Mastek Ltd Q2 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Jalaj Manocha - Svan Investment Advisors - Analyst : (technical difficulty)

Question: Jalaj Manocha - Svan Investment Advisors - Analyst : Yeah. Am I audible clearly?

Question: Jalaj Manocha - Svan Investment Advisors - Analyst : Congrats on a very good set of numbers. The first question is relating to the US market and we can definitely see some recovery there, 18% sequential growth. But if I see YoY growth, it is still at 11%. So just wanted to get some sense that the growth that we are seeing in the US market, how much of that number is sustainable? How much of that is coming from macro tailwind? How much of it is because of the efforts that we have taken for last several quarters? So just wanted to get some sense there. Umang Nahata - Mastek Ltd - Non-Executive Non-Independent Director Jalaj, this is Umang here. Thank you for your compliments. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 11:30AM, MAST.NS - Q2 2025 Mastek Ltd Earnings Call So the US growth, like you rightly said, we've had a good QoQ growth and at a YoY level, we're still at a steady level from where 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 had got delayed in terms of start, as we get back into -- we've got that into action on all of those transactions as well as there is new momentum that we see in the market. So both of those have helped us come back with a healthy growth. This was a growth rate that we generally expected for this -- for the US to grow. The macro is a positive sign. We haven't seen any direct impact of the 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.

Question: Jalaj Manocha - Svan Investment Advisors - Analyst : Great. The second question is related to UK business. I divide UK 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 the private market, if you see that for last 6, 7 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 seems to be UK private market or Europe private market. So if you can give us some direction on both UK government and Europe private market, what is happening on the UK side. Umang Nahata - Mastek Ltd - Non-Executive Non-Independent Director Sure, Jalaj. So I think your observations are right. Our UK 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 where we are closely -- we have a steady base business, but we're 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 more in our UK secured government businesses as the policies take more firm shape and the government spend directions become more clear. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 11:30AM, MAST.NS - Q2 2025 Mastek Ltd Earnings Call 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.

Question: Jalaj Manocha - Svan Investment Advisors - Analyst : Sure, sure. One last observation, maybe if I see from 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, there are debtor days got stretched because of new businesses there. So is my understanding correct that a developed market growth would be sufficient enough for us so that our debtor days and the unbilled revenue will remain under control for next two, three quarters at least? Umang Nahata - Mastek Ltd - Non-Executive Non-Independent Director Jalaj, the last part of the question was not clear. Can you repeat?

Question: Hasmukh Vishariya - Tata Mutual Fund - Analyst : Congratulations on a great set of numbers. So I have a 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? And with the UK reviving, do you think this let's say, 11% sort of growth can move to mid- to high teens?

Question: Hasmukh Vishariya - Tata Mutual Fund - Analyst : Sure. So secondly, on the employee count, so just wondering, despite, let's say, strong growth or 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 the near future for you? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 11:30AM, MAST.NS - Q2 2025 Mastek Ltd Earnings Call

Question: Hasmukh Vishariya - Tata Mutual Fund - Analyst : 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?

Question: Amit Chandra - HDFC Securities Inst Research - Analyst : Sir, you mentioned about the recovery in the NHS program, the healthcare program in the UK geography. So if you can elaborate more on that. So 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, is there a component of the deal from the NHS and also in terms of the integration that was happening in the various department of NHS and obviously, the new government focus has been on enhancing the healthcare there in the UK. So how do we see it, whether is the -- like revival of the deals that we have won earlier or is it a total new deal that is being awarded there in the -- specific to NHS? Umang Nahata - Mastek Ltd - Non-Executive Non-Independent Director Yes. Great set of questions. 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 SOWs signed in the contracts that we had signed earlier. Having said that, the broad direction of the government of 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 definitely very keen and optimistic about the healthcare vertical in general and especially the UK healthcare as the initiatives start taking shape, like I mentioned, we've already got some of these old long-standing contracts now fruitifying and we see a healthy pipe of new business that we look forward to execute in the coming quarters.

Question: Amit Chandra - HDFC Securities Inst Research - Analyst : Okay. So I was just mentioning about the recent win that we had on the defense side wherein the 3 expectations was that it will add around $30 million to $40 million over a period of 3 years. So are we already building in that in terms of run rate in this quarter and also in terms of order book, is it like there in the order book in the like 12-month executed order book that we had? Umang Nahata - Mastek Ltd - Non-Executive Non-Independent Director So these -- the output of these orders that we have won definitely is reflecting in the 12-month backlog that we are showcasing to you right now. These -- most of the healthcare orders that we have received are 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 are things that we are looking forward in the coming 2 quarters. But currently, this is more close out of what was already opened and like I said, is reflected in our backlog, 12-month backlogs. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 11:30AM, MAST.NS - Q2 2025 Mastek Ltd Earnings Call

Question: Dipesh Mehta - Emkay Global Financial Services Ltd - Analyst : 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 weakened cash conversion in H1. Umang Nahata - Mastek Ltd - Non-Executive Non-Independent Director 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 were 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 blips that we had earlier have now come back to strengthen 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 in these quarters. So I don't see any seasonality pattern in our North America's performance for this quarter. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 11:30AM, MAST.NS - Q2 2025 Mastek Ltd Earnings Call

Question: Ravi Menon - Macquarie Research - Analyst : Congrats on a really good quarter. I wanted to understand here the things like not too much of change in our costs at all. It just seems to be driven by operating leverage. So the margin, can we continue to improve those towards 17%? Do you have some sort of time frame in mind about that? And what sort of impact are you expecting from wage hikes next quarter?

Question: Ravi Menon - Macquarie Research - Analyst : And the attrition at 20%, 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 the sort of attrition that we've had historically as a firm and we think we can manage with where we utilizing this currently? Umang Nahata - Mastek Ltd - Non-Executive Non-Independent Director Yes. 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 some corrections in terms of our process, in terms of the wage hike that have recently gone out and the other balancing factors that we could put into play. Our 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 -- we see full impact of change that we want to make. And 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. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 11:30AM, MAST.NS - Q2 2025 Mastek Ltd Earnings Call

Question: Aayush Rastogi - Batlivala & Karani Securities India PVT. LTD. - Analyst : So a couple of questions. So first is for Umang. So definitely, if we see your commentary that you are a bit of the cautiously optimistic about growth in the next half, which is 2H. But if we see the order backlog pipeline that we have, it currently stands at all-time high. So are we like hinting that 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 some sign of slippages in the same? And second, I'll have a follow-up in the same for Arun. Umang Nahata - Mastek Ltd - Non-Executive Non-Independent Director 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 is looking at a variety of macro as well as internal factors. Like I said, we are still going through the UK government finalizing their budgets and their plans. So that's an important indicator and observation for us. The US 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 deal signings as well as start of the programs. 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.

Question: Aayush Rastogi - Batlivala & Karani Securities India PVT. LTD. - Analyst : 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 beneficiary for us. So how much of the benefit has come and led to the margin expansion? And what was the margin impact from the wage hike that they had provided in this one?

Question: Aayush Rastogi - Batlivala & Karani Securities India PVT. LTD. - Analyst : And just a last question again on margins. So definitely, 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 is the trajectory are we eyeing for, coupled with if you can just guide us what will be the margin levels and the headwinds that we are expecting it from expansion of the North American region margins specifically?

Question: Jalaj Manocha - Svan Investment Advisors - Analyst : So I wanted to dig a little deeper into the margins again. So you see there has been a majority shift has been in the margin that comes 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 in absolute terms? Could you please guide us about it?

Question: Jalaj Manocha - Svan Investment Advisors - Analyst : Got it. Got it. And secondly, on the margin guidance, maybe I'll combine 2 questions. With guidance of 17% to 18% EBITDA margin, when do we believe or let's assume it is an aspiration also what time line are we thinking in terms of let's say we achieve it, what will be the assumption which would be required for it to achieve it earlier, if you would say?

Question: Jalaj Manocha - Svan Investment Advisors - Analyst : Got it. Understood. And last part of question. As you mentioned that there could be an impact of almost 130 bps due to the complete wage hike which would be taken in next quarter. So what sort of -- what are your expectations and what is possibility would we be able to negate the impact from this headwind which we would have from 130 bps on the wage end?

Question: Jalaj Manocha - Svan Investment Advisors - Analyst : Got it. And then where are we on our terms of the large deals foray which we were looking on to -- which has been the agenda for quite a large time -- a longer period of time. Where are we on it right now? And what sort of pipeline or traction are we seeing there? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 18, 2024 / 11:30AM, MAST.NS - Q2 2025 Mastek Ltd Earnings Call Umang Nahata - Mastek Ltd - Non-Executive Non-Independent Director Yes. Jalaj, I think the large deal continues to be a key part of our initiatives. As we speak with, still they're building up our AI proposition or efficiency-driven AI proposition is adding to the services that we already have. We have a few very active discussions, but I mean, it will be hard to comment on time lines today. Like I said, the focus is there. The capability is now all capabilities being AI-enhanced gives us much better leverage on securing larger deals. We have a few in discussion, but nothing immediate in the line of sight that we could comment on.

Question: Ravi Menon - Macquarie Research - Analyst : 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 there's also probably in the presentation some preference about 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 would be great. Umang Nahata - Mastek Ltd - Non-Executive Non-Independent Director Yes, sure. So our AI positioning, like we had mentioned, Ravi, has 2 different 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're building use cases, we've had some use case development for around 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 parts as they've gone through their years of archival data. It helps. And it is already -- you've seen it improving the process from weeks to a few hours. So that's the kind of improvement we've been able to demonstrate to our clients already. Similar kind of other initiatives on use cases. We are running on 2 important use cases, which is around recruitment and talent management. Again, very phenomenal AI assisted 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 a lot of existing strategic customers who are pretty excited about the idea as we take them forward. There are various other use cases in the financial area in the supply chain space in the CX space that we have initiated and delivered 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 had mentioned earlier, our enterprise AI is the other area that we think will become even more strategic as we go forward. It's been worked in close collaborations with NVIDIA, and that will allow customers to develop far many more use cases on a custom basis as they really move towards their AI journey.

Question: Ravi Menon - Macquarie Research - Analyst : One last question, if I may. I know that you guys have historically had no SAP, just focus on our lateral approach. But in the context of the demand for SAP/HANA, are you seeing any change to that mindset? Or are you seeing any kind of earning higher incentives among customers to do an Oracle upgrade instead of re-placing SAP? Umang Nahata - Mastek Ltd - Non-Executive Non-Independent Director Though we are 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 the 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 ECC 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 see 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.