Page 1 Transcript Conference Call of Helios and Matheson Information Technology Limited Presentation Session Event Date / Time : 6th Feb 2013, 4:45 PM IST Event Duration : 39 min 22 sec Moderator: Good evening ladies and gentlemen. I am Beulah, moderator for this conference. Welcome to the Q1FY13 analysts discussion conference call of Helios and Matheson Information Technology Limited. We have with us today Mr. Muralikrishna G. K., CEO and Managing Director and Mr. Chandramouliswaran, Chief Financial Officer. Joining us from New York is Ms. Divya Ramachandran, President and CEO, HMIT Inc. and from California Mr. Pat Krishnan, Chief Technology Officer. At this moment all participants are in listen only mode. Later we will conduct a question and answer session. At that time if you have a question, please press * and 1 on your telephone keypad. Please note this conference is recorded. I would now like to hand over the floor to Ms. Rashmi Punjabi from Concept IR. Rashmi Punjabi: Good evening everyone. Firstly on behalf of Concept Investor Relation, I would like to welcome the management of Helios and Matheson Information Technology Limited. Also I welcome all the analysts present here. Helios and Matheson is an IT solutions company with a seamless global delivery model based out of Chennai while its New York subsidiary is listed on the NASDAQ. As some of you are aware, the company has been back in the news since the last quarter owing to its impressive performance and a unique positioning it holds, the same which has been sustained this quarter. I would now like to hand over the call to the management of Helios and Matheson to give more insight to their financial performance in Q1FY13. Ms. Divya, over to you ma am. Divya Ramachandran: Thank you Rashmi. Good evening and welcome. It is a pleasure to have this opportunity to interact with you. We will start the session with a couple of minutes running through our corporate overview, which is an introduction to Helios and Matheson and a flavor of our business and service offerings and client roster. After the initial two to three minutes of the corporate overview we will go on to our Q1 performance. Before I commence, I would like to remind you that anything that we say which refers to our outlook for the future is a forward looking statement, which must be read in conjunction with the risks that the company faces.. A full statement and explanation of the risks is available in our filings both in India and with the SEC. The global industry overview, the drivers of demand for technology services continue to be strong and the US continues to be the single most mature and dominant market accounting for over 60% of the spend and Helios and Matheson is uniquely positioned in this market also in the tri-state area, which accounts for majority of this spend.
Page 2 A quick snapshot of our company, we were founded in 1991, and we are in the 22 nd year of operation. We then got listed in 1999, in India we are listed on both the bourses the Bombay and the National Stock Exchanges and our US subsidiary is listed on the NASDAQ. We have a track record of shareholder value creation; the company prides itself on strong fiscal management and has always been very confident of internal accruals. We have had 21 years of consistent dividend payments and over 66% of our paid-up capital is through bonus issues. Our FCCB was redeemed in a single direct payment of over Rs. 100 crores. We derive a majority of our revenues from the US market and focus primarily on the banking, financial services, healthcare, and technology verticals. Our IT infrastructure is in place for the next two years, we do not envision any capex beyond routine replacement, which can be funded through internal accruals. A unique feature of our Future Proof Technology Center is green IT infrastructure. Our technology hubs boast private cloud architecture and diskless nodes. A view of our global footprint, our corporate headquarters are in Heliopolis, Chennai. We have our registered office in the Special Economic Zone Mahindra World City, which is about a half hour drive from the Chennai International Airport. In Bangalore our software centers are in Brigade Software Technology Park, Whitefield, and J. P. Nagar. Helios Towers in Chennai is one of our new technology centers. In the US we are headquartered in New York, in the Empire State Building and we have our West Coast headquarters in San Francisco, California. On the business highlights, I will hand it over to Murali. Murali? Muralikrishna G. K: Yeah. Thank you Divya and may I once again welcome all the participants. Some of the things that I would be presenting to you today could be a repetition of what you heard in the last analyst call, but keeping in view that some of you may have joined or logged in for the first time, I would just like to give you a flavor of the business that we do and like Divya had mentioned a short while ago, we derive a majority of our revenues from banking, financial services, and insurance, healthcare, and technology verticals. And in BFSI space, we are a full service provider offering services to various segments in banking space, be it consumer banking or credit cards or it is investment banking, wealth management, global market, risk technologies, and so on. And in healthcare sector we address essentially three players in the value chain, one is healthcare providers, the second is healthcare payers, and third is health sciences or life sciences companies. And these three segments constitute bulk of the IT spend in the healthcare vertical and in technology space, we work with some of the largest global system integrators with whom we participate in co development of projects. We do have presence in manufacturing space. We work for some of the prestigious automobile manufacturers. This is broadly about the various verticals from which we derive our business. We have 22 clients, each of whom gives more than a million dollar revenue year-onyear. And as you can see from this particular slide that the top 10 clients give us close to 50% of our revenue and we have four clients who contribute above 5 million dollar in terms of revenue and this quarter we have added two clients. The most significant feature about our client engagement is that all the 22 clients that I mentioned here, they are all Fortune 500 organizations and with whom we have had long-standing relationship. This is a time tested relationship that we have with these clients; It would not be out of place to mention that we could be among the very few companies our size that can boast of a client roster like this. And what we have developed over the last several years is a kind of a mutually dependent relationship with these clients and as we
Page 3 become more and more visible and as we gain critical mass, we see that we will be able to derive a lot of more of the wallet share from these clients and this is evident from the way in the last three quarters consecutively we have been able to grow at 10% quarteron-quarter. And it is very, very gratifying to see that the December quarter has been one of the more robust quarters fueled by a large growth in the banking and financial services space. We have recorded a 62% year-on-year growth in BFSI segment while healthcare and other segments also did very well. One aspect I would like to mention, highlight, here is that we have signed a multi-year contract with one of our long-standing clients in the automotive sector, they are in fact manufacturers of an iconic brand of automobiles and the way we are looking at the coming few quarters, we will be able to sustain the kind of a growth momentum that we have derived in the past two to three quarters - having built a very, very robust organic growth engine. To talk a little more about specifically the various pieces of work and the cutting edge technology that we engage in, may I hand you over to our Chief Technology Officer, Pat Krishnan? Pat? Pat Krishnan: Thank you Murali. This is Pat Krishnan here. Good evening everybody. As Murali pointed out, we are into multiple areas and verticals involved in the complete software lifecycle development. We do enterprise class solutions for various customers in Banking and healthcare. If you can look at the slide #15, we have our client engagements both in BFSI, healthcare, and technology sectors. Most of our revenue in the application development come from BFSI, healthcare and technology sector. Besides BFSI and healthcare, we also do projects with high tech and manufacturing vertical. Our BFSI offering covers a wide range of business activities starting from capital market to retail banking, wholesale banking, credit card risk management and various front office and mid office trading platform. While financial is very high on our list we are embarking into certain areas such as Big Data Analytics and business intelligence where we are seeing lot of push from our international customers to develop new applications. One of the core things that we have embarked on is to chart technology architecture that will scale for one of our very big clients in the area of consumer finance and risk management where the architecture should be able to handle both unstructured and structured data and to provide some valuable insights. If you go to slide number 17, we are trying to actually leverage customer data available with our clients in certain areas to project a 360 degree view of customer relationship with our clients. This would eventually end up maximizing the revenues for our client by helping them do cross sell and up sell of services. Besides that one of our clients is also using Big Data as a means to achieve operational efficiencies through a well integrated delivery platform. We are one of the very few companies embarking in Big Data Analytics where big players like IBM, Opera Solutions and the like. Over to you Murali. Muralikrishna G. K: Thanks Pat. I will hand this over to Mouli to run us through some of the operational details pertaining to December ending quarter, which is Q1FY13. Mouli? Chandramouliswaran: Thanks Mr. Murali. The highlights for the quarter ended December 31st consolidated level, before presenting the highlights for the quarter; let me have the pleasure of announcing that our board recommended an enhanced dividend of 18% up from 15% for FY12 that s concluded. So, highlights for the quarter ended December 31st 2012 on consolidated basis, revenue for Q1FY13 at 1403.3 million, a year-on-year growth of 37.9 and Q-on-Q growth of
Page 4 10.1%. EBITDA for the quarter at 316.7 million registering a growth of 44% year-on-year while EBITDA margins improved from 21.6% to 22.6%. Net profit at 105.2 million showed year-on-year growth of 92% while the net profit margin witnessed a 39.4% growth to 7.5%, so growth witnessed positive business traction from banking, financial and healthcare sectors contributing 60.5% of total revenues. Top 10 clients contributed 49.1% of revenue in Q1FY13. Earnings per share annualized at Rs.17.6. Gross addition of 281 employees, net addition of 189. Attrition level at 12.4%. Two new clients added. The group derived a 93.1% of total business from repeat client. Muralikrishna G. K: Thank you Mouli and I now throw the forum open for Q&A. Question and Answer Session Moderator: Thank you sir. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press * and 1 on your telephone keypad and wait for your turn to ask the question. If you would like to withdraw your request, you may do so by pressing * and 1 again. The first question comes from Mr. Vimal Gohil from Share Khan. Please go ahead. Mr. Vimal Gohil, you may go ahead now. Vimal Gohil: Congratulations on a good set of numbers. I have two questions. One is on the demand environment, how would you compare the demand, let s say, a quarter ago versus now, especially in the BFSI space? And the second question is for the CFO, sir, there is a marked improvement in the ROE and the ROCE this quarter, and so where do you see the improvement coming from, I mean, could you just take us through that. Thank you. Thanks Vimal. First may I address the demand space question. Growth in BFSI has been most impressive. Even the last quarter, which was a typically holiday season, we have not seen any softening whatsoever and we have had a very, very robust quarter as you could see and this is following closely on the heels of the previous two quarters, which witnessed similar growth traction. Our own experience has been that the BFSI segment has been witnessing good traction. One of the things that must have also helped us is that we do not have significant presence in Europe. Particularly our banking clients are more focused or they have origins in the US. American markets were less affected. So, that is one of the reasons why we had not seen any kind of a slowdown. The second thing is that we have actually seen an uptake or an increase in discretionary spending by some of our larger clients, who have rolled out technology roadmaps that envisaged spend running into several hundreds of millions of dollars, which gives us the confidence that environment is going to be very, very interesting for us going forward. And Mouli would you like to speak about ROE? Chandramouliswaran: Yeah. Thanks Vimal. You can see that from last quarter, we were able to improve ROE and this is on track. We were able to improve ROE supported by better traction in revenue and also increase in profits. Moreover, we will be able to reduce the CAPEX, compared to last fiscal. So, these things should contribute to the increase in the ROCE and we are very much on track to achieve 19.8% in FY14.
Page 5 So, basically Vimal if I may add to what Divya also said in the beginning mentioned. We do not envisage any significant CAPEX going forward in the next two years. So, the whole infrastructure is in place and we are ready to utilize the benefits of increased traction that we are witnessing in the market. So, with the kind of increase in revenues that we are seeing and consequent increase in profits, with no significant addition to CAPEX all these clearly help us to derive much better margins. And like Mouli had mentioned, we are well on track to achieving 19.8% ROE and ROCE down the road and we already have a run rate of well over 15%. And may be by next quarter we would see some more improvement. Vimal Gohil: Sir, what is your outlook on, would you give a quantitative number on what would be outlook on the CAPEX going into the quarters to come? Chandramouliswaran: We don t envisage any additional CAPEX except the normal renewals and replacements. Vimal Gohil: Okay fine. And one last question on the budget sir, how do you see the budget sir shaping up for FY14? Yeah, Divya would you like to take that question? Divya Ramachandran: Sure. I think that in terms of overall spends; they were pretty depressed during 2009 to 2010 and the part of 2011. But, over the last couple of years we are definitely seeing a strong upswing. The focus is always on high value locations. So, in terms of our overall blend that is what is the driver of the value that we provide to the clients. In terms of absolute spends, we definitely see good, strong momentum on the ground. Vimal Gohil: Right Divya, are these, the increased bullishness that we are experiencing in the budgets, your positive comments getting triggered from the newer technologies or is it the bread and butter technologies like the application development and maintenance? Are they contributing incrementally to the budgets or is it the new technologies like Cloud, Mobility and Analytics that are pushing up budgets further in FY14? Divya Ramachandran: It is a combination, because the key is that there is a pressure on all the companies to show improved operating margins. So, the way operating margins can be driven is through technology, particularly in large banks, financial institutions and insurance companies. So, as I said earlier, the move is to continuously enhance the headcount in high value locations across the globe. So, that continues and that has traditionally has been part of the spend, so any incremental spend there is on a very large base and in absolute dollars, automatically shows a significant increase. But, what is very exciting even for players like us is the new areas, precisely what you mentioned in terms of Cloud, Mobility, Analytics. So, these are the fast growing areas. In absolute terms it still forms a small percentage of the overall spends. But, we see them growing at a very rapid pace in the coming years. Murali? Vimal Gohil: Just one more question if I may? Sir, do you see any aggressive behavior in the competitive landscape in terms of pricing going ahead, especially from your larger peers, Indian peers?
Page 6 Not that I can specifically comment on, but overall the sense we get is that in terms of pricing, there is only an upward bias and there is no move towards competing on just price. Vimal Gohil: Okay. So, you are not seeing any competitive pressures on pricing? Yeah. Vimal Gohil: Okay. I think that is all from my side. Good numbers. Congratulations and all the best. Thanks. Thanks Vimal. Divya Ramachandran: Thank you. Moderator: Thank you sir. The next question is from Mr. Pratik Mehta from Bajaj Allianz Life Insurance Company. Please go ahead. Thank you for the opportunity. Mr. Mouli, I don t have your dollar revenue numbers, so it would be really great if you can update for this quarter as well as CY12 and CY11 dollar revenue numbers, if you have it ready in front of you? Chandramouliswaran: For Q1 December it is 26 million in dollar terms. Q4 it was 23.4 million, registering a growth of 11%. Chandramouliswaran: What would be the number for full year CY12 and CY11? CY12 it will be 88.9 million US dollar. And that would be what growth over CY11? 32% in dollar terms is the growth during the quarter. Okay. What I am asking is would you be able to help me with the growth that you had in CY12, so that from where we can start in terms of CY13, how is it likely to be compared? I think last time we answered this, it was about 12% growth that we had year on year last year. And current year, this first quarter which is ending December, we have grown at 32% in dollar terms. Okay. So, clearly this is a very marked improvement in terms of growth rate. So, does it look like, I am not sure if you give revenue guidance, but how does it look like in terms of full year panning out? Do you think you will be able to? Pratik, we do not give a formal guidance and I have to recall what Divya had said in the beginning of the call. So, this might sound like a forward looking statement, but kindly take it with all the caution that you should for such observations. If you see last three quarters, we have had robust growth. The quarter
Page 7 ending June 2012, we grew at over 9% and September 2012 quarter we grew at 10.5% and this December ending quarter it is 10.1%. So, you could see an average 10% quarter on quarter growth sequentially, is what we have recorded in the last three quarters. And a simple arithmetic suggests that it is well over 40% in a year. So, we are pretty confident that we would be able to sustain this kind of a growth. Right. Sir, question is that essentially what has changed in terms of, is this the growth driven by a set of one or two clients or it is more of a broad based change or is there a change in strategy which is leading to stark deviation from what our growth rate was in the previous year? About three years back we did make a strategic shift in terms of where we were focused. We decided that we would focus a lot more on banking and financial services space. We were earlier differentiated as a healthcare focused company. While that gave us a niche segmentation, but we thought we were missing out on big action by not being very aggressively present in the BFSI sector, so that s a strategic shift that we have made. But, for any such strategic moves to gain visible traction, it does take this kind of a time. Of course, our cause is not also helped by the global meltdown in the financial market that happened in 2009 and 2010. And starting 2011 and 2012 we have made significant investments both in infrastructure and skill development. We have had relationships with some of these larger BFSI clients for a long time, and we were able to showcase our strengths to them. As markets revived, we started witnessing good growth and traction. And that is what you see happening in the last three quarters. No doubt, we did enter this with a sense of caution, because this is a sector that is dominated by very well established and large players. I am very happy to inform you that we are very well received by our clients. And now we work for something like seven of the top twenty global banks and we are pretty confident. So, to answer you once again Pratik in a more specific manner, the growth we see is lot more secular and not confined to just one or two clients or engagements. Sure, that is good. And on headcount if you can help me, what is the current headcount that we have any number that you can help me with in terms of whether you have given some offers for new joinees or how many people are you likely to add over next two or three quarters? Yeah, we have added 281 people in the last quarter. And our quarter ending headcount is about 3165. I guess over the next remaining three quarters of the year, we will have a similar addition in terms of headcount. Okay, that is all from my side. Thank you very much. Thanks Pratik. Moderator: Thank you sir. Ladies and gentlemen, if you have a question, please press * and 1 on your telephone keypad. Next question is from Mr. Dhananjay Mishra from Sushil Finance. Please go ahead. Dhananjay Mishra: Hello sir. Congrats on good numbers. Just some book keeping questions on the current debt position and cash position and also I would like to
Page 8 know about what percentage of shareholding the promoter is pledged and for what reason? Chandramouliswaran: Current debt position is 257 crores. There is a reduction of some 10 crores at the previous quarter. Current cash position is 47.28 crores. Dhananjay, basically there has been a reduction in terms of debt and going forward we will see, a regime where we would move towards lower debt situation. I am afraid I have not understood the last part of your question, where you said what part of promoters, something pledge or what is that? Dhananjay Mishra: Promoter shareholding is pledged? Pledged, okay. How much Mouli? Chandramouliswaran: 16. That is 16% pledged. It is all done for financial assistance from the banks for company s business, both for working capital and term loans. And the entire pledge is something that has happened way back in the company s growth history. These are all pledges that have taken place when the company was much smaller and when the bankers were looking for that kind of a comfort. And once the security is provided, as long as the relationship continues, the banks wouldn t want to let go of that security. So, these are all some historical pledges that have happened and as promoters we also are okay, whether it is with us or with our banker, with whom we have a long term relationship, it is okay. And to answer you more specifically, the promoters have not pledged any shares whatsoever for any activity other than the financial assistance from the banking system. And no new pledges have been made in the last few years. Dhananjay Mishra: Okay, that is all from my side. Thank you. Moderator: Thank you sir. The next question is from Ms. Amrita Burde from Nirmal Bang Securities. Please go ahead. Hello, congratulations. Hi Amrita. Hello sir. Congratulations on a good set of numbers. I just have two questions. The clients that were added this quarter, I needed to know which sector are these from and from which geography? Yeah, both the clients are from the US geography and one is from the banking space and the other is from the technology vertical. Okay. Sir, you mentioned about one multiyear contract with a long standing client in automobile sector. Sir, could you throw some more light on that?
Page 9 engagement? Divya, would you like to speak about the nature of Divya Ramachandran: Sure Murali. This automobile manufacturer has been a client of the company for over thirteen years and this is for the motorcycle division. It effectively involves a global team that is managing everything right from the requirements gathering up to deployment. Pat, would you like to add anything about the flavor of the engagement? Pat Krishnan: Sure this engagement follows the full sdlc including the application development and maintenance routine. something? the best for your future. This contract was signed in this quarter is it, in Q1 FY13? Yes. Okay and if you could share with us the contract size or Amrita, that is not in public domain. Okay, no problem. No problem. That is all from my side. All Thank you. Thank you. Moderator: Thank you sir. Ladies and gentlemen, if you have a question, please press * and 1 on your telephone keypad. There are no further questions. Now, I hand over the floor to Ms. Rashmi Punjabi from Concept IR for closing comments. Rashmi Punjabi: I thank all on behalf of Concept Investor Relations for participating and being part of this teleconference. If you have any further queries, please drop in an email at rashmi.p@conceptpr.com. Once again thank you very much. Moderator: Thank you ma am. Ladies and gentlemen, this concludes your conference for today. Thank you for your participation and for using Door Sabha s conference call service. You may disconnect your lines now. Thank you and have a pleasant evening Thank you. Note: 1.This document has been edited to improve readability. 2. Blanks in this transcript represent inaudible or incomprehensible words.