few basis points of deficit in the PF trust yield rate. Also what we are petitioning to the government is to give a temporary holiday, interest holiday on the dormant accounts, which they have done in the past. In the past, for unclaimed balances, they have given interest exemption. Out of the INR 1,400 crore of portfolio that we have under PF trust, almost INR 500 crore comes under the unclaimed dormant accounts. If there is a interest exemption to the extent of that 500 crore, that would completely offset the shortfall in yield rates.
No, I understand that, ma'am, but you know, this is luck siding in our favor. I'm saying on a run rate basis, you know, we are carrying on a run rate basis, assuming everybody claims what is due to them, we are actually carrying a deficit on a run rate basis.
Yes. We have called that out.
Yes. I agree with you, Manish, and we had called that out earlier saying that.
Yeah.
It is at a few basis points less than the realized, required rate to be given.
We will be revisiting the equity exposure policy on a quarter-on-quarter basis, whether we have to increase it, managing the risk and yield rates.
Ma'am, there is no other option for you but to follow this, you know, 8.5% guaranteed return. I mean, you can't make it a managed contribution plan which is invested based on risk, a certain risk profile that people choose.
No, Manish, it can't be done. The long-term plan is whether we can consider transferring this PF trust to the RPFC, but that takes some time. It takes at least a few years, four to five years time frame to get that system. That plan is there in the long term.
Okay. Thank you, ma'am.
Okay.
Thank you. Any participant who has a question may enter star and one on your touchtone telephone. Next question is from the line of Sachin Shah from Emkay Investment Managers. Please go ahead.
Yeah, hi. Thank you for the opportunity. Sorry if I'm a little naive on this PF thing. You know, continuing with the previous questions, if that 8.5% guaranteed for whatever reason you are not able to earn from the investment that you made, you will have to make it up from your core business profits. Is that a correct understanding?
Yes, that's right.
Okay. Why would we do this? I mean, can't we just put it in the government EPS where we don't have any liability or anything?
So that is-
Is that something we would do?
No, that would be our long-term strategy if this were to continue to play out as a yield to what has to be credited. At this point, I mean, from a servicing perspective of the employees, having our own trust has always been better in the past, and that is really where the element of setting up the trust and managing it had played out. We were also in surplus over past investments to returns to be given. This has been impacted by virtue of the two stress assets and the current yield rate while the government has not revisited the 8.5%.
If over the coming years, this element of differential between yield and what the government is asking to be credited continues to play out, and as our reserves get depleted, if on that count, we would explore the aspect of moving to the RPFC.
Yeah. You know, not only I'm saying, suppose I'm just saying that why should we distract ourselves from the core business?
I think this is primarily done from a servicing of the employees perspective. I think the historical element of service around the PF claims and transfers has been quite bad from the EPFO. As our employee base has grown, our ability to give them comfort and confidence on servicing has been tremendously high by having our trust. Obviously we don't intend to do that if there is a continued stress from a financials aspect. We would relook at this as we go forward.
Yeah. Because, you know, in this kind of a world where everything is volatile, uncertain, complex, it's going to be like this, right? I mean, whether this time it may be government, next time it will be some global X, Y, Z, something or the other. Why do we distract ourselves? I'm just wondering. Anyway, I'm done.
I mean, I totally take the point. I mean, for 15 years we've had no problem in administering the trust and ensuring better service to the associates. Obviously, the last two years have changed that, and we would relook as we go forward. We are open to that.
Sure. Thank you. Thank you.
Thank you. Our next question is from the line of Mukul Garg from Motilal Oswal. Please go ahead.
Hey, thanks. I just wanted to check up on the you know, the initial commentary around the Haryana you know, government plan to hire locally. You know, is that something which will be more from a nuisance perspective for you? Or do you think you know, there can be a meaningful impact in our business because you know, there is a requirement to hire locally and maybe you will not be able to find enough people under that INR 30,000 per month category.
I mean, it's more nuisance at this point, Mukul, rather than actually impacting the business. I think some of the governments have been approaching this reservation for locals, for local jobs. In the past, you know, even Andhra Pradesh has done this. The pushback from industry has been where is the local talent to map to the jobs? They have been a little flexible on not following it through and so on. I think to some extent at this point in time, it is more a nuisance value rather than impacting any of the growth aspects. You know, I'll have Ritu also add into that.
Yeah, I completely agree with what Ashok said, that it's more an irritation. Finally, the reality on ground in Haryana is that local talent they are not available for the said jobs. The thing is, if you look at the wage level of INR 30,000 and below, this essentially covers even call center, domestic call center, international call centers. It also at one hand covers all the delivery agents, sales profiles. I think sooner or later, I'm sure prudence will shine upon us, especially the government of Haryana. There is an election around the corner, so one can totally understand the need for making such a move. However, from some latest reports that have come in, industry bodies have chosen to contest it at the court level.
We'll have to wait and watch how this just essentially goes. None of the existing business obviously gets impacted. We believe that employers will come up with, and so shall we probably, of ways and means of ensuring that these candidates are routed to the appropriate states like Delhi or UP, given that there is free mobility available across NCR.
Understood. Like, if we assume that this thing kind of get passed, you know, how should we look at the different businesses in terms of exposure, both the general staffing as well as, you know, IT staffing? How much is at exposure from our end?
I think it's more than our exposure. We have to think about the reaction from the industries per se, because there has been a very aggressive pushback that has come through from NASSCOM, CII, the Automotive Association, the Industrial Association of Haryana. I mean, it's like I think it is completely contrary to what they set out to do and why Haryana became attractive for them. I guess from our perspective, we feel that yes, it is a little bit of a hiccup in the short run. I'm sure more than us, it's not gone well with the industries per se.
If the industries choose to move, actually, and some of them are considering their base, and thanks to the pandemic where remote work, hybrid work, the fact that you can easily be location agnostic has been exposed to us, I think industry will, you know, avail of all these options.
I think just from our perspective, yes, if it were implemented strongly and enforced, there would be the challenge of ensuring we only find local candidates for the local job. It will put additional pressure on the hiring on that front. You know, I think we'll have to take this as we go forward because it also concerns industry per se, about them being able to find the talent, even if they had much more stringent standards or let loose the standards to find only local people for the jobs, and more so in the knowledge industry.
Understood. The second question was, you know, on the associate addition. You know, this quarter, 25K was a very, very strong number. You know, I think your comment imply that you will continue to see strong additions in next few quarters. Will they be on similar scale or like is there some seasonal factor which helped Q2? You know, again, I think I will just kind of try to merge this with Sudheer's earlier comment. You know, is there some sort of pressure on the non-IT general staffing side, whether in terms of salaries or availability you are seeing on supply end?
I think I will refrain from giving any guidance for the future in terms of exact ballpark that we're looking at. Yes, we expect a good strong performance for the next few quarters based on the pipeline that we have. Now, availability of manpower, whether there is pandemic or not, is always a tricky thing for an organization like ours. We need to figure out ways and means of succeeding and solving for customer requirements in spite of it. I think we've established a track record, given the contextual mastery, especially around hiring, the differentiated hiring capability we've developed across the six business cohorts, which is playing through. We've been able to come out with the right kind of mix, and we feel that will help us maximize our conversion ratio.
Our conversion ratio actually to client requirements has been extremely good of late, which is almost at the 60% level. I think I mean, there are challenges which we narrated on the margin side, but on the associate growth and addition, we feel that we will continue to maintain positive traction into this.
I think if we were to break it down, in general staffing, clearly, you know, we've called this out in Q1 also that the feedback from customers when wave two hit, was that they were putting their plans on hold and deferring them rather than canceling them. I think as the unlocking has happened thereafter, customers have come back strongly on their demand for headcount. You know, it's twofold. One is that, we have been adding headcount to existing customers, and we have been adding new logos, across, verticals. Coupled with the fact that, our hiring delivery has improved substantially and a large number of the open positions that are coming in, we are able to deliver to.
I think when we look at the coming few quarters, the element of the stated demand from the customer side is still quite strong. So I think on the back of that, we are quite confident that growth in headcount should continue. Normally in Q2 and Q3, there is a seasonal element that comes into play, but we are talking about growth net of seasonal element. In specialized staffing, obviously, you know, the demand for the IT skill sets have been tremendously large. We have been making continuous investments in improving our delivery to the customers and beefing up the teams given the growth in number asks that they have. I think from that perspective, growth on that front also is something that we would continue to see.
Similarly in NETAP, which was the business that got hugely impacted on the negative in Q1, we have seen a strong rebound from customers. I think the element of the rebound, existing customers wanting to fill up open positions and we being able to sign on a lot more new logos is what will sustain the growth for the future quarters.
Ashok, sorry. Let me just again, a bit of a clarification here. This quarter, you know, is it possible at all to kind of separate out qualitatively or quantitatively the impact which came in because of a seasonality and, the unlock happening, which obviously, you know, was paused last quarter and, the new logos which you are winning and, you know, new spend which is happening. Is there a way to kind of proportionate out these two?
We could give the breakup between new logos and existing client growth, but it would be impossible to differentiate between seasonal element and continuing element because frankly, attrition still continues. It's not that the net growth. We have a differential between gross growth and net growth. The stated numbers are net growth. Element of seasonal up and down and natural attrition and forced attrition is factored into the element of the differential between gross growth and net growth. Difficult for us to quantify the seasonal element of it, but we can clearly call out the new to old client growth.
Sir, if I may add to that. Perpetuity has never been the pillar on which temp staffing has been built on. Which means that one of the reasons that an option like temp staffing has become attractive is its ability to handle seasonality, to handle projects, to handle ups and downs, essentially. For us, this has always been the case that the Q2, Q3 are essentially the quarters where there's always a spike in demand and pretty much reflects the domestic consumption pattern and what happens overall in the GDP of the country. I guess, like Ashok mentioned, it's very difficult to unpack the impact of it. Some of the gains which we see in Q2 and Q3 actually has a longer yield.
Some of the gains we kind of end up losing probably towards Q4. That's how this business works.
Overall, I think, Mukul, we do expect a net, as we have had a net growth in Q2, we expect a net growth in the coming quarters.
Mr. Garg, I'm sorry to interrupt.
Much.
May we request you to return to the queue? Thank you. In the interest of time, ladies and gentlemen, we will take our last question. That's from the line of Susmit Patodia from Motilal Oswal AMC. Please go ahead.
Hi. Good evening, everyone, and related wishes for a festive season. My first question is, you know, despite the very healthy growth quarter-over-quarter in general staffing revenue, the EBIT has actually declined in the segment results. I'm sorry I joined in late. If you could throw some light on that.
We had called that out earlier in the call where we said that as PAP in absolute terms the realization and the profits have improved, but the headline billing number has grown more rapidly than the realization. That kind of contributes to the lower return. Also there have been some element of costs that have come in incrementally around insurance and otherwise that have given to the lower yield per se. We expect this to kind of hold out in that manner as we go forward.
The new margin that we see is what we should assume because of the increased insurance cost.
At a portfolio level, we believe that we would be able to improve the margins, because the other businesses would start contributing more as we go forward.
Just one thing, Ashok, just to clarify. While you're seeing in absolute terms it has increased quarter-over-quarter, in absolute terms it has not increased, right?
General staffing. While top line has gone up 10%.
The PAPM has risen quarter-on-quarter in absolute rupee terms, about INR 13.
Okay. I'm just referring to the presentation. You have said INR 23.8 crores are general staffing EBITDA. The same number as Q1 and Q2 FY 2022.
Yes. On a quarter-on-quarter basis, it has remained flattish.
While your top line has gone up by 10%. That's what I was referring to.
That's with the combination of two things. One is with the margin pressure continuing at PAPM level and some investments made at back end, like in terms of our leadership pipeline, hiring capabilities, marketing in those areas.
The insurance costs.
Yeah, the insurance cost, which Ritu has explained.
Yeah, is there a I mean, the operating leverage that will kick in at some point? You think, or this business will become a little, it's got cost as you grow as well, which was not envisioned earlier.
Yeah. The operating leverage will kick in after a couple of quarters, Susmit, because as Ritu mentioned earlier. We will continue to make investments in some of these areas, which is reflecting in our strong headcount addition, sales and growth. For a couple of quarters, the margins would more or less remain at this rate.
Right. You know, just, you know, as a long-term shareholder, I just want position on this whole PF thing, which is, you know, there is. In the past you have called out that there is no issue and then there is an issue, and this is quite significant, right? It is four, nearly four quarters of cash flow for our shareholders. I was just wanting to know, when was this decision taken? How was this decision arrived at? You know, I hope you appreciate that, you know, there was also some change in promoter shareholding during the quarter. If you could just help us, how was this decision taken?
I mean, firstly, the change in promoter shareholding has nothing to do with this decision. This is mainly triggered by crystallization of DHFL and also, at the new board level, we have, I mean, the board of directors, they have taken a call that we should go with a clean audit report without any qualifications. It's more like a prudent call to make a provision and get the qualifications removed.
What is the shortfall really, I mean? What is the real shortfall that we have? As somebody asked earlier as well, is this a treadmill that we are running, where we'll always be behind the race?
At current loss of DHFL and IL&FS, the real shortfall is about INR 20-odd crore. There can be interest shortfall year-on-year because of the gap between the yield rate of 7.5% and our liability rate of 8.5%.
Got it. Okay. Thank you very much. I'm out.
Thank you. I would now like to hand the floor back to Mr. Sudheer Guntupalli for closing comments. Over to you, sir.
Yeah. Thank you, management team and all of you for joining us. Ashok, I'll leave the floor open to you if you want to make any closing remarks.
Yeah. No. I think in terms of the operating element, we believe our investments in the team structures and the sales and hiring are paying off. We believe that the growth that we have seen will continue to play out into the coming quarters. The element of the HR services also having gotten into the positive will play to the aspect of at a consolidated level margin improvement that we can showcase as we go into the year. Obviously, as has been called out, the provident fund provision is something that was the white elephant in the room.
I think it's something that has been a conscious debate with the board and with the auditors and a view that, you know, going prudent and going with a provision and an unqualified report would be the right thing to do. I do believe that we will not have any further surprises coming in from that side. I think with that behind us, the continued focus on operational growth and margin improvement with the fiscal discipline otherwise that we had is what we would be focused on. With that, thank you for participating in the call.
Thank you. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference. Thank you for joining us and you may now disconnect your lines.